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Ahead of the Curve Auto Supplier Blog

February 11, 2013

Commissioned Sales Representatives: The Contract

Did you know that your employees can be considered sales representatives, just like outside sales representatives? If you pay your employee in whole or in part by commission, he or she is likely considered a “sales representative” under Michigan law. When this is the case, it is advisable for you and your employee to have a sales commission contract that lays out the specifics of how and when the employee is paid and addresses other important issues. There are no specific requirements under Michigan law for the form or content of a sales commission contract. A contract may be oral, written, no more than a couple of sentences, or exceptionally detailed. But just because any of these types of contracts may be legally valid, it does not mean that it is prudent. Here are a few things that you should keep in mind when working with a sales representative:
  •  Write it down - It’s easy for everyone to agree on the terms of a contract ... until they don’t. If a sales commission contract is not put in writing, you may find it difficult to establish what your sales representative’s commission should be if there is ever a dispute about it. So put it on paper and get it signed.
  •  Make it specific - Generally speaking, a sales commission contract should cover any issues about which you might later disagree, such as the commission amount and how the commission is to be calculated (i.e., on a per sale or per customer basis). Additionally, a contract should indicate whether there are any prerequisites to payment of commissions, such as repayment of any advanced costs or return of unsold products.
  • Renew it - Certain contracts have an expiration date, and if a contract says it will end in a year, it ends in a year. Courts generally won’t extend the term of a sales commission contract beyond a contract’s stated termination date. This is true even if the company and its sales representative continue to act as if the contract is valid. So if you want to continue with the contract beyond the expiration date, renew it in writing and get it signed.
If a sales commission contract is not carefully drafted, a dispute over its terms may result in significant costs and penalties. Under the Michigan Sales Representative Act, you may be liable for penalties of up to $100,000, in addition to the costs of litigation. It is best to anticipate the potential disputes and have a properly drafted sales commission contract to make sure that you are covered when your sales representative or employee no longer has your best interests in mind.

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