The Importance of Written Sales Commission Agreements

So what constitutes a commission? Short-term productivity bonuses and bonus and profit-sharing plans are specifically excluded from the definition of “commissions.” A commission occurs when the employer promises to pay a fixed percentage of sales or profits as compensation for work. Because this definition has some ambiguities, employers should protect themselves by having a carefully drafted bonus plan as well as a commission plan. This will help reduce misunderstandings and disputes with your employees.

It should be noted that since most employees are “at will,” it is important to include a provision in the written sales commission agreement confirming that the employee is “at will.” It should be made clear that the employee’s at-will status is not altered because a written contract is in place.

The agreement should set forth the calculation for determining commissions. This includes defining what constitutes “sales” and “profits.” For example, will returns, refunds and discounts be subtracted from the amount of the sale? In order to provide your employees with full disclosure, many employers choose to provide a summary of how commissions are calculated with each check.

A final issue to consider is the timing of when the commission is considered to be earned. This is important because once a commission is earned, it becomes a wage that is due and payable to the employee. Is the commission earned when a customer places a purchase order? When the company issues an invoice? Once the goods have been shipped? When the customer pays for the goods or services?

There are many factors that must be considered when drafting commission agreements with employees. Let us help. Contact us today to schedule your initial consultation. The legal team at The Swenson Law Firm provides a variety of business law services to entities of all sizes.

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