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What are sales commission clawbacks?

On Behalf of | Oct 25, 2022 | Employment Law - Employer |

Several industries use commission clawbacks to legally recompense the money that the company already allocated to a salesperson. There are several reasons for this.

1. Fraud prevention

Clawbacks are frequently used in high-dollar securities fraud cases but are also used regularly in small and medium-sized businesses. Florida Atlantic University’s Business Department makes the point that small businesses may be more vulnerable to accounting fraud than large businesses. If a salesperson overstates or falsifies how much they sold in a given quarter, the company has the right to recoup the loss arising from commission overpayment.

2. Changes in circumstance

A company may prepay commissions when a new client signs a long-term contract. But, if the client withdraws before the end of the contract, the advanced commissions go back to the company. The salesperson in question who originally received the commission may have also exited the company before their contract was up. Companies retain the right to clawback compensation when they give it on a conditional basis.

3. Accurate accounting

Sales managers want their teams to be compensated in a fair way; this ensures motivation and loyalty. The nonprofit Conference Board reported in 2020 that CEOs’ top priority was attracting and retaining top talent.

CEOs also need to ensure accurate accounting. When auditors ask questions about unfulfilled contracts and customer retention, these numbers should match the sales and commission figures.

4. Termination of Employment

Under Florida law, in the absence of a written policy or agreement, an employee who is terminated or resigns from a company before being paid a commission will be entitled to that commission so long as the employee, prior to leaving, did everything they needed to do to earn that commission. If there was still more to do beyond the company just receiving the payment from the customer, and particularly if the company pays another employee a commission for completing the former employee’s work, then a commission would not be owed to the former employee.

On the other hand, if the company does have a written policy or agreement that provides an employee must be employed at the time the commission is paid, or would be paid in the normal course of business, then the former employee would not be entitled to a commission after leaving the company.

Businesses are well-advised to seek the counsel and assistance of a knowledgeable and experienced employment attorney to ensure that policies and agreements addressing payment of commissions are clear and known to their employees. Employees should also speak with an attorney if they feel a commission properly owed to them has not been paid.