Free commission agreement templates: employee, 1099 contractor, commission-only, tiered, and draw. Covers earned versus paid, chargebacks, and state rules.
Six commission agreement templates for US small business: employee sales commission, independent contractor, commission-only with a minimum wage floor, tiered, draw against commission, and a compliance checklist. Each defines the commission base, the earning trigger, payment timing, and chargebacks, with the written-agreement and signed-receipt rules built in. Download as DOCX, no signup.
A commission agreement is the written contract that says how a salesperson gets paid: the rate, what it applies to, when the commission is earned, and when it lands in a paycheck. For a small business hiring its first sales rep, it is worth more than its length suggests. Commission is the one pay arrangement where two reasonable people can read the same words and arrive at different numbers, and the resulting arguments tend to surface at the worst moment, when someone is leaving with a big deal half-closed.
There are six templates here covering the structures small businesses actually use: an employee sales commission agreement, a 1099 contractor version, commission-only with a minimum wage floor, tiered, draw against commission, and a compliance checklist to run before anything goes out. Each downloads as an editable Word document, free and without an email. They also carry something most commission templates leave out entirely, which is the written-agreement and signed-receipt requirement that applies to commissioned employees working in California. This pairs with your offer letter and your broader compensation policy.
TL;DR
A commission agreement defines the rate, the commission base, when commission is earned, when it is paid, and how chargebacks work. Download six free templates as DOCX: employee, 1099 contractor, commission-only, tiered, draw against commission, and a compliance checklist. Three things trip up small businesses: earned and paid are different dates and the gap decides who gets paid at separation; commission-only pay still owes minimum wage for every hour worked; and California requires a signed written agreement with a signed employee receipt, which a handbook policy does not satisfy. This is general information, not legal advice.
What a Commission Agreement Is
A commission agreement is a written contract between a business and a salesperson that sets out how commission is calculated, when it is earned, and when it is paid. It is an employer-side document used for both W-2 employees on base plus commission and 1099 sales representatives, and it goes by several names including sales commission agreement, commission plan, and commission contract.
Its value is precision in a pay arrangement that invites ambiguity. A salary is one number. A commission depends on a base, a rate, a trigger, a set of exclusions, and an adjustment mechanism, and every one of those is a place where an unwritten assumption can cost real money. It sits alongside the employment contract that governs the wider relationship.
One Clause Causes Most Commission Disputes
When is the commission earned? On the signed order, on the invoice, or when the customer pays? Pick one, say it in a single sentence, and keep it separate from when the commission is paid out. Get this wrong and the argument arrives when a salesperson leaves mid-deal, which is precisely when it is most expensive. In several states, commission that is already earned counts as wages, and wages generally cannot be forfeited by contract. This is general information, not legal advice.
What Every Agreement Includes
A complete commission agreement covers four groups: the math, the earned-versus-paid timing, the adjustment mechanism, and the exit terms. The groups below are the consensus set that strong commission agreements share.
The math
Commission rate or tier table
The base the rate applies to
What is excluded from that base
Earned vs paid
The single event that triggers earning
When earned commission is paid out
The statement showing the calculation
Adjustments
Chargebacks on returns and cancellations
Unpaid-invoice handling and the window
Any draw and whether it is recoverable
Ending it
What happens to earned commission at separation
How the plan can be changed and with what notice
Signature block and a signed employee receipt
The two items small businesses most often skip, and most need, are a precise definition of the commission base and an explicit earning trigger. Vague on the base and every deal becomes a negotiation. Silent on the trigger and every departure becomes a dispute.
Which Template Should You Use?
Start from the employment relationship, then the pay structure. A W-2 salesperson on base plus commission: the employee agreement. A self-employed rep: the contractor version. No base at all: commission-only. Rates that climb: tiered. A regular advance: draw against commission.
Employee Sales Commission
The default
The standard agreement for a W-2 salesperson earning base plus commission. Covers the rate, the commission base, the earning trigger, payment timing, chargebacks, and the signed acknowledgment most states expect and one requires.
