Before your business engages the services of a sales rep, it is important to have a detailed contract in place to govern your relationship.
All businesses need to devote time to business development. Many businesses utilize a sales force to help them solicit leads. Here are seven clauses that should be in your sales representative contracts.
1. Parties’ Relationship
The first item that should be clarified in a representative contract, even it has already been discussed, is whether he or she is an independent contractor or an employee.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payment to independent contractors.
An independent contractor is an individual who maintains the means and methods of the work to be performed. On the other hand, when the employer controls not only what work an individual will perform, but also how that work will be performed, that individual is an employee.
If an employer gives an individual freedom of action, but the employer has the right to control the details of how the services are performed, the individual is still an employee.
2. Representative’s Duties and Responsibilities
Next, you will want to clearly specify the duties and responsibilities of the representative, such as:
- Conducting himself in a manner consistent with the image and reputation of your company
- Using best efforts to promote and sell goods
- Forwarding orders promptly (be sure to describe the proper method)
- Having adequately trained and competent personnel
You will also want to be sure to specify which actions the representative is prohibited from doing. For example:
- The company may demand the right to choose whether or not to accept orders
- The representative may not be allowed to make representations on behalf of the company
- The representative may not be allowed to set or change prices or terms of sale
- The representative may be prohibited from accepting payments or collecting debts
- The representative may be prohibited from selling competing products while working with the company
If your company sells a variety of products or services, you may want to specify which products your representative can sell. If you want to limit the products a representative can sell, you should attach a complete list of the approved products to the agreement and update the list periodically if the products change.
You may also want to specify other limitations, such as where the products can be sold. Representatives may be limited to a particular region or type of customer. You may attach a list of existing customers that the representative can contact to the agreement.
Additionally, if you decide to set a sales quota for your representatives, you should include that information in the agreement as well. Past performance is often a good indicator of reasonable minimum expectations.
An important section of any representative agreement details how the representative will be paid. The agreement should specify how the commission will be computed, specifying the basis of the commissions and that it is the only compensation the representative will receive outside of bonuses or other incentives.
The agreement should also specify when the representative would receive compensation for their work. Typically, commissions are only paid after the product is shipped to the customer. Under some circumstances, commissions may not be paid to the representative.
For example, if the order was solicited from an unauthorized account, or if the order is attributed to another representative, the contract should specify that under these circumstances no commission will be paid.
The agreement should also indicate how often your company will send statements to the representative regarding the status of the commission account and allow a specified time for the representative to make any objections to the contents of the statement.
Also, depending on the situation, representative may or may not be reimbursed for work expenses. Whether representative expenses can be reimbursed and limitations on reimbursable expenses should be made clear in the agreement.
Sales representatives are trusted with a variety of information that their companies will wish to keep confidential. What information a representative is not allowed to share with outside parties should be listed in the agreement. Such information may include:
- Sales lists
- Business plans
- Price structures
- Commission rates
- Customer lists
- Vendor lists
- Financial information
- Operating procedures
- Computer programs
- Design formulas
Smart business owners will ensure that there are clear grounds for termination in the contract. The basis for termination can be “for cause” or “for convenience.” An example of a termination “for cause” would be if the sales representative fails to meet quotas.
An example of “for convenience” would be if the business decides it does not wish to use the services of the representative anymore. In either scenario there should be a clear process in place for termination and appropriate notification provisions.
7. After Termination
Finally, the agreement should detail what a representative must do after termination. The agreement should require the representative to stop holding himself out as a representative of your company and that he must return any materials provided to him by the company.
You may also want to include a non-compete clause in the agreement, preventing the employee from working for a competitor until a reasonable period of time has passed. This will help prevent the representative from sharing confidential information with your competitors.
Of course, in addition to these main provisions there are various other provisions that should be included, such as choice of law and severability. For a more detailed rundown of sales rep agreements, check out this powerpoint.