Parker v. NutriSystem, Inc.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 09-3545

ADRIAN E. PARKER, Individually

and on behalf of all others similarly situated

v.

NUTRISYSTEM, INC.

DELORIS WYNN,

Administratrix of the Estate of Adrian E. Parker;

DONALD J. WILSON; FRANK L. STEPHENS, IV;

MONICA THOMPSON; SENYA SAUNDERS,

Appellants

(Pursuant to Rule 12(a), Fed. R. App. P.)

(Pursuant to Rule 43(a)(1), Fed. R. App. P.)

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. No. 2-08-cv-01508)

District Judge: Honorable Harvey Bartle, III

Argued June 21, 2010

Before: SMITH, FISHER and COWEN, Circuit Judges.

(Filed: September 7, 2010)

Shanon J. Carson (Argued)

Ellen T. Noteware

Berger & Montague

1622 Locust Street

Philadelphia, PA 19103

R. Andrew Santillo

Peter D. Winebrake

The Winebrake Law Firm

715 Twining Office Center

Twining Office Center, Suite 211

Dresher, PA 19025

Counsel for Appellants

Sarah E. Bouchard (Argued)

Katherine E. Kenny

Jonathan S. Krause

Morgan, Lewis & Bockius

1701 Market Street

Philadelphia, PA 19103

Counsel for Appellee

Paul L. Frieden

Laura Moskowitz (Argued)

2

United States Department of Labor

Office of the Solicitor

N-2716

200 Constitution Avenue, N.W.

Washington, DC 20210

Counsel for Amicus Curiae,

Secretary of Labor

David A. Borgen

Goldstein, Demchak, Baller, Borgen & Dardarian

300 Lakeside Drive, Suite 1000

Oakland, CA 94612

Counsel for Amicus Curiae,

National Employment Lawyers Association.,

Comité De Apoyo A Los Trabajadores

Agrícolas, Community Legal Services,

Cornell Labor Law Clinic, Friends of

Farmworkers, Juntos, National Lawyers

Guild Labor and Employment Committee,

Southern Poverty Law Center, The Sugar

Law Center, and Working Hands Legal Clinic

OPINION OF THE COURT

FISHER, Circuit Judge.

This appeal arises from an order of the District Court,

entered July 30, 2009, granting Appellee NutriSystem, Inc.’s

3

(“NutriSystem”) motion for summary judgment on Appellants’

claims for past overtime payments based on violations of the

Fair Labor Standards Act (“FLSA” or the “Act”), 29 U.S.C.

§ 201, et seq.1 We must decide whether the District Court

correctly concluded that NutriSystem’s method of compensating

its call-center employees constituted a commission under the

FLSA so that Nutrisystem was exempt from paying Appellants

overtime. For the reasons articulated below, we agree with the

District Court that NutriSystem’s compensation plan qualified

as a commission and affirm its ruling.

I.

A.

The facts in this case are undisputed. NutriSystem is a

provider of weight loss and weight management products. It

markets and sells its prepackaged meals directly to customers

for personal use. Its core product is a 28-day meal program.

NutriSystem offers several varieties of the meal plan depending

on customers’ needs. In 2008, NutriSystem offered plans under

two methods of shipping, regular or auto-ship, at different

prices: a men’s regular 28-day plan for $371.50, or $319.95; a

women’s regular 28-day meal plan for $342.36, or $293.72; a

women’s or men’s silver 28-day plan (for older customers) for

$342.36, or $293.72; a women’s or men’s diabetic-friendly

28-day plan for $342.36, or $293.72; and a women’s or men’s

1

Deloris Wynn has been substituted as lead plaintiff

pursuant to Federal Rule of Appellate Procedure 43(a)(1).

4

vegetarian 28-day plan for $342.36, or $293.72. Under the

regular method, the customer receives only a 28-day shipment

and then must affirmatively request additional shipments.

Under the auto-ship method, a customer signs up to receive

automatic monthly shipments of food and is charged by

NutriSystem on a monthly basis. Customers are permitted to

cancel the auto-ship plan after the first month.

