Employee commission agreement
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Why pay on a commission basis?
When you are growing a sales team, you'll want to reward hard work, motivate employees to perform and instil loyalty.
Paying employees on a commission basis can help engage average performers to make more sales, and keep the best performers from joining a competitor, working for as a freelancer or starting their own agency.
It also means that you as the employer (also known as the principal) matches costs more closely with sales. Your team only is rewarded when profits are high. Paying on commission is a transparent and fair way of rewarding the best staff.
A well written sales commission agreement ensures that everyone is held accountable for pay and performance by communicating clear and specific remuneration structures, and reduces the risks of employees stealing clients, under the table deals, and low motivation. It the salesperson performs as agreed, they will be well rewarded.
You should use a commission agreement whenever you hire a new sales representative or promote an employee into the position of a sales agent and that person is paid partly in the form of a revenue share.
What is a sales commission agreement?
A sales commission agreement is a legally binding contract between a sales agent (in this case, an employee) and a principal that sets out the terms and conditions under which revenue (sometimes after costs) will be shared.
Commission is a variable remuneration additional to basic pay that is paid on the basis of the level of performance of an individual and/or the business as a whole. The commission fee is transparent, based on the revenue or profits the salesperson and/or their team generates.
Commission structures are commonly found in sales fields in industries such as property sale and purchase (estate agency), financial services and high-value or repeat-sale consumer goods and services.
Supplement an existing employment contract or add to it
Most employers will use this sales commission agreement to supplement an existing contract of employment.
There are good reasons why that might be beneficial:
- you might use a standard version employment contract for all your staff and want to avoid changing it
- the number of employees permitted to sell on commission is low
- the period during which the payment model will operate is limited or could be limited, after which the employee will be paid on a normal wage basis
- you have a union agreement regarding the content of your employment contracts
However, the words within it can also be added to any contract, such as our standard one for any employee.
If used as a stand-alone agreement, this document does not affect terms of the employment contract and deals only with matter relating directly to selling.
Considerations when using sales commission agreements
An employment contract usually includes a confidentiality clause that is designed to keep trade secrets confidential.
If it doesn't, then you should consider having the employee sign a separate non-disclosure agreement. You could include such terms in the sales commission contract, but the risk is that if the commission arrangement ends, the confidentiality requirement also ends and confidential information might leak.
Basic salary requirements
The basic salary you offer an employee needs to meet the National Minimum Wage. Commissions earned should be additional - effectively a bonus.
There is no legal requirement for a particular commission split. It could be 5% or 50%, calculated on the gross sales price or a calculated gross profit.
The employee might have to hit a sales quota to be eligible to be paid on a commission basis or there may be a tiered commission structure that becomes more rewarding as sales increase.
You should also think about payout terms. You might pay every calendar month in line with basic salary, or you might pay at the end of the year. You should consider not only how to motivate employees but also how to benefit from the additional cash flow they bring.
Balancing motivation against aggression
The point of sales commission agreements is to motivate employees. But you may want to place limits on what employees can do in order to make sales. Specifically you might not want an overzealous marketer to damage your brand by hassling prospective clients too often or too much or by creating promotional materials promising a product or service that you can't deliver.
- Legal framework
- Basis of agreement
- General duties to sell
- Commission earnings and payment procedure
- Non-compete provision
- Termination clauses
- Other appropriate legal provisions to protect your interests
This document was written by a solicitor for Net Lawman. It complies with current English law.
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