Are Sales Commission Clawbacks Legal

Carol Collect

Are sales commission clawbacks legal?

Generally, the answer is Yes but key that it is in the terms of how the employer and employee engaged (ie in the employment or sales target plan agreement).

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Sales commission clawbacks are a common practice in sales compensation plans that allows companies to recover overpaid commission amounts from their sales representatives.

The legality of sales commission clawbacks has been a topic of discussion, and there is no straightforward answer. It depends on several factors, including state laws, federal laws, and the specific circumstances of the commission clawback.

In general, sales commission clawbacks are legal, as long as they comply with federal and state laws and the agreement between the parties

However, there are some situations where clawbacks may be illegal, such as when they violate state wage laws, employment contracts, or collective bargaining agreements.

In summary

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Common practice. In summary, it is a common practice but need to be compliance with State or Collective bargaining agreements (if applicable) and the employment contracts. It is important that clawbacks are are transparent and communicated clearly to sales teams to ensure they are do not lead to loss of motivation.

Lets dive in abit more

Employment Contracts
The key factor to consider when determining the legality of sales commission clawbacks is the employee's employment contract. If the employment contract prohibits clawbacks, then the employer cannot claw back commission payments without violating the contract.

Employment contracts can be written or verbal, and they can include terms regarding commission payments, clawbacks, and other compensation-related issues. If an employment contract prohibits clawbacks, then the employer must follow the terms of the contract and cannot claw back commission payments.

Collective Bargaining Agreements

For unionized employees, collective bargaining agreements may dictate the terms of commission payments and clawbacks. If a collective bargaining agreement prohibits clawbacks, then the employer cannot claw back commission payments without violating the agreement. Collective bargaining agreements are negotiated between the employer and the union and can include terms regarding commission payments, clawbacks, and other compensation-related issues. If a collective bargaining agreement prohibits clawbacks, then the employer must follow the terms of the agreement and cannot claw back commission payments.

Fair Labor Standards Act (FLSA)

The Fair Labor Standards Act (FLSA) is a federal law that sets minimum wage, overtime pay, and recordkeeping requirements for employers. The FLSA applies to most employees who work in the United States. Under the FLSA, commission payments are generally considered wages, and employers must pay employees all wages earned during a pay period. Additionally, employers cannot make deductions from an employee's wages, except in limited circumstances. However, the FLSA does allow employers to make deductions from an employee's wages for overpayments, as long as the deduction does not reduce the employee's wages below the minimum wage or overtime pay requirements. The FLSA does not specifically address commission clawbacks, but it does provide guidance on when employers can make deductions from employee wages.

If a commission clawback complies with the FLSA's requirements for deductions from wages, then it is likely legal.

Are sales commissions taxable and what is the effect of a clawback? When sales commissions are paid, they are taxable in the US. When there is a clawback, the employer reduces on the payroll so for the employee, the clawback is tax deductible.

Before we deal with State llevel issues below, in summary, sales commission clawbacks are generally legal, as long as they comply with federal and state laws, employment contracts, and collective bargaining agreements.

State Wage Laws

One of the main concerns with sales commission clawbacks is that they may violate state wage laws.

Most states require that employers pay employees all wages earned during a pay period, and they prohibit employers from making deductions from wages, except in limited circumstances.

For example, in California, employers cannot make deductions from an employee's wages, except for taxes, Social Security contributions, and other legally required deductions.

Additionally, California law requires that employees receive all wages earned during a pay period, and employers cannot withhold or "setoff" any portion of the employee's wages for any reason.

In New York, employers cannot make deductions from an employee's wages, except for taxes, Social Security contributions, and other legally required deductions.

Additionally, employers can only make deductions from an employee's wages if the employee has given written consent, and the deduction is for a lawful purpose.

In some states, employers can make deductions from an employee's wages for overpayments, as long as the employee consents in writing. However, the consent must be voluntary and cannot be a condition of employment.

It is important that any clawbacks be in compliance with your State laws AND that any clawback has been previosuly agreed to by the sales representative and their consent has been recorded.

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