Blacks Solicitors’ expert Employment Law team can help you if your business is experiencing difficulties with commercial agents.
Due to the perceived burden and pitfalls of employment legislation, some employers are increasingly turning to the engagement of self-employed staff.
The prospect of substituting salaries with “payment by results” (i.e. commission) can seem attractive. However a self-employed salesman or saleswoman is likely to attract the protection of legislation affecting commercial agents.
A Commercial Agent is a self-employed intermediary who, in return for a commission payment, has authority to negotiate the sale or purchase of goods on behalf of his principal. This relationship is governed by the Commercial Agents (Council Directive) Regulations.
A Commercial Agent is not an employee and the law surrounding commercial agency is complicated, so if you are entering into a Commercial Agency Agreement it is important that it should be carefully documented.
If an Agency has been terminated the Commercial Agent may be entitled to compensation, and if the Agent can show that orders reaching the principal within a reasonable period of time after termination were as a result of their efforts before termination, the Agent will also be entitled to commission on those orders. This ‘reasonable’ period will vary according to the type of business and length of transaction, but a period of time can be agreed.
Terminating a Commercial Agency Agreement
You should always specify the events permitting termination e.g. force majeure, material and/or repeated breach, insolvency, or if the contract was entered into by the Principal because a particular individual was working for the Agent, the incapacity or death of such individual.
No mandatory events are specified in the Regulations. However for agencies of indefinite duration, the Regulations set out minimum periods of notice:
- One month for the first year of the Agency
- Two months during the second year of the Agency
- Three months in the third and subsequent years
If no notice (or short notice) is given, compensation will be payable for breach of contract – as in with the employer-employee relationship – and will represent the amount of commission which would have been payable to the Agent had proper notice been given.
For Fixed-Term Agency Agreements, the Regulations don’t specify any period of notice. However, if a Fixed-Term Contract continues beyond its term, it will be treated as an Agency of Indefinite Duration and the Regulations in relation to minimum periods of notice will apply.
Restraint of Trade
Subject to normal public policy considerations, a Principal can impose restrictions on a Commercial Agent to restrict their activities following termination.
Compensating the Agent on the expiry or termination of an Agency
The Regulations provide for two methods of compensating an Agent upon either the expiry or the termination of an Agency – Indemnity and Compensation.
Indemnity or Compensation are payable even if notice requirements have been followed. However, they are only payable if the Principal will continue to benefit from the business that the Commercial Agent has generated. A sum can be agreed in the Agency Agreement, but this is unlikely to be a guard against later claims.
An Indemnity represents a share of the goodwill built up by the Agent during the Agency. The Regulations are very prescriptive in relation to an Indemnity and impose a limit of one year’s remuneration, calculated on the average annual remuneration over the preceding five years.
However, an Indemnity is payable only where the Agency Agreement expressly provides for it. Principals will often choose this option, as there is greater certainty and a cap on the amount payable. It can make better commercial sense, compared with compensation.
If there is no written Agency Agreement, or the agreement is silent on the matter, an Agent will be entitled to Compensation.
Compensation is calculated by reference to the value of the Agency. In other words, normal business valuation principles apply to value the Agency at the moment of expiry or termination. Relevant valuation factors might include that the commission stream was in decline, or the market for the goods was contracting.
A Commercial Agent loses entitlement to Indemnity or Compensation if:
- The termination is due to the fault of the Commercial Agent (being a fault justifying immediate termination in accordance with normal contractual principles)
- The Commercial Agent terminated the Contract
- The Commercial Agent transfers the Contract to another Agent
- The Commercial Agent doesn’t inform the Principal of his intention to pursue a claim within one year after termination
If the Commercial Agent has consented to the termination on the suggestion of the Principal, Indemnity or Compensation will still apply.
These exceptions, unfortunately, leave some areas open to debate. For example, the Regulations do not expressly mention the insolvency of the Agent. If the Principal wishes to terminate on the Agent’s insolvency – but the Agent is still capable of fulfilling its obligations (for example, where an Administrator is running the business) – it seems likely that the Principal would still remain liable to pay Indemnity or Compensation.
If you would like to find out more about how Blacks can help you with a Commercial Agency Agreement, or for a free no obligation discussion, please email or call our Employment Law team today on 0113 207 0000.