When is a commission considered "earned" versus "paid"?

These are two different events and the difference causes most commission disputes. A commission is earned when the triggering condition in the agreement is met — for example, when the customer signs, when the product ships, or when payment clears. It is paid on the schedule the agreement sets, such as the next payroll run. A well-drafted agreement defines the earning event precisely so there is no argument about whether a deal counts when a salesperson leaves before the customer pays.

What is a draw against commission?

A draw is an advance against future commissions. A "recoverable" draw is essentially a loan: if the salesperson does not earn enough commission to cover it, the shortfall carries forward and is deducted from later commissions. A "non-recoverable" draw acts more like a guaranteed minimum the salesperson keeps regardless of performance. The agreement must state which type applies and how unrecovered draws are handled if the relationship ends.

Can an employer refuse to pay commissions after a salesperson quits?

It depends on what the agreement says and on state law. Many states treat earned commissions as wages that must be paid even after separation, and some impose penalties for late payment. If the agreement clearly states that a commission is earned only while the person is actively employed or engaged, that term may control — but vague agreements are usually read in the salesperson's favor. Spell out post-termination commissions explicitly to avoid this fight.

What is a commission chargeback or clawback?

A chargeback lets the company reverse a commission that was already paid if the underlying sale falls through — for example, a refund, a cancellation, or a customer who never pays. The agreement should define exactly which events trigger a chargeback, the window during which it applies, and how the amount is recovered (deducted from future commissions or invoiced back). Open-ended clawback rights are a common source of disputes and are limited by wage law in some states.

Does a commission agreement need to be in writing?

Yes — and in several states it is legally required. A number of jurisdictions mandate a written commission agreement for sales representatives and impose penalties on companies that fail to provide one. Even where it is not strictly required, a written agreement is the only reliable way to prove the rate, the earning trigger, and the payment terms if a disagreement arises. A verbal commission arrangement is extremely difficult to enforce.

Commission Agreement Template: How to Write One (Rates, Clauses & Examples)

Learn to write a commission agreement that holds up: commission structure, when commissions are earned vs. paid, draws, clawbacks, and the clauses that prevent disputes.

A commission agreement is the document that turns a handshake about pay into an enforceable promise. It defines how much a salesperson earns, what they have to do to earn it, and when the money actually lands. Get it right and everyone knows where they stand. Get it wrong — or skip it entirely — and you end up arguing over deals that closed months ago, draws that were never repaid, and commissions on customers who walked away.

This guide explains what a commission agreement is, how to structure the commission itself, the clauses that matter most, and the mistakes that turn a simple pay arrangement into a legal mess.

What is a commission agreement?

A commission agreement is a contract between a business and a salesperson — an employee, an independent sales rep, or an agent — that sets out how the salesperson is compensated based on the sales they generate. Instead of (or in addition to) a fixed salary, the salesperson earns a percentage of revenue, a flat fee per sale, or some blend of the two.

Commission agreements go by several names depending on the relationship: sales commission agreement, commission-based pay agreement, sales representative agreement, or simply a commission clause inside a broader employment or contractor contract. The core job is always the same — answer three questions without ambiguity:

How much does the salesperson earn per sale?
What triggers the commission — when is it "earned"?
When and how does it get paid?

The companies that avoid commission disputes are the ones that answer all three in writing, in advance.

Employee vs. independent contractor: it changes everything

Before you draft a single rate, decide whether the salesperson is an employee or an independent contractor. This classification drives tax treatment, benefits, expense reimbursement, and how much control you can exert over how they sell.

An employee salesperson typically receives a W-2, may get a base salary plus commission, and works under the company's direction and schedule.
An independent contractor sales rep receives a 1099, usually works on pure commission, controls their own methods, and often sells for more than one company.

Misclassifying an employee as a contractor to avoid payroll taxes is one of the costliest mistakes a growing company can make. If you're engaging an outside rep, the structure should look like an independent sales rep agreement with commission and territory protection, not an employment contract dressed up to dodge taxes. For salaried sellers, a salary plus commission structure is the more honest model.

