Do you know the answer to this threshold question: are my company’s agreements with our sales representatives even legal and enforceable? Whether you know it or not, there is most likely a state law that imposes certain requirements on the relationship between you and your sales representatives. Particularly in the manufacturing world, there may be several statutes that apply depending on the location of your and your customer’s facilities. Nearly every state has enacted a statute that governs the relationship between companies and sales representatives. These statutes primarily govern the payment of commission during the representation relationship and following termination of the relationship. If a company violates these provisions the penalty can be severe.
Sales representatives have contact with two of a company’s most important assets: its customers and its technical knowledge. An up-to-date and enforceable sales representative agreement is critical to appropriately defining the company’s relationship with its sales people, maximizing protection of its critical assets, and avoiding liability. A simple review and update of agreements can provide the needed preventive measures to protect these assets and minimize risk. Here are six fundamental questions you need to ask (and answer) when reviewing your company's agreements:
Does it matter how I compensate my sales representatives?
Yes. Whether or not the sales representative is compensated in whole or in part with commissions is a gateway question for applicability of many states’ sales representative statutes. Michigan, for instance, defines “sales representative” as a “person who contracts with or is employed by a principal for the solicitation of orders or sale of goods and is paid, in whole or in part, by commission.”1 If the sales representative is not compensated at least in part with commission, the statute, and its penalty provisions, may not apply. Be clear from the outset what form of compensation has been agreed upon so that you can determine what statutory requirements, if any, may apply.
Should I be specific in identifying the scope of the representation?
Yes. A common issue faced by companies is the sales representative that keeps coming back for additional commission on parts the representative was never involved in selling. An ambiguous agreement may give the representative a hook for claiming commission on parts the parties never contemplated, and that may have even been outside the scope of your company’s business at the time the agreement was signed. A carefully drafted agreement specifically detailing what the representative may or may not sell is critical to protecting you from liability.
How much flexibility do I have in deciding when my sales representative has earned his or her commission?
This date can typically be set by the parties in the sales representative agreement. It may be the date new orders are received, the date payment is received from a customer, or otherwise. If the date that compensation is earned is not specified in the contract, state statutes usually include a “gap filler” provision – often the past practice between the parties or the “custom and usage prevalent” for the particular industry.2
Ambiguity concerning when commission is earned may lead to problems after termination of the parties’ relationship, especially if customers the representative was targeting order goods or services after the representative relationship ends. In most states, ambiguity is construed against the drafter of the agreement: typically you! Moreover, absent specific language, the sales representative may be able to rely on the common-law “procuring cause doctrine” and recover commission for an extended period of time.3
Some states require commission to be paid within a certain number of days after it is earned. Michigan has no such provision. In New York, commission must be paid within five (5) days of the date it is “earned.”4 Other states, such as Massachusetts, refer to custom, usage or practice within the state or business.5 It is important to know whether the applicable statute has such a requirement, and if the parties can contract otherwise.
I don’t believe my sales representatives provide value to my company. Can I terminate them?
Yes, but almost all statutes require that earned commissions be paid within a certain time after the sales representative relationship ends. Some states also specify payment terms for commission that becomes due after termination of the representative relationship. In Michigan, all commissions due at termination, and any that become due after termination, must be paid within forty-five (45) days of coming due.6 Payment of commission post-termination is a frequently litigated issue. If your agreements do not comply with the applicable statutes, extreme and unnecessary penalties can result.
What if my company doesn’t comply with the statutes?
Your failure to comply can lead to substantial penalties. Nearly every state allows the representative to recover two or three times the actual amount of commission owed. To add insult to injury, the representative is also typically entitled to recover his or her attorneys’ fees incurred in recovering the commission due.7 Again, paid by you to the representative.
In, Warring v. Total Mfg. Systems, Inc.,8 the company failed to pay commissions on certain sales and failed to properly calculate the amount of commissions. The sales representative was found to be entitled to $30,340 in actual damages for unpaid commission. The court, however, then doubled the amount owed pursuant to Michigan’s statute, and awarded the sales representative $60,680 in damages. You can avoid, or greatly minimize, much of this risk by having your agreement revised, or drafted, by an expert who will manage most of these risks through provisions in the agreement.
Should I include any other provision in my sales representative agreements?
In addition to the above requirements, company’s may wish to include non-compete, non-solicit and trade secret protection, provisions dealing with HIPAA and HITECH, performance standards, fraud and abuse prevention, insurance requirements, geographic scope of representation, modification and termination provisions, among others. By having a detailed agreement, you may later avoid litigating each party’s interpretation of the relationship.
For more information, please contact one of the attorneys listed below.
1 Mich. Comp. Laws § 600.2961(1)(e)
2 Mich. Comp. Laws § 600.1961(2)-(3)
3 Roberts Associates, Inc. v Blazer International Corp, 741 F.Supp 650 (ED Mich 1990)
4 N.Y. Labor Law § 191-b(3)
5 Mass. Gen. Laws. Ann. Ch. 104, § 8
6 Mich. Comp. Laws. § 600.2961(4)
7 Mich. Comp. Laws. § 600.2961(6)
8 2007 WL 2257719 (August 7, 2007)