Sixth Circuit Rules that Employers' Unenforced Policies Can Be the Basis for a Lawsuit

Employers have a new reason to review that dusty employee handbook that may have been left untouched for years. In Stein et al. v. hhgregg, Inc., et al., a divided Sixth Circuit ruled that an employer’s having an unlawful policy on the books, even if that policy has never actually been enforced against an employee, can be sufficient in at least some circumstances for an employee’s lawsuit to survive a motion to dismiss in federal court.

Stein involved hhgregg’s compensation policy for their retail and sales employees. Under the policy, employees are paid solely on the basis of commission. If an employee’s commission for a given week falls below the minimum-wage requirements under the Fair Labor Standards Act (“FLSA”), the employee is advanced a “draw” so that the employee’s weekly pay meets the minimum wage. The amount of the draw is then deducted from the employee’s future earnings in weeks where the employee’s commission exceeds the minimum wage. Additionally, the policy as-written states that employees must repay hhgregg for any outstanding draws upon their termination.

The plaintiffs are one current employee and one former employee, and they brought their lawsuit on behalf of themselves as well as all other current and former hhgregg employees. The draw policy was enforced against the plaintiffs during their employment. However, the plaintiffs’ complaint does not allege that hhgregg ever demanded that any former employee repay his or her draws upon leaving hhgregg. Similarly, at oral argument, hhgregg’s counsel unequivocally stated that the company has never collected, and has no intention of ever attempting to collect, unpaid draws after an employee is terminated.

All three members of the Sixth Circuit panel were in agreement that hhgregg’s draw policy for active employees was permitted under the FLSA’s “free and clear” regulation (29 C.F.R. § 531.35), which requires that the minimum wage be paid “finally and unconditionally or ‘free and clear.’” The regulation prohibits employers from requiring their employees to pay back any part of their minimum wage after the funds have already been distributed; however, the regulation does not prohibit employers from making deductions from wages that have not yet been distributed. As a result, the Sixth Circuit concluded that hhgregg’s policy for active employees—deducting the draws from future wages before those wages are ever paid out to employees—is permissible.

Additionally, the panel unanimously agreed that hhgregg’s post-termination policy, if enforced, would violate the “free and clear” regulation, because it would require employees to return their minimum wage after the funds have been distributed. However, the panel members parted ways on whether the plaintiffs’ complaint stated viable causes of action in light of the fact that hhgregg’s post-termination policy had not actually been enforced against them.

The majority held that the plaintiffs’ allegation that hhgregg’s policy required an employee to “immediately pay [defendants] any unpaid Deficit amounts” upon termination was sufficient to survive a motion to dismiss, notwithstanding the fact that the complaint did not allege that the policy had actually been enforced against the plaintiffs. The majority reasoned that “[e]ven if defendants never demanded repayment in practice, an employee may believe he owes a debt to the company for which he could be made responsible at a later date. Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications for individuals.”

In dissent, Judge Sutton opined that because the plaintiffs’ complaint does not allege that hhgregg ever demanded that employees repay a draw after they left the company, and because the plaintiffs conceded at oral argument that the post-termination policy was never applied to them, “there is no plausible factual predicate for [the plaintiffs’] claim.” Accordingly, Judge Sutton believed that the plaintiffs’ complaint failed to satisfy the Twombly-Iqbal federal pleading standard.

Stein could have lasting effects well outside of the context of the FLSA’s “free and clear” regulation. Stein’s holding indicates that employees can survive a motion to dismiss in federal court merely by alleging that an employer has an unlawful policy that could theoretically be enforced against them, regardless of whether or not the policy was so enforced, at least where it could be argued that the policy’s existence has some “practical implications” for the employees. For this reason, employers would be wise to review their existing handbooks to ensure that problematic policies are not lurking on the books, even if those policies have not been enforced in practice.