Commission Contracts: Everything You Need to Know
Commission contracts are useful for any employee that’s paid on a commission structure.3 min read
2. Contract Terms
3. Sales Commission Uncertainties
Updated November 24, 2020:
Commission contracts are useful for any employee that’s paid on a commission structure. The U.S. Department of Labor defines a commission system as the payment given to a worker upon finishing a designated task. With that, commissions are not the most common forms of compensation covered under federal labor laws. Therefore, you should ensure that your employment contract includes an explanation of what commission means under state labor laws.
Under New York laws, for example, commissions are defined as payments based on sales revenue streams. In Colorado, commissions are wages that are paid based on an agreement involving an employer and employee. Further, you need to provide various employment contracts for different states if you operate in multiple states.
You may pay (or be paid) in many different ways:
- Per hour
Commission agreements outline employment compensation and terms so an employee and employer know what to expect in the future. Another common scenario is the use of a commission contract where the service provider wishes to be remunerated via commission to share profits without taking on rights and duties associated with an equity share.
Moreover, the agreement helps employers and employees outline the duties of a job and the nature of the relationship. Such terms provide a clear definition of the following:
- Employment date
- Commission percentages
Employees also benefit from the business terms if any misunderstanding arises between the two parties. Also, an employer can protect his or her business with non-competitive or confidentiality clauses within the commission agreement. In addition to explaining the employment relationship, the employee contract includes certain definitions regarding common terms. When you draft commission contracts in the sales field, you should first name all parties involved in the contract.
Additionally, you should explain whether the salespersons are independent contractors or employees. In many cases, a salesperson is an independent contractor and earns on commission for any sales produced. If the owner fails to limit payment to sales, employees could claim commission on sales they had no part in. The contract should also mention the start and termination dates, or an explanation on why either party ended the agreement.
Further, certain state laws may allow employers to charge commissions back that have already been issued to employees. Such a contract should mention an explanation behind chargeback, and how an employer can reclaim the money. States such as New York and California allow employees to draw against yet-to-be-earned commissions. Such a method falls under minimum wage laws, which may include certain minimum draws within the contract.
Sales Commission Uncertainties
More cases arise where businesses are hurt by poorly worded or vague compensation clauses within the agreements. For instance, a commission-based lawsuit filed in Massachusetts confirmed that the management of sales commission plans are discretionary (meaning you may create any provisions you wish), but the commission itself is not discretionary (you are compelled to honor whatever agreement in place). In states such as Maryland and Massachusetts, wage collection laws entitle salespeople to recover up to three times the balance of any unpaid sales commission, including attorney fees. Also, states tend to rule in favor of employees.
The notion of a sales commission plan sounds simple, but you may run into uncertain areas. For instance, a salesman manipulates discount terms to book higher sales figures, or one of his or her closed accounts mandates a refund. This is why drafting a sales commission should be a primary priority for any business. For all workers, you should give a written description of the following:
- Pay rates
- Payment manner
- Advanced notice changes
If you come across ambiguities in a contract, a court often sides with the employee. You may download a sample sales commission plan online, but you should also use professional support. First, you should design the right type of plan with the help of a firm that specializes in sales compensation. Second, you should work with a sound legal attorney that has experience in the state where you conduct business. Experts should review all documentation to ensure it complies with the law while detailing your specific goals.
If you need to find out more information about commission contracts, submit your legal inquiry to our UpCounsel marketplace. UpCounsel retains some of the best lawyers from around the nation, and they will help you in all matters pertaining to commission contracts. Further, our lawyers will assist you in contract difficulties, or if you come across a vague or complex language you may not understand.