Legal Question in Business Law in California

Re: explanation on Draw against commission

Let's suppose you get a 10% commission on your sales for the month and you sell $40,000 of merchandise. Your gross commission would be $4,000. Instead of giving you a $4,000 check at the end of the month, some might give you a $2000 "draw" that would essentially be a loan against your anticipate commissions for the month. Sometime the mid month check might be a set amount and end of month might be for the remaining balance of the actual commission.

Re: explanation on Draw against commission

A draw against commissions is an advance or a loan, to be repaid out of earned sales commissions, usually by payroll deduction or a similar process that is more or less automatic. Generally, but not always, no interest is charged.

Applicable law is the common law of contracts. Very few California statutes could be found regarding commissions, and none at all mentioning draws or advances.

A question that sometimes arises in the context of advances or draws against commission is whether the employee is liable to the employer for repayment of any draws where the earned commissions fail to cover the draws. Again, I believe the ordinary law of contracts applies. If the terms of employment or the employer's rules regarding draws or advances specify one way or the other that would be controlling. I have seen at least one case in which the Court of Appeal upheld a lower court's finding that the salesman did have to make up a shortfall in earned commissions and repay to the employer the balance on his advances. However, this was because the court found that there was at least an implied promise by the salesman to do so. I think the more general rule is that in the absence of an agreement, policy, rule or promise, express or implied, the salesman is under no obligation to pay the shortfall to the employer.

I believe there are scholarly discussions of this subject in legal encyclopedias such as Corpus Juris Secundum and American Law Review, but I cannot access these resources on line without incurring a charge. If you wish, I could log in and print out this material if you would reimburse my time and the access fees.

Re: explanation on Draw against commission

A draw against commission is an advance or loan as stated and covered under contract law.

3 Witkin Sum. Cal. Law Agency � 416 states:

Where a commission salesperson's contract calls for a draw, i.e., regular advances against anticipated commission, are the advances repayable by the salesperson if not covered by earned commissions? The court in Agnew v. Cameron (1967) 247 C.A.2d 619, 55 C.R. 733, gave a negative answer, following the majority American rule. Regular advances to a salesperson who works on commission are presumed to be salary or wages, i.e., minimum compensation, given in consideration of the salesperson's undertaking to give his or her time and effort to the job. (247 C.A.2d 622.) The parties may agree otherwise, but, in view of the employer's superior bargaining power, the salesperson's right to recover those payments should be explicitly stated and understood. (247 C.A.2d 624.) (See 95 A.L.R.2d 504 [employer's liability for agreed advances or drawing account that exceed commissions or share of profits earned]; 32 A.L.R.3d 809 [employee's liability for advances or withdrawals in excess of commissions earned, bonus, or share of profits].)

Therefore:

If you did make a draw on an expected commission and then the expected sales did not occur or you quit and left employment you probably would be required to repay the money back to the employer under an equity theory if the sale NEVER occurred and the employer never received any money in which your sales commission could come from. However, if the employer receives the sale then you probably would be due your commission even if you left his employ and he received the sale afterwards.

The case which is best on the point of draws and commissions is Ellis. In Ellis v. McKinnon Broadcasting Co. (1993) 18 C.A.4th 1796, 23 C.R.2d 80, plaintiff was employed as an advertising salesman by a television station owned by defendant. The written contract between the parties contained a clause providing that plaintiff would receive no commission on advertising fees received by defendant after termination of plaintiff's employment. After plaintiff voluntarily left the station, defendant collected nearly $ 100,000 in fees on advertising previously sold by plaintiff, and paid plaintiff no commission on these sales. In challenging the forfeiture provision, plaintiff received a favorable ruling before the Labor Commission, but on trial de novo the trial court ruled for defendant. Held, reversed; the forfeiture provision was unconscionable.

Thanks for the question and I hope this helps with any concerns you may have. As always if you seek legal representation please do not hesitate to call me.