Commission Agreements: 4 Myths That Can Needlessly Expose Your Small Business to Legal Claims

This article exposes the myths associated with sales commission agreements, and explains how oral agreements or poorly drafted agreements can leave a company needlessly vulnerable to breach of contract claims

Copyright (c) 2008 Law Offices of Jonathan Cooper

Although several of the small business owners I have encountered in the past few years thought they were immune from being sued for unpaid commissions by their salespeople, they learned -- too late -- that New York's Labor laws dictated otherwise. As part of their Monday morning quarterbacking, these business owners came to realize that had they invested a modest amount of additional time and resources into drafting a comprehensive and clear commission agreement in the first place, they certainly would not face exposure to paying commissions at a salesman's wished upon (rather than agreed upon) terms, and perhaps could have prevented litigation altogether. After some further analysis, it seems that these business owners' surprise (and Achilles' heel) was the product of their belief in one or more of the following myths:

Myth #1 - Signing bonuses are inherently discretionary - New York's courts have held that where a signing bonus is guaranteed as a term of employment that is tied to the salesperson's job performance (such as the sale of a new account), and further, is not expressly made subject to management's discretion, the bonus is deemed wages under the Labor Law, and thus, cannot be forfeited if earned prior to termination and/or resignation.

Myth #2 - "If it Isn't Written, It Doesn't Exist - contrary to popular belief, just because a commission agreement is oral doesn't necessarily mean it is unenforceable. In that regard, while an employer can change the terms of an at-will employee's agreement prospectively, it cannot change the terms of the agreement retrospectively. Simply put, once the salesperson has already earned commissions at an agreed upon rate, the employer cannot go back and refuse to pay those commissions.

Myth #3 - Termination for Cause Is Cause for Forfeiture of Commissions - New York's Labor Law clearly states that commissions which are earned during employment (i.e., vested), cannot be forfeited as a matter of public policy.

Myth #4 - If It Isn't Clear from the Contract that a Commission is Owed, the Salesperson Can't Collect - a fundamental, and nearly uniform rule of law is that any ambiguity in a contract is construed against the drafter of the contract. As a practical matter, this means that the courts are obliged to side with the salesperson with regard to any provision in the agreement that does not make it patently clear as to whether, and if so, how much, commissions are owed for a particular sale.

As the foregoing makes clear, it certainly pays to have well-crafted and clear agreements with commission salespeople. The short-term cost in time and money will not only help avert misunderstandings, and thus safeguard company morale, but will likely save you untold sums of money by either minimizing, or preventing entirely, the costs of litigation.

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