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Pay Plans – A Checklist

By Jamie S. Felsen, Esq.
Milman Labuda Law Group, PLLC

All dealers use pay plans. Some use detailed written plans. Others use ‘everybody knows’ plans. (“We don’t have to write down our sales pay plan; everybody knows.”) Pay plans can be the source of employee satisfaction or employee unhappiness. Here is a checklist of terms that should be in every pay plan to help manage employees’ expectations to limit disputes.

1. There is a written plan that is signed. Make sure the plan is in writing. You’d be surprised how little ‘everybody knows’ when there is a dispute. And make sure pay plans are signed. It is a rule of thumb in the car business that a document that is not signed was not seen.

2. The pay components are clearly stated. Salary? Commission? Bonus? Draw? Spell out each element of pay.

3. Define the base to calculate the commission or bonus. When paying based on a financial statement number, define the account clearly. When paying on net profit, define how gross profit is determined and the adjustments. A dealer should define the vehicle ‘cost” for calculation of net profit on vehicle sales as that determined in the dealer’s sole discretion.

4. Define when commissions or bonuses are earned. Is it month end, or after all adjustments? Sales employees should know when commissions are earned for vehicle sales … upon delivery? Or when the deal is neat and complete?

5. Payment date is clearly defined. Does the dealer pay commissions or bonuses as deals are completed? Or does it do so weekly? Monthly? Make sure the plan tells employees when to expect payment.

6. Conditions are clearly spelled out. Must the employee meet certain qualifications to earn a bonus? For example, is there a CSI qualifier? Or must the employee work the entire month and the first ten days of the next month to clear up deals and earn a bonus? Spell out all qualifiers clearly.

7. The plan provides for deficit carry forward. The pay plan should provide for deficit carry forward, if the dealership wants to recoup overpayments. For example, salespeople, especially beginning salespeople, can find themselves in a deficit position because of a large number of hours worked (for which dealerships must pay minimum wage times the hours worked) but lower sales volume. In that situation, a sales employee will earn commissions that are less than the draw. Pay plans should state that any deficit may be recaptured in future pay periods, if that is the dealer’s policy.

8. There is a provision for correction of errors and changes. The plan should provide the dealer an opportunity for the correction of errors in future pay periods. And the dealer should protect its right to make changes in the pay plan. The pay plan should specifically provide the dealership broad authority to change the terms of the pay plan at its discretion with notice to the employee.

9. Disclaimer of contract. All payment plans should note that the employee is an employee at will and that the pay plan is not a contract of employment for any term. An employee can leave employment at any time and a dealership can terminate that employee at any time.

The right to a demonstrator is defined. If demonstrators are provided to employees, the pay plan should include the right of the dealership to terminate demonstrator usage or to make changes to demonstrator usage at any time.