Are claw backs legal when the account is past due?

Question and answer format

Question

Our small sales team is paid 100% commission on gross margin. Sometimes, we claw back commissions that were paid after the customer is past due and in collections, is this legal?

Answer

I won’t venture a legal opinion here — and believe it is likely to vary from state to state. However, I will assure you that it is common practice to recover commissions paid in cases in which the company is not paid. To be sure you’re covered legally, and that everyone knows what to expect, you would do well to document your intention to do that in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you’ll be all set.