How to legally pay remuneration to partners of an MLM company?

Activity of MLM companies is still not legally regulated. Relations between the company and its partners are established by local acts - the partnership agreement and marketing plan, which determines the system of remuneration. If this documentation is prepared incorrectly, there is a risk of disputes between MLM company and distributors. In particular, we are talking about the risk of recognition the relationship as an employment. In this article we will look at the issues related to establishing specific requirements for MLM business partners and risk mitigation of a partnership agreement recognized as an employment contract.

How is the relationship between an MLM company and a partner typically formalized?

The purpose of network marketing company is to attract the maximum number of partners, that increases the profit of the company. MLM companies have some features, which makes it impossible to regulate labor relations with partners. Such specific features are:

  1. The number of people involved in the direct sales business. It is not profitable for MLM companies to conclude an employment contract with each person interested in the business of network marketing. The number of partners can be up to 100 000 and more, and for each of them the company will have to pay personal income tax (13%), make contributions to the Pension Fund, the Federal Compulsory Medical Insurance Fund, the Social Security Fund (15%).
  2. MLM company does not develop internal labor rules, accordingly, partners do not have schedule of working hours. Involved persons distribute and advertise company's product/service in convenient time.
  3. MLM companies that distribute, for example, natural cosmetics, do not provide partners with this product at their own expense for subsequent sale. Partners pay for a certain amount of product, receive instructions to sell it, and then act on their own. The employer is obligated to provide the employee with equipment, tools, technical documentation and other means necessary to perform their job duties (Art. 22 of the Russian Labor Code).

As we told in the article "The role of the partner agreement in the network marketing business", MLM companies conclude the partnership agreement with partners which is either marketing service agreement)[1], or the agency contract[2], or the distribution contract[3]. None of the existing large MLM companies have considered their partners as employees. For a deeper understanding of features of the network marketing business, let's refer to the doctrine. Nicole Biggart, expert in the field of management, economic sociology and network marketing, in her work "Charismatic Capitalism: Direct Selling Organizations in America" noted that MLM companies are not classical legal entities because distributors are legally independent, labor contracts are not concluded, respectively, there is no provision in the contract for a fixed work day and labor functions are not indicated. In addition, distributors tend to work from "remote" locations, i.e., they perform the distribution function remotely.

Risk mitigation for MLM company

It is necessary to prepare a partnership agreement and marketing plan very carefully and legally, taking into account what services or what kind of goods the company plans to promote. These documents set payment procedure to partners for the referrals brought to the company. We recommend MLM companies to include in the partnership agreement provisions of service agreement or to separate these two documents at all. The partnership agreement will contain general provisions and refer the partner to a separate document – service agreement. We will provide some advice on which provisions should be included in the above documents:

  1. The subject matter - the provision of marketing services, that is, advertising of services (works) or goods that the company sells;
  2. Providing and signing a certificate of services rendered (necessarily specify the term of the service and its price (can be set by a marketing plan);
  3. Providing a receipt if the partner is registered as self-employed (about how to send a receipt for receiving funds will be discussed below);
  4. The obligation of the partner to be registered as a self-employed or sole proprietor, as well as providing documentary evidence of such status;
  5. The provision on payment for services in agreement must refer the partner to the marketing plan, which describes in detail the conditions and procedure for payment of remuneration;
  6. Inclusion of a provision stating that the partner is not an intermediary between the company and the referral. Otherwise, the person registered as self-employed will not be able to apply this special tax regime (Art. 4 of the Federal Law of 27.11.2018 N 422-FZ "On the experiment to establish a special tax regime "Tax on professional income");
  7. The obligation of the partner registered as self-employed or sole proprietor to notify the MLM company about the renunciation of this status.

Features of interaction between MLM company and self-employed

The funds that the partner receives as remuneration are reflected on the MLM company's site. The balance in the partner's personal profile reflect the partner's right to demand from the company the payment of funds in the amount equivalent to the his balance. He or she exercises this right after clicking "Withdraw funds", then money are transferred from the company's business account to a partner's personal account.

To continue the question about the obligation of the partner registered as self-employed to provide receipts after getting the funds, it is necessary to note the service (mobile application) "My Tax", which allows sending a check to an electronic address in a few minutes. In this app, the self-employed person enters the data on the receipt of funds, generates an electronic check and sends it to the recipient.

A similar service is offered by Sber, "Own Business". It allows to accept payment both from individuals (by card number) and from legal entities or individual entrepreneurs (by card account details), as well as in cash. Also, when you transfer from individual by card number, details of which were entered when registering in the service, the check is generated automatically. In the case of receiving funds from a legal entity, the check is created manually and then sent to the client.

To summarize, we looked at how to regulate the relationship with a partner, what provisions should be included in a contract for rendering of compensated services and how the self-employed can comply with the requirement to provide a receipt to the company, spending a minimum of time on it. Drafting a user agreement, partnership agreement, and service agreement is a complex task that requires a clear understanding of the MLM company's goals and structure. That is why if you are planning to launch a start up in the MLM business the specialists of A4 will be able to prepare all the necessary documentation taking into account the features of your business plan.


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