• New Guidance on the Permissibility of Employer Commission Draw Policies
  • April 4, 2018
  • The recoverable draw is a common practice utilized by companies that employ commissioned sales staff to ensure compliance with minimum wage and overtime regulations. Under a recoverable draw system, an employer will supplement a worker’s commissions during a given pay period where the worker earns less than the minimum wage in order to raise the worker’s pay to the applicable minimum wage level. The employer will then recoup these funds by deducting future commissions earned by the worker in a subsequent pay period. In Stein v. hhgregg, Inc., No. 16-3364 (6th Cir. Oct. 12, 2017), the Sixth Circuit Court of Appeals held that such recoverable draw policies are permissible under the Fair Labor Standards Act (FLSA). At the same time, however, the court held that similar company policies requiring reimbursement for any outstanding draw amounts following a worker’s termination runs afoul of the FLSA. The Stein decision is noteworthy for employers as the opinion provides key guidance as to the permissible contours of company draw policies and practices.

    Hhgregg owns and operates over 220 appliance, furniture and electronic stores across the U.S. The company’s entire sales and retail staff is compensated exclusively on the basis of commissions. Pursuant to the company’s “draw-on-commission” policy, in pay periods where an employee’s commissions fall below the federal minimum wage level, the worker is paid a draw to meet minimum wage requirements. When this occurs, hhgregg subsequently deducts the amount of the draw from commissions earned during the employee’s next pay period to recoup the funds. In addition, pursuant to the policy, upon termination from employment, an employee is required to immediately reimburse hhgregg for any outstanding draw amounts. Robert Stein, on behalf of himself and all other former and current employees of hhgregg, brought suit against the company, claiming that the draw policy violated the Fair Labor Standards Act. The district court found the policy to be lawful and dismissed all of Stein’s federal claims. Stein appealed.

    On appeal, the Sixth Circuit agreed with the district court that hhgregg’s practice of deducting draw amounts from an employee’s future earnings did not violate the FLSA. In doing so, the Sixth Circuit found that hhgregg’s practice of deducting amounts from wages not delivered, that is, from future earned commissions that had not yet been paid, was permissible under the FLSA and related U.S. Department of Labor (DOL) regulations. Significantly, however, the Sixth Circuit ruled that hhgregg’s post-termination liability policy violated the FLSA and, in particular, the DOL’s “free-and-clear” regulation, because it required a repayment of wages already delivered to the employee, even if the company did not enforce the policy.

    The Stein decision is a significant win for employers as it reaffirms the longstanding view that recoverable draw policies allowing for the recoupment of draw advances from “future earned commissions that have not yet been paid” are permissible under the FLSA. In addition, Stein also offers a clear warning to employers that post-termination repayment provisions pertaining to outstanding, unpaid draws may give rise to a cognizable wage claim, even where the policy is not enforced. As such, employers should take heed from the Stein opinion to tread cautiously as it relates to how they manage the reimbursement of outstanding draw balances following the termination of an employee.