FLSA2006-9 — Private health club/fitness center and section 7(i)

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

March 10, 2006 FLSA2006-9

Dear Name*:

This is in response to your letter requesting an opinion regarding the application of section 7(i) of the Fair Labor
Standards Act (FLSA) to payments made to membership directors employed by your client, a private health
club/fitness facility. You seek this opinion for employment in states other than California. Our response will cover
the application of the FLSA in all states, including California. Note, however, that no provision of the FLSA
preempts a state law or municipal ordinance that provides greater benefit to employees. See 29 U.S.C. § 218(a)
(copy enclosed).

You state that your client runs a health club/fitness facility and explain the duties of the membership directors as
enlisting members and selling them additional services. Membership directors must: meet production goals; conduct
presentations and tours of the facilities; discover prospective members’ fitness goals, motivation for joining, and
objectives; develop leads and solicit referrals; and provide other customer services and engage in other sales related
activities. The health club/fitness facility is a for-profit establishment that sells memberships to the general public.
Your client receives more than 75% of its annual sales volume from the sale of services that are not for resale. In
another letter regarding this employer, you state that you believe your client “is clearly a service establishment.”

You describe the payment of membership directors as a mixture that includes (a) a base pay amount, (b)
commissions, (c) a draw against commissions, and (d) bonuses. The fitness club pays its membership directors on a
semimonthly basis (the 7th and the 22nd of the month) as follows:

• On the first payday they receive (a) base pay for the second half of the preceding month, and (b) a
draw that will be counted against commissions earned from the previous month.
• On the second payday they receive (a) base pay for the first half of the current month, and (b)
commissions earned from the previous month (less the amount of the draw they received on the first
payday of the month).

You also state that the amount of the draw remains the same each month, but do not discuss the relative amount of
the draw compared to the amount of the commissions earned. You also do not provide information about how the
“base pay” is determined (for example, whether it is based on a salary or an hourly rate) or the amount of the base
pay relative to the commissions.

You further state that the membership directors’ “commission” payments may include one quarterly and two
monthly bonuses:

• Quarterly incentive bonuses based on sales in excess of the quarterly quota;
• A “performance bonus,” which is a fixed dollar amount paid to the employees with the highest
sales in the month and the highest overall “closing” rate for the month; and
• A “pooling bonus” that varies from month to month. You state that each club has a specific
“target” for the month and that, if the target is met, a pool of between $1,000 and $2,000 is distributed
among the membership directors according to each individual’s contribution toward meeting the goal for
the month.

Lastly, you state that the regular rate of pay for membership directors exceeds one and one-half times the minimum
wage rate and that more than half of their compensation for a representative period of at least a month consists of
“commissions/bonuses” on services. Although your letter does not provide sufficient detail to perform the
calculations needed to verify that the requirements are met, the following guidance is provided to assist your client
in making the calculations needed to determine the exempt status of each membership director.

The application of the section 7(i) exemption to individual employees depends in part upon their specific earnings.
See 29 U.S.C. § 207(i) (copy enclosed). Accordingly, we cannot opine about the exemption based upon the general
earnings information you provide. That would require specific earnings information for each employee. However,
we can explain how to evaluate the types of payments your client makes to its employees to determine whether they
qualify for the exemption.
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U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

To qualify for the section 7(i) exemption from the overtime provisions of the FLSA, three conditions must be met:

1. The employee must be employed by a retail or service establishment;
2. The employee’s regular rate of pay must exceed one and one-half times the applicable minimum
wage under section 6 of the FLSA; and
3. More than half of the employee’s total earnings in a representative period must consist of
commissions on goods or services.

It is the employer, not the employee, who must satisfy the first element of this test. See 29 C.F.R. § 779.411 (copy
enclosed). In order to qualify as a “retail or service establishment” under section 7(i), an employer must engage in
the sale of goods or services, at least 75% of the annual dollar volume of sales of goods or services must not be for
resale, and the sales must be recognized as retail sales or service in the particular industry. Id. The health
club/fitness facility engages in the sale of health and fitness services. Additionally, sales of these services are not for
resale, so the second requirement is met. Finally, health club/fitness facilities are recognized as retail service
establishments because they (1) service the everyday needs of the community, (2) are at the end of the distribution
stream, (3) do not take part in the manufacturing process, and (4) provide services for the comfort and convenience
of the public by opening membership to members of the general public. 29 C.F.R. § 779.318 and Field Operations
Handbook § 21b03(a) (copies enclosed). Therefore, it is our opinion that the health club/fitness facility qualifies as
a retail or service establishment.