Independent Contractor (1099)
Outside rep
For a self-employed sales representative rather than an employee. Adds contractor status language, W-9 collection, no benefits or withholding, and post-termination commission on orders already accepted.
Commission-Only
With minimum wage floor
For a role paid entirely by commission. Includes the makeup-pay clause that keeps you compliant when commission runs low, plus hours tracking and an honest treatment of the sales overtime exemptions.
Tiered / Graduated
Escalating rates
For rates that rise as cumulative sales grow. Includes the tier table and, critically, forces a choice between the marginal and retroactive method, which is where tiered plans most often go wrong.
Draw Against Commission
Advance on earnings
For a regular draw paid ahead of commission earned. Makes the recoverable versus non-recoverable choice explicit, handles reconciliation, and flags the state limits on recovering a balance.
Compliance Checklist
Before you issue it
A working checklist covering the four clauses that cause most disputes, the written-agreement and signed-receipt requirements, wage and hour items, separation, and what to do when the plan changes.
Sign It With the Offer, Not After the First Sale
Timing matters more than most owners expect. Send the commission agreement alongside the offer letter so the terms are settled before any selling happens. Once a large deal is in flight, every definition in the plan becomes a negotiation with real money attached, and the conversation is much harder. Agreeing the rules while both sides are optimistic and nothing is at stake is the cheapest version of this discussion you will ever have. This is general information, not legal advice.
6 Free Commission Agreement Templates
Download all six together or take individual documents. The employee agreement covers the common case, the contractor version handles 1099 reps, and the commission-only, tiered, and draw templates each solve a specific structural problem. The checklist runs before any of them goes out.
Download All 6 Commission Agreement Templates
An employee sales commission agreement, a 1099 contractor version, commission-only with a minimum wage floor, tiered, draw against commission, and a compliance checklist. All as DOCX files in one download.
Template 1: Employee Sales Commission Agreement
The standard agreement for a W-2 salesperson on base plus commission. Covers the rate, the commission base with exclusions, a worked example, the earning trigger, payment timing, chargebacks, separation, and the signed acknowledgment.
Employee Sales Commission Agreement
SALES COMMISSION AGREEMENT
This Sales Commission Agreement (the "Agreement") is entered into as of [date]
between [Company Name], a [state] [entity type] located at [address] (the
"Company"), and [Employee Name] (the "Employee").
1. PURPOSE AND SCOPE
This Agreement sets out how the Employee's sales commissions are computed and
paid. It supplements, and does not replace, the Employee's offer letter or
employment terms. Employment remains at-will.
2. POSITION AND BASE PAY
•Position: [job title]
•Base pay: $[amount] per [year / hour], paid on the Company's regular payroll
schedule
•Classification: [exempt / non-exempt] under the Fair Labor Standards Act
Base pay is separate from and in addition to any commission earned under this
Agreement.
3. COMMISSION RATE AND CALCULATION
The Employee earns commission at the rate of [X] percent of [net revenue /
gross sales / gross profit] on qualifying sales.
•Commission base: [define precisely what the percentage applies to, for example
invoiced revenue net of discounts, returns, taxes, and shipping]
•Excluded from the base: [list exclusions, for example renewals, house
accounts, sales taxes, freight]
•Territory or accounts covered: [define]
•Quota or threshold, if any: $[amount] per [month / quarter]
Worked example: a $[10,000] qualifying sale at [X] percent produces a commission
of $[amount].
4. WHEN COMMISSION IS EARNED
This section defines the earning trigger. Commission is earned when [choose one
and delete the others]:
•The customer signs the contract or purchase order
•The Company invoices the customer
•The Company receives full payment from the customer
•[Other milestone]
Commission is not earned before that event occurs. Once earned, commission is a
wage.
5. WHEN COMMISSION IS PAID
Earned commission is paid on the [second] regular payroll date following the
[month / quarter] in which it was earned. The Company will provide a statement
showing each qualifying sale, the base amount, the rate applied, and any
adjustments.
6. ADJUSTMENTS AND CHARGEBACKS
If a customer returns product, cancels, or fails to pay within [90] days, the
related commission is [reversed against future commission payments / adjusted as
follows]. The Company will identify each adjustment on the commission statement.
