Co-authored by Kerry Friedrichs and Kyle Petersen

Seyfarth Synopsis: A common feature of many a commission plan is the recoverable draw that is offset against future commissions. The DOL has long held this is a permissible way to satisfy the minimum wage requirement. In a recent decision, the Sixth Circuit agreed, up to a pointthe point of termination. It concluded that requiring employees to repay the draw post-termination ran afoul of the FLSA’s requirement that the minimum wage be paid “free and clear” because the practice is akin to an unlawful kickback of paid wages. The Sixth Circuit punted the case back to the district court even though the employer had never actually enforced the repayment policy. The remanded case also includes Plaintiffs’ claims that they were pressured to work off the clock in order to lower the weekly draw payments.

Fall … traditionally a time for enjoying the changing season, watching falling leaves and football, preparing holiday meals, and—for employers across the country—updating annual sales commission plans in anticipation of the new year. In doing so, employers should bear in mind the Sixth Circuit’s timely decision that a “draw against commissions” pay structure for commissioned salespeople can be used to satisfy the minimum wage but that employees cannot be made to repay recoverable “unearned” draws post-termination.

In Stein v. hhgregg, Inc., the retail furniture and appliance store paid its sales employees on a commission-only basis. To ensure that the sales force was paid at least the minimum wage required by the FLSA, the employer paid plaintiffs a recoverable draw against future commissions in any workweek in which their commission earnings fell short of minimum wage. The draw was recovered from later pay checks when the commissions were high enough to exceed the minimum wage. As is often the case, the commission policy also required that any “unearned” draw balance be repaid at the time of termination, although the employer never actually sought repayment.

The plaintiffs challenged this pay structure, arguing that recovery of the draw was actually an unlawful “kick-back” of wages in violation of the FLSA’s requirement that minimum wages be paid “free and clear,” without condition. Plaintiffs also alleged that the draw policy led to pressure to work off the clock so as to minimize the minimum wage obligations and draw payments.

Adopting the long-standing position of the DOL, the Sixth Circuit rejected the plaintiffs’ contention that the draw structure violated the FLSA when advanced amounts were recovered during employment. They came to a different conclusion, however, with the provision in hhgregg’s compensation plan requiring that terminated employees repay “unearned” draw balances after termination. The court distinguished the pre- and post-termination recovery on their characterization of the post-termination recovery as a repayment of already earned and paid wages whereas they construed the pre-termination recovery as merely an offset against future unpaid and unearned commissions.

A particularly interesting aspect of that holding is the court’s rebuff of the employer’s argument that it had never actually sought repayment from a former employee and had since removed this provision from its plans. In so holding, the court noted the detrimental effects—including psychological effects—on employees who believed that they owed a debt to their former employer. It appears neither the court nor the parties addressed the potential standing issues or what sort of recovery the court envisioned plaintiffs might be able to obtain under the FLSA for the psychological harm they suffered by having a theoretical debt hanging over them.

The Sixth Circuit also held that the plaintiffs could bring their off-the-clock and overtime claims based on their theory that hhgregg’s managers encouraged employees to work off the clock in order to reduce or eliminate their commission draw by reducing their reported hours worked and increasing their earned commissions for the workweek.

While Stein v. hhgregg largely validates the common practice of advancing future commissions to meet the FLSA’s minimum wage requirement, there are some cautionary points for employers to keep in mind as they revise their commission plans. First, inclusion of a post-termination repayment provision—even if only there as a theoretical stick—could create liability, at least in the Sixth Circuit. Second, although the FLSA allows for recoverable draws during employment, be mindful of varying state laws that may preclude this practice. For example, California has a stricter minimum wage law that does not allow for “averaging” earnings to meet the minimum wage and restricts employers from taking unauthorized deductions from earned wages. California employers should work closely with counsel to develop commission plans that properly incentivize sales staff while complying with California law. Finally, the court’s decision on the off-the-clock claim reinforces the need for employers to implement clear policies against off-the-clock work, even for employees paid on a commission basis.

Co-authored by Kara Goodwin and Noah Finkel

The U.S. Supreme Court recently agreed to resolve the question of whether “service advisors” at car dealerships—workers whose primary job responsibilities involve identifying service needs and selling service solutions to the dealership’s customers—are exempt from the Fair Labor Standard Act’s (“FLSA”) overtime pay requirements. Although the case involves a somewhat-discrete exemption that has been ruled on only a handful of times in the past four decades, far-reaching implications on the interpretation of FLSA exemptions may ride on the Supreme Court’s decision.

Case Background

In Navarro et al. v. Encino Motorcars, LLC, a group of current and former car dealership employees who worked as service advisors brought a collective action under the FLSA in the Central District of California alleging that their dealership employer failed to pay them overtime wages. As service advisors, the plaintiffs would meet and greet car owners as they entered the service area; evaluate customers’ service and repair needs; suggest services to be performed on the vehicle to address the customers’ complaints; solicit supplemental services to be performed (such as preventive maintenance); prepare price estimates for repairs and services; and inform the owner about the status of the vehicle. Service advisors did not receive an hourly wage or a salary but were instead paid by commission based on the services sold.

