Sixth Circuit Provides Clarification On Legality Of Draw-On-Commission Policy

Last month, the Sixth Circuit revived a lawsuit brought under the Fair Labor Standards Act ("FLSA") alleging that a retailer's commission policy was unlawful in Stein v. hhgregg, Inc., 2017 U.S. App. LEXIS 19908 (6th Cir. Ohio Oct. 12, 2017). The decision provides support for the legality of taking a draw on an employee's future commissions, and highlights the problem with having a policy that requires repayment of draws upon termination.

Background

Plaintiffs worked for Defendants hhgregg, Inc. and Gregg Appliances, Inc. as retail sales employees and were subject to Defendants' draw-on-commission policy. Under this policy, all retail sales employees are paid solely on the basis of commissions. However, in pay periods when an employee's commissions fall below the minimum wage, he or she is paid a "draw" to meet minimum wage requirements. If an employee reports working forty hours or less in a week, the draw equals the difference between the minimum wage for each hour worked and the amount of commissions actually earned. If an employee works more than forty hours in one week, the draw equals the difference between an amount at least one and one-half times the applicable minimum wage for each hour worked and the amount of commissions actually earned. Draw payments are calculated on a weekly basis. An employee receives a draw only if the commissions earned that week fall below the minimum wage (in a non-overtime week) or one and one-half times the minimum wage (in an overtime week).

According to Plaintiffs, employees who receive a draw are required to repay it by deducting the amount of the draw from commissions earned during the next week. As an example, "if the weekly minimum wage were assumed to be $290, and an employee earned only $100 in commissions in one week, he would receive a draw of $190 to meet the minimum wage of $290. However, if the following week he earned $600 in commissions, he would receive only $410, and the remaining $190 would be credited back to the company to repay the $190 draw from the previous week." Plaintiffs claimed that if the subsequent week's commissions were insufficient to repay the draw, Defendants would deduct the amount of the outstanding draw from the next paycheck the employee received for a week in which the employee's commissions exceeded the applicable minimum wage. Further, Defendants' policy stated that "[u]pon termination of employment, the [employee] will immediately pay the Company any unpaid...