Southern District of Ohio Upholds Structure of Mr. Tire's Pay to Managers
by
In a lengthy opinion entered by Judge Gregory Frost of the Southern District of Ohio, the Court upheld the pay structure utilized by Mr. Tire Auto Service Centers ("Mr. Tire") to pay its store managers and assistant managers. See Mcaninch v. Monro Muffler Brake, Inc., S.D. Ohio Case No. 2:09-cv-989. Despite the fact that Mr. Tire's compensation structure was complicated and did not tie pay to actual sales, the Court held that the structure satisfied the Fair Labor Standard Act's overtime exemption for commissions paid to employees at a retail or service establishment.
The plaintiffs were former managers and assistant managers at Mr. Tire who were never paid overtime. Instead, they were paid based on a convoluted formula created at the highest levels of the company. The formula incorporated various factors including the gross profit less payroll and benefits, controllable expenses, inventory shortages, and earnings expectations at each individual store. The formulations ultimately culminated in a budgeted "controllable profit" for each month at each store. If the manager exceeded the controllable profit budget at his store, he would receive additional compensation over and above his monthly draw.
Mr. Tire argued that the managers met the "retail commission" exemption found at 29 U.S.C., Section 207(i), which provides that an employee may be deemed exempt from the overtime compensation requirement if: (1) the stores qualify as retail or service establishments; (2) the employer pays the employees a regular rate of pay of at least one and one-half times the federal minimum wage for each hour worked; and (3) the employees receive more than half of their compensation in the form of commissions earned from the sale of goods or services.
The plaintiffs contested the third requirement on several bases. First, they claimed that because pay was tied to profit rather than sales, Mr. Tire's compensation plan could not accurately be described as commission-based. Second, the plaintiffs argued that the commissions were not sufficiently proportional to the amount charged to customers because Mr. Tire executives used a highly complicated compensation structure and retained vast discretion in setting the percentages of a store's controllable profit that managers could earn. Third, the plaintiffs argued that their compensation seldom exceeded the amount of their draw, in violation of regulations defining a commission-based pay plan. Finally, the Plaintiffs argued that their pay was not decoupled from their hours, a factor that weighed strongly against finding the plan to be commission-based. The Court rejected all of the plaintiff's arguments.
First, the Court held that a commission-based compensation plan does not require that the commission be tied to sales. Citing a federal regulation which allowed commissions to be based on "all types of commissions...and not exclusively those measured by 'sales' of these goods," the Court held that employer profits are an acceptable alternative upon which to base a commission plan.
Similarly, despite holding that the compensation structure was not "overly generous," and that the pay plan allowed the defendant to inject multiple factors and to exercise discretion in setting the commission rate, the Court held there was some correlation between the compensation and sales. Distinguishing cases where the defendant could not show any connection between the employee's pay and the company's sales, the Court noted that the plaintiffs were paid, at least in part, based on their ability to keep sales figures high and to keep costs low. "Some correlation" was sufficient proportionality to find the compensation structure commission-based.
With respect to the third claim, the plaintiffs pointed to evidence showing that they exceeded their weekly draw amount only about 25% of the time. This lack of variety in pay, they argued, showed that they seldom earned a different amount from their fixed compensation in violation of federal regulations defining the sales commission exemption. Interpreting the regulation, the Court referenced cases where the employees earned excess compensation 39% and 28% of the time, which was considered to be more than "seldom." Like 39% and 28%, approximately 25% was more than "seldom," and constituted sufficient variation in pay to qualify as a bona fide commission plan.
Finally, the plaintiffs showed that they were scheduled to work 60 hours per week regardless of the incentives provided by commissions. As a result, they argued that their pay was not decoupled from the hours they worked, a factor weighing against finding a plan to be commission based. The Court again discounted this argument. It noted that Mr. Tire's compensation plan provided the plaintiffs with "an incentive to work more and to work more productively." Despite the fact that the plaintiffs typically worked the same hours and typically earned the same pay, the defendants had carried their burden in proving that the compensation plan was commission-based and exempt from overtime requirements.
Many of the Court's holdings extend and/or limit the reach of previous holdings interpreting the sales commission exemption to the Fair Labor Standards Act. The decision has been appealed to the Sixth Circuit Court of Appeals. Whatever the decision on appeal, the case should shed light on how broadly courts in the Sixth Circuit will interpret the sales commission exemption moving forward.
Click Here to Download Article
The publications available on this website are intended by McCarthy, Lebit, Crystal & Liffman Co. LPA to educate and inform our clients and the general public regarding important legal developments. These publications are not intended, nor should be construed to be legal advice. The publications provide general information and may not apply to your specific facts and circumstances. You should contact legal counsel relative to your individual circumstances. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.
