8 Sep 2021

The Government has just announced it is increasing national insurance contributions (NICs) – in effect an employment tax.  For some businesses with employed sales representatives this may be the time to invite the employees concerned to become a self-employed sales agent.

For businesses contemplating such a change what issues should you consider?

Commerciality

A change in the status of the sales force needs to make commercial sense –for the business and the sales force.  For both there will be an issue of “how do we make it work?”

The business can be expected to want to include in any agreement with the newly appointed agent some provisions which will give it confidence that the agent will service customers and seek new customers in ways consistent with the business’s objectives.

An agent can be expected to look for some form of financial assistance as most agency models work on a commission basis with a time lag between the taking of an order and the customer paying.  Different financial schemes – ranging from a temporary monthly retainer to the payment of advance commission – can be put in place to bridge the initial time gap following the commencement of the agency so as to ensure that the agent is not financially disadvantaged.

The agency agreement

The change in status will mean replacing the employment contract with an agency contract. From a legal perspective there is a material difference – an employed sales representative will move from being an employee to self-employed.  Whilst this may seem to be a statement of the obvious – and is the key to addressing the increased NIC cost mentioned above – an agency agreement should address issues which are different to those found in employment contracts as follows:

  • The scope of the appointment of the agent needs to be stated.  In essence what is the extent of the agent’s entitlements and responsibilities in terms of:
    • geographical territory;
    • products;
    • new products in the future;
    • customers and channels to market?
  • What is reserved to the business should also be stated.
  • What would be the duration of the agency?  In a situation where the status of the employed sales representative is changing – it would be unusual for the duration to be fixed.  Instead it can be expected that the agency will be continuous subject to either party being required to give a specific period of notice (for example, three months).

Various obligations on the agent can be expected to be included such as:

  • Providing the business with details of customers contacted or to be contacted;
  • Transmitting orders obtained and generally acting as a conduit between the business and customers;
  • Attending sales meetings and possibly trade shows; and
  • Providing market reports.

Correspondingly obligations on the business can be expected including:

  • Supporting the agent with samples, information, POS materials, and technology (for example tablets); and
  • How and when commission is to be paid.

The Commercial Agents Regulations

The Commercial Agents Regulations have been in existence for many years but still urban myths abound about them.

The Regulations govern the relations between businesses and their agents.  Whilst the Regulations are pro-agent, there are ways in which they can and should be balanced, given the intended relationship between the business and its agents.  These include:

  • Providing for the above notice of termination to be given and expire at any time;
  • Stating that subject to meeting various requirements under the Regulations, the agent will be entitled to an indemnity (and not compensation) following termination of the agency; and
  • Addressing the provisions in the Regulations that specify that actions taken by the agent before termination and resulting in orders after termination will not result in the payment of commission by the business to agent. 
    This can be particularly important where new agent is succeeding an old agent and the business could be faced with having to pay two lots of commission in respect of the same sale!

Take home points 

  • The recently announced changes to National Insurance Contributions could be commercially advantageous for both businesses and agents if agents moved to becoming self employed
  • To do so would require a change in contract from an employment contract to an agency contract
  • Whilst the change from an employed sales force to self-employed agents may be considered as resulting in the business having less control over sales, this can be addressed in the agency agreement as can, to a large extent, the pro-agent Regulations.

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