Yi, Dong v. Sterling Collision ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-2645
DONG YI and EDGAR MARTINEZ, individually
and on behalf of all others similarly situated,
Plaintiffs-Appellants,
v.
STERLING COLLISION CENTERS, INC.,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 3138—Paul E. Plunkett, Judge.
____________
ARGUED JANUARY 12, 2007—DECIDED MARCH 13, 2007
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Before POSNER, WOOD, and SYKES, Circuit Judges.
POSNER, Circuit Judge. The Fair Labor Standards Act
requires that employees be paid one and a half times their
hourly wage for every hour that they work in excess of
40 hours a week. 29 U.S.C. § 207(a)(1). But there is an
exemption for workers in retail stores or other service
establishments (including the automobile repair service
that is the defendant in this case) who (1) are paid a
wage that exceeds one and a half times the minimum
wage and (2) receive more than half their compensation
2 No. 06-2645
in the form of “commissions on goods or services.” § 207(i).
In this suit, resolved in favor of the defendant on sum-
mary judgment, we are required to decide whether a
system of compensation common in the auto repair
industry is a commission system within the meaning of
the statute.
The facts are undisputed; the question is what “commis-
sions on goods or services” means. The plaintiffs’ conten-
tion that the defendant must prove its entitlement to the
exemption by “clear and affirmative evidence” is there-
fore irrelevant; for evidence is used to resolve factual
disputes, and there are none in this case. But the contention
is also incorrect, for nothing in the statute, the regulations
under it, or the law of evidence justifies imposing a re-
quirement of proving entitlement to the exemption by
“clear and affirmative evidence.”
A number of FLSA cases say this is the standard. Renfro
v. Indiana Michigan Power Co., 370 F.3d 512, 515 (6th Cir.
2004); Klinedinst v. Swift Investments, Inc., 260 F.3d 1251,
1254 (11th Cir. 2001); Aaron v. City of Wichita, 54 F.3d 652,
657 (10th Cir. 1995); Clark v. J.M. Benson, Co., 789 F.2d 282,
286 (4th Cir. 1986). But they say it “without explanation of
what the phrase means.” Martin v. Indiana Michigan Power
Co., 381 F.3d 574, 578-79 and n. 1 (6th Cir. 2004); see also
Acs v. Detroit Edison Co., 444 F.3d 763, 767 (6th Cir. 2006).
The phrase first appeared in Donovan v. United Video, Inc.,
725 F.2d 577, 581 (10th Cir. 1984), and was not explained,
but was merely attributed to two earlier cases, Walling v.
General Industries Co., 330 U.S. 545, 547-48 (1947), and Legg
v. Rock Products Mfg. Corp., 309 F.2d 172, 174 (10th Cir.
1962). General Industries just says that the burden of prov-
ing entitlement to an exemption is on the defendant (of
course). Legg says that “one asserting that an employee is
No. 06-2645 3
exempt from the wage and hour provisions of the Act has
the burden of establishing the exemption affirmatively
and clearly.” Legg offers no explanation for defining the
burden thus but merely cites General Industries and an
earlier case, McComb v. Farmers Reservoir & Irrigation Co.,
167 F.2d 911, 915 (10th Cir. 1948), which says that an
employer seeking an exemption “has the burden of show-
ing affirmatively that they [the employees] come clearly
within an exemption provision,” citing General Industries.
Earlier still, we read that “the burden is upon the ap-
pellant to bring itself plainly and unmistakably within the
terms and the spirit of the exemptions.” Armstrong Co. v.
Walling, 161 F.2d 515, 518 (1st Cir. 1947). This formula,
which also appears in McComb v. Hunt Foods, Inc., 167
F.2d 905, 908 (9th Cir. 1948), had been lifted from A.H.
Phillips, Inc. v. Walling, 324 U.S. 490, 493 (1945), where the
Supreme Court had said: “Any exemption from such
humanitarian and remedial legislation [i.e., the FLSA] must
therefore be narrowly construed, giving due regard to the
plain meaning of statutory language and the intent of
Congress. To extend an exemption to other than those
plainly and unmistakably within its terms and spirit is to
abuse the interpretative process and to frustrate the
announced will of the people.”
At this point the trail grows cold. But one sees what
happened: the opinion in Farmers Reservoir used “affirma-
tively” and “clearly,” and the opinions in Armstrong and
Hunt Foods (following A.H. Phillips) “plainly” and “unmis-
takably,” merely to indicate that exemptions are to be
construed narrowly—that plainly is the meaning of the
passage in A.H. Phillips—and, in the Farmers Reservoir
version, also that the burden of proof is on the defendant,
4 No. 06-2645
since entitlement to an exemption is an affirmative defense.
