What to do about contract cancellations?

Originally published on March 31, 2009
Greg Taylor

The bread and butter of the agent business is relationships the agent builds with customers. An agent spends the majority of his time cultivating and nurturing these relationships in hopes they return healthy recurring commissions and continued upsell opportunities.

In fact, the 2009 PHONE+Channel Compensation Survey found that partners’ paychecks rely heavily on monthly residual commissions. Half of respondents said their compensation consisted of a combination of upfront commissions, wholesale buy rates and residual commissions. But, more than 36 percent said they are primarily compensated through residual commissions.

So, what happens if those residuals suddenly disappear? There is a general feeling in the agent community that due in part to our nation’s poor economy, carriers might be trying to pad their bottom lines by kicking the little guys (i.e. channel partners) around.

“[Carriers] are cancelling agent contracts to partners not hitting commitments at record levels,” said Jeffery Ponts, executive vice president of master agent Datatel Solutions. “It is immoral and unethical to cancel an income stream to an agent that originated business for the carrier they would never have had. I can understand reducing commission levels, but cancelling revenue altogether is wrong.”

Rumors are circulating about multiple carriers suddenly invoking clauses in contracts in order to axe agents, whether for not meeting minimums, not generating enough new business, or just “underperforming” in general, as ambiguous as that may be. To add insult to injury, agents receiving such notification that their contracts have been cancelled — usually by the dreaded form letter — often find their residual commissions being cut by the carrier. In essence, commissions for customer accounts these agents had generated are taken from them.

Greg Taylor, attorney at Technology Law Group LLC, said following the termination of the agreement, agents often find themselves “on the short end of the residual commission stick” despite express language in the agreement. “In the worst cases, I am personally aware of carriers who terminated agent agreements and withheld residual commissions simply because they changed their business model; that is, the carrier lost interest in supporting the agent channel. Carriers typically own the end-user customer, not the agent. If the agents aren’t producing substantial revenue for the carrier, the carrier can cynically increase profitability merely by discontinuing its agent channel, keep the customers it derived as a result of the agents’ efforts, and refuse to pay residual commissions on the assumption most of the ex-agents will not be in a position to do anything about it.”