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Monday, February 24, 2020

Appeals court rules commission reconciliation doesn't violate state, federal wage laws

Federal Court

By Scott Holland | Sep 24, 2019


CHICAGO — A three-judge panel of the U.S. Seventh Circuit Court of Appeals said commission payments for sales personnel don’t violate federal wage laws.

When Adriel Osorio worked for the Tile Shop, in Illinois and New Mexico, he was guaranteed $1,000 per month. In months when his commission exceeded that amount, the company reconciled the difference. After quitting in July 2014, he filed a class action complaint alleging the “recoverable draw” system was essentially a cash advance protocol in violation of the Illinois Wage Payment and Collection Act, while also bringing claims involving the federal Fair Labor Standards Act and the Illinois Minimum Wage Law.

U.S. District Judge Matthew Kennelly granted summary judgment in favor of the Tile Shop, ruling the policy doesn’t involve cash advances, as Osorio argued. In an opinion issued Sept. 23, the appeals panel sided with the Tile Shop, though using a different rationale than Kennelly. 

Seventh Circuit Judge Diane Sykes

Seventh Circuit Judge Diane Sykes wrote the opinion; Judges Amy Barrett and Amy St. Eve concurred.

Kennelly granted class certification after Osorio argued the IWPCA bars cash advance repayment schedules involving more than 15% of gross wages or final compensation. He then granted summary judgment in favor of the Tile Shop, determining the fact workers aren’t required to repay draws on their final checks means it isn’t a cash advance system.

The appeals panel said that wasn’t the prevailing issue.

“The rules for repayment of cash advances are found in the regulations, but the threshold question is whether the Tile Shop’s draw reconciliations are ‘deductions’ from wages or final compensation,” Sykes wrote. “They are not.”

According to the panel, the guaranteed $1,000 per month counts toward gross wages when calculating payroll and income taxes. It’s prorated for employees who don’t work the full pay period, and in the first three bimonthly pay cycles the company doesn’t recover any shortfalls for employees whose commissions don’t hit the threshold.

Citing Osorio’s specific history, the panel noted he was paid $2,038 in recoverable draw compensation while working in New Mexico and the company reconciled $1,141 against subsequent commissions and incentives. When he quit, he didn’t have to repay the balance.

The panel explained the key distinction is whether the Tile Shop’s reconciliation withholdings constitute wage deductions in the same vein as income tax or insurance payments.

“Considered in context, the term ‘deductions’ as used in the (Illinois Wage Payment and Collection) Act refers to withholdings from an employee’s gross wages, not the formula used to calculate an employee’s gross wages,” Sykes wrote. “This poses an insurmountable obstacle for Osorio.”

There are no deductions from an employee’s wages or final compensation, the panel said, just a guarantee the worker earns at least $24,000, but not base pay plus commission.

“Osorio’s paystub confirms this understanding,” Sykes wrote. “The draw payments and reconciliations appear as line items under ‘Earnings,’ not under ‘Deductions.’ To borrow an accounting phrase, the draw reconciliation is made ‘above the line’ to calculate the employee’s gross wages before withholding for taxes and other applicable deductions are made.”

Since the system doesn’t violate the IWPCA, the panel affirmed Kennelly’s summary judgment in favor of the Tile Shop.

Osorio has been represented by attorney Mark Anthony Bulgarelli and others with the Progressive Law Group LLC, of Chicago.

The Tile Shop has been represented by the firms of Greenberg Traurig LLP, of Chicago, and Fredrikson & Byron P.A., of Minneapolis.

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Organizations in this Story

Progressive Law GroupU.S. District Court for the Northern District of IllinoisU.S. Court of Appeals for the Seventh CircuitGreenberg Traurig LLP

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