Protect Yourself From Wily Sales Agents

ISOs must always protect themselves from wily sales agents.  A high percentage of fraud claims in merchant processing agreements stem from ISO sales agents’ tactics.  Whether authorized by the ISO or not, these tactics can often result in ISO liability, including punitive damages in breach of contract actions.  (See 1 Punitive Damages: Law and Pract. 2d § 5:7 (2013 ed.).)  On the other hand, ISOs can protect themselves by following to a few simple steps.

ISOs have the ability to protect themselves by creating a legal barrier between itself and the sales agent.  When a court considers the sales agent an employee of the ISO, the ISO is liable for any unlawful conduct by the sales agent.  The opposite is true for an independent contractor.  But simply labeling the sales agent an independent contractor does not cut off liability.  ISOs should strive to solidify an independent contractor relationship with all sales agents based on established legal principles.

Determining whether a sales agent is an employee or an independent contractor is often difficult.  Courts weigh a number of factors in their determination, including the source of equipment and merchandise, the skill required to do the job, the intent of the parties, and whether the hired party owns their own business.  (See Proving the Existence of an Employment Relationship, 22 Am. Jur. Proof of Facts 3d 353 (Originally published in 1993).)  These factors are easy to manipulate in an ISOs favor.

First, sales agents should buy anything they intend on selling to a merchant from the ISO.  If the source of the equipment a merchant uses is obtained from the sales agent (instead of the ISO), courts are more likely to find them to be independent contractors.  Second, ISOs should advertise and hire highly-skilled, veteran sales agents.  The more skill required for a job, the more likely the court will find them to be independent contractors.   Third – and the biggest factor in a number of cases – is that ISOs should provide affordable avenues for sales agents to have their own business entity.  These business entities, for example, a corporation or LLC, are cheap and easy to create.

To conclude, ISOs should always strive to limit their liability.  Every ISO should have an attorney or law firm at arms-reach that they can rely on in times of trouble.  These resources have the distinct ability to implement preventative measures, such as drafting ISO-to-sales agent contracts for equipment purchases and forming LLCs for sales agents.  A wily sales agent has its benefits and detriments, of which ISOs should always be aware.

— Article by: Greyson M. Goody, Esq.