On May 8, 2019, the Massachusetts Supreme Judicial Court (the “SJC”) issued an important decision concerning the interpretation of the Massachusetts Wage Act, and related regulations. The decision issued by the SJC, titled Sullivan et. al. v. Sleepy’s LLC et. al., will directly impact many motor vehicle dealers in the Commonwealth of Massachusetts. It is important that all dealers consult with legal counsel to review their pay plans and payroll documents to ensure compliance with this new case law. This is an area ripe for new litigation.
Under Massachusetts law, a Federal Court interpreting state law issues of first impression may request guidance from the Commonwealth’s highest court (the Supreme Judicial Court of the Commonwealth of Massachusetts [“SJC”]) concerning statutory interpretation of state law. The Sullivan case involves how the Commonwealth’s Overtime and Sunday premium wage statutes should be applied to inside sales employees who are paid 100% by commission. Although the Sullivan case involved Sleepy’s (a mattress store), the manner in which Sleepy’s pays it sales staff is similar to how many auto dealerships (and other retailers) pay their sales employees. Like auto dealerships, Sleepy’s pays it commissioned employees a lump sum based entirely upon a draw and commission, the total of which exceeds what the employee would have otherwise earned under Minimum Wage, Overtime and Sunday premium wage statutes. Under such a pay plan, a dealership sales employee typically earns more than what he or she would have earned had the employee been paid straight Minimum Wage, Overtime and Sunday premium pay on an hourly basis.
The Sullivan Court however held that this compensation structure does not comply with the Massachusetts Wage Act. The Sullivan Court specifically held that the Overtime and Sunday premium wage statutes require separate and additional overtime (or Sunday premium) compensation to be provided to a 100% commission employee, regardless of whether that employee receives a recoverable draw or commissions that equals or exceeds what would be due under the Overtime statute (i.e., 1.5 times the employee’s regular hourly rate- which for an employee is based on minimum wage). For example, if a dealership employee works 45 hours, he or she must be paid at least minimum wage of $12.00 per hour for the first 40 hours worked, plus an additional $18.00 per hour for the 5 hours of Overtime worked, regardless of what he or she is paid for commission. The Sullivan Court held that Massachusetts statute “entitles the employees to separate and additional overtime payments beyond their draws and commission.” The Sullivan Court also held that these separate categories of compensation must be broken down and included on wage statements.
It is imperative that employers work with their payroll providers immediately to make changes to their pay plans and how payments are reflected on wage statements. An employer must specifically carve-out and separately pay an employee for each hour worked over 40 hours in a week (or on Sunday) regardless of the amount of the commission. The SJC noted that this result might mean an employee’s overall compensation is less going forward if the dealership reduces the amount of commissions but that may be a necessary outcome of the SJC application of the law. The SJC further determined that the rate of pay for each overtime hour worked should be one and a half times minimum wage.
How did the SJC arrive at this conclusion? The Court looked at the legislative purpose of the Overtime and Sunday premium wage statutes. The Sullivan Court held that the purpose of the Overtime statute was to “reduce the number of hours of work, encourage the employment of more persons, and compensate employees for the burden of a long workweek.” Based upon this view of the statutory purpose, the Sullivan Court held that allowing employers to retroactively allocate a lump draw or commission payment to cover overtime hours would not encourage employers to hire additional employees, which (according to the SJC) is one of the primary purposes of the Overtime statute. Using this same theory, the SJC held the same requirements apply for pay earned on Sundays. In other words, employees who work on Sundays must be paid separate and additional compensation for Sunday premium wages, unless there is an applicable exception.
This decision is problematic for dealerships because, generally speaking, many dealerships have been using draws and commission as a credit against Overtime wages and Sunday premium wages for many years. By and large, sales employees being compensated in this manner are making commission wages which far exceed the minimum requirements set by law. In addition, dealerships and other retailers have relied upon certain opinion letters issued by the Department of Labor Standards (DLS) that contain language which seemingly approves of the “lump sum” pay structure. The SJC acknowledged this, holding “We recognize that the opinion letters are less than a model of clarity and may have misled employers.” Nevertheless, the SJC held that employers may not retroactively reallocate and credit payments made to fulfill one set of wage obligations (commissions and draws) against separate and independent obligations (overtime and Sunday premium pay).
What is next? It is very important that all dealers consult with their attorneys to make sure that their dealerships are compensating sales employees in a manner that is consistent with the Sullivan decision. If changes are required, they should be implemented as quickly as possible. Violations of the Commonwealth’s Wage and Hour laws can carry serious penalties, both for the dealership corporation and the dealer principals individually.