The phrases were then garbled (what could “affirmative
evidence” mean?—it implies that there must be some-
thing called “negative evidence”), the garbled form re-
peated, and the original meaning forgotten.
Also forgotten was the presumption that the burden of
proof in federal civil cases is proof by a preponderance of
the evidence. “Because the preponderance-of-the-evidence
standard results in a roughly equal allocation of the risk of
error between litigants, we presume that this standard is
applicable in civil actions between private litigants unless
‘particularly important individual interests or rights are
at stake.’ ” Grogan v. Garner, 498 U.S. 279, 286 (1991),
quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 389-
90 (1983). The exemption from the FLSA’s overtime
provision, at issue in this case, curtails no greater individ-
ual interest or right than the right to a discharge in bank-
ruptcy, at issue in Grogan, where the Supreme Court
rejected a requirement that a creditor prove by clear
and convincing evidence his entitlement to an exception
to the debtor’s right to a discharge.
Even if understood as merely a clumsy invocation of the
familiar principle of statutory interpretation that exemp-
tions from a statute that creates remedies should be
construed narrowly, the “clear and affirmative evidence”
formula of United Video and the cases following it is
unsatisfactory because the underlying principle is mysteri-
ous. Why should one provision in a statute take precedence
over another? But there is an answer in the passage we
quoted from Phillips warning that to interpret an exemp-
tion broadly threatens “to abuse the interpretative pro-
cess and to frustrate the announced will of the people.”
A.H. Phillips, Inc. v. Walling, supra, 324 U.S. at 493. Unless
No. 06-2645 5
“due regard to the plain meaning of statutory language
and the intent of Congress” indicates otherwise, id.; see
also EEOC v. AIC Securities Investigations, Ltd., 55 F.3d
1276, 1282 (7th Cir. 1995); Graczyk v. United Steelworkers of
America, 763 F.2d 256, 262 (7th Cir. 1985), an exemption
should not be interpreted so broadly that it renders the
statutory remedy ineffectual or easily evaded. With this
construal, there can be no quarrel. It suggests that the
principle of narrow interpretation of exemptions is a
tie breaker, Mechmet v. Four Seasons Hotels, Ltd., 825 F.2d
1173, 1177-78 (7th Cir. 1987); Reich v. Delcorp, Inc., 3 F.3d
1181, 1186 (8th Cir. 1993), and although the present case
is not entirely free from doubt, it is not a tie.
The statute does not define “commission.” About all that
is clear is that the word need not be used for the exemption
to be applicable. Mechmet v. Four Seasons Hotels, Ltd., supra,
825 F.2d at 1177; Klinedinst v. Swift Investments, Inc., supra,
260 F.3d at 1254, 1257; 29 C.F.R. § 779.416; Department of
Labor, Wage & Hour Division, Field Operations Handbook
§ 21h04(d) (July 12, 1990); Department of Labor, Opinion
Letter No. FLSA152006-NA (June 29, 2006), www.dol.gov/
esa/whd/opinion/FLSANA/2006/2006_06_29_15NA_F
LSA.pdf. The 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
6 No. 06-2645
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. See Mechmet v. Four Seasons
Hotels, Ltd., supra, 825 F.2d at 1176-77; Gieg v. DDR, Inc., 407
F.3d 1038, 1045-46 (9th Cir. 2005). There is no relevant
legislative history.
Now suppose two real estate brokers work on the sale of
the same house, and the question arises how they should
split their commission. One broker suggests a 50-50 split,
but the other ripostes, “I put in two-thirds of the time on
this sale, so I should get two-thirds of the commission.”
Suppose the first broker agrees. Does this mean, because
the number of hours they worked figured in their split of
the commission, that they weren’t paid a commission, but
an hourly wage? Surely not. This simple example turns
out to resolve the present, complicated-seeming case.
Sterling, the defendant, a chain of auto repair shops,
charges its customers as follows. It 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 multiplica-
tion 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
No. 06-2645 7
team member’s actual hours worked to the total hours
worked by the team, and then by (3) a wage, per booked
(not actually worked) hour, based on the skill or quality
of the individual team member.
So suppose the number of booked hours assigned to the
repair of a headlight is 6; a team of two mechanics com-
pletes the job in 3 hours; one member of the team, call him
A, worked 2 hours and the other, B, 1 hour; and A’s
booked-hour rate is $20 and B’s $15. Then A’s compensa-
tion would be $80 and B’s $30, for a total of $110. The
figures for A and B are calculated as follows. A put in two-
thirds of the total amount of time that it took to complete
the job, and so he is credited with two-thirds of the booked
hours. That is 4 hours, and when multiplied by $20 per
booked hour yields $80. B put in one-third of the time, so
he is credited with one-third of the booked hours, which
is 2 hours, which when multiplied by $15 is $30. The
customer would be charged 6 hours times some hourly
rate, plus the cost of the materials used in the repair.
