Many car dealers throughout the country could face legal problems regarding how their commissioned-based employees are paid.

The warning comes as new legislation goes on the books in New York that requires written pay plans for commissioned employees that spell out worker classification, payment of wages, and calculation of commissions.

Without such a written pay plan in place, the burden of proof in employment claims falls on the dealer.

“The New York law highlights these issues and places employers at greater potential risk. The vulnerability for dealerships already existed,” says Ari Karen, a labor and employment partner with the law firm Venable LLP. “But now dealerships have been put on notice that absent a well-drafted, compliant pay plan, employees will have the upper hand in any dispute.”

For instance, in New York, if a commissioned employee makes claims against an employer and there is no signed pay plan, the courts will routinely favor the plaintiff,” Karen says.

Having contracts with employees was always a good business practice. Now it appears to be an absolute legal imperative.

And while New York has put explicit legislation in place to address these issues, no dealer in any state is immune from the threat of problems with pay plans, says Aaron Jacoby, chairman of Venable's auto-industry practice.

“California is actually the starting point for many of these cases, including wage-hour class actions based on the inside sales exemption and claims that it doesn't apply,” he says. “Many of the other states then follow suit.”

The commission pay-plan model could be a huge issue for the auto dealers because the whole industry is dependent on it.

“Since dealers typically rely heavily on commission-paid employees, all of their pay plans would be subject to attack because very few dealer groups have perfectly written plans,” Jacoby says. “And even for those that do, the written plans are subject to language erosion.

“Too many people in companies have apparent authority to make changes to the pay plan, and such arbitrary changes can have a seriously adverse affect,” he says.

Karen and Jacoby say the main changes that need to take place to safeguard the industry and avoid potentially costly litigation include:

  • Implementing written pay plans, with common industry terms clearly defined.
  • Creating a template for employee contracts, and making sure the language does not change from person to person.
  • Changing from an immediate calculation of commission to a draw subject to a later calculation of commission — to allow employers to do charge backs for errors, etc.

Dealership groups would also be wise to regularly audit their commission agreements to be certain that they adhere to current laws and do not pose a litigation liability, they say. Doing that could ward off potential legal battles.