Carefully word draw-against-commission contracts—or be prepared to lose money — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Carefully word draw-against-commission contracts—or be prepared to lose money

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If you pay employees on a commission basis and allow them to draw against those commissions, be very careful how you word the contract language.

If you don’t specify that employees must repay any draws they do not earn back with commissions, they won’t have to.

Note: Make sure the contract specifies what happens to drawn funds if employees leave before earning commissions.

Recent case:
Eric Diedrich and a fellow employee worked on a commission basis. They signed an agreement that paid them annual salaries, which were structured as a draw against their commission.

The contract said, “The draw is a loan against future commissions and needs to be repaid.” Less clear was how repayment would happen, and what would happen if they quit before earning enough commissions to cover their salaries.

When they resigned, the company sued to get some of its money back. But the court said the contract was ambiguous—and that it would require a trial to decide what it meant. (Creekridge Capital v. Diedrich, et al., No. A08-0854, Minnesota Court of Appeals, 2009)

Final note:
What could have been an easy process for the employer has now become a complicated and expensive one. Don’t write your own contracts or rely on contract templates. Instead, have an experienced attorney draft the contract for you. Guaranteed, that will be less expensive than a lawsuit and the legal fees that go along with litigation.

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