Sales commission agreements are a crucial legal document for all businesses that work with sales agents. They offer benefits to both employers and employees. A well-drafted sales commission agreement clearly sets expectations between businesses and sales agents, helping to prevent disputes and protect businesses from liability.
This is a comprehensive guide to creating and understanding sales commission agreements, particularly for businesses and sales professionals in the UK. We'll cover the essential elements of these agreements, their importance in incentivising and managing sales teams, and how Lawhive can assist in drafting customised, legally compliant agreements that protect both employers and employees.
We’ve written this for:
Business owners and entrepreneurs
Sales managers and teams
Corporate legal departments
Human resources professionals
After reading, businesses will be familiar with the legal aspects of commission structures and understand the benefits of seeking legal services for drafting or reviewing their sales commission agreements.
Our contract review solicitors are experts in drafting and reviewing sales commission agreements that align with the business goals and legal standards of small businesses and corporates.
What is a sales commission agreement?
A sales commission agreement is a legally binding contract between a sales agent and a company. The agreement outlines the terms and conditions of the sales agent's commission, and may include the sales agent's responsibilities. Solicitors can ensure these contracts meet the aims of the company and sales agent.
They play an important role in incentivising and compensating sales teams. Many businesses include personal incentives for sales reps as motivation to boost sales, including bonuses for achieving a number of sales, or tiered commission percentage structures.
With their incentives, including commission structures, sales commission agreements are crucial for motivating performance and ensuring fair compensation for sales agents.
Key elements of a sales commission agreement
When drafting a sales commission agreement, you should ensure you include the following essential terms.
Commission structures
There are a number of different types of commission structures including fixed, tiered, and percentage-based:
Fixed commission structure – also known as a fixed rate commission or single rate, is a sales commission agreement where a salesperson receives a set percentage of the sale for each sale they make. The percentage is fixed and the salesperson receives the same percentage for each item, whether the sale is large or small
Tiered commission structure – in this type of agreement, sales personnel receive different commission rates for performance levels. The purpose is to motivate salespeople to achieve higher sales volumes and exceed targets
Percentage-based commission structure – with this type of agreement a salesperson earns a percentage of the sales they make
Payment terms
Agreements should outline the timing and method of commission payments, including the for earning and receiving commissions. Make sure your agreements set out exactly when sales reps earn their commission. Depending on the circumstances of the sale, there can be a wide time lag between earning a commission when the sale is made versus when the order is paid for by the client.
Your agreements should also outline when commissions will be paid and the date up to each commission is calculated. As an example, an agreement may specify that commissions are paid on the 25th of each month and the payment is made up of all commissions earned before the 20th of the month.
Termination and clawback clauses
Unfortunately, not all sales go smoothly. Anyone who runs a small business, or works in a product-based business knows that refunds, cancellations and payment defaults can hit your bottom line, transforming a logged sale into a non-sale.
Your agreement should cover instances where a sale is cancelled and establish how commissions are impacted in these scenarios. You can do this by including a clawback clause in your agreements. A clawback clause is a contractual clause that requires sales personnel to return money to an employer under certain circumstances.
They are often used in sales commission agreements to recover commissions paid when a sale falls through. They can also be used to account for misconduct cases, allowing a business to recover money paid to employees who don’t follow company policy or commit fraud.
Dispute resolution
Ideally, clear and comprehensive terms and conditions in well-drafted sales commission agreements help avoid disputes by providing clarity to sales reps. However, disputes, can still arise as they do in many employer-employee relationships.
This may be because of unclear commission plans, failure to pay commissions, disagreements over the payment of commission and the timing of commission payments.
That’s why it is important for businesses that work with salespeople to include clauses for resolving disputes related to commission payments. Sales commission agreements may include provisions for submitting a grievance to give employees an avenue to raise a complaint and highlight how and when alternative dispute resolution mechanisms, such as mediation can be used.
Legal framework for sales commission agreements in the UK
UK employment law impacts commission agreements, giving workers protection via worker rights. Commission must be separate from an employee’s base salary on their payslips. Your employer cannot pay you a lower salary because you were paid a commission. If an employer doesn’t pay an employee the commission they are owed, this may be considered an unlawful deduction of their wages.
