How-to guide: How to terminate a sales representative agreement (USA)

Introduction

This guide will assist in-house counsel and private practitioners when preparing to terminate a sales representative agreement and includes issues that commonly arise in the termination process.

The guide covers:

1. Laws governing the termination of sales representative agreements
2. Invoking the termination provisions within the sales representative agreement
3. The steps to follow to terminate a sales representative agreement
4. Wrongful termination issues
5. Remitting commissions due

The rules and laws related to the termination of sales representative agreements may vary between US jurisdictions. The discussion in this guide is a general statement of the laws applicable in most US jurisdictions. You should consult local laws before beginning the termination process of a sales representative agreement.

This guide can be used in conjunction with the following Checklists: What to consider when terminating a contract, What to consider to ensure a contract is valid and Overview of US employment law.

Section 1 – Laws governing the termination of sales representative agreements

1.1 Review the agreement

The agreement between the company and the sales representative will usually include a ‘choice of law’ provision identifying the state governing law or jurisdiction of the agreement. A particular state’s law may affect how certain terms (that may not be specifically defined in the contract) are construed. For example, courts in one jurisdiction may view the ‘good cause’ that would merit termination differently from the courts of another jurisdiction.

State law may have provisions that govern the notice required to be given to the terminated sales representative. For example, Minnesota law provides that in order to terminate a sales representative for good cause, a principal must give 90 days’ notice, and the notice must set forth the reasons that constitute good cause for termination. See Minn Stat section 325E.37(2)(a).

1.2 Evaluate the impact of the choice of law on the termination process requirements

When enforceable, the contract’s choice of law provision dictates which jurisdiction’s laws will be used to interpret the agreement. Contract law as well as statutory law governing sales representatives vary between states, and the differences can have important consequences when terminating a sales representative agreement.

Courts tend to respect the selection of law made by the parties provided that the forum selection clause is reasonable under the circumstances. See The Bremen v Zapata Off-Shore Co, 407 US 1 (1972). However, where there is no reasonable connection to the state whose laws are chosen or a state has sales representative protection legislation courts are more reluctant to apply choice of law provisions. There has been a trend among states towards adopting laws that protect sales representatives.

For example, in an agreement between a sales representative company, a Minnesota citizen with a Minnesota sole proprietorship, and an Illinois corporation, a choice of law provision selecting Ohio law was found invalid because of the Minnesota Termination of Sales Representatives Act, Minn. Stat. section 325E.37 (MTSRA). The court found that the legislature intended to prioritize the MTSRA over contractual choice of law provisions. Hedding v Pneu Fast Company, No. 18-1233 (JRT/SER) (D. Minn. Jan 2, 2019).

In another case, an agreement between a Minnesota corporation with its principal place of business in Illinois and a Texas corporation that had its principal place of business in Texas specified that Texas law would govern the contract. However, Illinois had enacted legislation (Illinois Sales Representative Act (ISRA) 820 ILCS 120/1 et seq) with a stated strong public policy of protecting the rights of sales representatives. The court held that allowing the case to be governed by Texas law would violate public policy because Illinois had enacted laws specifically designed to protect sales representatives. See Maher & Assocs v Quality Cabinets, 267 Ill App 3d 69, 203 Ill Dec 850, 640 NE2d 1000 (App 2d Dist 1994).

1.2.1 Is it a claim in tort?

Some courts have held that the usual type of choice of law clause (e.g., ‘This Agreement shall be governed by, and construed in accordance with, the law of the State of X’) is not sufficiently broad enough to cover claims based in tort, as opposed to contract claims. See, United Feature Syndicate Inc v Miller Features Syndicate Inc, 216 F Supp 2d 198 (SDNY 2002). It is thus important that the agreement specifies that tort claims are also covered by the choice of law. If tort claims are not covered, and a terminated sales representative were to assert a claim for wrongful discharge or some other tort, the case would be decided according to the choice of law rules of the forum jurisdiction, making the probable outcome of the case less predictable.

1.2.2 Impact of governing law on payment of commissions

It is important to check what the requirements around the payment of commissions to the terminated sales representative are in the jurisdiction which governs the agreement. States will differ; for example, Connecticut law states that sales commissions due when a sales representative is terminated must be paid to the sales representative by the date specified in the contract or 30 days after the effective date of termination, whichever is later. In Pennsylvania, however, the Commissioned Sales Representatives Law, 43 P.S. section 1471, et seq, provides that when a sales representative is terminated, the principal must pay the sales representative all commissions due as of the time of the termination within 14 days following the termination.

