Policy Requiring Recovery of Draw Payments from Terminated Employees Violates FLSA

An employer that has a written policy of continuing to hold employees liable for unearned draw payments after their termination violates the Fair Labor Standards Act (FLSA), even if it does not enforce the policy, concluded the 6th U.S. Circuit Court of Appeals.

HHGregg owns and operates more than 220 stores across the country, selling appliances, furniture and electronics. Robert Stein was a retail sales employee at an HHGregg store in Hamilton County, Ohio. All retail sales employees at HHGregg were paid solely on the basis of commissions. In pay periods when an employee's earned commissions fell below the minimum wage, the worker was paid a "draw" to meet the minimum-wage requirements.

[SHRM members-only HR Q&A: What are "draws" under a sales compensation plan and how do they work?]

In a nonovertime week, the draw equaled the difference between the minimum wage for each hour worked and the amount of commissions actually earned. In an overtime week, the draw equaled the difference between at least one and one-half times the applicable minimum wage for each hour worked and the amount of commissions actually earned.

Draw payments were calculated on a weekly basis. Employees who received a draw were required to repay it, by deducting the amount of the outstanding draw from the next paycheck. HHGregg's policy provided that upon termination of employment, "the employee will immediately pay the company any unpaid deficit amounts."

Stein brought suit on behalf of himself and others similarly situated, saying that the draw policy violated the FLSA. Specifically, Stein argued that HHGregg failed to deliver wages "free and clear" because under its compensation policy, any draw amount paid to meet the minimum wage was deducted from future paychecks. Stein characterized the draw as "nothing more than a loan" that retail sales employees were then expected to repay, or "kickback" to the company. The district court found that HHGregg's policy was lawful and dismissed all federal claims.

The 6th Circuit agreed with the district court that Stein failed to demonstrate that HHGregg's practice of deducting the amount of the draw from future earnings violated the FLSA. Department of Labor regulations require that the minimum wage be paid "finally and unconditionally or 'free and clear.' " The free-and-clear regulation specifically provides that the FLSA is not met when the employee kicks back wages, either in whole or in part, whether directly or indirectly to the employer.

The court noted that under HHGregg's system, whether in nonovertime or overtime weeks, deductions were not made from wages that were paid to employees, but from future earned commissions that had not yet been paid. Because the company's practice of deducting draw payments from future commission earnings did not unlawfully kickback directly or indirectly to the employer the whole or part of the wage paid to employees, the 6th Circuit held that HHGregg's practice did not violate the free-and-clear regulation.

However, the court held that Stein had alleged sufficient facts to demonstrate an FLSA violation where the company's compensation policy held employees liable for any unearned draw payments upon termination for any reason. Although HHGregg represented to the court that it had not collected, and would not in the future collect, any debts from any employee upon termination, the court chose to focus upon the company's written policy rather than how it had implemented its policy thus far. The court remarked that "simply because a policy has never been applied does not mean that the employee has not been affected by the policy."

Even if HHGregg never demanded repayment, the court commented that "believing that one has incurred a debt has far-reaching practical implications for individuals," such as reporting that debt when filling out job applications, credit applications or other financial records that require self-reporting of existing liabilities. Since a terminated individual who had gone several weeks without earning any commissions could be liable for thousands of dollars under this policy, the court could not find that the minimum wage was provided free and clear.

Stein v.
HHGregg Inc., 6th Cir., No. 16-3364, (Oct. 12, 2017).

Professional Pointer: Although federal law does not require employers to give former employees their final check immediately, employers should review their state law requirements for guidance regarding the timing of the final payment, as well as the payment of such accrued benefits as vacation time.

Roger S. Achille is an attorney and a professor at Johnson & Wales University in Providence, R.I.

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