Many companies do not formalize commission arrangements with sales representatives in a formal contract. They shake hands, they have a custom of paying a certain rate for several years, or they agree in a series of emails and never distill those down into a contract.
You want your commission agreements in writing. If you don’t, and a dispute arises with a sales representative, your lawsuit just became far more expensive, because the first step (before fighting about whether the rep is owed money they say they didn’t get paid) will be to argue over what the agreement was. This is a costly step in a lawsuit that can take years, and that is easily avoidable.
And if you underpay (even unintentionally), your sales rep may be entitled to three times the amount of the commission they are owed, plus the fees their lawyer charges to sue you.
Here are the top 10 things to include in every sales commission agreement to protect your company:
- Allow commission rates to be dictated by the company and state that the commission rate may change from time to time. Expressly state that no consideration is necessary for commission changes.
- Specify the accounting method for commissions to which an independent contractor is entitled—and stick with it to prevent future problems.
- Think about whether you want the agreement to be terminable for cause, or after a certain duration, or terminable at will.
- State what constitutes a sale and when commissions are earned (when a PO is received, for example).
- Make it clear when commissions are to be paid (such as a set period of time after you get paid by the customer).
- Allow the sales rep to earn commissions only on sales consummated during the period of the agreement, and say that they are not entitled to commissions on post-termination sales.
- Specify a time frame for reporting a commission dispute.
- Include a method for resolving disputes that doesn’t involve a lawsuit.
- Specify a timeframe for the sales rep to report a claim of underpayment or otherwise dispute their commission. State that if the sales rep accepts payment and does not contest it during the specified time, the sales rep waives any claims of underpayment.
- Include a prevailing party attorneys’ fees provision. That means that if you have all of the above in the agreement and you pay your rep what they are owed on time, even if they think they are entitled to more and sue you, you can get your money back when you win (and if you stick to this list and pay your reps properly, you will win).