In what may be viewed as a pyrrhic victory, now-defunct “big box” electronics, appliance and furniture retailer hhgregg’s commission-with-draws compensation program generally was lawful under the FLSA, the Sixth Circuit Court of Appeals has held. However, its policy holding employees liable for any unearned draw payments upon termination of employment would violate the Act. Stein v. hhgregg, Inc., 2017 U.S. App. LEXIS 19908 (3rd Cir. Oct. 12, 2017). The Sixth Circuit has jurisdiction over Kentucky, Michigan, Ohio and Tennessee.
For decades, many retail companies have compensated their sales employees primarily through commissions, supplemented by “draw” payments in weeks where an employee’s commissions failed to provide sufficient compensation for the employee to earn minimum wage. Typically, under these plans the amount of the draw is then deducted from future earnings in weeks when the employee’s commissions exceed the applicable minimum wage. For years, such draw-on-commission policies routinely have been recognized and accepted by the Department of Labor as a method of compensation for retail sales employees. Specifically, Section 7(i) of the FLSA excludes retail or service employees from additional overtime pay if (a) the regular rate of pay of such employee is in excess of one and one-half times the applicable minimum wage rate and (b) more than half of the employee’s compensation is earned through commissions. At issue was whether hhgregg’s draw-on-commission policies complied with DOL regulations.
Plaintiffs argued that by reducing future paychecks to recoup prior draw payments, hhgregg’s compensation policy was an unlawful “kickback” scheme because, in requiring such repayment, the company failed to deliver wages to the employees “free and clear,” as required under DOL regulations. The Sixth Circuit rejected this argument, noting that the “free and clear” requirement only pertained to wages that already had been delivered to the employee but, as a result of coercion or through a prior secret agreement, were immediately repaid to the employer. Here, however, the recoupment comes from future commissions, that is, wages that have not yet been delivered. This interpretation, and in general the validity of a draw-against commission pay system, has long been recognized by the DOL in its Field Operations handbook and several opinion letters, noted the Court of Appeals.
On the other hand, the company’s policy stating that upon termination of employment for any reason, an employee must “immediately pay [the company] any unpaid [draw balance]” could, if enforced as written, violate the FLSA, concluded the Sixth Circuit. Because, in theory, an employee could be required to repay commissions already delivered to him or her, those wages would not have been paid “free and clear” as required under the Act, particularly where, for example, the employee might owe thousands of dollars in draw payments. The Court of Appeals noted that the aforementioned DOL opinion letters, on which it relied to validate the company’s regular draw-on-commission policy, explicitly noted that the no repayment of draws was expected on separation of employment. Thus, on this basis, as well as on allegations that management tacitly, if not explicitly, approved off-the-clock work, the case was reversed in part and remanded.