4 Best Practices for Businesses Engaging Sales Representatives

When done right, sales compensation plans can motivate sales representatives, increase revenue, and improve employee satisfaction and retention rates. While you don’t want a compensation plan so complex that it’s impossible to govern, there are some steps you need to take to avoid common legal pitfalls. The following best practices can minimize the risk of payment disputes and claims for unequal employment:

1. Put It In Writing

Decide ahead of time how commissions are earned, when commission payments are due, and what sales representatives are entitled to after termination of the relationship.

How are commissions earned?

You may want to pay one rate for new customers and a different rate for sales to existing customers, but the key is to explicitly address this in writing at the outset of the engagement. Employers often neglect to discuss how sales commissions are earned with a sales representative before engagement, which frequently results in the sales representative contending they are owed for all sales made to various customers when the sales rep did little (or nothing) to procure or continue servicing that customer. To avoid this situation, make sure you and your sales representative put in writing when and how a sales commission is earned. For example, are commissions earned when an order is placed by a new customer? When orders are placed by an existing customer? When an existing customer orders a new part? When an existing customer increases amounts from prior orders? Documenting the commission conditions in writing at the time of engagement will save future headaches (and expenses) if the relationship is on rockier terms. The specific parameters regarding when and how commissions are earned will, of course, depend on your company’s particular sales model and the market. You may want to pay one rate for new customers and a different rate for sales to existing customers, but the key is to explicitly address this in writing at the outset of the engagement.

When are commission payments due?

Reach an agreement at the outset when you will be paying out commission payments, whether monthly, quarterly, or annually. Alternatively, you can pay the commissions within a certain amount of time after the commission is “earned.” However, if payment terms are not put in writing, the past practices of the company and/or industry standards may govern when the commissions were due. Many states also have sales representative laws that require commissions be paid within a certain amount of time after termination. For example, in Illinois, the Illinois Sales Representative Act (ISRA) requires that any commissions due at the time of termination be paid within 13 days of termination.

What happens in the event of termination?

At the outset of the engagement, you want to get ahead of any potential disputes related to termination. Make clear that the sales representative is not entitled to commissions on any orders that come in after termination because if you don’t, laws favorable to sales representatives may fill in the blanks in a way that was never intended.

• Keep Accurate Data

Even though you and your sales representative are keeping track of the sales data, it is your responsibility to keep accurate data to ensure that you are paying accurate commissions. Do your research on commission trackers that can help you stay up to date with what your sales representative earns.

• Handle Issues Consistently

The influx of pay transparency laws in the past few years highlights that employees and contractors are discussing their pay with each other more frequently. Get ahead of any related issues or potential claims for unequal payment by establishing consistent sales compensation plans across the board. If some compensation plans are different from others, make sure you put in writing the basis for the differences, such as territory or market.

• Know and Understand Applicable Laws

By virtue of their job, sales representatives often work in jurisdictions outside of the state where your company is based. However, merely including a provision stating that your state’s law applies may not be sufficient. Many state laws pertaining to sales representatives’ commission protections declare that employers’ agreements cannot get around that law by choosing another state’s laws. Some state commission protection laws are territorial, meaning that the sales representative must make the claim in a state that was part of their assigned territory or where they made or solicited sales. This analysis is on a case-by-case basis depending on the company’s locations, sales representative(s), and the territories or customers at issue. You should discuss with legal counsel the jurisdictions your sales representatives cover, so you know and understand the full range of applicable laws.

LP has significant experience advising clients regarding relationships with outside sales representatives. If you have any questions, please don’t hesitate to reach out.