At What Point are Commission Sales Earned?

As 2011 gets underway and economic conditions improve, many companies will be hiring new employees and sales representatives. In so doing, these companies will be executing employment contracts and relying on compensation management as many of these contracts will involve sales commissions and Sales Commission Software.

While people may think compensation programs are pretty straight forward, that is not necessarily the case. One question that frequently comes up is: At what point are commission sales earned? Like, when a sale is made, a sales person assumes he or she will be paid a commission on it, right? Not always - there can be extenuating circumstances.

For instance, suppose a sales rep makes a number of sales and then changes jobs or is let go. Say a sale is not competed until after the rep left the former employer. Should the rep still get paid the commission? You would think so since the person made the sale, but there can be a legal dispute over the sales compensation if the company fails to remunerate the sales person. Because of questions over commission sales, it's important that a sales rep knows the legalities of commission statements.

While there is no definitive answer to sales compensation problems, there are many factors that can be considered, such as state law, the wording of a written contract, and any other written communications on the topic of pay commission. These factors can all help clarify the answer to the question: At what point are commission sales earned?

If a dispute over pay commission goes to court, there are universal guidelines that federal and state courts use in deciding this issue. Both the company and the sales representatives should be familiar with these guidelines in order to protect themselves in the event of a dispute.

The Employment Contract

When a sales representative is hired, he or she will be provided with an employment contract that spells out the terms for commission sales and describing the obligations of the company and the employee or sales representative. In the event of a dispute, this contract can be used in court to win or lose. For instance, if the company contends that it's understood that commissions are only paid if payment for goods is received, such language must be stated in the contract. Nothing is "understood". If the contract merely stated the rep was to receive a 5 percent sale commission, then payment for the goods was not a part of the agreement, and the company would have to pay that percentage commissions on sales whether payment was received or not. Everything needs to be spelled out in detail in the employment contract for protection of the company and employee alike. However, most companies look after their own interests alone when creating commission sales contracts. Therefore, the sales person should also get legal advice before agreeing to a commission sales contract that may not protect his best interests.

The Understanding of the Parties Concerned

In the absence of specific provisions in the employment agreement or commission sales contract, the Courts will consider communications between the company and the sales person over the course of their relationship during the sales person's employment tenure. Case in point: say that sales compensation is not received for completed sales, and the sales rep makes a written inquiry about the commissions being due. Say the company replies that since there was no payment for the goods, they can't pay commissions on the sales. Then, if such a response is not challenged by the sales person, the Courts may look at that as an admission by the sales person of a specific company policy.

Statutory Timing

In some states, the Court's attitude is favorable to the sales person if that person completed all of his or her duties to secure the commission sales, and then some arbitrary event out of the sales rep's control occurred after the sales person's termination from the company. Such a case occurred in Maryland, where an employment agreement was invalidated because the earnings of commission sales were predicated by factors beyond the sales person's control. The Court held that a provision in the contract requiring the sales person to remain in the company's employ to earn the commissions was invalid, against public policy and against Maryland's Labor and Employment laws, thus permitting the sales rep to recover up to three times the amount of the unpaid sale commission and attorney fees.

So it's important for both companies and sales reps to know their rights, especially when the termination of a sales compensation agreement occurs. Besides the actual sales agreement, other communications may be pertinent in the event of a dispute, including all written communications that can impact each party's understanding of when sales commissions are earned.