Is It Illegal to Have Distributors Earn Income by Referring Others?

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We are often asked by executives starting a network marketing company if they can have consultants earn income by referring others and if it’s legal.

Effectively, multilevel marketing is the sale of products through person-to-person, “referral” marketing. It is very illegal to pay headhunting fees, i.e., paying commissions merely for distributors to recruit other distributors. However, if a distributor builds a sales organization and receives override commissions on the sales activity of those in his or her downline, this is the essence of multilevel marketing, and is quite acceptable, assuming all other elements of legitimate direct selling (vs. pyramiding) are in place.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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