NutriSystem customers typically place their orders via

telephone or the internet. The phone calls are fielded at a

NutriSystem call center in Horsham, Pennsylvania, which

employs approximately 230 sales associates. Under a

NutriSystem sales policy, sales associates are prohibited from

remaining idle for more than five minutes while awaiting an

inbound call. Before the five-minute mark is reached, an

associate must originate an outbound sales call. These calls are

generally to people who filled out profiles on the company

website but failed to place an order or to customers who

previously placed orders but whose credit cards were declined.

NutriSystem sales associates are assigned to six different

work shifts: 7:00 a.m. to 3:30 p.m., 9:00 a.m. to 5:30 p.m.,

11:00 a.m. to 7:30 p.m., 1:30 p.m. to 10:00 p.m., 3:30 p.m. to

12:00 a.m., and 11:00 p.m. to 7:30 a.m. (the “overnight shift”).

Since January 2007, sales associates, except those working the

overnight shift, have been permitted to work extra hours during

a week if in the preceding week they exceeded the average

“sales dollars per call,” a figure the company calculates based on

the revenue the sales associates generate and the calls they make

each week.

5

In March 2005, NutriSystem implemented the

compensation scheme for sales associates at issue in this case.

Under the plan, sales associates receive the greater of either

their hourly pay or their flat-rate payments per sale for each pay

period. The hourly rate is $10 per hour for the first forty hours

per week, and $15 per hour for overtime. The flat rates per sale

are $18 for each 28-day program sold via an incoming call

during daytime hours, $25 for each 28-day program sold on an

incoming call during evening or weekend hours, and $40 for

each 28-day program sold on an outbound call or during the

overnight shift. These flat rates do not vary based on the cost of

the meal plan to the consumer.

The majority of the sales associates are compensated

based on these flat rates, not their hourly earnings. Under the

compensation plan, sales associates do not receive overtime

compensation when they are paid the flat rates for the sales

made. There is no change to the flat rates when a sales associate

works more than forty hours in one week.

B.

Adrian Parker, a former sales associate, sued

NutriSystem for violations of the FLSA and the Pennsylvania

Minimum Wage Act (“PMWA”), 43 Pa. Cons. Stat. § 333.101,

et seq., on behalf of himself and others similarly situated

(collectively “Appellants”). Parker asserted his FLSA claim as

a collective action under 29 U.S.C. § 216(b) and his PMWA

claim as a class action under Federal Rule of Civil Procedure 23.

6

In a July 25, 2008 order, the District Court declined to

exercise supplemental jurisdiction over Parker’s PMWA class

action claim.2 On September 26, 2008, the District Court

conditionally granted Parker’s motion to proceed as a collective

action for his FLSA claims, and seventy-eight plaintiffs opted

in.

NutriSystem moved for summary judgment against lead

plaintiff Parker and the first four opt-in plaintiffs in the FLSA

collective action. NutriSystem informed the District Court it

would move for summary judgment against the remaining

plaintiffs if the court found in its favor. Parker also moved for

summary judgment against NutriSystem. On July 30, 2009, the

District Court granted NutriSystem’s motion for summary

judgment and denied Parker’s.

Appellants filed a timely notice of appeal. The Secretary

of Labor has filed a brief as amicus curiae in support of

Appellants’ position.

2

Appellants argue that the District Court abused its

discretion in declining to exercise supplemental jurisdiction over

the state class action claims. Because we affirm the District

Court’s grant of summary judgment in favor of NutriSystem as

to the federal claims against it, we need not address the propriety

of the District Court’s decision with regard to its jurisdiction

over the state law claims. The District Court was free to decline

to exercise supplemental jurisdiction because it “dismissed all

claims over which it [had] original jurisdiction.” 28 U.S.C.

§ 1367(c)(3).

7

II.

The District Court had jurisdiction over Appellants’

FLSA claim pursuant to 28 U.S.C. § 1331 and 29 U.S.C.

§ 216(b). We have appellate jurisdiction under 28 U.S.C.

§ 1291. We review a district court’s grant of summary judgment

de novo. Levy v. Sterling Holding Co., 544 F.3d 493, 501 (3d

Cir. 2008). Summary judgment is appropriate “if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine

issue as to any material fact and that the moving party is entitled

to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).