1.3 Consider whether the sales representative is an employee or an independent contractor in terms of the agreement?

The laws governing the termination of a sales representative may differ depending on whether they are an employee or an independent contractor.

For most purposes, including tax law, agency law, and other employment-related purposes, a person who works for another for pay is presumed to be an employee in the absence of compelling reasons to consider them an independent contractor. The presence of a written agreement stating that a person is an independent contractor is one factor to consider.

Some states have laws dealing with the status of salespersons. For example, California law uses the same rules as the Internal Revenue Service (IRS) to determine eligibility for unemployment insurance. See, California Code of Regulations Title 22, section 4304-1.

For further information on the distinction between employees and independent contractors see the IRS webpage, Independent Contractor (Self-Employed) or Employee? (classification for tax purposes) and the Department of Labor webpage, Misclassification of Employees as Independent Contractors. For information on state laws governing the distinction, review state labor or employment law websites and state tax authority websites.

Section 2 – Invoking the termination provisions within a sales representative agreement

2.1 Identify the relevant termination provision

The first step in considering whether to terminate any contract is to identify the termination clauses in the agreement. Typically, there will be multiple possible termination provisions such as, ‘for cause’ and ‘without cause’ (see 2.3 and 2.4). It is important that the provision invoked correlates with the facts and circumstances of the claim under consideration.

2.2 Expiration of the agreement

The agreement may specify an explicit expiration date. If the agreement under consideration has such a provision, the prudent decision may be to ‘time out’ the agreement and let it run to the end of its term rather than initiate termination of the sales representative.

2.3 For cause

Termination for cause occurs when the sales representative’s actions are contrary to specific terms in the agreement or are so egregious that they require termination, sometimes immediately. Some examples of such egregious behavior may include the following:

• violation of the company’s code of conduct or ethics policy;
• failure to follow company policy, whether this includes any company policy or only specific ones;
• breach of contract;
• violence or threatened violence;
• threats or threatening behavior to a colleague or customer;
• stealing company money or property;
• falsifying records;
• harassment; and/or
• a conviction for certain crimes, such as a violent crime or a crime involving fraud or dishonesty.

2.4 Without cause

The agreement may explicitly provide that it may be terminated at any time for no cause whatsoever. A notice period may or may not be required. It may also be that where this term is not provided for in the agreement, or if the agreement is silent on the question of termination without cause, the agreement may be considered terminable at will at any time by either party without liability.

2.5 Non-performance

Terminating a sales representative for non-performance should be uncomplicated provided that the company has been effectively communicating with the sales representative, preferably in writing, so that there is documentation of issues should termination be necessary. Non-performance can take different forms, including not meeting sales quotas, or not making enough sales calls. The primary factor in the decision must be based on objective proof in the form of documentation that the sales representative is familiar with. Such documentation may include the following:

• sales figures;
• telephone-call statistics;
• conversion rates;
• critical ratios;
• call reports;
• commission reports;
• performance comparisons
• sales as a percentage of quota;
• training records;
• customer feedback surveys;
• results from assessments; and
• closing percentages.

2.6 Breach of contractual provisions

If you wish to terminate for breach of specific provisions within the sales representative agreement, make the circumstances for the termination clear. Provide notice of the violation to the sales representative as soon as the company is aware of it.

The agreement (or governing law) may contain provisions that provide the sales representative with an opportunity to cure their breach of the agreement. As such, make it clear in the notice to the sales representative that they need to cease and desist from any further actions that violate the agreement, and that they must remedy any potential harm caused by the acts within the time specified in the agreement or governing law.

Section 3 – The steps to follow to terminate a sales representative agreement

3.1 Specific date of termination

It is essential to specify the effective date of termination. This is the sales representative’s last working day for the company. The time gap between the date of serving the termination notice and the final date of termination should be equal to or more than the notice period stipulated in the employment contract.

3.2 Notice to the sales representative

The agreement between the company and the sales representative typically will include the specific notice requirements for any communication between the parties. Any correspondence sent regarding termination should adhere to these specific standards.

3.3 Reason for termination

If the termination is for cause, list all the reasons that led to the sales representative’s termination. Support the reasons with evidence wherever possible, such as previous memoranda or written warnings. The document giving notice (e.g. termination letter) should indicate clearly that the company has given enough opportunity to the sales representative to take corrective measures before deciding to proceed with the termination.

Where notices of possible reasons for termination have previously been provided to the sales representative, that should be clearly stated as well. Below is some sample wording for a termination letter.

