A growing number of former distributors are using the statute to allege exploitation through misclassification
By: David Bland
The Beachbody Co., a fitness and wellness company known for its home workout programs, is being sued by one of its former distributors in a dual individual and class-action lawsuit filed under California’s Private Attorneys General Act (PAGA). The May 2023 filing was brought by Jessica Lyons, who joined Beachbody’s direct selling division, Team Beachbody, in 2016. Lyons’ lawsuit alleges that The Beachbody Company, Inc. (re-branded in 2023 as BODi) is exploiting its distributors (called Coaches) by misclassifying them as independent contractors instead of employees.
The 137-page lawsuit alleges that Beachbody, by misclassifying its Coaches, violated a wide variety of provisions of the California Labor Code that apply to employees, such as not paying them a minimum wage, not providing meal and rest breaks, failing to keep payroll records and wage statements, not reimbursing business expenses, and failing to pay unpaid wages at the time of separation of employment. The lawsuit alleges that all of these actions constitute unfair competition, in violation of California law.
PAGA Provides Powerful Tools to California Workers
PAGA is a groundbreaking labor law that empowers employees to act as private attorneys general to enforce labor code violations on behalf of themselves and other employees.
Enacted in 2004, PAGA provides a unique avenue for workers in the state to address violations of the California Labor Code, such as wage theft, discrimination, and workplace safety infractions. Under this law, employees can seek penalties and recover unpaid wages on behalf of not just themselves, but on behalf of others too. PAGA also imposes substantial penalties on employers found in violation of the law.
Before PAGA was passed, workers seeking redress for labor code violations had limited options. They typically had to rely on government agencies, such as the California Labor Commissioner’s Office or the Department of Fair Employment and Housing, to investigate and enforce labor laws on their behalf.
While government agencies played a crucial role in addressing labor violations, their resources were often stretched thin, leading to lengthy delays in resolving cases. Additionally, employees had little control over the process and outcomes, as the decision to pursue legal action rested primarily with the government agencies.
California Direct Sales Exemption from the ABC Test Is Challenged
In her lawsuit, Lyons argues that Beachbody is covered by the ABC Test set forth in California’s Assembly Bill 5 (AB5) governing the classification of independent contractors and employees, and is not made exempt from that test by a direct seller exemption.
California Governor Gavin Newsom signed AB5 into law on Sept. 18, 2019, marking a significant development in the state’s labor landscape. AB5 aimed to clarify the classification of workers as either employees or independent contractors, using the “ABC Test” as the primary standard.
Introduced by the 2018 decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, and later codified by Assembly Bill 5 (AB5), the ABC Test presumes workers to be employees unless they meet all three criteria of an independent contractor:
A – The worker is free from the control and direction of the hiring entity in performing the work.
B – The work performed is outside the usual course of the hiring entity’s business.
C – The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed.
The Direct Selling Association (DSA) lobbied for, and won, a direct selling exemption from AB5 prior to its passage. However, Lyons claims that California’s direct selling exemption to AB5 applies only to “in-person” sales and not Beachbody’s online business model.
The lawsuit claims that the exemption “…does not reach Beachbody’s modern, online business model, where Coaches drive social media engagement under its guidance and direction, directing consumers to Beachbody-controlled websites, where Beachbody accepts and processes the sales and fulfills the orders, while also collecting and benefiting from the consumer data it acquires from these leads.”
The lawsuit details Lyons’ arguments that Beachbody’s business model fails each aspect of the ABC Test.
First, Lyons argues that Beachbody Coaches are not free from company control. According to the filing, the company’s “byzantine” 48-page policy and procedure document controls and restricts Coaches through policies dictating how they order products, how they market products online, and where the products can be sold.
The lawsuit argues that, “While Beachbody does not expressly prohibit in-person sales, …Beachbody has created many incentives for Coaches to sell on its online platform, [and] made it difficult, if not impossible, for Coaches to engage in most forms of in-person sales.”
As for the second part of the ABC Test, Lyons submits that the use of Coaches to market Beachbody products is a central part of its business model, and argues that the company’s primary benefit from the Coaches’ work is the engagement driven to the company’s website. Furthermore, according to the lawsuit’s allegations, Beachbody exerts significant control over its Coaches by restricting their ability to recruit Coaches from other “competing” downlines, as well as by prohibiting the use of lead-generating tools.