III.

The dispute in this case centers on the limited issue of

whether NutriSystem’s method of compensating its sales

associates represents “commissions on goods or services,”

which turns on whether the “earnings result[] from the

application of a bona fide commission rate.” 29 U.S.C. § 207(i).

We conclude that NutriSystem’s compensation plan establishes

a “bona fide commission rate” and is therefore a “commission”

under the FLSA.

A. Background

The FLSA requires that employers pay their employees

one and one-half times their regular rate of pay for any hours

worked in excess of forty hours per week. 29 U.S.C. § 207(a).

The Act contains an exception to the overtime requirements for

8

employees working in retail or service establishments. Section

7(i), the “retail commission exception,” provides:

No employer shall be deemed to have

violated subsection (a) of this section by

employing any employee of a retail or service

establishment for a workweek in excess of the

applicable workweek specified therein, if (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 under section 206 of this

title, and (2) more than half his compensation for

a representative period (not less than one month)

represents commissions on goods or services. In

determining the proportion of compensation

representing commissions, all earnings resulting

from the application of a bona fide commission

rate shall be deemed commissions on goods or

services without regard to whether the computed

commissions exceed the draw or guarantee.

29 U.S.C. § 207(i). The employer has the burden of

demonstrating that it is eligible for the retail commission

exception. See Mitchell v. Ky. Fin. Co., 359 U.S. 290, 295-96

(1959); Madison v. Res. for Human Dev., Inc., 233 F.3d 175,

183 (3d Cir. 2000).

Here, the parties agree that under § 7(i), NutriSystem

qualifies as a retail establishment and that its sales associates’

regular rate of pay is more than one and one-half times the

9

federal minimum wage; the question we face is the meaning of

“commissions on goods or services.”

“‘In interpreting a statute, the Court looks first to the

statute’s plain meaning and, if the statutory language is clear and

unambiguous, the inquiry comes to an end.’” Kaufman v.

Allstate N.J. Ins. Co., 561 F.3d 144, 155 (3d Cir. 2009) (quoting

Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54 (1992)).

Where the statutory language is unambiguous, the court should

not consider statutory purpose or legislative history. See AT&T,

Inc. v. F.C.C., 582 F.3d 490, 498 (3d Cir. 2009).

In determining whether language is unambiguous, we

“read the statute in its ordinary and natural sense.” Harvard

Secured Creditors Liquidation Trust v. I.R.S., 568 F.3d 444, 451

(3d Cir. 2009). A provision is ambiguous only where the

disputed language is “reasonably susceptible of different

interpretations.” Dobrek v. Phelan, 419 F.3d 259, 264 (3d Cir.

2005).

The FLSA does not define the term “commission.” The

plain meaning of the term, according to Black’s Law Dictionary,

is “[a] fee paid to an agent or employee for a particular

transaction, usu[ally] as a percentage of the money received

from the transaction.” Black’s Law Dictionary 306 (9th ed.

2009). Section 7(i), however, requires that in order to be a

commission, the fee paid to the employee must be based on a

“bona fide commission rate.” The “bona fide commission rate”

language is imprecise and capable of ambiguity. Therefore, we

hold the plain language of § 7(i) does not provide sufficient

guidance to govern the application of the statute in this case. Cf.

10

Mechmet v. Four Seasons Hotels, Ltd., 825 F.2d 1173, 1175 (7th

Cir. 1987) (finding that “[i]t would not be sensible to try to

decide [a] case on the basis of dictionary meanings, or for that

matter common legal usages, of the word ‘commission.’”).

Because we cannot unlock the meaning of “commission”

based on the plain language in this context, we consider

legislative history and statutory purpose. See In re Lord Abbett

Mut. Funds Fee Litig., 553 F.3d 248, 254 (3d Cir. 2009)

(“‘Where the statutory language does not express Congress’s

intent unequivocally, a court traditionally refers to the legislative

history and the atmosphere in which the statute was enacted in

an attempt to determine the congressional purpose.’”) (quoting

United States v. Gregg, 226 F.3d 253, 257 (3d Cir. 2000)).

