Consultant Advice: Commission - What to watch out for

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craiggsean
Posts: 122
Joined: Wed Nov 27, 2013 5:47 pm

Consultant Advice: Commission - What to watch out for

Post by craiggsean » Thu Oct 11, 2018 4:34 am

Dear fellow consultants, lawyers, CPAs,

Perhaps one of you have been in this situation and you could share your advice.

Situation:
I've been working on a project with a client as a 1099 consultant.
I met the client through a consulting broker(they find clients, connect them to consultants and take a commission from the client).
The broker abruptly pulled out the contract due to their internal reasons (audit) which left the client and me in an inconvenient situation.

Client and I decided to continue the project directly without the broker (because they broke their contract)
and are renegotiating a new contract.

But now going forward, the broker is asking for a part of their commission paid directly from me (consultant).

Questions:
- Is this an ethical request from the broker (because they broke the contract abruptly due to their internal issue)?
- I'd only do this as a good will for future relationship - but the broker is unlikely to bring another client in my specialty in the future.
- Now I have to take care of all the administrative burden.
- What are the legal pitfalls in this scenario?
- What is the tax consequence for me if I do agree to pay out a commission every time I get paid by the client?
- What would you do if you were in this situation?

Thank you in advance for sharing your experience and wisdom.

NextMil
Posts: 477
Joined: Wed Dec 13, 2017 12:33 pm

Re: Consultant Advice: Commission - What to watch out for

Post by NextMil » Thu Oct 11, 2018 5:15 am

Is the client paying the other half of the commission?

My view would be to tell the broker to pound sand, especially since his breaking the contract could have left you in a lurch.

afan
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Joined: Sun Jul 25, 2010 4:01 pm

Re: Consultant Advice: Commission - What to watch out for

Post by afan » Thu Oct 11, 2018 6:45 am

Agree you need a lawyer. Your obligations dpened on what the contract said.
From the broker's point of view they have already done their part of the deal- bringing you the client.The fact that they will not bring more does not change the service they already provided.

But legally? You need a lawyer.
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NextMil
Posts: 477
Joined: Wed Dec 13, 2017 12:33 pm

Re: Consultant Advice: Commission - What to watch out for

Post by NextMil » Thu Oct 11, 2018 6:54 am

afan wrote:
Thu Oct 11, 2018 6:45 am
Agree you need a lawyer. Your obligations dpened on what the contract said.
From the broker's point of view they have already done their part of the deal- bringing you the client.The fact that they will not bring more does not change the service they already provided.

But legally? You need a lawyer.
Why does he need a lawyer? We don't know how much money is involved, and odds are its not that big given that the broker killed the contract on his side, and the only person I could see suing him would be that same broker, who broke the contract. I wouldn't hire a lawyer in this case at all. Odds are that would be a total waste of money.

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8foot7
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Re: Consultant Advice: Commission - What to watch out for

Post by 8foot7 » Thu Oct 11, 2018 7:09 am

Just tell the broker no, you broke the contract, you left us in a lurch, you pulled out, have a nice life. That’ll probably be the end of it.

If I understand correctly you have no agreement with the broker and never had one. The contract was with your client and the broker. Is that correct? If so you cannot be held to the terms of a contract to which you were never a party.
Last edited by 8foot7 on Thu Oct 11, 2018 8:40 am, edited 1 time in total.

Bruce T
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Joined: Wed Mar 28, 2018 8:34 pm

Re: Consultant Advice: Commission - What to watch out for

Post by Bruce T » Thu Oct 11, 2018 8:28 am

I would check your agreement with broker to make sure that you are not in violation (e.g. a non-compete provision)... bear in mind that your agreement with broker is different (presumably) than broker's agreement with client. It's possible, e.g., that broker's contract w/ client is an easily repaired matter, in which case you may be ethically and legally bound to allow it to be repaired (e.g. to avoid a tortious interference claim by broker).

If you are in the clear to work w/ client and the broker's contract break is not easily repaired, then consider telling the broker "for the time being, it's in everyone's interest for me to continue to meet the client's needs ... in the future, if you make me an offer I cannot refuse, then I will not refuse it".

Note: IANAL, nor do I play one on TV.

Good luck!

megabad
Posts: 585
Joined: Fri Jun 01, 2018 4:00 pm

Re: Consultant Advice: Commission - What to watch out for

Post by megabad » Thu Oct 11, 2018 11:47 am

craiggsean wrote:
Thu Oct 11, 2018 4:34 am
Dear fellow consultants, lawyers, CPAs,

Perhaps one of you have been in this situation and you could share your advice.

Situation:
I've been working on a project with a client as a 1099 consultant.
I met the client through a consulting broker(they find clients, connect them to consultants and take a commission from the client).
The broker abruptly pulled out the contract due to their internal reasons (audit) which left the client and me in an inconvenient situation.

Client and I decided to continue the project directly without the broker (because they broke their contract)
and are renegotiating a new contract.

But now going forward, the broker is asking for a part of their commission paid directly from me (consultant).

