Wrongful Termination of Sales Reps
What Is Wrongful Termination?
Wrongful termination of Sales Reps involves several types of misconduct by their Principals.
1) Improper notice of termination of a sales rep’s contract.
2) Termination of a sales rep’s contract with proper notice for the primary purpose of avoiding the payment of commissions.
3) Retaliatory termination for the sales rep demanding their rightful commissions.
Common Causes of Wrongful Termination of Independent Sales Reps
Breach Of Contract
Breach of contract occurs when written provisions in a signed agreement are not followed. For example, most Sales Representation Agreements (“SRAs”) require that to be validly terminated certain procedures must be followed.
1) Notice deficiencies – Notice deficiencies in a written termination notice can result in a breach of contract. Such as when an SRA has a provision requiring 30 day notice by certified mail. But the Principal sends a notice of termination by email.
2) Failure to negotiate. Failure to negotiate a resolution (or at least try) when less important breaches of contract occur can also result in a wrongful termination. When SRAs contain a provision that allows termination for cause but only after the non-breaching party contacts the offending party to notify them of the breach to give them a chance to correct it, that process must be followed. If it is not, a termination may be viewed as wrongful.
Bad Faith
Bad faith termination is committed when Sales Reps without proper contract protections are terminated, only because the manufacturer is trying to increase its profit margin.
1) Intent to avoid commission payment – An intent to avoid a large commission payment, or a series of commission payments over an extended time, can result in a bad faith termination, even though the termination notice complies with the notice provisions of the contract. Meaning, the rep can successfully sue even though there is no breach of contract.
2) Retaliatory termination – Retaliatory termination occurs if a sales rep stands up for their right to be paid commissions, and winds up receiving a termination notice as a result.
Legal Protections for Sales Representatives Facing Wrongful Termination
State Law Protections
Arizona. Has a Bad Faith Termination statute in its Sales Representative Protection Laws which requires commissions to be paid on post-termination sales if the rep proves that the termination was “primarily for the purpose of avoiding the payment of commissions.”
Maryland. Has Bad Faith Termination provisions in its Sales Representative Protection Laws similar provisions to those of Arizona.
North Carolina. Has a Bad Faith Termination provision in its Sales Representative Protection Laws which requires commissions to be paid on post-termination sales if a termination is deemed “wrongful.”
Protective Contract Provisions
There are contractual provisions (which most SRAs don’t have) that will protect independent sales reps from wrongful terminations, including:
Life of Part / Life of Program. Life of Part or Life of Program contract provisions can be negotiated. They require the Principal to pay commissions, even after termination, for the sales procured by the sales rep. Good incentive to not terminate the contract.
Example – “The Representative will be paid commissions for the life of the sales of the part to each customer procured by Representative, with whom the Company had no prior sales.”
Minimum duration. Minimum duration provisions can be negotiated and required if a particular industry has a long gestation period before sales occur (engineered parts e.g.).
Example – “This Agreement will commence on the effective date and will be automatically renewed on the anniversary date, year after year, for __ years. After which, this Agreement may be terminated on 30 day written notice by either party.”
Commissions based on sales development period. Commission duration provisions should be based on sales generation time. Meaning if it takes a sales rep 18 months to garner a design win that results in their Principal’s component parts being distributed to an OEM for years, they should get a contract that protects them on the back end for that long cultivation process.
Example – “This Agreement will commence on the effective date and run through ______ . After which time, this Agreement may be terminated on 30 days written notice by either party. However, if so terminated by Company, Representative will continue to receive commissions on sales to each customer for whom it procured the initial sales, commensurate with the number of months it took to procure such sales ”
Downward sliding scale for commissions. A downward sliding commission scale is a commission structure where the sales rep’s commission percentage decreases after hitting certain sales plateaus. It is an effective provision to keep a sales rep and their Principal working together for a long time
Example – A contract requires a 10% commission until the sales rep reaches $1 million in sales per year, at which time the commission decreases to 8%. If sales reach $5 million per year, the commission decreases to 5%
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Steps to Take If You’ve Been Wrongfully Terminated
Step 1: Review Your Contract or Agreement
- Look for termination clauses and commission payment terms.
- Highlight these provisions for discussion with an attorney who understands independent sales rep contracts, and laws that protect sales reps.
- Note that even if a contract allows only 30 day notice to terminate, with no strings attached on commission payments, a sales rep may still have the right to commissions on post-termination sales for which they were responsible.
Step 2: Document & Investigate Breaches
- Gather emails, contracts, and sales records as evidence.
- Interview and document meetings with your agency’s sales personnel.
- Interview and document meetings with customers whose purchases are at issue, and seek to gain their cooperation if their records are needed to establish sales and commissions owed.
- Prepare an Excel spreadsheet documenting sales and damages, if possible.
