Care is required when advancing earnings to employee

Employers in Indiana who pay their employees on commission should be mindful of Department of Labor rules regarding paying 'draws" against future commissions. Even an unused written policy can cause problems in the future.

In a recent US Court of Appeals Sixth Circuit decision, the court determined that a written payment policy containing an improper provision could give rise to a wage and hour claim, even if the provision was never enforced. The claim arose on several allegations regarding payment of earnings.

The employer, an appliance dealer, paid salespersons on commission. If the employee's commissions for a given week were insufficient to meet minimum wage requirements, the employer would pay a draw or an advance to the employee against future commissions. If the employee was $300 short of minimum wage earnings for a 40-hour work week, the employer would pay the salesperson $300 above the commissions earned. In future weeks, when commissions exceeded minimum wage, the employer would deduct an amount to repay the advance.

In addition, the employer had a written policy that if a person left employment, any advances made would become due and payable immediately. There was no evidence the employer ever enforced this policy.

The court determined the method of repaying advances was proper because it was paid back through future earnings, rather than past earnings. The court determined the policy when leaving employment was improper and against DOL regulations because repayment would be made against past earnings. Though not enforced, the court reasoned that the policy as written could have an effect on employee actions, such as an employee remaining at the company because he or she had advances that had not yet been repaid.

The decision provides a lesson for employers to periodically review their compensation policies. Those policies should be reviewed by a person knowledgeable in Federal and State wage and hour law regulations to ensure compliance. If a policy is contrary to regulations, it can subject the employer to sanctions, even if not enforced.

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