What is a Commission Share Agreement?
Commission sharing agreements commence when two or more brokers agree to share the commission which is earned from the sale of real property. This concept is a necessary component for the administration of cooperative brokerage in the MLS arena and has spread into other fields such as commercial and business brokerage. It is used to settle agency and liability issues which may arise in the context of cooperative agency, finders fees, sub-agency, buyer rebates, exclusive agency and other compensation related concepts. It is the method by which the compensation offered to the entire broker community in any given market place can be reduced to an amount which is acceptable by both of the involved brokers. Sharing commission usually involves the preparation of a written commission sharing agreement.
There are three common situations where commission sharing agreements are used: 1) A cooperating broker brings a Purchaser to a transaction. The Seller has entered into a Listing Agreement with an Exclusive Agent specifying the rate of commission the Seller may be obligated to pay. The Listing Agreement also grants the Exclusive Agent the right to cooperate whereby a commission shall be paid to the cooperating broker if it results in the consummation of a transaction. An administration of estate tax and agency liability is best accomplished through a written Commission Sharing Agreement. It serves as additional evidence of the parties’ intent that cooperating brokerage exists thereby overcoming the presumption that no cooperating brokerage existed if the Seller were to allege that no commission should be due to the cooperating Broker. 2) The commission is shared by many Brokers. Due to the political nature of the real estate business , sub-agents and sub-agency should be considered in many listings. 3) When a single sales person is acting as the broker and is representing the parties to a transaction. In this instance the commission may be shared with another real estate company. The use of Commission Sharing Agreements in this situation helps to satisfy the wheel of agency theory developed by the Florida Courts. The problem with distributing the commission so broadly is that the increase in broker’s expenses inevitably causes an increase in the commission.
Key Elements of a Commission Share Agreement
A thoroughly drafted commission sharing agreement will clearly state the parties who will benefit from the agreement, the commission structure, the procedure for paying and receiving commissions and the obligations of each party. In addition, there should be a dispute resolution clause included in the agreement, spelling out how to resolve any differences which arise as to the distribution of the commission before a neutral third party. Parties may also wish to include a confidentiality clause in their agreement if sensitive medical or pharmaceutical information will be disclosed as part of the agreement and any requisite consent to share such information.
Parties to a commission sharing agreement should consider these components in the following detail:
- Parties. Each party should be specifically identified in the agreement, including their address, contact information and role in the transaction.
- Scope of Work. The agreement should detail what work each party will perform in order to receive their share of the commission.
- Term and Termination. The agreement should spell out how long the contract is in effect and how it can be renewed at the end of the term or terminated early. A dispute resolution clause should also be included in order to clarify how to proceed in the event of a disagreement.
- Amount and Payment of Commission. The agreement should clearly specify how much the commission will be and how it will be broken down among the different parties. The agreement should also specify how and when the commission will be paid.
- Disclosure. Parties should also be aware of any reporting requirements (to whom and when) if patient health information (PHI) is being used or if any of the participants are considered covered entities under HIPAA (Health Insurance Portability and Accountability Act), or if any of the payor organizations are considered federal healthcare programs.
Advantages of a Commission Share Agreement
Commission sharing agreements offer various advantages to businesses and individuals. For the business, whether a small or large company, a commission sharing agreement offers a scalable way to increase sales and revenues without the burden of employee overhead expenses that are typical with other types of sales personnel. For example, by entering into a commission sharing agreement, a business/individual can use sales professionals to increase sales in another State or Territory without the need to hire any employees, purchase additional property, or take on any risk. A commission sharing agreement also has the advantage of placing the risk of a slow month or low sales volume on the business/individual independent sales person rather than the business/individual. Many businesses have used independent sales representatives with success. With a well-drafted commission sharing agreement, a business can incentivize an individual to sell without the costs typically associated with hiring an employee.
When drafting or negotiating a commission sharing agreement, an individual or business should consider the following:
Possible Issues and Solutions
Like all contracts, a commission sharing agreement has the potential to create problems, most of which arise from the imprecision of the document itself. Not unsurprisingly, the less detail there is in an agreement, the less clear-cut the obligations of each party will be and the greater the opportunities for disagreement among the co-brokers. The most common mistakes that co-brokers make in executing commission sharing agreements include:
Each of these problems can be avoided by being crystal clear about what each party is supposed to do and then having written documentation confirming each party’s understanding. The commission sharing agreement should set out as precisely as possible each of the broker’s responsibilities and the timeline by which each of those responsibilities will be completed. Keeping a close eye on the fulfillment of the terms of the agreement will help avoid conflicts even the smallest of broker responsibilities are followed through.
Legal Issues and Compliance
An effective commission sharing agreement must be drafted with careful consideration of relevant laws like the Fair Labor Standards Act (FLSA) and regulations where your business is located. Misclassification of agents, contractors, or employees can lead to large fines or back wages owed.
If you are a broker, you will need to ensure that you have complied with state licensing requirements which can vary from state to state, or federal requirements if your business operates in multiple states. In most states, a person needs a broker’s license to receive or share real estate commission payments. In California, for example , you will need a Special Circumstance Unlicensed Office license in order to receive commission payments as part of a referral arrangement.
