The direct sales industry was built on the foundation of the work-from-home mindset. With social distancing standing its ground as the new national norm, consumers are increasingly resistant to traditional retail shopping, thereby creating a greater demand for direct selling-based products. We’re seeing our field succeed by offering them advantages in several key areas, including campaigns focused on social selling tools, effectively onboarding new distributors, providing a simplified back office that makes access intuitive, and therefore used more frequently, and coaching toward current communication platform utilization.
— Shirley Kimmes, Business Development Director, Rodan + Fields
I am seeing the field going back to what’s most important in our industry: building strong relationships! The last few years have been interesting as everyone had to learn new ways to continue to work their business using social media. I am now seeing people seeking a balance between social media and in-person relationships. After a couple years of hiding behind their computer screen, they are now ready to get out there and solidify through face-to-face interaction some of the relationships they built online. Even when that isn’t possible, they are going back to putting people first whether that’s online or in-person. When they do, business always follows.
— Nancy Borgia, Sales Director, Canada, USANA
Concerning field strategies, events are what’s working right now. We’re really encouraging them to connect and hold events whether they’re in-person, virtual or hybrid. This connection is key to building relationships, so having those events means making that vital connection. Additionally, it’s clear that a more sophisticated, savvy strategy is required on socials. This means not sharing products or graphics supplied by the company but sharing “real life.” An example of real life would be posts of being out and about, what you’re wearing, what you’re using, and how are you using it. This affiliate-type marketing is what is succeeding on socials. Of course, follow-up is crucial.
— Hillary Alston, Director of Field Success, Stella & Dot
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Countering the risk of misclassification with proactive planning
By: Larry Steinberg and William Miller, Guest Contributors
In early 2021, a client of the Buchalter law firm received a notice from California’s Employment Development Department (EDD) that the EDD was conducting an audit to determine whether the client’s independent distributors were properly classified as independent contractors, instead of employees.
Though, over the years, the firm has handled scores of such audits on behalf of its clients, this was the first time the firm handled an audit which targeted a client that used a multilevel-marketing model. What also contributed to the unusual nature of this particular notice is that this client is based outside of the State of California.
While the client has no employees in California, and only a handful of non-distributor independent contractors, it does have thousands of independent distributors based in California.
The ostensible purpose of the EDD audit was to determine whether the client was properly paying all of its state payroll taxes, but the company and its counsel immediately understood that if the EDD decided the company’s distributors were misclassified employees, such a finding could have broad-ranging implications—including the possibility of a flurry of tagalong litigation, such as class actions and representative claims under California’s Private Attorney General Act
(PAGA) statute.
Unique Dangers That Come with a Government Challenge
At the outset, it should be said that having a government agency allege that your independent distributors are misclassified is daunting, and can be even more of a threat than a private lawsuit. When a misclassification allegation is made in a lawsuit, it is often made in tandem with other claims, and there is an opportunity to settle the lawsuit on favorable terms without needing to directly address or resolve the independent contractor issue.
By contrast, an EDD audit that addresses the client’s (and the industry’s) entire business model would present a very limited opportunity (if any) to settle the misclassification issue. As a result, a government inquiry into whether a company is misclassifying distributors as independent contractors can present an all-or-nothing proposition.
What follows is a brief description of the steps that Buchalter and its client took to successfully defend the audit, which, happily, resulted in the EDD closing its file without further action.
This particular EDD audit, like all that the law firm has been involved with in the past, began with a broad set of EDD document requests that needed to be responded to. It is important during this process to be as cooperative and transparent as possible. In the stated case, these requests included: copies of all IRS Form 1099s issued by the client during the past three years, the client’s detailed general ledger, licenses, check registers, and other related items, copies of distributor agreements, and policies and procedures. Depending on the auditor, some of the requests can be negotiated and narrowed with respect to time and scope. That being said, the burden is on the company to provide a clear and consistent accounting of how it is paying its distributors as independent contractors. As a result, keeping and maintaining these records in an easily accessible format is important.
After documents are produced, the auditor will set up an interview with the company and its attorneys. This interview, and the discussions leading up to it, are crucial. This is the company’s opportunity to educate the auditor not only on the specific facts regarding the company’s decision to classify its distributors as independent contractors, but also to educate the auditor on the direct sales model, and the relationship between the company and its distributors.
