Commission Agreement
Commission Agreement Generator
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Signature Requirements
Electronic Signature
This commission agreement is fully enforceable with electronic signatures under the ESIGN Act and UETA. Both the company and sales representative should sign before the representative begins earning commissions under these terms.
Sample Commission Agreement Generated by Legal Tank
Commission Agreement
Parties and Purpose
This Commission Agreement (this "Agreement") is entered into by and between [____________] ("Company") and [____________] ("Sales Representative"). Company engages Sales Representative to promote and sell the products and/or services described in Exhibit A (the "Products") within the territory defined in Section 2.1 (the "Territory").
Territory and Products
Sales Representative shall promote the Products within the following Territory: [____________]. The Territory [is / is not] exclusive. Company reserves the right to modify the Territory or Products upon [thirty (30)] days' prior written notice. Sales Representative shall not solicit or accept orders from customers outside the Territory without Company's prior written consent.
Commission Structure
Company shall pay Sales Representative a commission equal to [_____]% of the net revenue from all qualifying sales closed by Sales Representative within the Territory (the "Commission"). Net revenue means the total invoiced amount less returns, discounts, credits, shipping charges, and sales taxes. For the purposes of this Agreement, a "qualifying sale" means a completed transaction for which Company has received full payment from the customer.
Sales Representative shall also be entitled to: (a) a bonus commission of [_____]% on net revenue exceeding [$__________] in any calendar [month / quarter]; (b) a draw against commissions of [$__________] per month, which shall be recoverable from earned commissions; and (c) [residual commissions of _____% on recurring revenue from accounts originated by Sales Representative for a period of ______ months]. Commission rates may be modified by Company upon [sixty (60)] days' prior written notice.
Payment Terms
Commissions shall be calculated and paid on a [monthly / bi-weekly] basis, within [fifteen (15)] days after the end of each commission period. Company shall provide Sales Representative with a commission statement detailing all qualifying sales, commission rates, and amounts earned. Sales Representative shall have [thirty (30)] days to dispute any commission statement, after which the statement shall be deemed accepted.
View all 10 sections
Reporting and Records
Sales Representative shall maintain accurate records of all sales activities, customer contacts, and orders submitted, and shall provide Company with [weekly / monthly] reports as reasonably requested. Company shall maintain accurate records of all sales, revenue, and commissions and shall make such records available to Sales Representative for review upon reasonable notice.
Expenses
Sales Representative shall be responsible for all expenses incurred in the performance of duties under this Agreement, including travel, entertainment, office, and communication expenses, unless otherwise agreed in writing. Company shall provide Sales Representative with the following sales materials and support: [____________].
Independent Contractor Status
Sales Representative is an independent contractor and not an employee of Company. Sales Representative shall be solely responsible for all income taxes, self-employment taxes, and insurance. Company shall not withhold taxes or provide benefits. Sales Representative shall have no authority to bind Company or make commitments on Company's behalf except as expressly authorized in writing.
Non-Compete and Confidentiality
During the term of this Agreement and for [______] months following termination, Sales Representative shall not directly or indirectly sell, promote, or represent products or services that compete with the Products within the Territory. Sales Representative shall hold in confidence all proprietary information, including customer lists, pricing, and business strategies, and shall not disclose such information to any third party.
Term and Termination
This Agreement shall commence on [____________] and shall continue until terminated by either party upon [thirty (30)] days' prior written notice. Company may terminate immediately for cause, including fraud, misrepresentation, or material breach. Upon termination, Sales Representative shall be entitled to commissions on all qualifying sales closed prior to the termination date for which payment is subsequently received by Company, subject to Company's right to offset any amounts owed by Sales Representative.
Governing Law
This Agreement shall be governed by the laws of the State of [_____________]. Any disputes shall be resolved by [binding arbitration under the rules of ____________ / litigation in _____________ County]. This Agreement constitutes the entire agreement between the parties and may be amended only in writing signed by both parties.
What Is a Commission Agreement?
A commission agreement is a legally binding contract between a company and a sales professional or agent that defines the terms under which the individual earns commission compensation based on their sales performance. The agreement specifies the commission rate or commission schedule, the products or services eligible for commission, the point at which a commission is considered "earned," the payment timeline, and any conditions that may affect commission eligibility such as customer returns, cancellations, or non-payment. This document is essential for establishing clear expectations and preventing the disputes that commonly arise when compensation terms are ambiguous or undocumented.
Several states impose statutory requirements on commission agreements that make written documentation not merely advisable but legally mandatory. California Labor Code Section 2751 requires that all commission agreements be in writing, describe the method by which commissions are computed and paid, and be signed by the employer and the employee. Failure to comply can result in significant penalties, including the employee recovering unpaid commissions plus interest, attorneys' fees, and statutory damages. Other states with specific commission agreement requirements include Massachusetts, New York, and Washington, each with their own statutory provisions governing commission compensation.
The structure of commission compensation varies widely depending on the industry, the sales role, and the company's compensation philosophy. A tiered commission structure increases the commission percentage as the salesperson exceeds progressive sales thresholds, incentivizing higher performance. A draw against commission provides a guaranteed minimum payment that is deducted from future commission earnings, ensuring income stability while maintaining performance incentives. Residual commissions provide ongoing payments for as long as a customer continues to purchase, rewarding long-term relationship building. The agreement should also address split commissions for deals involving multiple salespeople and commission adjustments for discounted sales.
