Calculating claims for compensation – the potential significance of time spent in operating the relevant agency

Following the decision of the House of Lords in the landmark case of Lonsdale vs Howard & Hallam in 2007, the way in which compensation claims under Regulation 17(6) and (7) of the Commercial Agents Regulations are calculated is based on the hypothetical sales value of the relevant agency, as at the date when it was terminated.

In other words, the value of a claim for compensation (as opposed to any claim for an indemnity) is – broadly speaking – aligned with the amount of money that a third-party purchaser would hypothetically otherwise have paid for the agency in question (and, for the purposes of the relevant calculation exercise, making the obvious assumption that it [the agency] would actually have continued, instead of having been terminated).

Clearly, therefore, the more profitable an agency, the greater might then be its value from the perspective of calculating compensation, and this evaluation process is clearly something very different to what sales agents might otherwise imagine as being the appropriate process and criteria.

Following on from the above, the way in which businesses are valued has therefore become very important to understand, with one of the key fundamental aspects in this process being the calculation of net (as opposed to gross) earnings, including the deduction of a deemed salary for the sales agent in operating the relevant agency (and then applying an appropriate ‘multiplier’ to the resultant ‘multiplicand’).

As far as the deemed salary aspect is concerned (i.e.:- together with other expenses, to be deducted from gross income to then produce the required net earnings figure), this can often be quite difficult to be precise about in practice, but is generally based on (as a starting point) the appropriate basic salary (according to statistical data) for an employed sales person operating in the same territory area, and then making an apportioned deduction of that theoretical salary from gross earnings, based on one of several possible ways, including (as just one example) based on an assessment of what percentage the income from the agency was of the sales agent’s overall turnover. Another way, and possibly the most accurate basis of assessment, is to calculate the actual time spent by the sales agent in respect to the terminated agency.

Calculating actual time spent may however be particularly difficult to gauge where, obviously, the sales agent is not in a position to establish precisely how much time they spent in respect to any individual sales agency over any relevant period because they don’t have relevant records, and taking account of the fact that they may have a number of different agencies with any significant degree of overlap. That stated, it is obvious that it may be very valuable information to have. For example, if a sales agent had an agency earning them (say) £250,000 per annum, but which they could evidentially prove took them merely one day a week to operate as part of their business (i.e.:- and so that, as an expense, potentially only one fifth of a deemed salary needed be accounted for), then, and clearly, and assuming that other expenses were not excessive, the sales agency might in those circumstances (and for the purposes of calculating compensation) be regarded as extremely profitable. There are many examples I could indeed provide, however, and any terminated sales agency needs to be individually analysed as to its profitability from more of course than just this one perspective of deemed salary, before fact specific conclusions may be drawn.

It may also very well be that an agency which is relatively small in terms of its earnings pro rata to the aggregate amount earned by the sales agent from all of their agencies taken together nevertheless takes up a disproportionately large amount of time, precisely because the sales agent is trying to grow the level of business from that (currently low earnings level) sales agency.

Clearly, the precise method of calculation will vary from case to case, and as to which is the most appropriate will likely be fact dependent. It is also difficult to predict which methodology may produce the best outcome (for the sales agent). However, the message is intended to be clear that sales agents should try to as far as possible maintain accurate written records as to how they allocate and spend their time for individual principals, with the understanding that, potentially, the more time efficient that they can prove that they are in running specific agencies the more profitable they may then be valued at, thereby translating into greater compensation claims.

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© David Bentley, Bentley Agency Law Limited, Bentley & Co Solicitors 7 Littlemoor Road, Pudsey, Leeds, LS28 8AF 

T: – 0113 236 0550 e-mail:- db@bentleyandco-solicitors.com.

The ONLY law which we practice is the law as it relates to commercial sales agents.

Please ensure that you obtain specific legal advice before acting in reliance upon anything in this article, particularly since each individual’s circumstances may necessitate a unique approach, and also on account of the fact that the law may of course at any time change. Furthermore, please be very clear that information given in this column may not cover or otherwise refer to all possible angles, aspects, relevant information and/or points of law and so that all or any information which is given above needs in every instance to be referred for specific legal advice for clarification and amplification, before being relied upon.

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