New Labor Ruling. A Huge Blow to The Direct Sales Industry?

The following news sparked all kinds of thoughts and scenarios in my head. All I'm trying to do here is share some of them and pose some of the cautionary tales I observe in order to create awareness. Do we have clarity? Do we need to adapt and evolve? If you are at the helm of a company, is this something you want to consider and take under council? Are we vulnerable enough to where it can be left up to the courts? If it comes across as confrontational or criticizing, please know it's not.

Last month marked a significant development in the gig economy, with freelancers, including three New Jersey-based writers, suing the Department of Labor to challenge a new rule. This rule, if it classifies gig workers as employees, poses a substantial threat to the business models of companies like Uber, Lyft, and Doordash. These companies have largely depended on independent contractors, who are less costly than traditional employees. You know who else depends on independent contractors? Direct Sales (Network Marketing).

The Department of Labor announced a new federal rule that changes the existing 6 factor test used to classify whether a worker is either an employee or independent contractors. You may have already figured out why the stakes are so high as the financial impact this can have on a company can be catastrophic.

Questions within this 6 factor test has the potential to disrupt the Direct Sales industry. Why? Because of ramifications. A better question is: Does it open a door to scrutinize how independent reps in Direct Sales (Network Marketing) are classified? If so, it can definitely disrupt the way companies deal with their "independent contractors".

These changes are especially meaningful for those in the Gig Economy (companies and workers), but knowing what we know about the Direct Sales industry and looking at the questions on this test, one stands to question if companies are also vulnerable to similar lawsuits. Does this set a precedence others can take up and try their luck with?

Some of the questions in this test could apply Network Marketing companies depending on their Terms and Conditions. As we know, many companies have very strict "non-compete" clauses that tie a distributor making him less independent, binding him to a certain level of forced exclusivity.

This new rule could compel companies to start paying certain benefits to those working for them if the work contracts set forth don't pass the classification test with congruence in all 6 questions. The burden of proof lands on the company, not the workers.

Here are 3 examples of the test where I believe the industry could be vulnerable. It may crack the ice just enough for speculation to take place. If someone with enough means and opportunity was motivated enough to do something about it, well it could create massive waves that would impact the industry with the force and effect of a tsunami. Again, remember that this isn't a "2/3 ain't bad" type of test. You gotta hit all 6.

1) Opportunity for profit or loss depending on managerial skill. In other words: Can a worker negotiate the pay? Accept or decline projects and duties? or, choose which of those tasks are completed? If yes, then that's probably an Independent Contractor.?

1. While Distributors can't negotiate the pay with an MLM company, they usually choose to accept the compensation plan (even if they disagree with parts of it) and work it however they want, but they are also able to say "No Thanks!" However, most Distributor Agreements do include a clause for "...the company reserves the right to make changes without notice" which in essence says that "you aren't even able to know how much we're going to end up paying you." So, here, the industry skates on thin ice already. What do you think? ?

2) What degree of permanence is included in this work relationship: If the work relationship is continuous, without a specific end date, it could be considered an employee. But if the worker has an end date, is non-exclusive and based on the worker providing a service to a business. In this case, that worker is likely going to be classified as an independent contractor.?

1. This is where I believe the biggest liability lies. Independent distributor contracts usually don't come with end dates and the preconceived idea is that it'll go on forever as (and especially when) they see success and build a team. Add to this the nuance of the term "non-exclusive" and you can see where the vulnerable angles are. More on this below. You grab those 2 things and that thin ice starts to seem compromised.?

3) Nature and degree of control of employer over a worker: Does the employer have sufficient control over the worker, explicitly limit the workers ability to work for others? If yes, that's an employee. Think about it this way: Is the worker economically dependant on the employer for work. If yes, the worker is classified employee.?

1. The most widely known fact in network marketing is the limiting ability to work with other companies. As distributors become more and more successful they become more and more dependent on the company because it can take away their business without much ado at the first suspicion that said distributor may be affiliated with another company. Most MLMs want total loyalty and they want it indefinitely. Now, I'm not saying "I got ya" here. I'm not a legal expert so I could be overlooking details amusingly disguis... err, I mean, spelled out in legal terms within the Distributor Agreement. I also realize that from company to company those clauses could vary. What I AM saying is this: if someone was to take this new rules and has the ability to come after a company or the industry... say... the FTC, are we sure that we would win that case? Are we sure we are not toeing that line? Maybe blurring it a little? And that's all it takes, isn't it? All the FTC needs is the slightest opening. It's not like they have a history of being amiable toward the industry.?

Here's the big gotcha: I don't have to be 100% spot on with these ideas, with this theory. And I know I'm probably not. Here's the thing though: I don't need to "know what I'm talking about" with exactness because all that needs to happen is for someone, some activist group, to put 1 and 1 together and do something about it. In the meantime, companies continue to exert their muscle, tipping the balance on their favor. Asking for exclusivity while they themselves spread their risk over 100,000s of distributors all over the world. Holding people accountable to certain codes of conduct, "here's what you can say/do and here's what you cannot".?

I'm curious about your thoughts. Especially those who are legal experts in the industry: general councils, etc. How are companies protected against this new development? Or is this something that will lead to changes in how companies deal with their own independent contractors?

Leave comment with your thoughts and/or perspective and expertise.