What Is a Commission Agreement?
A commission agreement, or a sales commission agreement, is a written contract between two people or businesses. It explains how one person will be paid for helping another make a sale, bring in new clients, or close a deal. The kind of work can vary depending on the industry or task.
Instead of being paid a flat rate or an hourly wage, the person earns money based on the results they bring. This is called a commission, which is usually paid as a percentage of the sale or as a fixed amount for each deal.
Commission agreements are helpful because they make sure that both sides understand:
- What kind of work qualifies for a commission
- What each person is responsible for
- How much money will be paid
- When the payment will happen
Once both parties agree and sign the agreement, it becomes legally binding. That means each person must follow the terms and conditions laid out in the contract. A strong commission agreement includes the following aspects:
- A promise by both parties to act honestly and fairly
- A rule to keep all business and client information private
- Clear steps for how to end the agreement if needed
Using a commission agreement form is a simple way to record this information and protect both parties from misunderstandings down the road.
When to Use a Commission Agreement?
You should use a commission agreement any time someone is being paid based on the results they deliver. This contract helps ensure everyone is on the same page about how the commission will be earned and paid.
They’re commonly used in retail (product sales), real estate, insurance, marketing, and software sales, where work is tied to performance instead of time worked.
Here are some common situations where you may need a commission agreement:
- You’re hiring someone new, like a salesperson or a contractor, and a part of their pay will depend on how much they sell or how many leads they bring
- You’re promoting an employee to a role where they will start earning a commission
- You want to change how someone is paid, such as switching them from an hourly wage to a commission-based pay
- You’re working with someone temporarily, such as hiring a freelancer or a consultant, and you plan to pay them per project, lead, or result they secure.
How to Write a Commission Agreement
A well-written commission agreement helps both sides set clear expectations and understand the nature of the work, how the compensation is calculated, and how payments are handled.
Here are the key sections you should include when creating a commission agreement:
Identify the Parties
List everyone’s full legal name and contact information. Mention who is offering the commission (the principal) and who is earning it (the agent or contractor).
Define the Commission Structure
Make sure your sales commission agreement includes information about how the commissions will be calculated. Be transparent and explain clearly why it’s set up that way. Include:
- Commission rate or percentage. Clearly state the rate the person will earn per sale. This would be a fixed percentage or vary based on performance.
- Sales Targets or threshold. Clarify whether the commission applies after hitting a specific sales goal or not.
- Whether commission is earned on payment or delivery. Specify whether the commission will be earned when the customer pays or when the product or service is delivered.
- Bonus opportunities, caps, or clawback clauses (if applicable). State whether there are any bonuses for hitting goals or limits on how much commission can be earned. Also state the rules for taking back commission if needed.
Outline Payment Terms
State when and how the commission earned will be paid. State payment frequency (e.g., weekly or monthly payments), specify the payment methods, and other documentation that may be required to process payments (such as invoices, etc).
Describe the Services
Clearly state all the tasks, activities, and duties the person is expected to perform as a part of the agreement to be eligible for the commission. Be specific about what’s included and what’s not.
Set the Agreement Duration
Add the agreement’s start and end date. Specify whether the agreement will automatically renew or end after a specific period of time.
Explain the Termination Terms
Include a section on how either party can end the agreement should they wish to. Mention whether a notice is required. State what would happen in case of any pending payments and what the final responsibilities would include (if any). Include a clause for dispute resolution, such as mediation, arbitration, or litigation.
Add Confidentiality or Non-Compete Clauses (If Needed)
If the work involves access to sensitive information (such as business information or client data), you can include a clause within your commission agreement form that:
- Prevents individuals from sharing confidential information
- Limits the ability to compete with the business during or after the agreement.
These clauses are optional but can offer extra protection. Review your state’s laws to ensure that any clause will hold up in court, as many states have restrictions on non-compete agreements.
Before signing the agreement, take the time to walk through it together. You can do that in person or through a virtual meeting. Talking through the terms helps both sides understand what’s expected and can help resolve any confusion that anyone may have.
Sample Commission Agreement
Use our sample commission agreement template as a guide on what to include in each section. Fill out our step-by-step questionnaire and download your finished commission agreement in PDF or Word format.
