Pay plans can lead to employee satisfaction or dissatisfaction. For dissatisfied employees, lawsuits are a possibility, with significant liability for the dealership.
August 15, 2024
By Barrie Charapp Beaty
Charapp & Weiss, LLP
bbeaty@cwattorneys.com
Everyone is feeling the effects of high inflation and many people are living paycheck to paycheck. Due to high costs for daily life, employees, more now than ever, will be checking to confirm that they are being paid correctly. For this reason, complete and accurate pay plans are critical and describe how employees will be paid.
Pay plans can lead either to employee satisfaction or to dissatisfaction. For dissatisfied employees, lawsuits are a possibility with significant liability for the dealership. A pay plan is as significant as any other critical document in your dealership, and it should be treated as such with definitions, clear terms and conditions, and executed by the dealership and the employee.
The days of pay plans on the back of a napkin are long gone, but dealers still regularly create pay plans without formality and critical items missing. There should be a standard pay plan form for each group of personnel earning commissions so that critical items are not misstated, or even forgotten. We include a checklist of pay plan terms, the purpose of which is to address deficiencies we still see in pay plans.
The Keys to Pay Plans
- Pay plans must be written. A verbal pay plan is no pay plan. Without the employees’ pay in writing, it becomes a game of “he said,” “she said,” and the dealership will be on the losing end of it. You will be surprised at how little “everybody knows” if there is a dispute. All pay plans should be in writing.
- Pay plans need to be dated. Employees and the dealership need to know what pay plan is in effect for what period. What happens if the employee makes claims that monies were owed for a current paycheck but making his calculations from an old pay plan? Pay plans should be dated so you know their chronology.
- Pay plans must be signed. In the car business if a document is not signed it was not seen. Make sure an employee signs the pay plan.
- Pay plans are NOT contracts. When you hired the new manager with an increased pay provision for ninety days, did you intend to guarantee employment for that period? Probably not. But if the pay plan is not worded correctly, you may form a contract when the employee signs. The pay plan should include a disclaimer of contract. It should clarify it is simply a description of how the employee will be paid. It should state that the employee is employed “at will” – the employee may leave at any time, or the employee may be terminated at any time.
- Carefully describe compensation. How will the employee earn compensation? Be specific as to any salary. If there is a commission, define that. If there is a draw against commission, state that. If there is a bonus, state the basis for the bonus, and clarify it is in the discretion of management.
- There needs to be a clear definition of the commissionable base for salespeople. All too often, pay plan litigation is a result of the lack of a defined commissionable base for sales personnel. For salespeople, pay plans often simply provide that a salesperson will be paid on net profit per vehicle. A disgruntled salesperson may claim that means the selling price less the cost of the vehicle, with no provision for packs, clean up, reconditioning, or other common deductions. To a judge or jury with no experience in the business, that may make sense leading to liability of hundreds of dollars per vehicle sold. The pay plan should state that the salesperson earns a percentage of “commissionable net profit” on the “commissionable base”. It should clarify that the commissionable base is determined in the sole discretion of the dealership management, it includes costs to be determined in the sole discretion of dealership management, and it can be changed from time to time.
- Define commissionable base for managers and other employees that are not salespeople. Be specific about the base against which the commission percentage will be applied for a manager. Is it specific accounts on the financial statement? Is it specific revenues less defined deductions? The pay plan should spell it out.
- Define when commissions are earned. To a judge or jury with no knowledge of the car business, it may well be reasonable to agree with a disgruntled employee that a commission is earned when vehicles cross the curb. However, that is seldom the case. Generally, commissions are not earned until a deal is neat and complete and the revenue hits the books. The pay plan should be clear about that.
- Be clear when the employee will be paid. The pay plan should be clear about the date on which an employee will be paid. Otherwise, a disgruntled employee may contend the right to be paid daily, weekly, or some other time period that does not work for the dealership.
- Define the conditions for payment. Is there a CSI component in the pay plan? Is there a minimum delivery component to the pay plan? If there are conditions to enhance earnings, those should be spelled out.
- Clearly provide for advances and draws against commission. It is not unusual for an employee to sometimes run a deficit in a slow month. If it is the policy of the dealership for a deficit to be carried from pay period to pay period until repaid, the pay plan should state that. Remember: you can never recoup a deficit if it will reduce the employee’s earnings for any period below minimum wage for each pay period.
- Correction of errors. The pay plan should specifically provide that errors can be corrected and pay can be recomputed.
- Reserve the right to change the pay plan at will. Pay plans are not written in stone. The dealer should have the right to change the pay plan at its discretion with notice to the employee.
- Rights to benefits. Will the employee have rights to benefits? If the employee is part time, that should be stated and the maximum hours should be stated. If the employee has rights to benefits, identify where the employee can learn more about those rights.
- Identify demonstrator rights. While demonstrators are less common in dealerships today, if an employee has the benefit of a demonstrator, it should be clear the benefit is subject to the discretion of management, it can be withdrawn at any time, and the vehicle to be assigned shall be determined by management in its sole discretion.
- Keep dealership documents and pay plans consistent. If your dealership has an internal pricing and pay policy or manual, and that policy or manual has defined terms and conditions on how employees are paid (i.e., such as defining what a “finalized sale is”), the pay plan and the policy or manual should be consistent. Do you want the pay plan to override the policy or manual? A dealer may want to add language to the pay plan that it supersedes the policy or manual. The objective of the pay plan is to avoid any inconsistencies or confusion as to how the employee is to be paid, especially with any internal policies or manuals that could serve as arguments that the employee has not been paid accurately.
