CONTENTS:

Introduction

How The Scam Works

• Starting Out: "If I Work Hard, I'll Make It!"
• "Independent Contractor?"
• The Training Program
• Prospecting
• Failure: It's All Legal!

Fighting Back

• Avoiding The Scam
• Prosecution & Legislation
• Networking
• Links and Resources

Contact Author

"Independent contractor?"

Scammer firms often illegally hire their reps as "independent contractors," which in essence means that those reps are (unwittingly) running their own businesses -- paying for their own training, advertising, marketing, insurance, all business expenses, taxes, etc. Note how I emphasized taxes? The inexperienced rep (and most are, remember) may not realize the real cost of "owning his own business" until he suddenly owes a hefty chunk of his meager first-year income to the IRS!

But is it really his own business?

NO, it is not. Scammers attempt to mislead the "independent contractor" into believing he's working for (or has even bought) a franchise.

In a franchise, someone else has taken the risks to launch a new product/service and establish a customer base. If you buy a Gas-mart (yeah, I made that up), you are going to sell their products and accept Gas-mart's limitations on your business. However, you are buying the franchise because it is an established name that has an immediate, viable market. The owner of a franchise will certainly want to develop his local clientele, but a basic clientele already exists. That's part of what the franchise owner paid for.

Independent contracting can be very rewarding, but anybody choosing to become an independent contractor (IC, for short) should research carefully and understand the risks as well as the rewards. An IC is starting a business from scratch and thus assumes all the risks. An IC takes these risks because he does not want a franchise's restrictions on product line, income, etc. An IC's earnings and clients belong solely to him; a franchise owner's clients belong to the franchise and cannot be taken with him should he decide to leave. An IC's income belongs solely to him; a franchise owner's income is impacted by sharing profits with the franchise (managers above him earn overrides). An IC chooses his product line from the open market; a franchise owner must sell the franchise's product line. An IC performs his work for as many clients as he wishes; a franchise owner performs his work for only his franchise. An IC funds expansion to meet demand; a franchise owner's expansion is limited to the franchise's funding.

As an "independent contractor" with a scammer firm, you may now own a "franchise" with no established name or immediate, viable market! The proof is in the statistics: franchise owners enjoy a success rate of over 80%. Instead, you now own a "business" whose average failure rate is between 80-95%. Remember, the scammer's objective is to minimize or eliminate its own employment and advertising costs by forcing you to shoulder them. I'll get into the marketing issues in the upcoming "Prospecting" section, but here you need to realize why they didn't hire you as an employee.

An employee enjoys certain privileges as well as limitations. Privileges include stability and security. An employee receives a salary or wage, taxes are paid by the employer, and firms with a certain number of employees are required to give employees certain benefits such as health insurance, sick leave, vacation pay, and the like. Limitations are obviously that the employee may perform his services for only that firm and accepts the income limitation inherent in that choice. A firm that hires employees shoulders the costs of employment. Scammers may aim to keep costs down or eliminate them altogether by misclassifying employees as ICs, who cost the firm no overhead and lessen the firm's legal liability.

Note that the firm doesn't ultimately determine your classification; different government regulatory agencies do, including:

• the Internal Revenue Service
• state unemployment compensation insurance agencies
• state workers' compensation insurance agencies
• state tax departments
• the United States Labor Department
• the National Labor Relations Board
• the Federal Trade Commission

Each agency has its own guidelines. The IRS guidelines on determining whether a rep is an employee or independent contractor are listed below (Source #1, Source #2). You are more than likely an employee if:

1. You don't have a business license.
2. The firm provides your training. (Contractors typically do not receive training by the hiring firm; they start "fully hatched".)
3. The firm's success or continuation depends on the service you provide. (Contractors should not perform work that determines the success or continuation of the hiring firm.)
4. The firm maintains a continued relation with you and does not hire you on a per-project basis. (Contractors are hired per project and bill for their services.)
5. The firm requires you to provide reports of your performance. (Contractors are hired to produce a final result, and therefore should not be required to submit interim reports.)
6. The firm requires you to perform your services for only itself and not other firms. (Contractors should not be restricted from seeking and performing other gainful work, even within the same industry.)
7. The firm exercises control over you through the threat of dismissal, which causes you to obey the employer's instructions. (An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications.)
8. The firm exercises control over how your work gets done (insists you use THEIR system for generating leads or income such as the “friends & family” list) and supplies tools (phones, desks, marketing materials, etc.) for the performance of your work. (Contractors are responsible for the completed job but have full control over the means.)

If you think you've been misclassified as an IC to your disadvantage, contest it. See the "Links" page on this site for a list of avenues you should pursue for recovery, including taxes, wages, and unemployment benefits.

Here is one such decision* against a firm that misclassified its employees as independent contractors:

"The court found that persons who are controlled or subject to control are employees... [...] In looking at the direct evidence of control or direction, or the right to control the worker, there is a considerable amount of control over the worker. The registration and licensing of the sales representative needs the approval of [XXXX]. Once licensed, the worker can only provide these services to [XXXX]. The worker is required to record and report their weekly activities to a [XXXX] Upline Leader. The worker is prohibited from performing services for other Security Brokers/Dealers. Training is provided by [XXXX]. An independent contractor normally has the knowledge, skills and experience to perform contract services. An independent contractor would not need to follow policies and procedures outlined in a manual specific to the services they perform. [...] The written sales agreement stated the 'independent sales representative was an 'independent contractor' and responsible for her own taxes.' This is not conclusive of being an independent contractor. As to the 'right to fire' there would be no liability on the part of [the plaintiff]. She could terminate her services with no liability to the company. She would lose business transactions under the control of [XXXX]. There would be no loss to [XXXX], as they would retain the business brought in by [the plaintiff]."

The last and perhaps most important reason for misclassifying employees as ICs involves legal liability. Many firms simply feign ignorance of a "rogue" rep's "misconduct" when a consumer brings a lawsuit or a regulatory agency brings an action, even when they explicitly (but verbally!) encouraged the often-ignorant rep to break the law. The FTC has this to say about independent contractors involved in direct sales organizations:

If you decide to become a [salesperson], remember that you're legally responsible for the claims you make about the company, its product and the business opportunities it offers. [...] When you promote the qualities of a product or service, you're obligated to present those claims truthfully and to ensure there's enough solid evidence to back them up. The Federal Trade Commission advises you to verify the research behind any claims about a product's performance before repeating those claims to a potential customer. Likewise, if you decide to solicit new [salespeople], be aware that you're responsible for any claims you make about a [salesperson]'s earnings potential. [...] If those promises fall through, remember that you could be held liable.

Did you get that? As an independent contractor, you are responsible for doing the firm's homework and ensuring that its claims about the itself and its products, services, and opportunities are true! An independent contractor's own ignorance in simply repeating what he's been told could earn him fines and jail or prison time while the firm pleads ignorance of his "unapproved illegal activities" and gets off with a slap on the wrist, if that.

In a nutshell, if your "business" does not exist apart from its relationship with your firm, then you don't have a business and are not an independent contractor. You're an employee of the firm and are entitled to all benefits that entails. The employment contract you signed does NOT determine your relationship with the firm and is only useful if it's obeyed. It will be useless if you act and are treated like an employee.

The inexperienced work force sought out by scammers is most often totally ignorant of the above, so they'll accept the position without understanding the consequences. If you can pay the "licensing / background check" fees (and don't have a felony), you're hired!

And there's a good chance you're being lied to again about the cost of basic licensing and background checks, which may include hidden training class fees... so on to the training program and its part in the scam!

* Case found in public records.