UNDERSTANDING THE LEGAL POSITION OF SALES AGENTS –Kemunto Mogendi | Paralegal
The employer generally gets the employees he deserves” – J. Paul Getty
One may often hear the term “sales agent” and involuntarily think of Joe Girard, the world’s greatest car salesman. As exciting as the job sounds, it bears a certain set of duties and responsibilities. With the progression of time, there is a pressing need to define the said duties and responsibilities clearly. However, most employers are faced with the challenging task of distinguishing sales agents as either employees or agents in the strict sense. There is a risk that sales agents might be treated as employees with potential employment law implications to the employer.
This article aims to highlight the key factors that an employer should consider in determining the legal position of a sales agent.
Agents vis-à-vis Employees
Agents are persons who have a relationship with the business but with more freedom of action than an employee. Most agents act on behalf of and in the name of another person (the Principal) having been given some degree of authority to do so.
An agency relationship can be created either through:
- express authority through a sales agency agreement;
- implied authority through the conduct of the Principal; or
- apparent authority where a third party reasonably believes that the Principal granted power to the Agent to act on their behalf.
On the other hand, the existence of an employee-employer relationship is characterized by several obligations created on the employer by the laws on employment. These include:
- payment of wages/salaries;
- withholding of statutory taxes; and
- and the ability of the employer to control the details of the employee’s work.
Overtime, several additional factors have been considered key in establishing the distinction between agents and employees. Some of these factors include:
- the amount of control over the work;
- who provides the tools used to accomplish the work;
- the mode of payment to the individual;
- the duration of the relationship; and
- the level of skill taken to complete the work.
The application of the factors above is very fact-specific. Notably, the paramount factor that has been applied in solving this issue is the extent of control that the employer maintains over the individual’s day-to-day work activities.
Q: I am a sales executive operating within the real estate sector and looking to enter an employment or agency agreement – what terms should I be on the lookout out for?
A: In the real estate sector, where agents play a significant role in brokering and closing deals between sellers and buyers, an employment or agency agreement is a legally binding agreement between the employer (company/natural person) who desires to hire or employ an individual (prospective employee or prospective agent) to operate as the employer’s sales representative. The employment or agency agreement is designed to outline the rights and responsibilities, as well as the terms and conditions, for both parties prior to the start of the sales representative’s period or service or agency.
Whether you are a principal/employer or agent/employee, there are certain key clauses to look out for in an employment/agency contract:
- Job-specific terms
Both parties should pay attention to the terms in relation to the job title and the description of duties. What will the job title be? Is the individual referred to as a “Sales Representative,” “Sales Manager,” or “Sales Agent,” or even the ubiquitous “Property Agent”? Each terminology contains a unique set of obligations and roles that are ascribed to the salesperson.
The clause on description of duties is also relevant because it sets out the positive and negative covenants imposed on the sales representative. The job description clause helps in determining the scope of work of the salesperson and the kind of employment or agency sought after by the employer. This clause is key in establishing whether the sales representative is working in a temporary capacity i.e., commission based with no regular employee benefits like paid leaves, or the employment is permanent in nature with various benefits like gratuity, medical cover, etc., granted to the employee.
In most cases sales agents want exclusive rights in their territory and assurances of autonomy in performing their obligations, this being very typical in the property sector where exclusivity is highly sought after to protect the agent’s potential income stream. As an employer, you will need to agree on the extent of their duties, any exclusivity provisions and expressly state what sales in that territory the agent will receive commission for.
- Compensation
Compensation to a sales agent in the real estate sector generally runs in a two-fold mechanism depending on the nature of the employment relationship:
Employers should ensure they remit the commission payments promptly and consistently as per the terms of their agreement with the sales representative. An employer’s failure to pay an employee or independent sales agent may attract a claim for breach of contract.
- Termination
Terminating an employee is arguably one of the most difficult types of farewells since it has the potential to escalate into a full-fledged court battle for wrongful termination. The nature of the employment relationship will determine the necessity for a suitable termination procedure that conforms with employment laws as well as natural justice principles. Employers should therefore be keen to draft termination clauses in accordance with statutory regulations.
When it comes to an agency relationship, most commercial agents have the right to either compensation or indemnity when their agency is terminated. As the principal, one should balance between opting for compensation or indemnity. Indemnity payments relate to the value of the agent’s work in boosting your sales while compensation payments show the value of what the agent has done and the agent’s loss of future earnings. Generally speaking, indemnification clauses result in smaller payouts to agents at the end of an agency than compensation clauses.
- Acting for competitors
Businesses/persons who onboard sales representatives as independent agents often assume that an agent taking up agency for a competitor directly amounts to a breach of contract. However, this is not always the case since the agent’s obligation to act varies from one circumstance to the other. Ideally, the agent and principal should discuss what other agencies the agent has at the commencement of the agency and possibly document these in the sales agency agreement.
Similarly, in an employee-employer relationship, the employment agreement may incorporate a non-compete clause. The clause should be drafted reasonably to act as a deterrent for the sales representative to exploit the skills and trade secrets acquired during their employment but not restrain their ability to seek opportunities elsewhere should the employment relationship end.
Conclusion
In black and white, a sales representative agreement meticulously illustrates the nature of employment relationship being sought. As the need for talented sales people grows due to competition in various sectors, a carefully and well-drafted employment/agency agreement is vitally important as it assists the parties in mitigating the legal risks associated with it.