Last week we wrote about the recent Sixth Circuit Court of Appeals decision pertaining to hours worked and travel time. Following up in short order, the Sixth Circuit ruled on yet another and arguably more obscure part of wage and hour regulation, Draw Against Commissions.  They looked at whether an employer can collect draws by the employee that exceeded commissions owed after employment ends.

When commission based pay is practiced, it typically falls under four general methods according to Commerce Clearing House (CCH):

Straight commission without advances – Under this method of compensation the employee is paid a flat percentage on each dollar of sales he/she makes.

Straight commission with advances, guarantees, or draws – [For] this method of compensation the employee is paid a fixed weekly, biweekly, semi-monthly, or monthly "advance", "guarantee" or "draw." At periodic intervals, a settlement is made at which time the payments already made are supplemented by any additional amount by which his commission earnings exceed the amounts previously paid.

Salary plus commission – Under this method of compensation the employee receives a commission on all sales in addition to a base salary.

Quota bonus –  This method of commission payment is paid on sales over and above a predetermined sales quota.

In the Sixth Circuit’s decision in Robert Stien and Robert Beck v HHGREGG, Inc. and GREGG Appliances (No. 16-3364) 10/12/2017, the employer was a retailer that paid their retail and sales employees on a commission basis.  Under the company’s compensation plan employees were given a “draw,” but only to meet the minimum wage requirements if in any given week the employee’s commissions fell below the minimum wage. The draw taken was then deducted from future earnings in weeks when the commissions exceeded minimum wage. This is a unique provision to most draw against commission plans.

Plaintiff employees sued HHGREGG, Inc. alleging violation of the Fair Labor Standards Act (FLSA). The lower court ruled that the draw against commission plan was legal. They also ruled that the retail sales positions were exempt from the overtime requirements of the FLSA.

In review, the Sixth Circuit disagreed on two main points.

First, the Sixth Circuit found the argument that the retail sales positions were exempt from overtime inoperative. This was determined because the employer did not pay its retail employees pursuant to the FLSA’s Commission Sales Exemption requirement for regular rate of pay. The Court found HHGREGG, Inc.’s retail sales people’s regular rate pf pay did not exceed one and one-half times the minimum wage as required by Wage and Hour regulation, and the retail sales people did not derive “more than half [their] compensation for a [representative period covered] commissions on goods or services” 29 U.S.C 207(i).

The Court next reviewed whether the employer’s draw against commission plan was legal. The Court reviewed the plan through the FLSA’s and Department of Labor’s regulations and found it passed most concerns except that the payback method for draws could, in theory, be required after termination of employment. A concern the employer argued they never in reality practiced. The Sixth Circuit said that didn’t matter.  If the employees could reasonably believe that their debt due to their draw remained open post termination, that is a sufficient breach to the FLSA.

Employers that utilize commission based compensation plans need to ensure that their pay policy and practice meet the minimum requirements of the FLSA rules. In this case, the employer never tried to enforce its post-employment claw back of commissions. However, the Court rhetorically postured that if an employee thought it may owe overpaid commissions, “even believing that one has incurred a debt, has far reaching implications for individuals.” The Court applied some extrapolation to its concern saying that an individual that thought they owed monies under this plan could change the way they saved money or apply for loans, and report debt on credit applications, court documents, or other self-reporting reports or records.

Source:  Stein et. al. v. hhgregg et. al. No.16-3364 (10/12/2017) FLSA Employee Exemption Handbook, Thompson HR