Whether you are an employer or an employee, it is important to have your sales commission agreements in writing. In fact, several states (including California) require any employer that pays commissions to employees providing services in the state to have a written agreement with the employee. The contract must outline how the commissions are computed and how they will be paid.
A sales commission agreement should clearly explain how the commissions are calculated and when they will be paid. The employee should be provided a signed copy of the contract and the employer should retain a signed acknowledgement of receipt of the contract by the employee.
In setting forth the calculation of commissions, the terms “sales” and “profits” must be defined. If returns, refunds, cancelled orders or other such occurrences impact the calculation, this must be clearly stated in the contract. It should also set forth when a commission is earned. Is it earned when an order is placed, when the goods are shipped or when the customer pays?
What about bonuses? You must look at the applicable state law, but in California short-term productivity bonuses are excluded from the definition of “commissions.” This can be a tricky area, however. For example, if the California employer has agreed to pay a fixed percentage of sales or profits as compensation for work, that can be considered a commission. It is common for bonuses to be based on a percentage of sales or profits, so this can create some ambiguity in what constitutes a commission. As a result, the best strategy is to have a clear and concise written agreement that sets forth the bonus plan and/or commission plan in order to avoid any disputes with the employee.
It is important to note that most employers do not have contracts with their at-will employees, so the sales commission agreement should contain a provision stating that the employee’s at-will status is not changed by the existence of the written commission’s agreement.
There are numerous other factors that must be considered when drafting a sales commission agreement. If you need assistance creating this type of contract or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.