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Pay commission? Make sure contracts are clear about terms

by on
in Leaders & Managers,Performance Reviews

Commissions are a great way to motivate some employees to work harder. Usually a contract spells out the commission terms and how the payments work. But if the contract is the least bit unclear, expect trouble—especially if someday you have to discharge a commissioned salesman for poor performance. He is likely to sue for alleged underpayments, tying you up in court for months or even years.

Your best bet is to have an experienced attorney go over your commission contracts.

A good lawyer most likely will add a clause that ends any obligation to pay additional commissions once the employee has been terminated.

Recent case: Ed Tracy was fired from his position as a salesman with Filenet. He sued, alleging the company owed him commissions for a lengthy series of sales he had made before his termination. Several commission contracts were involved, as the company changed the agreement yearly.

A court concluded that some of the contracts contained ambiguous terms and a trial was in order. On other commission claims, the court found that Tracy clearly wasn’t entitled to more money. (Tracy v. Filenet, No. 06-1962, DC NJ, 2007)

Final note: New Jersey contract law says that, in order to win a breach of contract claim, a plaintiff must show:

  • There was a contract.
  • The other party breached the contract.
  • The plaintiff suffered damages because of the breach.
  • The plaintiff didn’t breach any of his or her own obligations under the contract.

Analyzing a contract is time-consuming and expensive. That’s why it’s best to keep the agreement simple and have it approved by your attorneys before you put it to use. Filenet could have saved a lot of money with a legal review.

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