Improper Commission Agreements Can Lead To Wage & Hour Liability

A recent New York Federal Court decision serves as a reminder for employers to make sure that their pay practices comply with requirements of the wage-and-hour laws—even those employees that it pays on a commission basis.

Karic v. Major Auto Companies, Inc. involved a group of commissioned salespersons that worked for a car dealership. The salespersons were paid a daily salary of $20 plus a commission on any car they sold. The salespersons typically worked 45-50 hours per week. If the salespersons sold no cars in a week, they only received their daily salary. The salespeople would regularly sell no cars in a week, but also sell multiple calls in other weeks. Commissions were subject to deductions by the dealership, but only some of the deductions were described in the commission agreement.

The salespersons sued the dealership, alleging that their pay violated the wage-and-hour laws because it did not ensure that they received at least the minimum wage in each week and because the employer improperly took deductions that were not described in their commission agreements. The dealership argued that the employees’ annual salary, which averaged $50,000, greatly exceeded the minimum wage that an employee would be entitled to over the course of a year, even if the employees earned less than the minimum wage in some weeks. It also argued that the deductions not listed in the commission agreement were permissible because the salespersons never objected to them.

The court rejected the dealership’s arguments and concluded that it had violated the wage-and-hour laws. It violated the minimum wage and overtime provisions because it did not insure that the salespersons received minimum wage and overtime in each week that they worked. It violated the provisions against impermissible deductions because it did not insure that all the legal deductions it was taking were described in the commission agreement. The dealership also took some deductions that were prohibited by law. The court concluded that the dealership’s violations were willful, entitling the salespersons to liquidated damages. It also held that the CEO and presidents of the dealership were individually liable.

This case illustrates an employer’s need to make sure that it pays commission sales staff properly. Commission sales agreements should clearly explain when commissions are paid, how they are paid, and any deductions that will be taken from a commission. Employers should also assess whether commission sales staff are exempt from minimum wage or overtime. If not, employers need to insure that their pay structure complies with the requirements of the wage-and-hour laws. If you have questions about sales exemptions or commission sales agreements, please contact any Clifton Budd & DeMaria attorney.