An employee charge back is a practice that usually occurs within sales industries. An employee earns either a commission or bonus on made sales that have yet to be finalized. Due to varying circumstances (i.e. sales numbers are lower than expected, or a majority of sales are returned or cancelled), an employer may choose to offset their losses by taking back any excess commission given to a sales employee. This is an employee charge back.
Most courts agree that employee charge backs are legal so long as it is indicated in the employment contract between the employee and the employer. If the employer fails to state any desire to charge back in the contract, courts generally assume that an employee is entitled to keep the extra commission. There are number of reasons why courts do this:
- Employers carry much more bargaining power than the employees they hire – For example, if you are a single engineer being hired by an international software company, you probably will not be able to dictate what terms are included in your employment contract. Therefore, due to an employer’s significant control over the employment process, courts tend to hold employers liable for whatever they choose to put or NOT put in the contract. If an employer fails to include a charge back clause, an employee should not be blamed for their mistake.
- Courts are generally reluctant to require forfeiture of money that has already been received – If the employer has already given the employee 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.
- Employees should not assume liability for an employer’s loses – When working for an employer, an employee uses time and energy to further the employer’s interests, regardless of whether the employer profits. Therefore, a court is less likely to hold an employee liable for employer losses by forcing them to give back excess commission.
However, despite this general assumption favoring employees, an employer may still be able to charge back under certain circumstances:
- If an employer can prove that money an employee received was intended as a loan rather than salary – This is usually the case in employment contracts where commissions involve using the term "advance." For example, say that A, an employer, is looking to hire B as a sales rep for his vacuum selling business. Under an employment contract, A agrees to, "advance to B 20% of sales from red vacuums sold." This provision could either be seen as a straight forward commission or as expecting B to eventually pay the sum back. Courts may need to look into a number of additional factors (who the employer/employee is, the nature of employment, etc.) to determine which of the two meanings to adopt.
- If an employee either explicitly or implicitly agreed or promised to repay the excess commissions – Agreeing to repay excess commissions is essentially agreeing to a charge back. Using the example above, if A were to tell B, "My commission can be deducted if any customer cancels or returns their order," this would be an explicit promise by A to repay excess commissions. Likewise, if B had previously been charging A for cancelled sales, and A allowed this to happen, a court may imply that A agreed to a charge back of his commissions.
- If an employee wrongfully abandons or stops working for their employer – Courts do not like to reward employees for deliberate harmful activity. Therefore, an employer may be able to charge back any excess commissions, in the event that an employee intentionally quits working without a valid reason.
Due to the importance placed on textual interpretation, it is best to consult an experienced contracts attorney to determine whether or not an employment contract includes an Employee Charge Back clause. An attorney should be able to determine not only whether a charge back clause in an employment contract exists, but also whether a court can imply one based on the circumstances of any individual case.