An important step that each sales representative should take as part of a business strategy is to become familiar with the laws governing the relationship between sales reps and principals.
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At a minimum, a basic understanding of sales representative laws in the state where the sales rep has its primary place of business is especially critical. This is because the majority of states, but not all, have recognized that protecting the rights and commissions of sales representatives is important as a matter of public policy. However, those public policy protections have taken shape through the enactment of specific statutes that vary greatly from state to state. Hence, a working knowledge of those particular laws can be of significant financial importance.
Wrongful Termination of Sales Reps
Under Minnesota law, for example, a principal will be required to make payment of commissions to a terminated sales representative for a period of 180 days after providing written notice not to continue a sales representative agreement of indefinite duration in the absence of good cause. In this regard, it is instructive that a principal is rarely able to establish good cause for termination as defined by Minnesota statutes and that most sales rep agreements are for an indefinite duration.
Thus, Minnesota law provides sales representatives with significant legal rights and a meaningful continuation of commissions in the event of a termination of that type of business relationship. In addition, where there has been a wrongful termination under the Minnesota termination of sales representative statute, a prevailing sales rep is also entitled to an award of its reasonable attorney’s fees and costs.
Prompt Payment of Commissions Requirement
It is also important for a sales rep to have an awareness of state laws with respect to prompt payment of earned commissions. A majority of states have enacted specific legislation requiring the timely payment of commissions to reps who resign or who are fired. Of considerable significance, many of those states also impose heavy monetary penalties against principals for the non-prompt payment of commissions owed.
Again in the state of Minnesota, following a termination or resignation by a sales rep, a business entity is obligated to make prompt payment of all outstanding sales commissions that are owed. In the event that a principal fails to make prompt payment of those commissions, Minnesota law provides for a statutory penalty in an amount totaling 1/15th of the commission amount due for every day of non-payment up to 15 days. Accordingly, this penalty effectively doubles the amount of the commissions owed where there has been a non-payment for 15 days or more following a termination or resignation. It is of further significance that a sales rep is additionally entitled to an award of its reasonable attorney’s fees and costs when a principal violates this prompt payment statute.
Forum-Selection and Choice-of-Law Clauses
Finally, it is important for a sales rep to know the laws in the state where the rep has its primary place of business concerning the enforceability of forum-selection and choice-of-law clauses in sales representative agreements. Because certain states have laws that are very favorable to sales reps, principals who distribute their products through sales representatives may seek to include forum-selection and/or choice-of-law provisions in the parties’ agreement to avoid those laws.
A principal may be able to nullify the application of state laws that would otherwise provide significant protection to the interests of the sales representative by designating as governing a state that has less favorable laws than the state of Minnesota, for example. Additionally, through such clauses principals can effectively increase the costs of litigation for a sales rep by contractually requiring that all litigation between the parties take place in a designated state that is distant from the rep’s place of business.
Courts in some states have refused to enforce these clauses in sales representative agreements on grounds that include public policy concerns, the unequal bargaining power of the parties, and that the governing law specified or the place designated as the venue for dispute resolution has no reasonable relationship to the interests of the parties. In a few states there also exists a blanket prohibition against the validity of such governing law and forum selection clauses.
On the other hand, courts in some states have adopted the position that in the absence of clearly and expressly articulated legislative policy, choice-of-forum and choice-of-law elections by parties in a sales rep agreement are legally enforceable. The courts in those states have effectively concluded that the best public policy is to allow parties dealing at arms-length to allocate by contract the risks and contingencies of their business as they see fit.
Conclusion
The bottom line is that to enhance and protect their legal rights and business interests, sales reps should at least have an awareness of the laws governing sales representatives and principals in the state where they have their primary place of business. Because the laws that apply specifically to sales reps do vary greatly from state to state, it is only with some working knowledge of those laws that reps will be in a position to adequately evaluate their pre-hiring considerations, negotiate in a strategic way the terms of their sales representative agreements, and successfully deal with principals in a way that maximizes their earnings potential.
