During this difficult sales downturn, dealers have been forced to cut expenses in many areas, and that includes trimming employee wages. Some employees may understand the difficulties the dealership faces and accept the reductions. Others will be less understanding, especially when they leave employment. Former employees may seek to file claims for wages they feel are due them. Those wage actions can be very expensive. An action filed under the federal Fair Labor Standards Act can lead to an award for back pay, statutory damages, and attorney’s fees. A claim filed under the state wage statute (the law requiring that the employer pay what is due the employee) can similarly lead to liability for back pay, penalty in the form of some multiple of the amount owed, and attorney’s fees.
Dealers should take steps to protect themselves from legal actions for wages. Here are some frequently asked questions and answers.
Question
I pay my salespeople draws. I won’t have a minimum wage problem, will I?
Answer
That’s not necessarily the case. If the draw is based on an assumed average work week, employees who claim to have worked more hours may have a minimum wage claim if their commissions during the pay period are not sufficient to pay them the minimum hourly wage for all hours worked. Have a policy to ensure that salespeople – and others in the company – earn minimum wage.
- Make sure that there is no doubt about hours worked. Require that employees clock in and clock out.
- Pay draws to salespeople on a regular basis – whether weekly or bimonthly.
- The draw should at least be sufficient to cover the minimum hourly wage per expected hours worked over an average work week.
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On the settlement date, check to be sure that each salesperson earned commissions equal to or greater than the minimum hourly wage times the number of hours worked. If not, pay the employee a supplement.
Question
If I pay a supplement to an employee for a month, am I entitled to recoup it later in a good month?
Answer
Yes, and your pay plan should provide for this. Subsidies can be recouped in a subsequent month where the commissions earned exceed minimum wage due for that period.
Question
Our cleanup personnel are really independent contractors who are paid on a piecework basis. We treat our occasional drivers the same way. Any problem?
Answer
Yes, there may be a serious problem. The federal government has launched a major effort to educate employees about their minimum wage rights and to audit businesses for minimum wage compliance. Personnel that you call independent contractors will often be called employees by the government. Where the piecework payments to them are not sufficient to provide the minimum hourly wage for all hours worked, the business may be penalized and forced to pay additional wages due. In addition, the Internal Revenue Service may audit to determine whether the dealership is withholding from employees appropriately for FICA and other required government payments. If the IRS disagrees and finds that the personnel you call independent contractors are really employees, it may assess you for back withholding, plus penalties and interest. Consult with your accounting advisor concerning the test the government uses to determine whether a person is an employee or an independent contractor, and make sure that personnel are properly classified.
Question
We don’t have a written pay plan but we settle monthly and the salespeople don’t complain. We should be okay, right?
Answer
Not necessarily. The most common wage claims filed against dealerships by former sales employees involve allegations that the dealer repeatedly shorted them on pay. Claimants will base their demands on poorly written pay plans that call for commissions based on net profit per vehicle. They will argue that packs and other charges were impermissibly added to inflate vehicle cost.
Question
How can I protect the dealership when I create pay plans?
Answer
Consult the dealership’s legal adviser about a pay plan template that contains adequate protections for your dealership.
Here are some things to consider.
- Have a written pay plan. If a dealership has twelve salespeople, it can be sure that there will be at least fifteen versions on the sales floor of what the pay plan is. Eliminate the possibility of differing stories. Pay plans should be in writing.
- A pay plan should not be a contract. If a pay plan is not carefully written it can be considered a contract between the dealership and the salespeople. This is an especially serious problem if the pay plan contains guarantees for a period (such as minimum earnings for ninety days) because it gives a salesperson the opportunity to claim that he or she was guaranteed employment for the specified period. The pay plan should specifically say three things. (1) The pay plan is nothing more than a description of how the employee will be paid; (2) it is not a contract; and (3) it does not affect the “at will” status of the employee, meaning that the person’s employment can be terminated at any time and the employee can terminate employment at any time.
- Pay on “commissionable gross”. Does your pay plan say that the commission base will be vehicle “profit” or “vehicle net profit”? That makes it awfully easy for a former salesperson’s lawyer to claim that this is simply the selling price less cost of the vehicle, and that packs and other adjustments to cost are prohibited. Use a term such as “commissionable gross” for calculating commissions. This will indicate that payment is based on a term to be defined by the dealership.
- Define “commissionable gross”. The pay plan should make clear that the “commissionable gross” is an amount based on the selling price less costs determined by the dealership is its discretion. Reserve the right to determine the various elements of cost that make up “commissionable gross”.
- Preserve the dealership’s right to change the plan. Include within the pay plan the right to change the pay plan at the dealership’s discretion at any time.
- Address spot cash and spiffs. Reserve the right to establish and withdraw special compensation programs immediately and, from time to time, based on market or competitive conditions.
- Are demonstrators addressed? If there is a reference in the pay plan to demonstrators, there should be language that: (1) states that the dealership may designate the type of demonstrator that is assigned in the best interest of the company; (2) reserves to the dealership the right to terminate the use of a demonstrator at any time; and (3) requires that the demonstrator be used in strict accordance with the company’s demonstrator policy.