One of the most contentious provisions in any commission agreement is the clawback clause, which allows the employer to recover previously paid commissions if a customer cancels, returns products, or fails to pay within a specified period. While clawback provisions are common and generally enforceable, they must comply with state wage and hour laws that may restrict an employer's ability to deduct from an employee's wages. The agreement should also clearly address what happens to commissions upon termination of employment, including whether commissions earned but not yet paid remain payable and whether the salesperson is entitled to commissions on deals that close after their departure. When the commission earner is an independent agent rather than an employee, the agreement functions similarly to an create your independent contractor agreement with commission-based compensation.
| Commission Structure | How It Works | Best For |
|---|---|---|
| Flat Rate | Fixed percentage on all sales | Simple product sales, entry-level reps |
| Tiered / Accelerator | Higher % as sales thresholds are exceeded | Incentivizing overperformance |
| Draw Against Commission | Guaranteed advance deducted from future earnings | New reps or seasonal businesses |
| Residual / Recurring | Ongoing payments while customer stays active | SaaS, insurance, subscription services |
| Split Commission | Shared between multiple reps on a deal | Team-based or multi-territory sales |
Why You Need a Commission Agreement
You are hiring a sales representative and need a legally compliant commission agreement that clearly defines how commissions are calculated, earned, and paid to prevent future disputes and comply with state labor laws. Get a quote for your commission agreement to ensure compliance with California Labor Code Section 2751 and other state-specific requirements.
Your company operates in California or another state that requires written commission agreements, and you need to document the commission plan in compliance with California Labor Code Section 2751 before the salesperson begins work.
You are restructuring your sales compensation plan and need to formalize new commission rates, tiered structures, quotas, and clawback provisions in a written agreement that all sales team members will sign. Include the updated terms in your employee handbook for company-wide reference.
A departing salesperson is claiming commissions on deals in the pipeline, and you realize you need a clear agreement addressing post-termination commission rights to prevent similar disputes in the future.
You are engaging an independent sales agent or broker to sell your products or services on a commission basis and need an agreement that establishes the agent's territory, rates, and non-solicitation agreement generator.
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Intellectual Property
Key Sections in a Commission Agreement
Commission Rate and Schedule
Defines the commission percentage or flat amount earned per sale, including any tiered structures, accelerators, or multipliers for exceeding quotas. The schedule should specify rates for different product categories, customer types, or deal sizes.
Eligible Sales and Territory
Identifies which products, services, or customer categories are eligible for commission and defines any geographic or account-based territory assignments. This section prevents disputes about which sales generate commission credit.
When Commission Is Earned
Specifies the triggering event that causes a commission to become "earned," such as when the customer signs the contract, when the order is shipped, when payment is received, or when the service is delivered. This distinction is critical for determining post-termination commission rights.
Payment Terms and Draw
Establishes when and how commissions are paid, typically on a monthly or semi-monthly cycle following the earning trigger. If a draw against commission is provided, this section defines the draw amount, recovery terms, and what happens to unrecovered draw balances.
Clawback and Adjustments
Defines the circumstances under which previously paid commissions may be recovered, such as customer cancellations, returns, or chargebacks within a specified period. The clawback mechanism must comply with applicable state wage deduction laws.
Quota and Performance Requirements
Sets minimum sales quotas or performance targets that must be met to maintain eligibility for commission or to qualify for accelerator rates. This section addresses the consequences of failing to meet quota, including potential termination or rate reductions.
Post-Termination Commissions
Addresses the salesperson's right to commissions on deals that were in progress at termination, deals that close after departure, and residual commissions on existing accounts. This is among the most frequently disputed provisions in commission agreements.
Commission Agreement Legal Requirements
California Labor Code Section 2751 requires that commission compensation agreements be in writing, describe the method of computing and paying commissions, provide the signed agreement to the employee, and obtain the employee's signed receipt of the agreement.
Massachusetts Wage Act (M.G.L. c. 149 Section 148) treats commissions as wages and prohibits employers from withholding or delaying payment of earned commissions, with treble damages available for violations.
New York Labor Law Section 191(1)(c) requires that commission salespeople be paid according to the terms of the written commission agreement or, absent a written agreement, within a reasonable time after the commission is earned.
The FLSA requires that commissioned employees receive at least minimum wage for all hours worked, and if commissions do not meet the minimum wage threshold in a pay period, the employer must make up the difference.
State wage deduction laws restrict an employer's ability to implement clawback provisions by prohibiting unauthorized deductions from employee wages, and commission clawbacks may qualify as prohibited deductions in certain jurisdictions. The Department of Labor state directory provides contact information for each state's wage and hour enforcement agency.
Common Commission Agreement Mistakes to Avoid
Failing to put the commission agreement in writing in states like California that statutorily require written commission plans, exposing the employer to penalties, interest, and attorneys' fees.
Not clearly defining when a commission is considered "earned" versus "paid," which is the source of the vast majority of commission disputes, particularly regarding deals in the pipeline at the time of termination.
Including clawback provisions that violate state wage deduction laws, which prohibit employers from making unauthorized deductions from employee wages even for legitimate business reasons like customer cancellations.
Omitting provisions for split commissions on deals involving multiple salespeople, leading to disputes about credit allocation and creating a disincentive for collaboration between team members.
Failing to address post-termination commission rights, which results in default to state law that may be more favorable to the employee than the employer would have agreed to contractually.
Frequently Asked Questions About Commission Agreements
What is a commission agreement?
Does a commission agreement need to be in writing?
What is the difference between commission and salary?
How is sales commission calculated?
What is a draw against commission?
Can commission be taken back?
What is a clawback provision?
What states require written commission agreements?
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