Direct Selling can be defined in various ways. A very carefully thought out definition is provided on the Direct Selling Association website—www.dsa.org—and is repeated below:
Direct Selling is the sale of a consumer product or service, person-to-person, away from a fixed retail location. These products and services are marketed to customers by independent salespeople. Depending on the company, the salespeople may be called distributors, representatives, consultants or various other titles. Products are sold primarily through in-home product demonstrations, parties and one-on-one selling.
The more formal or legal term for “independent salespeople” is “independent contractors.” The “independence” of independent contractors is absolutely critical to this form of selling. Many attacks over the years have come and gone. Legislators and regulators have looked to the large numbers of independent contractors in the United States and have wanted them reclassified and included in “workers compensation” programs and “unemployment insurance” programs. The laws are reasonably settled in those areas, although brush fires still occasionally erupt.
The IRS regulations clearly distinguish independent contractors from employees. A direct attack on that distinction is unlikely, but since the most critical benefit to companies and salespersons of the distinction involves post-payment by the taxpayer of income tax (the 1099 system) versus “pre-payment” by the company (via required W2 withholding), taxing authorities—both state and federal—are seeking ways to require withholding on payments to independent contractors. There are many arguments that can be and are being presented in the proper forums to oppose this idea. My intention in writing about this is to raise awareness, and also to point out the importance of at least four areas of differences between employees and independent contractors. What follow below are not just good ideas thought up by companies or lawyers, but contain direct quotes from an IRS Revenue Ruling, where the government developed a test to classify employee-independent contractor status; therefore, each will begin with, “Have you thought about why,” and although this article covers only four, there are many more for a possible follow-up article.
Have you thought about why virtually all independent contractor agreements are for one year and contain renewal provisions? Why aren’t they just forever? Well, the IRS says the contractor should be hired for a specified time period. Continuous work implies an employee relationship.
Have you thought about why it is rare to ever run into an independent contractor distributorship program with required oral or written reports or mandatory attendance at meetings? Well, the IRS says the contractor should NOT be required to submit regular oral or written reports or to attend the organization’s meetings.
Have you thought about why there is never any money available for “showing up” in a distributor situation, like there is when you go to “work” at the shop or office? The IRS is very clear on this one—the contractor should be paid by the job (in direct selling, job is translated to making a sale), as opposed to by the hour, week, or month.
Have you thought about why there is “always” a distributor contractual agreement? This is a very big one—the IRS requires that the intent of the parties to create an independent contractor relationship be “documented.” Oral agreements are not enough here. However, in recognition of technological advances and the Internet, electronic distributor agreement signing is recognized.
The independent contractor status of direct sellers is THE essential ingredient—the crux, if you will—of the direct selling channel of distribution. Help protect it in every way you can. Do not give the persons or agencies who want to impose withholding on independent contractors the argument – “Independent contractors are just like employees.” They are not. They are different. Know the differences. Maintain the differences. When in doubt, consult the company’s attorney or a private attorney.