“My wife and I have started a line of all-natural cosmetics. We launched our website a while back, and have received several inquiries from customers who love our products so much they want to become sales representatives for us.
Both of our mothers were ‘Avon ladies’ when we were children so we know a little bit about how this works. What are some of the legal issues we will face in setting up a ‘rep’ program similar to Avon’s?”
Back in the day, when the Baby Boomers were young, every neighborhood had at least one “Fuller Brush man” or “Avon lady” selling products door to door in their spare time. Interestingly, the model appears to be coming back with the increasing popularity of social media websites such as Facebook and LinkedIn. A lot of companies are looking to pay people for recommending and selling their products to their friends, neighbors, family members and acquaintances, and even established companies have “affiliate programs” where people can receive commissions for selling the company’s products on their own websites.
Here are some of the legal issues you will need to consider when setting up a “rep” program:
Decide Whether Your Reps Are “Agents” or “Distributors”. There’s a big difference. An “agent” generates orders for your products. You fulfill and ship each order, and collect the money directly from the customer. Then, every couple of weeks or once each month, you pay your rep a percentage of the sales made each month.
A “distributor,” on the other hand, buys your products directly from you, at a discount, then resells them to the customer.
The benefits of an “agent” program are:
- you know who your customers are, and can build a customer list, enabling you to sell more stuff directly to them;
- you know your customers are getting good service, because you are providing it.
The benefits of a “distributor” program are:
- you get paid up front, with fewer orders and returns;
- your rep handles any collection issues.
Make Sure Your Reps Are “Independent Contractors.” While you can set guidelines for your rep’s conduct (for example, you can prohibit them from making any statement about your products you haven’t authorized), you cannot – CANNOT – direct and control their activities. That makes them “employees”, requiring you to withhold taxes from all commissions and other amounts you pay them.
Your reps must be able to set their own hours. Also, “repping” your products should not be their only job. If you sense a rep is working full-time selling for you, you might ask them to form a corporation or limited liability company (LLC) for their business as legal entities generally are not considered employees for tax purposes.
Make Sure You Are Not Setting Up a “Franchise.” If you allow your reps to conduct business under your trademark, or require them to pay an upfront fee to become your rep, operate within an exclusive territory, or comply with detailed rules as to how and when they may sell your products, there’s a risk the Federal Trade Commission may view your rep program as a “franchise,” requiring you to comply with a complex set of disclosure and other legal requirements (http://en.wikipedia.org/wiki/Franchise_Rule).
Make Sure You Are Not Setting Up a “Network Marketing” Program. If, in addition to paying your rep a commission on products they actually sell, you also allow them to hire other reps and pay them a commission on all sales these “sub-reps” generate, you are starting to look like a “network marketing” program.
The “network marketing” label is generally bad for branding, as it is associated in the public mind with cheap, shoddy goods and aggressive sales tactics. If not carefully monitored, a network marketing program can degenerate into an illegal pyramid scheme (i.e. your reps will be making more from hiring sub-reps than they do actually selling your products). There’s also a greater chance that a rep will hire sub-reps without making 100% sure they are “independent contractors”.
Watch Out for the FTC’s “Endorsements and Testimonials” Rule. There’s a good chance your reps will want to advertise and promote your products on their websites, Facebook and LinkedIn pages, and other social media channels.
In 2009, the Federal Trade Commission adopted a detailed set of rules governing endorsements by consumers, experts, organizations and celebrities (www.ftc.gov/os/2009/10/091005revisedendorsementguides.pdf). While intended to apply primarily to professional product reviewers, the FTC guidelines prohibit your reps from promoting your products without disclosing that they receive money or other compensation for doing so.
Make Sure You Don’t “Cannibalize” Other, More Profitable Distribution Channels. Finally, keep an eye on your future growth plans. If it becomes possible for you to sell your products to department stores and other big customers through long-established retail distributors, they will not want to compete with a small army of individuals selling door-to-door or on eBay. They will want you to terminate your rep program, and that won’t be either easy or pleasant.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.