Further, in light of this statutory ambiguity we must

examine the Department of Labor’s (the “Department”) various

interpretations of the statute to determine whether the

Department is entitled to deference. See Chevron U.S.A., Inc. v.

Natural Res. Def. Council, Inc., 467 U.S. 837, 865 (1984).

“Interpretations such as those in opinion letters – like

interpretations contained in policy statements, agency manuals,

and enforcement guidelines, all of which lack the force of law

– do not warrant Chevron-style deference.” Christensen v.

Harris County, 529 U.S. 576, 587 (2000). Rather,

interpretations contained in formats such as opinion letters are

“entitled to respect” based on an agency interpretation’s power

to persuade. Id. (citing Skidmore v. Swift & Co., 323 U.S. 134,

140 (1944) (We consider “the thoroughness evident in [the

interpretation’s] consideration, the validity of [the

interpretation’s] reasoning, [the interpretation’s] consistency

11

with earlier and later pronouncements, and all those factors

which give [the interpretation] power to persuade, if lacking

power to control.”)); see also Packard v. Pittsburgh Transp.

Co., 418 F.3d 246, 253 (3d Cir. 2005). In this case, we examine

the various Department opinion letters addressing the meaning

of commission. Both sides point to court decisions that, they

claim, support their interpretation of the term “commission”

under section 7(i).

Appellants submit that to qualify as a commission under

§ 7(i), the fee paid to an employee must be based on the final

cost to the consumer and that NutriSystem’s plan, therefore,

would not qualify as a commission because the flat rate

payments are based not on the cost to the consumer, but on both

the time the sale was consummated and whether it was the result

of an incoming or outgoing call. The Department supports

Appellants’ position and argues that we should afford Skidmore

deference to its consistent view expressed in 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.)

NutriSystem, on the other hand, asserts that its compensation

scheme qualifies as commission because the sales associates’

pay varies across pay periods, their compensation was not linked

to the number of hours worked, and the payments were

proportional to the cost to the consumer.

B. Legislative History

Congress enacted the FLSA “to protect all covered

workers from substandard wages and oppressive working hours,

12

‘labor conditions [that are] detrimental to the maintenance of the

minimum standard of living necessary for health, efficiency and

general well-being of workers.’” Barrentine v. Ark.-Best

Freight Sys., Inc., 450 U.S. 728, 739 (1981) (quoting 29 U.S.C.

§ 202(a)). The Act was designed “to ensure that each employee

covered by the Act would receive ‘[a] fair day’s pay for a fair

day’s work’ and would be protected from ‘the evil of overwork

as well as underpay.’” Id. (quoting 81 Cong. Rec. 4983 (1937)

(message of President Roosevelt)).

The legislative history of the overtime compensation

provisions of the FLSA reveal a threefold purpose underlying

them: (1) to prevent workers who, perhaps out of desperation,

are willing to work abnormally long hours from taking jobs

away from workers who prefer shorter hours, including union

members; (2) to spread available work among a larger number

of workers and thereby reduce unemployment; and (3) to

compensate overtime workers for the increased risk of

workplace accidents they might face from exhaustion or

overexertion. Mechmet, 825 F.2d at 1175-76 (7th Cir. 1987)

(citing H.R. Rep. No. 1452, 75th Cong., 1st Sess. (1937); S.

Rep. No. 884, 75th Cong., 1st Sess. (1937)).

C. Department of Labor Interpretations

The Department’s regulations specifically elaborate on

the purpose of § 7(i):

Section 7(i) was enacted to relieve an

employer from the obligation of paying overtime

compensation to certain employees of a retail or

13

service establishment paid wholly or in greater

part on the basis of commissions. These

employees are generally employed in so-called

“big ticket” departments and those establishments

or parts of establishments where commission

methods of payment traditionally have been used,

typically those dealing in furniture, bedding and

home furnishings, floor covering, draperies, major

appliances, musical instruments, radios and

television, men's clothing, women’s ready to

wear, shoes, corsets, home insulation, and various

home custom orders. There may be other

segments in retailing where the proportionate

amount of commission payments would be great

enough for employees employed in such segments

to come within the exemption. Each such

situation will be examined, where exemption is

claimed, to make certain the employees treated as

exempt from overtime compensation under

section 7(i) are properly within the statutory

exclusion.

