Opinion ID: 174859
Heading Depth: 2
Heading Rank: 5

Heading: NutriSystem's Compensation Plan and Section 7(i)

Text: The Department argues that we should afford Skidmore deference to the consistent view expressed in its various opinion letters that to qualify as a commission for purposes of § 7(i), the payment must be linked to the cost of the product sold or services provided to the customer. (Dep't of Labor Br. at 21.) Put differently, to qualify as a commission, an increase in the cost to the consumer must result in a corresponding increase to the amount of the payment made to the employee. ( See id. at 30 (Had, for instance, NutriSystem utilized fixed payments that varied according to the differences in the cost to the customer, this would have constituted a commission under section 7(i).).) Although the Department may have more specialized experience than we do in the day-to-day administration of the FLSA, we do not find that the opinion letters at issue here provide sufficiently thorough reasoning, consistency, or factual similarities to the instant case to warrant deference. See Skidmore, 323 U.S. at 140, 65 S.Ct. 161. The work performed by the NutriSystem sales associates is distinguishable from the alarm installer who was paid a flat fee per installation. There is no indication in the Department's letter that the alarm installer paid a flat fee was responsible for selling the alarm; rather, he or she was only delivering the product to the consumer. Nothing in the letter suggests that there was an opportunity for the installer to increase the sales of his employer. At argument, the Department pointed to the health club employee letter as being factually closest and most instructive to the instant case. That letter, however, did not formally express an opinion on the compensation scheme because of the lack of information provided by the employer. Rather, the letter provided only broad, general guidance by citing to the Department's Wage and Hour Field Operations Handbook. Dep't of Labor Op. Ltr., 2005 WL 3308624 (Nov. 14, 2005). This broad guidance, which was not applied to the facts in the letter, is insufficiently thorough to persuade us that a commission must vary based on the end cost to consumers. Further, the letter's guidance does not explicitly require that an increase in the cost to the consumer result in an increase in the commission paid to the employee  the requirement the Department urges us to adopt. Rather, it states that flat fees paid without regard to the value of the service performed do not represent commissions on goods or services for purposes of Sec[tion] 7(i), and [c]ommissions, for purposes of Sec[tion] 7(i), usually denote[] a percentage of the amount of monies paid out or received. Id. (internal quotations and citations omitted) (emphasis in original). This lack of a consistent definition of commission further weighs against the persuasiveness of the Department's opinion letters. See Skidmore, 323 U.S. at 140, 65 S.Ct. 161. Unlike the compensation plans of the opinion letters, NutriSystem's payments to employees are based on consumer preference and the ability of the sales associate to persuade a customer to purchase a meal plan. Unlike the alarm installer who is paid a flat fee per installation, the number of calls the sales associate makes plays no part in determining the number of additional payments he receives. The number of calls only increases an associate's chances of making a sale and receiving the additional payment. Rather, the external factors of sales ability and customer preference, which are not present in the Department's opinion letters discussed supra, dictate whether NutriSystem's sales associates are paid the additional compensation. In sum, we do not find the Department's factually distinguishable opinion letters and broad general guidance sufficiently thorough or consistent to warrant deference in this case. See id.
