Creative Wage Structures Can Be Costly!

By:  Claudia D. Orr 

Employers often look for creative ways to save on payroll.  When I was a very new attorney, I had one client tell me they used the “50 hour rule” for overtime.  I asked what that was and was told overtime was paid after the employee worked 50 hours in a work week.  I asked one of the partners if there was such a rule and he laughed. Just to be clear… there is no such rule.  To this day, I am amazed at how creative employers can be to save a few bucks on payroll, only to have it cost so much more after the lawsuit is filed.  This article is about an employer who learned this very tough lesson after the Sixth Circuit Court of Appeals ruled last week in Stein v hhgregg, Inc.  Let’s look at the compensation plan at issue.

The defendant/employer owns over 25 retail stores in Ohio and well over 200 stores nationwide, selling appliances, furniture and electronics. Its sales employees were compensated on a “draw on commission” basis. If a sales person’s sales were insufficient for the earned commission to satisfy minimum wage, he would receive a “draw” on future commissions to satisfy the requirement.  Of course that draw had to be repaid.

So, if an employee worked 40 hours or less in a workweek, the draw would equal the difference between the amount of commissions actually earned and minimum wage for each hour worked.  If the employee worked overtime, the draw equaled the difference between “an amount set by the Company (at least one and one-half…times the applicable minimum wage) for each hour worked and the amount of commissions [actually] earned.”

Thus, an employee would “receive a draw only if the commissions earned that week [fell] below the minimum wage (in a non-overtime week) or one and one-half times the minimum wage (in an overtime week).”  Generally the draw was deducted from the following week’s commissions, assuming the amount after the deduction satisfied the minimum wage requirement.  If it did not, it would be deducted from the next commission check that was sufficient under this formula.  If an employee received too many draws or ran too great of a draw balance, he could be disciplined or fired.  Upon termination, an employee was required to repay any deficit.

The Sixth Circuit recognized that the US Department of Labor allows draw on commissions pay structures for retail employees, but this one was unique. Generally, the typical draw system has a fixed weekly draw, but this one varied from week to week.  Also, the typical draw amount bears some relationship to the usual amount of commissions that are earned, whereas this one was based on satisfying minimum wage requirements.

First the appellate court noted that the retail exemption did not apply to these employees since their regular rate of pay was not in excess of one and one-half times the minimum hourly rate of pay as required.  “The ‘regular rate of pay’ is defined as the ‘hourly rate actually paid the employee for the normal, nonovertime workweek for which he is employed.” Here the employees were only entitled to “exactly” the minimum hourly wage rate during a non-overtime workweek. Thus, the overtime exemption for retail employees did not apply.

Interestingly, the court did not find that the practice of requiring repayment of the draw from future checks to violate the “free and clear” requirement which prohibits an employer from requiring a “kick back” from wages already paid.  Here, the repayment was not from wages that had already been paid, but from future earned commissions.

However, the court found the policy’s requirement of repayment of deficits at termination to violate the FLSA.  While the employer represented to the court that it never did this and has since changed its policy, the fact remained that the employees who were subject to the policy could reasonably believe that they remained liable to the company for the deficits even after their employment terminated. The court found the proper focus to be what the policy states and not how it was implemented. Thus, the “free and clear” requirement was violated because the minimum wage that had been paid was not provided free and clear at time of termination.

There were other problems with the system as well such as approving (even encouraging) work “off the clock” including when there was a mandatory training or meeting to prevent an increase in the requisite amount of the draw caused by the increased work hours.   And, by not compensating the employees for all hours actually worked, the employer also violated the overtime requirements under the FLSA.  The Sixth Circuit remanded the case for further proceedings consistent with its opinion.

This employer was trying to find a creative way to save on payroll but, on remand, may find that the damages (and likely liquidated damages) will far exceed the savings that had been anticipated.  I am occasionally asked by clients about other “creative” compensation plans that simply don’t comply with wage laws. Whenever your company feels creative, run the compensation plan past experienced employment counsel, such as the author, before you implement it and end up facing the costly consequences.

This article was written by Claudia D. Orr, who is Chair of the Legal Affairs Committee of Detroit SHRM, and an experienced labor/employment attorney at the Detroit office of Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM).  She can be reached at corr@plunkettcooney.com or at (313) 983-4863. For further information go to: http://www.plunkettcooney.com/people-105.html. 

Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. October, 2017.