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Parties enter into their contracts with the understanding that each will faithfully discharge their respective undertakings.

It is expected that each party will personally perform under the contract. Typically, contracts provide that the contract may not be assigned by a party without the consent of the other. But, what are the practical and thus legal restraints that these obligations impose on the parties? This article will address issues that may arise from a sales representative point of view, under such restraints, many of which may be avoided by simply anticipating possible future changes in the relationship with the principal.

Something as simple as a change in the sales representative’s business entity structure can inadvertently create an assignment or delegation of duties. For example, if the representative’s entity is that of a sole proprietorship or a partnership when entering into the contract, and is subsequently changed to one created under a state-chartered entity such as a corporation or a limited liability company, the inadvertent end result may be to create a verbal agreement (if the relationship were to continue) between the principal and the now corporate representative. The written terms would no longer apply to that relationship. Instead the verbal understanding would now control.

Corporate Entities

Another issue lies if the contractual territory covers one or more states and the rep is a business entity chartered by the rep’s home state. Usually corporate entities created under one state are required to register to “do business” in another state. Sometimes, for reasons personal to the corporate entity (such as tax or other considerations), that entity may elect to not register to do business in an additional state, but instead may form a separate entity chartered in the second state. This new entity will not be the party to the underlying sales representative agreement.

At times a sales representative agreement could be deemed to require the personal services of a particular person, especially if the sales representative organization is a sole proprietorship. In such cases, work by persons other than the specific representative may not be authorized under the contract. Usually work by employees of a sales representative corporate entity that is the contracting party is considered work by the entity, but care should be taken that the contract does not provide language that requires that the work be performed by a given individual thus making it a personal service assignment.

The three instances discussed above can be anticipated during negotiation and language therefore provided that would foresee those events and that allows for their possible occurrence. “Form” agreements do not generally anticipate such events and consequently it is advisable to consult with attorneys to assist in the drafting of the documents.

Independent Contractors

Quite frequently, representatives will “hire” other salespersons to help them perform the representative’s duties, and will designate them as “independent contractors.” As such, these additional salespersons would not be considered to be employees avoiding thereby the need to incur liability for payroll taxes and fringe benefits. But this can only be so if these persons are true independent contractors. Other articles have previously appeared in this publication that discuss the distinction between an independent contractor and an employee. These have discussed the test that the Internal Revenue Service (IRS) and other governmental agencies use to determine the correct status. Suffice it to say herein that representatives need to be familiar with such tests in order to avoid a misclassification. However, if the additional salesperson is truly an independent contractor, then the delegation of the representative’s duties might be considered to be an unauthorized assignment of the contract.

It should be remembered that the sales representative agreement spells out the specific duties undertaken by the sales representative on behalf of the principal. These may involve the manner of treating the principal’s customers and may even require the caretaking of company accounts. Whenever a permitted assignment occurs, all the representative’s duties should be assumed by the assignee in order to avoid incomplete performance under the contract. It is recommended that a separate document be prepared evidencing the assignment and that recites the same undertakings as those recited in the original sales representative agreement. Obviously, some terms such as compensation and how to handle the communications with the principal should be separately addressed, but it should make obvious that the assignee will be performing in the same manner as was required in the original agreement.

With the growth of globalization, representatives are being engaged to perform their services in other countries. Often, the customers, because of local law, usage or custom, will require that they be serviced by a local representative. In those instances care should be taken to have a local attorney prepare the assignment agreement (or such other as may be required under local law) to ensure compliance with the applicable laws. Care should be taken with respect to when, and if, such an assignee could be deemed an employee and/or be subject to any labor protection laws that could require, for example, compensation to the assignee in the event of termination of the agreement.

This article is not intended, nor should it be taken, as legal advice for any particular matter. It hopes to demonstrate, however, the need for proper legal advice in order to prepare a sales representative agreement that adequately anticipates as many pitfalls as possible for, and otherwise protects, the representative.

MANA welcomes your comments on this article. Write to us at [email protected].