Does your company manufacture, distribute, or sell products and/or services by utilizing a sales force?

Are you a sales professional, selling for a company on either a base salary plus commission basis or as an independent contractor?

Not sure what terms you should be negotiating in your sales representative agreements?

Concerned that your agreement is not comprehensive enough in case there is a dispute?

January’s seminar at Saper Law focuses on the topic of Sales Representative Agreements. Daliah Saper, Principal Attorney at Saper Law, will lead the presentation using case studies and sample contracts. Her discussion will address payment and commission structures, non-compete and confidentiality agreements, territorial and geographical boundaries, intellectual property ownership, as well as the Illinois Sales Representative Act.

January’s seminar at Saper Law is a must-attend for any company or individual involved in sales. Sign up today before space runs out!

Details:
Thursday January 28, 2010
Saper Law Offices, LLC
500 N. Dearborn, Suite 1200
Chicago, IL 60654
Time: 11:30 am – 1:30 pm
Cost $15 with online registration: http://salesrep.eventbrite.com
$25 at the door
$5.00 to watch the live webcast
Lunch will be provided

First, I think that it’s a novel concept to equate employees as being the same as “property,” especially in the context of criminally convicting someone for “wire fraud.”   However, in the criminal law context, I don’t think that rusing is the same as wire fraud, unless a company can make a really strong case that an employee is company property and can be barred from going from one employer to another because a recruiter tricked them into leaving, and that the criminal justice system needs to imprison the recruiters perpetrating that fraud in order to prevent them or others from doing the same thing.

Let’s get real about this.  A recruiter who ruses to get past a gatekeeper in order to reach a real decision maker or information holder isn’t committing a federal crime.

But, in answer to the writer who asked if there’s a point where rusing could become illegal the answer is yes.  This will occur when rusing has been clearly indicated as being either criminally or civilly liable conduct.  This can occur via legislation or court decision.  But it hasn’t happened yet.  In the civil law context, liability (money damages or equitable relief) may occur if an enforceable contract or agreement has been violated.

The fact is no one is really sure how, when or if this new Act will be enforced. And, there aren’t any interpretive regulations yet (there are proposed rules available in PDF format at this link; if the link is expired, then search Google). The law basically provides more narrow but explicit definitions of what an independent contractor is, and it only applies to the construction, trucking, landscaping and related trades.

For my client, a trucking company, it’s not a big deal because the independent contractor agreement that I drafted for them months ago is already compliant with the new law. In fact, as long as a business’ independent contractor agreement strictly complies with federal and most states’ laws regarding independent contractors, that business will probably already be compliant. It’s a good idea for any affected business to audit their independent contractor agreements for compliance with this law–better safe than sorry (it’s also cheaper!).

The Act is enforced by the Illinois Department of Labor, one of our state’s more bureaucratic organizations (or as a colleague once said: “They screw everybody equally.”). The basic intent of the law is to prevent construction, landscaping, trucking and similar businesses from “misclassifying employees” as “independent contractors” in order to avoid paying payroll taxes, overtime, workers comp, insurance, etc.

So long as a business maintains strict adherence to the usual independent contractor rules of lack of control over the contractor, which includes hours, equipment, methods of work, etc., that business will probably be in compliance. Also, keep in mind that because the law is new and hasn’t been tested, the Illinois Department of Labor might go easy on businesses that, even though they may have violated the law, are acting in good faith. However, be mindful that the Internal Revenue Service, the Illinois Department of Employment Security, the Illinois Department of Revenue, and other business taxing agencies, might not take a lenient approach.

In short, don’t mess around with employee misclassification in any industry. Generally, the costs to clean up mistakes always exceed the costs to avoid them in the first place.

Fellow attorney Michael Moore of Russell, Krafft & Gruber, LLP, in Lancaster, PA, sent me the following comment concerning my December 2, 2007, post “Response to Reader’s Questions Regarding Severance & Separation Agreements.”

Chuck:

The strength of a severance agreement containing a nondisclosure agreement and release is always a question that businesses raise with me too. To improve the businesses chances of not getting into litigation, I suggest that any severance payment be made over time rather than in a lump sum. That gives the business the opportunity to stop payment if there is a problem and the former employee is not likely to sue if he is still owed money. I try to spread the payments out past the limitations period of filing an EEOC complaint, if possible. Repaying the money if you sue would be great; however, the tender back of consideration is problematic under the Older Worker Benefit Protection Act provisions of the ADEA. Sometimes, I will allocate some money to the nondisclosure portion of the severance agreement and provide that it must be repaid as liquidated damages if there is a breach or suit is filed.

One of the biggest problems with litigating breaches of nondisclosure agreements is that it can place customers in the middle of a legal battle which is really bad for business. Businesses should know this risk is there.

