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This article is written by Dhanya S Krishnan, pursuing a Diploma in Advanced Contract Drafting and Negotiation and Dispute Resolution from LawSikho

Introduction

Do you remember the days when sales representatives would knock on our doors and sell encyclopedias, often as a set? Have you ever wondered how much they earn by selling that one set of encyclopedias? The money they make off of one sale is called a sales commission. Sales representatives may either earn a base salary and sales commission or in some cases, their earnings are solely from the sales commissions. 

What is a sales commission? 

A sales commission is monetary compensation paid to the sales representatives based on the number of sales made by them. This is usually paid by the employer of a company to the employee in lieu of him/her selling the company’s products. This is offered as an added bonus to boost sales and employee morale. 

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Sales commission agreement 

The agreement is created between two or more parties wherein, one of them is a seller and the other is a salesperson. This agreement regulates the amount of money that will be paid to the salesperson as a commission. This will be the commission that will be paid per sale made. The agreement may also contain additional details such as the mode of payment of a commission, the date on which the payments will be made, and limits on the commission if any. 

Uses of this agreement 

The agreement ensures that there is a formal contract established which allows the sales representative to sell the goods and services of the company. It is a formal contract between the two parties and the company, through this agreement promises to pay compensation for the sales made by the representative. This agreement covers all potential scenarios to ensure that the two parties do not dispute.  A few main uses of this agreement from the perspective of a sales representative is as follows:

  1. The agreement sets out the commission amount/percentage and the date on which it will be paid. 
  2. It will also include provisions regarding default of payment and cancellation. 
  3. The representatives have a healthy competition. 

The uses of this agreement from the view of the seller are as follows: 

  1. The company will be able to motivate employees to increase sales. 
  2. The terms set out in the agreement will outline the commission structure and hence it would be easier for the companies to pay their employees accordingly. 
  3. The employees’ performances are acknowledged which increases the loyalty of the employee.
  4. Risks such as stealing clients and unlawful settlements are mitigated by entering into a good contract.

Drafting of a sales commission agreement 

There are a few clauses that are essential and must be included in every sales commission agreement:

  • Scope of the work: This clause will summarise what falls within the ambit of the contract. It will spell out the details regarding the activities that have to be performed by both parties.
  • Obligations of the party: This clause will set out the duties of both parties in detail. The parties have to fulfill these duties to uphold the contract. For instance, the clause will state the company’s expectations regarding the number of sales that the employee will be expected to make in a specific time period. It will also highlight the duties that the company has to perform such as supplying the goods to the employee on time to ensure that they are able to sell the same.
  • Payment of sales commission/sales commission structure: This is the main and the most important clause that is present in the agreement. This lays the foundation of the agreement. This clause includes the commission percentage/amount that will be paid and the specific time in which it shall be paid. 

For example, “The Company shall pay the Sales Representative/Agent a regular sales commission amounting to twelve percent (12%) of the aggregate amount made through the sales of the Company’s products. The company hereby agrees to pay the sales commission on a monthly basis.”

The agreement may however contain a schedule showing the fixed amount that may be paid to the sales representative on achieving a target and the date on which that commission may be paid. 

  • Confidentiality: As the title of the clause signifies, it guarantees that the employee maintains confidentiality especially in cases where the company has shared its trade secrets. Illegal usage of any confidential information shared by either party may result in the termination of the contract. 
  • Non-circumvention/Good Faith Clause: This is found in most agreements to make certain that parties act in good faith. It is usually inserted when the company wants to protect itself from any unethical practices that may be carried out by the employees. 
  • Term and Termination: This clause is very essential as it states for how long the particular agreement is enforceable and also states the grounds for terminating the agreement. The contract may end once the sales agent has made a particular number of sales or may end on a specific date. It may also contain a clause that states the agreement will be terminated if the sales agent does not reach a particular target within the first few months. 
  • Non-compete Clause: This states that the sales representative cannot work with its competitors or any other business closely involved with the company. This is to ensure no unethical practices take place. 

