United States: New Year's Resolution? Review Your Sales Pay Plan

Many dealerships give little thought to their sales pay plans. After all, they're simple and straightforward, right? X% of the front gross and Y% of the back end gross, plus whatever bonuses you choose to give. About as simple as you can get.  

Unfortunately, an increasing number of dealerships are finding out that their pay plans are a lot more complicated than they thought, particularly when they are examined in a courtroom by jurors who know nothing about the car business. A recent case from New York provides a good example of how complicated a sales pay plan can be.

Case In Point

In this case, a group of salespeople sued their dealership group, claiming they were paid below minimum wage and had unlawful deductions taken from their commissions. Eventually a total of 89 salespeople from all six dealerships joined the lawsuit.

The sales pay plan at issue was straightforward enough: 20% of the front gross and 10% of the back gross, less a $275 pack on new cars and a $950 pack on used cars; and $50 mini on a new car sold at a loss, $100 mini on a used car. The dealership group also paid $20 per day as shift pay. Like most salespeople, they worked 45 to 55 hours a week, a fact the dealership group admitted.

Minimum Wage: Strike One

The court ruled on the minimum wage claim quickly and easily – and in favor of the employees. The facts showed that when salespeople made no sales in a particular week, the dealerships only paid them $20 per day, far less than the required minimum wage. The court rejected the dealership group's argument that the salespeople's annual earnings – $40,000 to $50,000 – were more than sufficient to cover minimum wage on an annual basis.

This attempted "annual salary pitch" was dismissed as a red herring. After all, the law is clear: with a weekly pay plan, the salespeople must be paid at least the minimum wage for all hours worked each week, regardless of earnings in previous or subsequent weeks.   

Deductions: Strike Two

The court then turned to the commission claim. The salespeople claimed that the dealership group had manipulated their commissions in a number of different ways by adding additional "packs" and including extra "costs" to the vehicle and the transaction. Specifically, each of the dealerships made a deduction for "auction expenses" to which the salespeople had not agreed.

They also argued that the dealerships inflated the actual cost of these charges by having some work performed by "sham subsidiaries." They claimed, for example, that the actual costs of etching, tire and wheel protection, and extended warranties were inflated when deducted from their commissions, further reducing their compensation. Finally, they claimed that the dealer group made improper deductions from their commissions by fining them for personnel infractions (using improper forms, tardiness, other disciplinary matters), damage done to vehicles, and mechanical problems. 

The court started by examining the written documents explaining the commission calculation and found that they permitted the employer to make deductions for commission packs, transportation expenses, open Repair Orders, and gasoline costs. However, the court found that there was no language authorizing the deduction for "auction expenses." Therefore, that deduction was found to be improper and unlawful.

The dealership group defended the deduction, claiming that they had been taking it for years without complaint, meaning that the salespeople had, in effect, agreed to it. Not so, said the court: "A failure to complain does not render that conduct permissible in light of the clear contractual language to the contrary. Silent suffering of a contractual breach certainly does not excuse the dealership's failure to live up to its contractual obligations."

The court then addressed the "chargeback" deductions for disciplinary matters and similar infractions, and also found them improper. The court noted that none of these deductions were spelled out in the pay documents, and were not part of any established company policy.  

Willful Violations: Strike Three

All these mistakes were compounded when the court determined that the dealer group's violations were "willful," entitling the salespeople to double the amount improperly withheld. Under federal law, proof of willfulness is fairly easy: the salespeople only had to prove that the dealership group was aware of the existence of the federal Fair Labor Standards Act. 

In this case, that finding was not hard to reach. The court noted that the dealer group had undergone two state wage-hour investigations in recent years and had been cited for wage violations on both occasions, but had never changed its pay practices.    

Resolution Of The Case: It Wasn't Pretty

So how did it all turn out? The case finally settled in December 2015, six years after it was originally filed. The soft costs associated with six years of litigation were staggering: a number of company employees, including owners, were subjected to stressful and time-consuming depositions; the dealerships had to produce hundreds of thousands of documents in discovery; the plaintiffs' attorneys spent days at the dealerships examining thousands of deal files; and management was forced to attend numerous court hearings, meetings with their attorneys, and at least two mediation sessions.

The hard costs were even worse. The dealership group settled the minimum wage claims for $423,569.92. It also agreed to settle the commission claims by creating a fund of $5,500,000. About a third of the fund will go to the plaintiffs' attorneys, while the rest will cover unpaid commissions, settlement costs, and other costs associated with the case.   

Plus, the group had been paying its own attorneys – two different attorneys, one representing the owners and the other representing the General Manager, who had also been named in the lawsuit – for the six years of litigation. 

To add insult to injury, the lawsuit inspired a separate "copycat" lawsuit filed by another former salesperson making the same claims. That separate case took over two years to resolve and finally settled for $150,000.

Lessons To Be Learned

So what can we learn from this case? You should resolve to start 2016 by reviewing your pay plan to make sure you don't fall victim to the same troubles. Here are six practical steps you can take right away:

  1. Remember that a sales pay plan is a legally binding document, enforceable in court. You should take great care in drafting it to be sure that it states exactly how your salespeople will be paid.
  2. More importantly, you must ensure your salespeople are paid exactly in accordance with the plan. If you want to make an additional deduction in the commission calculation, for example, or make any other modification, you must revise and reissue the pay plan.
  3. You can calculate the commission any way you want, but you must clearly disclose any particular deductions that will be made from commissions.
  4. If you justify any part of your pay plan simply because you've been paying your people that way for years without complaint, that's no guarantee you won't be sued tomorrow. Pay plan claims are treated as contract claims, which often have a six-year statute of limitations. Review them to make sure they are compliant even if you've heard no complaints.
  5. Similarly, claiming that "all dealerships do it this way" is not likely to impress a judge. Arguing that a certain part of your plan is "industry practice" is unlikely to get you off the hook in court. Review your plan with an eye toward the law, not toward the dealership down the street.
  6. Make sure you review your company policy to make sure it doesn't conflict with the pay plan or the law. Unilateral policies (allowing for deductions for fines or damage to vehicle, for example) are unlikely to trump the terms of a pay plan, and could violate state or federal law. 

Conclusion: Don't Scrap Your Pay Plan

The irony of this and many other sales pay plan lawsuits is that the dealership could have lawfully paid its salespeople exactly as it wanted if it had just properly drafted its sales pay plan. For example, a dealership could lawfully deduct the cost of the dealer's dog groomer from sales commissions so long as this is clearly spelled out in the pay plan. 

Perhaps this is one reason why so many dealership pay plans are purposefully vague – some dealers do not want to be up front with their employees about what is actually being deducted when calculating their commissions. Of course, as this case made clear, if you are not up front and your pay plan is not transparent, there may be a significant price to pay.

We've heard reports of some dealers who are so frustrated with legal concerns that they decide they are going to do away with written sales pay plans altogether to protect themselves from liability and preserve their flexibility. Don't do that; that's just jumping out of the frying pan and into the fire. Your pay plan will still be just as legally binding as a written one, but now it will be an oral contract. It is far more difficult for a dealership to prove the terms of such a contract, and your chances of winning in court will be greatly reduced.

For years, Fisher & Phillips has helped dealerships across the country draft sales pay plans that comply with both federal and state laws, and also include proper commission-deduction disclosures. If you would like to have us review your current sales pay plan to determine if it will pass legal muster, we would be happy to do so. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.