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The Integrity of the Lines of SponsorshipA direct selling company is a company selling products and services through independent contractors. The company offers its independent contractors a financial incentive — bring the company business, and get paid in some way for doing so.A direct selling company becomes a multilevel direct selling company, when it offers its independent contractors a second, optional way to make money. More money is available, IF the independent contractor will become the “new independent contractor finder.” A direct payment for finding a new independent contractor is illegal (referred to as a head-hunting fee), so an indirect incentive is required. That incentive goes like this— written in the first person for clarity: I, the Company, promise that if you, the independent contractor, will be my “new independent contractor finder,” I will keep track of that activity in my computer (the activity is usually called sponsoring or recruiting), and when the new independent contractor generates business volume, and every time he or she generates business volume, I will compensate you— because you found that new person—per a published compensation plan. I may even compensate you, if the person you found finds another person who generates business volume, and so on. To determine how many levels down business volume activity can occur that may trigger compensation for you, just read the published compensation plan. The above company promise is the legal incentive that causes the company’s independent contractors to engage in sponsoring activity. Once the company accurately records in its computer who sponsored who, that linkage CAN NEVER BE CHANGED, without the promise being broken. The act of “sponsoring” or “recruiting” a person into an independent contractor position with a company that offers a multilevel form of compensation is the single most regulated act in direct selling. It is the act that can be labeled “pyramidal,” if the required legalities are not met. The legal incentive appears above, and any variation or manipulation of the incentive creates high legal risk. Every plan I have seen, designed, or legally reviewed prohibits sponsorship changes. The few — and rare — exceptions require written approval from everyone whose compensation could be affected. This principle is known as “the integrity of the lines of sponsorship.” It is the driving principle of the direct selling industry using a multilevel form of compensation, and the principle must be zealously guarded. Gerald P. Nehra is a private practice Attorney at Law. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing legal issues. He began his legal career in 1970, and from 1982 to 1991 he was the Director of the Amway Corporation Legal Division. He can be reached at Nehra & Waak, Attorneys at Law, 1710 Beach Street, Muskegon, Michigan 49441, 231-755-3800. His e-mail address is GNehra@mlmatty.com. You are invited to visit his web site at www.mlmatty.com. Permission to reproduce, with this attribution included, is granted. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. |
