Companies involved in the sale of technology products or services, just as all other companies, rely on sales personnel to promote and market their products and services to customers. Sales personnel may be direct employees of the company, or the company may prefer to work through non-employees such as sales representatives, distributors or franchisees. Each category comes with its own advantages and disadvantages and the distinctions may have significant ramifications for a company’s business.
I. Sales Employees and Sales Representatives
A sales employee is someone on the company’s payroll who is directly employed by the company to sell its products. The employee and the employer are subject to employer-employee laws and regulations. In contrast, sales representatives are not direct employees of the business, but instead are authorized by the company to sell the company’s products and services. Companies often prefer to avoid the expense and requirements involved in hiring an employee in favor of simply paying commissions. A sales representative sells the company’s product, but, unlike a distributor, does not take ownership of the product prior to selling it to the customer. There are requirements and obligations for sales representative relationships in Massachusetts that must be observed to comply with the law.
Massachusetts defines a sales representative as “a person, other than an employee, who contracts with a principal to solicit wholesale orders in the commonwealth and who is compensated, in whole or in part, by commission but shall not include one who places orders or purchases exclusively for his own account for resale.” Mass. Gen. Laws ch. 104 § 7. This statute follows the traditional distinction of a commissioned sales agent as someone whose compensation is based at least in part on commissions or a percentage of actual sales in acting as a middleman between sellers and buyer. Under Massachusetts’ statutory definition of a sales representative, the parties must be bound by contract, typically in writing, though an oral contract is enforceable if it does not violate the Statute of Frauds.
The company and sales representative might want the contract or agreement to set forth the specific terms for identifying qualifying sales and calculating compensation, along with any geographic area or product limits. They may wish to consider having all restrictions and compensation issues clearly laid out in a written agreement to the extent possible. The company may also want to be careful to state that the agreement is strictly for the creation of a sales representative relationship, and no employer- employee relationship or franchisorfranchisee relationship is to be construed from the agreement. They might also want the agreement to emphasize that the sales representative is independent from control by the company, and that no franchise relationship is being created. Franchise relationships typically have significant requirements on franchisees and if sufficient criteria are met, a sales representative may be deemed to be a franchisee with all the rights that accompany that relationship, even if the agreement states it is not a franchise relationship. Ideally, the sales representative contract might set a term or termination date, with or without renewal options, and it may be helpful to include a statement that the relationship may be terminated by either party upon notice to the other.
When a sales representative relationship is terminated by either party or otherwise comes to an end, certain payment obligations remain in effect per Mass. Gen. Laws ch. 104 § 7. All commissions due at the time of termination are to be paid within fourteen (14) days after the date of termination. Commissions that become due after the termination, such as when an order is placed pre-termination, but processed posttermination, must also be paid within fourteen (14) days after the date on which those commissions became due. See Mass. Gen. Laws ch. 104 § 8. These commission payment provisions cannot be waived, and a company’s failure to comply will result in liability for the amount of the commissions owed plus up to three times the amount of the commissions and reasonable attorneys’ fees and costs. See Mass. Gen. Laws ch. 104 § 9.
In summary, there are advantages to entering into a sales representative relationship, but it is advisable to describe the full business terms of the relationship in writing. Careful drafting of a sales representative agreement can ensure that the parties understand and comply with the requirements for establishing and enforcing a sales representative agreement, and avoid inadvertently creating other obligations or leaving key issues vague, which often leads to litigation.
II. Distributors and Franchisees
In Massachusetts, franchise or distribution agreements for certain industries are governed by statute. Those industries include motor vehicle dealerships (M.G.L. c. 93B), petroleum (M.G.L. c. 93E § 1-9), equipment (M.G.L. c. 93G), and alcoholic beverage distributors (M.G.L. c. 138 § 25E). The impetus for many of these laws was the need to protect smaller entities from the inherent imbalance of power of the two parties to an agreement, as well as to promote consumer welfare by regulating competition. See Richard Lundgren, Inc. v. American Honda Motor Co., 45 Mass. App. Ct. 410 (1998).
While the specifics may vary by industry, these statutes typically impose upon the manufacturer or supplier a duty of good faith and a requirement that termination of the relationship be for cause, whether that cause be breaches by the franchisee/distributor or a reasonable business decision, such as a decline in profit in a certain market. See Zapatha v. Dairy Mart, Inc. 381 Mass. 284 (1980).
Additional protections exist for franchisees as they are under a significant degree of control by the franchisor and may not be able to easily move on with their business opportunities upon termination by the franchisor. A franchisor-franchisee relationship is typically marked by significant control over the franchisee’s marketing, quality, and operation standards. See Depianti v. Jan-Pro Franchising International, Inc., 465 Mass. 607 (2013). “Under Federal law, a franchisor is required to maintain control and supervision over a franchisee's use of its mark, or else the franchisor will be deemed to have abandoned its mark under the abandonment provisions of the Lanham Act, 15 U.S.C. § 1064(5)(A) (2006).” Id. at 615. But where it is ambiguous as to whether a franchise relationship exists, a court will not simply impose franchisee obligations on a company merely because a distributor or sales representative alleges that it is a franchisee. C.N. Wood Co. v. Labrie Envtl. Group, 948 F. Supp. 2d 81 (D. Mass. 2013).
Working with sales representatives, distributors and franchisees provides companies with opportunities to contract for specific business terms for the relationship, and to define the terms for commissions, compensation, termination, and all of the other obligations between the parties. Being cognizant of the relevant laws will help determine which relationship is best and how to document that relationship to ensure that no other obligations are imposed on the company. Simply stating that a sales person is not an employee, or that a company selling your company’s products is not a franchisee, may not be enough if the underlying facts of the relationship create an employee or franchisee relationship. Clear drafting of the agreement, identification of the parties’ respective rights and obligations, and adherence to those rules will help companies avoid pitfalls in dealing with sales relationships.