By James W. Aiken, Attorney, Aiken Law Group
Have you given any thought to the impact existing pay plans may have on purchasing or selling a dealership? I suggest this is an issue overlooked until adverse consequences to either the purchaser or seller have already unfolded.
The following is one example which illustrates potential problems which can arise in buy/sell transactions: Seller has pay plans that are ‘illegal’ in some regard. In selling the assets of the dealership, all employees are terminated at closing and most are hired by the purchasing entity which presents the employees with ‘legal’ pay plans. What adverse consequences to the seller could be triggered by that?
The newly hired employees of the purchaser may note the variance between the prior employees pay plan and the legally compliant pay plan of the purchaser, and question “Why is the new pay plan so different and why does it have so many disclosures while the prior pay plan did not?” The employee independently or in consultation with legal counsel may determine that he or she was underpaid under the prior pay plan by several thousand dollars and come to know that a claim for punitive damages and attorney fees can be asserted, individually or in a class action.
Damage awards could be in the hundreds of thousands if not millions of dollars. Additionally, an effort by the selling dealer to structure the transaction as a stock sale may be thwarted when the purchaser in exercise of due diligence discovers the potential employment claims arising from the seller’s illegal pay plans.
If you have not had your pay plans drafted by or reviewed by your legal advisors, you most definitely should. There are hundreds of laws that Dealers must comply with. Dealers are often assisted in doing so by the use of standardized forms. Governmental entities, finance institutions, vehicle manufacturer’s, DMS providers, F&I providers, form vendors, and more provide forms to assist Dealers in complying with privacy laws, risk based pricing, warranties, and truth in lending, to name a few. But from whom do Dealers acquire contract forms to assist in complying with wage laws?
All States and the federal government have wage laws governing hours of work, rate of pay, minimum wage, overtime pay, and the like which are administered on the federal and State level. However, each employee’s entitlement to compensation is not dictated solely by statutory laws but is based also on the individual contract between the Dealer and each employee. It is critical for Dealers to have carefully drafted pay plans to protect themselves from governmental enforcement action and claims by employees, including class actions.
One claim by a disgruntled employee may have devastating effects on a dealership. Just as one bad apple can spoil the barrel, one employee claim can cause friction within the dealership, distract employees from their tasks, and involve countless hours and expense in engaging with legal counsel. One employee’s claim may be the basis for a class action against the dealership and can result in monetary awards, not always insured, in the millions of dollars. Monetary awards likely will include treble damages and attorney fees.
Critical Pay Plan Components
What are some of the critical components of pay plans that dealers should be aware of and address? Components may vary depending on the ‘class’ of employee, whether it is hourly, flat salaried, administrative, or commissioned. Written contracts need to be crafted to address issues as to each such class, including without limitation the following:
- Duties: Be specific as to all duties the employee is to perform. For example a salesperson’s duties include not only selling and delivering vehicles but moving and displaying vehicles, locking vehicles, driving dealer trades, lot presentation etc.
- Hours of Work: All hours of work, including staff meetings and training sessions, must be accounted for and documented for compliance with minimum wage laws and overtime entitlement. Have time machines to record all time expended by the employee and have time cards signed by the employee attesting to the time recorded being accurate and complete.
- Commissioned Employees: Sales personnel, finance managers, desk managers, general sales managers, general managers and more are commonly paid a percentage of a defined term, whether it is “Payable Gross Profit” or a line item on the factory financial statement. Disclosure must be made as to all components and exclusions pertaining to the defined term, particularly with respect to ‘Payable Gross Profit”. Disclosure of ‘packs’ and costs are critical. A detailed definition of “Payable Gross Profit” for both new and used units must be provided, for example the following as to new units (different or additional components may apply to used vehicles and F&I) :
- New Vehicle calculation – Payable Gross Profit is calculated in the following manner:
- New Vehicle Sales Price (Per Buyer’s Order)
- Less – Gross Factory Invoice Amount – including holdback, delivery and destination, regional advertising
- Less – Dealer Installed Options/Equipment at (a) dealer’s retail rate or (b) outside vendor’s rate plus 30%
- Less Pre-delivery inspection (PDI) charges from Service Dept- see attached Schedule
- Less – New Vehicle “Pack” of $220.00 (oil changes, pictures, etc.)
- Less – Cost of transportation and pack for dealer trade if applicable ($150 in State, $250 out of State)
- Less – Lot damage to vehicle if applicable at (a) dealer’s retail rate or (b) outside vendor’s rate plus 30%
- Less – Over-allowance on trade-ins
- Less – Cash paid on Customers behalf (high pay-off and membership fees )
- Less – Applicable after-sale repairs or promises (a) dealer’s retail rate or (b) outside vendor’s rate plus 30%
- Less – Aftermarket sales, if included in New Vehicle Sales Price from Item 1 above at (a) dealer’s retail rate or (b) outside vendor’s rate plus 30%.
- Less – Limited Warranty of $350 (credited if service contract is sold)
- Less – 15% of all Hold Checks With respect to managers paid on a line item on the financial statement, to the extent the line item is net of dealer packs or ‘diverted gross’, such should be disclosed with specificity.
- Chargebacks to Commissioned Employees: If a Dealer may legally ‘chargeback’ commissions (State laws vary) specificity in the pay plan must be provided. The circumstances triggering a chargeback must be listed (deal unwinds, F&I product cancellation, post sale adjustment with customer, unknown damage to trade, etc) and the pay plan should state that until termination of employment all commission payments (pay date must be set forth) are only advances on commissions, for example:Commissions are calculated on a calendar month basis (the “Pay Period”) per the commission structure above but are not fully earned until all adjustments, including chargebacks, have been calculated and applied. No actual commission is earned until all adjustments are made to calculated commissions. Upon termination of employment (voluntary or involuntary), Dealer will issue a final paycheck to you for all actual commissions earned that are subject to calculation as of the termination date (subject to chargeback and any withholding and any authorized deductions) or minimum wage, whichever is greater.
- Arbitration: If allowed by State law, provide for arbitration of all disputes with employees. To be binding, arbitration clauses must address a number of issues based on the laws of the State of employment including allocation of arbitration costs, location, selection of arbitrator, and waiver of rights to a jury trial and class action.The foregoing is not an exhaustive listing of important provisions which should be included in pay plans. Consult legal advisors on other issues such as minimum wage calculations, vacation pay, entitlement to gifts and prizes, bonuses, and award of attorney fees. The cost of non-compliance with statutory and contract laws is high, so care and attention to all pay plan issues is critical to the success of a dealership. The above is not legal advice but is intended to be and is educational only. Consult with legal advisors.
James W. Aiken is an attorney at Seattle-based Aiken Law Group. He can be reached at 206-728-4500 or jwaiken@aiken-lawgroup.com
