I am not a lawyer and have no authority to give you any form of legal advice. This post is focused on giving you some insights into what an agreement typically looks like and what clauses are designed to achieve. Please, get a good lawyer and make sure you are properly covered.
MLM, Multi-Level Marketing, Network Marketing, Direct Selling and Party Plan Selling are all interchangeable terms
Most importantly, I need to convince you to take your Network Marketing Distributor agreement very seriously. Getting it wrong can, in the best-case scenario, cause you a great deal of irritation and, in the worst-case scenario, result in expensive litigation.
When it comes to the dealer agreement you need to exercise a great deal of care. On the one hand, you are managing your network’s expectations while on the other hand, you are limiting your liability.
Your liability comes in two flavours. The first is your liability to your network. You are dealing with real money and you need to ensure that your network is 100% clear on what remuneration is being offered. The second is to the law of the land. You need to ensure that your network understands what they can and can’t do and that if they do something untoward that they are liable.
In this post, I would like to take you through a typical MLM Distributor agreement and highlight some of the clauses and explain the reason for including them. You can also download a sample distributor agreement here.
This provides a brief introduction to the document and why it is necessary.
If there is any specific terminology then it will be listed here. You can also use this area to make sure that terms like He and She are interchangeable.
3. NOT A PYRAMID SCHEME
Outline what a pyramid scheme is and highlight why your company is not a pyramid scheme.
4. BECOMING A DEALER
What does a person joining your MLM business need to do to be officially accepted as a Dealer? Do they need to sign application forms, submit a signed agreement, pay some money, purchase a starter pack, pay an administration fee etc?
5. APPLICATIONS FROM FORMER DEALERS
If a former dealer wishes to rejoin, can they join under a new sponsor? Is there a time period before they can rejoin? What are the penalties and costs for rejoining?
6. EQUAL OPPORTUNITY
Network Marketing is one of the truly equal opportunity businesses but to protect your company you need to specify this in your agreement. Here you have the opportunity to explain why and how your MLM company is an equal opportunity company.
7. RESTRICTIONS ON PURCHASE REQUIREMENTS
Your dealers will make some crazy statements and promises. To boost their sales they may tell a new network marketer that they need to purchase a sizable amount of stock to get started. It is essential that you outline what the restrictions are when becoming a dealer. The fact that a member is not required to purchase a substantial amount of stock or that they only need to purchase a starter kit should be mentioned.
8. CONSULTANCIES MUST BE INDIVIDUALS
In most network marketing and multi-level marketing organizations, members must be natural people and not registered companies. This prevents tax issues, corporate litigation and multiple people owning a position by virtue of being a shareholder of a company. The most important issue is that the tax authorities have a clear target when collecting tax for one of your members.
9. DEALER AGE REQUIREMENTS
Does your network have an age limit? In many countries, the legal age for working is 16. If you are selling items such as wine or vaping equipment then the legal age for using such a product would need to be stipulated here.
10. MARRIAGE MEMBERSHIP RESTRICTIONS
One of the biggest pains in Multi-Level Marketing businesses is dealing with spousal disputes. There are also methods to game the system by stacking one spouse on top of the other allowing them to receive a double commission. I recommend that you stay out of this by only allowing one of the marriage partners to be a member.
11. LIMITED TO ONE DEALERSHIP
Your MLM members will try to sign up with multiple memberships to try and leverage more commission out of the company. This should be prevented with a strong clause.
12. DETERMINATION AND PENALTY FOR DUAL DEALERSHIP
What will you do if you find a person holding multiple positions?
13. MEMBERSHIP FEE
These need to be specified
Are your members restricted to a specific territory and if they fail to abide by the restriction, what is the penalty?
If you are not careful you will find your product popping up all over the world. I recommend that you specify the terms related to exporting of product.
16. SELLING PRACTICES
Courtesy, honesty and the responsibility on the part of an agent to replace damaged or defective goods and, if necessary, provide a full refund.