The Company will not recover an adjustment by deducting from base wages where
doing so would reduce pay below the applicable minimum wage or otherwise
conflict with state wage-deduction law.
7. SEPARATION
If employment ends for any reason, commission earned before the separation date
under Section 4 will be paid [on the final paycheck / on the next regular
commission payment date, or as soon as the amount can reasonably be calculated].
Commission not yet earned as of the separation date [is not payable / is treated
as follows].
Note: several states treat earned commission as wages that cannot be forfeited.
Confirm the rule in the state where the Employee works before relying on a
forfeiture term.
8. CHANGES TO THIS AGREEMENT
The Company may modify commission terms prospectively with [30] days written
notice. Changes will not reduce commission already earned. Any modification will
be documented in a new written agreement signed by both parties.
9. ACKNOWLEDGMENT AND RECEIPT
I have received a signed copy of this Sales Commission Agreement, I have read it,
and I understand how my commissions are computed and paid.
Employee signature: __ Date: _
Employee printed name: __
Company representative: __ Date: _
Title: __
DISCLAIMER: This is a sample template for general information only and is not
legal advice. Commission pay is governed by state wage law, which varies widely
on earning triggers, forfeiture, and deductions. California requires a written,
signed commission agreement with a signed employee receipt. Have a qualified
For a self-employed sales representative rather than an employee. Adds contractor status language, W-9 collection, no withholding or benefits, and post-termination commission on orders accepted before the end date.
For a role paid entirely by commission. Includes the makeup-pay clause that keeps a low month compliant, hours tracking for all working time, and a straight treatment of the two sales overtime exemptions.
For rates that rise with cumulative sales. Includes the tier table and forces the explicit choice between the marginal and retroactive method, with worked examples of each, since ambiguity there is the classic tiered-plan failure.
Tiered / Graduated Commission Agreement
TIERED COMMISSION AGREEMENT
This Agreement is entered into as of [date] between [Company Name] (the
"Company") and [Employee Name] (the "Employee").
1. TIERED COMMISSION STRUCTURE
Commission is earned at an increasing rate as cumulative qualifying sales rise
within each [quarter / calendar year]. The measurement period resets at the start
of each new [quarter / year].
Cumulative sales in period Commission rate
$0 to $[50,000] [3] percent
$[50,001] to $[150,000] [5] percent
$[150,001] to $[300,000] [7] percent
Above $[300,000] [10] percent
2. HOW TIERS ARE APPLIED
Rates apply on a [marginal / retroactive] basis. Choose one and delete the other:
•Marginal: each tier rate applies only to the portion of sales within that tier.
Example: $[200,000] in period sales earns [3] percent on the first $[50,000],
[5] percent on the next $[100,000], and [7] percent on the remaining
$[50,000].
•Retroactive: once a tier is reached, that rate applies to all sales in the
period from the first dollar. Example: reaching $[150,001] means the [7]
percent rate applies to the entire period total.
The marginal method is the more common and the less expensive. State which one
applies, because ambiguity here is a frequent source of commission disputes.
3. COMMISSION BASE
Tiers are measured on [net invoiced revenue], excluding [returns, discounts,
taxes, freight, house accounts, and renewals]. Define this precisely, because
the tier thresholds are only as clear as the base they measure.
4. WHEN COMMISSION IS EARNED AND PAID
Commission is earned when [define the trigger]. Commission is paid [monthly at
the tier rate reached to date, with a true-up at the end of the period /
quarterly after the period closes].
If interim payments are made at a lower tier and a higher tier is reached later
in the period, the Company will pay the difference in the [period-end true-up].
5. ADJUSTMENTS
Returns, cancellations, and unpaid invoices reduce cumulative period sales and
may move the Employee to a lower tier. Any resulting overpayment is reversed
against future commission, subject to applicable wage-deduction law.
6. SEPARATION MID-PERIOD
If employment ends before the period closes, commission is calculated on
qualifying sales earned through the separation date, at the tier reached as of
that date, and paid in accordance with applicable state wage law.
