Sales Commission Agreement

A sales commission agreement is a common document when it comes to various types of sales. It is used when a sales representative is involved in the selling of products or services. A sales agent is typically responsible for showcasing and selling products or services to businesses and governmental units. Cooperating with sales representatives is essential for manufacturers and wholesalers. In this way, they can delegate promotion and marketing of their goods to potential buyers to professionals without hiring them.

Want to learn more about commission agreements? We have gathered some important details about the commission contract — read more in our article.

What Is a Commission Agreement?

A commission agreement is a document that indicates the agreement between a seller and sales agent about the seller using the services of the latter and paying them the agreed sum. One party is a manufacturer or wholesaler who provides certain goods or services while another party is an individual who markets and sells the manufacturer’s merchandise. According to a commission agreement, a manufacturer or wholesaler promises to pay the sales representative a certain amount of money for their services. This amount of money is also called a commission, and this is where the name for the contract stems from. The commission is commonly made for each sale made, but there might be other types of commission structures as well.

The commission contract is generally needed by businesses that don’t plan to hire sales representatives and sign an employer-employee sales commission agreement. A sales commission agreement lets lawfully work with independent contractors. For a business ordering sales representative services, it means that they will not have to pay income tax typically withheld from employees’ salaries.

Types of Sales Commission Structure

There are at least several types of commission plans you should know about before creating the agreement.

1. Base Salary + Commission

In this case, the salary is often set at the level of 60% (fixed amount) and the commission constitutes 40% (variable amount). This type of commission lets retain sales representatives when a company is heavily affected by the performance of the sales agents.

2. Straight Commission Plan

When a sales representative is using this type of commission, their income depends solely on the number of sales they earn. There is no security of a steady salary. Businesses that do not have a lot of capital benefit from this commission plan most of all.

3. Relative Commission Plan

For this type of commission, there is a certain target that a sales representative should achieve in order to get their salary. It can be set on an annual, quarterly, monthly, or weekly basis. If a target is achieved partially, a contractor gets a respective part of their commission.

4. Tiered Commission Plan

When a business offers a tiered commission structure to their sales reps, it means that contractors are encouraged to hit substantial sales milestones by being offered a higher commission. Essentially, reps get an increased commission if they consistently reach their goals and close more deals than they are expected to.

What Are the Components of a Sales Commission Contract?

This type of sales agreement is a comprehensive document that includes all the details of the financial relations between a manufacturer or wholesaler and a sales representative. It also covers a number of potential situations that could arise during the cooperation of the parties. You will typically see the following provisions in sales commission agreements:

Who signs the document

The agreement should always include information about the sales agent, that is, the contractor, and the company that orders their service.

What services are to be provided

It is important to outline what services will be provided by an independent contractor.

When the commission is earned

The agreement should explicitly spell out the date when the sales representative earns their commission. It is important as there’s a difference between awarding the contractor with commissions when a product is booked and when a product is paid for.

When commissions are to be paid

Another piece of information the agreement should include is when the commissions are to be paid. As an example, the contract might state that the commission will be paid by the company on the last day of every month, and each commission payment will include all commissions earned as of the 15th of each month.

The commission formula

The commission structure should be clear in the agreement. It should set out the amount the contractor will be paid for each sale they make and the sales amount to calculate the commission.

Scenarios that impact the commissions

It is unavoidable that products are sometimes returned by customers. There might also be cancellations of orders and defaults on payments that might affect the contractor’s commission. These situations and their impact should be clearly outlined in the document.

Bonuses

Businesses quite often include performance incentives for sales representatives. These incentives might have the form of bonuses for reaching a certain number of sales.

Non-compete and non-disclosure clauses

There are certain covenants businesses might want to include to protect themselves from possible negative consequences of the contractor learning their confidential information, getting access to their base of clients, etc. These covenants commonly include non-compete and non-disclosure clauses that set certain restrictions for the contractor for the term of the agreement and a certain time after.

Filling Out the Sales Commission Agreement

A sales commission formal contract is a comprehensive document that should cover a lot of details to offer proper protection to both sides of the agreement. We offer you to use our free commission agreement sample to save valuable time when you need to create a legitimate document with all the important clauses. Here are some instructions on what to include in your agreement.

Step 1 — Effective date and the parties

At the beginning of the commission agreement template, mention the date when it is created and the names of the contractor (or sales representatives) and the company that ordered the service.

Step 2 — Engagement of contractor

In this part of the document, there should be an outline of the conditions of the contractor’s work –  when the service will commence, what the term will be, a detailed description of the type of services that are going to be provided, and what hours of service will be. The other important information might be the invoicing terms, the amount of base compensation, any bonuses the company might reward the contractor with, and the amount of sales commission that the contractor will get along with other compensation.

The same section should specify that if the contractor breaches the terms of the contract, they will not be entitled to getting their compensation. The terms when it might happen should be explicitly outlined by the company.

It is common to include the terms of the contractor’s engagement in a separate exhibit that comes along with the main document. In this case, the commission agreement template should state that a substantial description of the services and compensation are set forth in the exhibit.

Step 3 — Independent contractor relationship

This section of the commission agreement should state that the parties work as independent contractor and the company and it means that it is the contractor’s obligation and responsibility to pay and withhold taxes connected with their services. The contractor also has the right to choose the manner in which they will perform their services.

Step 4 — Indemnification of the company

Further, there should be a provision about the company being held harmless by the contractor against all liabilities and losses connected with the performance of the service.

Step 5 — Proprietary rights of the company

The commission agreement template should explicitly set out the proprietary rights of the company. For instance, the parties might agree that all ownership, title, and intellectual rights in the services developed for the company belong to the company. The other aspect might be that the result of the contractor’s service is considered the company’s sole and exclusive property.

Step 6 — Contractor covenants

This provision in sales commission agreements is one of the most important ones. The most common covenants in a commission agreement are:

  • non-competition clause — the contractor agrees that they will not engage in the cooperation with the company’s competitors or clients for the term of the commission agreement and the specified amount of time after unless the company provides their approval in writing
  • non-solicitation clause — the contractor takes an obligation to not in any way persuade any employee, contractor, client, or vendor of the company to change their relations with the company for the term of the agreement and the specified amount of time after
  • non-disparagement clause — the contractor cannot disparage, insult, harass or embarrass the company using any public or private means of communication
  • confidential information — the contractor agrees to hold confidential all the company’s trade secrets made known to them during the performance of service

Other important aspects to cover are the contractor’s remedies for breach of the commission agreement, representations, and warranties, disgorgement of profits in case of the contractor’s breach of the agreement, etc.

Step 7 — Notices

This part of the commission agreement template should state that all the notices regarding the commission agreement should be given in writing.

Step 8 — Return of materials

You should mention that the contractor should return all physical materials that belong to the company given to them in connection with the service to be performed. The contractor should also agree to not retain any of those materials.

Step 9 — Miscellaneous

It is up to you whether to include other miscellaneous provisions in the commission agreement. it is typical to include Waiver, Assignment, Dispute resolution, and Governing law sections. The more provisions the parties include, the fewer chances will be that any disputes arise.

Step 10 – Signatures

The last step is to include the signatures of the parties. This way, they will indicate their consent to everything outlined in the commission agreement. Along with the signatures, names and titles of both parties’ representatives should be included.

Our free commission agreement form is at your disposal — use it to save time on creating your commission agreement. However, if you want to get an entire agreement written specifically for your business, better consult an attorney or law firm.

Published: Jul 30, 2021