Sample agreement 

Sales Commission Agreement

This SALES COMMISSION AGREEMENT (“Agreement”) is being entered into on [●] day of [●] 2021 (“Execution Date”) at [●]

BY AND BETWEEN

BRIT BOOKS Ltd., a private limited company incorporated under the provisions of the Company Act, 2013, bearing CIN [●]  and having its registered office at [●] (herein referred to as the ‘Company’, which expression shall, unless it be repugnant to the context or meaning thereof,  be deemed to mean and include its successors, nominees and assigns)  of the ONE PART;

AND

Mr. Shyam, an individual bearing PAN [●], residing in [●] (hereinafter referred to as “Sales Representative/Agent” as the party of the OTHER PART;

Each of them shall be referred to as “Party” and collectively may be known as “Parties.”

WHEREAS:

  1. The company is engaged in the business of printing, publishing, and selling encyclopedias, dictionaries, and other educational books for students and researchers.
  2. The Agent is a sales professional who has experience in making a large number of sales in a short period of time. 
  3. The company is looking to increase its sales and for this reason, it is employing the agent.
  4. The Parties have mutually agreed to define the terms of the payment whereby the Company shall make payments to the Agent on a percentage basis upon the fulfillment of the obligations of the Agreement. 
  5. NOW THEREFORE in consideration of the promises and the mutual covenants set forth herein, the Parties hereto, intending to be legally bound, hereby agree as follows: 
  • SCOPE OF THE WORK:
      1. The Agent agrees and acknowledges that he shall be the sales representative of the company and shall sell the company’s goods for the purpose of this Agreement. 
      2. The Agent does not warrant the company that any third party will be involved in this agreement. 
      3. The Agent shall make a minimum of [●] number of sales per month.
  • OBLIGATIONS OF THE PARTY:
      1. The Company shall be responsible for obtaining permits, approvals, and licenses if any which are necessary for the Agent to make sales. 
      2. The Company and the Agent shall abide by all applicable laws and regulations. Support and assistance should be provided by the Company to the Agent from time to time. 
      3. The Agent shall not delegate his responsibilities to a third party without the written consent of the Company.
  • PAYMENT OF SALES COMMISSION:
      1. The Company hereby agrees to pay commission to the Agent in consideration of the facilitation of services to be rendered under this agreement on the number of sales made by him. 10% of the revenue made by him through one sale will be given as commission, subject to revision from time to time with the mutual consent of both parties. 
      2. The mode of payment will be NEFT/RTGS and is subject to change with the mutual consent of both parties. 
      3. No other compensation other than the commission shall be paid to the Agent. 
  • CONFIDENTIALITY:
      1. It is hereby agreed that the Agent should maintain confidentiality concerning business operations, management, trade secrets, and transactions. 
      2. In the event that the Agent breaks confidentiality, this agreement shall stand terminated.  
  • TERM AND TERMINATION:
    1. Either party shall be entitled to terminate this Agreement in the event that any action is taken for or with a view:
      1. To wind-up of the other or
      2. To become insolvent or
      3.  is unable to pay its debts.
    2. The Company/Agent shall be entitled to terminate this Agreement forthwith in the event that:
      1. a conflict of interest or potential conflict of interest arises; or,
      2. repeated breach of the provisions of any part of this Agreement; or
      3. engages in any conduct prejudicial to the other party;
    3. The party shall be served a notice prior to 15 days of the date on which his termination will come into effect when he fails to fulfill this obligation. 

IN WITNESS WHEREOF the Parties hereto have executed this Agreement on the day and year first above written.

  • Signed and delivered for and on behalf of:

For and on behalf of [the Company]

  • [Insert Signature (& seal, where applicable)]
  • Authorized Signatory

Name:

Designation:

 

For and on behalf of [the Agent]

  • [Insert Signature (& seal, where applicable)]
  • Authorized Signatory

Name:

Designation:

Conclusion

Just like any other agreement, this agreement is very essential to point out the obligations of each of the parties. It not only conclusively states how a sales representative will be commissioned for making sales but it also helps the company maintain a healthy and professional environment where all the employees feel rewarded and acknowledged for their hard work and contribution.

References

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