Do Your Pay Plans Invite a Lawsuit?

Pay plans – the documents that summarize how compensation will be calculated for commissioned employees – are a major source of confusion for dealers. Even worse, poorly written pay plans can cost you in the form of litigation alleging breach of contract or fraud. 

While a newsletter article isn’t quite the same as advice from a consultant or legal counsel, we can provide you with an overview of what a good pay plan includes, along with tips for typical positions at a dealership.

Start With the Basics - Use a Pay Plan Checklist

Here’s a simple version of more extensive lists we cover with our clients:

1. Make sure the plan is in writing and make sure pay plans are signedby the employee
2. Clearly state in plain language each component of the pay plan. Ex: Salary, Commission, Bonus, Draw
3. Explain the base to calculate the commission or bonus. For example, when paying on net profit, define how gross profit is determined and the adjustments.
4. Define when commissions or bonuses are earned. State the payment dates for each type of compensation.
5. Clearly state conditions that must be met for commission.
6. Include a paragraph on handling deficit carry-forward.
7. Include a provision for correction of errors and changes. Provide an opportunity to correct errors in future pay and an opportunity to change the terms of the pay plan.
8. Reserve the right to establish and withdraw special compensation.
9. Note that employment is “at will” and explain what that means.
10. If demonstrators are provided to employees, include the dealership’s right to terminate demonstrator usage or to make changes to usage.

Customize Your Pay Plan for Each Position

One size does not fit all! The commissioned positions typically found in dealerships vary, requiring different kinds of information on their pay plans. Here are examples of issues to consider:

• Sales people
• When will commission be earned? Ex: when financing is complete and a vehicle is delivered.
• How will commission be paid when a staff member ends their employment?
• Service advisors
• What is the basis for their commission? Ex: products sold, cost sold, personal sales vs. departmental sales, etc.
• Managers
• What is the basis for their commission? Ex: if it’s department profits, how are those calculated?
• Do you guarantee a draw or salary?
• Technicians
• How is their pay calculated – does it include “flat rate manual”? And what about come-backs?

Get Specialized Advice

If you're located in California, you should get help complying with AB 1396, which establishes requirements for pay plans, effective Jan. 1, 2012.

For dealers through the U.S., have your pay plans reviewed by your attorney or other qualified counsel. (They're considered legal documents.)

If you use KPA's HR software (HR Management Solution or HotlinkHR), take advantage of the commission pay plan templates developed by attorneys. As a client, you can also have access to our certified HR consultants for assistance with creating your pay plans. If you’re not a KPA client, and would like to discuss a possible software or HR consulting solution, call (866) 356-1735.

For more complex pay plans, we suggest you contact KPA’s partner, the legal firm of Fine, Boggs and Perkins at (650) 712-8908.

The information provided through the KPA webinars, KPA newsletters or HRM Support is provided by certified HR professionals and is not a substitute for legal advice where the facts and circumstances warrant.  KPA recommends that users should always consult his or her own legal or other professional advisors and discuss the facts and circumstances that apply to the specific circumstance. HRM clients are automatically enrolled in a retainer with Fine, Boggs & Perkins, or Ford & Harrison and may consult them through the HR Advice Service included within HRM.  The information provided through KPA webinars or HRM Support  IS PROVIDED ON AN "AS IS, AS AVAILABLE" BASIS AND KPA MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE INFORMATION PROVIDED.