General Question

javi_510's avatar

Can paid commissions be taken back?

Asked by javi_510 (33 points ) November 26th, 2010

For this question, services are being sold in the state of CA.

Sales people get paid commissions for services sold and rendered. Can the employer at a later time take back paid commission if for any number of reasons outside the control of the sales person, the client is unwilling to pay for services already rendered? Examples would be, the client did not think the work was executed adequately or the client went out of business (bankrupt), making it difficult to collect. Shouldn’t the sales person be entitled to keep his earned commissions since they did their job and sold the services?

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12 Answers

iamthemob's avatar

More details are needed here. If there is a debate about whether the services were rendered, then it’s not a demand for earned commissions to be returned but a debate about whether the commissions were actually earned.

However, if payment has been released to the salesperson, then the employer would probably have to initiate suite against the employee (using those terms loosely). Bankruptcy of the employer don’t require return of anything to the estate legally paid. Employee wages and commissions earned within 90 days of the bankruptcy filing are entitled to a high bankruptcy priority. Anything else is treated as an unsecured creditor claim.

JLeslie's avatar

Commissioned sales people at department stores do have their commission taken back when a customer returns the item.

iamthemob's avatar

@JLeslie‘s situation would be one of those where there is an issue about whether the commission was actually earned.

Also, here are the relevant sections of the Bankruptcy Code (sec. 507) for you:

(4) Fourth, allowed unsecured claims, but only to the extent of $10,000 [$10,950 effective 4–1-07. Adjusted every 3 years by section 104.] for each individual or corporation, as the case may be, earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for—

(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual; or

(B) sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independent contractor in the sale of goods or services for the debtor in the ordinary course of the debtor’s business if, and only if, during the 12 months preceding that date, at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor.

(5) Fifth, allowed unsecured claims for contributions to an employee benefit plan—

(A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first; but only

(B) for each such plan, to the extent of—

(i) the number of employees covered by each such plan multiplied by $10,000[$10,950 effective 4–1-07. Adjusted every 3 years by section 104.]; less

(ii) the aggregate amount paid to such employees under paragraph (4) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.

javi_510's avatar

Thanks for the responses everyone!

@iamthemob The services were rendered, so that is not in contention. Also, I should clarify that the company who went bankrupt is not the employer of the sales person, but the employers client, to whom the services were rendered.

To paint a clearer picture:
-Sales person for Company A, sells services to Client Z.
-Company A fully fulfills the services to Client Z.
-Company A invoices Client Z for said services. Sales person gets paid commissions based on these invoices.
-Client Z refuses to pay for any number of reasons (bankruptcy was just an example) outside of the control of Sales person.
-Company A retracts commissions for unpaid invoices in next paycheck to Sales person (again, although services WERE rendered).

I hope this clarifies it a bit further. I have heard that the sales person is still entitled to his commissions. I am asking because in the employment offer letter for Company A, it states that they will take back earned commissions if they are not paid for any reason.

JLeslie's avatar

If the commission is actually earned and a deal falls apart the commission sometimes does stay with the sales person. One example is in real estate, when a deal falls through and an escrow amount is kept by the seller, typically the sales person still gets their commission, because they did their job, brought the customer. In many states it is on the listing contract, sometimes it is not a full commission.

iamthemob's avatar

Have you looked at your employee manual? It’s possible that it includes provisions for such deductions.

This doesn’t necessarily make them per se legal in all situations, but it may have an effect on the legal outcome if you had notice of these provisions.

wundayatta's avatar

Look at it this way. The commission is contingent upon the sale being completed and the money being paid into the employer’s account. If the money never arrives or it has to be returned, then the company is out the money, and there’s nothing to pay a commission on.

Paying commissions in advance is nice. It allows sales people to have a steady stream of income, instead of waiting for all invoices to be paid in full with not returns.

It sounds like this is being stated clearly in the contract, and it makes sense to me. As a salesperson, your job should be to make sure the customer is happy before and after the sale. You want them to be happy all along, even after they have paid. You want to makes sure their problems are taken care of. Why? Because you want to make more sales in the future and there is nothing like a happy customer to help you make sales, and there is nothing like service to make a customer feel happy.

A salesman’s job isn’t to sell a widget. It’s to make sure the customer is happy with the widget. If you can’t do that, you don’t deserve a commission. Sales people should pride themselves on keeping customers happy, and if the customer isn’t happy, pride themselves on refusing any commission until the customer is happy.

Happy customers don’t return products. Why? Because the salesperson made sure they got the right product in the first place. No lies. No stretching the truth. Just honest information to make sure the customer gets what they want.

Sometimes that means telling the customer that what they want isn’t going to help them. It means helping them understand that before you guide them to the product that will help them. Customers love that kind of help, if you do it right. They know you are on their side. It shouldn’t matter whether you move them to something cheaper or more expensive. You know that if they like you, they will be back. If you tell them the truth, they’ll like you.

iamthemob's avatar

Check out this question on labor law talk which is similar to yours, and the CA DOL standards manual.

Neizvestnaya's avatar

Depending on the type of sales then yes, there can be “rollbacks”, charge backs and adjustments. If your customer didn’t qualify for the financing originally contracted then that’s a common scenario as well as if they return later and cancel types of extra services or coverages that affect the overall selling price.

You should learn up front what items affect your commissions, the percentages or flats and then keep track that way.

javi_510's avatar

@iamthemob Our employee manual doesn’t touch on the subject of commissions. in fact, other than the disclaimer in the offer letter, there isn’t any other corporate document that addresses this in detail. Also, thanks for the links. I’ll be reading those in detail.

@wundayatta fortunately the type of sales i am referring to is not typical of what you describe. It is more so a consultative sales environment selling a service to high tech firms in Silicon Valley, a service that is black and white, they either need it or they don’t. There is no room for deception nor is it high pressure sales. In fact, the sales cycle can take up to a year before a purchase is made, and if the prospects were not confident in the service or their sales staff, they wouldn’t be engaging us past the initial RFQ stage. Clients are very very happy with their sales person. In Silicon Valley a lot of start-ups fail for any number of reasons and are unable to pay their bills (including the services we have performed). It is in these scenarios that the sales staff get commission taken back. In fact, our industry is so niche that we deal with the same people time and time again, and the contact at the failed start-up would have been a client of ours while at 5–10 different companies. So the client is always happy, its just the nature of industry we cater to is not the most stable at times.

wundayatta's avatar

If the company is never paid, do you think you should still be paid the commission? It’s not the fault of you or the company, yet there is no income. Why should anyone be paid? If you do get paid, where does the company get the money to do it?

tammyupson's avatar

The situation we are currently concerned with regarding our company; unpaid sales are written off and covered. Can a company write off a bad debt and still reclaim paid commissions?

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