An employee bonus is an incentive paid to employees for completing certain work tasks. In many cases, a court will only enforce an employee bonus promise if they are part of the employee’s original employment contract.

In other words, the bonus can only be paid in the anticipation of future work instead of as a reward for work which has already been done.

Why is an Employee Bonus Only Good for Future Work?

In order to enforce a bonus promise, a court typically tries to find the promise contained in an actual contract. In order for the contract to be valid, both the employer and the employee must have exchanged something of value. In other words, the employer must receive something in return for providing the bonus to the employee.

This is typically the case when a bonus is promised for subsequent employment. In these instances, an employer’s return benefit comes from an employee’s future work. Since the employee has already completed their work, any promise to provide a bonus lacks a return benefit. In other words, an employer cannot exchange for something that they have already received.

Can a Promised Employee Bonus Be Enforced Even if it’s not Considered a Contract?

In certain cases, yes an employee bonus may be enforced even if it is not considered a contract. A court may hold an employer liable for a promised bonus on the basis of detrimental reliance. It is important to note that courts typically reserve detrimental reliance for cases which present great injustice.

For example, suppose employer A promises employee B a bonus for their past work and contribution. B hopes to use that money as a down payment for a house and confirms with A that they will be receiving the bonus and why they need to receive it.

A assures B that the bonus will be paid and, therefore, B proceeds with the home purchase. In this case, although it is unlikely that a contract was formed, B may be able to claim detrimental reliance if A fails to pay the bonus.

What is Employee Chargeback?

An employee chargeback is a practice which typically occurs within sales industries. Employees may earn either a commission or a bonus that is made on sales which have yet to be finalized.

Due to varying circumstances, such as sales numbers being lower than expected, or a majority of sales being returned or canceled, an employer may choose to offset their losses by taking back any excess commissions provided to sales employees. This is what is known as an employee chargeback.

Can an Employer Legally Do a Chargeback?

The majority of courts agree that an employee chargeback is legal so long as it is indicated in the employment contract between the employer and the employee. If the employer fails to state that a chargeback is an option in the contract, the court will typically assume that the employee is entitled to keep the extra commission.

There are several reasons why courts have made this assumption, including:

  • The employer has more bargaining power;
  • A court is reluctant to require the return of money already provided; and
  • An employee should not bear an employer’s losses.

An employer carries much more bargaining power than the employees they hire. For example, if an individual is a single engineer being hired by an international software company, they probably will not be able to dictate what terms are included in their employment contract.

Therefore, due to the employer’s significant control over the employment process, courts will tend to hold employers liable for whatever they choose to put or not to put in the contract. If an employer fails to include a chargeback clause, an employee should not be blamed for the employer’s mistake;

Courts are generally reluctant to require forfeiture of money which has already been received. If an employer has already provided the employee with the commission money, a court more than likely will not require the employee to give it back. This would raise too many problems regarding money that may have already been spent or relied on by the employee; and

Employees should not be forced to assume liability for an employer’s losses. When working for an employer, an employee uses their time and energy to further the employer’s interests, regardless of whether the employer profits or not. Therefore, a court is less likely to hold an employee liable for the losses of the employer by forcing them to give back excess commission.

Although there is a general assumption that favors employees, employers may still be able to chargeback under certain circumstances. These circumstances may include:

  • The employer can prove the money was intended as a loan;
  • The employee agreed to repay the excess commissions; and
  • The employee wrongfully abandons their employment.

If the employer can prove that the money an employee received was intended as a loan rather than part of their salary. This is typically the case in employment contracts where commissions involve using the term advance.

For example, say that Y, an employer, is looking to hire Z as a sales rep for his vacuum selling business. Under an employment contract, Y agrees to advance to Z 20% of sales from red vacuums sold.

This provision could either be seen as a straight forward commission or as expecting Z to eventually pay the sum back. Courts may need to examine a number of additional factors such as who the employer or employee is, the nature of employment, etc., in order to determine which of the two meanings to adopt;

If an employee either explicitly or implicitly agrees or promises to repay the excess commissions, this is essentially agreeing to a chargeback.

Using the previous example, if Z were to tell Y, my commission can be deducted if any customer cancels or returns their order, this would be an explicit promise by Z to repay excess commissions. Similarly, if Y had previously been charging Z for canceled sales, and Z allowed this to happen, a court may imply that Z agreed to a chargeback of the commissions.

If an employee wrongfully abandons or stops working for their employer, a court will not be inclined to reward the employee for deliberate harmful activity. Therefore, the employer may be able to chargeback any excess commissions if an employee intentionally quits working without a valid reason.

How Can an Attorney Help Me?

It is important to have the assistance of a employment attorney for any issues you may have with chargebacks. An attorney can determine whether or not the employment contract contains a chargeback clause as well as whether or not the court will be able to imply one existed based on the circumstances of the case. If you are an employer, an attorney can assist you in presenting evidence to the court that your chargeback was necessary and valid.

Your attorney can review your situation, determine the consequences of a chargeback clause, if present, and present evidence to the court as to why you should not have to return any funds. Having an attorney may be the difference between keeping your commission and being forced to return it.