Educating Auditors About Unique Aspects of Network Marketing
In the case at hand, it was explained to the auditors that the client is a network marketing company with a multilevel compensation plan, and the auditor was educated on the MLM business model. The auditor was also provided with the client’s policies and procedures and independent distributor agreement.
It was important to show the auditor that the relationship between the company and its distributors was governed by a contract, and the business itself operated under policies and procedures that also defined the relationship.
As this matter was in California, it was necessary to discuss with the auditor the inapplicability of California’s current AB5 legislation, now California Labor Code § 2750.3, (which changed the general independent contractor test to the “ABC Test”) and to discuss the “direct seller” exemption that, in the client’s view, clearly applied to the client’s distributors. (See Cal. Labor Code § 2750.3(b)(5))
As a result, the client and counsel successfully argued that the inquiry into whether the client’s distributors qualified as independent contractors in California is governed not by the stringent ABC Test contained in AB5, but by the multi-factor test first enunciated in S.G Borello & Sons v. Dept. of Industrial Relations, 48 Cal.3d 342 (1989)—commonly referred to as the Borello Test.
Preparing for the Client Interview
In preparation for the EDD audit interview, it is important to work with the client to prepare a detailed outline describing why the client’s independent distributors met all of the factors to be considered independent contractors in California. The outline that the law firm typically used for other EDD Audits needed to be substantially modified to address the specifics of the relationship between the network marketing company and its MLM distributors. This outline was then provided to the auditor as a reference during the client interview.
The audit interview is generally conducted over the phone and will include the company’s representative (in this case, the client’s chief operating officer), in-house counsel, and outside counsel.
During the interview, the auditor asks a host of very specific questions regarding the company’s practices. (In some cases, if asked, some auditors will supply, in advance of the interview, a list of the questions the auditor intends to ask the client. In the stated case, to the client’s pleasant surprise, the auditor provided a comprehensive list of questions, which was of inestimable value in preparing the client for the EDD interview).
In the case at hand, less than a month after the interview concluded, the client was informed that the EDD had agreed with the client’s position that its distributors were properly classified as independent contractors, and closed its audit without making any change or reclassification. Predictably, counsel and the client were very pleased with the result. Had the EDD auditor concluded differently, the client was looking at the specter of years of appeals and collateral litigation, at great cost and risk.
The potential for state and federal audits regarding the misclassification of distributors and employees is a threat that exists, to varying degrees, in every state. To see the potential impact of these allegations, one need look no further than the adverse decision in litigation between the state of Oregon and the multilevel-marketing company ACN. In that case, the Oregon Supreme Court found that ACN’s distributors were misclassified employees.
A Balancing Act Between Robust Compliance and Too Much Control
As every network marketing legal department is well aware, there is a constant balancing act between exercising necessary and vigorous compliance oversight over distributors, on the one hand, and avoiding the exercise of what may be deemed to be the “control” that could cause a government agency, judge, or arbitrator to determine that a company’s distributors are misclassified employees.
To combat these threats, it is essential to have policies and procedures that detail the role of a distributor as an independent contractor, clear and consistent accounting for all of the distributors that are classified as independent contractors, and to be able to access all of that information easily.
A company should work with its legal counsel to develop a detailed fact-based outline describing, under the relevant state and federal factors, why it believes each of its distributors are independent contractors. This process will allow the company to identify and address any factors that may present challenges during a government audit or lawsuit, and to make any necessary adjustments to the contractual relationship between it and its distributors.
These steps will hopefully help any company achieve a positive outcome if its classification of its distributors as independent contractors is ever challenged.
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As businesses respond to society’s demand for authenticity, companies recognize the power of demonstrating core values
By: Jenna Lang Warford
Far from being harmless, as some executives assume, they’re often highly destructive. Empty values statements create cynical and dispirited employees, alienate customers, and undermine managerial credibility.
— Patrick M. Lencioni, author of The Five Dysfunctions of a Team
62% of consumers say purchasing decisions are influenced by a company’s ethical values and authenticity.
— Accenture Strategy
Fifty percent of consumers say that the pandemic has caused them to rethink their personal purpose and reevaluate what’s important to them in life, according to the 14th annual Accenture Strategy Global Consumer Pulse Research survey. Additionally, 42 percent say the pandemic made them realize they need to focus on others more than themselves. The result? Sixty-three percent are buying goods and services from companies that reflect their personal values and beliefs, and fully 47 percent have stopped doing business with a company as a result of its actions.
