Weighing the balance between commercial agency and employment

Richard Parr

Richard Parr

In the first three articles in this series we looked at the history of commercial agency and the definition of a commercial agent.  We then looked at the contrasting positions on termination, and finally turned to a comparison of the regimes in relation to compensation.  I think we now have enough information to start drawing comparisons between the relative benefits (from a businessman’s perspective) of engaging sales representatives as commercial agents, on the one hand, or employees, on the other hand.

Let’s weigh a handful of the respective (and obvious) advantages and disadvantages of having a sales representative as an employee and having that same sales representative as a commercial agent.

First, the advantages of having an employee:

  • it takes two years for an employee to acquire protection against unfair dismissal
  • an employee can be dismissed for cause (for example, poor performance) without compensation
  • whilst terminology such as “master and servant” is out of date, it remains the case that employees can be given detailed instructions, and methods of working can be tightly prescribed.

Now let’s look at some of the disadvantages of having an employee:

  • after 26 weeks of service (and, sometimes, with no service requirement at all) employees have a raft of maternity, paternity and parental rights
  • particularly with the introduction of pension auto‑enrolment the cost of providing employees with pensions is very much on the increase
  • though employees do not have an entitlement to sick pay as of right, there is an increasing expectation that some period of fully paid sickness absence will be given
  • equality legislation (affecting, for example, sex, race, disability, and so on) applies to all employees regardless of length of service
  • because of public policy issues in relation to restraint of trade, it can sometimes be difficult to enforce against employees post-termination restrictions relating to competitive activity
  • an employee engaged in sales activities which involve visiting customers will almost certainly expect to be provided with a fully expensed car as well as reimbursement of expenses.

Let’s now look at commercial agents. First, the advantages of engaging a sales representative as a commercial agent:

  • a commercial agent is paid by results. If no sales are achieved, then no commission is payable
  • because, for the most part, a commercial agent and his principal are assumed to be contracting with one another at arm’s length and with equal bargaining power, it is generally quite straightforward to impose post termination restrictions on a commercial agent and, vitally, to be able to enforce them
  • by definition, a commercial agent is not entitled to salary. This means that the principal will only be required to make payments to a commercial agent when that agent has achieved sales.  Furthermore, the principal may be able to claw back commission in circumstances where a debt due from a customer goes bad
  • a commercial agent will generally provide his or her own motor vehicle and deal with expenses incurred in connection with the sales process
  • a commercial agent will not be entitled to sick pay or paid holiday, nor will the “employer” be required to make any pension provision for the agent.

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

  • as we saw in an earlier article, even where a commercial agents contract is terminated for cause (for example, poor performance) may be very difficult to avoid paying the agent either compensation or indemnity
  • a commercial agent will generally be very much his own man (or woman) and so it may be more difficult to dictate to a commercial agent how and when the agent’s role is performed
  • it is commonplace for a commercial agent to have more than one agency. That may make it difficult for a principal to require an agent to concentrate on the principal’s products, as opposed to the products of another principal.

Given the plethora of rights which are given to employees by employment legislation it is not uncommon for a business to conclude that it would be better to engage sales representatives as commercial agents rather than employees.  Indeed, businesses are sometimes tempted to “dress up” employees as commercial agents in the expectation that the business will avoid the burden of the rights which accompany employee status.

But there is a trap for the unwary.  There have been a number of cases in which the degree of control which a business has exerted over a commercial agent has been such as to persuade the courts and tribunals to conclude that, though not an employee, the commercial agent is in fact a worker.  The distinction is important.  Whilst a worker has few of the rights which accompany employee status, a worker does have rights in relation to:

  • pension auto‑enrolment (and how are the contributions to be calculated given the varying commission income of the agent?)
  • paid holiday (and, again, with the agent’s income varying with commission, just how is holiday pay to be calculated?)
  • discrimination on grounds related to any of the usual “protected characteristics” (for example, sex, race, disability, sexual orientation, age, religion and belief).

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”.  Your decision should be based on what is going to produce the best results for your business, not on what the situation might be if things went wrong.

Richard Parr
Employment Department
0113 227 9246

You can view all the articles in this series here:

  1. The Mysterious World of Commercial Agents
  1. Termination of Commercial Agencies: contrasting the position with employees 
  1. Termination of Commercial Agencies: compensation regimes contrasted
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