Sales Plans Should Contain Specific Treatment of Trailing Commissions

Parker Poe Adams & Bernstein LLP

When we review employee sales commission plans or compensation agreements with sales representatives, the plans generally contain detailed language regarding how commissions are calculated and paid. For example, the plans may provide a formula for calculating commissions, set-off certain marketing and other costs, or provide for recapture based on customer returns. However, many sales commission plans fail to specifically address entitlement to commissions after termination of the agreement.

If an employee or independent sales representative contributes to a sale that is not completed until after they depart, should they receive compensation? How long should any entitlement to these “trailing” commissions continue? What happens if the salesperson makes an initial approach to the customer, but the sale itself is not closed until after they depart? If the commission plan or sales agreement is unclear or ambiguous on any of these questions, it generally will be interpreted in favor of the departed salesperson.

The good news for companies is that this uncertainty can be largely eliminated by careful explanation in the commission plan or sales agreement as to entitlement to these trailing commissions. Most states will allow the parties to establish binding agreements governing trailing commissions. For example, the plan could state that the salesperson is only entitled to commissions if the customer has paid as of the termination date. A more generous policy could provide for payment of trailing commissions for a specified time following termination of the relationship. The agreement can also define what specific actions by the salesperson prior to termination result in the earning of the commission.

Entitlement to trailing commissions is a leading source of legal disputes with departed salespersons. If  the dispute involves an employee, state wage and hour laws may impose liquidated damages and attorneys fee remedies against employers found to have deprived the salesperson of trailing commission payments. All companies with commissioned salespersons should periodically review their agreements, and ask themselves whether the agreements adequately address various scenarios involving the salesperson’s departure.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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