What happens if you do not comply with these rules? Non-compliance of relevant laws and regulations can expose your business to expensive lawsuits, fines, or other penalties. For example, if you are classified as an independent contractor, but the work performed leads regulators to reclassify you as an employee, this can result in large amounts of unpaid back wages owed to the government and taxes owed to the IRS. In addition, fines could be levied by regulators and you may be required pay additional workers’ compensation premiums to a workers’ compensation insurer.
Drafting Suggestions for a Comprehensive Commission Share Agreement
A successful commission sharing agreement is one that is effective in capturing the parties’ intent, in a clear and readily understandable manner. The agreement should then be properly documented in a manner which demonstrates that the parties entered into it with an understanding of its terms, was written in a manner consistent with their intentions, and is intended to be binding on the parties.
To achieve each of those elements, the following practice tips are suggested:
A commission sharing agreement should always be written in the clearest language possible. While an employee’s compensation is an important and sometimes protected area with respect to an employee’s income taxes, there is no prohibition against using plain English when drafting a commission sharing agreement. For example, rather than describing how and when a commission is earned, it is far easier to simply say it is earned at the time the customer pays. Legal practitioners will see far too many contracts that are incomprehensible or at least confusing even to the legal mind. It is better to have a clear and easily understood contract than a lengthy and confusing contract. A concise, intelligible agreement will only help if there is a dispute. Courts, arbitrators, ombudsmen and other grievance experts will be pleased to work with a clean, clear and easy-to-read contract.
The more well documented a commission agreement is, the harder it will be for the parties to suggest it was not subject to their intent. Thus, when a commission is paid, properly document the fact. When a commission is not paid, document why not. Was the customer late with his payment? Was the customer’s payment returned for insufficient funds? There is no such thing as too much information. While it is not likely that a customer would try to withhold a commission payment for no reason at all, the point here is that every element of the agreement be plainly documented and recorded at the time.
While a legal contract can always be construed according to what it says, there is another element worth keeping in mind. That is, if there was a discussion among the parties but the discussion was not recorded, it will be difficult later to say the parties had such a discussion, and that it was part of the contract. Thus, if a commission agreement results from a good faith negotiation between the parties, there should be a meeting of the minds, and a mutual understanding as to its elements. However, if there is no such meeting of the minds, disputes will arise.
In addition, a key aspect of a contract involves the intent of the parties. It is not enough that the parties understand an agreement. They must write down its terms in such a way that there is a clear meeting of the minds. Be very specific about the amount of commissions, when they are earned, and how they are to be paid. Describe them in detail, and write down the obligations of the parties. If the parties document everything that might be an issue, most conflicts will never occur.
Examples and Case Studies
Since 2005, when the Sixth Circuit issued its opinion in Blimka v. My Web Wholesaler, LLC, many of our clients have entered into commission sharing agreements to implement or extend their existing commission compensation plans. Under these agreements, a sales person referred by another sales person will earn a commission on sales transactions that they facilitate.
In one such arrangement, a technology provider offered a sales referral program to third-party agents. Each agent who joined the program was assigned a unique link to the technology provider’s products and services. When an end-user received the agent’s unique link, the end-user could view and place orders through that link. The ordering tool provided various options for placing orders, payment terms and order fulfillment. Upon completion of a sale, the sales referral agent was entitled to ten percent (10%) of the net sales transaction amount. In one year, the program generated more than $250,000. Based on the program’s success, the technology provider revised its salesperson compensation program to allow additional compensation to be paid to salespersons who referred other salespersons to the program. In this case, such "second-level" referral salespersons also enjoyed certain administrative and technical privileges. In addition, in response to a competitor’s aggressive pricing strategy, the technology provider offered volume-based price discounts to its distribution channel. As a result, in the same year, the technology provider’s salespersons were rewarded for sales involving over $400,000.
In another example, a consulting firm entered into an affiliate agreement with a sales referral agent under which the sales referral agent agreed to refer prospective clients to the consulting firm in exchange for commission on the consulting firm’s fees. The consulting firm ensured that its engagement with each prospective client contained effectual terms . The engagement letter included language providing the sales referral agent was entitled to any referral commission amounts for the terms of the engagement letter. The consulting firm’s engagement letter specified payment terms at the end of each month for that month’s services. Multiple sales transactions occurred throughout the term of the agreement, but the maximum referral commissions paid to the sales referral agent in any month equaled ten percent of the consulting firm’s services during that month. After executing this agreement, the consulting firm generated approximately $105,000 in revenue and paid approximately $8,000 in referral commissions.
While the commission sharing agreements noted above were not registered with the SEC, there are exceptions to the general registration requirement under the Securities Act, such that these arrangements can be structured to avoid registration. The above examples illustrate the various ways in which commission sharing agreements can be structured and the benefits of structuring such arrangements to drive revenue. Regardless of how the arrangement is structured, a commission sharing agreement should be clearly drafted to address the arrangement’s scope and integrity. For example, the Shire Limited redress action (Securities and Exchange Commission v. Shire Limited, SEC Admin. Proceeding No. 3-17782) involved a firm that entered into referral agreements to pay third-parties for referrals of pharmacy customers, but failed to disclose how those payments were allocated. Also, in 2012, the State of Florida successfully prosecuted a registered representative who failed to disclose commissions from a third-party marketing vendor to his clients. While the investigation and prosecution reported by the Department of Insurance tracked back to 2008, an investigation of the sales persons’ dishonesty has led to various securities enforcement actions as recently as this year.