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Meeting the Requirements of the FLSA While Employing Commission-Only Employees in Tennessee

stack of dollarsEmployers may sometimes be faced with the need to get creative when their preferred methods for compensating workers don’t necessarily mesh neatly with statutory requirements. For example, balancing an interest in compensating sales workers solely on commission may sometimes present challenges when it comes to remaining compliant with the Fair Labor Standards Act and minimum wage requirements. A case recently decided by the Sixth Circuit Court of Appeals is very informative for Tennessee employers and employees in clarifying which policies will, and which won’t, trigger a FLSA violation problem. If you have questions about this area of the law, our Tennessee FLSA lawyers are ready to advise you.

The case involved a major national chain of appliance and electronics stores. The employer had a policy that said that its retail and sales employees received compensation solely on commissions they earned. Of course, that policy didn’t absolve the employer from paying those workers in accordance with minimum wage law. Therefore, the employer crafted a plan for satisfying the minimum wage requirement:  each sales employee, regardless of commissions earned, got a minimum of $290 per week. If that worker’s commissions for that week were less than $290, the employee received what was called a “draw” and worked on somewhat like what many people might see as an advance. The draw made up the difference between the worker’s commission and $290, but, as soon as the worker had a week in which he earned more than $290, the amount of the draw was deducted from that future week’s pay.

In other words, as an example, if John Doe earned $150 in commission in the first week of September, he received a paycheck for $290, representing $150 plus a $140 draw. If John then earned $500 in the second week of September, his paycheck was $360, representing the $500 minus the $140 draw he got the week before.

Two employees from the Cincinnati area sued the employer for this policy. The FLSA requires that the amount of pay an employer provides to satisfy the wage requirements of the statute must be “free and clear,” meaning that they belong to the worker with no strings attached by the employer. The draw system this employer created wasn’t “free and clear,” the workers argued, since the draws were really nothing more than loans that the employees were required to kick back to the employer in future weeks.

As the courts noted in this case, various official documents from the U.S. Department of Labor, including multiple opinion letters, have indicated that this method of paying workers is one that generally complies with the law. Based on these documents and the DOL’s interpretation of the law contained within them, the appeals court concluded that the employer’s system of future deductions generally was not impermissible kick-backs that violated the statute.

However, there was one component of this employer’s set of rules that was potentially problematic and did provide the employees with valid grounds to continue pursuing their class action. This employer said that an employee remained obliged to pay any draws that remained outstanding, even if they separated from the company. This element requiring employees to pay employers even after termination raised a viable claim of the employer’s violation of the FLSA by maintaining a demand for payment post-termination.

The employer tried to defeat this part of the case by arguing that it had never actually forced any terminated employees to pay back outstanding draw balances they had when they left the company. The Sixth Circuit pointed out that, even if true, that wasn’t the point in terms of a FLSA violation. As the majority stated it, “Even if defendants never demanded repayment in practice, an employee may believe he owes a debt to the company for which he could be made responsible at a later date. Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications.”

In the end, this case was a partial success and partial defeat for each side, but it is instructive for Tennessee employers and employees regarding which creative tools are, and are not, available for satisfying the FLSA with commission-only employees.

Whether you are an employer or an employee, when you are faced with a minimum wage, overtime, or other FLSA case, you should do what is necessary to protect your rights and interests. Retain experienced employment litigation counsel right away. The skilled Tennessee wage law attorneys at Mays & Kerr have spent many years working to aid our clients as they take on their FLSA cases.

To speak with one of our lawyers about your case, call 1-877-986-5529.

More blog posts:

Church Appeals $388K Award of Back Wages Owed to ‘Volunteers’ at Restaurant, Atlanta Employment Attorneys Blog, Sept. 6, 2017

Georgia Employer Allowed to Keep Some of Employees’ Tips as Long as Employees Received Minimum Wage, Atlanta Employment Attorneys Blog, Sept. 14, 2016

Photo Credit: Petr Kratochvil, [CC0 License], via PublicDomainPictures.net