Opinion ID: 75607
Heading Depth: 2
Heading Rank: 1

Heading: Did the payment system represent a commission?

Text: The issue before us is whether the district court properly concluded that Swift met the commissioned work exemption to this provision.2 Whether Klinedinst’s payments constituted commissions is an issue of law. Yet, it is an issue that finds little illumination from the sparse case law and the vague 2 The commissioned work exemption as written in 29 U.S.C. § 207(i) states: No employer shall be deemed to have violated [the overtime provisions of the Act] by employing any employee of a retail or service establishment for a workweek in excess of [40 hours], if (1) the regular rate of pay of such employee is in excess of one and one half times the minimum [wage], and (2) more than half of his compensation for a representative period (not less than one month) represents commissions on goods or services. 5 references in statutes and regulations. Nonetheless, it is the duty of the courts to determine whether wage payment plans are in substantial compliance with FLSA. We undertake that duty by construing the remedial statutory provisions both narrowly and sensibly. See Walling v. A.H. Belo Corp., 316 U.S. 624, 634-35 (1942); Brennan v. Valley Towing Co., Inc., 515 F.2d 100, 110 (9th Cir. 1975); Birdwell v. City of Gadsden, Ala., 970 F.2d 802, 805 (11th Cir. 1992) (holding that FLSA provisions are interpreted liberally in the employee’s favor and its exemptions construed narrowly against the employer). Swift, as the employer, bears the burden of proving the applicability of a FLSA exception by “‘clear and affirmative evidence.’” Birdwell, 970 F.2d at 805. Swift avers that the flat rate system it utilized is a form of commission, which is incentive-based and encourages efficiency and speed. Klinedinst was assigned an hourly rate (flag rate) for a particular task, but if it took longer than the allotted time, he would not be paid extra. If he completed the task sooner, however, he would keep the difference. For example, deposition testimony reveals that whether a technician took ten or thirty hours to complete a job, he would still be paid the same. Specifically, Swift determined Klinedinst’s compensation per job by multiplying the predetermined flag hours by his hourly rate. He was to receive compensation under this formula regardless of whether he actually worked the 6 predetermined flag hours. The flat rate of pay was not the hours of time it actually took the worker to complete a job. It is a method of providing employees with an incentive to “hustle” to finish their jobs in order to obtain a larger number of jobs for greater compensation. To bolster the claim that the flat rate system constituted a commission, Swift cites to the Wage and Hour Division of the Department of Labor’s Field Operations Handbook: Some auto service garages and car dealerships compensate mechanics and painters on the following basis: The painter or mechanic gets so much a “flat rate” hour for the work he or she performs. A “flat rate” hour is not an actual clock hour. The painter or mechanic may work only 7, 8 or 9 hours a day and still receive credit for 10, 11 or 12, etc., flat rate hours depending upon how much work he or she has done. Each job is assigned a certain number of hours for which the customer is charged, regardless of the actual time it takes to perform the job. The employee is given a certain proportion of that charge expressed in terms of so many dollars and cents per “flat rate” hour rather than in terms of a percentage of the charge to the customer. The dealer does not change the employee’s share per flat rate hour if the charge to the customer is changed. In such situations Wage-Hour will not deny that such payments represent “commissions on goods or services” for purposes of Sec. 7(i) (see IB 778.117 and 779.413(b)). Such employment will qualify for exemption under Sec. 7(i) provided all the other tests of the exemption are met. Field Operations Handbook, Section 21h04(d). An agency’s internal directives to its employees, however, are without the force of law. See Brennan v. Ace Hardware Corp., 495 F.2d 368, 376 (8th Cir. 1974) (the Labor Department’s Field 7 Operations Handbook is without “the force and effect of law.”); Kirkland Masonry, Inc. v. C.I.R., 614 F.2d 532, 533 (5th Cir. 1980) (“Although federal agencies are bound by their own regulations, a simple administrative directive to agency employees does not suffice to create a duty to the public”). Although the Field Operations Handbook is not entitled to Chevron deference,3 we find it persuasive. Further support for this interpretation of commission may be found in 29 C.F.R. § 779.413(b), which states: Although typically in retail or service establishments commission payments are keyed to sales, the requirement of the exemption is that more than half the employee's compensation represent commissions on goods or services, which would include all types of commissions customarily based on the goods or services which the establishment sells, and not exclusively those measured by sales of these goods or services. See also Mechmet v. Four Seasons Hotel, Ltd., 825 F.2d 1173, 1175 (7th Cir. 1987) (“persons not engaged in the sale of goods – receivers, trustees, bailees, and others – are sometimes compensated in the form of what are commonly called commissions, and . . . [may be considered] ‘commissions’ within the meaning of 29 U.S.C. § 207(i) if the other requirements of the section are satisfied”); Black’s 3 See Chevron, U.S.A., Inc. v. Natl. Resources Defense Council, Inc., 467 U.S. 837, 844-45 (1984). Chevron held that if a statute was ambiguous, the courts would defer to an agency’s reasonable interpretation of that statute. Id.; Bank of America, N.A. v. FDIC, 244 F.3d 1309, 1314 (11th Cir. 2001). 8 Law Dictionary 264 (7th ed. 1999) (“Commission: . . . 5. A fee paid to an agent or employee for a particular transaction, usu. As a percentage of the money received from the transaction”); Merriam-Webster’s Collegiate Dictionary 231 (10th ed. 1996) (same). The cumulative effect of these citations is persuasive because they support the basic conception of a commission without undermining the purpose or logic behind overtime.4 The flat rate at issue (1) provides workers with an incentive to work quickly, while (2) paying them at a rate that exceeds minimum wage. The function of a commission exemption as embodied by section 7(i) is to ensure that workers who are paid on a commission basis are guaranteed to receive at least the legislated minimum wage without requiring them to work overtime for it. See 29 U.S.C. § 207(i). Payments of between $12 and $15 per flagged hour provide incentives for employees to work efficiently and effectively to the benefit of the employer, who may then take on more customers at a greater profit margin, and the employee, who reaps the benefits of increased flag hours regardless of the actual 4 The purpose of the FLSA-required overtime is two-fold: (1) to spread out employment by placing financial pressure on the employer to hire additional workers rather than employ the same number of workers for longer hours; and (2) to compensate employees who for a variety of reasons worked overtime. See H.R. Rep. No. 1452, 75th Cong., 1st Sess. (1937); S.Rep. No. 884, 75th Cong., 1st Sess. (1937); Donovan v. Brown Equipment and Service Tools, Inc., 666 F.2d 148, 152 (5th Cir. 1982); Mechmet, 825 F.2d at 1175-76. 9 amount of hours worked. With this in mind, we conclude that Klinedinst’s flat rate wages constitute a “commission” but are only exempt from overtime pay if Swift can establish that it has qualified for the overtime exemption provided in section 7(i). See Field Operations Handbook, Section 21h04(d). Section 7(i) states: No employer shall be deemed to have violated [the overtime provisions of the Act] by employing any employee of a retail or service5 establishment for a workweek in excess of [40 hours], if (1) the regular rate of pay of such employee is in excess of one and one half times the minimum [wage], and (2) more than half of his compensation for a representative period (not less than one month) represents commissions on goods or services. 29 U.S.C. § 207(i). As it is undisputed that all of Klinedinst’s wages were derived from the flat rate system and we have determined that the aforementioned system constitutes a commission, the second component of section 7(i) is fulfilled.