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Draw against commission employment

Yankease 10 April 6, 2012 at 11:32 AM
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Can anyone clarify the following scenario? Also, if anyone wants to talk about his/her experience working as a draw against commission employee, plus pros and cons, that would be great.


You are hired as a recruiter and will get paid $16/hour (as a 1099 independent contractor) to work 40 hours per week. That equals $2,560. If you make a placement in your first month of work that earns you a commission of $5,000, you will be paid the remainder of
$5,000 - $2,560 = $2,440.

However, if it takes 3 months to make the initial placement, you have been paid $7,680 in salary so far. Factoring in the $5,000 commission amount, do you now owe the employer $7,680 - $5,000= $2,680? This is the main concept I want to be clear on, because there is obviously a huge difference between being in debt to your employer and not being in debt.

If that is indeed the case, your effective monthly pay for that 3 month period decreased from $2,560 to $1,666. So, to summarize, you have to work very hard in a tough market to be over the commission amount so that you don't wind up owing money to your employer, right?

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#2
Bump. There must be SDers who can contribute
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#3
I have no idea about this business or market but replying to get it started.
I think it only effects for commission, don't think it will effect your salary.
It might be that after 3 months, you won't get any commission but wait for a better answer.
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#4
Ok first thing is first:

1) You don't have an employer. You have a company that is contracting your services...big difference.

2) They are probably misclassifying you as a 1099 contractor when in fact you should be an employee. You can report a grievance to the DOL.

3) I have no idea because I don't have the contract agreement to read...the terms should all be defined in the agreement.
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Quote from PiratesSayARRR View Post :
Ok first thing is first:

1) You don't have an employer. You have a company that is contracting your services...big difference.

2) They are probably misclassifying you as a 1099 contractor when in fact you should be an employee. You can report a grievance to the DOL.

3) I have no idea because I don't have the contract agreement to read...the terms should all be defined in the agreement.
I don't have the agreement yet. I was told I would be 1099 because there would be no insurance, etc. I believe most of the recruiters are 1099.
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Quote from Yankease View Post :
I don't have the agreement yet. I was told I would be 1099 because there would be no insurance, etc. I believe most of the recruiters are 1099.
Employer does not have the discretion to make the judgment call if you are a 1099 or employee. Read here: http://www.irs.gov/businesses/sma...21,00.html
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Quote from PiratesSayARRR View Post :
Employer does not have the discretion to make the judgment call if you are a 1099 or employee. Read here: http://www.irs.gov/businesses/sma...21,00.html
A few questions:


1)Aside from having to pay self-employment taxes (and some other expenses), would I be at a disadvantage here? If so, how? I ask because me disputing the classification with the company could be the difference between having a job and not having one. I will be relocating, but it appears I may begin working with them in my current city beforehand. Kind of hard to turn down a guaranteed position given my circumstances, unless of course it is not at all beneficial.

2)I assume this plays into the employee vs. independent contractor classification, but here are the circumstances:
a)I will be able to put in 40 hours however I see fit; it does not have to be 5 days a week, 8 hours a day
b)I will work from home in addition to working at the company office, so they will provide a computer and phone for me to do so
c)From what I understand, I will use their existing methods and techniques to begin to build my own candidate base. Once things progress, interviews and placements will be handled by the executives alone or jointly with me. I don't believe I will handle that aspect by myself in the near future.

3)If I am indeed classified as an independent contractor, does two weeks notice apply? Just wondering in case I feel the setup doesn't work for me and I want to seek out a salary-only position.
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#8
I recently got promoted into a new role at my company where part of my compensation is based off of commission that includes a "draw". Keep in mind that I am a salaried executive, so my case might differ a little from yours, but I think the draw principles are the same.

Every two weeks, I get paid $X. Taxes and whatnot aside, that X number is made up of A+B. A is my flat salary, and B is my recoverable draw. So, for simplicities sake, let's use some numbers as an example:
If my salary is $52,000 a year, and my recoverable draw is $26,000 a year (nice round numbers), that means that my bi-weekly salary is (52000+26000)/26=$3000. But out of that $3000, $1000 is the part that is the recoverable draw.

Now, part of my job is managing a department that is a revenue generator for the company. I get a commission on all of the revenue we bring in, as well as a percentage of the revenue that I am personally responsible for. In order to "break even" on my draw, my commission for any given payroll period needs to be at least $1000. So, if my commission percentage is let's say 5%, I need to bring in $20,000 in revenue every two weeks.

For anything over that amount, I would get paid an additional commission on top of my normal paycheck.

The commissions are calculated monthly, so from that standpoint it would be more like $2000/month for a draw.

So if in Month 1 I made $2200 in commission, I would get an extra $200. If in Month 2 I made only $1800 in commission, I would still get paid my full salary+draw, but I would be "short" $200, which would carry over to subsequent months. If in Month 3 I made $2100 in commission, I would only get my normal salary+draw, and the extra $100 would go to paying off my "draw debt", still leaving me with -$100. If in Month 4 I made $3000 in commission, I would get $900 as a bonus.

Consider the draw kind of like a loan on your commission.

Does that make sense to you?

Different companies have different ways of handling it. In some cases, if you leave the company with a negative draw balance, you might be held accountable to pay it back in.

