again, I remind you that the information contained on this page
and on this site is what I believe is true based on a decade of
research. You are free to believe otherwise.
firms often illegally hire their reps as "independent contractors,"
which in essence means that those reps are (unwittingly) running
their own businesses -- paying for their own training, advertising,
marketing, insurance, all business expenses, taxes, etc.
Note how I emphasized taxes? The
inexperienced rep (and most are, remember) may not realize the real
cost of "owning his own business" until he suddenly owes
a hefty chunk of his meager first-year income to the IRS!
is it really his own business?
it is not. Scammers attempt to mislead the "independent
contractor" into believing he's working for (or has even bought)
a franchise, someone else has taken the risks to launch a new product/service
and establish a customer base. If you buy a Gas-mart (yeah,
I made that up), you are going to sell their products and accept
Gas-mart's limitations on your business. However, you are
buying the franchise because it is an established name that has
an immediate, viable market. The owner of a franchise will
certainly want to develop his local clientele, but a basic clientele
already exists. That's part of what the franchise owner paid for.
contracting can be very rewarding, but anybody choosing to become
contractor (IC, for short) should research carefully and understand
the risks as well as the rewards. An IC is starting a business from
scratch and thus assumes all the risks. An IC takes these risks
because he does not want a franchise's restrictions on product line,
income, etc. An IC's earnings and clients belong solely to him;
a franchise owner's clients belong to the franchise and cannot be
taken with him should he decide to leave. An IC's income belongs
solely to him; a franchise owner's income is impacted by sharing
profits with the franchise (managers above him earn overrides).
An IC chooses his product line from the open market; a franchise
owner must sell the franchise's product line. An IC performs his
work for as many clients as he wishes; a franchise owner performs
his work for only his franchise. An IC funds expansion to meet demand;
a franchise owner's expansion is limited to the franchise's funding.
an "independent contractor" with a scammer firm, you may
now own a "franchise" with no established name or immediate,
viable market! The
proof is in the statistics: franchise owners enjoy a success rate
of over 80%. Instead, you now own a "business" whose average
failure rate is 80-95%. Remember, the scammer's
objective is to minimize or eliminate its own employment and advertising
costs by forcing you to shoulder them.
I'll get into the marketing issues in the upcoming
"Prospecting" section, but here you need to realize why
they didn't hire you as an employee.
employee enjoys certain privileges as well as limitations. Privileges
include stability and security. An employee receives a salary or
wage, taxes are paid by the employer, and firms with a certain number
of employees are required to give employees certain benefits such
as health insurance, sick leave, vacation pay, and the like. Limitations
are obviously that the employee may perform his services for only
that firm and accepts the income limitation inherent in that choice.
A firm that hires employees shoulders the costs of employment.
Scammers may aim to keep costs down
or eliminate them altogether by misclassifying employees as ICs,
who cost the firm no overhead and lessen the firm's legal liability.
that the firm doesn't ultimately determine your classification;
different government regulatory agencies do, including:
the Internal Revenue Service
unemployment compensation insurance agencies
workers' compensation insurance agencies
United States Labor Department
National Labor Relations Board
Federal Trade Commission
agency has its own guidelines.
The IRS guidelines on determining whether a rep is an employee or
independent contractor are listed below (Source
#3). You are more than likely
don't have a business license.
firm provides your training. (Contractors typically do not receive
training by the hiring firm; they start "fully hatched".)
firm's success or continuation depends on the service you provide.
(Contractors should not perform work that determines the success
or continuation of the hiring firm.)
firm maintains a continued relation with you and does not hire
you on a per-project basis. (Contractors are hired per project
and bill for their services.)
firm requires you to provide reports of your performance. (Contractors
are hired to produce a final result, and therefore should not
be required to submit interim reports.)
firm requires you to perform your services for only itself and
not other firms. (Contractors should not be restricted from seeking
and performing other gainful work, even within the same industry.)
firm exercises control over you through the threat of dismissal,
which causes you to obey the employer's instructions. (An independent
contractor cannot be fired so long as the independent contractor
produces a result that meets the contract specifications.)
firm exercises control over how your work gets done (insists you
use THEIR system for generating leads or income such as the “friends
& family” list) and supplies tools (phones, desks, marketing
materials, etc.) for the performance of your work.
(Contractors are responsible for the completed job but have full
control over the means.)
down, the IRS's general
rule is that an individual is an independent contractor if you,
the person for whom the services are performed, have the right to
control or direct only the result of the work and not the means
and methods of accomplishing the result.
you think you've been misclassified as an IC to your disadvantage,
contest it. See the "Links"
page on this site for a list of avenues you should pursue for recovery,
including taxes, wages, and unemployment benefits.
Word on Taxes
a firm is up front about hiring reps as independent contractors,
it may promote "fantastic" benefits of business
ownership such as tax write-offs, independence, and dreams
of wealth while slurring traditional brick-and-mortar businesses.
