Well-written agreements will benefit both the company and the consultant
By: Brent Kugler, Guest Contributor
Because many companies favor keeping transfer upon death policies in their consultant agreements, it is critical that these policies are drafted in a manner to not conflict with other key provisions in the agreement.
As important as it is to ensure that the transfer upon death provision does not conflict with or negate language in the consultant agreement, it is just as important for companies to avoid mistakes when facilitating the transfer of the business to the heir or beneficiary.
Many—some would even say a majority—of direct selling companies have provisions in their consultant agreements that allow a sales consultant to pass their business to an heir or
beneficiary upon their death. It’s a great marketing tool. How many jobs, professions, or business opportunities allow a worker to pass their hard work and success on to their children or heirs?
Other than the classic family-owned business, there are very few business opportunities that can easily be passed on to one’s heirs. Many direct sales companies continue to provide such an opportunity.
But, is this an outdated MLM marketing gimmick? Aren’t these just personal services contracts? Should the “willable business” concept be shelved alongside those obsolete “earnings not typical” disclaimers in a company’s archives? Is it a smart business practice in 2022 to allow members of a company’s salesforce to pass their business to their heirs when they die?
For a direct sales litigation attorney, “transfer upon death” provisions can be problematic because they present potential landmines that can be avoided altogether by simply not allowing the practice. Isn’t that what life insurance is for? But alas, it’s such a great marketing tool!
Because many companies favor keeping transfer upon death policies in their consultant agreements, it is critical that these policies are drafted in a manner to not conflict with other key provisions in the agreement. It is just as critical that companies exercise care and caution in how they transfer a consultant position to an heir or beneficiary, so they do not trigger any unintended adverse consequences to the company, its consultant hierarchy or its compensation structure.
Clearly Define the ‘Willable Business’
The starting point is the consultant agreement. A well-drafted consultant agreement should clearly define what an independent consultant’s business is and is not.
When a new consultant enrolls with “XYZ Company,” the consultant generally receives a bundle of contractual rights (i.e., the right to purchase and sell products, sponsor other consultants to purchase and sell products, earn compensation pursuant to the company’s compensation plan, participate in periodic incentives, etc).
A typical consultant agreement also contains provisions stating that a consultant has no contractual relationship with any other consultant and that the consultant disclaims any property interest in their downline. Consultant agreements also typically have a term (usually one year) with renewal and termination provisions.
Don’t Get Burned by a Poorly Written Agreement
While the consultant agreement is where the willable business is defined, the agreement is also where potential landmines must be avoided for companies to allow a consultant to pass their business to an heir or beneficiary by will. This is because a transfer upon death provision creates tension with other provisions in the consultant agreement.
For example, consider a consultant termination dispute. The transfer upon death provision, in essence, contemplates that the consultant will own the position for the duration of the consultant’s life. Should the consultant be terminated, that consultant can rely on the transfer upon death provision to create a damage model based upon what they would have earned from the date of termination over the course of the remainder of their lifetime.
This means that a consultant suing a company for wrongful termination could assert a claim for future lost commissions over a period of 20-30 years or more. In a poorly drafted agreement, a transfer upon death provision can give the consultant something they can point to in the consultant agreement to support their methodology for calculating significant damages.
To be clear, a well-drafted agreement should be able to overcome this problem, but MLM litigation lawyers often do not like to have provisions in the consultant agreement (a document prepared by the company) that can be used by a consultant against the company in court or an arbitration proceeding.
A provision allowing a consultant to pass their business to an heir or beneficiary by a will or testamentary instrument can also give the appearance that a consultant business has certain property characteristics that do not actually exist. As noted above, a consultant agreement essentially consists of a bundle of contractual rights. A transfer of a consultant agreement is an assignment of those rights.
It is important to clearly define these rights in the consultant agreement so that a prospective transferee heir or beneficiary cannot claim a vested or property interest in an advanced rank or position or downline.
Similarly, some companies have provisions in the consultant agreement reserving the right to terminate the agreement at will. Notwithstanding the potential independent contractor issues that arise from such a provision, the contractual right to terminate at will is seemingly at odds with a transfer upon death provision in which the company contractually agrees that a consultant may pass their business to an heir or beneficiary when they die.
This raises the possibility that the agreement may be challenged as being unenforceable due to unconscionability. An agreement is unconscionable (and unenforceable) if it is determined to be “inherently unfair.”
State laws vary, but an unconscionability analysis is usually a two-step or sliding-scale process. The first inquiry is focused on whether the contract is procedurally unconscionable, and the second inquiry is focused on whether the contract is substantively unconscionable.
A contract that is deemed to be both procedurally and substantively unconscionable is legally unenforceable. Because most direct selling companies utilize a standardized independent consultant agreement, the majority of consultant agreements are likely to be deemed procedurally unconscionable. As a result, companies must take extra steps to ensure that their consultant agreements are not substantively unconscionable.
In assessing substantive unconscionability, the primary inquiry is whether the agreement terms are mutual or one-sided. If a company terminates a consultant by exercising its right to terminate at will, the existence of a transfer upon death provision in the consultant agreement could invite scrutiny by a court or arbitrator into whether the provisions in the agreement (including the termination, class action waiver and arbitration provisions) are unenforceable due to unconscionability.
Establish an Integration Process for the Transferee Consultant
As important as it is to ensure that the transfer upon death provision does not conflict with or negate language in the consultant agreement, it is just as important for companies to avoid mistakes when facilitating the transfer of the business to the heir or beneficiary. It is here where many companies fall short and mistakes get made.
For starters, if there are any qualification requirements the transferee must meet, these should be clearly stated in the transfer upon death provision in the consultant agreement. Similarly, if the transferred position will retain the rank or position that it held prior to the transfer, this should be clearly stated in the transfer upon death provision.
Another issue companies struggle with is the unqualified heir or beneficiary. If a highly ranked consultant dies, chances are high that the heir or beneficiary who takes over the business will not have the skill set to maintain the business at that rank or level. The transfer upon death policy should state all obligations the heir or beneficiary is required to fulfill and whether compliance is required immediately, or if the company will extend a grace period to give the heir or beneficiary an opportunity to learn the business.
Next, companies should develop and implement business processes for integrating the transferee business. In this regard, many companies assign a new consultant ID number to the transferee business.
There is nothing inherently wrong with this practice, but complications can arise when a transferred position at an advanced rank is given a new ID number and processed as a new consultant position in the ordinary course of business.
From a programming perspective, this may inadvertently result in the transferred position being forced to meet qualification thresholds that the position previously satisfied under the prior ID number.
Conversely, assigning a new ID number may inadvertently allow the transferee position to earn (or claim) one-time rewards in the compensation plan that were previously earned by the consultant position under the prior ID number.
The compensation plan documentation should clearly delineate that a transferee position cannot earn any one-time generational bonuses or rewards previously paid to the transferor consultant position.
Whether a new ID number is assigned or not, companies should ensure that the transfer of the position does not disrupt the consultant hierarchy or compensation structure that existed prior to the transfer.
At the end of the day, companies must decide if the benefits of promoting a “willable business” are worth the potential risks and headaches that come with administering a transfer upon death policy.
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