The survey, which included more than 25,000 consumers across 22 countries, with follow-up focus groups in five countries, makes it clear that consumers want more than transactional relationships—they value a company’s stance and are interested in aligning with businesses that share their values. According to the research, 62 percent of consumers say purchasing decisions are influenced by a company’s ethical values and authenticity.
IC Rule is reinstated in victory for DSA and other independent contractor advocates
Independent contractors, and the businesses that utilize them, were handed a victory on March 4 when the U.S. District Court for the Eastern District of Texas ruled that the Department of Labor’s (DOL) 2021 cancellation of independent contractor regulations under the Fair Labor Standards Act (FLSA)—also called the Independent Contractor (IC) Rule—was unlawful.
Biden Administration Withdraws Rule
The rule was originally set to take effect on March 8, 2021. However, President Biden’s Labor Department submitted a proposal to delay the effective date until May 7, 2021, which was accepted after more than 1,500 public comments were received in response to the proposal to delay.
Just days later, on March 12, the DOL published a notice of proposed rulemaking (NPRM) to withdraw the IC Rule altogether after receiving over 1,000 comments about the NPRM.
In a 41-page opinion, the District Court ruled that the DOL had twice violated the Administrative Procedures Act (APA)—first, when it delayed the IC Rule and again when it withdrew the Rule in March 2021.
“Despite the DOL’s purported desire to provide clarity, the Department did not address the inconsistencies and lack of coherence in the manner in which the economic realities test was applied across the country prior to the Independent Contractor Rule. Nor did the DOL contemplate a solution for that problem—as previously identified by the Department,” the Court stated in the opinion.
Court Reinstates Rule
The court vacated both the delay and the withdrawal of the Rule and held that the Independent Contractor Rule was effected on March 8, 2021, and remains in effect at present. The DOL has not indicated whether it plans to appeal this decision.
The Direct Selling Association (DSA) is the Vice Chair of the primary plaintiff in the case, the Coalition for Workforce Innovation. The Association stated that it does expect the DOL to appeal the ruling.
The IC debate will continue to loom large across several U.S. business sectors, as more Americans consider gig work to set their own schedules, work from home, or supplement their primary income.
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Both US and overseas companies respond and adjust to the disruptions caused by the Russian invasion
Foundation 4Life supports The Children’s Home in Boyarka, Ukraine.
As the global business community continues to adjust to the strain of a years-long supply chain disruption prompted by pandemic restrictions and compounded by inflationary pressures in many markets, numerous direct selling companies have made further impactful moves in response to Russia’s invasion of Ukraine on Feb. 24.
Several direct sellers, both U.S. and overseas-based companies, have announced policy and operational changes, as well as plans to contribute to Ukrainian relief efforts, in light of the Russian government’s violent attack on its neighbor.
4Life Provides Direct Support to Ukrainian Children
Sandy, Utah-based 4Life has partnered with The Children’s Home in Boyarka, Ukraine, for 10 years through its Foundation 4Life. The specialty institution is one of Ukraine’s largest, which houses more than 100 children and provides medical care, primary education, and life skills training.
The 4Life website reports that the children were moved to a dark basement in the home as air raids threatened the area. However, Foundation 4Life Director of Service Jenna Lisonbee reports that the children are now safe after relocating to Poland.
“Our wartime efforts with SOS Children’s Villages in the Ukraine have been effective, although we are also aware that so much more is required,” Lisonbee says.
“Yes, Foundation 4Life programming is in process of assisting 45,000 families and, yes, the children of the orphanage in Boyarka, the one Foundation 4Life has served for the last decade, have been evacuated safely to Poland. Still, we are extremely sensitive to the necessity of timing for those many families who remain in the Ukraine. Therefore, our immediate efforts are combining contributions from worldwide 4Life affiliates and employees alike, with our European staff taking the lead.”
Tyler Madsen, vice president of global markets, says, “We are in constant communication with our Ukrainian friends and business partners. Our executive team is strategizing ways to provide ongoing support to those suffering in Ukraine. I send my love, as well the love of our Founders David and Bianca Lisonbee, and President and CEO Danny Lee.”
Amway Offers Ukrainian Relief While Considering Impact of Halt on its Russian Partners
Over 10 million Ukrainians have been displaced since the start of the war.
