Gallet Dreyer & Berkey, LLP | Companies Using Sales Representatives - Important Issues to Consider
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Companies Using Sales Representatives - Important Issues to Consider

09/08/2011 | Fall 2011 Newsletter
Companies using sales representatives must have a carefully drafted written agreement in place with their sales representatives, to protect the company from liability and avoid disputes.

The following are a few points to bear in mind in connection with such contracts:

Commission, Rate and Basis
These terms must be carefully negotiated and drafted in the agreement. The agreement should answer such questions as: On which sales does the sales representative earn its commission and at what point in time? If the principal has more than one sales representative for a particular territory, who earns what commissions on which sales?

Sales Representative Accepting Orders
Generally speaking, a company should avoid allowing its sales representatives to accept orders for its goods (or services). Allowing a sales representative to accept orders can result in legal problems for the principal, particularly a foreign company. The company should be the only one to accept (or decline) orders. Those points should be clearly specified in the agreement; and the company should, in actual practice, adhere to them.

If the company plans to allow a sales representative to receive advances against future commissions, the contract should be very clear that these are advances to be repaid within a specified time — for example, if earned commissions do not equal the advances.

Non-Competition Provisions
Whether such clauses are valid and enforceable will depend on the applicable U.S. state law. In some states, non-competition clauses on the representative may not be enforceable at all. In others, including New York, they are enforceable subject to certain requirements and limits. Clauses prohibiting the representative’s disclosure/use of the company’s confidential information after the agreement ends, and clauses prohibiting the representative from soliciting customers of the company or the company’s employees after the contract ends may, if properly drafted, be enforceable. 

Is the Representative an Employee or Independent Contractor?
If the representative is an individual, it is quite possible that he/she will be legally characterized as the company’s “employee” for U.S. legal and tax purposes. Simply writing in the contract that he/she is not the company’s employee probably will not do the trick. There are specific rules governing when an individual is or is not the “employee,” rather than an independent contractor. If, in fact, the individual should successfully claim he/she is an employee and that certain payments should have been made to him or on his behalf by the “employer” that were not made, the “employer” may have serious tax and other liabilities. Foreign companies may not want to have any U.S. employees soliciting and taking orders for good or services on its behalf within the United States for tax liability reasons as well.

Dispute Resolution
The agreement should address where and how disputes will be resolved. Often times, the contract will include an arbitration clause which will dictate that disputes must be resolved by private arbitration rather than be decided by a judge or jury.