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Employer Can Use Draw-On-Commissions but Cannot Require Repayment Upon Termination

    Client Alerts
  • October 27, 2017

On October 12, the Sixth Circuit Court of Appeals partially approved and partially rejected an unusual pay plan designed to satisfy federal minimum wage requirements. In Stein v. HHGregg, Inc., the employer placed retail sales employees on a draw-on-commissions plan under which compensation was totally based on commissions. In any given workweek if an employee failed to generate commissions necessary to cover minimum wage, the employer would advance a draw for this difference against future commissions earned. The pay plan required immediate repayment of any draw if the employee left employment, although the employer testified that it never enforced this policy.

The plaintiffs alleged that pay plan violates the Fair Labor Standards Act, pointing to Department of Labor regulations requiring that minimum wage must be paid free and clear of repayment obligations. They characterized the HHGregg pay plan as a scheme by the employer to require that the employees kick back a portion of their future wages. The district court rejected these arguments, and the plaintiffs appealed to the Sixth Circuit.

On appeal, the court noted that the DOL rules allow draws to count toward minimum wage, but it is usually in the context of a fixed draw instead of the variable week-to-week plan used by the employer in this case. Regardless, the Sixth Circuit concluded that this method satisfies minimum wage requirements because the draw on future commissions constituted a permissible advance on wages. Employees were permitted to keep all payments eventually earned. However, the court also concluded that the repayment upon termination obligation violates the FLSA because it could result in actual payment of less than minimum wage once the draw payment is recaptured. The fact that the employer did not enforce this policy does not change this analysis.

Unlike the defendant in this case, many retail employers use the FLSA Section 7(i) payment method for retail sales employees. This plan requires payment of 1.5 times the minimum wage for the normal workweek and allows the employer to use sales commissions to satisfy minimum wage and overtime obligations. For employers that do not meet this test, a draw-on-commissions plan may present another option for meeting federal minimum wage requirements.