Guidance on Commission-Based Compensation
By: Karuna S. Brunk
On September 23, 2019, the United States Court of Appeals for the Seventh Circuit released its decision in Osorio v. The Tile Shop, LLC, No. 18-2609 (7th Cir. September 23, 2019), approving draw-reconciliations as a method to smooth compensation in a commission-based system – that is, the Court essentially “blessed” a system in which an employer reconciles commissions on a pay period-to-pay period basis.
Illinois Wage Payment and Collection Act (“IWPCA”), 820 ILCS 115/, establishes when, where, and how often wages must be paid to employees. The IWPCA specifically prohibits employers from making deductions from employees’ wages unless certain conditions are met. Most relevant for the Osorio case, the IWPCA prohibits employers from deducting more that 15% from an employee’s wages per paycheck as repayment for previous cash advances.
In Osorio, the plaintiff sold tile and related products for The Tile Shop. The employer paid him a guaranteed $1,000.00 per semi-monthly pay period regardless of how much product he actually sold. If he earned less than $1,000.00 in a particular pay period, The Tile Shop would draw on future pay periods to ensure that he received his $1,000.00 and would reconcile the difference in later periods when his commissions exceeded $1,000.00. Osorio’s contention was that The Tile Shop’s “draw” system violated the IWPCA because it involved “deducting” more than 15% from his wages as a repayment for previous cash advances.
The Seventh Circuit disagreed with Osorio’s argument. Because the IWPCA does not explicitly define “deduction,” the Court turned to dictionary definitions. Deductions in the payroll context refer to money that is taken by an employer from an employee’s pay for income taxes or insurance, for example. The Court also looked to similar statutes to confirm that a “deduction” in the IWPCA is similar to withholding an employee’s earnings rather than an employer’s method of determining an employee’s earnings. The Tile Shop, then, was not deducting Osorio’s wages – it was utilizing a formula to calculate his commission earnings. Notably, on the date of Osorio’s separation from The Tile Shop, he was “in the red” in the amount of $2,038.47 as a recoverable draw on his future commissions, but The Tile Shop did not require that he repay this balance.
Thus, in the Court’s view, The Tile Shop’s “draw-reconciliation” method was a system to calculate a sales associate’s semimonthly commission earnings and not a deduction from the employee’s wages or final compensation. Osorio’s pay stubs referenced these draw payments and reconciliations as “earnings” and not “deductions.”
The Tile Shop’s method of reconciling and smoothing the ebb and flow of sales may be attractive to many potential employees who are looking for some amount of consistency and certainty in their compensation. As such, the Seventh Circuit’s decision should give many Illinois employers comfort that this method of compensating commission-based employees, especially sales associates, does not violate the law.
The IWPCA is a dynamic and complex area of Illinois law. To avoid potential lawsuits or investigations by the Illinois Department of Labor, employers should consult with a qualified and experienced employment law attorney.
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