17. INDEPENDENT DEALERS
If you do not specify that your Multi-Level Marketing members are an independent business owner you could be deemed as the member's employer and be liable for minimum wages and all the other requirements of an employer.
18. FALSE INFORMATION
The company requires honesty. If the Multi-Level Marketing member provides false information, what will happen?
19. INDEMNIFY COMPANY NAME
You need to indemnify the company against the inevitable questionable activities of some of your MLM members.
20. COMPLY WITH RULES OF CONDUCT
Dealers must comply with all rules of conduct.
21. VIOLATIONS OF RULES OF CONDUCT
And if they don’t comply with all rules of conduct?
22. RESIGNATION (Return Policy)
You need to outline exactly how long your Network Marketing members have to return their starter kit and get their money back. It is also important to talk about the condition required for a refund and if there are any penalties
23. LIABILITY FOR UNPAID DEBTS
How will you deal with outstanding liabilities after a network member resigns?
24. RESIGNATION OF SPOUSE
This can be a real issue - a married couple has a joint membership and then they get divorced. At this point, there is a war as to who gets the team and it drags the entire downline into the fray. You need to think through this process and clearly outline the rules of engagement if one of the spouses wants to resign. It is also essential that you stipulate how the downline should be approached to limit the fallout.
25. INVENTORY REPURCHASE
Front loading is illegal. It is therefore necessary to have purchase and return policies to protect the MLM agent from being trapped with stock but also to prevent them from purchasing stock to achieve higher ranks and discounts.
Stipulate who is responsible for training a new dealer. If it is the sponsor's responsibility, then outline what the new network member should expect.
27. INDEPENDENT RELATIONSHIP
The sponsor should remain an independent entity from a downline MLM recruit. Blurring these lines can lead to disputes over who recruited who and who the resulting commission should be paid to. It is messy and should be avoided.
28. SUPPORT COMPANY SPONSORED EVENTS
This clause builds on the company’s expectation. The company is paying the network to perform certain functions. Attending functions should be expected and required.
Specify the terms and expectations for the dealer/sponsor relationship. Within the NetReady system, there are mechanisms that allow a recruit to rate a sponsor. This will provide a level of accountability but what you will be rating on should be specified here.
30. VIOLATION OF THE CHANGE OF SPONSORSHIP RULE
This is a big one. A dealer can sometimes have a disagreement with their sponsor. They resign and then sign up under a new sponsor. The income generated to the new sponsor should be going to the old sponsor and can lead to serious problems – especially if the dealer is very successful and time has elapsed before the old sponsor discovers the issue.
Remember, the company could have paid hundreds of thousands of dollars in commission to the incorrect upline. You are now having to refund the commission to the correct upline and recover this commission from the existing upline. You will then need to move the entire team under the original sponsor. As you can imagine, this is a disaster. You need some very stiff penalties for this type of activity.
31. ASSIGNING OR TRANSFERRING A DEALERSHIP
A dealer has an upline and if a dealership is moved this affects the income of the entire upline. It is, therefore, necessary to lock down how transfers happen and to whom they can be transferred to. Let’s say you have a person in team A that purchases a network from someone in team B. You can’t move the person and their downline out from under team A and you can't give the team B leader a second position as this will upset the upline in team B. Most companies do not allow a dealership top to be sold to an existing member of the network but, as you can see, this is a minefield and you need to think through the ramifications of your decisions for this clause.
32. SEPARATION OR DIVORCE
In the event of separation or divorce, it is essential that the parties do not drag the network into the fray. This clause provides the leverage to terminate a dealership and compress the network if the parties bring their dispute to bear on their team.
33. AUTHORITY OF A LEGAL DECISION
This is a standard clause to state that the rule of law is above the rules of the company.
34. DEATH OF A DEALER
When you have a big team this is bound to happen. How will you deal with this? Does the team simply get placed under the deceased distributor's sponsor? Can the dealership be willed to a relative or some other person? If so, how does the inheriting party get up to speed with the business? Does the company have the right to vet the incoming person?
