United States: Sixth Circuit Cries Foul On Post-Termination Repayment Of Recoverable Draw

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.

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.

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