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Do Your Commissioned Salespersons Have Written Agreements?

The majority of employees in the United States do not have written employment agreements. Because employment agreements are not the norm, they often do not occur to employers as a possibility when hiring a new employee, let alone a requirement. With most employees, the lack of a written agreement is not an issue, except for one glaring exception:  commissioned salespersons.

Pursuant to New York labor law, New York employers must have a written agreement in place with each commissioned salesperson. This agreement must be signed by the employer and the employee, and must include a description of how all compensation will be earned and calculated, including any wages, salary, and commissions. If the terms of compensation include a recoverable draw, this must also be addressed in the agreement. For those not in-the-know:  A recoverable draw is a fixed amount advanced to an employee within a given time period. If the employee’s commissions during that period exceed the draw amount, the employee is then paid the difference. If the employee earns less in commissions than the draw amount, the employer can deduct the amount of the difference from the employee’s commissions in the next draw period. If such practices are part of the employer’s arrangement with the salesperson, they must be clearly explained in the written agreement, including the frequency with which the draw will be reconciled. The agreement should also detail how all forms of compensation will be calculated upon the employee’s termination or resignation.

In addition, it is vital that written commission agreements address the issue of when commissions are considered “earned.” Are they earned when the employee books the sale? When the client pays in full? How to define “earned” is up to you as the employer, but it should be clearly stated in the agreement. If the agreement is silent or ambiguous on this point, the employer runs the risk that a court reviewing the agreement will construe it against the employer.

The commission agreement is a good place to address other issues as well, such as at-will employment status and the obligation to adhere to the policies set forth in the company’s employee handbook. The agreement should also state whether the employee is exempt or non-exempt from overtime laws. Of course, before making this designation, the employer must educate itself on the applicable exemptions; many employers make the mistake of just assuming their salespersons are covered by the outside salesperson exemption without verifying that the exemption applies to each employee’s particular situation. The requirements for meeting the outside salesperson exemption are quite specific. The exemption applies only if the employee’s “primary duty” is making sales or obtaining orders or contracts for which a consideration will be paid by the client/customer, and the employee “customarily and regularly” works away from the employer’s place or places of business.

Employers should also consider including a non-solicitation covenant in agreements with salespersons, commissioned or otherwise. Because salespersons, by definition, are going to cultivate relationships with your company’s clients, they are well-positioned to poach clients when they leave the company. A well-drafted non-solicitation clause will restrict their ability to do so.

If entering into written agreements with each salesperson on your staff sounds like too much work, bear in mind that, without such an agreement, the Department of Labor will accept as true whatever terms the salesperson says were agreed upon. Thus, this is not a step any employer with commissioned sales staff should be skipping. For assistance in drafting compliant commission agreements, please contact an HR professional at PMP.

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Portnoy, Messinger, Pearl & Associates, Inc. is here to answer any questions you have regarding written agreements. Please keep in mind that in addition to our staff of seasoned HR consultants, we also have a staff of experienced employment lawyers on hand to address any questions you may have regarding compliance.  Contact us at 800-921-2195 or 516-921-3400. You can also visit our website http://www.pmphr.com/ or e-mail us at info@pmpHR.com.

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