Getting Paid Under the Terms of a Commission Compensation Agreements
In recent months, I have been working with clients to analyze draft, secure, and enforce commission compensation agreements. I have drafted a number of these agreements in the past without incident. The last time I litigated a commission agreement, Bill Clinton was President and Monica was not on the event horizon. So, I was bemused to learn that people are still struggling with them. Then I read the documents at issue and could hear the voice of Tevya, the lead character in Fiddler on the Roof, sighing with an “Oiy”!
A good commission agreement is very straightforward, notwithstanding the legal quirks of local jurisdictions. However as in all things, it is the details that “will kill ya”. An agreement which does not reflect an understanding of both customary industry practice and local law, can hit all of “high notes” and still craft an intellectual land mine waiting to explode. Poor conceptualization and drafting also can contribute potholes and worse, inconsistencies.
So what are the basics? A commission agreement must state how the commission is earned, what the selling entity or person must do complete their contract performance. The conditions of performance are a matter of contract negotiation and the parties may agree to anything they wish; well almost anything. They can’t agree to violate the law, including wage laws. In different situations, performance may be deemed upon completion of any of the following: identification of a new lead, working the lead, bringing the lead to the table, securing a written offer, securing a signed contract, or securing a purchase order.
A commission agreement must state when the earned payment becomes due. There are two considerations here, when the principal pays the service provider and when the service provider pays its sales force or lead generators. Agreements related to the sale of software and goods often provide that the commission is due either on the date(s) payment is received for the product or within a specified time thereafter. Industry practice comes into play here. Generally real estate sales agents are paid at the settlement table out of settlement proceeds when the money changes hands, actually when the money changes internet addresses. Real estate commercial leasing agents are generally paid in two tranches, one upon ratification and one upon occupancy.
The timing of service provider payment of sales staff and lead generation sources is governed primarily by contract but also may be regulated by law. All jurisdictions have wage laws which require payment of employees in a timely manner. The homely, “Nothing comes easy” clearly was coined to apply to the deciphering of wage and hour statues. Two things are clear. Job titles don’t matter and the parties cannot agree by contract to circumvent the law.
The applicability of these laws depends upon whether or not the person to be paid is deemed to be an “exempt” or “non-exempt” employee or an independent contractor. These determinations are based entirely upon the commission earner’s duties and the principal’s control over the earner’s work. The statutes provide some guidelines but little interpretation. The case law is fact specific and not usefully predictive. The decision to take a commission agreement outside of wage law coverage must be implemented through a best but un-guaranteed effort to craft the agreement language discussion of duties and work controls. This is important. A violation of wage law can result in a punitive penalty. Fortunately most wage laws do acknowledge the right to contract to pay partial commissions as they are received and to withhold, escrow or deposit disputed commission amounts.
Commission agreements must state the extent of the application of a commission to future sales. For example, a lead or finder’s fee or earned commission will apply to the first sale but may or may not apply to all sales. An earned commission will apply to the sale of a certain item or service but may or may not apply to subsequent sales or sales of different products and services.
Commission agreements must address the impact of the relationship’s termination. The courts protect sales principals and agents from “bad faith” terminations to avoid commission payments. The courts are more helpful when presented with a record documenting services and the acceptance of those services. However, the right to earn commissions post termination must cease at some point. Agreements address this issue with a “tail provision” which states how long after termination a lead or work entitles the source to commission for post engagement transactions. Wage laws also may be implicated here.
Commission agreements must set the commission and commission sharing structures. Commission fee rates are generally tied to sales volume and products and services sold. Commissions generally are calculated against gross payments less referral fees, outside commission payments, and expense or commission advances. Commissions are frequently shared between team members and agreements must set proportional allocations or a method to determine and implement the allocations.
While working on my clients’ projects, our legal research showed that most commission disputes arise from either bad faith terminations or claims for post-termination commissions. This warms my litigator’s heart (oxymoron). Putting on my counselor’s hat for a moment, a commission agreement must address the payment of commission earned before termination and the rights and limitations of commissions arising from projects worked on before termination which were not realized until after termination. Again, wage laws also may be implicated here.
Lastly, commission and/or related employment or independent contractor agreements should state who controls the customer and the rights to customer work, services, and/or procurements. The principal and sales staff or lead generators all have an interest in these relationships. Practices vary between industries, but one principle always applies. Deals originated while the sales staff and etc. were affiliated with the principal belong to the principal and are covered by the agreement.
Addressing commission agreement issues is best done by written agreement at the beginning of a relationship. Much like buy-sell agreements, efforts to negotiate commission rights and duties become progressively more difficult as the time nears for fee realization, e.g. people are counting their money. Failure to document this agreement timely too often results in the unnecessary costs of litigation.
In closing, I want to unabashedly promote my son’s work. Seth has spent the last two years raising money to start a school for disabled children in India. We are traveling there with him to open it in mid-July. Check it out at www.harmonythrougheducation.org.