The Hidden Legal Traps in Sales Commission Plans: What to Fix Now for 2026

Sales commissions are a powerful growth tool, and one of the most common areas where compensation plans run into trouble under state wage laws. Many commission conflicts don’t arise because a company intended to underpay its sales team. They arise because the commission plan does not clearly define when a commission is actually earned, or because payment timing, chargeback, and termination provisions are not carefully aligned with that definition.

As companies finalize their 2026 sales compensation plans, this is the moment to pressure-test plan language against real-world sales, finance, and payroll practices. Under many state wage laws, once a commission is earned under the plan, it may be treated as wages, which often determines whether commissions can be lawfully withheld, charged back, or forfeited, depending on the jurisdiction and the plan’s structure.

Below are common drafting issues we see in sales commission plans, and why they matter.

1. “Earned,” “Eligible,” and “Paid” Are Not the Same Thing

Commission plans often use terms like earned, eligible, due, payable, and paid interchangeably. From a legal perspective, those distinctions matter.

The key question in most commission disputes is straightforward:

At what point does the salesperson’s right to the commission become fixed under the plan (i.e., when is it “earned”)?

Where plans go wrong

A plan may state that commissions are paid when the customer pays, but elsewhere suggests that the commission is earned at booking, contract execution, or invoicing. When those concepts are not clearly separated and used consistently, ambiguity can create significant risk and may be construed against the drafter in some jurisdictions.

Why this matters under wage laws

In many states, once a commission is earned under the plan, it is treated as wages and may not be forfeited. That treatment can limit a company’s ability to delay payment, impose chargebacks, or condition payment on continued employment—and can also affect final-pay timing at separation. 

Plans can—and often should—include eligibility requirements and timing mechanics. But those concepts must be deliberately structured so they do not unintentionally define commissions as earned earlier than intended.

2. Termination Is Where Ambiguity Becomes Exposure

Commission plans are frequently tested at separation, but unclear drafting can create risk well before employment ends.

Common pressure points

• “Must be employed on the payout date” provisions that are not clearly tied to when a commission is earned

• Unclear treatment of commissions tied to customer payments received after separation

• No defined approach for handling partially completed deals

Why this matters

Under many state wage laws, commissions that are already earned generally cannot be forfeited. Employment-based conditions and eligibility requirements can be effective tools—but only when they are carefully integrated into the plan’s earning definition and overall structure, and applied consistently in administration.

3. Chargebacks Must Be Structured Around the Earning Definition

Chargebacks for cancellations, returns, credits, or non-payment are common in commission plans and can be legally permissible. Risk arises when chargebacks are layered onto a plan without regard to when commissions are deemed earned.

Common issues

• Chargebacks triggered after a commission is already earned under the plan

• Vague standards (e.g., “if the deal doesn’t work out”)

• Open-ended chargeback periods

• Chargebacks applied for circumstances outside the salesperson’s control (without clear, objective adjustment criteria)

Why this matters

If a commission is treated as earned wages under state law, a chargeback may be characterized as an unlawful wage deduction in some jurisdictions, particularly if the plan clearly establishes that the commission was not yet earned or remained subject to defined adjustment criteria (and the adjustment process is documented and consistently applied).

Well-drafted plans align the earning definition, eligibility conditions, and chargeback mechanics so they function as a single, coherent framework.

4. What Exactly Is the Commission Percentage Applied To?

Disputes often arise not over the commission rate, but over the commission base.

Common sources of confusion

• Undefined or inconsistently used terms such as “revenue,” “bookings,” or “ARR”

• Differences between recurring and non-recurring revenue

• One-year versus multi-year deals

• Credit allocation for splits, renewals, and spiffs (including timing and approval requirements)

Clear definitions of the commissionable base (and explicit exclusions) help prevent downstream disputes between sales, finance, and payroll.

5. The Written Plan Must Match Payroll Reality

Even a thoughtfully drafted commission plan can create risk if payroll practices do not align with the document.

Misalignment between what the plan says and how commissions are actually calculated or paid is a common trigger for wage-law claims, particularly when practices evolve but plan language does not.

Bottom Line: Start With “Earned”—Everything Else Flows from There

Sales commission plans are often drafted around incentives and targets, but disputes almost always turn on definitions. When a plan clearly defines when a commission is earned and carefully integrates payment timing, chargebacks, and eligibility conditions around that definition, it significantly reduces wage-law risk without undermining sales incentives.

As companies finalize their 2026 sales compensation plans, now is the right time to pressure-test commission plan language against how commissions are actually administered.

How We Can Help

If you are updating or rolling out a 2026 sales commission plan, a targeted legal review focused on when commissions are earned, chargebacks, and eligibility mechanics can help identify and address risk before disputes arise.

About the author: Jacqueline Piscitello is a Founding Partner of ExecutiveGC, LLP where she and her team provide practical, business-focused legal counsel to growing companies. To discuss your 2026 commission plan, contact Jacqueline today at jackie@executive-gc.com .

This article is for general informational purposes and does not constitute legal advice.