Commission-Only Employment Agreement

A Commission-Only Employment Agreement in the United States establishes the conditions of employment, covering role, compensation, leave and notice of termination. It defines duties, remuneration, working hours, leave, and termination procedures binding employer and employee.

Under the FLSA, non-exempt employees must receive at least the federal minimum wage ($7.25 per hour as of 2024, under 29 U.S.C. § 206) for all hours worked in a workweek. If a commission-only employee's total commissions in a workweek are less than the minimum wage multiplied by the number of hours worked, the employer must make up the difference with a supplemental payment. Non-exempt commission-only employees who work more than 40 hours in a workweek must also receive overtime compensation at one and one-half times their regular rate of pay under 29 U.S.C. § 207. The regular rate for overtime purposes is calculated by dividing total weekly compensation (commissions plus any other remuneration) by total hours worked in the week, under 29 CFR § 778.109.

A narrow FLSA exemption for outside sales employees under 29 CFR § 541.500 exempts from both minimum wage and overtime requirements employees whose primary duty is making sales (as defined in 29 U.S.C. § 203(k)) and who customarily and regularly work away from the employer's place of business. The outside sales exemption has no salary minimum requirement — it applies solely based on the nature and location of the work. Employers who misclassify inside sales employees as exempt outside sales employees face FLSA liability for back wages, liquidated damages equal to the amount of back wages, and attorneys' fees under 29 U.S.C. § 216(b).

State-specific commission payment laws impose additional obligations on employers beyond the FLSA. California Labor Code § 2751 requires every employer who pays wages partly or wholly by commission to provide a written commission plan that sets out the method by which commissions are computed and paid. California Labor Code § 204 requires commission wages to be paid at least twice monthly, and California Labor Code § 201 requires earned commissions to be paid at the time of termination (or within 72 hours for employees who resign). New York Labor Law § 191 requires commission wages to be paid in accordance with the agreed terms of employment. Illinois's Wage Payment and Collection Act (820 ILCS 115) requires commissions to be paid as earned under the agreement. Florida, Texas, and most other states follow common law contract principles for commission payment timing without a specific commission payment statute.

The Defend Trade Secrets Act of 2016 (DTSA, 18 U.S.C. § 1836 et seq.) provides federal civil remedies for the misappropriation of trade secrets by commission sales employees who gain access to customer lists, pricing strategies, and proprietary sales methods in the course of their employment. Commission employment agreements should include confidentiality and trade secret protection provisions referencing the DTSA and the applicable state trade secret statute (the Uniform Trade Secrets Act (UTSA) as adopted in most states, or the Texas Uniform Trade Secrets Act).

A Commission-Only Employment Agreement is needed whenever an employer hires sales employees on a commission-only basis — without a base salary — and wishes to document the terms of compensation, territory, and post-employment obligations in a legally binding written agreement.

Inside and outside sales roles in real estate, financial services, insurance, technology sales, pharmaceutical sales, and advertising are the most common contexts for commission-only employment arrangements. A real estate brokerage engaging commissioned sales agents must provide a written commission agreement specifying the commission split between the broker and the agent, per National Association of Realtors (NAR) standards and applicable state real estate licensing statutes (such as California Business & Professions Code § 10136 and New York Real Property Law § 442-d).

Insurance sales agents hired on a commission basis — selling life, health, property and casualty, or disability insurance — are subject to state insurance department licensing requirements and must have a written commission agreement that complies with state insurance code provisions governing agent compensation. Texas Insurance Code § 4001.001 et seq. and California Insurance Code § 1621 govern insurance agent compensation in those states.

Technology and SaaS sales roles — account executives, sales development representatives, and enterprise sales managers at software companies — frequently use commission-only or high-commission arrangements with a smaller base salary. These agreements must carefully address the commission trigger (contract execution vs. cash receipt), treatment of multi-year contracts, renewal commissions, account expansion commissions, and the treatment of in-progress deals upon termination.

Employers in California face the highest level of legal scrutiny for commission-only arrangements because of California's strong wage protection laws. Under the California Supreme Court's decision in Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662, an employer cannot average commissions across pay periods to satisfy minimum wage requirements — each pay period must independently satisfy the minimum wage. The California Labor Code's protections for commissioned employees are enforced by the California Labor Commissioner through wage claims, with civil penalties and private rights of action.

The Federal Trade Commission's 2024 Non-Compete Rule — which would have banned most post-employment non-compete clauses for all employees — was vacated by the US District Court for the Northern District of Texas in Ryan LLC v. FTC (Aug. 2024). State law therefore continues to govern non-compete enforceability, and commission employment agreements should include non-compete and non-solicitation provisions tailored to the specific state's enforceability standards.

A complete US Commission-Only Employment Agreement addresses the following essential provisions to establish clear, legally defensible compensation terms and post-employment obligations.

The employment classification and FLSA status clause specifies whether the employee is classified as exempt or non-exempt under the FLSA, and if non-exempt, acknowledges the employer's obligation to track hours worked, pay minimum wage for all hours in workweeks where commissions fall below minimum wage, and pay overtime at one and one-half times the regular rate for hours over 40 per week. For employees claimed to be exempt under the outside sales exemption, the agreement should describe the employee's primary duty and the customary and regular requirement to work away from the employer's place of business.

The commission structure clause defines in precise mathematical terms how commissions are calculated. Key elements include: the commission rate or rates (e.g., 8% of gross sales receipts, or tiered rates that increase as the employee meets quota thresholds); the definition of gross sales for commission purposes (whether inclusive or exclusive of discounts, returns, cancellations, and bad debts); and whether the commission is based on gross revenue, net revenue, or gross profit. Ambiguity in the commission calculation formula is the most common source of commission disputes and should be eliminated by providing a worked example in the agreement.

The commission trigger and payment timing clause specifies the event that causes a commission to become earned — typically the execution of a sales contract, the shipment of goods, the delivery of services, or the receipt of payment from the customer. California, New York, and Illinois require this to be explicitly stated in writing. The clause must also address chargebacks — circumstances in which a previously paid commission is reversed, such as customer cancellation or return — and whether reversals can be recovered from the employee's future commissions or whether the employer bears the chargeback risk.

The draw against commission clause, if applicable, specifies the amount of any advance payment (recoverable or non-recoverable draw) made to the employee during periods when commissions have not yet been earned, the draw amount per pay period, and whether unrecovered draws carry forward against future commissions or are forgiven if the employee's employment ends.

The sales territory and account assignment clause defines the geographic territory or account list within which the employee earns commissions, whether the territory is exclusive, how territorial disputes between employees are resolved, and whether the employee receives commissions on accounts that were the employee's customers but are now managed directly by the company (house accounts).

The treatment of in-progress deals on termination clause specifies what happens to commissions on transactions that were negotiated or partially closed by the employee but not yet finalized at the time of termination. This is among the most litigated provisions in commission employment disputes. The agreement should specify whether the employee earns commission on deals closed within a specified tail period after termination, the conditions for earning a post-termination commission, and whether any post-termination obligation (such as a non-compete) affects the right to the tail commission.

The non-compete and non-solicitation clause must be tailored to the law of the state where the employee works. California (Business & Professions Code § 16600) broadly prohibits non-compete agreements for employees. Florida (Fla. Stat. § 542.335) and Texas (Tex. Bus. & Com. Code § 15.50) enforce reasonable non-competes with specific enforceability requirements. Non-solicitation of customers and employees is more broadly enforceable across states, particularly where the employer can demonstrate that the employee had access to confidential customer information.