Most businesses have a sales team that is responsible for driving revenue through new and repeat business. To run a sales team effectively, many businesses employ a sales representative agreement, which lays out the framework for how a sales team should operate. Every sales representative agreement should include seven key provisions.
What are sales rep agreements, and why do you need them?
A sales representative agreement ensures that your sales rep pushes your product to your target audience for a fair price and in the appropriate places. A sales representative agreement outlines the terms of all sales activities via rights and responsibilities assigned to your business and the salespeople you hire. Sales rep agreements can act as protection for both you and your salespeople, and they can govern sensitive sales concerns, such as exclusive territory, confidential information, compensation, commission (and unpaid commissions), trade secrets and termination.
When can you terminate sales rep agreements?
Termination rules vary by state. While some states allow for a sales representative contract that gives your business the power to terminate sales rep agreements at any time, other states require that employers give as long as 90 days of notice before termination. Check your state regulations before writing your sales representative contract or terminating an existing agreement.
- Identification of the salesperson's role. Make sure your sales rep agreement indicates whether your sales rep is an independent contractor or an employee. Additionally, be clear that a sales rep is not a broker, distributor or agent. Explicitly state the work and obligations expected of your sales rep.
- A commission provision. If you are hiring a sales rep with exclusive territory or account responsibilities, include a commission provision that clearly states the compensation the rep will earn for all relevant sales. To protect your rep, you should also include details on how to seek recourse for unpaid commissions.
- Details of when sales activity should be expected. Not all sales work results in immediate sales. A sales rep agreement should outline how much time a rep needs to develop sales and recover commissions. Provisions about sales quotas should also be included.
- Division of power. Outline what power the representative does or does not have to finalize sales, alter prices, sell certain products and make other crucial decisions on behalf of your company.
- Confidentiality. If your sales rep will have access to confidential information such as trade secrets, price structures and other commission rates, your sales rep agreement should require your rep to keep this information private.
Below, find even more detail on the seven clauses that should be in your sales representative contracts.
7 elements to include in a sales representative agreement
To craft a comprehensive sales representative agreement, be sure to include the following seven provisions.
Classification of the sales representative
The first item to clarify in a sales representative contract, even if it has already been discussed, is whether the rep is an independent contractor or an employee.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payment to independent contractors.
An independent contractor is an individual who maintains the means and methods of the work to be performed. On the other hand, when the employer controls not only what work an individual will perform but also how that work will be performed, that individual is an employee.
If an employer gives an individual freedom of action but the employer has the right to control the details of how the services are performed, the individual is still an employee.
Sales representative duties and responsibilities
Next, clearly specify the duties and responsibilities of the representative. Examples of such responsibilities may include the following:
- Behaving in a manner consistent with the image and reputation of the company.
- Using best efforts to promote and sell goods.
- Forwarding orders promptly (be sure to describe the proper method).
- Having adequately trained and competent personnel.
Be sure to specify which actions the representative is prohibited from doing. Here are some examples:
- The company may demand the right to choose whether to accept orders.
- The representative may not be allowed to make representations on behalf of the company.
- The representative may not be allowed to set or change prices or terms of sale.
- The representative may be prohibited from accepting payments or collecting debts.
- The representative may be prohibited from selling competing products while working with the company.
If your company sells a variety of products or services, you may want to specify which products your representative can sell. If you want to limit the products a representative can sell, you should attach a complete list of the approved products to the agreement and update the list periodically if the products change.
You may also want to specify other limitations, such as where the products can be sold. Representatives may be limited to a particular region or type of customer. You may attach a list of existing customers the representative can contact.
Additionally, if you decide to set a sales quota for your representatives, you should include that information in the agreement as well. Past performance is often a good indicator of reasonable minimum expectations for sales goals.
An important section of any representative agreement details how the representative will be paid. The agreement should specify how the commission will be computed, specifying the basis of the commissions and that it is the only compensation the representative will receive outside of bonuses or other incentives.
The agreement should also specify when the representative would receive compensation for their work. Typically, commissions are paid only after the product is shipped to the customer. Under some circumstances, commissions may not be paid to the representative.
For example, if the order was solicited from an unauthorized account, or if the order is attributed to another representative, the contract should specify that, under these circumstances, no commission will be paid.
The agreement should also indicate how often your company will send statements to the representative regarding the status of the commission account and allow a specified time for the representative to make any objections to the contents of the statement.
Also, depending on the situation, the representative may not be reimbursed for work expenses. The agreement should state whether a representative's expenses can be reimbursed and specify any limitations on reimbursable expenses.
Sales representatives are trusted with a variety of information that their companies wish to keep confidential. The sales rep agreement should state which information a representative is not allowed to share with outside parties. Such confidential information may include the following:
- Sales lists
- Business plans
- Price structures
- Commission rates
- Customer lists
- Vendor lists
- Financial information
- Trade secrets
- Operating procedures
- Computer programs
- Design formulas
Smart business owners will ensure that there are clear grounds for termination in the contract. The basis for termination can be "for cause" or "for convenience." An example of a termination "for cause" would be if the sales representative failed to meet quotas. An example of "for convenience" would be if the business were to decide it didn't want to use the services of the representative anymore. In either scenario, there should be a clear process in place for termination and appropriate notification provisions.
Actions after termination
Finally, the agreement should detail what a representative must do after termination. The agreement should require representatives to stop portraying themselves as representatives of the company and to return any materials provided by the company.
You may also want to include a noncompete clause that prevents the employee from working for a competitor until a reasonable period of time has passed. This will help prevent the representative from sharing confidential information with your competitors.
In addition to these main provisions, there are various other clauses, such as choice of law and severability, you should include, so make sure to speak with your attorney before you finalize your sales representative agreement.
Sales rep agreement templates
Now that you fully understand what sales rep agreements should include, you might be thinking about writing one from scratch to ensure that every important provision is included in exactly the language you want. You can save time by using sales rep agreement templates that you can modify as needed. Here are a few template resources to get you started:
- Printable samples: Nine free sales representative agreement templates
- Sample independent sales representative agreement
- Rocket Lawyer: State-by-state sales representative agreement templates
Download a sales rep agreement template, and don't be afraid to change these templates to best suit your company's needs; what matters is that your final contract follows all of the above advice.
Additional reporting by Max Freedman.