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A sales commission agreement is a contract setting a sales representative's pay. It names the commission rate, when commissions are earned and paid, and each side's duties. This guide covers commission plans, each clause, and the steps to complete it.
Key facts
A sales commission agreement is a contract between a seller and a sales agent that sets the payment the agent earns for each sale, called the commission. The commission gives the contract its name.
The agreement works between three elements that come up in almost every commission contract:
The document is also called a commission contract, a sales representative agreement or a commissioned salesperson contract. A commission plan document is a related paper: it describes the plan for a whole sales team, while the agreement binds one representative.
A commission agreement fits a business that hands promotion and selling to outside professionals instead of building its own sales team. Manufacturers and wholesalers use it to reach new territories without adding staff. A business that pays its own employees a commission writes the same terms into a commission plan or an employment contract.
A different document fits other deals. A one-time sale of goods between two parties belongs in a sales agreement, and a broader service deal with a contractor belongs in a services contract.
The commission agreement usually describes the representative as an independent contractor, a person who chooses how to perform the work. The IRS guidance (IRS, Independent Contractor (Self-Employed) or Employee) says a business generally does not withhold or pay taxes on payments to independent contractors, unlike wages paid to an employee.
The label alone does not decide the question. Under the same IRS, Independent Contractor (Self-Employed) or Employee guidance, what matters is whether the business has the right to control the details of how the services are performed (IRS guidance on worker status). A representative who works on the company's schedule, by its methods, can be an employee even under a contractor agreement.
A commission structure sets how much of the representative's pay is fixed and how much depends on results. The plan picked shapes the commission formula and the payment terms, so the parties choose it before drafting the rest of the agreement.
A base salary plus commission plan pays a fixed amount each period plus a share of sales. The plan helps a company keep its representatives when its results depend heavily on how well they perform. The agreement names both the salary and the commission rate.
A straight commission plan pays only for the sales the representative closes, with no steady salary underneath. Businesses with little capital benefit from this plan most, because they pay only when revenue comes in. Independent sales agents often work on this plan.
A relative commission plan pays for reaching a set sales target within a period. The target can be annual, quarterly, monthly or weekly. A representative who reaches only part of the target receives a matching part of the commission.
A tiered commission plan offers a higher rate as sales pass set milestones. Representatives earn the increased rate when they reach their goals and close more deals than expected. The agreement lists each tier, its threshold and its rate.
A residual commission plan pays on the continuing revenue of an account, such as a subscription renewal or a repeat order. The agreement says how long the residual payments run and whether they stop when the representative leaves.
A worked example shows how the same month of sales pays differently under each plan. The figures below are made up for illustration; the parties replace them with their own rates and targets.
Anna Baker sells $20,000 of products in one month for a wholesaler. Here is what she earns under each of the four commission plans, using simple example rates.
| Plan | Example terms | Anna's pay |
|---|---|---|
| Base salary + commission | $2,400 fixed salary plus 8% of sales | $4,000 ($2,400 + $1,600) |
| Straight commission | 10% of sales | $2,000 |
| Relative commission | $3,000 commission for reaching a $25,000 target, paid in proportion to the target reached | $2,400 (80% of the target) |
| Tiered commission | 5% on the first $10,000 of sales and 8% above that | $1,300 ($500 + $800) |
The ranking of the plans is not fixed. Change one rate or one target and the order changes, so the parties test their own numbers before signing.
A sales commission contract is a type of sales agreement that lays out the financial relationship between a company and a sales representative, plus the situations that come up while they work together. The clauses below appear in most commission agreements.
The clauses that set a commission agreement apart from other service contracts each have their own section below.
The earning clause fixes the moment a sale counts toward the representative's pay. Earning a commission when an order is booked differs from earning it when the customer pays, and the two moments can be weeks apart. The clause names one of them in plain words.
The payment clause sets the schedule on which earned commissions are paid out. It names the pay date, the period each payment covers, and the report that goes with it.
For example, the company might pay on the last day of every month, and each payment would include all commissions earned through the 15th of that month.
The commission formula states the amount the representative receives for each sale and the sales figure it is calculated on. The clause says whether the rate applies to the gross price, the net price after discounts, or the profit on the sale.
The chargeback clause explains how a returned product, a cancelled order or an unpaid invoice affects a commission. It says whether the company deducts an already paid commission from later payments and for how long after the sale that can happen.
The quota clause sets the sales target the representative works toward and the period it covers. A territory clause names the region, the product lines or the accounts the representative covers, and says whether the representative has them alone.
The bonus clause adds a performance incentive on top of the commission, such as a bonus for reaching a set number of sales. It names the target, the amount and the payment date of each bonus.
The termination clause decides whether the representative is paid for orders placed before the agreement ends but paid for after. It names a cut-off point for those late commissions and the date of the final payment. The clause works within state law, which differs by state: in Minnesota, when a company ends an independent contractor commission salesperson's work or the salesperson resigns, the company must promptly pay the commissions earned through the last day, meaning sales delivered to and accepted by the customer by then (Minn. Stat. § 181.145).
The covenants protect the company's clients and confidential information when the representative gains access to them.
A sales commission agreement is filled in clause by clause, in the order of the document, from the effective date to the signatures. The steps below follow that order.
A signed commission agreement works only when both sides track sales against its formula. The steps below keep the payments and the agreement in line with each other.
For an agreement written specifically for a business, an attorney or law firm can draft or review the final text.
A commissioned salesperson contract is another name for a sales commission agreement. It sets how a salesperson is paid for the sales they make, when commissions are earned and paid, and the duties of each side.
A business that pays any seller by results needs one, whether the seller is an independent representative or an employee. Manufacturers and wholesalers that work with outside sales agents use it most.
The commission formula in the agreement sets the calculation: a rate applied to a named sales figure, a set amount per sale, or a payment for reaching a target. The calculation example above shows the same sales under each plan.
The agreement sets the date. A commission can be earned when a product is booked or when the customer pays for it, and the two moments can be weeks apart.
A commission agreement changes through a written amendment signed by both parties. The amendment names the clause it replaces and the date the new terms start.
A commission plan describes how a company pays its whole sales team. A commission agreement applies a plan to one representative and adds that person's duties, territory and covenants.
General information, not legal or tax advice.
