Lean Weeks and Fat Weeks: a Commissioned Employees Regular Rate of Overtime Pay

• Jurisdiction: United States,Federal
• Publication year: 2019
• Citation: Vol. 35 No. 2

Lean Weeks and Fat Weeks: A Commissioned Employees Regular Rate of Overtime Pay

Colt Burnett
Georgia State University College of Law, cburnett4@student.gsu.edu

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LEAN WEEKS AND FAT WEEKS: A COMMISSIONED EMPLOYEE'S REGULAR RATE OF OVERTIME PAY

Colt Burnett^*

INTRODUCTION

For an entire year, Sean Freixa worked between sixty and seventy hours per week selling cruise packages.¹ His employer, Prestige Cruise Lines, paid him $500 per week plus commission.² During that year, Freixa earned over $73,000.³ Commissions made up 63% of his annual earnings.⁴ Some months, Freixa sold many cruises.⁵ Prestige paid out those commissions in the following month.⁶ Other months, he did not earn a penny in commissions.⁷ During those months, Prestige Cruise Lines, believing their employee was exempt, did not pay Freixa overtime.⁸ In 2016, he sued Prestige, alleging that during the months where he earned no commission he should have earned overtime pay.⁹

Wage and hour litigation is skyrocketing.¹⁰ Every year tens of thousands of companies pay penalties for failing to comply with the

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Fair Labor Standards Act (FLSA).¹¹ Ambiguities abound between the words of the FLSA and its real-life application, creating uncertainty for employers and employees.¹² Such uncertainty can be costly.¹³ It is ubiquitously known that employers must pay employees overtime for hours worked in excess of forty hours per week.¹⁴ Passed in 1938, the FLSA established overtime provisions "to protect certain groups of the population from sub-standard wages and excessive hours which endangered the national health and well-being and the free flow of goods in interstate commerce."¹⁵ However, overtime calculation can be much more involved than merely multiplying the minimum wage by time-and-a-half.

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Some modern-day employers operate complicated pay schemes, and many employees work inconsistent hours.¹⁶ Most commission plans yield different earnings for the employee from pay period to pay period; sometimes this is strictly due to the employee's efforts, but sometimes employees structure the commission plan itself to change across periods.¹⁷ Additionally, many employers "defer" commissions, in which the employee only earns the commission after the employer is paid by the customer for that employee's sale.¹⁸ The commission payments are processed and then disbursed after they are earned.¹⁹ As the pay structure deviates from traditional norms, determining whether an employee is entitled to overtime becomes more complex.

This Note focuses on the uncertainty inherent in overtime calculations for certain categories of employees who earn commission in addition to hourly wages.²⁰ Part I of this Note gives the relevant history behind overtime and "regular rate" calculation.²¹ Part II analyzes the different methods of determining an employee's regular rate of pay in the Seventh and Eleventh United States Circuit Courts of Appeals.²² Part III proposes for a uniform approach to deferred commission allocation in overtime calculation, advocating the Eleventh Circuit's method because it more closely follows the

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aims of the FLSA and because the Department of Labor favors the interpretation.²³

I. Background

The Fair Labor Standards Act of 1938 creates "a ceiling over hours" and "a floor under wages" by establishing a forty-hour work week, with overtime pay for hours worked beyond forty and a minimum wage.²⁴ The Act aimed to rehabilitate and reform labor laws in the wake of the Great Depression.²⁵ Congress included the FLSA's overtime provision to increase employment.²⁶ The provision requires employers to pay an employee one-and-a-half times her regular rate for any work in excess of forty hours per week.²⁷

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Overtime requirements incentivize employers to hire more workers, rather than paying overtime to their existing workers.²⁸ This increases the employment rate while ensuring workers have time to spend their hard-earned money.²⁹

The FLSA's overtime provision has expanded to cover many kinds of employees.³⁰ However, many others are exempt depending on certain conditions.³¹ The "retail or service" exemption of § 207(i) of the FLSA is meant to protect employers from commissioned employees hoping to game the system.³² The Southern District of New York aptly rationalizes the exemption in English v. Ecolab, Inc.:

Service specialists, who are paid on a commission basis and are able to set their own schedules, can work fewer hours in one week and more in the next. If they received overtime, employees could compress their hours into one week (e.g., work 60 hours) to obtain overtime pay, and then coast during the next week (e.g., work 10 hours). By doing so, employees would end up working fewer hours than a regular employee working two forty hour work weeks, but yet earn more.³³

