Drawing the line

Exclusive to Canadian HR Reporter from Rudner Law.

Commissions are a fantastic way to motivate sales staff and reward employees for their performance. However, for a commission structure to work effectively, it is critical that employers clearly outline all key terms in a written employment agreement or commission plan.

One key element in commission plans is the concept of draws against commissions, or “draws”. Draws are advance payments to commissioned employees, usually to provide a degree of predictability for these types of earnings; draws are optional and it is up to the employer whether their commission plan provides them.

If draws are part of the plan, it is critical to have clear terms governing them, especially regarding employee overpayment obligations if their earned commissions fall short of a draw.

Indeed, a recent Ontario Divisional Court decision, 2250898 Ontario Inc. v. Pepe, 2026, provides a crucial lesson on draws, highlighting that failure to address overpayment obligations can result in draws inadvertently becoming guaranteed income.

Pepe and commission shortfall

In Pepe, the defendant was a senior account executive at an insurance brokerage. The written employment agreement provided that he would be "paid a draw against commissions for the first three (3) years in the amount of $90,000 annually”, and that such payments were credited against the employee’s commissions.

Approximately six months into the role, the employee voluntarily resigned. Up to that point, the employer had paid him $42,375.00 in monthly draws, while he had generated $9,391.92 in commissions, leaving a deficit of $32,983.08.

The employer subsequently brought an action in Small Claims Court seeking to compel the former employee to repay the $32,983.08 difference.

Battle lines: loan vs. guaranteed floor

The core dispute centered on whether the draw was recoverable or non-recoverable:

The employer argued that draws under the plan were recoverable, as draws are inherently loans. Since the draws exceeded earned commissions, the shortfall constituted a debt that the employee was personally obligated to repay. The Small Claims Court agreed with the employer, relying on older case law to hold that draws are presumptively recoverable loans.

The employee argued that his contract guaranteed a baseline draw of $90,000 per year against commissions, but contained no terms providing overpayment or debt obligations if commissions fell short of the draw.

Reality ‘cheque’

The employee successfully appealed. The Divisional Court set aside the trial judgment, and dismissed the employer's claim in its entirety, dismantling the employer's position on several grounds.

The court rejected the notion that draws are presumptively loans. Instead, courts must examine what the parties actually contemplated and agreed upon at the time the contract or commission agreement was made.

The court highlighted, citing prior case law, that a draw against commissions means that earned commissions are the funds from which draws are offset. Unless the employment agreement contains explicit language requiring the employee to repay excess draws from other funds if commissions fall short, the draws function as a non-recoverable guaranteed baseline, and the employer takes on the economic risk. If the intention is for draws to be recoverable from other funds, those terms must be clearly and expressly stated.

Further, the contract in this case was drafted entirely by the employer and was silent regarding any obligation to repay unearned draws from personal funds. The court applied the principle of contra proferentum, meaning that ambiguity is resolved in the employee’s favour, and the contract's "entire agreement" clause to determine that the employer cannot retroactively read a repayment debt into the contract. The court was clear that it is unreasonable to impose a debt obligation on the employee after the fact, particularly since such an arrangement imposes financial risk on the employee.

Lastly, the court emphasized that forcing the employee to repay $32,983.08 out of pocket for over 875 hours of worked office hours would leave him with net compensation far below the statutory minimum wage. Consequently, this breached the Employment Standards Act, 2000, (ESA) nullifying the employer’s allegedly implied clawback provisions.

Pith and substance

Pepe serves as a stark warning for employers offering commission-based compensation. It is critical for employers to implement strong, well drafted contracts and incentive agreements that clearly define how commission draws and overpayments are handled, in addition to other critical terms such as what happens upon the end of the employment relationship.

It is clear that if an employer intends for draws to be recoverable as a debt, the employment contract or commission plan must explicitly state that. Additionally, the terms must respect the ESA, including its minimum wage entitlements.

Otherwise, as Pepe demonstrates, the employer risks being unable to recover overpaid draws, leaving the employee entitled to keep the funds.

David Gelles is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].