What Is A Commission Agreement? (2026 Updated)

If you’re paying someone based on results (like sales, referrals, or leads), it’s tempting to keep things informal - especially if it’s a friend, a contractor, or your first “sales hire”.

But commission arrangements are one of the easiest ways for misunderstandings to turn into disputes, because everyone tends to remember the “percentage” and forget the details.

This 2026 update reflects what we’re consistently seeing in New Zealand businesses: more online selling, more affiliate-style relationships, and more mixed workforces (employees + contractors). The legal basics haven’t become complicated - but the risks have, and getting your agreement right from day one matters.

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

A commission agreement is a legal agreement that sets out how a person will earn commission - usually a percentage or fixed amount - for achieving a defined outcome.

That outcome might be:

• making a sale (e.g. closing a deal),
• introducing a customer (e.g. referrals),
• generating qualified leads,
• renewing subscriptions or accounts, or
• hitting revenue targets over a period.

In practice, commission agreements show up across heaps of industries in NZ, including:

• software/SaaS businesses running affiliate or reseller channels,
• real estate and recruitment-style referral models,
• marketing agencies paying referral partners,
• wholesale and distribution businesses using sales agents, and
• services businesses paying staff bonuses based on billings.

You usually need a commission agreement (or a clear commission clause inside another contract) if:

• you’re paying someone based on performance rather than time,
• there’s any chance of disagreement about when commission is earned, or
• the relationship will continue over time (so the “what happens if we part ways?” question will come up).

Commission terms can sit inside different documents depending on the relationship - for example, inside an Employment Contract for an employee, or inside a services/contractor agreement for a contractor.

Commission Vs Bonus: What’s The Difference?

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

Commission (Usually Formula-Based)

Commission is usually tied to a set formula, such as:

• 5% of GST-exclusive revenue received from the customer, or
• $100 per signed contract, or
• 10% of profit margin on each product sold.

Because it’s formula-based, commission is often treated as a core part of remuneration - meaning if the contract says it’s payable, it’s much harder to “change your mind later” without consequences.

Bonus (Often Discretionary Or Conditional)

A bonus may be:

• discretionary (e.g. “we may pay a bonus if we choose”),
• dependent on overall business performance,
• based on qualitative factors (like team performance), or
• subject to extra conditions (like being employed at payment time).

The key risk is when a business intends something to be discretionary but describes it in a way that sounds guaranteed. This is where clear drafting matters - and also where the Fair Trading Act 1986 can be relevant if representations are misleading or confusing in a business-to-business context.

Why This Distinction Matters

If you’re using commission as a major part of how someone gets paid, you should treat it like a “must be crystal clear” contract term. Vague commission promises are a common source of arguments about underpayment, entitlement, and whether someone was misled about earnings potential.

What Should A Commission Agreement Include?

A strong commission agreement doesn’t just state the rate. It spells out the “rules of the game” so both sides know what’s expected and what happens in edge cases.

Most commission agreements should cover the following.

1) Who The Parties Are (And What Role They’re Performing)

Start with the basics: who is paying the commission, and who is earning it?

This also ties into whether the person is an employee or a contractor. Misclassifying someone (calling them a contractor when they function like an employee) can create tax and employment law risks, and may affect entitlements.

If you’re engaging contractors, it’s often worth putting the relationship on a proper footing with a tailored Contractor Agreement.

2) What Exactly Counts As A “Commissionable” Event?

This is where many agreements fall over. You’ll want to define the trigger clearly, for example:

• when the customer signs a contract,
• when the business invoices the customer,
• when the customer pays (and the business actually receives cleared funds),
• when a lead is “qualified” (and what qualified means), or
• when a free trial converts to a paid plan.

If you don’t define the trigger, you can end up in messy arguments like:

• “I introduced them, so I’m owed commission even if they didn’t pay.”
• “They paid later - I should still be paid even though I left.”
• “That customer would’ve bought anyway.”

