Session Preview: Marianne Jennings: Avoiding Legal Pitfalls

Manufacturer’s reps face unique legal hazards.

MRERF faculty member and Arizona State University professor emeritus Dr. Marianne Jennings will present “Practical Practices for Avoiding Legal Pitfalls” for manufacturer’s reps from 9:00 a.m. to noon on Monday, Nov. 11.

Someone once asked me to list the top legal areas that are most likely to create headaches, heartaches and liability for manufacturer’s reps.
There are indeed areas of the law that can really hurt manufacturer’s reps in terms of time, cost and liability. The good news is that they are highly fixable. What follows is a quick summary, to be followed by more details and more high vulnerability areas at the November 11th session on “Practical Practices for Avoiding Legal Pitfalls.”

1. Are sales people employees or are they independent
While the IRS may have its hands full for some time handling internal issues, the agency has not yet changed its position on collecting back wage taxes. Those back wage-tax cases stem from small businesses that misclassify employees as independent contractors. If your sales people are truly independent contractors, then you give them a 1099 form at the end of the year and the sales people are responsible for their own FICA, and they are not covered by FUTA and you are not responsible for withholding their taxes.
To be able to pass the tax burden to sales people, you consider several factors:

  • Do they have their own office? Pay for their own supplies? Work independently on their own schedules?
  • Are they paid on a commission basis?
  • Do they pay for their own health insurance?

The key is that the more your sales people look like a small business, the greater the likelihood the sales people are independent contractors. If you mistakenly classify an employee as an independent contractor, you owe those taxes, plus interest, plus penalties.

2. What about exchanges of price information?
Oh, dear folks. Proceed with caution here. As a representative for various companies, you have the pricing information for competitors. It is your job to let customers know the various prices and products available. Reps get into difficulty when they begin working with manufacturers to divide up markets in order to stop the competition or engage with the manufacturer in price fixing. There are other questions that we will address in the session such as the flow of price information among reps and the possible antitrust issues there. This discussion requires a few charts and arrows and a clean look at the antitrust laws that affect your work.

3. How valid are covenants not to compete?
 There are different types of covenants. The first type is used in the sale of a business. To keep a rep who sells you his business from trotting down the street and opening up another business to compete directly with you, courts enforce covenants not to compete in these business purchase agreements as long as they are reasonable in length and geographic scope. The key in rep agreements is the nature of the line.

The second type of covenant not to compete is a bit more testy than those found in the sale of a business. This type of covenant applies to employees. Employers require their new hires, as part of their contractual arrangement, to agree not to compete with their employer should they decide to leave their employ. When an employee leaves his or her employ, a banishment from that area of doing business, i.e., from using their skills, can be tantamount to a ban on employment.

In dealing with these covenants, courts strike a balance between employees’ right to work and employers’ right to protect the trade secrets, training, etc. that former employees have and then take with them to another company or use to start a business.

Another possible avenue of protection is more readily enforceable — the confidentiality agreement, which prohibits employees from disclosing confidential and proprietary information that they learned of during their employment. You are not prohibiting them from working — you just want to protect your intellectual property that you worked hard to develop.

For example, for-profit colleges have lists of potential students that they have developed through contacts, e-mails and meetings. That list is valuable to the college. If an employee leaves, taking that list with her would be a breach of confidentiality and a taking of trade secrets. You can stop that kind of behavior without running afoul of the statutes in many states that do not allow enforcement of covenants not to compete. There is a catch — you have to keep confidential information and trade secrets, well, secret. If what you want to protect is floating around your office with full and ready access, you may not be able to enforce the non-disclosure agreement.

Some other areas to think about: What about your business structure? Are you sure your liability is limited? What happens to the business and your co-owners if one of you is divorced? Disabled? What about environmental liability and shipment of products? Product liability? Is the manufacturer on the line for that? And what about form contracts and agreements with manufacturers?

Other areas to consider include: Am I ever liable for overtime for the employees who work for me? What if I have them work a convention for three days as a kind of perk? In a nice place? Is that overtime? Some reps have found the Department of Labor is unforgiving on overtime mistakes.

There are legal pitfalls aplenty, but November’s session will bring you ideas, clarifications and insights to give you a level of comfort. CS

Dr. Marianne Jennings is a faculty member of the Manufacturers Representatives Education Research Foundation (MRERF). For more information, please visit