For the record, the IRS says you can't generally operate an
unprofitable "business" out of your home with the
"hopes" that it will pay off, and then deduct the
cost and operation of a personal residence/home office; pay
your family as employee write-offs; write off the family car;
deduct travel, meals, and entertainment under the guise that
everyone is a potential client; etc. See here
Note that if your "business" doesn't show
a NET profit in 3 out of 5 years, you may risk the IRS labeling
your "business" a not-for-profit or HOBBY.
entirely possible that your firm is classifying you as a direct
seller but is mistakenly calling you an independent contractor.
The IRS has specific guidelines for "direct sellers",
the category into which most MLM
(multi-level marketing organization) distributors
fall and which is essentially just an independent contractor.
It's a rather gray area of tax law that MLMs and those operating
similar to MLMs exploit. Internal
Revenue Code Section 3508 (IRC §3508) is the particularly
odious bit of legislation that lobbyists snuck through in
1982 that allowed this (mis-) classification of direct sellers.
Its classifications directly conflict with the IRS's own criteria
for independent contractors; it is just plain bad law, and
your firm may be taking advantage of it to your detriment.
Keep in mind some direct sellers and independent contractors
have successfully sued their companies and been found to be
employees anyway. For more on how IRC
§3508 has impacted the industries it purports
to "protect", click here.
Publication 911 for details on direct sellers. Also see
15-A: Direct sellers are statutory non-employees;
like independent contractors, they are treated as self-employed.
Note that prizes (bonuses, trips, etc.), awards, and
gifts are taxable if you are classified by the IRS as a direct
is one such decision* against
a firm that misclassified its employees as independent contractors:
court found that persons who are controlled or subject
to control are employees... [...] In looking at the direct
evidence of control or direction, or the right to control the
worker, there is a considerable amount of control over
the worker. The registration and licensing of the sales
representative needs the approval of [XXXX]. Once licensed, the
worker can only provide these services to [XXXX]. The worker is
required to record and report their weekly activities to a [XXXX]
Upline Leader. The worker is prohibited from performing services
for other Security Brokers/Dealers. Training is provided by [XXXX].
An independent contractor normally has the knowledge,
skills and experience to perform contract services. An independent
contractor would not need to follow policies and procedures outlined
in a manual specific to the services they perform. [...] The written
sales agreement stated the 'independent sales representative was
an 'independent contractor' and responsible for her own taxes.'
This is not conclusive of being an independent contractor. As
to the 'right to fire' there would be no liability on the part
of [the plaintiff]. She could terminate her services with no liability
to the company. She would lose business transactions under the
control of [XXXX]. There would be
no loss to [XXXX], as they would retain the business brought in
by [the plaintiff]."
last and perhaps most important reason for misclassifying employees
as ICs involves legal liability. Many firms simply
feign ignorance of a "rogue" rep's "misconduct"
when a consumer brings a lawsuit or a regulatory agency brings an
action, even when they explicitly (but verbally!) encouraged
the often-ignorant rep to break the law. The FTC
has this to say about independent contractors involved in direct
you decide to become a [salesperson], remember that you're
legally responsible for the claims you make about the company,
its product and the business opportunities it offers. [...]
When you promote the qualities of a product or service, you're
obligated to present those claims truthfully and to ensure
there's enough solid evidence to back them up. The Federal
Trade Commission advises you to verify the research
behind any claims about a product's performance before repeating
those claims to a potential customer. Likewise, if you decide
to solicit new [salespeople], be aware that you're
responsible for any claims you make about a [salesperson]'s earnings
potential. [...] If those promises fall through, remember
that you could be held liable.
you get that? As an independent contractor, you are responsible
for doing the firm's homework and ensuring that its claims about
the itself and its products, services, and opportunities are true!
An independent contractor's own ignorance
in simply repeating what he's been told could earn him fines and
jail or prison time while the firm pleads ignorance of his
"unapproved illegal activities" and gets off with a slap
on the wrist, if that.
a nutshell, if your "business" does not exist apart from
its relationship with your firm, then you don't have a business
and are not an independent contractor. You're an employee of the
firm and are entitled to all benefits that entails. The
employment contract you signed does NOT determine your relationship
with the firm and is only useful if it's obeyed. It will be useless
if you act and are treated like an employee.
inexperienced work force sought out by scammers is most often totally
ignorant of the above, so they'll accept the position without understanding
the consequences. If you can pay the "licensing / background
check" fees (and don't have a felony), you're hired!
there's a good chance you're being lied to again about the cost
of basic licensing and background checks, which may include hidden
training class fees... so on to the training program and its part
in the scam!
Case found in public records. Also for the record, the same company,
which I have avoided naming for legal reasons, is a member of the
Direct Sellers Association (DSA), whose "Code
of Ethics" includes an intriguing bit of double-speak entitled
"Prompt Investigation and No
Independent Contractor Defense" which states:
the purposes of this Code, in the interest of fostering consumer
protection, companies shall voluntarily
not raise the independent contractor status of salespersons
distributing their products or services under its trademark or
trade name as a defense against
Code violation allegations and such action shall
not be construed to be a waiver of the companies' right to raise
such defense under any other circumstance."
this site's opinion
article on MLMs for information on just what the DSA is doing
for its members.