Further, we decline to adopt a test that requires a commission, under § 7(i), to be strictly based on a percentage of the end cost to the consumer. While the various definitions discussed supra suggest that a commission is typically calculated as a percentage of sales price  for example a real estate broker receives 10% of a house's sale price or a paint salesmen receives 20% of his sales  both the Department and other courts have recognized that this strict percentage relationship is not a requirement for a commission scheme under § 7(i). See Dep't of Labor Op. Ltr., 2005 WL 3308624 (Nov. 14, 2005) (Commissions, for purposes of Sec[tion] 7(i), usually denotes a percentage.) (emphasis added); Yi, 480 F.3d at 508. Therefore, the fact that NutriSystem's plan is not calculated strictly as a percentage of sale price does not disqualify it from being a commission under § 7(i). [4]
A number of factors persuade us that NutriSystem's compensation plan establishes a bona fide commission rate and is therefore a commission under the FLSA. We conclude that when the flat-rate payments made to an employee based on that employee's sales are proportionally related to the charges passed on to the consumer, the payments can be considered a bona fide commission rate for the purposes of § 7(i). First, we agree with the District Court that the payments made to NutriSystem's sales associates are sufficiently proportional to the cost to the consumer to qualify as commission under section 7(i). See, e.g., Yi, 480 F.3d at 508; Dep't of Labor Op. Ltr., 2006 WL 4512957 (June 29, 2006). There is only a small difference between the absolute dollar value of the three flat-rate fees paid to sales associates ($18.00, $25.00, and $40.00). The variance in the flat-rate fee as a percentage of the cost to the consumer, which ranges from 5%-14%, is also relatively small. See Appendix I. These relatively small differences support the proposition that proportionality to the cost to the consumer exists in this case. The District Court offered an example in defining proportionality, which we find helpful: proportionality would not exist if an employee were paid the same dollar amount for selling a $10 ring as a $1,000,000 ring. This is plainly not the case here, as the differences in the costs of the meal plans are relatively small, with four of the five meal plans costing the same, $342.36. The men's plan is slightly more expensive, $371.50, because it contains more food. Customers can receive a $50 discount on all five products by selecting the auto-ship option. [5] Second, it is persuasive that NutriSystem's plan bases compensation on sales, just as Judge Posner described in Yi. 480 F.3d at 510. Under the plan, a flat rate fee is not paid unless a sales associate completes a sale. NutriSystem's flat rate payment is tied to both the time the sale is made and whether it is based on an incoming or outgoing call, rather than being a percentage of the cost to the consumer. The amount of the payment is based on the value NutriSystem was receiving from the sales associates' work. Under this plan, NutriSystem creates an incentive for sales associates to be actively making outgoing calls and to work less desirable hours, thus allowing NutriSystem to operate at peak efficiency around the clock. The sales associates' compensation is also decoupled from actual time worked, a characteristic both the Seventh Circuit and the Department identified as a hallmark of how commissions work. Id. at 509; see Dep't of Labor Op. Ltr., 2005 WL 3308624 (Nov. 14, 2005) (The whole premise behind earning a commission is that the amount of sales would increase the rate of pay.) (internal citation omitted). Third, from a policy standpoint it is reasonable to permit NutriSystem to offer different commissions depending on the time of the sale and whether the sale was the result of an incoming or outgoing call. This encourages sales staff to take undesirable shifts and to work harder to close a sale on outgoing calls. Additionally, NutriSystem offers various sales and promotions, including the auto-ship program. Had NutriSystem based commission purely as a percentage of the cost of the goods to consumers, it would have created a disincentive for a sales associate to encourage consumers to take advantage of the discounts that result from the auto-ship method. For example, had NutriSystem declared a 7% commission on all products sold, a sales associate would earn a $26.01 commission on a men's plan under the regular shipping method but only a $22.04 commission under the auto-ship method. NutriSystem offers the auto-ship method at a discount because the company believes in the end, this shipping method will generate the company greater revenue. A sales associate, however, would prefer to sell a consumer a meal plan under the regular shipping method because the associate receives a large commission. NutriSystem's plan eliminates this disincentive by providing associates with a flat rate commission not directly tied to the end cost to consumers. Finally, NutriSystem's plan does not offend the purposes of the FLSA and the overtime provisions discussed supra in Mechmet, 825 F.2d at 1175-76, and Yi, 480 F.3d at 510. First, the Appellants' income in the years they worked at NutriSystem ranged from approximately $40,000 to over $80,000, and thus they were not the lower-income type employees contemplated to be protected by the overtime provisions. Second, NutriSystem employees must achieve certain sales goals to work hours beyond their scheduled eight-hour shifts. Forcing NutriSystem to pay overtime is unlikely to induce the hiring of additional sales associates because the only sales associates working an excess of forty hours per week are the top sales associates. Third, high-performing call center workers could work more than forty hours a week, the health risks or accidents that can occur due to fatigue from long hours are generally not present for call center employees as compared to manual laborers, and thus the overtime premium is not needed to compensate for an increase in danger from working when tired.