By Anerio Altman

Recoverable draws are not recoverable….at least not in Bankruptcy.

Sometimes we have to argue against the former employers of the Debtor who claim that they are entitled to be paid a recoverable draw from the Debtor’s bankruptcy case.  They will file a Proof of Claim requesting payment.  In our Firm’s experience, these efforts, so far, have never been successful.

A recoverable draw is a tool utilized by many employers for their employees who are paid as salary, or hourly, employees and who earn their income in part, or in total, upon sales commission.  These arrangements are most often witnessed in real estate and mortgage companies and are extremely popular among both the employers and employees in that industry.

A recoverable draw works as follows:  The employee, either by prompting or by its own volition, chooses to advance some of his or her compensation from their future commission.  This advance can be a sporadic event, or may be a regular part of the employee’s pay cycle, where he or she receives a recoverable draw every week or month, ultimately to be paid back or off from future commissions.This agreement is both permissible and legal so long as the employer follows certain guidelines.

However, very few employers follow these guidelines.  While there is no “brightline” test for any instance of a recoverable draw, these are the general points of analysis:

California Doesn’t Like Employers to Recover Wages:  In California, the default presumption under California Law is that any monies paid by an employer to an employee are presumed to be wages.  Wages are not recoverable once paid to the employee.  When wages are “recovered” in this instance, they are “recovered” from the employee’s future commissions.  The future commissions exist in the coffers of the employer, and are distributed to the employee. Draws can be pulled from those commissions.  However, once those wages are in the hands of the employee, they are gone.

There Better Be A Written Agreement That Is Easily Understood:  If an employer is going to rip the wages away from an employee, they need to have a written agreement that can be understood by the average consumer.  If there is any dispute as to the meaning of the written agreement, that writing created by the employer will be interpreted as against the employer because they drafted it.  The employer should not rely upon constructive language concerning the construction of the written agreement to insulate it from this interpretation.

That Agreement Needs to Function as a Loan Document:  if an employer is going to pull back these wages from commission, the recoverable draws must be addressed through a separate loan document.    The written agreement must describe this arrangement and be able to stand on its own as a loan including finance charges, applicable disclosures, balloon payments etc.

The Draw Proceeds Must be Disbursed and Addressed as Separate Loan Proceeds:  Recoverable draws must be disbursed separately from the paychecks given to the employee, may not have payroll taxes removed and may not be linked to paychecks except to the extent that commission checks are lessened by the repayments to draw proceeds.

If the Recoverable Draw is Not Repaid By The Time the Employee Quits or Is Terminated, It is Not Getting Repaid:  Recoverable draws can be paid back from commissions if these procedures are followed, but once the employee has quit or is terminated and the final checks are paid out per California Labor Law, there are no longer commissions from which the employer can draw.  As such, upon termination of the employer/employee relationship, there is almost* no chance of recovery.

As always, if you have problems in your case or a question about how something works in Bankruptcy, please do not rely upon this post and please consult our law office.

*-The employer could create a balloon payment on the note that comes due upon termination of the employer/employee relationship but best of luck to the employer who tries that.