7. ACKNOWLEDGMENT AND RECEIPT
I have received a signed copy of this Agreement and understand the tier
structure, the method by which tiers are applied, and how commission is computed
and paid.
Employee signature: __ Date: _
Company representative: __ Date: _
DISCLAIMER: This is a sample template for general information only and is not
legal advice. Tiered plans generate disputes when the marginal versus
retroactive method is left ambiguous or the commission base is undefined. Have a
qualified employment attorney review before use.
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For a regular advance paid ahead of commission earned. Makes the recoverable versus non-recoverable choice explicit, sets out the reconciliation statement, and flags the minimum wage and state deduction limits on recovery.
Draw Against Commission Agreement
DRAW AGAINST COMMISSION AGREEMENT
This Agreement is entered into as of [date] between [Company Name] (the
"Company") and [Employee Name] (the "Employee").
1. WHAT A DRAW IS
A draw is a regular payment made in advance of commission earned. It provides
predictable income while the Employee builds a pipeline. This Agreement states
whether the draw is recoverable, which is the single most important term here.
2. DRAW AMOUNT AND SCHEDULE
•Draw amount: $[amount] per [pay period]
•Paid on: the Company's regular payroll schedule
•Draw period: [the first 6 months of employment / ongoing]
3. RECOVERABLE OR NON-RECOVERABLE
Choose one and delete the other.
OPTION A, NON-RECOVERABLE DRAW: The draw is a guaranteed minimum. If commission
earned in a period is less than the draw, the Employee keeps the draw and owes
nothing. If commission earned exceeds the draw, the Employee receives the excess.
The shortfall does not carry forward.
OPTION B, RECOVERABLE DRAW: The draw is an advance against future commission. If
commission earned in a period is less than the draw, the shortfall is recorded as
a draw balance and is recovered from commission earned in later periods. The
Employee receives commission only after the draw balance is repaid.
4. RECONCILIATION
Each [pay period / month], the Company will provide a statement showing:
•Commission earned in the period
•Draw paid in the period
•Amount recovered against the draw balance, if applicable
•Remaining draw balance, if applicable
5. MINIMUM WAGE AND DEDUCTION LIMITS
Recovery of a draw balance will not reduce the Employee's pay in any pay period
below the applicable minimum wage for all hours worked. Draw recovery is subject
to state wage-deduction law, which in some states restricts or prohibits
recovering advances from wages.
6. SEPARATION WITH AN OUTSTANDING BALANCE
If employment ends while a recoverable draw balance is outstanding, the balance
is [forgiven / recovered from final commission earned but not from base wages].
Note: recovering a draw balance from an employee after separation, or deducting
it from a final paycheck, is restricted or prohibited in a number of states.
Confirm the rule where the Employee works before including a repayment term.
7. ACKNOWLEDGMENT AND RECEIPT
I have received a signed copy of this Agreement, I understand whether my draw is
recoverable or non-recoverable, and I understand how commission is computed and
paid.
Employee signature: __ Date: _
Company representative: __ Date: _
DISCLAIMER: This is a sample template for general information only and is not
legal advice. Recoverable draws sit at the intersection of wage-deduction law,
minimum wage, and final-pay rules, and the rules differ substantially by state.
Have a qualified employment attorney review before use.
Template 6: Commission Plan Compliance Checklist
A working checklist covering the four clauses that cause most disputes, the written-agreement and signed-receipt requirements, wage and hour items, separation handling, and the reissue process when the plan changes.
Commission Plan Compliance Checklist
COMMISSION PLAN COMPLIANCE CHECKLIST
Run this before you issue a commission agreement, and again whenever the plan
changes. It is a working checklist, not a legal opinion.
THE FOUR CLAUSES THAT CAUSE DISPUTES
•Is the commission base defined precisely, including what is excluded?
•Is the earning trigger stated as a single, specific event?
•Is the payment timing stated separately from the earning trigger?
•Are chargebacks, returns, and unpaid invoices addressed?
