What Is An Employee Commission Agreement? (2026 Updated)

If you’re hiring (or managing) staff who earn commission, it’s normal to feel a bit unsure about what you can “just agree verbally” versus what really needs to be written down.

Commission arrangements can be a fantastic way to incentivise sales and reward performance - but they can also lead to misunderstandings fast if the rules aren’t clear. This 2026 update reflects what we’re consistently seeing in New Zealand businesses today: more complex sales channels, more remote work, and more attention on pay clarity and payroll compliance.

An Employee Commission Agreement is one of the simplest ways to protect your business (and your people) from day one by setting out exactly how commission is earned, calculated, paid, adjusted, and what happens when things change.

What Is An Employee Commission Agreement?

An employee commission agreement is a written agreement that sets out how an employee will earn commission as part of their remuneration.

In practice, it might be:

• a stand-alone commission agreement you sign alongside the employment agreement; or
• a commission schedule or annexure attached to the employment agreement; or
• a clause set included within the employment agreement itself.

The key point is this: commission is still “pay”. That means you need to document it clearly, administer it consistently, and make sure it complies with New Zealand employment laws (including minimum entitlements).

In most cases, your commission arrangement should sit alongside a properly drafted Employment Contract so that the overall relationship is clear - role, hours, base pay (if any), leave, notice, and then the commission structure on top.

Commission Agreement vs Bonus: What’s The Difference?

People often use the words “bonus” and “commission” interchangeably, but legally and practically they can work quite differently.

• Commission is usually tied to measurable results (for example, a percentage of sales revenue, profit margin, or signed contracts).
• Bonuses are often more discretionary (for example, “at the employer’s discretion based on performance”).

Why does this matter? Because if something is “commission” and the employee has met the criteria, it’s harder to treat it as optional. A good commission agreement reduces uncertainty by spelling out whether the commission is automatic on achievement, conditional on other requirements, or discretionary in limited ways.

Does A Commission Agreement Replace The Employment Agreement?

No - it usually shouldn’t.

In New Zealand, the employment agreement is the core document governing the employment relationship. A commission agreement typically operates as an additional set of pay rules. If the commission document contradicts the employment agreement, you can end up with confusion (and potentially a dispute) about which term applies.

That’s why it’s so important that your documents are consistent and drafted to work together.

When Do You Need An Employee Commission Agreement?

If you pay commission in any form, it’s a smart move to document it.

But it becomes especially important when any of the following are true:

• You’re hiring a salesperson, account manager, recruiter, broker, or business development employee.
• You have multiple products/services with different margins, and commission varies by product line.
• You have “team commission” or shared accounts and need a fair allocation method.
• Sales can be reversed (refunds, cancellations, chargebacks, contract unwind).
• You want to change commission rates depending on targets, tenure, or performance bands.
• You’re scaling quickly and want consistent rules across the team.

If You’re Paying “Commission Only”

Commission-only arrangements can be high risk if they’re not structured correctly, because you still need to meet minimum legal requirements (and you need to be very careful about how you describe the role, track hours, and calculate pay).

If you’re considering commission-only pay, it’s worth reading commission only guidance first - and getting advice specific to your setup before you roll it out.

If You’re Not Sure Whether They’re An Employee Or A Contractor

Some businesses try to sidestep commission complexity by engaging “sales contractors” instead. That can be legitimate in the right circumstances, but misclassifying an employee as a contractor can create serious liability.

If the worker is truly in business on their own account, you might need a contractor document like a Contractor Agreement (rather than an employee commission agreement). The right option depends on the real nature of the relationship - not just what you call it.

What Should An Employee Commission Agreement Include?

A strong employee commission agreement makes commission predictable, measurable, and difficult to argue about later.

While every business is different, most NZ commission agreements should cover the issues below.

