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Use Caution with Independent Sales Representatives

by David James & Joe Schmitt

Independent sales representatives, or sales reps, solicit sales for a company that does not employ them. Sales reps typically are assigned a particular territory and earn commissions on their sales rather than a salary or wage. As such, they commonly are treated as independent contractors rather than employees and are not eligible for benefits such as the company’s health plan or paid time off.  

Perhaps the most important category in the contractor test is behavioral control, which includes control over how to do the work, rather than simply the outcome, control over the location and time of the work, and training.

Though this may be a convenient way to sell products, sales rep relationships can create legal risks. In particular, the classification as a contractor (rather than employee) may come into question, whether by the sales rep or a government agency, such as the state unemployment office. Additionally, various states have statutes that govern key terms of a sales rep agreement, such as notice of termination and when commissions must be paid.

Contractor Classification

While the tests for contractor status vary by jurisdiction and area of law, there are common themes to all of them. Note that a contractor agreement does not trump these tests, so if a sales rep’s contractor status comes into question, a court or government agency will evaluate the status even if the parties agreed to a contractor relationship on paper.

Behavioral Control

Perhaps the most important category in the contractor test is behavioral control. Factors indicating behavioral control include:

Control over how to do the work, as opposed to caring only about the outcome of the work.

Control over the timing or location of the work.

Training provided to the sales rep.

Financial Control

Here, the overarching question is whether sales reps operate like they are running a business rather than relying fully on the employer for income. Factors include:

The extent to which sales reps incur unreimbursed business expenses or invest in tools, equipment, or other fixed
costs.

The extent to which sales reps make their services available to the market, not just one business.

How the business pays sales reps (i.e., 1099 v. W-2; commissions vs. salary or wages).

The extent to which sales reps can realize a profit or loss based on their hard work and business acumen.

Type of Relationship

This category asks whether the employer and sales rep operate at arm’s length like a company and vendor. Some of the factors in the category include:

Whether the employer and sales rep have a written contract with commercial terms.

The duration of the relationship, as contractors typically complete projects while employees work indefinitely.

The extent to which the sales rep performs services that constitute the regular business or operations of the employer, or work side-by-side with company employees.

Contractor misclassification can result in a variety of claims, such as back taxes from the IRS or unemployment office, workers’ compensation, or discrimination.

Sales Rep Statutes

Additionally, various states dictate contractual terms for sales reps. Minnesota’s sales representative statute is a good example. It provides that a company cannot decline to renew a sales rep agreement without 90 days’ notice and can only terminate a sales rep agreement with 90 days’ notice and an opportunity to cure.

Furthermore, the sales rep must continue to be paid for commissions earned during any notice period, regardless of whether the products have been shipped. Both provisions may conflict with the parties’ contract terms, in which case the statute—not the contract—governs the parties’ relationship. And, if the parties fail to maintain a contract at all, then a 180-day notice period is required to terminate.

Ultimately, sales reps can be a valuable resource to an organization, when done correctly. Organizations should review their relationships with sales reps to ensure that they are properly treated as independent contractors and the terms of the relationship do not run afoul of any local sales representative statutes. 

David James and Joe Schmitt are shareholders in the labor and employment group at Nilan Johnson Lewis.

Association members are entitled to 60-minute, no-cost, confidential consultations with the attorneys. Call the firm at (612) 305-7500.