Sixth Circuit Deems Unlawful a Policy Requiring Employees to Repay Advanced “Draws” Upon Termination

The employer, hhgregg, Inc., has a compensation system where the sales employees (non-exempt) are paid commissions. They are advanced a “draw” in any week in which they do not make enough sales to have the commission payments cover the minimum wage requirements. The “draw” is deducted from future commissions. Upon termination, the employee – per policy – is required to immediately repay any outstanding draws.

A collective action was brought against hhgregg, and various wage and hour claims were asserted. We are going to focus on one.

Interestingly, the employees did not focus on the policy which required them to repay any outstanding “draws” upon their termination. In fact, the company represented it did not even enforce that part of the policy. But, the Court of Appeals found it quite interesting.

The Court wrote about the complications such a policy might cause an employee, even if the policy were not enforced. “Even if defendants never demanded repayment in practice, an employee may believe he owes a debt to the company for which he could be made responsible at a later date. Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications for individuals. It could affect the way an individual saves money or applies for loans. An individual might feel obligated to report that debt when filling out job applications, credit applications, court documents, or other financial records that require self-reporting of existing liabilities.”

The Court of Appeals noted the possibility that, if made to repay the debt upon termination, the employee’s wages for a given work week could fall below minimum wage which would, in fact, be a violation of the Fair Labor Standards Act. Thus, even though the employees did not complain in their lawsuit about this section of the policy, it is this section that will survive and be returned to the trial court for further consideration.

Two things come to mind when reading this case. First, it is a reminder as to the importance of ensuring you are paying employees correctly. Second, it is a reminder to be proactive in your thinking about wage and hour issues – question the way in which you are compensating your employees. The “problem” raised in this lawsuit failed to even be the issue that sparked the interest of the Court of Appeals who, after careful review of the entire record, located an issue it deemed worthy of discussion (and remand to the trial court).

By Kristen L. Brightmire, KBrightmire@dsda.com