Commissions Can Be Distributed Over Time to Comply with FLSA Retail Sales Exemption

By Jeffrey Rhodes Jun 16, 2016
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The overtime exemption for employees of retail and service establishments does not require that those employees receive minimum pay for each week they work if the minimum is met annually, the U.S. District Court for the Southern District of Florida ruled.

Sean Freixa was a personal vacation consultant for three associated cruise companies, Prestige Cruise Services LLC, Prestige Cruise Holdings Inc., and Prestige Cruises International Inc. (collectively referred to as Prestige), from Dec. 1, 2013, to Dec. 19, 2014. Prestige specializes in cruise services and sales. Freixa sold cruises to the general public and earned commissions from cruise bookings. Each week, Prestige paid Freixa $500 as a fixed salary, and Freixa earned over 60 percent of his pay from commissions, boosting his earnings to $70,343 during his employment.

Freixa filed a federal lawsuit against Prestige claiming that he was not paid overtime wages, despite working 60- and 70-hour weeks, in violation of the Fair Labor Standards Act (FLSA). Prestige filed a motion for summary judgment to have the lawsuit dismissed prior to trial, claiming that Freixa was a commissioned employee and his position fit the FLSA’s retail sales exemption. Freixa argued that the exemption did not apply because he did not receive the minimum pay required and because Prestige did not comply with the record-keeping requirements for the exemption.

The FLSA’s retail sales exemption applies to a “retail or service establishment” that is exempted from paying overtime wages “if (1) the regular rate of pay of [the] 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 commission on goods and services.”

Freixa admitted that Prestige qualifies as a “retail or service establishment” and that he earned more than half of his compensation through bona fide commissions. Freixa nonetheless disputed Prestige’s argument that he received a sufficient “regular rate of pay” for each workweek, and argued that Prestige did not keep adequate records during his employment.

In their respective summary judgment briefs, Freixa and Prestige disagreed regarding how frequently Prestige had to pay him in excess of one and one-half times the applicable minimum wage. Freixa argued that Prestige needed to pay him this amount each week during his employment. Prestige argued that it could average Freixa’s total compensation during his one-year employment to show that he was paid at least one and one-half times the relevant minimum wage.

During Freixa’s employment, Florida’s minimum wage was $7.93, and time and a half of the minimum wage equaled $11.90. Freixa claimed that he worked 60 to 70 hours per week each week, or approximately 3,000 hours a year. Because Freixa only received $500.00 as a fixed salary each week, and sometimes waited several weeks for his commissions to be paid, there were many weeks in which Freixa did not receive $11.90 per hour. Nevertheless, because he was paid a total of $70,343 for the year, Freixa’s annual wage rate was approximately $23.45 an hour, which is well in excess of $11.90 an hour.

The court found that the retail sales exemption allowed Prestige to average Freixa’s pay over the course of one year. Noting that the FLSA generally requires overtime wages be calculated with “a single workweek as its standard,” the court found that the FLSA regulations allow “some other reasonable and equitable method” to distribute commissions over time when it is “not possible or practicable” to allocate a commission by each workweek. In this case, Freixa received lump-sum commission payments for cruise vacation sales he completed in prior weeks. The court found that, because Prestige aggregated sales over several weeks before making each commission payment, it was appropriate for Prestige to consider all of Freixa’s commissions over the year in calculating his regular rate of pay.

The court agreed with Freixa that Prestige failed to comply with the retail sales exemption’s record-keeping requirements. These requirements mandate that an employer note in its records which employees qualify for the exemption, outline the agreement concerning commissioned employees’ terms of employment and compensation, track employee hours each workweek, and review quarterly whether its representative time period for commissioned employees should be revised. While Prestige did not fulfill these requirements, the court found that such deficiencies did not eliminate the exemption. Rather, the U.S. Department of Labor could penalize Prestige for this noncompliance.

Freixa v. Prestige Cruise Services LLC, S.D. Fla., No. 15-22732 (May 23, 2016).

Professional Pointer: The retail sales exemption is often overlooked by employers. Employers can take advantage of this exemption and the ability to distribute commissions over multiple workweeks by keeping records in accordance with the FLSA regulations, which include tracking commissioned employees’ hours and the relevant time periods to which commissions relate.

Jeffrey Rhodes is an attorney with Doumar Martin in Arlington, Va.

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