How to “Claw Back” An Overview of Clawback Provisions

October 22, 2015

by Warren E. Buliox

Do you have employees who are paid in part on commissions? Do you have situations where commissions are paid but are later discovered to be made in error, either because of a miscalculation or because projected sales numbers have changed? Perhaps you have employees who receive advance commissions but occasionally do not meet whatever quarterly or annual metrics are in place to fully earn that commission. If any of this applies to you, you have come to the right place.

Efforts to recoup part or all of commission payments for overpayments or errors are not uncommon. Policies addressing this (such as in a compensation plan or an offer letter) are generally referred to “clawback” provisions or clauses. They are perfectly legal, but how much you can “claw” back, as well as when and how, can vary drastically from state to state.

As an initial matter, it is important to note the type of commission payment subject to the clawback effort. If recoupment efforts concern overpaid advance commission payments, the payments may be considered prepayments of wages and/or money not earned, meaning generally that you may be able to clawback those overpayments with limited (albeit some) restriction. If, on the other hand, the recoupment efforts concern already-earned commissions, the confines on what can be done can be quite restrictive.

In most states, earned commissions are considered “wages” and therefore subject to state laws concerning wages in general and deductions from wages in particular. What can and cannot be deducted from wages, as well as when and how such deductions can be made, varies significantly from state to state.

Thus, for example, some states allow (with limitations) employers to deduct from wages (which would include earned commissions) for overpayments or errors without authorization from the employee (e.g., Michigan and North Carolina), while other states require written authorization before any deduction can be made (e.g., Minnesota and Texas). Some states specifically place limits on the time employers have to deduct from future earnings (e.g., California, Michigan, and New York), while other states do not (e.g., Georgia and Pennsylvania). (By way of example, Michigan employers have six months after making an overpayment of wages to deduct from future wages to recoup the overpayment. In New York, employers have six years and in California employers have one year.)

In some states (e.g., California and North Carolina), deductions from base or guaranteed wages are not allowed, while other states (e.g. Georgia and Texas) have no such specific limitation, which was noted. As to how much in particular can be deducted from wages, some states (e.g., Illinois and Michigan) place limits on how much can be deducted from each pay period, while others states (e.g., Colorado and Pennsylvania) have no such restrictions other than perhaps general proscriptions against lowering wages below minimum wage.

If you operate in different states and are looking for a uniform policy, it can be done, but consideration must be given to each state in which you intend the policy to apply. For example, not all states require written authorizations for deductions for overpayments or errors. While you can certainly decide against requiring written authorizations in each state in which you have operations, you should identify (in the policy) the states in which a written authorization is needed and secure authorizations in those states.

If your goal is to have a uniform policy in place to recoup commission overpayments, you may want to identify the law in the most restrictive states in which you do business, and apply that law across the board. Although individual state requirements will inevitably vary and be subject to change, some of the more restrictive requirements employers will find include the following:

• A requirement that all deductions be made after receiving written authorization from the employee. The authorization should not be general in nature, but specific to the deduction(s) to be made. Also, the authorization should not occur prior to discovery of an overpayment or error. In other words, there should be no “pre-authorizations” or blanket authorizations. In addition, employees should be given adequate opportunity to withdraw written authorizations.
• Implementation of a procedure/mechanism in which employees can dispute or challenge the overpayment calculation or error and, therefore, the amount to be recouped. (New York has a rather involved process employers must follow in this regard.)
• A rule that no deduction be made from base or guaranteed wages, and a rule that no deductions be made that would result in the employee making less than minimum wage, even if the employee is a salaried, exempt employee.
• Policy language that no deductions are to be made from final paychecks, even if agreed to in writing with the employee.
• A limitation on the timeframe for recouping overpayments/errors (perhaps as soon as six months from the date of the overpayment).
• While deductions may be made over the course of several pay periods, policy provisions that provide that deductions should not exceed 15% of the employee’s gross wages per paycheck.

In addition, and given the law in California, New York, and Pennsylvania in particular, employers may want to consider having employees sign off on/agree in writing to any commission plan or arrangement, including how deductions for overpayments and errors work.

At the end of the day, what can and cannot be done in “clawing back” commissions is very state specific, and you should work to make sure you are following the law in each state that applies to you.