A Bad Rep?

They sell your products, but their contracts can sell you down the river.
Magazine Contributor
3 min read

This story appears in the December 2000 issue of Entrepreneur. Subscribe »

Whether they are employees or independent contractors, sales representatives can expand your market and boost the bottom line-or they can cost you a bundle in commission disputes and lost sales. You can avoid those problems with well-drafted sales representative agreements, says James B. Sherman, an attorney with the law firm Wessels & Pautsch PC in Min-neapolis. Sherman, who specializes in representing management in labor and employment cases, says he's amazed at how frequently companies fail to clearly define the terms of their relationships with sales reps at the outset and then run into problems later.

"A well-drafted rep agreement is critical," says Sherman, adding that companies in many states face severe penalties, including attorney's fees and punitive damages, should a sales rep prevail in a commission dispute. The key points any rep agreement should cover include:

The rep's duties. Clearly describe what you expect the rep to do to avoid any performance-related disputes.

Commission terms. Specifically define how and when commissions are earned and calculated, when they're paid, whether the sales rep is expected to assist in collecting any money due, whether delinquent accounts affect commissions and when commissions will end. Sherman says many states accept a doctrine of "procuring cause," which means that if someone demonstrates he or she was responsible for bringing you a customer (the procuring cause of the business), then he or she gets credit for all future business-which could theoretically mean that you would have to pay commissions to that person forever, unless your agreement says otherwise.

How the relationship can be terminated. Specify how either party can end the rep relationship and what your mutual obligations and liabilities are. Include issues like notice, severance and return of company property.

Restrictive covenants. On this topic, many business owners tend to think in terms of noncompete agreements, but other important restrictive covenants include agreements of confidentiality (preventing the disclosure of confidential company information) and of no-solicitation (preventing sales reps from calling on your customers if they go to work for someone else). It could be beneficial to make these covenants part of your contract.

Choice-of-laws provision. Indicate which state's laws govern the agreement-and be sure the agreement meets the legal requirements of that state.

Jacquelyn Lynn left the corporate world more than 13 years ago and has been writing about business and management from her home office in Winter Park, Florida, ever since.

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