If any answer is no, fix it before the agreement goes out. These four items
account for most commission disputes.
WRITTEN AGREEMENT REQUIREMENTS
•Is the agreement in writing and signed by a company representative?
•Did the employee receive a signed copy?
•Did you collect and retain a signed receipt from the employee?
•Is the signed agreement filed in the personnel record?
•If work is performed in California, note that a written commission agreement is
required, and an employee handbook or general written policy does not satisfy
it on its own
WAGE AND HOUR
•Are hours worked tracked for every non-exempt commissioned employee?
•Does pay meet the applicable minimum wage for all hours in every pay period,
including periods with low or no commission?
•If claiming an overtime exemption, have you confirmed the position actually
meets it rather than assuming commission pay is enough?
•For non-exempt employees, is non-discretionary commission included in the
regular rate used to calculate overtime?
•Do chargeback or draw recoveries comply with state wage-deduction limits?
SEPARATION
•Does the agreement say what happens to commission earned but not yet paid at
separation?
•Have you checked whether the state treats earned commission as wages that
cannot be forfeited?
•Does the final-pay timing match the state deadline?
•Is there a plan for commission that cannot be calculated by the final paycheck
date?
WHEN THE PLAN CHANGES
•Is the change prospective only, leaving already-earned commission untouched?
•Was notice given before the change took effect?
•Was a new written agreement issued and signed?
•Was a new signed receipt collected and filed?
RECORDS TO KEEP
•The signed agreement and every superseded version
•The signed receipt for each version
•Commission statements showing the calculation for each period
•Hours records for non-exempt commissioned employees
•Documentation of any chargeback or draw recovery
DISCLAIMER: This is a sample checklist for general information only and is not
legal advice. Commission rules vary substantially by state on earning, deduction,
forfeiture, and final pay. Have a qualified employment attorney review your plan
before it is issued.
Commission Structures Compared
Five structures cover almost every small-business sales role. The right one depends on how predictable the sales cycle is, how much risk the salesperson can carry, and how much administration you want to run each month.
Structure
How it works
Best fit
Watch out for
Base plus commission
Salary or hourly plus a percentage of sales
Most small-business sales roles
Defining the commission base precisely
Commission only
No base pay, all earnings from sales
Short cycles, high volume, proven demand
Minimum wage makeup pay and hours tracking
Tiered or graduated
Rate rises as cumulative sales climb
Pushing strong performers past quota
Stating marginal versus retroactive clearly
Draw against commission
Regular advance, reconciled to commission
New reps building a pipeline
Whether the draw is recoverable, and how
Contractor commission
1099 rep paid a percentage of sales
Outside reps in a defined territory
Classification, since a rate is not a test
Whichever you choose, the mechanics of the plan matter more than the label. For the wider pay context, see variable compensation.
Earned vs Paid: The Clause That Matters
These are two separate dates and they belong in two separate clauses. Earning is the event that creates the entitlement. Payment is when the money moves. A commission can be earned in March, adjusted in April, and paid in May without any contradiction, but only if the agreement treats them as distinct.
Earning trigger
What it means
Trade-off
Order signed
Earned when the customer signs
Best for the salesperson, most risk to you on returns and non-payment
Invoice issued
Earned when you bill the customer
Middle ground, still exposed if the customer never pays
Payment received
Earned when cash arrives
Safest for cash flow, longest wait, hardest at separation
The choice becomes consequential at separation. If commission is earned on the signed order and the rep leaves before the customer pays, the commission is likely already earned. Push the trigger to payment received and the same deal may pay nothing. Neither approach is wrong, but leaving it unstated is, and in several states earned commission is treated as wages that cannot be forfeited regardless of what the plan says. Address post-separation commission explicitly, and include a mechanism for amounts that cannot be calculated by the final paycheck date.
Wage Law and State Rules
Four rules shape how commission plans should be written and administered. Each is a place where small businesses commonly get it wrong, and each is built into the templates above.
