SERVING OUR CLIENTS AND COMMUNITY DURING COVID-19

Articles Tagged with Sales Rep lawyer

Employers are increasingly attempting to avoid having to pay sales employees their rightfully earned and owed sales commissions during the COVID pandemic. In many cases, a company has no legal basis to avoid paying sales representatives their earned commissions by unilaterally retroactively changing the terms and conditions of how sales commissions are earned because COVID related conditions result in an unexpected increase in sales. In these situations, a sales representative understanding of their legal rights is critical if he or she has any hope in recovering their earned commissions.

Employees who are paid through commissions rightfully rely on being timely paid their earned compensation. Commission structures also benefit employers by motivating employees to perform at or above company expectations, thereby increasing profitability for the employer and allowing the employer to identify and reward its most productive employees. The type of commission structure an employer uses can range from simple to complicated, and most of them are memorialized in employment agreements signed by both empB6D67F1E-7E48-4F4C-A59E-5470E7CCFEAF-300x169loyer and employee. Once an employee and employer agree to the terms of how commissions are earned and when they are to be paid, an employer cannot unilaterally and retroactively change the terms without breaching the contract or potentially violating wage payment law.  If an employer wishes to change the terms and conditions of a commission agreement, like any contract, they must give proper notice to the employee of the proposed change and obtain the employees clear consent to the new agreement. Often, employers who wish to alter commission structures do so to save money, which for the employee, means lower commissions and reduced income.

Sometimes, an employer is prevented from paying agreed-upon commissions due to unpredictable hardships outside of the employer’s control, like acts of terrorism or natural disasters that make performance of the contract impossible or impracticable. For an employer to protect itself from these unforeseen events, they may contain a force majeure clause in a sales agreement which potentially could release the paying party from its obligations when payment becomes impossible or impracticable.

Termination clauses are among the most important aspects of any independent sales representation agreement.  Without a strong termination clause, an independent manufacturing representative is left without little legal protection should the principle decide it no longer needs its services.

The recent Tax Court case Potter v Commissioner, T.C.M. 2018-153 (T.C. Sep. 17, 2018)   provides a great example of the type of protection that a termination clause can provide to a manufacturing representative.  In that case, Jeff Potter worked as an independent contractor for a company called Green Country, which was in the business of selling garden soil and other related products.  Mr. Potter was well represented when drafting his sales representative contract and was protected by a strong termination clause.  The clause stipulated that if his compensation agreement was terminated, he would be owed a termination payout equal to 150% of his commissions from the previous year.  When his agreement was terminated, the company compensated in accordance with this clause.  The lawsuit that followed did not contest this payment, the dispute was merely over the federal income tax implications of the termination payment.

As we see in Potter, one approach to contracting for compensation in the event the sales representation contract is terminated is to structure it as a payout equal to a percentage of commissions paid over the previous year, or some other period of time.  This is of course not the only way to structure a termination clause pay out. Another popular approach is to structure it in terms of a percentage of sales made on accounts that the independent sales representative generated.  This, in effect, would allow the sales representative to continue earning a commission on sales that were properly attributable to their own work efforts. In order to provide real protection, termination clauses must be negotiated as a part of the initial contract. As a result, some sales representatives may prefer to structure the clause in terms of a flat rate, like a liquidated damages clause.

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