A local woman has had a hard time finding work, but is desperate for income, and hears from a friend about a business opportunity which allows her to work from home. Excited about the prospect, she spends $99 in order to get a starter kit, which allows her to sell product to customers. Before she can make commission on her sales, she must sell a minimum amount of product per month. Though she sometimes meets that goal, when she doesn’t, she purchases product herself so as not to lose her commission eligibility. To sell, she uses her Facebook and Instagram accounts; posting five times a day and messaging everyone on her friends list. She has a notebook where she writes who she’s reached out to and when to reach out again.
Even though she makes money on commission, she knows the thing that will bring in the biggest income is recruiting other salespeople, called her “down-line” — she’ll get bonuses, additional commission, and income based on the sales that those salespeople make. These payments, along with the other information that dictates how she sells product, is contained within an independent contractor agreement that she signed when she paid the initial $99 to begin selling. It tells her where she can sell, what sales she is permitted to offer, what language she is allowed to use, and limits her ability to sell for other companies. She is sometimes concerned about what her future with the company looks like; she could be fired at any point, and often loses money from her minimum product purchasing. She’s used to working hard and wants to succeed, so she puts in 20-hour weeks and pays twice a year to attend a conference to teach her how to improve her sales with the company. What employment protections may she be entitled to?
Essential oils, colorful leggings, and a range of diet pills—what do they have in common? Many are sold in this manner, through multi-level marketing (MLM). Nationally, in 2015 an estimated 20 million people participated in MLM sales, and the industry generates $36.12 billion annually. This structure, also referred to as “direct sales,” compensates salespeople both for the sale of products, and the recruitment of other salespeople. Though the convoluted, intricate compensation schemes vary, less than 1% of MLM salespeople make a profit. These sellers are overwhelmingly women, and many live in rural areas, particularly in the south, where the offer of flexible, online work is particularly enticing.
Thirty years ago, you would purchase Tupperware when a housewife up the street hosted a party at her home, or ordered makeup when the Avon lady knocked on your door. Today, direct sales has changed; sales are made through online platforms, clients are contacted through social media, and parties that used to happen in living rooms now happen in Facebook groups. This change, paired with the exponential growth of the MLM industry, should intrigue advocates for workers’ rights: how does this growing, changing industry relate differently to the law than it has in the past?
A foundational question to examine is whether MLM sellers are employees or independent contractors. Today, MLM sellers near universally classify their sellers as independent contractors, a classification which has not been widely challenged in recent years. In the 1940s, MLM giant Avon was litigating battles over whether salespeople were properly classified as independent contractors, as opposed to employees. Today that litigation has slowed, as it became more well-established that the traditional selling done by MLM salespeople allowed them to be properly classified as independent contractors. However, as employers seek to have the benefits of a controlled, supervised, and restricted workforce, they must also consider their changing legal duties to their workers, a change which might ultimately drastically change the landscape of MLM sales in our country.
Whether a worker is properly classified as an employee or an independent contractor can vary depending on the individual statute under which the question of their classification arises. The common law test to determine employment status looks to the level of control that an employer can exercise over a worker. There are a number of factors which can be considered in this analysis. Some of those tests may tend to lead to a conclusion that MLM salespeople are employees:
- Many MLM contracts give the corporation full control over the firing of salespeople, at any time and for any reason.
- The contracts signed by MLM sellers often restrict them from working for other companies or using the same skills at the same time. This undermines the conception of what an independent contractor is, and why they are not classified as employees.
- The work that direct sellers do is often not skilled, and companies exercise significant control over workers with detailed requirements about where, how, and when products may be sold, indicates a significant level of control.
However, there are factors which may lead a court to determine that these salespeople are not employees, including:
- MLM salespeople generally set their own hours and work in short bursts.
- Nearly all direct sellers work from home, using their own computers and other materials not provided by the company for which they work.
- The level of work or sales skill that each salesperson has can, and often does, affect the profit they are able to make.
There are cases that establish that employees with similar supervisory control are employees. Ultimately, the question of who qualifies as an employee is a fact-based inquiry, which will vary between MLM companies. Though the weighing of these factors doesn’t conclusively show that every MLM salesperson should properly be classified as an employee as opposed to an independent contractor, it does show that there is a set of factual circumstances that would lead an MLM salesperson to be considered an employee.
MLM salespeople may have access to employment protections which they would otherwise be denied. To show that they are entitled to the protections of the Fair Labor Standards Act (FLSA), salespeople will need to show that they are not “outside sales” employees, who are exempt from FLSA. The outside sales exception applies to employees who make sales and is customarily and regularly engages away from the employer’s place of business. While this, at first glance, may appear to exclude MLM salespeople, DOL regulations paint a different picture. Under DOL regulations, an employee working from home who solicits sales over the telephone or internet is not considered to be an outside salesperson, and their home is considered the employer’s place of business under the statute, even though the employer has no formal control over the property. The centrality of online sales to modern MLMs would likely ensure that if MLM salespeople were found to be employees under the control of the employer, they would be entitled to minimum wage under FLSA.
As MLM sales have changed, the employment status of salespeople may have changed as well. As this area of our economy continues to grow, and companies ask more from MLM employees without offering more compensation in return, the classification of MLM salespeople and their eligibility for employment protections will become increasingly important for workers and their advocates.