What Is A Commission Agreement? (2026 Updated)

If you pay people based on results (like sales, referrals, or deals closed), you'll almost always hear the same question sooner or later: "So how does commission actually work?"

And right after that comes the riskier question: "Do we really need this in writing?"

A well-drafted commission agreement can save you a lot of stress. It helps you set expectations, avoid disputes about what's "owed", and protect your business if someone leaves or a deal falls over.

Below, we'll break down what a commission agreement is, when you need one, what to include, and the common traps businesses run into when commission isn't documented properly.

What Is A Commission Agreement (And When Do You Need One)?

A commission agreement is a contract that sets out how commission will be earned, calculated, and paid.

In plain English: it's the document that answers the money questions before they turn into a dispute.

Commission arrangements are common across all sorts of UK businesses, including:

• sales teams and business development roles
• recruitment and talent agencies
• referral partners and introducers
• account managers and partnership managers
• influencers and affiliates (where commission is tied to tracked sales)
• brokers, agents, and intermediaries

You generally need a commission agreement when:

• someone is being paid based on performance (not just time worked), and
• the numbers depend on rules (e.g. "paid when the customer pays", "paid only on gross profit", "paid only if the customer stays 30 days").

It's also worth noting that a commission arrangement can sit inside an employment relationship or outside it. For example, it might be:

• a schedule or add-on to an Employment Contract (for employees)
• a separate contract for a contractor or sales agent (for non-employees)
• part of a broader services agreement with a commercial partner

The key is not what you call it. It's whether the document clearly explains the rules in a way both sides can follow.

Commission Agreement Vs Bonus: What's The Difference?

Businesses often use "commission" and "bonus" interchangeably, but legally and practically they can work quite differently:

• Commission is usually tied to a defined measurable outcome (e.g. "5% of net revenue from deals you close").
• A bonus is often discretionary or tied to broader performance (e.g. company results or subjective KPIs).

If you want to keep a payment truly discretionary, you need to be careful with your wording and how you operate it in practice. If you consistently pay it the same way, it may start to look contractual.

How Does Commission Work In The UK (In Practical Terms)?

There's no single "UK commission law" that sets one universal model. Instead, commission is mainly governed by:

• your contract terms (this is why the commission agreement matters)
• employment law principles if the person is an employee
• wage protection rules, particularly around unlawful deductions from wages for employees

That means the way commission works is often decided by what you agree upfront.

In practice, most commission structures will specify:

• what counts as a "sale" or "deal"
• how commission is calculated (rate, base figure, thresholds)
• when commission becomes "earned"
• when it is actually paid
• what happens if a customer cancels, asks for a refund, or doesn't pay
• what happens if the staff member leaves partway through a sales cycle

Do You Need Commission Terms In Writing?

If commission is part of the deal, putting it in writing is one of the easiest ways to protect both sides.

Verbal agreements can be legally enforceable in some situations, but they're notoriously hard to prove if the relationship becomes strained. Even with email trails, you can end up arguing about what was agreed, when it changed, and whether someone accepted new terms.

If you've ever wondered how easily agreements can form through everyday communications, it's worth keeping in mind that emails can be legally binding depending on the wording and context.

What Should A Commission Agreement Include?

The best commission agreements are detailed where it matters and simple where it doesn't. Your goal is for someone to read it and immediately understand how they get paid.

While every business is different, most UK commission agreements should cover the key areas below.

1. Who The Parties Are (And Their Status)

Start with the basics:

• the business details
• the individual (or company) earning commission
• whether they are an employee, worker, contractor, or agent

This matters because employment status affects rights and risk. If you're unsure whether a "sales rep" should be an employee or a contractor, it's worth getting advice early, and documenting the arrangement properly (often alongside a Contractors Agreement where relevant).

2. The Commission Structure (Rates, Tiers, And Base Amount)

This is usually the heart of the agreement. Be specific about:

• the rate (e.g. 5% or 10%)
• what it applies to (gross revenue, net revenue, gross profit, margin, etc.)
• tiers and thresholds (e.g. higher rates after hitting monthly targets)
• what is excluded (VAT, delivery charges, refunds, chargebacks, discounts)

Tip: if you want the commission base to be "net of VAT", say that clearly. If you want it to exclude discounts, define what counts as a discount and who can approve one.

3. When Commission Is Earned Vs When It's Paid

This is where many disputes start.

There's a big difference between:

• earned (the conditions have been met, so commission is due), and
• paid (the payroll or payment date).

Common "earned" triggers include:

• when the customer signs a contract
• when the customer pays an invoice (or pays in full)
• after a cooling-off period has ended
• after delivery or completion of services

Then you can set the payment timetable, such as:

• monthly in arrears
• with the next payroll run
• within 14 days of month-end

This is also where you should address clawbacks (for example, if the customer cancels or gets a refund). If you sell to consumers, make sure the rules align with your consumer obligations, including refund rights under the Consumer Rights Act 2015, because disputes often start at the "refund" stage rather than the "sale" stage.

4. What Counts As A Valid Sale Or Lead?

You might assume "a sale is a sale", but commission often depends on definitions. Your agreement should clarify things like:

• does the sale need to be attributed in a CRM?
• does the person need to be the one who originated the lead, or just closed it?
• what happens if two people contribute?
• what counts as an eligible lead (new customers only, or upsells too)?