35. PROPER PURCHASING OF PRODUCT
Sometimes dealers who are trying to hit targets will offer a product to members of their downline or other people's downline at discounted rates. This creates ructions in the teams if exposed. This clause specifies how and from where a dealer can purchase a product.
36. VOLUME MONTH
This outlines how volume is assigned (weekly, monthly, calendar month etc).
37. PRODUCT DISTRIBUTION
As mentioned earlier, front loading is illegal, but many dealers will purchase product in an attempt to hit the target and then return the orders the following month after earning a commission at a higher rate. This clause gives you the power to sanction dealers involved in this type of activity.
38. DEBTS OWED TO COMPANY NAME
This clause provides you with the power to take any outstanding debt from the member's commission account and to retain all commissions until the debt is paid in full.
39. DIRECTIONS FOR USE
The dealer is responsible for explaining the use of the product they sell.
40. PRODUCT SALES TO NON-DEALERS FOR RESALE
This should not be allowed
41. MODIFICATIONS TO PACKAGING
This should not be allowed
42. DISPLAY IN RETAIL OUTLETS AND OTHER ESTABLISHMENTS
This should not be allowed and should be strictly policed. Imagine dealer A spends time showing a customer how good a product is and then that customer purchases the product from some retail outlet. The result would be the loss of your dealer. You are either in Multi-Level Marketing or you are in retail. You can’t be in both.
43. DISPLAY OR SALE ONLINE
Your dealers should only be able to sell via a company replicated eCommerce store and never via any other third-party platform. Sales through Amazon, eBay and such sites can cause a lot of trouble within the network.
44. DEALERS PRIVATE OFFICES
Most companies allow their dealers to display their products in their private offices.
45. ADVERTISEMENT AND PROMOTIONAL MATERIAL
You need to control this tightly. If not, your members will create the biggest pile of garbage and drag your brand through the mud. All advertising and marketing material should be created by the company.
46. INTERVIEWS OR STATEMENTS TO THE MEDIA
Same as point 45
47. OFFERING PRODUCTS FOR AUCTION
Same as point 42 and 43
48. OFFERING THE BUSINESS OPPORTUNITY
This is an area where people can get the network marketing company into real trouble. They make claims and promises that have no basis in reality and will bring the authorities down around your ears. You will need proof of what your people are contractually allowed to say if you want to continue trading.
49. INCOME CLAIMS
See point 48
50. VIDEO/AUDIO TAPES
This clause is designed to keep the company's logo and name out of any videos made by members of the network.
51. TELEVISION, SATELLITE OR RADIO BROADCASTING
This should be managed by the company and should not be available to the network.
52. TELEPHONE BOOK LISTINGS
This clause specifies how a telephone directory listing should be formatted.
53. LOCAL LAWS
This clause stipulates that a dealer must comply with any and all local laws.
54. MUST RETAIL AND QUALIFY TO EARN
This clause is designed to ensure that the focus of all dealers in the network marketing team is on sales and that they are aware that sales are required to earn an income from the company.
55. NO OBLIGATION TO PURCHASE PRODUCT
Some team leaders will tell a recruit that they have to purchase a minimum volume every month. This is not legal and you should make sure that your people are bound by a specific clause in the agreement.
56. TRADE NAMES, TRADEMARKS AND LOGOS
These belong to the company and this should be clearly stipulated.
57. BUSINESS STATIONERY
Can a member create stationary and, if so, how do they identify themselves as an independent dealer? Also, are they allowed to use trademarks and logos?
58. REPRODUCTION OF MATERIAL
Some Multi Level Marketing companies have teams who produce training material and set up a business within the network selling this material to the entire network. This disrupts the company's income and moves the messaging to a group of people outside of the company's control. This should be prohibited!
59. PENALTIES FOR SUPPLYING NON-COMPANY NAME SALES AIDS OR MATERIALS
If you catch people doing this, how will you respond? If your response is clearly outlined in the agreement, you can act with no risk of legal reprisal.
Wow, that was tedious and if you got to this point, I’m really impressed! You can download a sample agreement here but please remember to get a lawyer to look it over.