29 C.F.R. § 779.414.

Although the Department has not defined “commission”

in its regulations,3 the Wage and Hour Division of the

3

While the Department of Labor’s regulations do not

define commission, they do specify what a bona fide

commission is not:

14

Department of Labor has attempted to explain the meaning of

the term “commission” under the retail commission exception

through various opinion letters. The following three letters are

most relevant to our analysis.

First, the Department opined that alarm system installers

who were compensated based on a percentage of the sales price

of the alarm systems they installed were paid a commission.

However, installers who were paid a flat fee per installation

were not paid a commission and did not fall within the scope of

A commission rate is not bona fide if the

formula for computing the commissions is such

that the employee, in fact, always or almost

always earns the same fixed amount of

compensation for each workweek (as would be

the case where the computed commissions seldom

or never equal or exceed the amount of the draw

or guarantee). Another example of a commission

plan which would not be considered as bona fide

is one in which the employee receives a regular

payment constituting nearly his entire earnings

which is expressed in terms of a percentage of the

sales which the establishment or department can

always be expected to make with only a slight

addition to his wages based upon a greatly

reduced percentage applied to the sales above the

expected quota.

29 C.F.R. § 779.416(c).

15

section 7(i). Dep’t of Labor Op. Ltr., 1996 WL 1031770

(Apr. 3, 1996). The Department’s letter does not elaborate on

whether the installers who were paid a percentage of the sales

price also had the ability to sell upgrades to alarm systems on-

site, thereby increasing their commissions by increasing the cost

to the consumer. Put differently, it is unclear from the letter

whether these installers can be considered “in sales.” The

Department based its determination of what was a “commission”

solely on the fact that one compensation method was based on

a percentage of cost to the consumer and the other was a flat rate

with no connection to the cost to the consumer.

In a second letter concerning health club instructional

employees, the Department was unable to reach an opinion

because the employees – membership sales associates and

personal trainers – appeared to be compensated under more than

one method. Dep’t of Labor Op. Ltr., 2005 WL 3308624 (Nov.

14, 2005). The Department did offer the employer the following

guidance:

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).” Field Operations Handbook,

21h04(c) . . . Rather, employees paid a flat fee

“are considered to be compensated on a piece rate

basis and not on the basis of commissions.

Commissions, for purposes of Sec[tion] 7(i),

usually denotes a percentage of the amount of

monies paid out or received.” . . . Moreover,

instructional employees paid a flat fee per lesson

16

or session taught appear likely to earn the same

amount each week, contrary to the requirements

of 29 C.F.R. § 779.416.

Id.

In the third letter, concerning automobile detailers and

painters, the Department relied on the same above-quoted

passage from the Wage and Hour Field Operations Handbook to

determine the definition of commission. Dep’t of Labor Op.

Ltr., 2006 WL 4512957 (June 29, 2006). The detailers and

painters in this letter were paid according to how many vehicles

they serviced each week. Each vehicle was assigned a

predetermined number of “flag hours” based on the employer’s

expectation of how long the job would take to complete. Each

detailer or painter was assigned a “flag rate” of pay based on his

or her experience and expertise. The detailers and painters were

paid by multiplying their flag rate by the flag hours for each

vehicle they serviced, regardless of how long it actually took

them to complete a job. Under this system, the employees were

encouraged to work rapidly and efficiently, and their pay varied

from week to week. In its letter, the Department concluded that

this payment arrangement was a commission because “the

amount of the payment appears to be related to the value of the

service performed.” Id.

D. Relevant Case Law

This Court has not weighed in on the question of what

qualifies as a commission under § 7(i). Decisions on the

meaning of “commission” under the retail commission

17

exception are, in fact, sparse. Klinedinst v. Swift Invs., Inc., 260

F.3d 1251, 1254 (11th Cir. 2001) (noting that the meaning of

commission “is an issue that finds little illumination from the

sparse case law and the vague references in statutes and

regulations.”). There do not appear to be decisions from other

circuits that have considered whether compensating call center

employees with flat rate payments qualifies as bona fide

commissions under the retail commission exception. Of the

limited case law on this issue, we find the following case most

instructive.

