Compliance and MLMs

Although multi-level marketing companies (MLMs) have been selling products and services via “distributor” networks for years, they have shot to prominence in the aftermath of the 2008 global financial crisis. In reaction to long-term unemployment or under-employment and systemic, structural changes to the labor market in many communities, non-traditional workforces such as the non-employee, commission-only participants in MLMs have become more common than ever before in the United States.

MLMs all determine their own compensation scheme and marketing and recruitment strategies, but they do share some similarities with the way they brand themselves and communicate. They operate in diverse industries, from nutrition and fitness/wellness to fashion apparel to jewelry to housewares, but they all are organized around a pyramid-shape commission system, where participants at the top recruit and make residual income from the participants below them on a sliding scale. These business also all rely heavily on worth of mouth marketing, both to sell the products or services on offer as well as to recruit new participants to fill out the levels of the pyramid.

Because of this operation style, MLM participants are expected to promote the products and the company itself very eagerly, often expressing the financial freedom and flexibility that the non-traditional working arrangement has granted them in unstable times and portraying the MLM company as a self-employment or entrepreneurship opportunity. These portrayals are particularly effective with the aid of social media and are prevalent in communities where social connection and employment consistency may be hard to achieve and sustain, such as stay-at-home parents, military spouses, or people who need to work from home for medical or personal reasons.

While some MLMs certainly do offer popular products and present an opportunity for participants to earn at least some income, studies have shown that most participants make no money from their involvement or even lose money due to sunken costs of inventory and personal products they buy and do not or cannot sell. Questions are rampant as to whether many MLMs are pyramid schemes, scams that purport to sell products or services but really just recruit members in order for them to recruit other members.   These schemes are often illegal and seen by many as immoral due to the misleading or even fraudulent representations made to participants to get them to spend money, join, and continue making investments.

  • As noted above, one root cause of the popularity of MLMs in the current economy is the struggle of many communities for economic opportunity post-financial crisis. Rural communities, for example, were especially hard-hit by the crisis and have not experienced a fully-realized economic recovery in the following years. To these individuals, joining an MLM appeals because it promises freedom for family time, quick income, and an “American dream” lifestyle that is otherwise far out of reach. This version of the MLM business model is laser-targeted to women in these rural areas who did not work before the financial crisis or don’t work now and seek economic freedom and community, as well as the allure of fun products such as nail decals or whimsically patterned leggings. These companies hawk a message of women’s empowerment and female entrepreneurialism matched with a do-it-yourself dream of financial success. Unfortunately, many of these people enter into these businesses by getting into debt and are never able to recoup their initial investment let alone make money for it that could justify the effort and hours spent. Most disconcertingly, many of the participants enter without any risk disclosure from the MLM company:  Multilevel-marketing companies like LuLaRoe are forcing people into debt and psychological crisis
  • This New Yorker piece goes into greater detail about the ways that MLMs play up the aspirational nature of their branding to recruit participants who join unaware of the attendant possible risks. In this case, companies such as DoTerra market aromatic oils to which all kinds of medicinal properties are ascribed without any regulatory or legal legitimacy to reinforce this. Participants in these MLMs often claim that their suffering from psychology, physical, and other medical problems have been almost miraculously addressed by using the products they are selling. The companies operate in a gray area of not giving medical advice but nonetheless suggesting that the products can help with health or lifestyle problems, creating an echo chamber where customers and participants assure themselves that they are both sick and able to be cured by buying expensive essential oils and other homeopathic, non-regulated products: How Essential Oils Became the Cure for Our Age of Anxiety 
  • Here’s yet another perspective on how female participants have been manipulated through MLM company marketing and social media to stake their financial well-being on unattainable goals of personal enfranchisement and economic success. In their efforts to reach toward these goals, participants often find themselves instead in over their heads, without proper training or sufficient expertise selling products that are not regulated, effective, or sometimes even safe:  How Women Making Men Rich Has Been Misbranded As Feminism
  • MLM participants aren’t only at danger of fraud, misrepresentation, and other risks from the companies for which they are sellers. In a commercial market run by independent sellers and conducted via person to person sales, often online and even on social media, sellers are vulnerable to disputes with customers. Buyers can be fraudulent or even predatory and sellers often find themselves out on both the product and their money. MLMs such as LuLaRoe often do not step in to intervene on behalf of their representatives, who have a consultancy relationship with the company and therefore are not afforded the same protections as employees might be. The style of selling is overwhelmingly casual, social marketing conducted via comments on pictures on social media or at parties, making direct salespeople especially susceptible to scammers:  Do MLMs Protect Their Online Sellers From Fraud?
  • Since 2012, hedge fund manager Bill Ackman has been embroiled in an ongoing dispute with Herbalife. Ackman has spent years shorting Herbalife in hopes that its stock price will be driven to zero by public and regulatory identification of the company of a pyramid scheme. Due at least in part to the publicity generated by Ackman and likeminded individuals, in 2016 Herbalife settled with the Federal Trade Commission to resolve their charges that the company had made deceptive disclosures to distributors who lost money. As part of the FTC settlement, Herbalife agreed to provide evidence that its products are being sold to actual customers and not just participants within the pyramid who are funding their own involvement and keeping the façade going to recruit new people underneath them. The standard this settlement sets for the MLM industry, should the FTC keep pace with investigation and enforcement priorities in this, could greatly complicate the way these companies operate: Herbalife Deal Poses Challenges For The Industry

To find out more about MLMs, how they have become so ubiquitous in today’s employment market, and the risks they pose to participants and the economy in general, check out the great piece from a 2016 episode of Last Week Tonight with John Oliver.