Lalli v. Gen. Nutrition Ctrs., Inc.

• Decision Date: 12 February 2016
• Docket Number: No. 15–1199.,15–1199.
• Citation: 814 F.3d 1
• Parties: Joseph LALLI, Plaintiff, Appellant, v. GENERAL NUTRITION CENTERS, INC. and General Nutrition Corp., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

814 F.3d 1

Joseph LALLI, Plaintiff, Appellant,

v.GENERAL NUTRITION CENTERS, INC. and General Nutrition Corp., Defendants, Appellees.

No. 15–1199.

United States Court of Appeals, First Circuit.

Feb. 12, 2016.

Mathew P. Jasinski, with whom William Narwold and Motley Rice LLC were on brief, for appellant.

Robert W. Pritchard, with whom Allison R. Brown and Littler Mendelson, P.C. were on brief, for appellee.

Before KAYATTA, STAHL, and BARRON, Circuit Judges.

STAHL, Circuit Judge.

From August 2009 through January 2013, Plaintiff–Appellant Joseph Lalli ("Plaintiff" or "Lalli") was employed by General Nutrition Centers, Inc. and General Nutrition Corp. (collectively, "Defendants" or "GNC") as a store manager. Lalli challenged his compensation arrangement under the Fair Labor Standards Act ("FLSA"), 29 U.S.C. §§ 201 –219, and the Massachusetts Minimum Fair Wage Law ("State Wage Law"), Mass. Gen. Laws ch. 151, §§ 1 –22. Upon GNC's motion, the district court dismissed the complaint. Lalli now appeals that decision. For the reasons set forth below, we affirm.

I. Facts & Background

The facts of the case are quite straightforward. GNC sells health and wellness products through company-owned stores throughout the United States. Lalli was a store manager at a GNC store in Massachusetts. As a store manager, Lalli earned a guaranteed weekly salary regardless of the hours worked that week and a non-discretionary sales commission that varied based upon the amount of eligible sales attributed to him for that week. Whenever Lalli worked over forty hours in a given week, he was also paid an overtime premium for each hour worked in excess of the forty hours. In calculating Lalli's overtime, GNC used a "fluctuating workweek" ("FWW") method to calculate his overtime pay rate. Under this method, GNC would (1) add together both (a) the guaranteed salary for the week and (b) the commissions earned that week; (2) divide the total wages by the number of hours the employee logged for that week; and (3) pay an additional 50% of the resulting per hour rate for any hour worked in excess of forty hours that week.

On December 31, 2013, Lalli filed a two-count complaint alleging violations of the FLSA and the State Wage Law. Lalli alleged that GNC's method of calculating overtime violated the statutes, arguing that the FWW calculation method lawfully applies only when a business pays a fixed amount for the week. Because the commission earnings varied from week to week, Lalli alleged that GNC did not pay him a "fixed" amount. One month later, GNC moved to dismiss the complaint for failure to state a claim. The district court allowed the motion, concluding that an employer may use the FWW method to assess overtime pay rates even when an employee's weekly pay varies as a result of performance-based commissions. Lalli then filed the instant appeal.

II. Analysis

The FLSA¹ requires employers to compensate employees for each hour worked in excess of forty hours during a workweek "at a rate not less than one and one-half times the regular rate at which [they are] employed." 29 U.S.C. § 207(a)(1). "[T]he regular rate refers to the hourly rate actually paid the employee for the normal, non-overtime workweek for which he is employed." Walling v. Youngerman–Reynolds Hardwood Co., 325 U.S. 419, 424, 65 S.Ct. 1242, 89 L.Ed. 1705 (1945).

If an employee is paid a fixed salary each week regardless of the hours worked, the employer calculates the "regular rate" each week by dividing the weekly wages by the hours worked that particular week. Overnight Motor Transp. Co. v. Missel,

316 U.S. 572, 580 n. 16, 62 S.Ct. 1216, 86 L.Ed. 1682 (1942). "[T]hough week by week the regular rate varies with the number of hours worked," it is "regular in the statutory sense inasmuch as the rate per hour does not vary for the entire week." Id. at 580, 62 S.Ct. 1216. The employer then multiplies the regular rate by 50% to produce the additional overtime compensation that must be paid for every hour worked beyond forty that week. O'Brien v. Town of Agawam, 350 F.3d 279, 287 (1st Cir.2003). Only an additional "half" is required to satisfy the statute because the "time" in "time-and-a-half" has already been compensated under the salary arrangement.²

Id. at 288.

