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Article “Agreements with Sales Representatives”
Most manufacturers sell their products using the services of independent sales representatives. Manufacturers need to be aware of the fact that some 35 states in the United States and Puerto Rico have passed legislation designed to ensure that independent sales representatives are paid commissions in a timely fashion in the same way that regular employees would be paid salaries by an employer. These laws potentially expose the manufacture to severe risks and penalties in a dispute with an independent sales representative.
The laws vary from state to state. In Puerto Rico if the sales representative is the exclusive representative on the island, on termination he is entitled to a termination payment for the goodwill created taking into account the length of service, business growth, marketing efforts, etc. Typically, the statutes provide for payment of double or triple damages plus the attorney’s fees and court costs by the manufacturer in the event of a dispute with a sales representative over timely payment. For this reason manufacturers should try to limit exposure by having a written contract with the sales representative that is clear and specific so as to reduce the possibility of a payment dispute. The commercial issues to make clear include at least the following – (i) how commission is calculated; (ii) when it is deemed to be earned (on order, delivery or payment); (iii) when commissions are payable; and (iv) most importantly, what and when commissions are payable and paid once the relationship is terminated.
Some states allow the parties to agree in the contract as to those items, but not all. As an example, New Jersey specifies that commission is payable on orders received by the manufacturer by the time of termination, even if the order is only accepted later, delivered or paid for after termination. Minnesota prohibits termination of a sales representative without “good cause” and the sales representative must be given at least 90 days to cure. There are also several states including California, Maryland and Pennsylvania which make any provision in a contract purporting to waive sales representative’s rights under the applicable statute void and contrary to public policy and subject any such disputes to the jurisdiction of the sales representative’s state.
Ideally a manufacturer should carefully evaluate the laws applicable when hiring a sales representative and give special consideration to the issues referred to above. Even if it is not practical to fully evaluate on a state by state basis, it would still be preferable for a manufacturer to have a standard agreement dealing with the financial issues rather than have the terms of the relationship be uncertain.
The contents of this article are intended for general information purposes only and should not be construed as a professional opinion on any specific facts or circumstances. Professional advice should be consulted with regard to specific application of the information on a case by case basis.
Bryan Friedman is a shareholder at Friedman Stroffe & Gerard, P.C. in Irvine, California. He is a shareholder of Friedman Stroffe & Gerard, P.C. and chairs the firm’s Corporate and Business Practice Group. Contact him at firstname.lastname@example.org or 949.265.1106.