Self-employed commission-only salespeople – a good fit for your firm?

The right sales rep can make a substantial and positive benefit to your company’s bottom line. Sales people, by their very nature, are superb at presenting products and services in a way that makes them both attractive and relevant to prospects. Sales reps can make someone sitting on the fence really see and appreciate the benefits of what your product or service can bring to their business. They also don’t take “no” for an answer easily but they still manage to keep the prospect engaged on a friendly, cooperative basis throughout.

There are three big problems you take on when you employ a sales rep though – provision of leads, ongoing management, and the cost.

In this article, we’re going to look at the cost – we’ll come back to the other two aspects in a future article. We’re doing this because last month, the First Tier Tribunal threw out a case of a self-employed double-glazing salesman of 35 years’ standing who was trying to claim that he was, in fact, employed.

The case shares many of the features of another well-known “contractor or employee” case in 2018 involving Pimlico Plumbers. We wrote about this case in July – you can see it here.

Costs of employing a sales rep

Although a talented, determined sales rep can add significantly to both your turnover and profit, there is a cost attached.

Generally, reps are paid a basic wage and commission. Let’s say that you got a sales rep in on £25,000 a year. Once you’d added National Insurance Employers’ Contributions and pension contributions to his or her wages (16.8% in total), that £25,000 is now £29,200, equivalent to £561 per week.

If your business has a 20% margin on sales, your staff member would need to sell £561 divided by 80% to cover his or her costs – a total of £701.25 per week.

Following on, let’s say that you wanted your sales rep to add £1,000 in profit to your company over and above his or her wages and that you were paying 15% commission on sales above the first £701 worth of gross profit. You would then have to divide £1,000 by 85% to find out the level of gross profit that he or she needed to generate to hit that target – in this case, £1,176.47.

With a margin of 20% on sales, you then have to divided £1,176.47 by 80% to set your target to achieve the additional £1,000 worth of profit per week. This calculation works out as £1,470.59.

In total, your rep needs to sell £1,470.59 + £701.25 = £2,171.84 per week of products to create £1,000 additional profit per week after the cost of his or her basic and commission and the cost of supplying the goods or services is factored in.

Finding the right salesperson is notoriously difficult. They need 3-5 months to bed in before you’ll truly know if they’re right for your business and if it turns out that they’re the wrong person, then you’re thousands of pounds down and no further forward.

Self-employed and commission-only the answer?

A self-employed, commission-only sales rep is only paid on the sales he or she makes. They submit an invoice to you which you pay out on and this invoice does not add 16.8% to cover National Insurance Employers’ Contributions or pension contributions.

This person has no right to parental leave, sick pay, holiday pay, or any of the other rights enshrined in various different pieces of employment legislation.

Sounds ideal? Well, it sounds better at face value than the hassle and expense of taking on a sales rep as an employee. However, after the Pimlico Plumbers ruling, how can you be as sure as you can be that you’re not paying someone as a contractor when IR35 might dictate that they are, in fact, a disguised employee?

There’s no certainties in business and we’re definitely not presenting this as a certainty to you (in other words, caveat emptor) but the recent First Tier Tribunal ruling in the case of Malcolm Tomlinson v HMRC (TC05943) might offer some clues.

Mr Tomlinson had provided commission-only sales services for Window Centre (Solihull) Ltd (WCSL) since the early 1990s. No contract had ever existed between them. Mr Tomlinson argued that his arrangement with WCSL was in fact that of an employer-employee and that, as such, there was a shortfall in his accumulated National Insurance Contributions as he approached retirement. The court case was an attempt to redress what he considered to be an injustice to him.

The First Tier Tribunal then applied the familiar “badges of trade” test to Mr Tomlinson’s engagement with WCSL. They found his argument lacking on the following counts:

  • He was paid commission only and if he had been paid commission on a sale that later fell through, the payment was clawed back from – a key indicator of self-employment
  • The lack of a written contract
  • He could take holiday as and when he liked and he was not paid for it
  • Control over his time was “modest”
  • Tomlinson was free to work for another company
  • There was no mutuality of obligation

Take legal advice

You may be surprised by the number of experienced salespeople who really know how to sell products and services who are willing to work on a commission-only basis. There are tens of thousands of these professionals up and down the country who are that skilled at presenting and who are justifiably that confident about their own abilities that they’re willing to be paid purely on results.

Before entering into such an agreement, you are strongly recommended to approach an experienced employment solicitor to draw up as watertight a contract as possible. Once you have that, come to see us about how to factor in commission into your business forecasts. Call us today on 01932 704700 to discuss how we can help you.

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