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DIRECT SELLING INDUSTRY: The Structural Recruitment Problem

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Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.

In the first of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

Planning For & Avoiding “Structural Recruitment”

Background

Most Canadian provinces and territories require direct selling companies to obtain a licence in advance of making direct sales in that jurisdiction (some going so far as to require individual direct sellers to obtain a personal licence in addition to the company).

In most cases, these company licenses require the direct seller to obtain a positive ‘Advisory Opinion’ from Canada’s Competition Bureau (the “Bureau”) — essentially, Canada’s version of the Federal Trade Commission (“FTC”).

The Advisory Opinion is generally a good thing and confirms that the direct seller’s Compensation Plan complies with the multi-level marketing provisions of Canada’s Competition Act – which are codified “anti-pyramid rules”. Further, many in the industry regard a positive Advisory Opinion as the “gold standard” of Canadian direct selling compliance, leading some US-based direct sellers to wish that the FTC provided similar review!

2017 Competition Bureau Policy

In 2017, the Canadian Bureau began taking the position that Advisory Opinions would not be provided to any Compensation Plans that required a participant to recruit more than a single additional individual into the plan on the basis that these requirements constituted improper ‘compensation for recruitment’ and potentially illegal “schemes of pyramid selling” under section 55.1 of the Competition Act (the “Structural Recruitment Policy”).

While initially confined to Advisory Opinions for new market entrants, the Bureau has now started to ask established direct selling companies (even those present in the Canadian market for decades) to update their Compensation Plans in order to obtain new Advisory Opinions, where required for provincial licensing purposes (typically when the provincial regulator has determined that there has been a material change to the Compensation Plan).

Commentary

Accordingly, the Bureau’s Structural Recruitment Policy is expected to make waves and require significant changes to Compensation Plans and business strategies in Canada for all direct sellers.

Effectively, anywhere a Compensation Plan requires the recruitment of multiple downline distributors to advance in rank/level or achieve increased compensation, bonuses, or commissions (or even caps compensation for the distributor based on the performance of multiple ‘legs’), there may be potential problems in the future!

Fortunately, there are a number of alternative structures for plans which have been found to withstand the scrutiny of the Bureau’s Structural Recruitment Policy, and which can functionally approximate the original structure of the US Compensation Plan. Professional guidance from experienced professionals is a must to explore these alternatives to ‘recruitment-focussed’ Compensation Plans, which usually put customer-centric and sales-volume based changes front and centre.

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