All of these principles are echoed and illustrated in the interpretive bulletins issued by the Department of Labor ("DOL"). In 29 C.F.R. § 778.109, the DOL lays out the general rule for calculating overtime pay:

The "regular rate" under the Act is a rate per hour. The Act does not require employers to compensate employees on an hourly rate basis; their earnings may be determined on a piece-rate, salary, commission, or other basis, but in such case the overtime compensation due to employees must be computed on the basis of the hourly rate derived therefrom.... The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment ... in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid.

Section 778.109 then states that "[t]he following sections give some examples of the proper method of determining the regular rate of pay in particular instances."

Two "examples" of compliant pay structures warrant particularly close attention here. Section 778.114 describes what to do when an employee receives a "[f]ixed salary for fluctuating hours." According to the DOL, an employee may be employed on a salary basis and have hours "which fluctuate from week to week" if the salary is paid "pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many." 29 C.F.R. § 778.114(a). "Where there is a clear mutual understanding ... that the fixed salary is compensation ... for the hours worked each workweek, whatever their number, ... such a salary arrangement is permitted by the Act" if the resulting regular rate is sufficient to provide compensation above the minimum wage rate. Id. As in Missel, the regular rate "is determined by dividing the number of hours worked in the workweek into the amount of the salary." Id. "Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate." Id. (emphasis added).

In O'Brien, we restated these conditions in a four-factor test:

(1) the employee's hours must fluctuate from week to week;

(2) the employee must receive a fixed salary that does not vary with the number of hours worked during the week (excluding overtime premiums);

(3) the fixed amount must be sufficient to provide compensation every week at a regular rate that is at least equal to the minimum wage; and

(4) the employer and employee must share a "clear mutual understanding" that the employer will pay that fixed salary regardless of the number of hours worked.

350 F.3d at 288. If the employer uses the FWW method, it must satisfy a fifth factor in order to comply with the FLSA's overtime requirement: "the employee [must] receiv[e] a fifty percent (50%) overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week." See Wills v. RadioShack Corp., 981 F.Supp.2d 245, 255 (S.D.N.Y.2013) (emphasis added).

Section 778.118, on the other hand, describes what to do when an employee receives a "[c]ommission paid on a workweek basis." As an adjacent section points out: "Commissions ... must be included in the regular rate. This is true regardless of whether the commission is the sole source of the employee's compensation or is paid in addition to a guaranteed salary [.]" 29 C.F.R. § 778.117. "When the commission is paid on a weekly basis, it is added to the employee's other earnings for that workweek ... and the total is divided by the total number of hours worked in the workweek to obtain the employee's regular hourly rate for the particular workweek." Id. § 778.118. As with the overtime premium provided under section 778.114, where an employee's compensation arrangement already accounts for the "time" in "time-and-a-half," the employee who earns a commission on a workweek basis "must then be paid extra compensation at one-half of that rate for each hour worked in excess of the applicable maximum hours standard." Id. (emphasis added).

In the instant case, Defendants employed a pay structure that combines the example set out in section 778.114 (a fixed weekly salary regardless of hours worked) with the example set out in section 778.118 (commissions paid weekly).³ Because each element reflects a permissible compensation scheme, one might suspect Defendants to be on solid footing. Instead, Plaintiff contends that two rights make a wrong, and that the commission component of the pay arrangement takes the pay scheme as a whole outside the example provided in section 778.114. The district court rejected this contention, and we review its determination de novo. Ruivo v. Wells Fargo Bank, N. Am., 766 F.3d 87, 90 (1st Cir.2014).

We agree with the district court and hold that the payment of a performance-based commission does not foreclose the application of section 778.114 with respect to the salary portion of the pay structure at issue.

Lalli was paid a fixed salary for whatever hours he worked, and Lalli's earned commissions were added to his regular rate calculation. GNC then paid Lalli a 50% premium on top of the regular rate for all overtime hours worked. Based on the plain language of the federal regulations at issue, GNC's compensation arrangement would seem to pass muster. Plaintiff demurs, pointing first to our decision in O'Brien and next to the DOL's interpretive bulletins. We turn to O'Brien first.

In O'Brien, this Circuit considered whether the pay scheme established in a collective bargaining agreement ("CBA") between a town and its police officers satisfied the fixed...