Benefits and Compensation

Windfalls and Changing the Terms of Commission Agreements

Vesting of Commissions

One particularly difficult sticking point with commission agreements is failing to define what is supposed to happen if a sale is canceled or the terms need to be renegotiated.

One solution that eliminates many problems is to state that a draw or advance becomes a vested commission only after all conditions on vesting have been removed (e.g., vested only after customer’s time to cancel has expired, and/or terms have been accepted by customer with no right of renegotiation).

Do not have some vague statement about your ability to take back, says Kato; that most likely will not hold up.

From a legal standpoint, courts and agencies will not allow the employer to “shift the risk of the enterprise onto the employee.” Employers need to balance clear and fair conditions for vesting. Avoid using a provision that makes the employee the guarantor of the sale.

Changing the Vesting Event

Another common source of disputes is where the employer tries to modify an employee’s contract, due perhaps to a miscalculation in forecasting or a large windfall sale that results in huge commissions.

Such attempts to change the deal are OK only if:

  • It does not result in forfeiture of already earned commissions.
  • It doesn’t breach the covenant of good faith and fair dealing.

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‘Windfall’ transaction defined

A windfall provision allows an employer to reduce the commission to prevent unfair windfall commissions. If the agreement is ambiguous or unclear about the employer’s right to change the agreement, the court will not allow the change.

Courts will generally side with the employee where the employee is the procuring cause or effective cause of the sale and where there is substantial compliance with the terms.

Some refer to this as “shaking the tree.” That is, if a sales employee has shaken the tree, that salesperson is entitled to the fruit that falls to the ground. The test is one of the tests of fairness.

Windfall provisions are more likely to be enforced following a windfall transaction where:

  • The employee was involved in forecasting the sales quota.
  • The employee was not the procuring cause of the sale or expended little effort in making the sale.
  • The covenant of good faith and fair dealing was not violated.

This is an implied covenant, but the court may require the employer to follow the principles of good faith and fair dealing.

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1 thought on “Windfalls and Changing the Terms of Commission Agreements”

  1. It’s probably wise to consult an attorney before changing terms–this is the kind of thing that provokes litigious employees.

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