Put Your Commission Agreements in Writing: 10 Things to Include in Sales Representative Agreements | Levenfeld Pearlstein, LLC
Many companies do not formalize commission agreements with sales representatives in a formal contract. They shake hands, they usually pay a certain rate for several years, or they agree in a series of emails and never turn it into a contract.
You want your commission agreements in writing. If you don’t and a dispute arises with a sales rep, your lawsuit becomes much more expensive, because the first step (before fighting over whether the rep owes money, he says he doesn’t ‘wasn’t paid) will be discussing what the deal was. This is an expensive step in a lawsuit that can take years and is easily avoidable.
And if you underpay (even unwittingly), your sales representative may be entitled to three times the amount of commission owed to them, plus the fees charged by their lawyer to sue you.
Here are the top 10 things to include in every sales commission agreement to protect your business:
- 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 needed for commission changes.
- Clarify the method of accounting for commissions to which an independent contractor is entitled and stick to it to avoid future problems.
- Consider whether you want the agreement to be terminable for cause, or after a certain duration, or terminable at will.
- Indicate what constitutes a sale and when commissions are earned (when a purchase order is received, for example).
- Clearly state when commissions are to be paid (e.g. a set period of time after being paid by the customer).
- Allow the sales rep to earn commissions only on sales made during the term of the agreement and say they are not entitled to commissions on sales after termination.
- Specify a time frame for reporting a commission dispute.
- Include a method of dispute resolution that does not involve litigation.
- Specify a time frame for the sales rep to report an underpayment claim or dispute their commission. State that if the sales representative accepts the payment and does not dispute it within the allotted time, he waives any claim for underpayment.
- Include provision for applicable parties’ attorneys’ fees. This means that if you have all of the above in the agreement and you pay your representative what they are owed on time, even if they think they are entitled to more and sues you, you can get your money back. when you win (and if you stick to this list and pay your reps correctly, you will win).