Running a manufacturers’ rep agency brings opportunities but at times can generate risks, especially when considering employment matters. This article presents an overview of those risks and suggestions for how to manage such risks.

Misclassifying Workers as “Independent Contractors”

Rep agencies use independent contractors or subreps for myriad reasons — “fit” for a particular situation, coverage for an open territory, flexibility and cost savings, as examples. While using independent contractors can provide significant benefits, misclassifying employees as independent contractors can lead to detrimental outcomes such as having to pay unpaid withholding taxes, back pay, penalties, fees and interest.

The IRS and the U.S. Department of Labor continue to spend significant resources to crack down on employers that misclassify workers as independent contractors. Fortunately for agencies, steps can be taken to mitigate these risks.

Employees vs. Independent Contractors

The difficulty with this area of the law is in determining whether a worker is an “employee” or an “independent contractor.” While no simple test exists, there are some relevant considerations that can be applied. Generally, the relevant considerations include the following:

• Does the agency provide training for the worker?
• Where is the work performed?
• Who provides the equipment (e.g., computer, cell phone, etc.) needed for the job?
• Is the work temporary?
• Is the worker free to accept work from other businesses?
• Is the worker free to decide how to reach the goal (e.g., using their own processes, methods, approach, etc.)?
• Is the worker treated like an employee?

Managing Risk of Misclassification

As might be expected, a well-thought-out independent contractor agreement can help reduce risk by identifying responsibilities while avoiding employment classification. Requiring that truly independent contractors be separately incorporated and have other customers as clients can help. Another best practice is to prepare a policy setting out how the agency will engage independent contractors. In the current legal climate, the safest action that agencies can take may be to treat workers as employees in the event of serious doubts.

Wage and Hour — Implications of Incorrect “Exempt” Classifications

Employers occasionally classify employees as “exempt” or “salaried” to avoid having to pay overtime hours (hours beyond 40 in a workweek).

Managing Risk of “Exempt” Misclassification

The decision of whether to classify an employee as “exempt” or “non-exempt” is complex and must be analyzed carefully.  The term “exempt” means that the employee is exempt from the overtime pay requirement under the Fair Labor Standards Act (“FLSA”). If the employee is “non-exempt,” and frequently this is an hourly employee, the FLSA requires certain minimum wage and overtime requirements be followed. If the employee is “exempt,” however, minimum wage and overtime requirements generally do not apply. Under the FLSA, exemptions exist for executives, administrative employees, professional employees, and outside sales employees. It is important that employers apply the FLSA’s tests to ensure the employee is properly classified as “exempt” or “non-exempt.” Failure to satisfy the exemption tests exposes agencies to liability under the FLSA in the form of back wages, overtime wages, liquidated damages and other penalties. Additional information regarding the FLSA exemptions can be found here: www.dol.gov/agencies/whd/fact-sheets/17a-overtime.

Any agency that is uncertain about its exemption classifications should consult with legal counsel to confirm compliance with the FLSA and any applicable state laws.

Termination — Legal Risks for Termination of At‑Will Employees

Employers and agencies often believe that there is no legal risk associated with the termination of an “at-will” employee because the employee likely does not have a contract or is not subject to any “for cause” termination requirement. However, the legal risk is that the “at-will” employee being terminated could allege that the termination decision was discriminatory, unjust, against public policy, as well as many other reasons.

At-Will Employment Defined

Generally speaking, being an “at-will” employee means that an agency can terminate that employee for good cause, no cause, or for any reason at all, as long as that reason is not an illegal reason. For example, if a 45-year-old employee is terminated for poor job performance, even though they are an “at-will” employee, that employee could still file a discrimination charge with a state agency or if applicable, under federal law, alleging their termination was based on their age because they are over the age of 40. These allegations are best defensed with contemporaneously prepared documentation establishing the reason for termination.

Limiting Risk Relating to Terminations of At‑Will Employees

Due to the foregoing, a strategy consideration to reduce legal risk and exposure relating to termination of an at-will employee is to offer the employee a severance payment, pursuant to a severance agreement where the employee releases the company from any and all claims. While there is no magic severance figure, oftentimes the departing employee will sign a severance agreement for 2 or 3 weeks worth of pay. Another important strategy is to prepare detailed contemporaneous documentation of the performance issues and concerns while the employee is employed. Documentation of the performance issues prepared “in the moment” and during employment can be extremely valuable in defending terminations of “at-will” employees.

Also, it is important for agencies to have clear post-termination commission payment terms in the event of a termination of their employee reps who are paid on commission. While it is almost impossible to eliminate all legal risk relating to terminations of “at-will” employees, with careful planning and preparation, agencies can take steps to reduce the legal risk and exposure relating to such decisions.

Protecting Rep Agency Relationships Through Restrictive Covenants

Rep agency relationships, with their suppliers, prospective suppliers and customers, are often the rep agencies’ most valuable resource. Indeed, the rep agency’s existence and growth potential are often directly tied to these key relationships. Unfortunately for rep agencies, these relationships are often fragile and can easily be manipulated and taken advantage of by others trying to direct business away from the rep agency. Accordingly, rep agencies must take steps to secure and protect these relationships to ensure viability and success going forward.

Mitigating Risk by Protecting Rep Agency Relationships

Despite the recent news surrounding federal agencies issuing proposed rules banning non-compete agreements, we fundamentally recommend that rep agencies still take steps to protect and secure these key relationships when dealing with departing employees and independent contractors. Often with the assistance of counsel, rep agencies can prepare non-solicitation of supplier and customer agreements and non-disclosure of confidential information agreements. Rep agencies can also require their employees to sign post-employment non-solicitation of employee agreements to prohibit former employees from raiding their current employees.

Conclusion

The most valuable “assets” of rep agencies go home at night. By careful management of agency relationships with employees and independent contractors, agencies can maximize their productivity while minimizing the risk of adverse consequences.

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