Pay plans are just descriptions of how employee pay will be calculated, right? Not unless it is carefully created. Poorly drafted pay plans can create contracts with terms different than a dealer intends, and this can lead to unexpected liability.

The most common problems resulting from poorly drafted pay plans are lawsuits from former sales employees who claim that they were repeatedly shorted. The claims are generally based on sales pay plans providing for a percentage of profit on each vehicle sold.

Sales people who sue tend to claim the dealer manipulated the profit on deals through use of packs or other adjustments to vehicle cost. The suits may have a breach of contract claim or may be based on the law in most states that requires employers to pay employees what they are owed, especially upon termination from employment.

Wage actions often are brought on behalf of a class of employees. A group of employees who prevails on a state-law wage claim typically may recover back wages, statutory damages (usually a multiple of the unpaid wages), and attorneys' fees.

Make sure pay plans contain adequate protections for your dealership. Be especially careful about sales pay plans that contain calculations based on profit per vehicle.

Consult with your legal advisor in creating pay-plan templates. Here are some things to think about when putting together pay plans for sales employees.

Have a written pay plan. If a dealership has 12 sales people, it potentially can have 12 perceived versions on the sales floor of what the pay plan provides. There should be a written pay plan to eliminate doubt.

A pay plan should not be a contract. If it is not carefully written, it can be considered a contract between the dealership and the sales people. This is a serious problem if the plan contains guarantees for a period of time (such as minimum earnings for 90 days) because it gives a sales person the opportunity to claim guaranteed employment for the specified time. The plan should specifically say three things. (1) The plan is nothing more than a description of how the sales person will be paid; (2) it is not a contract; and (3) in applicable states, it does not affect the “at will” status of the employee, meaning employment can be terminated by the dealership at any time and the employee can terminate employment at any time.

Pay on “commissionable gross.” A plan that provides that the dealership will pay a sales person based on “profit” or “net profit” per vehicle is a problem since a claimant will charge that this simply means the difference between sale price and actual vehicle cost. Use a term for calculation of the commission base such as “commissionable gross” that will indicate that the dealership defines the base.

Define commissionable gross. The pay plan should make clear commissionable gross is an amount based on the selling price less costs determined by the dealership in its discretion. Reserve the right, in the dealership's sole discretion, to determine the various elements of cost in the calculation of commissionable gross.

Preserve revision rights. The dealership should specifically include its right to change the pay plan at its discretion at any time.

Address spot cash and spiffs. The dealership should reserve the right to establish and withdraw special compensation programs immediately and from time to time based on market or competitive conditions.

Is the opportunity to use a demonstrator addressed? If there is a reference in the plan to the opportunity to use a demonstrator car, there should be language that: (1) states the dealership may designate the type of demonstrator that is assigned in the best interest of the company; (2) reserves to the dealership the right to terminate use at any time; and (3) requires use in strict accordance with company policy.

Michael Charapp, an attorney with Charapp & Weiss, LLP who specializes in representing motor vehicle dealers, can be reached at 703-564-0220 or,

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