Direct selling companies would be well served to periodically review their marketing program to see that they are keeping in touch with legal and tax issues facing the industry.
Updating Your Marketing Plan:
Thinking of changing your marketing program? Direct selling companies would be well served to periodically review their marketing program to see that they are keeping in touch with legal and tax issues facing the industry. In addition, it is important to assure that the company is remaining competitive and up-to-date with other programs in the marketplace that are being offered to would be direct selling distributors.
Experience would suggest that changes in marketing programs are not well received by distributors, unless it is clear that the changes are to their benefit. For this reason, the prudent company should keep a running list of changes that it has in mind and make those changes all at once and in a manner that creates positive perception among distributors. Here is a brief checklist of some things that the company should be thinking about concerning distributor agreements, policies and procedures, program administration and marketing plan structure.
1. DISTRIBUTOR AGREEMENTS
Distributor agreements should be reviewed annually. Keep in mind that legal requirements affecting distributor contracts are being impacted on a continuing basis by multilevel distribution statutes; business opportunity, franchise and pyramid legislation; case decisions and regulatory enforcement policies at federal and state levels. Do the distributor contracts comply with cancellation requirements now imposed by several states? Have the agreements adopted specific buy-back policies which are being required in all states with multilevel distribution statutes? What are the entry level requirements for participation in the program? Will the initial investment trigger either pyramid legislation or business opportunity legislation?
The tax laws affecting independent contractor status of direct selling companies have changed. Thus, does the distributor agreement reflect necessary language to establish independent contractor status under federal and state laws? Does the contract provide for a specific term or an indefinite duration? Does the contract require renewal by distributors? At what intervals? What rules regulate termination of distributors? Have antitrust considerations been taken into account?
2. POLICIES AND PROCEDURES
Don't forget to review existing company policies and procedures. What guidelines has the company provided to distributors regarding earnings representations? The subject of earnings representations is in a state of flux at both the federal and state levels and state legislatures and regulatory officials have also been vocal on this subject. What is the company's position on sales tax? Does the company collect and remit sales tax or does it require resale tax i.d. numbers from its distributors? Be careful, the company may be sitting on a ticking time bomb of potential "sales tax" liability. Now is a good time to review company advertising policies and to set forth any updates in advertising guidelines for distributors.
What is the company's position on downline sales organization data? Has the company taken a position with regard to distributors competing with the company? Is there information which is transmitted to distributors that the company deems to be a trade secret or in some way confidential? How far can the company go in claiming confidentiality of sales distributor or customer lists? What language must appear in distributor agreements and marketing program documents to protect confidential information from being used against the company?
3. ADMINISTRATIVE MATTERS
Take the opportunity to update administrative policies. What is the company's position regarding sale of distributorships? Inheritance of distributorships? Perhaps this would be a good opportunity to provide specific guidelines and information to distributors on this important subject. Another issue constantly on the mind of distributors is the tax advantage of the direct selling distributor. This is a good time to educate its distributors on their tax deduction rights and to assure that neither the company nor the distributors are abusing their tax deduction status. How much data processing information should be provided to distributors? Who should pay for this information and how should such fees be collected? Distributors are increasingly anxious to receive sales data and a company should use the opportunity to review what it is currently providing.
4. MARKETING PLAN
Of course, every review of the marketing program should encompass a review of the marketing plan itself. Is the marketing in the mainstream of legitimate direct selling activity? What does the program do to stress retail sales, to prevent inventory loading and to prohibit headhunting? Does the program require adequate training and supervision by sponsors as is required in most states? Is the incentive and commission program competitive with other direct selling companies? What are the activity level requirements of distributors and should they be modified?
The updating process provides the company, its legal, tax marketing advisors a good opportunity to evaluate where the company has been and where it should be going. Consider it an opportunity for constructive change.
|Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
|Jeffrey A. Babener, a partner in the Portland, Oregon, law
firm Babener & Associates, represents many of the leading direct selling companies in
the United States and abroad.
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