Salesperson Compensation – Is it time to review your pay plans?

Plaintiffs brought three interesting cases last year against automobile dealers and dealer groups regarding salespersons’ commissions and pay plans. These suits highlight the need for automobile dealers to:

  1. Have clearly written pay plans,
  2. Follow written pay plans, and
  3. Periodically review whether business or legal needs should drive changes to pay plans.

Salesperson Commission

Thirty-three former salespeople of Rick Hendrick Chevrolet filed suit in Collier County Florida in early 2018 seeking class action certification against the dealership and its parent company, Hendrick Automotive Group, the sixth-largest dealership organization in the U.S. Hendrick has 96 auto dealerships in 4 states. The suit alleges the dealership fraudulently reduced salesperson commissions. If the suit certifies as a class action, it will be open to current and former Hendrick employees in Florida and other states where Hendrick does business.

Plaintiffs at Hendrick were paid on a straight commission basis—25% gross profit on new cars and 30% gross profit on used cars. Plaintiffs allege that Hendrick engaged in a number methods to decrease sales commissions, including misstating the cost of vehicles, failing to pay commissions on holdbacks and other incentives, and inflating vehicle preparation costs. Plaintiffs claim these practices resulted in salespersons earning only the minimum guarantee of $200 per unit and, in some cases, salespersons were unable to meet monthly draws. Plaintiffs further allege the dealership refused to provide an accounting of their deals.

In North Carolina, Plaintiffs filed for class action certification against Parks-Michael Automotive Group alleging that the dealer did not pay commissions to salespersons on dealer documentary (“doc”) fees and other fees and charges. Doc fees in North Carolina are on average $599 per unit. Plaintiffs contend salespersons are entitled to commissions on doc fees, and other fees, such as lot fees, administrative fees, and other markups. Plaintiffs claim that salespersons sold vehicles at below asking price or inflated trade-in values in order to sell units to customers who would have otherwise shopped elsewhere. The result was decreased commissions to salespersons. Plaintiffs allege that they should be paid commissions that include dealer fees and that they should know what is included in commissions. In North Carolina, changes to a commission policy must be in writing and disclosed to sales personnel so that they understand commission calculations.

Overtime Pay

In June 2018, Tesla announced that it had settled a federal class action lawsuit brought by three current and former “owner/advisors” at its service centers in California. Tesla did not qualify for the federal overtime exemption for salespersons available to automobile dealers because Tesla is not a non-manufacturing establishment engaged in the business of selling new or used automobiles to the ultimate purchaser. However, the facts of the Tesla case may provide some insight into how to properly calculate commissions. In the Tesla case, Plaintiffs alleged that Tesla failed to pay salespersons at least minimum wage in every pay period and failed to pay overtime.

Claims for minimum wage violations may arise when the amount of guaranteed compensation or “draw” is not sufficient to meet minimum wage requirements. Salespersons who receive a draw must have a draw that is equal to the minimum wage requirements for hours worked during the applicable pay period. The Tesla lawsuit challenged whether the “salespersons” were exempt from minimum wage requirements pursuant to California law. Plaintiffs claimed that Tesla continually moved quarterly sales targets, making it difficult for owner/advisors to earn expected commissions on a per-unit and per quarter basis and that these practices resulted in long workweeks with little financial reward. In California, commissioned employees are exempt if the employee receives at least 50% of income from sales commission. The suit alleged that because Plaintiffs and other owner/advisors received less than 50% of income from commissions, Plaintiffs should have been classified “non-exempt” and therefore paid an hourly wage for all hours worked plus overtime when they worked more than 8 hours per day or 40 hours per week. Tesla denied wrongdoing but entered into a $1 million dollar settlement agreement with Plaintiffs.

What do these cases mean to you?

You should have a written and easy to understand pay plan, you should clearly communicate your pay structure to employees, and you should follow the structure. In order to comply with legal requirements, you must take into account each employee’s commission take-home and other pay elements, and make up for the difference if the commission and other elements earned are less than the hourly wage rate for your state. The state of Iowa defaults to the current Federal Minimum Wage Rate of $7.25 per hour and is governed by the Fair Labor Standards Act, 29 U.S.C. §201, et, seq. (“FLSA”). The default rule, as provided in 29 U.S.C. §207(a)(1), is that an employer must pay every employee overtime unless he or she qualifies for an exemption:

…no employer shall employ any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.

If your salespersons’ pay plan includes a draw, you should track employee time or otherwise ensure that you are meeting minimum wage and overtime requirements on a workweek basis.

What are the important elements of a pay plan?

At a minimum, you should have a clearly written pay plan provided to all salespersons. Do not assume that salespersons understand how their commission is calculated. When writing pay plans consider the following:

  • Draft clearly written pay plans. A clearly written pay plan should include information about how and when the employee will be paid, it should state that the plan is not an employment contract, and it should state that the pay plan does not change the “at will” status of an employee.
  • Define “commissionable gross” or similar language used in your plan. Explain your calculation of commissionable gross (sales price less vehicle cost). Explain how you determine “vehicle cost.” Are packs included? Are other fees or charges included in the vehicle cost? If so, are packs or fees included in or deducted from salespersons’ commissions? The plan should clearly state the policy. Ambiguities with respect to calculation of commission lead to disputes between salespersons and management, low morale, and, yes, lawsuits.Explain the elements of the employee’s pay plan. Will the employee work largely on commission and/or earn a draw? Is there a guarantee? Will the employee have an opportunity to earn a bonus or any spiffs? Will you use a combination of these elements? No matter what elements you decide to incorporate into your pay plan, remember that employees must be able to earn the minimum pay standard required by their state’s minimum wage laws.
  • Reserve the dealer’s right to change. Reserve your right to modify the pay plan at any time. When you modify a pay plan, notify the impacted employee, and provide them the opportunity to ask questions and understand how the changes affect them.

Consideration: Alternative Commission Structures

Review your compensation structure in light of the current business environment and minimum wage and overtime laws in your state. At a time when new vehicles routinely sell at or even below invoice, should you look at alternatives to pure commission-based pay? What is the demographic of your salesforce? What incentivizes them? If your sales force is changing from “baby boomer” to “millennial,” what incentives appeal to the new workforce? Some performance-based plan elements may include:

  • Base pay (equal or greater to minimum wage requirements discussed above) plus a flat bonus for every new and used unit sold. This may eliminate ambiguities in the commission structure and vehicle costs.
  • Create sales teams that encourage collaboration by creating incentives for a team to work together by giving each team member a small bonus for every vehicle sold by a fellow team member. The best performing team may earn an additional bonus at month end or quarter end.
  • Use target-based bonuses. This incentive could be an increase for every unit sold after the target or if the sales person or team achieves the target, retroactive to the first unit sold for the applicable period.
  • Long-term bonuses based on quarterly performance for metrics such as CSI score, sale of “must sell vehicles,” or new unit bonuses.

No matter what pay plan or combination of plans you choose, it is important that you clearly draft and communicate the plan to each employee to avoid some of the pitfalls that dealers experience with respect to poorly written, poorly communicated, and outdated plans and policies.

If you have questions about how to draft your pay plans, work with your auto dealer lawyer to ensure that your plans are up to date and comply with your state’s applicable laws. Arenson Law Group, PC has over 30 years of combined experience in working with auto dealer clients, and can assist you with your pay plan and other employment needs.