Business buzzwords are always being reinvented. A more recent term that is a reinvention of something that has been around for decades is Multi-Level Marketing (MLM). MLM is a system where a company representative earns a commission for the products they sell on behalf of a company.

Perhaps you’ve seen products being pushed or advertised by your friends, or maybe they’ve even tried to get you to join the business as a salesperson as well. There are skin care products, vitamins, cooking equipment, essential oils, and more. All these goods are being sold to friends and family.

The issue is, are these MLM companies pyramid schemes or legitimate businesses?

Multi-Level Marketing

Multi-level marketing also goes by the name of referral selling or direct selling. An existing company hires you to sell their products to individuals. There is usually a joining fee along with an extensive lock-in contract. However, the things to look out for in a MLM is whether they provide commissions for just the product or sign-ups as well.

If there are commissions for signing up new members, this is likely to be a pyramid scheme.

MLM Pros and Cons

The mantra that is normally put forward is that you can be your own boss. This is semi-true as you act like an independent contractor. Despite this, there still may be commissions to be earnt or loss and targets to reach. Ultimately you don’t have control over the direction of the business nor complete control over profit and earnings. On the other hand, you will have the advantage of not needing to create a product or come up with a new idea. But, you may be left with hundreds spent on a product to sell, all while it gathers dust in your house.

Pyramid Scheme

In 2018 there have been 286 reports alone of pyramid schemes. Among these reports, 28% are reports of financial loss. The two most significant ways this happened was through social media or in person. The distinguishing feature of a pyramid scheme is the need to recruit more people. A pyramid scheme survives on new members recruiting more members. Each time someone joins the cause, they have to pay a fee. The allocation of this fee and income ends up being spread thin with the majority going to a few high ranking people at the top. The products are usually hard to sell and are of low quality.

What is legal?

Both a pyramid scheme and multi-level marketing involve the sale of a product. A referral selling scheme (MLM) is where a product is sold and a commission is made. A pyramid scheme relies on the participation and joining fee instead even when a product is sold. This is per the Competition and Consumer Act 2010 (Cth) Schedule 2 chapter 3 div 3. To determine whether there is a MLM or pyramid scheme depends upon whether the business is leading the new members to believe they will eventually gain a share of the recruitment fee if they recruit new people. The reasonableness of the price of the joining fee along with whether the emphasis is placed on the joining fee or selling of the product.

Your own Business

If you decide the MLM life is not for you, then you could always be a sole trader. This gives you the advantage of being your own boss without having to deal with joining fees and commission targets. You can then set out your own supply agreements.

Conclusion

As always, the choice is yours. Whether you want to enter into an agreement and use an existing product or create your own business as a sole trader is up to you. Just make sure that the contract you enter into isn’t illegal, or filled with complex termination clauses and hidden fees and penalties. Likewise, double check that the Multi-level marketing company isn’t actually a pyramid scheme

Have more questions? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Justin Pasqualino

Justin is a legal intern at LawPath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.