Michel is right. An installment or spread payment schedule is one of the best ways to prevent and discourage a breach.

Hi Charles ,

Thanks for throwing light on this subject ! However, I have a few doubts and would appreciate if You could help resolve them:

1. What is the guarantee that the exiting employee would not reveal the secrets / sue the firm even after signing the severance agreement / taking the money ?

2. is this a common practice in US / other parts of the world?

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Regards

Ritu Anand

HR

GE – India

My response to Ritu follows:

Hi Ritu,

Thanks for your questions. They’re excellent and thoughtful. I’m going to post them and my responses to the HR Community’s list serve and on my website.

I’m answering your questions in the same order and number you asked them.

1. What is the guarantee that the exiting employee would not reveal the secrets/sue the firm even after signing the severance agreement/taking the money?

Answer: As a means to discouraging the employee conduct you refer to, all severance and separation agreements should permit the employer to recover damages, costs and expenses from the employee (assuming the legal system permits such recovery). This won’t absolutely prevent an exiting employee from talking, but it increases the likelihood that they won’t breach the agreement.

Even if a severance or separation agreement prohibits disclosure, if the ex-employee breaches, the employer still needs to take enforcement action. This does not necessarily mean that the employer has to sue the ex-employee. The employer can issue some type of warning (letter, phone call, etc.), or the employer can contact competitors and warn them about using such secrets. The latter action poses its own risks due to ethical concerns, antitrust, defamation, libel and slander concerns. Obviously, the most extreme action an employer can legally take is to actually sue the ex-employee for breaching the agreement. A lawsuit will cost the business time and money, even if they can recover damages, costs and expenses from the employee.

With respect to a lawsuit or some other sort of complaint by the ex-employee, this is easier to deal with. As long as the terms of the agreement’s confidentiality, nondisclosure and other prohibitions are legally compliant, no court or other sort of tribunal should adjudicate a lawsuit or complaint, and all costs, expenses and damages should be awarded to the employer.

2. Is this a common practice in US/other parts of the world?

Answer: Yes, this is a common practice in the U.S., and it has been increasing in popularity. These agreements used to be reserved for top executives and are now being used for employees at all levels. The confidentiality and noncompete aspects of these agreements are also commonly used for pre-employment agreements between employers and employees.

With respect to its popularity in other parts of the world, it depends on the nation’s, province’s or region’s legal system. Common law and “Westernized” legal systems are likely to uphold severance and separation agreements as they’re mutually agreed to contracts with valuable consideration exchanged between the parties. Additionally, more capitalistic economies ( e.g., former Soviet-bloc nations) might be more prone to honor such agreements as the protection of the employer’s property (capital) is paramount to innovation and profitability. However, these same legal systems will take measures to protect and ensure an individual’s ability to apply their skills, trade, knowledge and abilities in an unrestricted manner. After all, if individuals cannot freely earn a living, then they cannot consume the goods and services employers produce, and businesses will lose money.

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Answer: I briefly discussed your concern in my article. Excerpted below:

“Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.”

To expand further upon this, you might be right to say that “[i]f this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees.”

There are U.S. companies which have a reputation for caving in to exiting employee demands for large severances because they’re afraid of the public relations ramifications of lawsuits, complaints, ill-will, etc. Some companies just think it’s cheaper to offer money than to defend their record. But, as I indicated above, the likelihood of a legal precedent being set is minimal.

The concerns regarding employee morale and feelings of entitlement can be combated by offering severance and separation agreements infrequently or in extreme circumstances (e.g., in order to protect company confidentiality, capital, etc.), and making it clear to employees that they are at-will employees (if applicable). In other words, it’s relatively easy in an article like this to state in a generic and sterile manner what should or shouldn’t be done. It’s a completely different matter to actually draft and execute an agreement in a way that sufficiently communicates to a particular employee and the entire workforce that this is an isolated and unique circumstance, and a serious and binding agreement with provisions that must be honored. In short, how individual businesses and practitioners implement severance and separation agreements is crucial. Issues with execution are what leads to misunderstandings, disputes and your questions. I personally believe that many of the issues you allude to are avoidable and resolvable via a professionally drafted and executed severance or separation agreement and the advise of competent legal counsel.

Now, a few caveats. My original statement, as well as my response to your questions, are general statements and not intended as legal advice nor do my statements create any sort of attorney-client relationship. Moreover, as stated above, every circumstance is unique and might require its own unique agreement, contract and mode of execution. Again, consult competent legal counsel before taking any action.

I hope that this answers your questions. Feel free to ask for additional information or opinions. Moreover, thanks for taking the time to read the article.