By Eric D. Morton
Most companies that sell something have sale representatives. Some have “in-house” reps who are employees. Many use sales reps that are independent contractors. This is particularly true if a company needs a sales rep in a territory outside its home state. The use of independent sales reps has become more prevalent in recent years. The Internet and computer applications make it easy for companies and independent sales reps to work together and track sales and commissions. However, most companies are not aware that unique state laws protect independent sales representatives. The penalties for violating those laws can be severe.
Many companies have loose practices towards their independent sales reps. Since these individuals are not employees, the companies sometimes don’t believe they need a written contract, or if they do, the contract is short and only covers certain deal points. This is a mistake. Sloppy and incomplete contracts create confusion and misunderstandings. In addition, most states have laws that protect independent sales representatives. These can cause trouble for a company that runs afoul of them.
State Laws
Several states have laws that protect independent sales representatives. California, New York, Texas, Illinois, and most other states have statutes that protect independent sales reps.
Most independent sales rep laws are not concerned with the contractual relationship between the company and the sales rep. They are focused on regulating the compensation of sales reps through the payment of commissions during and after the termination of the contract.
State laws protecting sales reps typically:
- Apply only to sales reps that are:
- independent contractors;
- compensated in whole or in part through commissions; and
- solicit orders for wholesale.
- Seek to protect the payment of commissions during and after the termination of the sales rep agreement.
- Provide for enhanced penalties, such as treble or double damages, as well as reasonable attorney’s fees and court costs for the prevailing party for violations of the statute.
- Require that the sales rep agreement regarding the payment of commissions be in writing.
- Extend personal jurisdiction over suppliers that contract with sales reps in the particular state, regardless of whether or not the supplier has a permanent place of business or otherwise conducts any business in the particular state.
- May not be contractually waived.
The courts of the states with these laws have jurisdiction over companies that hire independent sales reps located in those states, regardless of contract clauses. For example, a California company hires an independent sales rep in Texas. The Texas Sales Representatives Statute would govern the contract and Texas courts would have jurisdiction over the parties, even if the contract specifically states otherwise.
Many of these state laws have strict time limits as to when commissions must be paid and heavy penalties for violations of the law.
What to do
Companies that employ independent sales representatives should review their existing contracts. The location and territory of the independent sales reps will determine the applicable law. Contracts that do not comply with the applicable law should be revised. When hiring new independent sales reps, companies should be aware to the location of the sales rep and the applicable law. Contact an attorney for help as necessary.
Eric D. Morton is the principal attorney at Clear Sky Law Group, P.C. He can be contacted at 760-722-6582, 510-556-0367, or emorton@clearskylaw.com