Last updated February 2, 2024
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What is a Compensation Agreement?
A Compensation Agreement is a contract between an employer and an employee that records a change in the employee’s wage or earning potential. It’s an essential document for managing and retaining employees.
It can outline simple or complex compensation changes to an employee’s hourly wage or yearly salary. If an employee works on commission, you can outline changes to their commission formula too.
A Compensation Agreement acts as a supplemental form to an Employment Contract, in that it does not replace it. Instead, a Compensation Agreement only changes the details regarding employee compensation.
A Compensation Agreement may also be known as a:
- Employee raise agreement
- Pay raise agreement
What is the purpose of a Compensation Agreement?
A Compensation Agreement ensures that both the employer and the employee are clear about the compensation terms.
Despite there being no legal requirement to put them in writing, Compensation Agreements are the best way to create a record of the agreed-upon payment changes and protect the interests of both parties.
Simply put, verbal agreements do not suffice when changing compensation terms. Relying on a purely verbal agreement should be avoided because it’s difficult—if not impossible—to prove its exact terms. If a dispute arises and an employer and employee don’t have a Compensation Agreement, they could recall the new terms differently and have trouble resolving the conflict.
Instead, written Compensation Agreements provide a record of the payment terms so that either party can use it as legal protection in case of a dispute or lawsuit.
What’s included in a Compensation Agreement?
A Compensation Agreement should include specific terms
- Date of the original Employment Contract
- Employer name and address
- Employee name and address
- New compensation information
- Start and end dates
When outlining the new compensation details, specify how you will pay an employee (hourly wage, yearly salary, commission, etc.), as well as the rate and frequency of payment. You must abide by your province or territory’s minimum wage rate.
Also, you may use a Compensation Agreement to make changes to an employee’s overtime payment and vacation time.
Our Compensation Agreement template requires you to provide a start and end date for the compensation change. If you want to make a long-lasting change to an employee’s compensation, simply provide a far-away end date.
Alternatively, you may use an Amending Agreement to record an employee’s permanent compensation change.
What’s the difference between a Compensation Agreement and an Employment Contract?
Although related, a Compensation Agreement is quite different from an Employment Contract.
After an employer has offered someone a job, they create an Employment Contract to outline the employment terms, such as the recruit's job title, responsibilities, and hours, as well as details about the initial compensation an employee receives when they begin their employment.
A Compensation Agreement is usually introduced at some point during the employment term, such as after a probationary period or annual review, to outline any changes in wage, salary, or commission. The agreement simply records the employee's updated compensation terms.
As stated previously, a Compensation Agreement is a supplemental form to an Employment Contract and does not replace the entire thing.
When to use a Compensation Agreement
Use a Compensation Agreement when:
- Promoting an employee: When you offer an existing employee a promotion, a Compensation Agreement may be necessary to outline a wage or salary that is suitable for their new position.
- Giving an employee a raise: After evaluating an employee, you may increase their compensation to retain them. Using a Compensation Agreement is the easiest way to record a compensation change.
- Changing commission formula: When a salesperson or agent works on commission, a Compensation Agreement may be used to outline the percentage of commission earned for each sale, how often commissions are paid, and other details.
