Agents versus employees

A look at the pros and cons of using self-employed agents as opposed to employed sales reps.

Stephen Sidkin, a partner at law firm Fox Williams, looks at the pros and cons of using self-employed agents as opposed to employed sales reps.

There appears to be a trend among companies towards using fewer employed sales representatives and more self-employed agents.

An obvious reason for this is the cost of an employee. You pay national insurance contributions for each employed sales representative, but not for your agents.

But tax is not the only issue. Agents can increase the chance of your products being shown to customers: for example, when an agent carries other product ranges that are complementary to yours.

Both employees and agents require management from your sales director, but agents' greater financial incentive to sell ought to mean less supervision. Certainly, they will require less attention from your HR department, so the costs of using an agent as opposed to an employee should be lower.

However, the position of agents in law is not as well understood as that of employees. For example, English law does not require an agency agreement to be in writing, but if the agreement is unwritten, the law implies certain rights and obligations on both the business and agent.

An agent owes an overriding duty of good faith to the business he serves, known as his "principal". He must not be in the position where his own personal interests, or those of another business he works for, are preferred to those of his principal. If that happens, he will be in breach of this duty and the principal can terminate the agreement. This obligation is not subject to any minimum thresholds of orders, time period, or geographical extent.

So as to be sure that he is never in breach of this duty to his principal, an agent should avoid carrying products that compete with the principal's. For an agent to admit that he was carrying another company's product, but that it only competes with 1 per cent of his principal’s range of products is, in law, a bad argument. But if the agent is subject to a non-compete restriction (whether during or after the agency agreement) which is more than reasonably necessary to protect the principal’s legitimate business interests, the restriction will be unenforceable.

The law also requires that a non-compete restriction is in writing, relates specifically to the geographical area and products allocated to the agent, and extends for no more than two years after termination of the agency agreement. Therefore a non-compete restriction covering the United Kingdom will be unenforceable against an agent whose territory is, for example, Wales.

Despite these complexities, whether a business uses a sales representative or an agent should of course be based on what is best for the business in terms of generating turnover and improving the bottom line.