The recruitment practices that keep distributor teams compliant

What to take away

Name the practices, then run them

Every practice below has an owner, a written record, and a check at onboarding. The distributor team is audited against them.

Read the income disclosure aloud. The recruiter reads the current statement to the applicant and hands over a copy. The FTC's advertising substantiation policy requires a reasonable basis for objective earnings claims before they are made. A published average is substantiated; a screenshot of one top earner is not.

Apply the FTC's 2018 MLM guidance. The FTC's business guidance on multi-level marketing asks whether compensation comes mainly from sales to people outside the network. Recruiters should point to product sales to outside customers. The 2016 FTC settlement with Herbalife, a $200 million payment, required the company to change how it paid distributors and to disclose what they earn.

Sign an independent-contractor agreement. The agreement states the distributor sets their own hours, pays their own expenses, and is not an employee. The IRS behavioral and financial control tests decide classification, so the paperwork has to match how the team works. A distributor who must attend a daily 9 a.m. meeting looks like an employee.

Form SS-8 is the IRS route to a worker status determination. Form 1099-NEC is what you file for contractor pay.

Initial the cost and autoship figures. The applicant initials the enrollment fee, the kit price, and the monthly autoship minimum. No figure enters the file that the company cannot back with a receipt. The FTC's Business Opportunity Rule, 16 CFR 437, lists the disclosure items for a covered seller: earnings claims, legal actions, and refund terms. Confirm whether your plan falls in its definition.

Screen recruiting videos. The FTC's endorsement guides and its Disclosures 101 for social media influencers apply when a distributor posts a recruiting video. A material connection has to be disclosed. Earnings claims in a video need the same substantiation as a printed brochure.

Ban the phrases that draw complaints. The script bars "unlimited income," "financial freedom," and "quit your job." It lists what a recruiter may say about rank, bonus, and payout timing. Quote the allowed language in the script so nobody improvises.

Vet lead vendors before buying. Ask for the vendor's source, consent language, and refund terms. The Telemarketing Sales Rule and the National Do Not Call Registry govern the calls that follow, and CAN-SPAM governs the email. Track lead cost per recruit against how many recruits reach qualified completion.

Log every contact in the CRM. Every call, text, and meeting gets a dated entry in HubSpot or Salesforce. If a state attorney general asks what an applicant was told, the record answers. DocuSign and Adobe Acrobat Sign stamp the signed disclosure with a date and time. Plans typically run $10 to $40 per user per month.

Run the 90-day retention review. Compare recruits who reached qualified completion with those who did not. Attrition in the first 90 days usually traces to a claim made at recruitment.

Classify before you onboard

A distributor is a 1099 contractor or a W-2 employee, and the IRS tests decide which. Behavioral control covers who sets the schedule and the sales method. Financial control covers who buys the samples, pays for the booth, and carries the loss.

The Department of Labor's 2024 independent contractor rule applies a six-factor economic reality test to the same question. A written agreement that says "contractor" while the company sets the schedule does not settle it.

Canadian distributors file Form T2125 for business income and expenses. The CRA publishes the deduction rules, and a licensed accountant applies them to the individual return. Nothing here substitutes for that.

Keep the evidence file

The recruitment file holds the signed disclosure, the signed agreement, the autoship acknowledgment, the script version, and the dated CRM notes. The GAO data reliability guide ties data quality to its intended use. That is the right standard for an income disclosure: the average must describe the population it claims to describe.

Log access, changes, and corrections to that file. The CISA logging guidance explains why event records are kept and reviewed. Logs show who changed a disclosure; they do not prove what a recruit earned.

Vet recruitment software the same way. The CISA software acquisition fact sheet covers supply-chain exposure, deployment, and vulnerability management. Add those checks to the purchase record.

A worked example: case 149

Case 149 involved a recruiter who told applicants they would earn back their kit cost in 30 days. The claim was not in the approved script and had no substantiation.

The fix was a retrained recruiter, a corrected disclosure, and a written notice to the affected applicants. The Direct Selling Association's Code of Ethics expects members to give prospects factual earnings information before enrollment, which is the same correction at company scale.

Common questions

What must a recruiter disclose before someone signs?

Startup cost, the monthly autoship minimum, and the current average earnings of active distributors. Hand over the income disclosure statement and keep a signed copy. The FTC substantiation policy sets the standard for any earnings claim made during recruitment.

How do I know if a distributor is a 1099 contractor?

Apply the IRS behavioral and financial control tests to how the person actually works, not to the contract heading. If the company sets the schedule and pays the expenses, the role looks like employment. A licensed accountant or attorney should review the classification.

How often should the recruitment file be reviewed?

At onboarding, at 90 days, and whenever a claim or script changes. Attrition in the first 90 days often traces to something said at recruitment. Correct the public material and the applicant record when a claim is found to be unsupported. Keep the IRS Form SS-8 determination in the same file if status is ever questioned.

Where do state rules come in?

State attorneys general enforce their own income-claim and disclosure statutes, and those vary by state. Confirm the current requirement with your state attorney general's office before running a campaign. The distributor recruitment guide covers the enrollment paperwork that follows.