3) The Commission Rate And How It’s Calculated

This sounds simple, but it’s often where the most money is at stake. Your agreement should be clear about:

• percentage vs fixed fee,
• whether the base amount is GST-inclusive or GST-exclusive,
• whether it’s based on gross revenue, net revenue, or profit margin,
• how discounts, refunds, credits, chargebacks, or failed payments are handled, and
• whether shipping, installation, or third-party costs are excluded.

If your business sells online subscriptions, you may also need to define whether commission is paid on:

• initial sign-up only,
• renewals for a defined period, or
• ongoing recurring revenue while the customer stays active.

4) Payment Timing And Reporting

A clear agreement sets expectations about when commission is paid, for example:

• monthly in arrears,
• within 7–14 days after month-end,
• only once payment is received from the customer, or
• subject to a minimum threshold (e.g. only pay once commission reaches $200).

It should also say what reporting will be provided (if any), and how disputes about calculations will be handled.

5) Territory, Exclusivity, And Customer Ownership

If you have more than one sales rep/agent/partner, you should define boundaries. Otherwise, you can end up with two people claiming commission on the same account.

Depending on your model, you may want to cover:

• territory (e.g. Auckland region only),
• industry segment (e.g. hospitality customers),
• named accounts,
• whether the arrangement is exclusive or non-exclusive, and
• what happens if the customer upgrades or expands later.

6) Term, Termination, And Commission After The Relationship Ends

This is the part people avoid talking about - until someone resigns, gets terminated, or the relationship simply fizzles out.

You’ll want to address:

• how long the agreement runs for (fixed term vs ongoing),
• how either party can end it (notice periods),
• whether commission is payable on deals in progress, and
• whether commission continues for a “tail period” after termination (common in referral/affiliate arrangements).

For employee-based roles, termination and notice terms are usually handled in the employment agreement, and it can be important to understand topics like payment in lieu of notice if you’re ending the relationship quickly.

7) Confidentiality And Intellectual Property

Anyone doing sales, lead generation, or referral work will likely get access to:

• pricing and margins,
• customer lists and CRM data,
• sales scripts and templates, and
• campaign strategy and positioning.

So, your commission agreement (or the broader contract it sits within) should include confidentiality protections and clarify who owns IP created during the engagement (like pitch decks, email sequences, or landing page copy).

For many businesses, this is handled with a proper Confidentiality Clause or an NDA, depending on how sensitive the information is.

8) Dispute Resolution

Even with the best intentions, commission disputes happen. You can reduce the damage by having a process for resolving issues, such as:

• good-faith negotiation first,
• mediation, and
• steps for information sharing (so the person can understand how the numbers were calculated).

This doesn’t guarantee you’ll avoid conflict, but it can prevent a disagreement from escalating into a full legal dispute.

Employee Commission Vs Contractor Commission: What’s The Legal Risk?

One of the biggest “hidden” issues with commission arrangements is that the legal rules can change depending on whether the person is an employee or an independent contractor.

If The Person Is An Employee

If your commission earner is an employee, your arrangement needs to align with New Zealand employment law. In general, that includes:

• having a written employment agreement,
• meeting at least the minimum wage requirements (including how commission interacts with wages),
• paying holiday pay and other entitlements correctly, and
• following a fair process for any performance issues or termination.

In other words, commission doesn’t replace your baseline employment obligations - it sits on top of them, and should be documented clearly in the employment agreement.

If The Person Is A Contractor Or Sales Agent

If the person is genuinely a contractor (or an external sales agent), you’ll usually have more flexibility in how you structure commission, but you also need to be careful about:

• how you describe the relationship (to avoid confusion or misclassification),
• tax responsibilities (contractors typically manage their own tax obligations), and
• restraint/confidentiality protections (because contractors often work with multiple clients).

Sometimes, the best structure isn’t a “commission agreement” standalone document at all - it might be a broader service arrangement with a commission schedule attached. This is common where someone is doing lead generation, business development, or ongoing account management.

Why Misclassification Can Cause Problems

If someone is treated like an employee but labelled as a contractor, you could face disputes around:

• unpaid leave entitlements,
• PAYE and KiwiSaver obligations (depending on the facts), and
• rights on termination.

This is one of those areas where getting tailored advice early can save a lot of stress later - especially if the commission earner will be a key part of your growth.

