Hiring sales people as independent contractors

This is a good idea if you have the incentives right. It's especially nice if you can do it on 100% commission -- that way if they fail you've wasted time but not money -- not a bad risk.

Here is a 2-page agreement with no legalese that I used years ago for our comission-only outside sales guys.

Some general points from that document:

1. Commissions with no base salary need to be large, like 30%. This doesn't scale, though it might be fine to get you going. (At scale you need base salaries and a smaller commission to get your CAC down to reasonable levels.)
2. Territories can be important so two salespeople don't call up the same customer.
3. They have to record their activity in a CRM system you can access (ideally that you own and control) so you can verify that they really did run the customer down and that it didn't come in on its own.
4. If you do both outside and direct sales, that can easily create a conflict with the same customer. The document addresses this, but it's something you'll need to hash out yourself as well.

For my book industry, when the independent sales rep does not have exclusive sales territory to get credit for sales the order must have the sales person's name on it. Otherwise no commission. That is part of the agreement.

I believe most independent sales reps will not use the company's crm because they consider their customer base their own. (If there is a sales made, then the customer information is part of the company's info.) Indep sales reps work for themselves and sell for different companies. However, unlike sales employees they are not accountable to the company for time worked and who they contacted. (That is why the company does not pay them a salary, benefits, payroll taxes, etc.) They are accountable for results. If the indep rep makes no sales then they should be dropped. That would be in the contract.

Instead of “good”, experienced would have been a better choice of words. Advice given to me by successful indep reps when I started was never give out your customer list, do not complete sales reports, do not check in. At the same time, you can require your sales employees to do sales reports and use the crm, etc as they work for you.

This is a bit technical but inherent in this issue is the definition between an independent contractor (sales rep) and an employee. http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Most small businesses think "independent contractor" in terms of compensation. While it is easier to pay a contractor solely on the basis of results, your time and energy is more expensive than the wages if you waste it on developing people who aren't going to sell.

There are number of factors to consider when structuring the compensation, including:

1. Length of your sales cycle. How often can the salesperson expect to see money?
2. Size of the sale and commission check
3. Expected frequency of sales
4. Difficulty or amount of effort to get a sale. Is it a one-call close, or does it require developing a relationship?
5. Product knowledge required to represent you well

There are other factors in compensation, including price control. If you set a firm, fixed price you can compensate on gross sales. If you allow sales people to negotiate, compensation has to be based on margins.

If you use reps, what else do they sell? Their dedication to your products will vary depending on the attractiveness of he other products in their portfolios. In such cases, you are competing not only against replacement products, but also against other sales opportunities.

I've been writing regularly about sales comp and motivation at www.awakeat2oclock.com although that site is more general, and doesn't discuss only sales.

Sean, I'm not an attorney, but I might suggest investing in one. That fortune you mention could be minor compared to what you pay in fines due to improper reporting of employee status. There are very specific requirements at both the state and federal level for what determines an IC or employee. If it is determined that an employer is hiring someone as an IC to avoid employer obligations (FICA, FUTA, unemployment insurance, etc) it's bad news.

Also, if you want any control, including set hours, over the people you are looking to hire you may want to consider hiring them as employees. Are you planning on using a non-compete agreement for your sales force? Again, check with an attorney, but you may not be able to enforce a non-compete with an IC.

Shawn

Thanks for your responses, I was thinking along the same lines. In todays environment, its critical to get the agreements correct so that someone can't come back and make a claim against you. I want to set the Independant Contractor agreement up correctly without spending a fortune with a lawyer. On final review, I will have my lawyer take a look but any input on where to find a good template?

I am an independent sales rep for educational book publishers and get many requests by publishers looking for new representation. Some of the key things I consider when deciding whether to pick up a new representation is the fairness or win-win balance in the contract and whether the company is looking for long term representation. Sales relationships take time to develop and I am not interested in developing the market and then the publisher dropping the independent sales force to create an in house centralized sales department. (This happens!). I can also tell right off when a lawyer wrote up the contract as it is many times very pro-publisher and I will request specific revisions if I am interested in the representation.

I would be very careful about hiring independent contractors that are not, in fact, really independent contractors. States obviously extract a certain amount of money from payroll taxes, and have, with the economic downturn, been hunting down people that are not in compliance with applicable local law.

The advice to talk to an attorney is sound. You may, in speaking to your lawyer, also get some perspective on whether what you want to be doing is developing an employee sales team, or simply farming out sales. This is because your lawyer, in order to assess the legality of what you are doing, is going to have to ask some very specific questions that may force you to pigeon-hole yourself in a way that helps you answer your own question.

This is meant as information, not legal advice, and no attorney client relationship has been created here.

Some general points from that document:

1.Commissions with no base salary need to be large, like 30%. 2.Territories can be important so two salespeople don't call up the same customer. 3.They have to record their activity in a CRM system you can access (ideally that you own and control) so you can verify that they really did run the customer down and that it didn't come in on its own. 4.If you do both outside and direct sales, that can easily create a conflict with the same customer. The document addresses this, but it's something you'll need to hash out yourself as well.

The laws (both the IRS and your state Dept. of Labor) have become very strict when determining if someone is an independent contractor. As an independent contractor, you have no right to demand that they record their activity at all. You cannot control any aspect of the independent contractor...you can't even provide extensive training as ICs are suppose to be experts in their field and shouldn't require training.

Some things the IRS looks at in determining employment status: An employee receives instruction on when, where, how work is performed; an employee requires training; an employee is and integral part of the firm and the success of the business; any helpers hired and paid for by the business indicates that the IC is their supervisor and therefore an employee; an IC is hired for a limited time and a continuing relationship indicates and employer/employee; you cannot set the hours of work; you cannot require full time; you cannot furnish tools and equipment necessary to complete the job; the IC should realize a profit or loss and have a significant investment; the IC should be performing services for more than one company.

Not all of these items need to be in place in order for the IRS to determine that your IC has been misclassified and is an employee. Some issues seem to be more important than other so having just two major items present could put you in a BAD place. I would suggest you read up on the requirements before you leave yourself exposed to back employment taxes, fines and interest when the IRS or Dept of Labor catches up with you.