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When an employee's regular rate is more than one-and-a-half times the minimum wage, he is exempt from receiving overtime because he already earns more than overtime necessitates.³⁴ Although the words "regular rate" were not defined in the FLSA of 1938, they were given meaning by the Supreme Court in 1942, in Overnight Motor Transport Co. v. Missel, as the rate computed by dividing wages by hours worked.³⁵

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Issues arise when the employee's commissions vary greatly between pay periods and the employer does not—or cannot—keep track of the period in which the commissions are earned.³⁶ In the event an employee files a claim for unpaid wages against her employer, the jurisdiction in which she states her claim could apply a rule that would grant her compensation. However, if she filed her claim in a different state, that jurisdiction could decide, like the trial court in Freixa, that she is exempt from overtime requirements and dismiss her case entirely.³⁷ To establish a prima facie case for unpaid overtime wages, a plaintiff must establish that: (1) the defendant employed her; (2) the defendant is an enterprise engaged in interstate commerce covered by the FLSA; (3) she worked more than forty hours per week; and (4) the defendant did not pay her overtime wages.³⁸ Section 207(i) of the FLSA exempts retail or service establishments from paying overtime wages where: "(1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him . . . and (2) more than half of his compensation for a representative period (not less than one month) represents commissions on goods and services."³⁹ This represents an affirmative defense for retail or service employers in wage and hour suits.⁴⁰

Determining whether more than half of an employee's compensation derives from commission is simple. The law requires employers to keep detailed and accurate wage records.⁴¹ Without

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records, an employer cannot prove an overtime exemption.⁴² Employees are typically either wholly commissioned or earn a base pay rate plus commission on top,⁴³ but some employers use more complicated commission structures.⁴⁴

Determining the employee's regular rate of pay is less simple. The regular rate of pay is "the hourly rate actually paid the employee for the normal, nonovertime workweek for which he is employed."⁴⁵ The regular rate is important for employers to know because it may or may not exempt an employee from earning overtime.⁴⁶ If an employer does not know when the employee's commissions are earned, courts may use "other reasonable or equitable method[s]" to

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calculate an employee's regular rate of pay.⁴⁷ These other methods have been interpreted to include averaging wages and hours over an entire pay period, effectively spreading the employee's high commission earnings over low earning periods.⁴⁸ Other courts limit the spread of those earnings, confining earnings to certain time periods based on how often the employer pays the employee.⁴⁹

Before the Eleventh Circuit decided Freixa in April 2017, many district courts within the Eleventh Circuit averaged commissions across long terms of an employee's employment period to determine the employee's regular rate of pay.⁵⁰ The United States Court of Appeals for the Seventh Circuit continues to decide the regular rate of pay in overtime disputes in this way.⁵¹ The method of averaging the commissions is laid out in 29 C.F.R. § 778.120. Courts employing the method only did so where the commissions were not identifiable as earned in particular workweeks.⁵² However, now that Freixa has clarified the rule that commissions may only be averaged across the pay period in which they were earned, it will be much more difficult for employers to argue for averaging commissions across an employee's full term of employment while in the Eleventh Circuit. The Eleventh Circuit held that the commissions must be allocated to the weeks within the time period in which they were earned, either the pay period or the "computation period."⁵³ In

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contrast, the Seventh Circuit allows any "other reasonable and equitable method," often resorting to allocation across the full term of employment.⁵⁴

II. Analysis

A. Averaging Commissions Across All Hours Worked to Determine the Regular Rate

In 1967, the Tenth Circuit affirmed an Oklahoma district court's method of computing overtime compensation by taking an employee's monthly salary, multiplying it by twelve months, then dividing the product by fifty-two weeks, and finally dividing the quotient by the number of hours worked in the week.⁵⁵ The formula to find this number looked like this:

Monthly salary × 12 months ÷ 52 weeks = weekly compensation
Weekly compensation ÷ average number of house worked per week = regular rate for each hour worked⁵⁶

In Triple AAA Co. v. Wirtz, the Tenth Circuit determined this number to be an employee's regular rate.⁵⁷ In Triple AAA, four employees were compensated $2,557.69 in overtime compensation.⁵⁸ The court found the employees had worked an average of forty-four hours per week and had not been fairly...