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)