If you don't define this upfront, you can end up arguing about whether someone "really" earned the commission (which is the worst kind of argument to have with a sales-focused role).

5. Commission On Renewals, Repeat Orders, And Ongoing Revenue

For subscription businesses, retainers, and longer-term client accounts, you'll want to be clear about whether commission applies to:

• initial sale only
• renewals (and for how long)
• upsells or add-ons
• price increases

If you're running an ongoing subscription model, your commission rules should also align with your broader terms and cancellation process, because customer churn and cancellations can directly impact commission calculations.

6. What Happens If Someone Leaves (Or You Terminate The Relationship)?

One of the biggest flashpoints is commission on deals that are:

• in progress when someone resigns
• paid by the customer after someone leaves
• renewed after someone leaves

Your agreement should spell out:

• whether commission is payable on deals signed before the end date but paid later
• whether commission is forfeited if the person is not employed/engaged on the payment date
• whether there are exceptions (e.g. redundancy, termination without cause)
• handover obligations (so the business can keep servicing the customer)

Be cautious here. In employment situations, the way you structure "forfeiture" clauses can create real risk if it results in someone losing pay they've already earned. This is exactly the kind of clause that should be reviewed in context.

7. Confidentiality, IP, And Post-Engagement Restrictions

Salespeople often have access to valuable commercial information, including pricing, pipelines, and customer relationships. A commission agreement may need to include (or refer to) obligations around:

• confidential information
• customer lists and lead data
• ownership of materials created (scripts, outreach templates, sales assets)
• non-solicitation or non-compete restrictions (where appropriate and enforceable)

If this is a sensitive area for your business, it's usually better to handle it with a properly drafted NDA or tailored contract terms rather than relying on assumptions.

And if you're updating your documents, be mindful that changing commission terms isn't just an operational decision - it's often a contract change, which should be handled properly, especially where the person may not agree to it.

Common Commission Agreement Mistakes (And How To Avoid Them)

Commission disputes tend to follow patterns. Here are some of the most common mistakes we see, and what you can do instead.

Leaving "Edge Cases" Undefined

Commission rarely runs smoothly when you only document the happy path.

Ask yourself upfront:

• What happens if the customer pays late?
• What happens if there's a partial refund?
• What happens if the sale is cancelled within 14 days?
• What happens if the product is returned or a service is disputed?

It's much easier to agree the rule now than argue about it later.

Using A Generic Template That Doesn't Match Your Business Model

Commission structures vary wildly between industries. A template designed for a one-off retail sale may not work for:

• a SaaS subscription with churn
• a long sales cycle with staged payments
• a recruitment business where fees depend on candidates staying in-role

Generic templates can also miss key UK-specific issues (like wage deduction rules in employment relationships). It's usually worth getting the document tailored so you don't accidentally create a contractual promise you can't manage.

Not Aligning Commission With The Employment/Engagement Contract

If you have an employee with commission, the commission terms should sit neatly with their broader relationship documents.

For example, you don't want:

• an employment contract saying "commission is discretionary", but a commission plan describing it as guaranteed
• conflicting notice and termination rules across different documents
• commission clauses that don't match how payroll actually runs

If the person is not an employee, make sure the arrangement is documented in a way that reflects the commercial reality and avoids confusion about their status.

Changing Commission Rules Without Proper Process

Many businesses update commission plans when pricing changes, targets change, or margins tighten.

That's normal - but you should do it carefully.

If commission terms are contractual, you usually can't just announce a change and expect it to apply automatically. You may need written agreement, and it's often best practice to provide clear notice and updated documents.

Do You Need A Commission Agreement For Commission-Only Sales?

Commission-only sales roles can work well for the right business and the right person, but they need extra care.

From a legal and risk perspective, commission-only arrangements can raise questions about:

• employment status (employee/worker/self-employed)
• whether minimum wage rules apply
• what happens during quiet months
• how expenses are handled
• how targets and performance management work

If you're thinking about setting up commission-only pay, it's worth reviewing how to structure it properly, including what your documents should say and how you operate it day-to-day. This is a common area where businesses benefit from a clear plan and a clear contract, rather than trying to patch issues as they pop up.

In practice, many businesses combine:

• an overarching employment or contractor agreement (setting the relationship terms), and
• a separate commission agreement (setting the commission mechanics)

That way, each document stays focused and easier to update over time.

Key Takeaways

• A commission agreement is a contract that sets out how commission is earned, calculated, and paid, so you can avoid misunderstandings and disputes.
• Good commission agreements clearly define the commission rate, what sales count, when commission is earned versus when it's paid, and what happens with refunds, cancellations, or non-payment.
• Make sure your commission terms match the wider relationship documents, especially where commission sits inside an Employment Contract or a contractor arrangement.
• Leaving "edge cases" undefined (like partial refunds, late payment, or deals in progress when someone leaves) is one of the fastest ways to end up in a commission dispute.
• Be careful when changing commission structures - if the terms are contractual, you'll often need agreement and clean documentation, not just an announcement.
• If you're paying commission to non-employees (like contractors or agents), document the arrangement properly, often alongside a Contractors Agreement, so everyone is clear on expectations and risk.

If you'd like help drafting or reviewing a commission agreement (or making sure it works properly alongside your wider contracts), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.