Amway has joined many other major companies in pausing its operations in Russia. Cindy Droog, Amway’s vice president of global communications, reputation, and corporate social responsibility, told the NBC affiliate in the company’s home state of Michigan, “The regulatory and supply chain environment for doing business in Russia is extremely challenging.”
Addressing the timing of her company’s suspension of operations, Droog stated that the company was hesitant to disrupt the incomes and livelihoods of Amway’s hundreds of thousands of Russian distributors.
Amway also has over 2,000 employees and distributors in Ukraine with the main office located in Kiev as well as shopping centers in Dnepropetrovsk, Lviv, and Odessa. The company has begun the transition from business operations to relief work in the war-torn country, including support for Ukrainians fleeing to Poland.
“… We have between 500 to 600 employees there (Poland) to embrace them, bring them in, and help them with shelter and food and clothing and transportation,” Droog said. “But even toys. Some of them came into Poland and other countries with their kids and could only take one small suitcase or backpack.”
In an official statement on March 4, Amway announced that teams across the globe would be donating supplies and money to Global Impact’s Ukraine Relief Fund, UNICEF, hospitals and shelters, and directly to employees in need of food, housing, and safe passage. The company pledged to match these donations with no limit from its U.S.-based World Headquarters as well as from other markets.
Avon Remains Active in Russia While Parent Company Postpones U.S. Stock Listing
Brazilian cosmetics giant Natura &Co, the parent company behind The Body Shop, Aesop and Avon Products, recently announced its operations strategy for addressing the Russia/Ukraine situation. The company will suspend product delivery in Russia to The Body Shop and Aesop, but Avon will continue to maintain its operations there “in support of Representatives who operate as independent entrepreneurs,” according to the company’s official statement posted
to naturaeco.com.
“We believe restricting their access to products would have an outsize impact on women and children there. For 135 years, Avon has stood for women wherever they are in the world, regardless of ethnicity, nationality, age, or religion. There is no financial advantage to Natura &Co being in Russia,” the statement concludes.
In a LinkedIn post, Avon CEO Angela Cretu said, “While Ukrainian people fight for their survival, many of us feel that we can’t do more than sending emojis around. But we can. At Avon, we insured direct contact with each of our associates in distress, looking for ways to ensure their safety and financial support to their particular needs, our neighboring Avon countries are supporting the refugees centers. Our voice and individual action matter.”
Natura &Co is working with organizations such as the Red Cross and local NGOs with funds and personal-care products for refugees.
Citing high volatility in global equity markets brought on by the war in Ukraine, Natura &Co postponed the transfer of its primary stock listing to the New York Stock Exchange (NYSE) that was set to be listed under the ticker symbol NTCO. Bloomberg reports that the company will direct its immediate attention to the turnaround of Avon Products Inc. and will consider again the Stock Exchange move at a later date.
Faberlic CEO Provides Update
Reporting over 10 million customers and over 100,000 independent consultants, Moscow-based Faberlic is the largest Russian direct selling company and manufactures beauty, cosmetic and personal-care products in multiple countries around the world. Faberlic launched in the U.S. in late 2021. In a post to the official UK/Ireland Faberlic Facebook page, CEO Konstantin Barmashov stated:
“As a global company, Faberlic is committed to maintaining business continuity and serving our customers around the world during this turbulent time. As the political crisis between Russia and Ukraine continues to escalate since February 22, we would like to share what we know now:
“Sanctions by the United States and European countries against the Russian government and organizations associated with it were introduced on February 24. They are directed against the inner circle of the President of Russia and some specific Russian banks.
“Faberlic does not partner or work with these individuals or banks to manage our global structures and we do not expect this to affect our operations.
“Faberlic operates in 46 countries around the world and we strive to continue serving our customers around the world.
“If the situation changes and adaptations are required to maintain the quality of our services, we will inform you of these changes as soon as possible. You are part of the Faberlic family and we value you!”
Herbalife Suspends Russian Operations While Assisting Victims and Employees in Affected Regions
Herbalife released a statement on March 11 condemning the war in Ukraine and noting that the company has 44,000 active distributors in Russia since its launch there in 1995. The Los Angeles-based nutrition company announced that it would be suspending operations in each of its 62 sales centers in Russia and will no longer ship supplies there.
The Herbalife release also stated that the company is actively supporting its employees in the region and providing nutrition products and financial aid to organizations supporting impacted communities.