Employers cannot pay only commission if it does not equal or exceed the National Minimum Wage. Workers may be able to make an employment tribunal claim relating to lost commission if a clawback provision is too broad or vague, or you if they weren’t given adequate notice of the provision. Clawback provisions must be clearly defined and reasonable. The circumstances in which commission can be reclaimed must be clearly set out.
Tax considerations
Commission payments are classed as taxable income and should be paid through an employee’s salary. It may be necessary to speak to tax experts and accountants to understand the tax implications of paying commissions before finalising your sales commission agreements.
Customising a sales commission agreement
As with any contract, it is essential to tailor it to your specific circumstances and business needs. Tailored sales commission agreements to reflect specific sales roles, industry standards, and business objectives.
There’s no doubt you can find many templated sales commission agreements online, downloadable with just one click. You might think: “Job done, that’s another thing ticked off my to-do list.”, however, boilerplate clauses can land you in hot water.
Boilerplate clauses may include information about legal protection for parties, including limitation of liability or indemnification provisions. However, when these templated clauses are not properly customised inconsistencies and contradictions can exist in the agreement that compromises its enforceability and open the door for legal challenges in disputes.
Customising a sales commission agreement ensures that the agreement complies with UK laws and regulations, and reflects industry best practices. No contract should be fixed in perpetuity, it’s vitally important to regularly review and update agreements to reflect changes in the law or business operations.
Common pitfalls in sales commission agreements
These are complex agreements that require tailoring based on careful understanding of business needs. Here are the most common pitfalls:
Ambiguity and vagueness - the risks of unclear or poorly defined commission structures. This risk can be mitigated by clear and comprehensive terms drafted by an expert lawyer. Any areas of conflict should be resolved with the sales representative before signing the agreement
Disputes over performance metrics - issues that can arise when sales targets are not clearly defined or are unrealistic. A well-drafted agreement can add clarity to targets. However, it is also important to ensure they are realistic and attainable, as targets should be within salespeople’s reach to ensure a motivated workforce. Despite these mitigating efforts, disputes can still arise. They can be resolved through clear dispute-resolution mechanisms
Non-compliance – businesses that fail to comply with the legal requirements of the jurisdictions they operate in can lead to potential disputes or legal challenges. These risks can be avoided by working with an expert in the locations your agreements apply to
How often should sales commission agreements be reviewed?
Sales commission agreements should be reviewed at least annually to ensure they remain up to date with legislation and the businesses’ needs. They can be reviewed more frequently when there are changes to job roles and new contracts are won.
Here’s when to review your sales commission agreements:
Business model changes – when a business changes its model for example from traditional sales to a subscription model
Sales goals – it’s a good time to review commission structures when sales goals change, due to market shifts or a new service is launched
What should be included in sales commission agreement?
Here’s a handy summary of what you need to include in a sales commission agreement:
The names of the parties involved
The commission structure
Performance criteria
Payment terms - including frequency and method of payment
A termination clause
Confidentiality and non-compete clauses
Dispute resolution clause
Clawback clause
How much does it cost to draft or review a sales commission agreement?
The cost for a licensed solicitor to help with a sales commission agreement is dependent on many factors including the complexity and specific requirements of the case. On average it is expected to range from £100-£150, but in some cases, it could cost as much as £200.
Why choose Lawhive for sales commission agreements?
Here are some of the top reasons our clients choose our specialist lawyers to solve their issues:
Expertise in employment and contract law - Lawhive’s solicitors have a deep understanding of UK employment and contract law as it applies to commission agreements
Combination of technology and legal expertise - we leverage technology to provide efficient and cost-effective services
Tailored solutions - we provide customised agreements that align with business objectives and legal requirements
Legal assistance for drafting commission contracts
Having robust sales commission agreements protects businesses from potential disputes which can be costly and time-consuming.
Lawhive solicitors excel in drafting these complex legal agreements to your specific business needs and circumstances. This way you can be assured that your agreements are fit for purpose.
Contact Lawhive today for professional assistance from employment solicitors in drafting or reviewing sales commission agreements and book your free case assessment to discuss your circumstances.