Advancing ‘draw’ against future commissions ok, but post-termination payback policy may violate FLSA
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Monday, October 16, 2017

Advancing ‘draw’ against future commissions ok, but post-termination payback policy may violate FLSA

By Lorene D. Park, J.D.

Reversing in part the dismissal of retail sales employees’ claims that their employer’s draw-on-commission policy violated the FLSA’s minimum wage and overtime provisions, the Sixth Circuit explained that it was lawful to advance a “draw” against future commissions to make sure an employee is paid the minimum wage each week, but requiring repayment of outstanding draws after termination would violate the FLSA, so the plaintiffs sufficiently stated their claim in that regard. They also sufficiently alleged that the employer unlawfully encouraged them to work off the clock for mandatory training. Judge Sutton dissented in part, finding that because the employer did not actually enforce the post-termination repayment part of the policy, that provision did not violate the FLSA (Stein v. HHGregg, Inc., October12, 2017, Moore, K.).

Draw-on-commission policy. The employer operates 25 HHGregg stores in Ohio and over 200 nationwide, selling appliances, furniture, and electronics. All retail sales employees, including the two plaintiffs here, are subject to a draw-on-commission policy. Under this policy, sales reps are paid based solely on commissions, and during pay periods when earned commissions fall below the minimum wage, they are paid a “draw” against future pay to meet the minimum.

If an employee works 40 hours or less in a week, the draw is “the difference between the minimum wage for each hour worked and the amount of commissions [actually] earned.” If an employee works over 40 hours (an overtime week) the draw is “the difference between an amount set by the Company (at least one and one-half (11/2) times the applicable minimum wage) for each hour worked and the amount of commissions” earned. Draw payments are calculated weekly, and an employee only receives a draw if commissions fall below the minimum wage (in a non-overtime week) or one and one-half times the minimum (in an overtime week). Sales reps repay the draw, usually by deducting it from future commissions. An employee may be subject to discipline for receiving frequent draws or accumulating too great a deficit, and the policy requires immediate repayment of any deficit upon termination.

Variation from DOL regs. Although the U.S. Department of Labor recognizes the draw-on-commission pay structure (referred to as “straight commission with . . . ‘draws’”) as a potential method of compensation for retail employees, the draw policy here was “somewhat unique.”

Whereas a typical draw system pays a fixed amount as a draw, the amounts here varied from week to week. Also, the fixed draw usually bears a fixed relationship to expected commissions, but here the draw was based not on expected commissions but on the minimum wage.

Lawsuit. Filing a class action, the plaintiffs claimed the draw-on-commission policy violated the FLSA and state law and that they were encouraged to work “off the clock” for training and conferences, among other claims. The court dismissed the suit and the employees appealed.

Retail or service establish exemption does not apply. Reversing, the Sixth Circuit first held that the lower court erred in applying the Section 7(i) retail or service exemption. This only exempts a retail or service employee from overtime pay if “the regular rate of pay . . . is in excess of one and one-half times the minimum hourly rate applicable to him” under the FLSA’s minimum wage provisions. The “regular rate of pay” is the “hourly rate actually paid the employee for the normal, nonovertime workweek for which he is employed,” explained the court, and the allegations here showed only that in a nonovertime week, employees are entitled to exactly the minimum hourly rate. There was therefore no basis to apply the exemption.

Drawing on future commissions is ok, post-termination liability isn’t.The appeals court next held that while the plaintiffs failed to allege sufficient facts demonstrating that the practice of deducting a draw from future earnings violates the FLSA, they did sufficiently allege a violation where the draw-on-commission policy holds employees liable for any unearned draw payments upon termination for any reason.

As to the first point, the employees had argued that the practice of deducting the draw violated the DOL regulations requiring that minimum wages be delivered “free and clear.” They characterized the draw as “nothing more than a loan” that sale reps have to repay or “kick-back” to the employer. However, the appeals court saw things differently and explained that sales reps could keep the full amount “delivered,” while the deductions were instead made from wages that were not yet delivered or paid. This was not a “kick-back” as that term is ordinarily defined.

The conclusion that drawing on future commissions was lawful was also supported by the DOL field operations handbook, which indicates that the FLSA permits employers to “credit . . . draws or guarantee payments against their minimum wage obligation when settling out the amount due employees at the end of the pay (settlement) period.”

Post-termination liability for deficit would violate FLSA. Although the plaintiffs failed to sufficiently allege that the draw payment plan violated minimum wage or overtime requirements, the result was different with respect to the requirement that an employee “immediately pay” any unpaid deficit upon termination and the company has “the right to demand payment” of the deficit after termination. This aspect of the policy violated the “free and clear” regulation because it requires a repayment of wages already delivered, explained the appeals court. The employer’s oral assurances to the court that this aspect of the policy wasn’t actually enforced did not change the analysis, which focused solely on the language of the written policy.

Claim regarding off-the-clock work revived. The appeals court further held that the plaintiffs sufficiently alleged the employer’s policies encouraged them to work “off the clock” without compensation in order to avoid a higher draw. Specifically, they alleged that managers encouraged them to work off the clock when attending mandatory training and conferences. Though the employer argued that the practice would not violate the FLSA because under-reporting working time in draw weeks would lessen draw payments (and increase commission) in future weeks, that argument failed because the FLSA requires employers to actually pay the minimum wage for all hours worked in any given pay period. The appeals court also found that the alleged off-the-clock work supported the employee’s claim of overtime violations as well.

Partial dissent. Dissenting in part, Judge Sutton agreed that the employer could not lawfully “claw back” draw payments after an employee’s termination, but the judge disagreed that there was a violation here because there were no allegations that the employer actually enforced the policy by demanding repayment of a draw after termination.

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