Employees Vs commercial agents

Posted on 17 Nov 2014 by Victoria Fitzgerald

Richard Parr of Blacks Solicitors compares and contrasts employees and commercial agents in manufacturing.

Manufacturers are familiar with an employee’s rights.  Can the same be said in relation to the rights of commercial agents?

Lawyers talk about “commercial agents”.  They are referring to the Commercial Agents (Council Directive) Regulations 1993 (“Regulations”), and to self‑employed people (and companies) who sell goods for commission.

Commercial agents are not employees.  But they do have rights.  For example, what happens if you fire one?

Aside from proper notice (and “pipeline” commission), an agent who is fired for anything other than very serious misconduct will be entitled to be:

  • indemnified (for the goodwill built up by the agent, capped at one year’s remuneration);  or
  • compensated (for the value of the agency – in other words, normal business valuation principles apply).

By contrast, an employee who is unfairly dismissed is entitled to:

  • pay during notice
  • a basic award, and
  • a “compensatory award” (a maximum of £76,574 or a year’s net salary, whichever is less).

So much for money.  Let’s weigh the more obvious advantages and disadvantages of having an employee or a commercial agent.

First, the advantages.  An employee:

  • needs two years service to be protected against unfair dismissal.
  • can be dismissed for cause (e.g., poor performance) without compensation.
  • can be given detailed instructions, and tightly prescribed methods of working.

Now the disadvantages:

  • After 26 weeks’ service (and, sometimes, with no service) employees have a raft of maternity, paternity and parental rights.
  • Pension contributions!
  • An expectation of some fully paid sickness absence.
  • Equality legislation (sex, race, disability, and so on) applies to all employees regardless of length of service.
  • Difficulty in enforcing post-termination restrictions relating to competitive activity.
  • The expectation of a car and expenses.

Let’s look at commercial agents. First, the advantages:

  • Payment by results.  If no sales are achieved, no commission is payable.
  • An agent and principal contract at arm’s length, so it’s easier to impose post termination restrictions and, vitally, to enforce them.
  • No entitlement to salary – only payment for sales.  Further, the principal may be able to claw back commission if a debt goes bad.
  • An agent will generally have a car and pay his/her own with expenses.
  • No sick pay, paid holiday, or pension contributions.

But there are some disadvantages involved in engaging a commercial agent. For example:

  • Even where termination is for cause (eg, poor performance) it may be very difficult to avoid paying either compensation or indemnity.
  • An agent is very much his own man (or woman), so it may be difficult to dictate how and when the role is performed.
  • An agent may have more than one agency, making it difficult to insist the agent concentrates on the principal’s widgets.

Many rights are given to employees by employment legislation – so it’s common for a business to appoint commercial agents rather than employees.  Sometimes employees are “dressed-up” as commercial agents to avoid employment rights.

But there is a trap for the unwary. The control which a business exerts over an agent can persuade the courts that, though not an employee, the agent is a worker.  A worker has few normal employment rights, but does have rights in relation to:

  • Pension auto enrolment
  • Paid holiday
  • Discrimination (on grounds related to any of the usual “protected characteristics” such as sex, race, disability, sexual orientation etc etc).

Richard Parr, Blacks Solicitors
 So should you appoint commercial agents or engage employees? Decisions, decisions, decisions . . . .

As someone once said: “Stay committed to your decisions, but stay flexible in your approach . . . . “.

Base your decision on what is going to produce the best results for your business – not on what the situation might be if things went wrong.