In Yi v. Sterling Collision Centers, 480 F.3d 505 (7th Cir.

2007), the defendants paid the plaintiff auto mechanics under

the following scheme:

[Defendant Sterling] calculates the number of

hours normally required to do a given type of

repair (these are called “booked hours”) and

multiplies that number by a dollar figure. The

product of this multiplication is the labor price of

the repair to the customer. Sterling adds material

costs to the labor price to come up with a final

price. A team of mechanics is then assigned to

the job. Each member of the team keeps track of

the hours he works on the job. When it’s

completed and the hours of the team members are

added up, Sterling determines each member’s

compensation by multiplying (1) the number of

booked hours for the job by (2) the ratio of the

team member’s actual hours worked to the total

hours worked by the team, and then by (3) a

18

wage, per booked (not actually worked) hour,

based on the skill or quality of the individual team

member.

Id. at 509.

In considering whether that system of compensation was

a commission system within the meaning of the statute, Judge

Posner, writing for the Seventh Circuit, stated:

[t]he essence of a commission is that it bases

compensation on sales, for example a percentage

of the sales price, as when a real estate broker

receives as his compensation a percentage of the

price at which the property he brokers is sold.

Although his income is likely to be influenced by

the number of hours a week that he works, the

relation is unlikely to be a regular one. In one

week business may be slow; he may make no

sales and thus have no income for that week. The

next week business may pick up and by working

overtime that week he may be able to make up the

income he lost because of slack business the

previous week. Over a year his hours of work

may be similar to those of regular hourly

employees. So if he had to be paid overtime, his

annual income would be higher than theirs even

though he hadn’t worked more hours over the

course of the year than they had. We take this to

be the rationale for the commission exemption

from the FLSA’s overtime provision.

19

Id. at 508. The Seventh Circuit noted that a commission can be

based on the full price of the good or service sold or on only part

of the price, for example the price of the labor that goes into the

good or service. Id. at 509-10. The court in Yi concluded that

the compensation plan at issue was indeed a commission under

§ 7(i).

E. NutriSystem’s Compensation Plan and Section 7(i)

1. Skidmore Deference

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.

20

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

21

commission further weighs against the persuasiveness of the

Department’s opinion letters. See Skidmore, 323 U.S. at 140.

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.

2. Percentage of Cost to Consumer

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

22

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

3. Proportionality and Sales

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

4

The Department’s own regulations provide guidance on

what is not a bona fide commission plan. 29 C.F.R.

§ 779.416(c). NutriSystem’s plan does not fall into either of the

examples given in that regulation, and neither Appellants nor the

Department argue that it does. NutriSystem’s employees’ pay

can vary greatly across pay periods and the plan is not based on

the sales NutriSystem expects to make as a whole, but rather is

tied precisely to the number of sales each sales associate closes.

23

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

5

There was discussion at argument dealing with the

boundaries of proportionality. We, like the District Court, need

not define the outer limits of proportionality here as we are

satisfied that it exists in this case.

24

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

25

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.

26

IV.

For the foregoing reasons, we will affirm the District

Court’s grant of summary judgment to NutriSystem and denial

of summary judgment to the Appellants.

27

Appendix I

28

Parker, etc. v. NutriSystem, Inc., No. 09-3545

COWEN, Circuit Judge, dissenting

Unlike the majority, I would afford Skidmore deference

to the Department’s view that in order to constitute a

commission for purposes of § 7(I), the amount of compensation

paid to the employee must be proportionally related to the

amount charged to the customer. Because NutriSystem failed to

demonstrate the requisite proportionality, its compensation plan

cannot be considered a bona fide commission plan under § 7(I).

As the majority recognizes, the Department has issued

several opinion letters concerning the scope of the retail

commission exemption. In the majority’s view, these opinion

letters fail to “provide sufficiently thorough reasoning,

consistency, or factual similarities to the instant case to warrant

deference.” Maj. Typescript Op. at 20. I disagree, as in my

view, the opinion letters clearly reflect the Department’s

consistent view that, in order to be considered a commission

under § 7(I), there must be a degree of proportionality between

the payment an employee receives and the costs passed down to

the customer.

