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Legally Speaking
Draws Against Commission
When business is good and the economy is growing, profits follow. When business is very good and profits great, owners often neglect to remain focused on business details. Mistakes do not have the same impact on the bottom line in a strong economy. In today’s economy one area for potential problems is draws advanced against commission to be earned.
If you pay salespeople whole or part commission on each sale made the policy must be in writing and detailed. Commission Plans pay on gross profits, net profits, gross sales, margin, sales above a minimum level, and hundreds of other variables. There is no correct formula for a Commission Plan. Monthly spiffs and incentives further complicate compensation. The failure to regularly introduce new variables, contests, and incentives can cause the sales staff to lose motivation.
Unwritten Commission or Compensation Plans are like playing the childhood game of telephone. Each employee hears the proposal differently. It is for that reason that all plans must be in writing and detailed. This applies to contests and other incentives as well. Begin with the accounting period for the measurement of commissions or contest. Establish when the sale is made. Is it when the sale is booked, delivered, installed, or paid for? What are the salespersons responsibilities after the sale? Is the salesperson involved with the delivery, installation, training, and/or customer follow-up? If all the sales functions are not performed is the commission earned?
How will returns be handled? Do you wait thirty days to pay the commission? Do you chargeback? Must the employee be employed on the date of payment to receive the commission? If others complete the sales responsibilities is the commission shared or forfeited? In a litigated case, a salesperson made a significant sale and based upon his success demanded an increase in compensation. The owner refused and the employee quit. The written commission policy provided for several obligations after the order was written and the employee had to be employed to receive the commission. The company refused to pay the commission and the court upheld the decision. The written policy was clear, the salesperson did not perform all the requirements, and he was not employed on the date required. Keep in mind the employee resigned, the outcome would surely be different if he was terminated without cause.
Many employers pay a draw against commission to help employees with their budgeting. In a difficult economy it is not unusual for an employee to draw more than being earned. If the employee subsequently quits can the draws be recovered? A written commission policy will govern the situation. In addition, how the draw is characterized will be a factor as well. If the draw is stated as a minimum salary it cannot be recovered. If it is a loan against commissions earned it can. If the draw is a loan then an appropriate note should be prepared to memorialize the indebtedness. Employers should also consider placing a cap on the amount of the draw. Rules also vary depending upon whether a salesperson is an inside or an outside salesperson. Minimum wage does not apply to outside salespeople if they are in the field at least eighty per cent of the time. Inside salespeople on commission must receive at least one and one-half times minimum wage as compensation.
If an employee owes you draw and leaves your employment it is important to pursue the deficiency. Failure to do so is a license for your other salespeople to do the same. Bring your salespeople into the discussion in formulating a Commission or Compensation Plan. Participation in the formulation makes acceptance easier. Most importantly however is having a written plan. In today’s economy it is essential.
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