In theory, the idea of a minimum wage is simple enough: employers have a legal obligation to pay their workers a certain amount of money per hour. As an employer, you can pay your employees more than minimum wage, but not less. On top of that, if employees work overtime, you may have to increase their pay for those hours.
In the real world, however, remuneration is complicated. Some employees collect tips. Some get paid on commission, pocketing a percentage of sales in which they were involved. An employee may receive a portion of their compensation now, and another portion months or years in the future. Many workers, salaried and otherwise, earn bonuses if they help their employers reach certain yearly, quarterly, or monthly goals. Stock options and benefits may come into play. And increasingly, employees collect reimbursement from their employers for work-related expenses such as meals, fuel, plane tickets, and even payments to contractors.
And then there are “draws.” When a salesperson is paid through commission, their income and cash flow may be unpredictable or irregular. This frequently happens in low-volume or seasonal industries. A salesperson could earn commission on 5 massive sales in one month, for instance, but close no deals the next month. In this kind of situation, an employer may allow the employee to “draw” an advance against future commissions, provided that the employee pays the employer back once the next deal is closed.
Draws make it possible for salespeople in precarious circumstances to receive a steady stream of minimum wage, regardless of whatever boons or shortfalls the future may hold. But could a draw be considered a “kick-back” under the Fair Labor Standards Act?
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And what happens if an employee loses their job? If the advances they collected during employement fall below the minimum wage, does the company have a duty to pay them after the fact? Or, if the employee collected an advance without later earning commission, do they need to pay their former employer the difference?
A recent article by our friends at Fisher Phillips explores these questions through the lens of a recent decision by the Sixth Circuit U.S. Court of Appeals. Employers looking for answers, they write, need to dig deeper than the headlines:
“Media reports have mistakenly suggested that a recent decision by the Sixth Circuit U.S. Court of Appeals (Kentucky, Michigan, Ohio, and Tennessee) found the federal Fair Labor Standards Act to prohibit recouping a draw or advance from future earnings. However, a closer reading of the opinion proves that you can’t judge a ruling by its headings.
Stein v. hhgregg Inc. involved an FLSA “collective action” against a seller of appliances, furniture, and electronics. The plaintiffs were retail-sales employees paid solely on a commission-basis. They received what they called a “draw” when their commissions failed to meet the FLSA’s minimum-wage requirements.
Employees who received such a draw had to repay the sum in later weeks for which their commissions exceeded that minimum wage. They were required to “immediately pay the Company any unpaid Deficit amounts” at the end of their employment. The plaintiffs claimed that these policies violated the FLSA (and state law). The lower court dismissed the FLSA claims, finding that these practices were not inconsistent with that law.
However, the Sixth Circuit reversed the dismissal and sent the case back for further proceedings. Although a heading in the court’s opinion said that the employees “alleged sufficient facts to demonstrate that the draw policy violates the FLSA”, the court in fact held that requiring the draw to be repaid from future earnings did not violate the FLSA.