California requires a signed written commission agreement
This is the compliance point most commission templates omit entirely. Under California Labor Code Section 2751, added by AB 1396 and effective since January 2013, when an employment contract contemplates payment by commission for services rendered in California, the contract must be in writing and must set out the method by which commissions are computed and paid. The employer must give a signed copy to every employee who is a party to it and obtain a signed receipt back from each one. Two details matter for small businesses. First, the requirement reaches employers located outside California who have commissioned employees working in the state. Second, putting commission terms in an employee handbook or a general written policy does not satisfy it, because a signed standalone agreement is what the statute contemplates. Reissue and re-sign whenever the plan changes. This is general information, not legal advice.
Earned and paid are two different dates, and the gap is where disputes live
Almost every commission dispute traces back to one ambiguity: when is a commission actually earned? A plan can tie earning to the signed order, the invoice, or the customer's payment, and each choice produces a different answer when a salesperson leaves in the middle of a deal cycle. Say it once, precisely, and then state payment timing as a separate clause, because a commission can be earned in March and payable in May without contradiction. This matters most at separation, since several states treat commission that has already been earned as wages, and wages generally cannot be forfeited by contract even if the plan says otherwise. New York, for instance, treats earned commission as wages not subject to forfeiture, while other states enforce continued-employment conditions more readily. Define the trigger, then check the rule in the state where the person works. This is general information, not legal advice.
Commission-only does not mean minimum-wage-free
Paying entirely by commission does not remove minimum wage obligations. A non-exempt employee must receive at least the applicable minimum wage for every hour worked in each pay period, so if commission runs low the employer owes makeup pay, and that requires tracking hours for commissioned staff, including time spent prospecting, traveling, and doing administration rather than selling. Overtime is separate: a commissioned employee is not automatically exempt. The two exemptions commonly relied on are outside sales and the retail or service establishment exemption under FLSA Section 7(i), and the second has three strict conditions, including that the employee's regular rate exceed one and one-half times the applicable minimum wage. In January 2026 the Department of Labor issued opinion letter FLSA2026-4, confirming that the Section 7(i) calculation uses the federal minimum wage rather than a higher state figure. Note that the exemption covers overtime only, never minimum wage. This is general information, not legal advice.
Chargebacks and draw recoveries run into wage-deduction law
Reversing a commission when a customer returns product or never pays is a normal and reasonable term, and so is recovering a draw balance from later commission. Both become a problem when the recovery reaches into base wages. State wage-deduction rules restrict what an employer may take out of a paycheck, and several states limit or prohibit recovering advances and overpayments from wages, particularly from a final paycheck. The practical guardrails are consistent: state the chargeback window and method in writing before the sale, never let a recovery drop a pay period below the applicable minimum wage for hours worked, recover from future commission rather than from base pay, and check the state rule before including any post-separation repayment term for an outstanding draw balance. Also mind that for non-exempt staff, non-discretionary commission belongs in the regular rate used to calculate overtime. This is general information, not legal advice.
California Requires a Signed Written Agreement
Under California Labor Code Section 2751, an employment contract contemplating commission pay for services rendered in California must be in writing and must set out how commissions are computed and paid. The employer must give the employee a signed copy and obtain a signed receipt in return. It applies to out-of-state employers with commissioned staff working in California, and a handbook policy alone does not satisfy it. For federal wage and hour background, the Department of Labor publishes the conditions for the retail commission overtime exemption. This is general information, not legal advice.
Beyond California, a number of states have sales-representative statutes governing commission payment and post-termination commission, particularly for outside reps, and some carry penalty provisions. For the surrounding rules, see the Fair Labor Standards Act overview and the exempt versus non-exempt guide.
Commission Plans Without an HR Team
A large company runs commission through a compensation team, a plan-document process, and software that calculates attainment automatically. A small business has an owner writing a plan for the first sales hire, often in a spreadsheet, usually while doing four other things. The legal exposure is identical. What differs is that a small business has no one to catch a vague clause before it goes out, and feels a single wage claim far more sharply.
