Dealers In California May Be Forced To Change The Way Salespeople Are Paid

In a class action lawsuit filed on June 21, 2011 against AutoNation (Santa Clara Superior Court, entitled Lilly v. AutoNation, Case No. 1-11-CV-203569), attorneys are claiming that AutoNation is in violation of the California Labor Code by misclassifying commissioned sales reps as exempt from overtime and, in addition, issuing deduct vouchers post-sale for losses in commissionable gross due to repair or service costs incurred.

It’s standard practice in California to consider minimum wage as a “draw” against commissions. This hourly wage is only paid if the salesperson’s commissions for any pay period are less than commissions earned (ie. they would get the higher of the two amounts – commissions or hourly wages). Many dealers “settle up” at month end with the salespeople meaning the view the commissions/hourly wages on a monthly basis (versus a pay period). California labor law mandates that overtime be paid for any hours over 8 in a DAY, not by 40 hours in a week. (ie. If I worked 12 hours the whole week but all in one day, I would be due 4 hours overtime even though I only worked one day that week.)

We all know that salespeople work A LOT especially hungry ones. Many salespeople who aren’t making a ton of commissions will make sure they work a lot of hours to insure that they get a decent check in the first place. Of course a salesperson that is getting paid hourly too many times has a short lifespan within a dealership.

Now onto the deduct vouchers. Dealers in California pay commissions in one of two ways: upon approval, or upon funding. Most dealers pay upon approval. This is designed so that salespeople don’t have to wait forever to earn their paychecks and dealers don’t have to cough up minimum wage while the salesperson has unpaid commission vouchers pending funding. It’s also pretty common that grosses decrease post-sale for many reasons: a dealer has trouble with funding and/or has multiple approvals, spot-deliveries based solely upon credit, repairs and due bills completed post-sale, unforeseen bank fees, option contracts cashed in, back-end product cancellations, etc.

Typically, since vouchers are issued upon approval, those vouchers are issued based upon the gross at the time of delivery and/or approval and included in the salesperson’s check for the next pay period. If dealers cannot issue deduct vouchers for loss in gross, this will force dealers to restructure pay plans as something that was spot-delivered with a high front-end gross that gets cut back due to financing issues or any of the other reasons mentioned above, could go from a nice voucher for the salesperson to a mini. If the dealer continued to pay in the way that they are now, and could not issue deduct vouchers, they would risk losing money by issuing commission vouchers prematurely.

Then you have to consider that a sales manager would be forced to structure the deal differently taking into consideration potential cut-backs to take into account the future inability to issue a voucher. The only way to structure a new pay plan without risk to the dealer would be to issue the voucher upon funding which would open the dealer up to the possibility of having to pay the salesperson hourly wages (including overtime), while the salesperson had unissued commission vouchers pending funding. A salesperson who knew how to game the system and/or a passive F&I manager could further complicate things while awaiting stipulations from the customer.

In any case, dealers in California need to watch this pending litigation carefully as it could have a great impact on how they compensate their sales staff and, if the lawsuit is successful, would open up ALL dealers in California to future lawsuits for the same reason.

Right now, AutoNation is the only target, but your dealership could be next.

(Originally published on Dealer magazine, July 22, 2011)

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Comment by Arnold Tijerina on July 25, 2011 at 3:21pm: ...oh, and this lawsuit doesn't just effect salespeople.. as Jim pointed out, it would include every member of your staff that's not salaried.. F&I, service, etc

Comment by Sue Brief on July 25, 2011 at 3:20pm: Jim is right. The way to assure a quality customer experience is to have happy , well trained,
employees who are part of a team. The team needs to consist of everyone that touches a deal.
Sales managers, finance people, the whole circle. It is time that dealers realize that good
sales people are not a dime a dozen or easily recruited or retained. Will it cost a dealer more
in compensation? Sure, but how much more will they earn by having a sales team that holds gross, tops out CSI
and has consistant repeat and referral business. In short it is long past time for dealers to pay those who
are the keys to their long term success. It is a shame that it takes law suits to bring about this
type of revelation.

Comment by Arnold Tijerina on July 25, 2011 at 3:19pm: So if you pay the voucher UPON FUNDING, how do you prevent a dealer from having to pay hourly (including overtime) if a salesperson doesn't have any funded deals for that pay period? The dealers still out of pocket that hourly wage.

There are lots of times that your star salesperson may have a slow start.. we all know that. So they may go balls to the wall and sell a ton of cars during the second half of the month but you still end up paying them hourly for the first pay period.

We all know that F&I's heat sheet doesn't just include deals waiting for stips, etc but there are also banks that are slow to fund. That would effect a dealership's bottom line if they end up paying hourly because a bank is slow to fund and may make you reconsider using that particular lender.

Comment by Jim Kristoff on July 25, 2011 at 3:17pm: Nice rebound on the training comment John.....LOL....

Comment by John Fuhrman on July 25, 2011 at 3:16pm: Oh wait. The solution to those who take up space is training. Those who use the training stay, those who don't go.

Comment by John Fuhrman on July 25, 2011 at 3:15pm: All pay plans have the word "incentive" in them somewhere. Yet, over the last decade or so, incentive has become just a word. Salespeople performing to get something more (an incentive) generally do the right thing every time. They should be rewarded. I agree with Jim. If dealers spent more time thinking about how to reward those who perform and eliminate "warm bodies" who are lawsuits waiting to happen, everyone will win.

Comment by Jim Kristoff on July 25, 2011 at 3:12pm: Arnold - I believe the time has come to STOP paying a Salesperson a "commission" entirely!

The model is too old and worn out......

Comment by Arnold Tijerina on July 25, 2011 at 3:05pm: Jim, I would have to assume that the hourly wage part applies to any employee. It's not specific to commissioned people. The overtime rules are across the board.

Comment by Jim Kristoff on July 25, 2011 at 3:02pm: As a 30 year veteran of the retail automobile world....I say it is TIME for a renaissance in the automotive world!

The model of the "commissioned" salesperson needs to change drastically! A NEW business model MUST be formed!

The time to act.....is NOW....

If Dealers TRULY want to give their customers a "wow" experience, have the customers overwhelmed by professionalism and retain ALL of their customers....a renaissance needs to occur.....

Does your Company look like this??

Most towns have one…A legendary local business… that consistently attracts people from miles around…

It’s a place that the locals proudly bring visiting relatives and friends to….

The place that’s always jumping with turbocharged workers and lines of delighted customers…

Even while nearby competitors are struggling just to stay in business…

It is a highly successful business…where it is difficult to get a job there…all the employees are thoroughly trained…and all the employees wear a smile…and share a laugh…

Does this describe your organization??

Comment by Jim Richter on July 25, 2011 at 2:54pm: I wonder how this would apply to Service Advisors? They are primarily commission based and definetly work more than 8 hours daily.