Questions:
- Is this an ethical request from the broker (because they broke the contract abruptly due to their internal issue)?
- I'd only do this as a good will for future relationship - but the broker is unlikely to bring another client in my specialty in the future.
- Now I have to take care of all the administrative burden.
- What are the legal pitfalls in this scenario?
- What is the tax consequence for me if I do agree to pay out a commission every time I get paid by the client?
- What would you do if you were in this situation?

Thank you in advance for sharing your experience and wisdom.
In my industry, 1099 consultants do not sign a contract with "brokers" only with source hiring client company. Source hiring company would then handle all dealings with broker. If you did not sign a contract or agree to anything with the broker legally, than you are not likely required to do or pay anything to him/her. If client company breaches contract with broker than that is their business and would not concern me very much personally and I would stay out of it (not a lawyer and not legal advice...). Otherwise, your course of action will depend on what you legally agreed to and only you would have that info.

craiggsean
Posts: 122
Joined: Wed Nov 27, 2013 5:47 pm

Re: Consultant Advice: Commission - What to watch out for

Post by craiggsean » Thu Oct 11, 2018 3:52 pm

Thank you for your advice so far. Please keep them coming.

From the advices, it seems like this situation is uncommon:
The broker suddenly broke the contract with the client (company that I'm doing project with) and the consultant (me).

The broker will not be operating with this client company in the future non-compete is not a worry.

Regarding the tax side,
IF I (sole proprietor) issue 1099 to the broker (C-corp) a percentage of the total amount I earn from the client,
what are some tax considerations? Let's say for simplicity, the commission amount is $4K/month.

- I expense it as a business deduction?
- I owe more tax because I have to ask for that extra $4K to the client?
- Anything else?

Thank you.

NextMil
Posts: 477
Joined: Wed Dec 13, 2017 12:33 pm

Re: Consultant Advice: Commission - What to watch out for

Post by NextMil » Thu Oct 11, 2018 6:30 pm

craiggsean wrote:
Thu Oct 11, 2018 3:52 pm
Thank you for your advice so far. Please keep them coming.

From the advices, it seems like this situation is uncommon:
The broker suddenly broke the contract with the client (company that I'm doing project with) and the consultant (me).

The broker will not be operating with this client company in the future non-compete is not a worry.

Regarding the tax side,
IF I (sole proprietor) issue 1099 to the broker (C-corp) a percentage of the total amount I earn from the client,
what are some tax considerations? Let's say for simplicity, the commission amount is $4K/month.

- I expense it as a business deduction?
- I owe more tax because I have to ask for that extra $4K to the client?
- Anything else?

Thank you.
That is a great question, and I should know this, but I have never asked myself, as I occasionally have 1099s working for me. I assume that for my business the $4k is treated as coming off the top of your taxes. Would be some weird stuff if government was taking taxes off me and off the 1099 as well on the same cash, but we are talking about the government, right? :wink: Will ask my CPA, but you may get a better answer here more quickly.

adamthesmythe
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Joined: Mon Sep 22, 2014 4:47 pm

Re: Consultant Advice: Commission - What to watch out for

Post by adamthesmythe » Thu Oct 11, 2018 6:36 pm

NextMil wrote:
Thu Oct 11, 2018 6:54 am
afan wrote:
Thu Oct 11, 2018 6:45 am
Agree you need a lawyer. Your obligations dpened on what the contract said.
From the broker's point of view they have already done their part of the deal- bringing you the client.The fact that they will not bring more does not change the service they already provided.

But legally? You need a lawyer.
Why does he need a lawyer? We don't know how much money is involved, and odds are its not that big given that the broker killed the contract on his side, and the only person I could see suing him would be that same broker, who broke the contract. I wouldn't hire a lawyer in this case at all. Odds are that would be a total waste of money.
Seems to me OP needs a lawyer only if he can't read the contract. If there is one. If there is one he can read it and figure out what his obligation is.

ralph124cf
Posts: 2008
Joined: Tue Apr 01, 2014 11:41 am

Re: Consultant Advice: Commission - What to watch out for

Post by ralph124cf » Fri Oct 12, 2018 1:04 am

Some of these broker contracts are structured such that the consultant bills the broker at her normal rate, and then the broker adds her 35% and bills the client for that amount. Both the client and the consultant have contracts with the broker, but no contract with each other. These contracts normally forbid contracting between the client and the consultant for a period (a year?) after the last brokered work is performed on the contract.

If the broker terminates the contracts, I see no way that the broker is entitled to any money.

IANAL

Ralph

craiggsean
Posts: 122
Joined: Wed Nov 27, 2013 5:47 pm

Re: Consultant Advice: Commission - What to watch out for

Post by craiggsean » Fri Oct 12, 2018 9:01 am

ralph124cf wrote:
Fri Oct 12, 2018 1:04 am
S
The above description is quite accurate.
Broker is terminating the contracts prematurely due to the broker's own issues but still WANTS a commision.
Should I?
IF so, what are some precautions?
are the questions.

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