Termination of Commercial Agencies: contrasting the position with employees

Richard Parr

Richard Parr

In the first article we looked at the history of commercial agency in the UK and defined what the phrase “commercial agent” means.  In this second article, we look at the subject of terminating a commercial agency and contrast the law in this area with the law relating to the termination of employment relationships.

Whether one is looking at commercial agents or employees, the position on termination appears to be simple.  As regards commercial agents, the Commercial Agents (Council Directive) Regulations 1993 (“Regulations”) set out minimum periods of notice, as follows:

  • one month during the first year of the agency
  • two months during the second year of the agency, and
  • three months in the third and subsequent years of the agency.

As with employees, the parties are of course free to specify a longer period of notice.

In the case of employees, the Employment Rights Act 1996 (“1996 Act”) entitles an employee who has been in employment for a month to a minimum of one week’s notice.  That increases to two weeks after two years of service rising to a maximum of 12 weeks’ notice after 12 years’ service.

On the face of it, there is not a lot to choose to between commercial agency and employment – save for the obvious point that it would take an employee 12 years, as opposed to two years for a commercial agent, before he or she had an entitlement to three months’ notice.

But in the same way that the 1996 Act requires an employer to have a good reason for termination (a “fair” reason), so the Regulations provide that even where the requisite minimum notice has been given, a commercial agent will be entitled to compensation for termination – save in very specific and narrow circumstances.

In essence, there will be no entitlement to compensation where:

  • the commercial agent terminates the contract
  • the commercial transfers the contract to another agent, or
  • termination is due to the fault of the commercial agent.

But before we look at what is meant by the word “fault” let’s remind ourselves regarding the reasons upon which an employer can rely for dismissing an employee.  Subject to the overriding principle that an employer has to act reasonably (ie, fairly), an employer can dismiss for reasons relating to:

  • capability
  • conduct
  • redundancy
  • a restriction imposed by law, and
  • “some other substantial reason”.

Let’s take “capability” as a random (but typical) reason for termination.  The position in relation to an employee is that if an employee fails to perform then, provided the employee is given sufficient warning regarding the consequences of failure to improve, and a fair disciplinary procedure is followed, the employee can be fairly dismissed and will have no entitlement to compensation.

So if a commercial agency can be terminated due to the “fault” of the commercial agent then what is the difference?  In fact, the difference is marked.  Under the Regulations the “fault” has to be of a nature justifying immediate termination in accordance with normal contractual principles.

Pursuing the employment analogy, this means that in order for the fault to be of such a type as to exclude the agent’s entitlement to compensation then it must be akin to “gross misconduct” (or, as the lawyers might put it, “repudiatory breach”).  The problem in practice is that whilst continued failure by an employee (or an agent, for that matter) to improve the performance is almost certain to justify (in a general sense) termination on notice, this is highly unlikely to justify immediate termination.  In short, where a principal (the technical term for a commercial agent’s “boss”) has a poorly performing agent it is likely to be difficult (though perhaps not totally impossible) to terminate the agency and claim that any entitlement to compensation is excluded because of “fault” on the part of the commercial agent.

Of course, we haven’t touched on the issue of length of service.  An employee can’t bring an unfair dismissal claim until he or she has been in employment for 104 continuous weeks.  By contrast, a commercial agent could make a claim for compensation on termination regardless of the length of the agency.

Let’s pause there.  In the next (the third) of this series of articles we will look at compensation for commercial agents and compensation for employees.

Richard Parr
Employment Department
0113 227 9246

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