1. What Counts As A “Sale” (Or Commissionable Event)?

This is the foundation. You want to define exactly what triggers commission, for example:

• signed customer contract
• invoice issued
• payment received
• job completed / service delivered
• end of cooling-off period

If you don’t define this clearly, you can end up in messy situations like: “I closed the deal, so I’m owed commission” versus “the customer never paid, so no commission is payable.”

2. Commission Rate, Structure, And Thresholds

Your agreement should set out:

• the commission rate (e.g. 5% of revenue)
• whether it’s based on revenue, profit, margin, or another metric
• tiers/accelerators (e.g. 3% up to $50k, 6% above $50k)
• targets and when higher rates apply
• whether GST is included or excluded in the calculation

Even small drafting details matter here. A single sentence can change whether commission is calculated on “total contract value” or only on “amounts actually received”.

3. When Commission Is Payable (Timing And Payroll)

Commission payment timing is one of the most common sources of disputes.

Your agreement should specify:

• how often commission is calculated (weekly, fortnightly, monthly, quarterly)
• when it is paid (e.g. the next payroll cycle after calculation)
• what happens if commission calculations require reconciliation later
• any requirement for management approval (and what that approval is actually checking)

You also want to align commission with your payroll processes so you’re meeting your pay cycle obligations under the employment agreement.

4. Deductions, Clawbacks, And Adjustments (Refunds, Cancellations, Bad Debt)

Realistically, some sales don’t “stick”. Customers cancel. Goods get returned. Projects are refunded. Payments fail.

That’s why many commission agreements include mechanisms for:

• refund adjustments (commission reversed if money is refunded)
• cancellation rules (no commission unless minimum term is met)
• bad debt (no commission if the invoice isn’t paid after a defined period)
• partial payments (commission payable pro-rata as payments are received)

Be careful here: deductions from wages are a sensitive area and need to be handled properly. Your document should be drafted so it’s clear whether a “clawback” is a true deduction from wages, or simply an adjustment to future commission calculations.

5. What Happens When The Employee Leaves (Resignation Or Termination)

This is another major flashpoint.

You’ll usually want clear rules around:

• commission earned but not yet paid at the termination date
• deals in progress (pipeline) and whether commission is payable
• sales completed during a notice period
• handover situations (who gets commission if another staff member completes the work)

From a business perspective, you want to avoid paying commission twice for the same deal. From an employee perspective, they want confidence they’ll be paid fairly for results they delivered.

Good drafting aims to handle both fairly - and in a way that’s clear enough that you don’t have to “negotiate it” at exit time.

6. Dispute Process And Record-Keeping

Commission disputes are often evidence disputes.

For example:

• What data source is the “single source of truth” (CRM, invoicing system, signed order form)?
• Who is responsible for updating it?
• What’s the timeframe to raise a commission query?

Including a simple internal process (and a timeframe for queries) can stop a minor issue becoming a full employment relationship problem.

7. Relationship With Other Policies And Entitlements

Commission arrangements don’t exist in a vacuum.

Your commission agreement should be consistent with other documents and obligations, including:

• confidentiality terms (especially for client lists and pricing)
• restraint clauses (if appropriate and enforceable)
• your incentives policies and performance management process

If your sales team also works additional hours during peak periods, it’s also worth checking how overtime is dealt with. Commission doesn’t automatically cancel out overtime obligations, so it’s important to be consistent with your approach to overtime and remuneration generally.

How Do You Calculate Commission (And Keep It Compliant)?

There’s no single “right” commission formula - the best approach depends on your sales cycle, margins, cash flow, and how much control the employee has over the result.

But your structure needs to be:

• understandable (the employee should be able to verify it),
• measurable (based on objective data), and
• compliant with minimum legal standards.

Common Commission Models In NZ

• Percentage of revenue: e.g. 5% of the invoice amount (often excluding GST).
• Percentage of gross profit: e.g. 15% of margin (more complex, but better aligned to profitability).
• Tiered commission: e.g. higher rates once the employee hits a monthly target.
• Flat fee per sale: e.g. $100 per closed deal (simple and predictable).
• Team commission pool: commission shared across a team based on a formula.

