Commission-based sales rep contracts are widely used by startup companies to incentivize their reps and to drive revenue growth. However, these arrangements can also lead to disputes and legal challenges if not properly structured. At Sanders & Montalto, we recognize the importance of protecting both businesses, sales reps and employees through well-drafted sales commission contracts. Essential protections that should be included in all commission-based contracts, for fairness and clarity,are as follows:
1. Clear Definition of Terms
One of the most crucial elements of any sales commission contract is the clear definition of terms. Ambiguities can lead to misunderstandings and disputes. Key terms such as “commissionable sales,” house accounts,” “charge-backs,” and “territory” should be explicitly defined. Ensuring that all parties have a mutual understanding of these terms can prevent conflicts down the line.
2. Detailed Commission Structure
The commission structure should be detailed and unambiguous. This includes specifying the commission rate, the basis for calculation (e.g., net sales or gross sales), and the timing of payments. These essential terms are even required by certain State laws, including California’s. It is also important to outline any thresholds or tiers that affect commission rates. For instance, will higher sales volumes result in higher commission rates, or even possibly lower commission rates as we have seen in certain contracts presented by our clients? Providing a clear and detailed commission structure helps set clear expectations and reduces the potential for disputes.
3. Payment Schedule
A well-defined payment schedule is essential. This should include the frequency of commission payments (e.g., weekly, monthly) and the timing relative to the sales. E.g. within 30 days after shipment. Or as some manufacturers prefer – within 30 days after collecting invoice price from a customer. A transparent payment schedule ensures that sales reps and employees know when to expect their earnings, fostering trust and satisfaction.
4. Alternative Dispute Resolution Mechanisms
Despite best efforts, disputes can arise. Including an alternative dispute resolution mechanism in the contract can provide a clear path for resolving disagreements without resorting to lawsuits in court. This might involve mediation (a settlement conference with a retired judge or an attorney with expertise on the issues) or arbitration (a private adjudication out-of-court). Having a predefined method for handling disputes can save time, money, and relationships by providing a structured way to address and resolve legal issues.
5. Termination Clauses
Termination clauses are vital for protecting both parties. These clauses should outline: a) the conditions under which the contract can be terminated by either party (for cause, or without cause aka “at will”) and; b) the implications for commission payments. Most importantly,what happens to commissions if the sales rep/employee leaves or is terminated. We advise our sales rep clients to garner termination clauses commensurate with the amount of time it takes to develop their markets and sales. For example, a designed in component in a defense weaponry system might take 18 months to 2 years for sales to develop. In that instance, while the sales rep may have worked for free for up to 2 years, a two-year post-termination commission payment provision should be included in the contract. For equity’s sake. That does not mean that the company cannot terminate the sales rep, only that if they do they have to pay commissions on post-termination sales for an extended period of time. That is only fair under this scenario.
6. Non-Compete and Non-Solicitation Clauses
To protect business interests, it may be necessary to include non-compete and non-solicitation clauses in the contract. These clauses can prevent former employees from competing with the business or soliciting its customers for a specified period after the contract ends. However, these clauses must be reasonable in scope and duration to be enforceable. And in certain states, such as California, post-termination non-compete agreements are banned in favor of free business competition.Consult with a legal expert for clarity.
Conclusion
Commission-based sales models can be highly effective for driving performance and rewarding sales.. However, without proper protections, they can also lead to significant disputes and legal challenges. By including clear definitions, a detailed commission structure, a transparent payment schedule, dispute resolution mechanisms, fair termination clauses, and appropriate non-compete and non-solicitation clauses, businesses and sales people can protect their interests and foster a fair and motivating environment.At Sanders Montalto, we specialize in crafting customized sales commission contracts tailored to the unique needs of the parties. For more information on how we can assist you in protecting your business, please visit our contact page at sandersmontalto.com/contact.