Finally, Lyons argues that the Beachbody business model fails the third aspect of the ABC Test, as its Coaches are not “customarily engaged” in an established sales and marketing business; the lawsuit alleges that, on the contrary, “…most Beachbody Coaches are recruited regardless of their skill or experience, only perform sales and marketing for Beachbody (using Beachbody’s approved platforms), and maintain no separate sales or marketing business.”
Beachbody Lawsuit Not the First PAGA Problem for Direct Sellers
The Beachbody lawsuit is not the first PAGA action alleging worker misclassification against a prominent direct selling company. In 2020, former Amway distributor William Orage sued the company for misclassifying its Independent Business Owners (IBOs) operating as independent contractors.
As in the Lyons lawsuit, the Orage class-action alleges that Amway failed to pay IBOs a minimum wage and maintain employment records. Orage also cites the various Amway rules that he believes represent control of IBOs, thus failing all existing legal tests defining independent contractors.
These controlling policies include company prohibitions against displaying products without authorization, selling products online apart from the replicated Amway website, selling products to retail customers online, and working or selling for other direct selling companies.
Jeunesse Global, a Florida-based direct selling company that reported over $8 billion in global sales in 2020, is also being sued under California’s PAGA statute. Like the other cases brought by former direct selling distributors, the Jeunesse lawsuit, filed in June 2023, alleges that the company has misclassified its workers and failed to pay them minimum wage and keep employment records, along with other complaints.
The plaintiffs in the Beachbody, Amway, and Jeunesse lawsuits are seeking civil penalties, restitution of rightful wages and attorneys fees, and injunctive relief halting continuation of the defendants’ compensation policies. All three cases are still pending.
PAGA Classification Cases Threaten the Direct Selling Model
The ABC Test for independent contractors continues to shape the legal framework for labor classification across the country. While a judgment for the plaintiffs in the California PAGA lawsuits could have devastating financial impacts on the companies being sued, these cases have the potential to significantly impact many U.S. multilevel-marketing companies with a similar business model.
Over 30 states have adopted the ABC Test to determine worker classification, although some states do not use all three prongs of the test.
“These PAGA cases are a very serious matter for the direct selling channel in that they strike at the heart of the independent contractor model, which treats each distributor as an independent business owner,” says Larry Steinberg, chair of the Buchalter law firm’s MLM Industry Group.
“For the ABC test not to apply, companies will need to demonstrate that they fall within the scope of the direct seller exemption. And once that showing is made, companies will still need to demonstrate that their distributors operate without significant supervision or control.”
Steinberg continues, “To make this showing of lack of control, companies will need to make arguments such as that distributors’ success is entirely dependent on their own skill and effort, distributors are free to spend as much or as little time as they want in connection with their business, distributors can sell as much or as little as they want, and distributors can work as much or as little as they want, or not at all.”
Plaintiffs, on the other hand, will argue that the detailed policies and procedures documents that many companies have constitutes control, and this makes direct sellers vulnerable to an allegation that their distributors are misclassified employees.
The PAGA statute’s broad application and potential for substantial financial penalties create a climate of uncertainty and legal vulnerability for direct selling companies operating in California. The ongoing cases have already highlighted the challenges surrounding worker classification and have raised questions about the independent contractor model that is central to virtually all direct selling business models.
However, network marketing companies are not without outside support when pushing back against accusations of misclassification.
“The DSA has always been a huge advocate for the independent contractor status of salesforce members as recognized under the law,” says Brian Bennett, DSA senior vice president, government affairs and policy.
“We advocate for laws at the state and federal level clearly recognizing that direct sellers are independent contractors to create legal clarity,” Bennett says. “The association has supported cases by filing amicus briefs and providing robust legal resources for reference that can assist in a positive outcome for these cases.”
As these cases unfold, the direct selling channel may face increased scrutiny, potential regulatory changes, and a need to reassess certain business practices and policies to ensure compliance with the labor laws in each state.
The outcome of these PAGA cases will undoubtedly shape the future of the direct selling channel, as companies seek to mitigate the risks associated with worker misclassification.