Types of commission structures

The commission structure is the heart of the agreement. Choose the one that matches how your sales actually work — and define it in plain numbers, not vague promises.

Straight commission

The salesperson earns a percentage or flat amount per sale and nothing else. High upside, high risk for the seller. Common for independent reps and high-ticket sales.

Base salary plus commission

A fixed salary provides stability, and commission rewards performance. This is the most common structure for employed sales staff because it attracts talent while keeping incentives sharp.

Tiered commission

The rate increases as the salesperson hits higher volume — for example, 5% up to $50,000 in sales, then 8% above that. Tiers reward your top performers and motivate sellers to push past quota.

Draw against commission

The company advances money against future commissions to smooth out income during slow periods. Critical to specify whether the draw is recoverable (repaid from later commissions) or non-recoverable (a guaranteed floor the rep keeps).

Residual or recurring commission

The salesperson earns commission on renewals or ongoing revenue from a customer they brought in — common in SaaS and insurance. Define how long residuals last and whether they survive the salesperson's departure.

Key clauses in a commission agreement

1. Commission rate and calculation

State the exact rate or fee and — just as important — the base it's calculated on. Is it a percentage of gross revenue, net revenue, or profit? Does it come off the list price or the discounted price the customer actually paid? "10% commission" means nothing until you define 10% of what.

2. When the commission is earned

This is the single most disputed clause in any commission agreement, so be surgical. Define the precise event that earns the commission:

When the customer signs the contract
When the product ships or the service is delivered
When the customer pays in full

A salesperson who closes a deal and leaves before the customer pays will argue the commission was earned at signing. The company will argue it's earned at payment. The agreement decides — if it says so clearly.

3. Payment timing

Separate from earning: once a commission is earned, when does it get paid? Specify the schedule — the next regular payroll, the month after the customer pays, quarterly, etc. Some states require commissions to be paid within a set number of days of becoming due, so don't bury this.

4. Draws and how they're recovered

If you offer a draw, state the amount, the frequency, whether it's recoverable, and what happens to an unrecovered balance if the relationship ends. An undefined draw is a recipe for a debt dispute.

5. Chargebacks and clawbacks

Define when a paid commission can be reversed — refunds, cancellations, chargebacks, or non-payment by the customer. State the window during which a clawback applies and how the company recovers the money. Open-ended clawback rights invite disputes and may be limited by wage law.

6. Territory and account assignment

If the salesperson owns a geographic territory or a set of named accounts, define it. Specify whether they earn on all sales in that territory or only deals they personally source, and how house accounts or inbound leads are treated.

7. Quotas and performance expectations

If continued engagement depends on hitting a quota, say so — and define the quota, the measurement period, and the consequence of missing it.

8. Post-termination commissions

Spell out what happens to deals in the pipeline when the salesperson leaves. Do they earn on deals that close after departure ("trailing commissions")? For how long? This clause prevents the ugliest commission fights.

9. Confidentiality and non-solicitation

Salespeople carry customer lists, pricing, and pipeline data in their heads. Protect it. Many companies pair a commission agreement with an NDA — if that's you, our guide to writing a non-disclosure agreement walks through the clauses that actually hold up.

10. Governing law and dispute resolution

State which state's law governs and where disputes are resolved. Commission and wage statutes vary widely by state, so this clause has real teeth.

How to write a commission agreement: step-by-step

Step 1: Identify the parties and the relationship. Use full legal names. State clearly whether the salesperson is an employee or an independent contractor — the rest of the agreement flows from this.

Step 2: Define the products or services being sold. Specify what sales count toward commission. A rep selling one product line shouldn't earn on a different division's deals unless you intend that.

Step 3: Set the commission structure and rate. Pick straight, base-plus, tiered, or residual. Write the exact percentage or fee and the base it's calculated on.

Step 4: Define the earning trigger. Name the precise event — signing, delivery, or payment — that earns the commission. This single sentence prevents most disputes.