The district court dismissed the overtime claim and concluded (consistent with an unbroken line of authority from federal and state courts across the country) that service advisors fall within the FLSA’s exemption for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles,” 29 U.S.C. § 213(b)(10)(A), because service advisors are “salesm[e]n … engaged in … servicing automobiles.”

The Ninth Circuit reversed, deferring to a Department of Labor regulatory definition stating that the exemption is limited to salesmen who sell vehicles and mechanics who service vehicles, thus excluding from the exemption service advisors (i.e., salesmen who sell services). In doing so, the Ninth Circuit acknowledged that its holding “conflicts with decisions of the Fourth and Fifth Circuits, several district courts, and the Supreme Court of Montana”—i.e., every other court to have considered the question—which had uniformly ignored or refused to defer to the Department of Labor’s “restrictive” interpretation of § 213(b)(10)(A) and recognized that the use of the disjunctive “or” in § 213(b)(10)(A) between the words “selling” and “servicing” means that the exemption applies to any salesman, partsman, or mechanic who is primarily engaged in either of those duties. In contrast, the Ninth Circuit concluded that a “natural reading” of the exemption suggested that Congress could not have intended that “selling” and “servicing” would apply to all three subjects (salesman, partsman, mechanic), proposing a similarly structured phrase involving what to do if “my dogs or cats were barking or meowing” and stating that the interpretation adopted by the other courts “would include a meowing dog and a barking cat.” Accordingly, the Ninth Circuit took a more narrow approach to interpreting the exemption, holding that Congress likely intended “salesman” to be connected only to “selling” automobiles, thus excluding service advisors (salesmen who sell services) from the exemption.

The Supreme Court granted the dealership’s petition for a writ of certiorari and agreed to answer the question of “whether ‘service advisors’ at car dealerships are exempt under 29 U.S.C. § 213(b)(10)(A) from the FLSA’s overtime-pay requirements.”

Potential Implications for FLSA Collective Actions

While the Supreme Court’s ruling on this issue undoubtedly will have immediate and significant impact on the nation’s 18,000 franchised car dealerships and estimated 45,000 service advisors, it may also have far-reaching implications for the interpretation of FLSA exemptions generally.

For example, in 2012, the Supreme Court rejected a “narrow” interpretation of the outside sales exemption in Christopher v. SmithKline Beecham Corp., which would have excluded pharmaceutical sales representatives, and favored a “functional,” “flexible,” and “realistic” rather than “technical” and “formalistic” approach to interpreting the FLSA exemption. Similarly here, the dealership is asking the Supreme Court to reject the Ninth Circuit’s narrow interpretation and to take a functional and realistic approach to interpreting § 213(b)(10)(A) because service advisors are “a paradigmatic example of a salesman engaged in servicing automobiles,” are “functionally equivalent” to salesmen, partsmen, and mechanics, and are similarly responsible for the selling and servicing of automobiles.” If the Supreme Court agrees, it would provide further evidence to support a more flexible and elastic approach to interpreting FLSA exemptions—a critical development as the Department of Labor issues its upcoming revisions to the white-collar exemptions.

Authored by Caitlin Ladd

Employers with commissioned employees will be pleased with a new decision finding that Morgan Stanley Smith Barney’s approach to commission calculations was not an improper deduction from wages under the New York Labor Law.

MSSB’s compensation structure allows its Financial Advisors to select from a variety of formulas, all of which provide for fixed business development allowances for events like seminars and client dinners. When calculating the FAs’ commissions, the company first considers how much the FA received in such allowances. In a multidistrict overtime litigation pending in the District of New Jersey, the plaintiffs argued that MSSB’s formula violates NYLL § 193 because, they said, the company required them to spend those amounts, thereby reducing the value of their commissions.

Judge William Martini did not buy the argument. Relying on the NY Court of Appeals 2008 decision in Pachter v. Bernard Hodes Group, he found that the commission plan did not result in impermissible deductions from “wages” because the compensation policies provided that payments would be computed after deductions were made for their monthly advances. He further reasoned that, by continuing to work, the FAs signified their agreement with these policies, in particular their treatment of business expenses and allowances. According to Judge Martini, if some FAs chose to exceed their allowances to build their client base, as they were permitted to do, “it is hard to see how they did so involuntarily.”

With this decision, MSSB has effectively trimmed all impermissible wage deduction claims from the cases, leaving only claims under federal and state law for overtime violations. More to come on that front as the cases proceed.

In the meantime, employers with commission-based compensation plans can take heart that federal courts will apply Pachter and reject NYLL deduction claims where the payment plans provide that commissions are not “earned” or “vested” until all possible allowances have been computed. Another important lesson from this decision is that compensation plans should specify the allowances provided for business development expenses and make clear that expenses incurred beyond those amounts are voluntary and not subject to reimbursement.