Brief Introduction About Sales Commission Agreement
A company that sells goods needs salespeople to sell them to customers. Large corporations employ their sales team. But small and medium companies can engage salespeople on a contract basis. They are not their employees but work for them for some time. These sales services can be offered by individuals or companies.
If you are a company hiring salespeople, you should have a sales commission agreement. Also known as a commission sales agreement, it is a contract between the company and the salesperson. It authorizes the salesperson to sell the products on behalf of the company. It specifies the conditions under which the salesperson will work. These include the duration of the contract, the amount of commission the salesperson will receive, manner of payment, and responsibilities of the parties.
This agreement should be used by a company that is hiring salespeople on a commission basis. Additionally, if you are an independent salesperson who is being hired by a company on commission, you should use this agreement if the company does not provide you with one. It will protect you from unfavorable situations like your client refusing to pay you on time.
Purpose of a Sales Commission Agreement
The main aim of this agreement is to ensure that either party is aware of the other’s expectations. It helps them to carry out their roles efficiently. It also protects them from potential disputes. It helps the company to set the obligations of the salesperson. He will be bound to follow them under the contract.
On the other hand, the salesperson will be paid a commission under the agreement. He can refer to it if the company does not pay him accordingly. Thus, it shields both of them from possible default by either party. Even if one party breaches the agreement, it will have provisions stating what is to be done in such a scenario. This prevents misunderstandings between the parties as they know what course of action they have to take.
Who Needs a Sales Commission Agreement?
If you are hiring a salesperson as an independent contractor, you should include certain extra provisions in the agreement owing to the legal status of an independent contractor. These extra provisions will state that the independent contractor is not an employee, partner, or agent of the company. It will have other relevant terms based on the applicable federal and state laws on independent contractors.
Contents of a Sales Commission Agreement
A typical sales commission agreement template will generally display the following terms:
- Names of the parties
- Date of entering into the agreement
- Authorization of the salesperson to sell the company’s products
- Nature of the agreement-exclusive or non-exclusive
- Details of the products to be sold including the selling price
- The geographical territory where the salesperson will sell the products
- Term of the agreement
- Commission- calculation, payment, time and mode of payment
- Performance incentives, if any
- Parties’ obligations
- Confidentiality
- Termination
- Notice
- Governing law
- Signature of the parties
How to Draft a Sales Commission Agreement?
Drafting a sales commission agreement is fairly simple. But it is important to keep in mind the following points:
- Authorization: State the objective of the agreement, that is, authorization of the salesperson to sell the company’s products. This clause can also include any additional conditions which he must follow when selling the products. For example, he cannot give discounts without the company’s approval. It should also state how he is required to record his sales so that the company can have a record of the same.
- Nature: Mention whether the agreement is exclusive or non-exclusive. If the agreement is exclusive, it means that the company will not hire any other salesperson to sell the same products. If it is non-exclusive, the company can hire other salespeople to sell the products.
- Commission: This term must mention the percentage of commission that the salesperson is entitled to and how it is calculated. It must also state when the commission will become payable? whether at the time of placing the order or when the order is completed and paid for. It should consider cancellation or refund of the product amount.
- Obligations: It is vital to include a non-compete clause to put the salesperson under an obligation not to engage with the company’s competitors for some time after the agreement ends.
Negotiation Strategy
The agreement should be fair to both parties. Both will negotiate for the best terms for them. Usually, the company has a greater negotiating power because it is in a more powerful position than an individual. The salesperson needs to be firm about his terms. Referring to a sales commission agreement sample may give him some clarity. Provisions such as the amount of compensation, duration of the agreement, and obligations should be discussed openly.
Benefits and Drawbacks of the Sales Commission Agreement
Benefits:
- It protects both parties from legal troubles as it addresses situations that may lead to disputes.
- It allows a company to maintain its sales budget as it has to pay the salesperson based on his performance.
Drawbacks:
In the absence of a training provision in the agreement, the salesperson may use aggressive tactics to sell the products if he is not adequately trained. This may drive customers away from the company.
What Happens in Case of Violation?
If the agreement is violated, the defaulting party can be sued in the local court of the state whose law governs the agreement. But if the agreement mentions a particular mode of dispute settlement, such as mediation(1), then that method has to be followed.
A sales commission agreement avoids miscommunication between parties that may lead to legal troubles. You can download a pdf for your reference. It helps if you get it reviewed by an attorney. This will ensure that all the relevant laws and regulations are complied with.