What Is an Independent Sales Representative Agreement?
An Independent Sales Representative Agreement is a written contract between a company that wants to sell its products, and an independent contractor that will sell the products in exchange for a commission. The Independent Contractor is a business itself, not an employee of the Company. The contract is designed to protect both parties, the Independent Sales Representative and the company they represent. The agreement should cover everything from how the commission is calculated and how it gets paid, to whether any minimums must be met for a certain period of time .
The purpose of an Independent Sales Agreement is to make the business relationship formal. It not only describes the relationship, but it also protects business interests of the Company for all of those things that could go wrong. Just as importantly, it also protects the Independent Sales Representative, or the Commission Sales Agent, by making sure that he or she gets paid on time and that his or her hard work literally pays off. This agreement is sometimes also referred to as a Manufacturer’s Representative Agreement or an Independent Representative Agreement.
Key Provisions of a Sales Representative Agreement
A standard commission rate. This clause sets forth the percentage that the sales representative will receive from sales of the supplier’s products. As stated above, this clause is generally based on the relationship between the supplier and the sales representative. In situations where the parties are seeking to not have a pre-existing relationship prior to a potential enforcement action, a standard commission rate will be rejected as the sole basis for a restrictive covenant.
A specific territory. This clause defines the geographic area in which the sales agent will sell the supplier’s products. Again, this term is generally agreeable to both parties as each has competing interests in the territory: the sales representative wants a large territory in which to operate, while the supplier seeks to limit competition.
Terms. It is important to set forth the payment terms to ensure they are clear and unambiguous. This will prevent disputes. The terms may be structured on a net payable basis, with accounting performed either monthly or quarterly, or it may be on a sales date basis. As often sales agents will be working on commission and may not be drawing a salary, timely payments are crucial to the relationship.
Termination. A sales representative agreement may be terminated by either party upon a 30 day written notice or may be drafted with specific termination provisions unless a triggering event takes place. This may include: bankruptcy, sale of assets, or change in control. The parties may also have to specify if the termination is with or without cause. Commissions owed and those commissions earned by the sales representative at the time of termination should be clearly delineated.
Confidentiality. A confidentiality provision protects the supplier’s confidential information and trade secrets. A supplier will generally have an interest in maintaining secrecy over its confidential pricing information, product specifications, customer lists and other trade secrets.
Advantages of a Sales Representative Agreement
A well-drafted independent sales representative agreement benefits both the company and the salesperson. Such an agreement provides a clear set of rules by which the parties will be governed, and it will give the company legal protection if the representative violates its terms. Additionally, the agreement delineates the expectations of each party, thereby both maximizing the effectiveness of the relationship and protecting the company in the event that the relationship must be terminated.
By spelling out the obligations and duties of the parties, the agreement makes it clear that the salesperson is not an employee. In fact, IRS audit teams frequently look at independent contractor agreements to see if a company is misclassifying employees as independent contractors. Therefore, the agreement needs to be clear, and include all relevant provisions regarding the relationship between the parties. These terms include how the parties will interact and communicate, the sales procedures to be followed, the length of the term of agreement, and how either party can terminate the relationship, among other things. The written agreement will also help the company to present a professional appearance to its customers by publishing a consistent sales policy.
Sales Representative Agreement Mistakes
Ambiguities in Compensation Structure
A common pitfall that both companies and sales representatives may encounter when negotiating an independent sales representative agreement is agreeing to a compensation structure without adequately reviewing all the details of compensation relating to the products purchased. For example, is compensation based on net sales (gross sales less returns or chargebacks), purchases, products shipped or products that have been paid for by the customer? When terms such as "sales", "products sold" or "purchases" are used without being specifically defined, commission disputes may arise as the parties seek to understand their rights. Do not make the ground rules of compensation scheme ambiguous, which will likely lead to disagreement over amounts and terms. Make sure the terms of the compensation are very specific: know what performance needs to be accomplished to get paid, how payment will occur, when payment will be made, and who is responsible for various tasks.
Depending on the type of product sold, the compensation provisions may need to be even more specific. For example, in selling televisions, the period of purchase may not occur on the same date as the product is delivered. Thus, a refined compensation scheme for this scenario could be: "the first of the month after customer receives possession of the product".