Three Habits That Prevent Most Commission Problems
First, define the commission base in writing with a worked example, because a percentage means nothing until you say what it applies to. Second, put the earning trigger and the payment date in separate sentences, so nobody has to infer which one governs. Third, when the plan changes, issue a new signed agreement rather than announcing it by email, and keep the old version. Those three habits handle the overwhelming majority of what goes wrong with commission at small-business scale. This is general information, not legal advice.
The other thing worth doing early is keeping the signed agreement, the signed receipt, and the monthly commission statements together per person. Scattered across email, that set becomes very hard to reconstruct when someone disputes a calculation from eighteen months ago, and the reconstruction is exactly what a wage claim asks you to produce.
Sign, Store, and Reissue
A downloaded template is the starting point, and these work on their own. The strain shows up in the operational layer: agreements signed but never filed, receipts never collected, plan changes announced verbally, and no clear record of which version governed a sale two years ago.
Fill and check
Pick the structure that matches the role, define the base and the earning trigger precisely, then run the compliance checklist before anything goes out.
Sign it before day one
Send it with the offer letter so the plan is agreed before the first sale, not renegotiated after one lands.
Keep the signed receipt
Collect the employee acknowledgment, store it with the signed agreement in the personnel record, and keep every superseded version.
Reissue when it changes
Any plan change means a new written agreement, prospective only, with a new signature and a new receipt on file.
To run that without a spreadsheet, FirstHR stores the signed commission agreement against the employee record, captures the acknowledgment with e-signature so the receipt is dated and retrievable, keeps every superseded version alongside the current one, and flags who has not yet signed after a plan change. FirstHR is an onboarding and HR platform, not a payroll provider, a commission calculation engine, or a law firm: it does not compute attainment, run payroll, or decide what your plan should say, so pair it with your payroll provider and a qualified attorney for those calls. Applicant tracking is coming soon to FirstHR.
Key Takeaways
A commission agreement defines the rate, the commission base, the earning trigger, the payment timing, and how chargebacks and separation are handled.
Earned and paid are different dates and belong in separate clauses; the gap between them decides who gets paid when someone leaves mid-deal.
California requires a written commission agreement with a signed copy to the employee and a signed receipt retained, and a handbook policy does not satisfy it.
Commission-only pay does not remove minimum wage obligations, so track hours and pay makeup wages when commission falls short in a pay period.
Tiered plans must state whether rates apply marginally or retroactively, since the two methods produce very different payouts on the same sales.
A draw must say whether it is recoverable, and recovery is limited by minimum wage and state wage-deduction rules. This is general information, not legal advice.
Frequently Asked Questions
What is a commission agreement?
A commission agreement is a written contract between a business and a salesperson that sets out how commission is calculated, when it is earned, and when it is paid. It typically covers the commission rate or tier table, the base that rate applies to and what is excluded from it, the specific event that triggers earning, the payment schedule, how returns and unpaid invoices are handled, what happens to unpaid commission when employment ends, and how the plan can be changed. It is an employer-side document, used both for W-2 employees paid base plus commission and for 1099 sales representatives. Its purpose is to remove ambiguity from a pay arrangement that is unusually prone to disputes, because unlike a salary, commission depends on definitions that two people can read differently. It is also a legal requirement in California for commissioned employees working in the state. This is general information, not legal advice.
Is a commission agreement legally required?
There is no federal law requiring a written commission agreement, but California requires one. Under California Labor Code Section 2751, when an employment contract contemplates payment by commission for services rendered in the state, the contract must be in writing and must set out how commissions are computed and paid. The employer must give the employee a signed copy and obtain a signed receipt in return. That requirement reaches employers based outside California who have commissioned staff working there, and a general commission policy in an employee handbook does not satisfy it on its own. Several other states have sales-representative statutes that regulate commission payment, particularly for outside reps and after termination. Even where no statute applies, a written agreement is the practical answer, since commission disputes turn on definitions that are very hard to reconstruct after the fact. This is general information, not legal advice.
When is a commission considered earned?