Common Commission Agreement Mistakes (And How To Avoid Them)

Most commission disputes don’t happen because someone is trying to do the wrong thing - they happen because the agreement didn’t cover the messy real-life scenarios.

Here are some common pitfalls we see.

1) Not Defining “Revenue” Or “Sale” Properly

Is it revenue when you invoice, or when you get paid?

If your customers pay in instalments, do you pay commission on each instalment, or only after the full amount is paid?

These details matter. If you don’t spell them out, you’ll end up debating what “counts”.

2) Forgetting Refunds, Chargebacks, And Cancellations

If you pay commission when the sale is made, but later the customer cancels or demands a refund, you need a clear rule for what happens next, such as:

• clawback (repayment),
• offset against future commission, or
• no clawback (but then you’re taking on that risk as the business).

If you sell to consumers, your refund obligations can also be shaped by the Consumer Guarantees Act 1993 and the Fair Trading Act 1986, so your commission structure should work in a way that doesn’t encourage risky sales behaviour or misleading representations.

3) Vague Targets Or “We’ll Work It Out Later” Terms

A handshake deal like “we’ll do 10% commission” is rarely enough.

When you start scaling (more team members, bigger deals, longer sales cycles), the gaps show fast - and the costs of getting it wrong increase.

4) Not Aligning Commission With Your Pricing And Marketing Rules

If commission is paid on revenue, salespeople may be motivated to discount heavily to close deals.

That’s not necessarily bad - but you should decide upfront:

• who can approve discounts,
• whether commission is reduced when discounts exceed a threshold, and
• whether commission is based on list price or actual sale price.

5) No Clear Rules About Leads And Referrals

If the commission is for referrals, define what counts as a referral and what doesn’t.

For example:

• Does the customer need to mention the referrer at sign-up?
• What if the customer was already in your CRM?
• What if two people refer the same customer?

These aren’t “edge cases” for long - they become regular business problems as you grow.

6) Not Including Confidentiality Or Restrictions Where Appropriate

If someone is representing your brand, you’ll often want obligations around confidentiality and conduct.

Depending on the model, you may also want reasonable restrictions to protect your business relationships - but these clauses need to be drafted carefully to be enforceable and proportionate.

Do You Need A Lawyer To Draft A Commission Agreement?

You don’t legally have to use a lawyer, but it’s usually a smart move if commission is:

• a significant part of someone’s pay,
• tied to longer-term customer relationships (like subscriptions or renewals),
• part of a contractor/agent/referral model (where disputes can be harder to manage), or
• connected to other legal risks (like advertising claims, data use, or customer contracts).

Online templates often miss the practical realities of your business model. Even small wording changes (like the definition of “earned” vs “payable”) can make a big difference to outcomes if there’s a disagreement later.

It can also be a good idea to step back and consider how the commission agreement fits into your overall legal setup - for example:

• If you’re using resellers or channel partners, your broader terms may need a Distribution Agreement.
• If you’re growing a team, strong core contracts matter, including your Employment Contract templates.
• If you’re collecting leads or sharing customer information, you’ll want a fit-for-purpose Privacy Policy and compliant processes under the Privacy Act 2020.

Put simply: commission is where law, money, and human motivation overlap - so it’s worth getting right from day one.

Key Takeaways

• A commission agreement sets out how commission is earned, calculated, and paid, and it’s essential whenever you’re paying someone based on results like sales, leads, or referrals.
• Good commission terms go beyond the percentage - they define the commission trigger, calculation method (including GST and refunds), timing, reporting, and what happens when the relationship ends.
• Whether the person is an employee or a contractor matters, because different legal obligations apply and misclassification can create serious risk.
• Common commission disputes come from unclear definitions of “sale” or “revenue”, missing rules for refunds/chargebacks, and no process for handling competing lead claims.
• Commission arrangements often intersect with broader legal compliance, including consumer law (Fair Trading Act 1986 and Consumer Guarantees Act 1993) and privacy obligations under the Privacy Act 2020.
• Using a tailored agreement (rather than a generic template) is one of the simplest ways to protect your cashflow, your customer relationships, and your business reputation.

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