If the termination is not for cause, it is usually best to be very succinct. The more information that is provided in this situation, the more likely the sales representative is to inquire into the reasons for termination or spin the information into a reason for suing. For example, if you state that the sales representative is being terminated for not meeting sales figures, but another employee of a different sex is retained despite worse sales numbers, the employee could pursue a sex discrimination suit.

3.4 Process for return of equipment and materials

It is advisable that the termination notice states that all company materials need to be returned by the termination date and provides a process and a point of contact for their return. Where possible, provide a complete list of materials in the notice of termination.

3.5 Process for payment of commissions due

In the termination notice include a description for the process that will be used for the payment of final commissions due. The process usually involves sending the commissions, when payable, to the terminated sales representative’s home address, unless they specify a different address. Wherever possible, make reference to language included in the original contract, by quoting the applicable provisions. Note that governing law will impact the timing and calculation of the payment of commissions. State law may provide that these timing and calculation provisions may not be waived by agreement.

3.6 Notice to other parties

Make sure the notice of termination to the sales representative occurs before notifying any other third parties.

3.6.1 Customers

Generally, immediately following notice to the sales representative, the company should contact the customers affected by the termination. It is a good idea that any notice to customers includes direction on their new point of contact as well as a description of the plan to transition from the terminated sales representative.

In the notice to customers, avoid disclosing the possible reasons for the termination, as this may result in potential litigation issues with the terminated sales representative for damage to their reputation.

3.6.2 Public at large

In rare cases, a public notice must be made in order to protect the interests of the company to direct customers and others that the terminated person no longer represents them. Examples of such cases include a situation in which a sales representative fails to stop advertising that they are a representative for your organization, or if they continue to solicit or process new orders. Take care when you release the information to avoid allegations by the terminated sales representative that the company is causing harm to their professional reputation.

3.7 Date of termination

3.7.1 Immediate notice

Where the reasons for termination are especially egregious, the termination may be immediate. This is especially true if the conduct is causing irreparable harm to the represented organization and its reputation in the business community. For example, if the sales representative was arrested for a highly publicized incident and the company logo or vehicle was clearly identified in news coverage, there would be sufficient grounds for immediate termination. Other acts may include theft of company property or leaking confidential company information.

3.7.2 Reasonable notice

Generally, the company is required to provide reasonable notice of the termination. Reasonable notice may be defined in the contract, or it may be provided for in governing law. In Minnesota, for example, under the Minnesota Termination of Sales Representatives Act a notice of 90 days is required when the termination is for good cause. See, Minn Stat section 325E.37(a).

It should be noted that statutes protecting sales representatives are becoming increasingly prevalent. See, for example, the Pennsylvania Commissioned Sales Representatives Law and the Illinois Sales Representative Act for two examples of this legislative trend.

3.7.3 Transition and reassignment of responsibilities

When determining the date of termination, the company should contemporaneously design a plan for the transition or reassignment of the responsibilities currently being performed by the sales representative. The company should decide, for example, if a new representative will be engaged to serve the client base of the terminated agent.

3.8 Ongoing responsibility by sales representative

The agreement may detail what a sales representative must do after termination, especially with regards to company intellectual property such as trade secrets. The sales representative should stop holding themselves out as representing the company and return any materials provided by the company. It would be prudent to ensure that the representative is informed to cease and desist from interacting with customers or sales leads.

3.9 Acknowledgment of termination by sales representative

A required element of the termination is the acknowledgment by the sales representative. An acknowledgment of termination ensures that both parties have a meeting of minds with respect to the termination.

The acknowledgment of termination is prepared by the company and contains some basic sections and components, including as follows:

• a header stating it is a termination of the contract;
• the date;
• the basic purpose and date of the initial contract;
• a statement saying the contract has been terminated by mutual agreement;
• the effective termination date; and
• a signature.

A copy of the signed acknowledgement should be provided to the terminated employee, and another copy retained in the employer’s records. In addition, immediately preceding the signature there should be a statement that says that the sales representative acknowledges receipt of the termination notice and agrees to the terms stated in the notice and in the acknowledgment letter.

Section 4 – Wrongful termination issues

Terminated employees may claim that their termination was a breach of their employment agreement. Claims of unlawful discrimination may also be raised. Employers should be prepared for such allegations by retaining evidence of the grounds for termination of an employee.

4.1 Documented lack of performance or other misconduct

By the time termination of a sales representative for reasons of lack of performance or any other misconduct is under consideration, the company should have an extensive trail of documented non-performance of which the sales representative has full and complete knowledge. The company needs to ensure these statistics are adequately documented, summarized, and included in the termination notice. Documentation is important because it provides proof of a legitimate termination reason which can counter claims of wrongful termination by the sales representative.