Step 5: Set the payment schedule. State when earned commissions are paid and confirm it complies with your state's wage-timing rules.

Step 6: Address draws, chargebacks, and clawbacks. If any apply, define them in numbers and time windows. If none apply, say so explicitly so there's no ambiguity.

Step 7: Cover territory, quotas, and post-termination commissions. Decide how trailing deals are handled before anyone has a reason to fight about them.

Step 8: Add confidentiality, governing law, and signatures. Both parties sign. For a company, the signatory must have authority to bind it.

Common mistakes that cause commission disputes

Confusing "earned" with "paid." The most expensive mistake. If the agreement doesn't separate the earning event from the payment date, a departing salesperson and the company will read it in opposite directions — and courts often side with the salesperson.

Calculating commission on an undefined base. "5% of sales" leaves open whether that's gross, net, pre-discount, or post-refund. Define the base in the same sentence as the rate.

Silent on post-termination deals. Pipelines don't stop when someone quits. If the agreement says nothing about trailing commissions, expect a claim on every deal that closes for months afterward.

Open-ended clawbacks. A clawback right with no time limit feels safe to the company but is widely disputed and is restricted by wage law in several states. Bound it.

Treating a draw as a gift. An undefined draw that the salesperson assumed was a bonus becomes a debt the company tries to collect on exit. State recoverable vs. non-recoverable up front.

No written agreement at all. A verbal commission deal is nearly impossible to enforce, and some states penalize companies that fail to provide a written one. Put it in writing before the first sale.

A worked example: where the money actually splits

Imagine a rep on a tiered plan: 5% on the first $50,000 of monthly sales, 8% above that, calculated on net revenue after discounts. In March they book $80,000 in signed deals, but $10,000 of it is a customer who later cancels within the refund window.

The earning trigger is payment received, so the canceled $10,000 never earns a commission — no chargeback needed because it was never paid.
On the remaining $70,000: 5% of the first $50,000 = $2,500, plus 8% of the next $20,000 = $1,600, for $4,100 earned.
The agreement pays earned commissions on the payroll run following the month the customer pays, so the $4,100 lands in April.

Every number in that paragraph traces back to a clause: the tier breakpoints, the net-of-discounts base, the payment-received trigger, and the payroll-following-payment schedule. Take any one of those clauses out and the rep and the company will compute a different number — which is exactly how disputes start.

State law can override what your agreement says

A commission agreement does not operate in a vacuum. Several states have sales representative commission statutes that treat earned commissions as wages, require payment within a fixed number of days of separation, and impose double or treble damages plus attorney's fees on companies that withhold them. Some states also require a written commission agreement for outside sales reps and penalize the company if none exists.

The practical takeaways:

You can define when a commission is earned, but once it's earned, state wage law often controls how fast it must be paid — especially after termination.
Overly aggressive clawback or forfeiture clauses may be unenforceable where commissions are treated as protected wages.
Always include a governing-law clause, but don't assume it lets you escape the wage statute of the state where the salesperson actually works.

When the relationship involves outside reps with protected territories, these rules interact with the territory and commission protections in a sales rep agreement — worth reviewing alongside this one.

When to use a commission agreement

Hiring a salesperson on a base-plus-commission or pure-commission plan
Engaging an independent sales rep or agency to sell on your behalf
Adding commission to an existing role, such as moving a support rep into upsell
Bringing on a referral or channel partner who earns on deals they source — closely related to a referral and training services agreement with a commission structure
Formalizing a verbal arrangement that has started to generate real money and real questions

Related guides

Generate Your Commission Agreement with Contractable

A clear commission agreement protects both sides — the salesperson knows exactly what they'll earn, and the company knows exactly what it owes and when. The hard part is getting every clause right for your specific structure: the earning trigger, the draw terms, the clawback window, the post-termination rules. Contractable generates a customized sales commission agreement in seconds, with the right structure for your business — no lawyers or legal background required.