For instance, in the April 3, 1996, letter concerning alarm

system installers, the Department explained that, if the installers

“were to be compensated on a percentage of the sales price of

the alarm systems they installed[, s]uch a method of payment

would constitute payment on a commission basis;” but if the

installers were “paid a flat fee per installation, [the Department]

would not consider such a payment to be a commission

payment.” Dep’t of Labor Op. Ltr., 1996 WL 1031770 (Apr. 3,

1996).

1

Similarly, in its subsequent letter about health club

instructional employees, the Department made clear that, while

instructors who were paid a percentage of the club’s revenue per

lesson would qualify for the exemption, instructors paid a flat

fee per lesson would not because “[f]lat fees paid without regard

to the value of the service performed do not represent

‘commissions on goods or services’ for purposes of [§] 7(I).”

Dep’t of Labor Op. Ltr., 2005 WL 3308624 (Nov. 14, 2005)

(internal quotation marks and citations omitted). In that opinion

letter, the Department went on to state that, in general,

“employees paid a flat fee are considered to be compensated on

a piece rate basis and not on the basis of commissions.

Commissions, for purposes of [§] 7(I), usually denotes a

percentage of the amount of monies paid out or received.” Id.

In the third letter, the DOL determined that automobile

detailers and painters who were paid under the flag-rate method

were subject to the commission exemption because the flag

hours that the employer set for each job corresponded to the

labor hours ultimately charged to the customer. Dep’t of Labor

Op. Ltr., 2006 WL 4512957 (June 29, 2006).

Insofar as these opinion letters express the Department’s

consistent and reasonable position that § 7(I) requires a

proportional relationship between employee compensation and

customer costs, I would afford them a “measure of respect”

2

under Skidmore.1 See Fed. Express Corp. v. Holowecki, 552

U.S. 389, 399 (2008).

After declining to defer to the Department’s

interpretation of § 7(I), the majority nonetheless adopts a

definition that is consistent with the Department’s approach,

holding 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).” Maj. Typescript Op. at 23. The majority then concludes

that NutriSystem’s compensation plan meets this definition

because the payments made to its sales associates are

“sufficiently proportional” to the cost to the consumer. Id.

While I do not object to the majority’s contention that § 7(I)

requires a proportional relationship between employee

compensation and customer costs, I cannot agree that

NutriSystem has demonstrated such a proportional relationship

here.

It is undisputed that NutriSystem’s meal plans vary in

price depending on the type of meal plan the customer chooses

1

See also 29 C.F.R. § 779.413(a)(4) (describing a

“[s]traight commission” as “a flat percentage on each dollar of

sales [the employee] makes”); U.S. Dep’t of Labor, Glossary of

Current Industrial Relations & Wage Terms, Bulletin No. 1438,

at 15 (1965) (defining “commission earnings” as

“[c]ompensation to salespeople based on a predetermined

percentage of the value of sales”); U.S. Dept’ of Labor, Glossary

of Currently Used Wage Terms, Bulletin No. 983, at 4 (1950)

(defining “commission earnings” as “compensation to sales

personnel based on a percentage of value of sales”).

3

and the length of the customer’s commitment. It is likewise

undisputed that the flat-rate fee paid to a sales associate does not

vary depending on the type of plan the customer chooses or the

length of the customer’s commitment. NutriSystem clearly has

not demonstrated that the flat-rate fees are proportionally related

to the cost to the customer. While neither the plaintiffs nor the

Department suggests that a commission must be based on a

strict percentage of the end cost to the consumer, the flat-rate

payments in this case do not correspond at all with the end cost

to the consumer. Rather, the flat-rate payments are based on the

time the sale is made and whether it results from an incoming or

outgoing call. The fact that NutriSystem can perform math to

portray its flat-rate fees as percentages of customer costs does

not transform the fees into commissions.

Therefore I am unable to agree with the majority and

would reverse and remand for further proceedings.

4