Whenever your agreement says it is, which is exactly why the clause matters so much. Common triggers are the moment the customer signs the order, the moment the company issues the invoice, or the moment the customer actually pays. Each produces a different result when a deal spans a salesperson's departure, and if the agreement is silent or ambiguous, the dispute is resolved by a court or a labor agency rather than by you. Pick one event, state it in a single sentence, and keep it separate from the payment timing clause, since commission can be earned in one month and payable in another without any contradiction. The stakes are real: in several states, commission that has already been earned is treated as wages, and wages generally cannot be forfeited by contract, so a clause cancelling earned commission on termination may be unenforceable where the person works. This is general information, not legal advice.
Can an employee be paid commission only?
Yes, commission-only pay is lawful, but it does not remove minimum wage obligations. A non-exempt employee must receive at least the applicable federal, state, or local minimum wage, whichever is highest, for every hour worked in each pay period. If commission earned in a period divided by hours worked falls below that floor, the employer owes makeup pay for the difference, which means you must track hours for commission-only staff including prospecting, travel, training, and administrative time, not only time spent selling. Overtime is a separate question, and being paid by commission does not by itself create an exemption. The two exemptions most often relied on are outside sales and the retail or service establishment exemption under FLSA Section 7(i), both of which have strict conditions, and the second covers overtime only rather than minimum wage. Some states apply stricter rules still. This is general information, not legal advice.
What is a draw against commission?
A draw is a regular payment made in advance of commission earned, used to give a new or seasonal salesperson predictable income while a pipeline builds. The critical distinction is whether it is recoverable. A non-recoverable draw functions as a guaranteed minimum: if commission comes in below the draw, the employee keeps the draw and the shortfall does not carry forward. A recoverable draw is an advance: the shortfall becomes a balance that is recovered out of commission earned in later periods, so the employee sees commission only once the balance is repaid. Say which one applies in the agreement, because the difference is thousands of dollars and it is the single most disputed term in draw arrangements. Recovery also has limits: it cannot push a pay period below minimum wage, it is subject to state wage-deduction rules, and recovering an outstanding balance from a final paycheck is restricted in a number of states. This is general information, not legal advice.
What is the difference between tiered and flat commission?
A flat commission pays one rate on every qualifying sale, which is simple to administer and easy for a salesperson to calculate in their head. A tiered or graduated plan raises the rate as cumulative sales climb through defined thresholds within a period, which rewards overperformance and is common where the goal is pushing top performers past quota. Tiered plans introduce one question that flat plans do not: whether rates apply marginally, meaning each rate applies only to the sales within its band, or retroactively, meaning hitting a tier applies that rate to every sale in the period from the first dollar. Marginal is more common and considerably less expensive. Leaving that choice unstated is the classic tiered-plan mistake, since the two methods can differ enormously on the same sales figures. State the method explicitly and include a worked example. This is general information, not legal advice.
What happens to unpaid commission when an employee leaves?
It depends on whether the commission was earned before the separation date and on the law of the state where the person worked. Commission that was already earned under the agreement's trigger is, in many states, treated as wages, and wages generally must be paid out on the state's final-paycheck timeline and cannot be forfeited by contract. New York, for example, treats earned commission as wages not subject to forfeiture, while discretionary bonuses are treated differently. Other states enforce continued-employment conditions more readily. Commission not yet earned at separation is a different question, governed by what the agreement says. Two practical points: address post-separation commission explicitly rather than leaving it silent, and include a mechanism for commission that cannot yet be calculated on the final paycheck date, since a pending customer payment often means the exact figure is not knowable that day. This is general information, not legal advice.
Can I change a commission plan after it is signed?
Generally yes, prospectively, provided you follow the right process. The safe approach has four parts: make the change apply only going forward so commission already earned under the old plan is untouched, give written notice before the new terms take effect, issue a new written agreement rather than an email announcement, and collect a fresh signature and a new signed receipt. Retroactively reducing commission on sales already made is where employers get into trouble, since earned commission is treated as wages in many states. In California the reissue step is not optional: the written-agreement and signed-receipt requirements apply to the new plan just as they did to the original, so a mid-year change means a new signed document on file for each affected employee. Keep every superseded version, because a dispute two years later will turn on which plan governed which sale. This is general information, not legal advice.
