When you don’t have the budget for full-time sales people, and lack the time or the skills to generate increased sales yourself, appointing a commission-only sales agent seems like the best of all worlds. You don’t have the costs or management hassle associated with an additional employee; you only have to pay them when you’ve made a sale; and suddenly your business feels bigger and more impressive than before.
Beware! Ironically, although many companies hire independent sales agents as a ‘low-commitment/low cost’ solution to their sales issues, an independent agent actually has more rights than an employee. Thanks to a lovely bit of EU legislation, implemented in the form of the Commercial Agents Regulations 1993, an independent sales agent is entitled to:
- at least 30 days notice of termination during their first year of working for you
- increasing to 60 days in year 2, and 90 days in the third and subsequent year
- compensation for lost earnings when the agreement is terminated, even if this is because it was a fixed term contract that has come to an end.
There are all sorts of other obligations on you if you hire independent agents, including an obligation to allow the agent to check your books to make sure you’re paying them correctly. But the requirement to pay compensation on termination is probably the most painful for small business owners. This can kick in not just if you terminate because you no longer want to work with the agent, but also if they have to stop work because of ill health.
The most challenging element of the regulations is that it is not lawful to ‘contract out’ of the great majority of the provisions, and you are bound by them regardless of what is in your written agreement with the agent. So even if an agent says ‘Don’t worry, I won’t ask for compensation’, there is still the risk that if they changed their mind after termination, you could be facing a claim equal, perhaps, to the sum of their final year’s commission. These regulations apply across the EU, so if you appoint French, German and Spanish agents, for example, they would also be able to benefit from this protection.
Great news if you’re an agent, but less great if you’re the principal!
If you are going to appoint an agent, make sure you are very clear on the scope of their responsibilities and authority. If they can only sell on your standard terms, for example, make sure this is clear in their agreement. Consider what sort of recourse you could/should have if they made false claims for your product and mislead clients about what it could and could not do, or if they agreed to commercial terms that were not acceptable to you.
To summarise, having third-party help with sales is a great boost to many small businesses. But make sure you’ve carefully considered all the angles before you go ahead – or you could find yourself with a very expensive problem on your hands! Before you appoint a sales agent, be sure to call us for a free initial consultation.
Founder and Managing Director, Devant