When Sales Commissions Become Earned

When Sales Commissions Become Earned

For sales professionals, commissions are typically a significant portion of a compensation package.  While the upside potential to commissions appears limitless, there are downside risks if a sales professional fails to take certain precautions.

A common legal dispute arises over outstanding earned commissions when the sales professional has cultivated a client relationship, closed the deal and all that remains is for the funds to be received. In some situations, there is a substantial time period between closing the deal and the customer paying. If the relationship between employer and sales professional terminates between the deal closing and incoming money, a dispute is likely.

Under most employment agreements, a sales professional is typically not entitled to payment unless the commission is earned.  

Sales commissions, and specifically determining when a commission is earned, should be worked out during the hiring stage. The circumstances of how and when a commission becomes earned should be flushed out by the sales professional.

The employer and sales professional’s respective expectations of earned commission ideally should be the same.

From the sales professional’s perspective, it’s best for the commission to be earned after performing all (or substantially all) obligations to close the sales deal.

From the employer’s perspective, it’s crucial to establish when the obligation to pay the earned commission is triggered. Although a commission may be earned upon the sales professional “closing the deal,” the obligation to pay may not arise until after the funds are received.

The best protection for both the sales professional and the employer is a written agreement. Although oral contracts may be enforceable subject to the Statute of Frauds, proving what an oral contract said or did not say is uncertain  and very expensive. Sometimes, the parties truly forget what they talked about. In other situations, one party will bend the truth or say an outright lie.

Guidelines for a Written Agreement

  1. Be sure the written agreement is well drafted.

A court will first examine the plain language of the contract or agreement when interpreting the contractual language. If the language at issue is clear and unambiguous, the court’s interpretation starts and ends with the four corners of the contract. Under these circumstances, only one reasonable interpretation exists in establishing when a commission is earned.

Clear and unambiguous language also cuts down on litigation expenses while vague and ambiguous language does the opposite. Courts resort to a secondary set of rules to interpret contractual language that is vague and ambiguous. For example, courts may look at evidence outside the contract to explain or define certain terms. And under circumstances when one party drafts non-negotiable terms, ambiguous terms are interpreted in favor of the non-drafting party and against the drafting party.

Furthermore, if both sides in the agreement offer competing interpretations by pointing to language that is”reasonably susceptible” to their respective interpretations, this ambiguity must be resolved through a lawsuit. As a consequence, commercial litigation becomes very expensive.

Remember, a poorly drafted written agreement is not much better than proving an oral contract, especially when dealing with whether a commission is earned or other payment obligations.

  1. Include contractual language that clearly expresses the earned commission conditions.

A deterioration in the business relationship, different job opportunities and other situations can happen between closing the sales deal and earning the commission. Although contracts in Arizona create an implied duty of good faith and fair dealing that may prevent an employer from wiggling out of paying commissions, it’s better to have express language that deals with this issue rather than rely on an implied duty.

  1. Use a lawyer to draft the written agreement.

To save money, it is very common for a party to use a prior and unrelated written agreement by merely changing a few terms. Others search for and use agreements available on the Internet, a document preparation service or a relative who once took a business law class in undergrad to prepare the agreement. The end result is likely a poorly drafted written agreement riddled with vague and ambiguous terms and irrelevant and unnecessary provisions.

Lawyers love throwing mud on the wall and seeing what sticks. And nothing provides more ammunition to employ this litigation tactic than a dispute revolving around an oral contract or a poorly drafted written agreement.

Each business transaction is unique. It is a solid business practice to use a lawyer to assist in preparing written agreements, especially when dealing with important terms, such as when a commission is earned.

Flushing out the circumstances of when a commission is earned can save both parties a lot of time, effort, money and anguish should their relationship terminate.

Contact Paul if you need assistance with preparing, revising or negotiating employment and independent contractor agreements, or need assistance in attempting to resolve a dispute.



Posted on

October 18, 2015