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Corporation Cleaning Services (hereinafter “CCS”) is Chicago’s largest provider of window washing services to high rise commercial and apartment buildings along with some governmental and other non-commercial, non-residential, buildings such as hospitals and museums; fewer than 1% of its customers are private home owners.  Plaintiffs were 24 window washers employed currently or formerly by CCS who alleged they were not paid at least 1 ½ times their normally hourly wage for any hours they worked in excess of 40 hours a week as required by the Fair Labor Standards Act. But there is an exemption applicable in this case, that required satisfaction of three conditions:

  1. The workers’ regular pay exceeded 1 ½ times the federal minimum wage (plaintiffs agreed this was satisfied and not an issue in the case);
  2. More than half the compensation for a representative period (not less than one month) represents commissions on goods or services;
  3. And, the employee must be employed by a “retail or service establishment.”

The issues presented by the appeal in Alvarado v. Corporation Cleaning Services, No. 13-3818 were whether CCS’ window washers were paid mostly by commission and whether CCS was a retail or service establishment. When receiving a window washing order, CCS calculates the number of “points” to assign to the job based on the job’s complexity and the estimated number of hours that the window washers will take to complete it; usually each worker assigned to the job gets the same share of the points allocated to it.  CCS paid each window washer the number of points allocated to him multiplied by a rate, specific to each worker, that is specified in the company’s Collective Bargaining Agreement with the Service Employee’s International Union.  CCS used the number of points assigned to a job to determine the price it charged the customers, naturally using a higher ratio of dollars per point for setting its price for customers than for compensating its employees, so that it could make a profit.  CCS also regularly made price adjustments, such as adding the cost of permits and equipment rentals, rounding the price to the nearest $25.00 increment, and reducing the price because of competition or a desire to maintain good relations with customers. These adjustments caused the percentage of the price attributable to window washer’s compensation to vary from job-to-job.

CCS doesn’t call its compensation system a “commission” system, but instead a “piece-rate” system, which is not subject to the overtime exemption at issue in the case.  The 7th Circuit noted that the nomenclature was not determinative and the word “commission” need not be used for the exemption to be applicable.   The 7th Circuit noted the differences between the two compensation systems (commission versus piece work).  In a piece-rate system, a worker is paid by the item produced.  In a commission system, the worker is paid by the sale. Thus, the piece-rate worker is paid for the item produced whether it is sold or not while the commission worker is paid only upon a sale.  In the present case, the 7th Circuit found that the window washers were paid only if there had been a sale, namely a sale of a window washing services to a building owner or manager, and therefore CCS’ payment system was a commission system rather than a piece-rate system.  Additionally, commission compensated work involves irregular hours of work which applied to window washing services. Window washing employment is necessarily irregular because of the peculiar conditions of the window washing business.

In order to prevail, however, CCS was also required to show not only that its employees were paid by commission but also that it was a retail or service establishment, terms not defined in the statute.  The 7th Circuit found that CCS was selling a service, not goods, and thus was supportive of the exemption.  Demand for services often varies, and when demand drops a seller cannot make up for it, as a maker of goods can do, by producing for inventory rather than for immediate sale. Thus, as a service establishment CCS meets the “retail or service establishment” requirement of the exemption.  The 7th Circuit declined to give deference to the Department of Labor’s Regulation that uses the phrase “lacks a retail concept” and provides a partial list of establishments to which the retail concept does not apply.  The 7th Circuit noted that window washing was not on the Department’s list and rejected the Department of Labor’s Amicus argument  that sale to the “general public” is a fundamental characteristic of a retail or service establishment since many retailers sell products to narrow segments of the public such as hospital supplies, judge’s robes, or body bags.

The 7th Circuit’s Opinion continues to support the use of commission/points compensation systems as an exemption to the Fair Labor Standards Act overtime requirements continuing the analysis it conducted in Ye v. Sterling Collision Centers, Inc., 480 F.3d 505 (7th Cir. 2007) as it related to auto repair mechanics.

Employer’s should continue to examine the nature and extent of their business operations to determine whether they fall under any of the exemptions to the FLSA overtime requirements, including the exemption applicable in Alvarado  and Ye.