Lengthy Termination Provisions
When you’re drafting an independent sales representative agreement, you have to strike a balance between the seller’s desire to protect its client relationships and other valuable assets, and the representative’s desire to terminate its relationship with few strings attached. Most independent sales representative agreements have lengthy notice provisions, as termination requires the firing party to provide written notice of the proposed termination. If the parties are unfamiliar with how long notice provisions should be, we suggest looking into state’s statutes regarding notice provisions with the existing title 13 schemes. For California, Code of Civil Procedure section 1161 provides standard time periods for termination. Depending on your state, existing laws may provide guidance to parties who have never terminated contracts. For example, in California, the statutes provide that 60 days notice must be given in order to terminate. While this is a good starting point for how much notice you’d need to provide regarding terminating a contract, the California courts hold a different view of this period. For example, if you’re leasing an apartment for six months, you try to notify the landlord three months before as required by the lease, but the landlord says they can show it to another tenant less time. The California courts have held that any notices must be "reasonable" and that the requirements can be waived by failure to comply.
This is just one of many examples of how the statutes and case law can provide guidance for parties. But, if you are ever in doubt, consider having a window of 60-90 days before termination to allow your counterpart time to hire a new sales representative to replace your services or to reduce their inventory. For those considering taking legal action, it may be better to provide the opponent with as much notice as possible. However, terminating a contract which expressly requires at least 60 days’ notice is considered a material breach of contract.
Negotiating a Sales Representative Agreement
Negotiating an independent sales representative agreement can seem daunting, but both parties can accomplish their objectives and come to a mutually beneficial arrangement by focusing on the relevant factors. Like most contracts, mutual agreement is key. That means both sides need to prepare not only to voice their own needs, but to listen to the other side and make compromises. It also means that neither side should enter the negotiations with their hearts set on an absolutely non-negotiable aspect of the deal. The less flexibility you show, the less likely the negotiations will result in a deal.
Other strategies to keep in mind are as follows:
As the terms of the ISRs commission/compensation plan are likely to be the most important to the ISR , they should be one of the first topics discussed in the negotiations.
The agreement may contain clauses that are standard in an ISR agreement, but potentially detrimental to the ISR. Therefore, it is critical to read the agreement closely and consult with an attorney or even an accountant/principal of the ISR company for guidance before signing, being particularly careful to review the compensation structure and the termination clause(s)/provisions. So long as you are willing to give and take to negotiate appropriately, the outcome should benefit both the supplier and the ISR.
Sales Representative Agreement Legal Considerations
As with any commercial agreement, ensuring that your terms not only promote the successful operation of the relationship with your representative, but also comply with legal requirements and industry standards, is important. With regard to your independent sales representative agreement, the very nature of the relationship you are entering into invites special scrutiny under the law. The common assumption is that an independent sale’s representative is not an employee and should not be treated as such. However, state and federal labor and tax laws have specific tests for determining whether the representative is an independent contractor or an employee.
Unfortunately, no one standard test is used. The most commonly referenced test is the "IRS Independent Contractor Test" which focuses on the level of control that the employer exercises over the sales representative. A comprehensive list of the factors that courts and agencies consider in determining who is, and who is not, an employee may be found at the IRS website. Wherever you and your representative are located, the laws of your state may contain additional requirements and tests that do not exist at the federal level, but would apply to you. Seeking the advice of a legal professional to evaluate the proposed arrangement is not an exercise to be overlooked.
Sales Representative Agreement Sample
Independent terms and conditions of sale and pricing lists are typically provided by the supplier. Templates for independent sales representative agreements are readily available on the internet, but care should be taken to ensure they are not created for a different jurisdiction or by a company with a significantly larger footprint than yours. If your sales representative’s home office is overseas, then you will want to start with a template that is either created by (or for) a supplier with overseas sales representatives, or one that already contemplates international sales .
You will want to include specifics about commissions, for example, how they will be earned (by orders received shipped), when they will be paid (typically a specified number of days after the end of each month), who pays for sales trips (the supplier or the sales rep). You will also want to customize the payout procedure in the event there is a termination – a party that terminates an agreement gives up the right to collect future commissions but may still have to pay commissions not yet paid through the date of the termination (or possibly longer depending upon various factors).