FLSA/Wages

6th Circuit Court’s Decision Provides Guidance on Draw-on-Commission Policies

In a recent decision, the U.S. Court of Appeals for the 6th Circuit—which covers Kentucky, Michigan, Ohio, and Tennessee—held that an employer’s week-to-week, commission-only pay system was generally valid. However, it was illegal for the company’s policy to state that employees had to repay immediately upon termination draws that had been given during employment.commission

Facts

Appliance, furniture, and electronics retailer hhgregg has more than 25 stores in Ohio and more than 220 stores in the United States. The company’s retail sales employees are paid solely on commissions. However, in pay periods in which employees’ earned commissions fall below minimum wage, hhgregg pays them a “draw” to meet the minimum wage requirement.

Employees are required to repay the draws based on future commissions earned. Under hhgregg’s policy, employees could be subject to discipline, including termination, if they received frequent draws or accumulated too great of a balance. The written policy also stated that upon termination, employees would “immediately pay the company any unpaid deficit amounts.”

Two hhgregg employees, “Will” and “Owen,” filed a lawsuit in the U.S. District Court for the Southern District of Ohio, Cincinnati, on behalf of themselves and all other former and current hhgregg retail sales employees alleging that the company’s compensation policy was illegal under the Fair Labor Standards Act (FLSA) and Ohio law. Specifically, Will and Owen alleged that:

  1. The draw policy encouraged retail employees to work “off the clock.”
  2. The draw policy improperly manipulated commissions in violation of the FLSA.
  3. The company failed to properly pay overtime in weeks in which overtime was worked.
  4. The policy required employees to pay back deficit amounts upon termination in violation of the FLSA.

The “encouraged employees to work off the clock” claim was premised on allegations that hhgregg required employees to attend mandatory training and conferences. Because no commissions were earned during the meetings, Will and Owen claimed that employees, with the knowledge and approval of managers, worked “off the clock” to avoid incurring a draw based on those hours.

Rather than filing an answer to Will and Owen’s complaint, hhgregg filed a motion to dismiss asserting that the commission payment policy was legal on its face. The district court ultimately agreed with hhgregg and dismissed all of Will and Owen’s federal claims and declined to hear the state-law claims. Will and Owen appealed to the 6th Circuit.

Court’s Decision

In a 2-1 decision, the 6th Circuit agreed with the district court on some issues but reversed the lower court’s decision on other issues. Adopting a long-standing position from the U.S. Department of Labor (DOL), the court rejected Will and Owen’s contention that the draw structure violated the FLSA when draw advances were repaid from subsequent commissions earned during the course of employment.

The 6th Circuit ruled differently, however, regarding the provision in hhgregg’s commission payment policy that required terminated employees to repay deficits in their draw balances after termination. In its ruling, the district court noted that the legality of the provision was questionable but granted hhgregg’s motion to dismiss because there was no evidence that hhgregg actually enforced that aspect of the compensation plan when employees’ employment ended.

A majority of the judges on the 6th Circuit panel disagreed with the district court that the lack of enforcement of the payback provision made a difference. The 6th Circuit ruled that although the provision had never been enforced, the fact that the policy said money had to be repaid was sufficient to state a viable claim.

According to the court, “Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications for individuals.” The 6th Circuit also ruled that Will and Owen alleged sufficient facts to state a claim that hhgregg’s policies and practices unlawfully encouraged employees to work “off the clock” without compensation.

Judge Jeffrey Sutton dissented from the majority’s decision to reverse the district court’s rulings on those two issues. Regarding the repayment issue, Judge Sutton agreed with the district court that since there was no evidence that terminated employees had actually been asked to repay draws, there was no plausible factual predicate for Will and Owen’s claim to be further litigated.

On the “off the clock” overtime allegations, Judge Sutton ruled that Will and Owen’s complaint failed to allege with specificity that they did not receive overtime pay. Stein v. hhgregg, Inc.,No. 16-3364 (6th Cir., Oct. 12, 2017).

Takeaways

The 6th Circuit’s decision is significant in several respects. It confirms that the practice of advancing future commissions to retail and service employees during employment lawfully meets the FLSA’s minimum wage requirement.

However, including posttermination repayment requirements in a commission-based compensation policy could create liability, even if the requirements are never actually enforced. Also, the court’s decision on the off-the-clock work claim is a good reminder to implement clear policies prohibiting off-the-clock work, even for employees paid on a commission basis.

Franck G. Wobst, an editor of Ohio Employment Law Letter, and can be reached at fwobst@porterwright.com or 614-227-2266.