In another example, a very long time ago I used to work for Gateway Computers as a sales associate. We were paid about $10/hour, but our entire salary was incorporated into a draw. So while we were guaranteed to make $10/hour, we would only get commission on sales for amounts that exceeded this amount. We weren't penalized for being short, outside of not making any commission, and the slate was washed clean every month or payperiod (I forget which). If people were routinely short, they were subject to disciplinary actions up to termination though.

This had some upsides and downsides. To the latter, if I was very high up in my commissions, and it was close to the end of the month, and I knew that I had to work a shift where there were going to be no sales, I was basically working for free. Because any part of my hourly pay was being "deducted" from my commission. I ended up making the same amount, as the funds were going from one pool to another, but in the end I made the same as if I didn't work.

In your case, as a 1099 contract worker, things might be different. And like I said, employers can have different rules and policies on how this works in general.
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Quote from phonic View Post :
I recently got promoted into a new role at my company where part of my compensation is based off of commission that includes a "draw". Keep in mind that I am a salaried executive, so my case might differ a little from yours, but I think the draw principles are the same.

Every two weeks, I get paid $X. Taxes and whatnot aside, that X number is made up of A+B. A is my flat salary, and B is my recoverable draw. So, for simplicities sake, let's use some numbers as an example:
If my salary is $52,000 a year, and my recoverable draw is $26,000 a year (nice round numbers), that means that my bi-weekly salary is (52000+26000)/26=$3000. But out of that $3000, $1000 is the part that is the recoverable draw.

Now, part of my job is managing a department that is a revenue generator for the company. I get a commission on all of the revenue we bring in, as well as a percentage of the revenue that I am personally responsible for. In order to "break even" on my draw, my commission for any given payroll period needs to be at least $1000. So, if my commission percentage is let's say 5%, I need to bring in $20,000 in revenue every two weeks.

For anything over that amount, I would get paid an additional commission on top of my normal paycheck.

The commissions are calculated monthly, so from that standpoint it would be more like $2000/month for a draw.

So if in Month 1 I made $2200 in commission, I would get an extra $200. If in Month 2 I made only $1800 in commission, I would still get paid my full salary+draw, but I would be "short" $200, which would carry over to subsequent months. If in Month 3 I made $2100 in commission, I would only get my normal salary+draw, and the extra $100 would go to paying off my "draw debt", still leaving me with -$100. If in Month 4 I made $3000 in commission, I would get $900 as a bonus.

Consider the draw kind of like a loan on your commission.

Does that make sense to you?

Different companies have different ways of handling it. In some cases, if you leave the company with a negative draw balance, you might be held accountable to pay it back in.

In another example, a very long time ago I used to work for Gateway Computers as a sales associate. We were paid about $10/hour, but our entire salary was incorporated into a draw. So while we were guaranteed to make $10/hour, we would only get commission on sales for amounts that exceeded this amount. We weren't penalized for being short, outside of not making any commission, and the slate was washed clean every month or payperiod (I forget which). If people were routinely short, they were subject to disciplinary actions up to termination though.

This had some upsides and downsides. To the latter, if I was very high up in my commissions, and it was close to the end of the month, and I knew that I had to work a shift where there were going to be no sales, I was basically working for free. Because any part of my hourly pay was being "deducted" from my commission. I ended up making the same amount, as the funds were going from one pool to another, but in the end I made the same as if I didn't work.

In your case, as a 1099 contract worker, things might be different. And like I said, employers can have different rules and policies on how this works in general.
Thanks, it's helpful to get some feedback from a person who has worked under a similar set of circumstances. I don't have all the information yet, but I hope that if I am "in the red" that it only counts against my possible commission earnings (and not my hourly rate). I will report back once I have more definitive terms.
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#10
the big question is it a recoverable draw which means you would owe the $$ also as an independent contractor you make your own hours so look at that and the IRS rules you will also have to pay Social Security tax and other stuff as an employer so for 1 placement a month you will make 32.00/hr rough numbers, how many employees are you supposed to hire per month, can you work for another company while working for them. If you find a great Web developer and they have no openings can you contact other companies to find them employment?

if you are signed into an exclusive contract and they stop hiring between Thanksgiving and New years due to the holidays what do you do?

How are you expected to track your hours?
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*removed by OP to maintain privacy
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Quote from Yankease View Post :
I can now provide official details from the documentation, but of course I will be as vague as possible so as to maintain my privacy and not compromise the contract.

Sounds like it, yes. You will always get paid $16/hour, whether you make commission on top of that would depend on whether your total commission for the period exceeded your hourly paid wage for the period.

Keep in mind though that while they can't pay you less then $16 for a commission shortage, based on what you said is in the contract, if this happens routinely you probably won't have a job for very long Wink.
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Thanks phonic. And yes, I understand Wink

There is only one other section I found that seems to talk about the possibility of the company withholding money, but it doesn't seem like it is directly applicable to the draw/commissions unless I've done something wrong. Can anyone confirm?

*The rest of this post removed by OP to maintain privacy
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Quote from Yankease View Post :
I can now provide official details from the documentation, but of course I will be as vague as possible so as to maintain my privacy and not compromise the contract.
Doesn't matter if the contract states that you are a contractor...they have to pass the IRS test.
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Quote from PiratesSayARRR View Post :
Doesn't matter if the contract states that you are a contractor...they have to pass the IRS test.
Understood. How about my most recent question regarding the draw and commissions?
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