29 May 2024, 16:03
By Stephen Sidkin Oct 11, 2021

When sales reps go self-employed

With the increase of national insurance contributions (NICs), some businesses with employed sales representatives will be looking at the viability of inviting the employees concerned to become self-employed sales agent, writes Fox Williams LLP's Stephen Sidkin – but what issues should they consider?

A change in the status of the sales force needs to make commercial sense –for the business and the sales force. For both, there will be an issue of “how do we make it work?”.

The business can be expected to want to include in any agreement with the newly appointed agent some provisions which will give it confidence that the agent will service customers and seek new customers in ways consistent with the business’ objectives. 

An agent can be expected to look for some form of financial assistance, as most agency models work on a commission basis with a time lag between the taking of an order and the customer paying. Different financial schemes – ranging from a temporary monthly retainer to the payment of advance commission – can be put in place to bridge the initial time gap following the commencement of the agency, so as to ensure that the agent is not financially disadvantaged.

The agency agreement

The change in status will mean replacing the employment contract with an agency contract. From a legal perspective, there is a material difference – an employed sales representative will move from being an employee to self-employed. Whilst this may seem to be a statement of the obvious – and is the key to addressing the increased NIC cost mentioned above – an agency agreement should address issues which are different to those found in employment contracts.

The scope of the appointment of the agent needs to be stated. In essence, what the extent of the agent’s entitlements and responsibilities is, in terms of: geographical territory; products; new products in the future; and customers and channels to market. What is reserved to the business should also be stated.

 What would be the duration of the agency? In a situation where the status of the employed sales representative is changing, it would be unusual for the duration to be fixed. Instead, it can be expected that the agency will be continuous subject to either party being required to give a specific period of notice (for example, three months).

Various obligations on the agent can be expected to be included, such as: providing the business with details of customers contacted or to be contacted; transmitting orders obtained and generally acting as a conduit between the business and customers; attending sales meetings and possibly trade shows; and providing market reports. 

Correspondingly, obligations on the business can be expected, including: supporting the agent with samples, information, PoS materials and technology (for example tablets); and how and when commission is to be paid.

The Commercial Agents Regulations 

The Commercial Agents Regulations have been in existence for many years, but still urban myths abound about them. The regulations govern the relations between businesses and their agents. Whilst the regulations are pro-agent, there are ways in which they can and should be balanced, given the intended relationship between the business and its agents.  

These include: providing for the above notice of termination to be given and expire at any time; stating that, subject to meeting various requirements under the regulations, the agent will be entitled to an indemnity (and not compensation) following termination of the agency; and addressing the provisions in the regulations that specify that actions taken by the agent before termination and resulting in orders after termination will not result in the payment of commission by the business to the agent (this can be particularly important where new agent is succeeding an old agent, and the business could be faced with having to pay two lots of commission in respect of the same sale!).

Take-home points  

A business/agent relationship is symbiotic – the better the business does, the better the agent does, and vice versa. 

Whilst the change from an employed sales force to self-employed agents may be considered as resulting in the business having less control over sales, this can be addressed in the agency agreement – as can, to a large extent, the pro-agent regulations. 

Finally, there can be tax savings for both parties.

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