Direct sellers are normally classified as Distributors, Agents or (very rarely) Employees. UK trading schemes law requires a statement in the agreement of the capacity in which the direct seller operates. The expressions "agent" and "distributor" are notoriously misused, and the risks associated with unintentionally creating an employment relationship are serious.

The three expressions have the following meanings in sales:

  • An agent acts on behalf of another (the "principal"), so that contracts are between the buyer and the principal. The agent is normally compensated by way of commission.  
  • A distributor acts on his/her own behalf, and therefore buys and sells for his own account, bearing the risk of profit/loss. His compensation normally consists entirely of his profit margin.  
  • An employee operates under a contract of service whereby he works for an employer. His actions are normally, therefore, attributed to his employer; to an extent, therefore, he is an agent of his employer.

Usually, it is fundamental that the direct sellers be self-employed independent contractors, and an employment relationship is to be avoided for various legal and business reasons. The legal reasons usually include the increasingly complex and onerous regulation of the employer/employee relationship. The fundamental reason is usually the business need to release the entrepreneurial spirit in direct sellers, which, many feel, is better achieved via self-employment.

The classification of agent, distributor or employee, depends upon analysis of all the relevant circumstances. The parties' description is a factor to be taken into account, but only a factor. The substance of the arrangements is critical. It is feasible and increasingly common for a direct seller to be both a distributor and an agent in a hybrid arrangement. For example, some direct sellers operate ordinarily as distributors who buy and sell tangible products but as agents as regards services provided via the DSO.

The greater the extent to which the DSO controls the direct seller, the greater is the risk that the seller will be classified as an employee.

The classification is rarely a simple matter. The picture may be complex. There are often factors tending towards opposite conclusions. The judgment lies in weighting and evaluating them.

The different capacities give rise to different consequences. In essence, it is easier to impose restraints on an employee or agent (as he is an emanation of the principal's business) than on a distributor. On the other hand, European law, as transposed into national law of the member states of the EU, gives some agents rights which are collateral to, and sometimes more extensive than, those in written contracts.

Many DSOs wish to set the sale prices of their products, both on DSO websites and those of their direct sellers. DSOs may believe that the imposition of retail sale prices is inconsistent with distributorship status and unlawful under European and national competition law. This is superficially correct, but may be rather over-cautious. We are concerned here with "vertical" agreements, i.e. between parties at different levels in the supply chain, and the law is applied to a less restrictive standard than in the case of "horizontal" agreements, between competitors.

The DSO’s desire in this area also runs counter to the normal feature of distributorship, whereby the distributor buys for a fixed price but is free to sell at whatever price he chooses. Fixing prices does not of itself mean that the direct seller is not a distributor. A number of UK DSOs call their direct sales people distributors despite giving them no freedom at all to set sale prices.

DSOs might choose to permit direct sellers to sell at prices determined by themselves on their own web-sites, whilst continuing to fix prices on DSO-managed sites. This would certainly help to substantiate the argument that the direct seller is a distributor.

In short, there is no “one size fits all” answer to the direct seller status question.