Groupon Inc. faces a potential class-action lawsuit by sales reps who claim they weren't paid overtime.
Ranita Dailey, who left the company last month, filed suit in U.S. District Court, seeking retroactive overtime pay plus 2 percent in damages.
The suit says the Chicago-based 3-year-old daily-deal business didn't pay sales employees overtime, violating wage laws, or didn't pay them enough.
“It's a systemic problem,” said Douglas Werman, a Chicago-based attorney who filed the suit on behalf of Dailey and is seeking class-action status on behalf of her and other sales reps allegedly cheated out of overtime pay.
His firm, Werman Law Office, won the largest wage-and-hour case in Illinois history two years ago, an $11 million settlement against Troy, Michigan-based staffing firm Kelly Services Inc.
A Groupon spokeswoman declined to comment on the allegations, but said, "We believe this suit is without merit, and we'll defend ourselves vigorously."
The lawsuit is the latest in a string of headaches for Chicago-based Groupon. Its initial public offering is in limbo, and the company is facing multiple lawsuits over whether the rules for its emailed coupons violate consumer-protection laws designed for gift cards.
The overtime suit could become a problem for the company, which employs more than 4,800 sales reps worldwide out of a workforce approaching 10,000. Roughly 1,000 of the reps are in the U.S. and therefore covered by federal labor laws.
On average, the reps are paid about $32,500 a year, plus commissions equal to a percentage of the value of the deals they line up with restaurants, salons and other local businesses.
According to the suit, Groupon didn't pay overtime to these employees from the time it was founded in August 2008 until last spring, when management discovered the problem.
Groupon had hoped to resolve the issue out of court. Employees were told of the oversight in March, and the company said it would pay the overtime owed. But those payments never happened, according to a former employee.
Further, the suit contends that when Groupon started paying overtime, payments were based on rates that were too low.
“We're talking about over 1,000 employees who should have been paid potentially millions in wages that instead went to (Groupon's) bottom line,” Werman says.
A source familiar with the matter estimated that most sales reps are eligible for retroactive payments of $2,000 to $5,000 each, though some longtime employees might receive more than $10,000. That could mean a total payout of $2 million or more.
The lawsuit, first reported Friday by website Paidcontent.org, is a sign of the growing pains at the startup. It has brought in new management that has started to put in place new policies and procedures, some of which aren't sitting well with employees.
The company recently lowered sales commissions to 1.5 percent from 2.5 percent of gross profit, or Groupon's take after it splits the proceeds of its daily deals with merchants. The moves are taking a toll on morale, leading to defections among some sales reps, a former Groupon employee said.
Those reps are a touchy issue for Groupon. Because the company hasn't turned a profit, its sales and administrative costs—at 74 percent of net revenue after merchants are paid—is seen as a liability by some analysts. But a high-touch sales model that allows Groupon to line up merchants is seen as a potential barrier to entry for a business that's easy to replicate.