Editor’s Note: Jeff has covered this topic for us in the past, but as he has said, it needs to be addressed again, and more thoroughly. You can read his original post here for further information.
In the United States, a “draw” (technically known as a non-recoverable draw against commission) is the most common, yet the most misunderstood way of paying a recruiter.
I’ll show you how to get back most of that draw in a minute. But first, let’s see how the draw arrangement works legally:
A draw is either a loan (temporarily given) or wages (mandatory “can’t-get-it-back” pay for work) depending on whether the recruiter (employee) is still employed at the end of the pay period (a loan) or not (wages). This “disappearing salary” feature is designed to comply with the minimum wage laws.
The recruiter is given a fixed amount of money at scheduled intervals (the pay period). Usually all payroll deductions are taken out, so it’s a net amount.
If the recruiter remains employed for any reason:
The draw is a loan, so when any commissions are due (for however long you agree), the disbursement is made by (1) taking all payroll deductions out of the amount, (2) deducting (subtracting) the amount of all draws paid, then (3) paying the balance to the recruiter.
The legal reason for this arrangement is that you’ve complied with the minimum wage laws by sequentially paying for the work (recruiting, research, etc.) performed. The physiological reason for this arrangement is that the recruiter must eat regularly to survive.
So if the recruiter stays, you just “disappear” that draw and get it back – just as though you had loaned it to the recruiter.
If the recruiter does not remain employed for any reason:
If the recruiter bails after receiving the draw, it becomes a salary.
It’s a non-recoverable draw. That’s because once you pay wages, you can’t get them back. They vest.
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Again, you’ve complied with the minimum wage laws.
The best way to legally get a draw back is to actually treat it as a loan. That means separating the wage portion of the payment from the loan portion by writing separate checks. You can even charge interest on the loan!
You simply (1) execute (sign) a promissory note (contract to pay the money back), (2) indicate on every separate check that it is a loan, (3) give the recruiter a statement for the amount borrowed at each pay period, and (4) give a separate mandatory minimum wage check for the work (recruiting, research, etc.) performed.
The loan is treated as a totally separate transaction from the pay-for-work wage, so it’s always a gross amount. However, you then deduct the net amount of the wages already paid from the loan balance. The recruiter is just giving you his or her paycheck to repay the loan. It’s legally the same as the recruiter paying his credit card bill.
That’s how to get the draw back in the U.S., and most other countries. However, the wage laws vary in each country. Be sure you’re complying with all your state and local laws as well.
May this and my other replies help recruiters around the world to make more placements!
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