This article was originally written for and featured in Footwear Today.
So George Osborne blinked. Rather than increase employer’s national insurance contributions in last month’s Budget, he announced plans to reduce NIC for small and medium sized businesses from April 2014.
If the plans find their way into legislation (not an absolute certainty with the coalition Government!), they will be very welcomed by small footwear businesses with employed sales representatives. But until then a footwear company with 10 sales representatives earning £50,000 a year each will cost their employer over £58k a year in employment tax. In contrast employers do not pay national insurance contributions in respect of their self-employed agents.
Whilst this financial issue is important, for some businesses using agents means using individuals who are truly motivated to obtain orders. For other businesses it will also increase the chance of their products being shown to the right customers. This will occur when the agent in question carries complimentary product ranges to those of his principal’s business.
But there is no such thing as a free lunch. Agents require management just as do employees. However, it is arguable that agents need a different, probably smaller, management resource. Both sales representatives and agents will require direction from a business’s sales director and his team.
However, traditionally it has been thought that given the financial incentive which agents should have to sell, they require less direction from management than do employees. It is also the case that agents will require less management from a business’s personnel department. Overall therefore the costs to a business of using a self-employed agent as opposed to an employed sales representative should be less.
Ultimately, however, whether a business uses a sales representative or an agent, first and foremost the decision should be based on what is best for the business in terms of generating turnover and improving the bottom line.
With reference to this it is worth bearing in mind that, unlike the laws of some countries, English law does not require an agency agreement to be in writing. Where it is unwritten, English law will imply certain rights and obligations on both the business and the agent. These arise both under the common law and as a result of the Commercial Agents Regulations.
As such, an agent owes an overriding duty of good faith to his principal. He cannot put himself in the position where his own personal interests or those of another principal are preferred to the interests of his first principal. If he does, he will be in breach of this duty and it will be open to the first
principal to treat the agreement as being at an end.
The Regulations also particularise the duties which the agent owes to his principal. They expressly require the agent to:
- make proper efforts to negotiate and, where appropriate, conclude transactions which he has been instructed to take care of.
- communicate to his principal all the necessary information available to the agent.
- and comply with his principal’s reasonable instructions.
But a principal should not rely simply on common law and statutory obligations. Instead, the principal’s standard agency agreement to be entered into with each of its agents should contain two distinct sets of provisions.
The first set should be concerned with maximising the agent’s performance. Accordingly, whilst the way in which the agent performs his obligations will be down to him, the agency agreement should provide for:
- minimum sales requirements.
- regular reporting of the agent’s activities.
- the provision of information by the agent of how competitors are doing in the market.
- attendance at trade shows.
- notifying the principal of changes relating to customers, for example a change in the identity of the customer’s buyer.
The second set should be concerned with minimising the principal’s exposure under the Regulations. Accordingly, the agency agreement should make it clear that:
- the requisite statutory notice of termination may expire at any time and not at the end of a month.
- the principal can convert accounts into house accounts in certain situations and on payment of a pre-determined amount to the agent
- on termination the agent will be entitled to an indemnity and not statutory compensation.
- there is excluded the statutory entitlement to commission on orders that reach the principal within a reasonable period after termination of the agency agreement as a result of the agent’s efforts before termination.
- any claim by the agent to statutory commission on unfulfilled orders must be made within 12 months of the date from when commission on such orders would have been earned had they been fulfilled.
- English law is to govern the interpretation of the agency agreement and that any disputes are to be determined by the English courts.
And then if the worst does come to the worst and it is necessary to terminate the agency agreement, this minimised exposure should be capable of being further reduced by careful performance management of the agent!
Alternatively, you can take the view to continue with employed sales representatives and keep George Osborne happy.