Suppose the hourly rate is $40. Then the labor component
of the price to the customer would be $240 ($40 × 6), and
the team would have received 46 percent ($110 ÷ $240) of
that price. The faster the team works, the more it earns per
number of hours, since its commission is based not on the
total number of hours it puts in on a job but on the number
of booked hours times each team member’s booked-hour
rate. That is how commissions work; they are decoupled
from actual time worked. The percentage rate is implicit in
Sterling’s method of compensation. It is equivalent to
paying the team a percentage (46 percent in our exam-
ple) of the labor component of the price of their service
to the customer.
Notice how closely this method of compensation resem-
bles our example of the two real estate brokers who work
8 No. 06-2645
as a team and split the commission two-thirds one-third
on the basis of their relative time. It is because the mechan-
ics work in teams, with members making different contri-
butions of time and skill, that it becomes necessary to
allocate the commission. The fact that the time they put
in is a factor in divvying up the commission no more alters
the commission character of their compensation than in
the broker case. If a team is paid a commission, the com-
mission has to be divided between them somehow, and
the method chosen for doing this doesn’t alter the char-
acter of the compensation as a commission.
The only differences between our case and the brokerage
example are, first, that there is an additional weighting,
by quality, in our case, and, second, that the commission
in the real estate example is on the full price of the good
sold (the house), whereas in our case it is on only part of
the price—the price of the labor that goes into the repair.
There is also a materials costs, and the mechanics do not
share in the part of the price that covers those costs.
The first difference is irrelevant—but so is the second.
Suppose a seller pays shipping costs and adds them to his
price to the buyer, but the seller pays his salesmen com-
missions based on the price minus those costs; it would
still be a bona fide commission system of compensation.
To try to distinguish the system in this case from the
brokerage example would complicate the law without
furthering the purposes of the overtime provision. The
purposes are to spread work in order to reduce unemploy-
ment, to discourage (by increasing the cost to the employer)
a degree of overtime that might impair workers’ health
or safety, and to increase the welfare of low-paid workers.
Mechmet v. Four Seasons Hotels, Ltd., supra, 825 F.2d at 1175-
76. None of these purposes is engaged by this case. Both
named plaintiffs earn more than $60,000 a year; their
No. 06-2645 9
booked-hour rates are $21.50 and $18.50 and their actual
hourly rates considerably higher, as in our example. Skilled
workers at their level are scarce, so that forcing employ-
ers to pay them more for overtime would be unlikely to
induce employers to hire many additional mechanics
rather than reluctantly pay the overtime premium to the
ones they have. And finally, as we have emphasized,
there is no evidence that the members of the plaintiff
class work more than 2000 hours a year, which would be
the equivalent of 40 hours a week with two weeks of
annual vacation. Remember that unlike hourly workers
they are paid only when they work; and if they have a slow
week they will work fewer than 40 hours and so they
will have to work more in a fast week in order to work
2000 hours a year.
The plaintiffs argue that their class includes workers
who are paid much less than they. But if so and those
workers feel aggrieved, it is odd that none of them is a
class representative.
Although the mechanics are paid by the job, this is not
piecework (which is not exempt from the overtime provi-
sion, 29 U.S.C. § 207(g); United States v. Rosenwasser, 323
U.S. 360, 363 (1945); Rutherford Food Corp. v. McComb, 331
U.S. 722, 729 (1947); McLaughlin v. Seafood, Inc., 861 F.2d
450, 452-53 (5th Cir. 1988)), any more than selling real
estate is piecework. You can spend 40 hours a week making
quilts, and be paid by the quilt, and you won’t be in the
position of having to work overtime one week in order
to make up slack time in the previous week. But if you’re
paid by the sale, you can’t count on working steadily
the same amount of time week after week, because sales
depend on buyers’ decisions, which are unpredictable; in
the present case sales depend on the flow of wounded
cars into each of Sterling’s local repair shops.
10 No. 06-2645
The system of compensation used by Sterling is industry-
wide, and of long standing. Department of Labor, Wage &
Hour Division, supra, § 21h04(d); “FLSA Compliance: Retail
and Service Exemptions From Overtime Rules,” Payroll
Practitioner’s Monthly, Oct. 2006; Ed Kovalchik, “Hourly
Tech Pay Plans—Automobile Mechanics,” Ward’s Dealer
Business (Apr. 1996), http://findarticles.com/p/articles/
mi_m0FJN/is_n8_v30/ai_18728424. It is possible for an
entire industry to be in violation of the Fair Labor Stan-
dards Act for a long time without the Labor Department
noticing. But a more plausible hypothesis is that the
auto repair industry has been left alone because the
character of its compensation system has been recognized
for what it is—a bona fide commission system.
AFFIRMED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-13-07