Getting properly aligned is important. That’s true not only when using a dog bed, but also when using independent sales reps.
Sales reps generally receive commissions. When commissions systems are unclear, disputes arise. We don’t want disputes. You may think your commission system is clear, whether by tradition or otherwise. But it’s probably not as clear as you think. Unclear commission plans lead to lawsuits, especially after the relationship with a sales rep ends.
Here are ten tips for avoiding commission disputes. These tips are helpful whether your sales rep is an independent contractor or an employee.
1. Put the commission plan in writing, and get the rep to sign it. Many states require written, signed commission plans for employees. (California, I’m looking at you!) But even when not required by law, a clearly drafted and accepted plan is the best way to avoid disputes.
2. Define what constitutes a sale. Is a sale complete when the customer pays for the good? When the good is delivered? When it’s accepted? When some period for returns has expired? Whatever you decide, state it clearly.
3. Define when a commission is earned. Usually there are several things that have to happen before a commission is earned. List them all, and make clear that a commission is not earned until all of these things have occurred.
4. Specify the timing of when commission payments are due. For employee sales reps, you might have less flexibility than with contractors, since state laws often require that employees are paid at certain intervals. But you can also create some space for yourself in your definition of when a commission is considered “earned.”
5. Clarify whether the sales rep must still be employed (or still under contract) to earn a commission. This term will be viewed in tandem with your explanation of when a commission is considered “earned.” Some states (hey there, California!) require that the commission has been paid if the employee has basically done everything needed to earn the commission, even if employment has ended. Calling the rep a contractor won’t necessarily get around that, since as we know, California does not grant a lot of deference to classifying workers as contractors instead of employees.
6. Explain how the commission amount is calculated. The formula might be A times B times C. Whatever it is, write it out.
7. Clarify the relevant time period. If the commission plan is for 2022 only, say so. If the commission plan overrides all prior year plans, say that too.
8. What about charge backs? Are there circumstances when a commission might be paid but you’d have to recoup some of the payment through a charge back? Describe when chargebacks are permitted, if at all.
9. Don’t assume. Spell everything out. Just because there haven’t been commission disputes in the past doesn’t mean they won’t happen in the future. A recently departed sales rep is going to be more aggressive about a commission dispute than one who is still happily engaged, especially if the rep just closed a big deal was separated before the company received payment from the customer. Without a clearly drafted plan, that’s a lawsuit waiting to happen.
10. Write for the jury. A stranger reading your commission plan should be able to tell whether a commission is earned or not, how much the commission should be, and when the commission is due. It needs to be that clear. If there’s ambiguity, expect that the disputed term will be interpreted in favor of the sales rep. After all, you wrote the plan, not the rep.
Bonus 11th Tip: Don’t forget state law. State law may contain requirements for commission plans. Know where your salespeople are working and where they are selling. If multiple states are involved, consider adding a choice of law clause.
Getting aligned on commissions before there’s a dispute can go a long way toward preventing a dispute. Getting misaligned on a dog bed may lead to back pain or a funny picture, but getting misaligned on commissions can lead to expensive litigation.
© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.