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Sales Reps: Independent Contractors or Employees?

In today’s day and age, it’s become more common for manufacturers to use independent sales agents contracted through a manufacturers’ representative agency to sell their products. These sales reps represent manufacturers in territories/markets, and establish relationships with customers that otherwise would be difficult for manufacturers to cultivate themselves.

But how should sales reps be classified? Are they employees, or independent contractors? In most cases they are designated as independent contractors — and as a result, from a legal standpoint it’s important they be treated as such.

The Internal Revenue Service (IRS) has strict rules for classifying a worker as an employee or an independent contractor, as this determines if a business is required by law to withhold income taxes for things such as Social Security or Medicare. Typically, you would not be required to withhold income taxes for independent contractors such as manufacturers’ sales reps.

According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship. Whether a worker is an independent contractor or employee depends on the facts in each situation.”

There are a variety of factors that should be considered, including Behavioral Control, Financial Control and Relationship of the Parties. Here is a quick overview of each, courtesy of the IRS:

  • Behavioral Control: “A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.”
  • Financial Control: “Does the business have a right to direct or control the financial and business aspects of the worker's job?”
  • Relationship of the Parties: “The type of relationship depends upon how the worker and business perceive their interaction with one another.” In this category, factors that should be considered include benefits, the permanency of the relationship and written contracts.

When it comes to sales reps specifically, this means you can’t control the hours they work, for example. Instead, they should be managed by outcomes only. As sales reps are not salaried and only paid through commission when a sale is made, this falls neatly into the “independent contractor” designation.

If you’re unsure of what actions are or aren’t allowed with your sales reps to ensure they stay designated as independent contractors, consult with a manufacturers’ representative agency like Hexis. We’d be happy to provide insight into the ins and outs of using sales reps to fuel your sales team, including what to keep in mind from a legal standpoint.

For more information on how Hexis’ dedicated industrial manufacturers’ representatives can improve your bottom line, visit hexisreps.com, call 612.804.1143 or email interest@hexisreps.com.

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