Split Commissions - Legal Protections for Sales Reps
What Are Split Commissions?
Definition
- Split commissions are arrangements where two or more sales reps share commissions on a sale.
Common scenarios for split commissions include
- Collaborative sales efforts.
- Territory overlaps, such as an order originating in one sales rep’s territory but shipping to another sales rep’s territory.
- Introduction to the product by one sales rep and closure of the sale by another.
Why They Lead to Legal Disputes
- Lack of clear commission-sharing provisions in Sales Representation Agreements (SRA’s) often results in disputes over unpaid earnings, and lawsuits to recover unpaid commissions
Common Legal Issues with Split Commissions
Unwritten, Ambiguous or Unfair Agreements
- Verbal agreements or poorly defined terms in SRAs can lead to disputes over split-commissions because the parties may not have contemplated all situations where a split commission might be applicable.
- Likewise, when Principals have absolute discretion to apportion a commission, this too can lead to disputes over split-commissions.
Breach of Contract
- Violations of split commission agreements in sales representation contracts. Sales reps need to simply look at the provisions in their SRA.
- Is the Principal splitting commissions against the explicit provisions of the SRA?
Statutory Violations
- Violations of State laws protecting commissioned sales agents and independent contractors.
Legal Protections in Split Commission Disputes
Contract Enforcement
- Review and enforce SRAs and other written agreements that define split commissions and payment terms.
Federal and State Protections
- The Fair Labor Standards Act (FLSA) has prohibitions against unfair business practices which may be useful in split commission disputes
- State-specific laws protecting commission payments can act as leverage to collect what is due.
Statutory Remedies
- State laws allowing for penalties and attorney fees against an Employer or Principal in cases where they unfairly split commissions.
Steps to Take If You Have a Split Commission Dispute
Step 1: Review Your Contract Terms
- Focus on clauses related to exclusive territories, commissions, split commissions and termination.
Step 2: Document All Transactions
- Maintain proof of client communications, sales contributions, and agreements. Provide a spreadsheet on damages based on this info, reflecting commissions paid versus commissions due.
Step 3: Meet with an Attorney
- Find an attorney knowledgeable regarding the law on independent sales reps and consult with them on split commission issues.
Step 4: Send a Demand Letter
- Work with the attorney to demand unpaid commissions or contract enforcement.
Step 5: Seek to Negotiate a Settlement
- It is quicker and more cost-effective to seek a remedy out-of-court if possible.
Step 6: Consider Legal Action
- If negotiations fail, explore litigation options for commission recovery, and potential punitive damages and recovery of attorney fees.
How a Sales Rep Attorney Can Help with Split Commissions
Contract Drafting and Review
- Ensure commission splits are defined clearly in contracts.
Demand Letters and Settlements
- Send formal letters and negotiate settlements without litigation.
Litigation for Commission Recovery
- File lawsuits, when negotiations fail, to recover unpaid commissions and enforce contracts.
Statutory Violations and Claims
- Pursue claims under State commission protection laws.
Uncertain about the validity of a split commission?
Contact our sales rep attorneys today for a free consultation to protect your earnings.
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Real-World Examples and Case Studies
Case Study Example
- Our sales rep attorneys have had many successful recoveries of wrongfully split commissions for sales reps denied earnings.
- In one case, a sales rep’s SRA had a split commission clause which stated that the rep where the order was taken would receive 50% of the commission and the rep where the order was shipped would receive the other 50%.
- Our client was responsible for generating a series of large orders over several years through a lot of hard work in her authorized territory; but the products were shipped into a different territory. Strangely, there was no sales rep assigned to the territory where the products were shipped.
- The Company tried to pocket 50% of the commissions under the split commission provisions. Our attorneys disputed that and argued it was a case of bad faith since there was no other sales rep with whom to split the commission, and the Company could now be considered a “sales rep.”
- The sales rep was awarded $375,000 as her other 50% share of the commissions that had gone unpaid. The company was not allowed to increase its profit margin in this greedy manner
MANA’s (the Manufacturer’s Agents National Association) guidelines for splitting commissions:
- MANA recommends against a standard formula by which to split commissions and instead advises that an analysis on a case-by-case basis is preferred.
- MANA further suggests that the sales rep and Principal come to an agreement on a case-by-case basis before the sale is consummated.
FAQs About Split Commissions and Legal Rights
A split commission agreement is a provision in an SRA that calls for 2 or more sales reps to split a commission on a sale.
A written agreement addressing split commissions would be required for any party to enforce a split commission.
If the provisions for a split commission are not in writing, and the company tries to split the commission anyway, the primary sales rep should be able to recover the full commission.
If the other rep claims a larger share than the SRA allows, this must immediately be disputed.
The time to file a claim for unpaid or underpaid commissions (called the statute of limitations) varies from State to State. Generally, if the claim is based on an oral contract the sales rep has 1 or 2 years from the date they discovered the breach; and if it is based on a written contract the sales rep has 3 or 4 years from the date they discovered the breach.
The statute of limitations is not a straightforward analysis. An attorney experienced in the law regarding sales reps should be consulted to ascertain the deadline to file.
Related Topics and Internal Links
Protect Your Right to Fair Commission Splits
- Sales reps have many legal protections to recover reduced commissions. From statutory protections where the offending company may be liable for 2 times, 3 times or even 4 times what’s owed, to historic legal doctrines such as bad faith and procuring cause.
- However, a sales rep must take quick action to enforce or challenge the split commission provisions in their SRAs. Otherwise, continued acceptance of less than what’s owed may result in a Court finding that there has been a new contract created at the lower commission rate, based on the parties’ conduct.
- We have over 70 years combined experience in analyzing these issues and assisting sales reps in recovering their rightful commissions. If your commissions have been split unfairly, or unpaid, contact our experienced sales rep attorneys today for a free consultation.