Step 3: Hire an Attorney
- Work with an attorney who understands independent sales reps contracts and laws to establish unpaid commissions and legal remedies available.
- Send a Demand for compensation (and an accounting if the sales and commission sums are unknown).
- Engage in settlement negotiations with the other side.
Step 4: Consider Filing a Lawsuit
- Contact an attorney who understands the laws pertaining to independent sales reps.
- Evaluate chances of success and potential outcomes if a lawsuit is filed. The analysis should include the maximum damages obtainable (some states require triple or even quadruple damages) and just as important the sales rep’s exposure for having to pay the Principal’s attorney fees if they lose.
- Notice the variations in State laws that protect sales reps. Some states require the lawsuit to be found as “frivolous” in order for the Principal to be awarded their attorney fees. Other states will award attorney fees to the “prevailing party.” So even if the lawsuit was not frivolous and the sales rep loses, they may have to pay the other side’s attorney fees.
- We offer FREE INITIAL CONSULTATIONS on any new matter presented by a sales rep.
Why Sales Reps Face Unique Challenges in Wrongful Termination Cases
Evidence Problems. Evidence problems arise because Independent Sales Reps are at a disadvantage when documenting sales and resulting commissions they are owed. Because customers usually place purchase orders directly with the Principal. Two things can be done to address this problem:
- Send a demand letter to the Principal shortly after any wrongful termination demanding a “Litigation Hold.” Meaning, a demand to preserve all hard copy and electronic documents pertaining to the dispute, pending a lawsuit.
- Contact customers and seek to have them provide information on sales to form a calculation of total commissions owed.
Unequal War Chests. Most manufacturers have anything from a small to a large budget for lawyers and litigation. Most Independent Sales Reps have no budget for legal disputes.
We have creative fee agreements to balance out this inequity, including contingent fee agreements.
Contract One-sidedness. Typical SRAs (normally created by the Principal) not surprisingly favor the Principal. But good sales rep attorneys sometimes have leverage outside of the limited contract provisions that will help their clients. Knowledge of more arcane legal doctrines in this field are essential.
Non-compete agreements are provisions which a Principal may try to use as leverage to get a sales rep to back down on their claim for unpaid commissions. Many states do not honor Non-compete agreements after an SRA is terminated, including California.
How a Sales Rep Attorney Can Help You
- Contract Review: Sales rep attorneys review contracts, assess whether the contract was violated, and what the options are to rectify it.
- Demand Letters: Sales rep attorneys send formal letters to demand accountings of sales and commissions, retractions of improper termination notices, and recovery of unpaid commissions.
- Lawsuit Preparation: Sales rep attorneys build cases for unpaid commissions, wrongful termination, and enforcement of statutory violations. Choosing the proper venue and court system can be essential. And, avoiding (when possible) alternative dispute resolution provisions in contracts (such as arbitration provisions) which can greatly limit a plaintiff’s procedures and damages in a lawsuit, can be the key to success.
We have considered these strategies for sales reps in hundreds of cases and we use this experience to advise sales reps on how to gain the best leverage in these disputes.
- Negotiating Settlements: Sales rep attorneys can sometimes secure compensation without lengthy litigation. In many cases the SCE are able to negotiate a settlement within 6 months of filing suit. Sometimes, we are able to settle disputes without ever filing a lawsuit, after leveraging the Principal with threatening legal remedies and procedures.
- Representation in Court: We file lawsuits in State and Federal Courts throughout the US.
We have successfully litigated commission disputes and won judgments and settlements for sales reps in California, Nevada, Oregon, Washington, Arizona, Texas, Illinois, Missouri, Ohio, Minnesota, Pennsylvania, New York, New Jersey, Connecticut, Maine, Maryland, North Carolina, South Carolina, Florida and Georgia.
Founder Scott M. Sanders was one of the first attorneys to obtain a triple damage award under California’s Sales Commission Protection statute, in 1998.
If you’ve been fired unfairly, don’t wait. Time is of the essence.
Contact our sales rep attorneys today for a free consultation to protect your book of business, commissions and career.
FAQs About Wrongful Termination of Sales Representatives
Wrongful termination of a sales rep encompasses terminating them for demanding their contractual commissions, and/or terminating them after they land a big customer or sale.
Yes, but each state has different viewpoints on wrongful termination of sales reps.
Unpaid commissions after termination may be recoverable. It depends on the contract and State laws involved.
It varies from State to State and also based on the nature of the dispute.
In many cases a demand letter acts as a catalyst to spur negotiations after a wrongful termination, sometimes resulting in reinstatement or the payment of a lump-sum settlement.
In most instances, yes.
LEGAL COUNSEL FAMILIAR WITH THE LAW PERTAINING TO INDEPENDENT SALES REPS SHOULD BE CONSULTED ON ALL OF THE ABOVE ISSUES BEFORE TAKING ACTION.