Minimum Wage Still Matters

Even with commission-heavy roles, you need to ensure employees receive at least the minimum wage for hours worked (unless a very specific exemption applies, which is uncommon in everyday sales roles).

This is one reason commission-only arrangements can be tricky: if an employee works a quiet month and doesn’t generate enough commission, you can’t simply pay them $0 for that period if they’ve worked hours that should be paid.

Avoid “Cash-In-Hand” Shortcuts

When commission is involved, some businesses are tempted to pay “cash bonuses” off the books to keep things simple.

That approach can create tax issues, payroll issues, and serious legal risk. It’s always safer to pay commission transparently through payroll and keep proper records - and avoid arrangements that could be seen as cash in hand.

Leave, Holidays, And Commission

Commission can also affect how you calculate holiday pay and leave entitlements, because variable pay may form part of an employee’s “gross earnings” depending on how they’re paid and what the payments represent.

This is a technical area (and the Holidays Act 2003 can be complex in practice), so it’s worth getting tailored advice on how your commission payments interact with annual leave, public holidays, and other leave calculations.

Common Risks (And How A Commission Agreement Helps Avoid Them)

Commission can be motivating and fair - but only if the rules are clear and consistently applied.

Here are some of the most common issues we see, and how a written agreement helps.

“You Changed The Commission Rate Without Telling Me”

If your commission terms are vague, you might think you can change them quickly as the business evolves. But in employment, changes to pay usually need consultation and agreement.

A well-drafted commission agreement can include:

• a review mechanism (e.g. rates reviewed quarterly), and
• a process for updates (e.g. changes apply from a future date after notice).

This helps you stay flexible without accidentally breaching the employee’s agreed remuneration terms.

Disputes About “Who Owned The Client”

In many businesses, more than one person touches a sale (lead gen, sales closer, account manager, customer success).

Your commission agreement should clearly set out attribution rules, including:

• who gets commission if the lead is reassigned,
• how commission is split for team deals, and
• what happens if the customer renews later.

Commission Not Matching What The Employee Expected

This often comes down to definitions:

• Is commission calculated on signed value or paid value?
• Is it calculated on the full contract or only the first invoice?
• Does it include setup fees, shipping, add-ons, and renewals?

If you spell these out upfront, you reduce the risk of frustration, resignation, or formal complaints later.

Commission Conflicts With Other Employment Terms

Commission disputes can also overlap with other issues like working hours, role expectations, or employment status (for example, casual vs permanent patterns).

If your workforce includes different arrangements, it’s worth keeping your documents consistent and checking how entitlements differ - for example, casual vs part-time classifications can affect how you document hours, availability, and expectations.

Inconsistent Records Or Unclear Data

If the employee can’t verify their commission, trust breaks down quickly.

Good commission systems usually include:

• a defined reporting source (e.g. CRM + invoicing system)
• regular statements (so errors are caught early)
• a clear correction process

Putting this into the agreement makes it part of “how you do business”, not an ad hoc favour.

Key Takeaways

• An employee commission agreement is a written document that sets out how commission is earned, calculated, and paid, and it should align with the employee’s overall employment agreement.
• Commission is still “pay”, so it needs to be documented clearly and handled consistently, with minimum entitlements (including minimum wage and Holidays Act obligations) kept in mind.
• A strong commission agreement defines what counts as a commissionable sale, the commission rate and structure, the payment timing, and how refunds/cancellations and other adjustments are handled.
• You should include clear rules for what happens to commission when an employee leaves, because this is one of the most common areas where disputes arise.
• Commission-only arrangements and contractor-style sales arrangements can be high risk if misclassified or poorly drafted, so it’s worth getting advice before you roll them out.
• Clear record-keeping and a practical dispute process help you resolve commission questions early, before they turn into bigger employment issues.

If you’d like help putting the right commission structure in place (or reviewing what you’re currently using), reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.