Many states, including Michigan, have laws that award a salesperson twice the amount of the actual commission, along with attorney fees and litigation costs, if the salesperson wins a lawsuit over commissions. Such litigation can be extremely costly to a retailer.
According to David J. Gass and S. Grace Davis, of Miller, Johnson, Snell & Cummiskey, P.L.C., the best way to avoid litigation is to have clearly written agreements that are well understood by your sales staff. Don’t assume you understand each other; make sure you do. Gass and Davis offer the following pointers:
- Put your agreements in writing.
Your commissions system may be based on years of unwritten policies and procedures, or even worse, a handshake agreement. In the absence of a written agreement, many salespeople claim, often successfully, that they are owed more than what you agreed upon. Your agreements regarding commissions should always be in writing. - Explain how commissions are paid.
The contract should identify the percentage of commission you will pay and on what (earnings before tax, open purchase orders, etc.), when you will pay it and what deductions you will make. Define key words and phrases, because judges and juries won’t necessarily be familiar with the language of your business. - Explain what happens when the contract is terminated.
Hope for the best in your relationship with your salespeople, but draft your contract anticipating the worst. Your contract should include a post-termination commissions clause that clearly states: (1) whether you will pay any post-termination commissions; (2) if so, on what; and (3) for how long. - Select the law that you want to apply to the contract and identify where a lawsuit can be filed.
Most states allow parties to select the law that will apply to their contract and the state in which related lawsuits can be filed. - Sign the contract.
Both you and the salesperson should sign and date the contract and any modifications of it. Also, consider having salespeople initial key provisions in their contracts to signify that they have read and understood them. - Create a written record.
Business records can be powerful evidence. Start creating a written record of your relationship with your salespeople now. Send a detailed monthly commission report with each commission check. If there are performance problems—especially if your customers complain about the salesperson—record the problem or complaint in writing.
Follow these steps, even though they demand time and attention. The alternative could be a much greater expenditure of both of these—and money, too.
If you would like more information about this issue, please contact David J. Gass (616.831.1717; gassd@mjsc.com ) or S. Grace Davis (616.831.1786; davissg@mjsc.com ) at Miller, Johnson, Snell & Cummiskey, P.L.C.; a full service law firm with offices in Grand Rapids and Kalamazoo.
