Can I Recover an Outstanding Draw When My Employee Quits?
Posted by David Wallace on August 24, 2018
I’ve recently received a number of questions about recovering outstanding draws when an employee leaves a company. I’ve heard from both sides of the issue, employer and employee.
This week, I received the following note:
I am an employer with an employee owing a large amount on his recoverable draw. I now find he is being aggressively recruited by a recruiting company.
This has been a large investment for my small company where not wanting to lose my employee I agreed to a longer term/higher amount than I should have. Everyone knows once he leaves my chance for recovery is slim.
Is there anything I can do to either discourage the recruitment or cause the new employer to be liable for interfering with my business?
Here is my response:
You are in a tough position. I recently wrote the following to an employee who wanted to extend his draw. I think it also applies to employers. There is risk associated with draws, but they are a valuable tool if applied properly.
Draws are a two-edged sword. You need to be careful of what you ask for. In essence, a draw is a loan from the company to the sales rep that is repaid through earned commissions. A lot of sales reps don’t like to take a draw because they recognize that they are going into debt with the company and, when commissions start flowing, much of those commissions are used to repay the outstanding draw. Sales reps by nature, I have found, don’t like to owe money on their draws.
On the other hand, draws provide a very valuable service. Draws can help sales reps maintain an even cash flow through lean sales periods. Draws can keep the valleys from being too deep while skimming the peaks off the too high mountains.
From an employer’s perspective, you are at risk if the sales rep goes deeply in “the hole,” owing a lot in draw that he or she may not be able to offset with commissions. In these situations, employees may start to look to leave the company without repaying the draw.
In some states, companies can demand repayment of the outstanding draw with legal recourse. In other states, such as New York, companies cannot recover the outstanding draw if the employee leaves for another opportunity. In general, collecting outstanding draw amounts are very difficult to do. The prospective employer has no requirement to pay the draw. Check with your labor attorney, but I don’t think you would be successful claiming interference unless you have a well-defined employment contract with your employee.
For you to entice your employee to stay with your company, you might consider a few things:
Do you want this employee to stay? Are they capable of generating the revenue necessary to pay for themselves and grow your business?
If you do want them to stay, is there sufficient opportunity and is the commission plan structured (rich enough) for the sales rep realistically to make their on-target earnings?
If your sales rep is too deep in the hole, consider forgiving some or all of the outstanding draw. If the sales rep leaves, you’re likely to lose it all anyway. Why not help the rep out and garner good will in the process? Consider the previously paid draw as the cost of on-boarding your rep (water over the dam).
In any event, contact a good employment law attorney in your area to understand your legal options and limitations.