MONAT Global Donates Sales and Matches Gifts
MONAT Global, the Doral, Florida-based beauty and hair-care direct seller has committed to matching all donations up to $50,000 while working with Polish Humanitarian Action and International Rescue Committee. The company will provide essential hygiene products to refugees, donating 100 percent of European sales of its More Than a Lather product. MONAT also made a $10,000 gift to Polish Humanitarian Action.
Nu Skin Suspends Russian Business
Provo, Utah-based Nu Skin announced on March 4 that it had suspended operations in Russia, effective immediately. The company said, “Our heartfelt thoughts are with the people of Ukraine and to all who are affected by these tragic events. We hope that this conflict will come to an end soon and that peace will prevail.”
Oriflame Suspends Operations in Russia
Swedish direct seller Oriflame said in a March 7 press release that its main priority was to provide “personal safety and every possible support to our employees and their families, as well as to help our brand partners and people in Ukraine.”
The company confirmed that its Ukraine operations have closed to ensure the safety of its 115 employees there and that production from its Russian factory would be redistributed to other manufacturing sites.
While the March 7 statement stated that “Oriflame has decided to keep our Russian social selling business open for the time being with the aim to support our brand partners and their families many of which have Oriflame as the only source of income,” the company put out a subsequent press release on March 21 announcing that it would further reduce operations in Russia by suspending investments, marketing, training, and events. The beauty and wellness company also announced a suspension of online sales to Russian end consumers. “These actions will have a material impact on our business in Russia,” said the company.
Young Living Partners with NCOs and Assists Ukrainian Employees
Lehi, Utah-based Young Living, through its Young Living Foundation, is partnering with two organizations supporting displaced families—Asociatia Casa Share and British-Ukrainian Aid.
The Foundation’s website states that donations will help provide food, medical and psychological care, emergency supplies, and shelter to refugee families fleeing conflict. Young Living is covering all administrative costs and matching donations up to $100,000.
The company is advancing salary payments to Ukrainian employees and paying commissions at pre-war levels to brand partners, as well as working with bussing companies to provide transportation for staff members and their families who wish to leave Ukraine.
SELDIA Coordinates with Ukrainian Direct Selling Association
SELDIA, the European Direct Selling Association, reports that it has remained in constant contact with the Ukrainian Direct Selling Association, which is a member of SELDIA, as well as a Ukrainian commerce group.
“We are thankful that our colleague from the Ukrainian Direct Selling Association is now safe in Warsaw. We look forward to welcoming her in person at the Seldia Conference on 10 and 11 May in Brussels. Our conference dinner will be dedicated to Ukrainians,” says Laure Alexandre, the Executive Director of SELDIA.
“Our focus at SELDIA has been to provide a safe space for our members to exchange about the consequences of the war, and keep members informed of the emergency regulations adopted in the EU. Seldia also joined Ukrainian Network Working Group of Eurocommerce, exchanging on supply chain disruptions and regulatory consequences for the months to come,” says Alexandre.
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Two-month comment period underway to shape prospective rule impacting direct sellers
By: David Bland
The Federal Trade Commission (FTC) published its Advanced Notice of Proposed Rulemaking (ANPR) as well as a request for public comment concerning false, misleading and unsubstantiated earnings claims to the Federal Register on March 11.
This action starts the clock on a 60-day window in which the public may submit written comments, data and arguments in regard to the need for such a rulemaking. All public comment submissions are due by May 10.
The ANPR outlines the FTC’s consideration of a new earnings claims rule for several types of businesses promoting business opportunities, including multi-level marketers, gig economy platforms, for-profit colleges, franchises, e-commerce companies, and other business and investment opportunities.
The Commissioners also included in the ANPR a multitude of specific questions about various aspects of a potential new rule in an effort to guide and assist the public in its responses.
Direct sellers invest in technology, training and new ideas with COVID-19’s endemic phase on the horizon
By: Jenna Lang Warford
What worked in 2020… no longer really works.
— Suzie Read, National Sales Director, Jordan Essentials
We have to bring the digital experience to a whole other level… So the question is, how do we elevate the experience?
— Garrett McGrath, CEO, The Happy Co.
Responding rather than initiating has been a common strategy for operating a business during the past two years, as many direct selling companies have chosen to “wait it out” and “play it safe” in a time with no relevant precedent. While innovations were often distributor-led, and hugely successful, it’s clear that 2022 requires different growth strategies as the pandemic shifts to the endemic.
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