The final two elements of section 7(i) depend upon payments to the employees and not the establishment for which
they work. To qualify as a commission, payments must be based on the provision of “goods or services which the
establishment sells.” 29 C.F.R. § 779.413(b) (copy enclosed). “The whole premise behind earning a commission is
that the amount of sales would increase the rate of pay. Thus, employees may elect to work more hours so they can
increase their sales, and in turn, their earnings. When a commission plan never affects the rate of pay, the purpose
behind using a commission rate also fails.” See Erichs v. Venator Group, Inc., 128 F. Supp. 2d 1255, 1260 (N.D.
Cal. 2001) (quoting Herman v. Suwannee Swifty Stores, Inc., 19 F. Supp. 2d 1365, 1371 (M.D. Ga. 1998)). Note
that all of the compensation plans found in 29 C.F.R. § 779.413(a) “except for the ‘straight salary or hourly rate’
may qualify as ‘bona fide commission’ plans under §207(i).” Viciedo v. New Horizons Computer Learning Ctr. of
Columbus, Ltd., 246 F. Supp. 2d 886, 896 (S.D. Ohio 2003). Straight salary and hourly payments do not qualify as
commissions.

Over the representative period, the employer must ensure that the employee’s commissions represent more than half
the employee’s total pay. See 29 C.F.R. § 779.417 (copy enclosed). Analysis of the various payments made to your
client’s membership directors indicates some, but not all, qualify as commissions under section 7(i).

The base payment is clearly not commissions, whether paid on an hourly or a salary basis. The performance,
pooling, and quarterly incentive bonuses, whether individual or group, will qualify as commissions under section
7(i), provided they are based on the level of sales of health and fitness services.

A straight commission with draws qualifies as a commission if it results “from the application of a bona fide
commission rate.” 29 U.S.C. § 207(i). The proportion of commission payments and the amount paid as a draw
against future earnings must be closely scrutinized by the employer to assure this requirement is met. As explained
in the regulations, a commission plan is not bona fide if, in fact, the formula for computing commissions is such that
an employee always earns the same fixed amount of compensation each pay period. If an employee’s commission
seldom or only infrequently exceeds the draw, serious doubts would arise regarding the substance of the commission
agreement. The relationship of draws to commissions is specifically discussed at 29 C.F.R. § 779.416 (copy
enclosed). See WH Opinion Letters July 14, 1982, and April 24, 1998 (copies enclosed). If the individual
employee’s commission meets the requirements listed above, it is our opinion that the membership directors’
compensation plan would comply with the requirements of section 7(i).

This opinion is based exclusively on the facts and circumstances described in your request and is given based on
your representation, express or implied, that you have provided a full and fair description of all the facts and
circumstances that would be pertinent to our consideration of the question presented. Existence of any other factual
or historical background not contained in your letter might require a conclusion different from the one expressed
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U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

herein. You have represented that this opinion is not sought by a party to pending private litigation concerning the
issue addressed herein. You have also represented that this opinion is not sought in connection with an investigation
or litigation between a client or firm and the Wage and Hour Division or the Department of Labor. This opinion is
issued as an official ruling of the Wage and Hour Division for purposes of the Portal-to-Portal Act, 29 U.S.C. § 259.
See 29 C.F.R. §§ 790.17(d), 790.19; Hultgren v. County of Lancaster, 913 F.2d 498, 507 (8th Cir. 1990).

We trust that the above is responsive to your inquiry.

Sincerely,

Alfred B. Robinson, Jr.
Acting Administrator

Enclosures: FLSA §§ 7(i) and 18(a)
29 C.F.R. 779.411
29 C.F.R. 779.318
FOH 21b03
29 C.F.R. 779.413
29 C.F.R. 779.416-7
WH Opinion Letters July 14, 1982 and April 24, 1998

Note: * The actual name(s) was removed to preserve privacy in accordance with 5 U.S.C. § 552(b)(7)

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