Documenting non-performance of a sales representative is a matter of comparing expectations versus actual figures for metrics such as sales figures, calling statistics, conversion rates, critical ratios, call reports, commission reports, performance comparisons, sales as a percentage of quota, training records, customer feedback surveys, results from assessments and closing percentages. Regular reporting on these metrics should be required for the sales representative.

4.2 History of communication with sales representative

It is critical to document any communication with the sales representative, so as to provide evidence regarding the circumstances of the termination in case the matter should escalate to litigation. In addition to the above records, it is advisable that the company retain meeting notes associated with the regularly scheduled sales calls to review sales performance. Documentation accumulated to support the termination should include any letters or emails delivered to the sales representative. In addition, document any oral communication by summarizing it in a letter or email.

4.3 Potential discrimination issues

Potential discrimination may be asserted by a sales representative for claims based on, for example, race, color, religion, sex (including pregnancy, gender identity, and sexual orientation), national origin, age (40 or older), disability, or genetic information. A prima facie case of discrimination can be made by showing that a member of a protected class was denied a benefit of employment (i.e., they were terminated) while a person not of that class was not denied. That prima facie case can be rebutted by showing evidence that the denial of the benefit was based on a legitimate business purpose. See, McDonnell Douglas Corp v Green, 411 US 792 (1973). Therefore, the strongest defense against any of these claims will be indisputable evidence of poor performance or misconduct.

Section 5 – Remitting commissions due

5.1 Sales in queue

Some sales attributable to the sales representative may not yet have been fully executed at the time of termination. In assessing any such sales and any remuneration potentially owing to the sales representative, it is important to consider both the contract terms as well as the relevant governing law. In most states, a terminated sales representative is entitled to receive commissions paid after the termination if those commissions were earned before the termination, and if the amount of those commissions can be calculated. See, for example, Israel v Voya Institutional Plan Servs LLC, No 15-cv-11914-ADB (D Mass Mar 16, 2017). Whether the sales representative is an employee or contractor may also factor into the application of certain state laws designed to protect sales representatives.

Under Florida law, a sales representative agreement is required to be in writing, and all outstanding commissions, including those earned but not yet paid, must be paid within 30 days of termination. Even where a contract is oral, the same 30-day payment rule applies. And, especially important, the company may be subject to triple damages and attorney's fees if they fail to comply with these requirements. See §686.201 Fla. Stat.

5.2 Post-termination sales due to efforts of sales representative

As with each of the special circumstances related to the payment of commissions, any analysis should start with the original agreement and then ascertain whether any state law intervenes. Where the contract is silent, courts may apply the ‘procuring cause doctrine.’ This doctrine provides a default rule and states that, in the absence of contractual language to the contrary, a terminated sales representative is entitled to receive a commission when their acts have so contributed to bringing about the sale that but for their acts, the sale would not have been accomplished. See, Perthuis v Baylor Miraca Genetics Laboratories LLC, 645 SW3d 228 (Tex 2022).

5.3 Set-off or hold-back of commissions owed

Depending on the terms of the contract, it is generally acceptable to hold back some portion of commission due in certain circumstances listed below.

5.3.1 Pending return of equipment and materials

If any equipment is due to be returned, it is a good idea to ensure this is done prior to paying any outstanding commission. The date for the expected return of the equipment as stated in the termination letter is usually the expected required date for payment of commissions earned.

Note that many state laws require payment of earned commissions within a specified time limit. Withholding payment pending return of equipment may be allowed if the original agreement with the sales representative provides for it.

5.3.2 Resolution of final orders

Depending on specific contract terms and governing law, orders for finalized sales by the sales representative will require payment of commissions even if the orders are not paid for until after termination. Prepare an account of all pending sales, and if it is possible to calculate the commission to be paid, note this on the account.

5.3.3 Cancellation and returns of orders

Cancellation of orders is a common business occurrence and so provision should be made for how this is to be dealt with in the sales representative agreement. State rules differ in terms of how the payment of commissions is dealt with after cancellation or return of an order; however, generally it is the case that this is a risk and cost borne by the company.

5.4 Commission disputes

Disputes regarding payment of commissions are common and to be expected. Advance preparation by reviewing the agreement and applicable law will help you resolve conflicts promptly. In addition, make sure you have careful documentation of all transactions entered into by the sales representative, and an accurate calculation of the amounts paid and payable. Keep any documentation of any additional or supplementary agreements.

Additional resources

National Sales Rep Attorneys, ‘From Toothless to Tigers: A Look at State Sales Rep Statutes’
Shouse Labor Law Group, ‘Can an employer reduce or take away my commission in California?’

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