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What is Multi-Level Marketing (MLM)? The Facts You Need to Know about the MLM Legality in India

Direct sales companies such as Amway or Herbalife can function through two business models: single level marketing or multi-level marketing. Multi-level marketing is a strategy which involves promoting the existing distributors to bring more distributors into the fold and the incentive for the old distributors is a percentage of their recruit's sale. The recruited distributors are called down like for the recruiter.

In companies like Amway that utilise this business model, the participants buy the products from the company directly and sell them to the customers to earn commission on the sale while they also earn apart from the income of their downline. Since the MLM company's revenue is derived from the distributors, an MLM has the characteristic of being more focused on distributor recruitment than sales to customers.

This business model has earned some ill repute due to the fact that most of the MLM distributors, the ones doing most of the work, either earn no or nominal profits while the distributors at the higher levels earn significant profits, forming a pyramid scheme.

The earnings of the fortunate few are then highlighted to attract more people to the business while the people are kept ignorant about the fact that the majority of the participants provide revenue for the company -which is the earnings of the company and select few participants- by suffering financial loses themselves.

Promising quick and easy money is illegal

The question of the legality of these businesses is often raised as some people find the pyramid scheme questionable. However, it has been concluded that not all MLM companies are illegal while not all are legitimate either.

In 1979, a United States judgment by an Administrative law judge in the case accusing Amway of functioning as an illegal pyramid scheme ruled in favour of Amway. It has lead to the establishment of Amway Safeguard Rule which is now the legal standards for the courts and other regulatory authorities to judge the legality of an MLM.

[Suggested Read: Objectives of Legal Aid in India]

Model Direct Selling Guidelines India The rules state that the business plan must focus on earning through the sale of products rather than recruiting new members and the MLM needs to be upfront that to earn the member will have to learn new skills and work up to 7-8 hours rather than promising easy money quickly. Furthermore, illegitimacy can be gauged by whether the company asks its members to buy the products in bulk or claims that members can earn a significant amount of money without selling, then such companies are not legal. The products also need to be legitimate ones, that can be sold to people at retail price at the open market and don't claim to give miraculous cured to health issues without approval by the medical association.

However, in India, it was only in 2016 that any legislation regarding direct selling companies came into being. Prior to this, any legal actions arising against MLM companies were based only on Prize Chits and Money Circulation Schemes (Banning) Act of 1978. This Act banned schemes for making quick and easy money "applicable to the enrollment of members into the scheme". This, however, was unsatisfactory to be made applicable to direct selling companies.

[Suggested Read: Right to Legal Aid and Access To Justice]

This confusion was solved by the release of Model Direct Selling Guidelines, 2016 by the Ministry of Food Affairs.

Must be a legal entity under the law, create contract and establish grievance redressal mechanism

Any MLM company in India must structure its business according to the 2016 guidelines and some of the requirements are given below:

  • The MLM company must be registered under the Companies Act, 2013, must have acquired necessary licenses, must comply with statutory formalities like income tax etc.
  • An undertaking must be submitted to the Department of Consumer Affairs within 90 days of the release of guidelines. Furthermore, a declaration of compliance must be submitted.
  • The direct sellers cannot be forced to buy more products than they can sell or pay any monthly subscription and neither can they earn a commission for recruitment of new sellers. Their remuneration can only be extracted from the sale of products.
  • There must exist a written contract between the company and the participant which must lay down the main terms including the repurchase policy, warranty policy, cooling off period etc. Also, the method of calculating remuneration should be explained properly.
  • A grievance redressal mechanism for the customers must be established by the company details of which must be provided to the consumer by the direct seller. The company is liable for all grievances arising out of the sale of products or services.
  • The state governments are also under orders to establish mechanisms to regulate and overview the functioning of these direct selling entities.
  • It is mandated for the company to provide their potential direct sellers with accurate and honest information about all aspects of direct selling including realistic remuneration, opportunities, rights and responsibilities.
  • The direct sellers cannot use unfair trade practices, claim unverifiable facts about the product or compel other direct sellers to buy an unreasonable amount of goods.
  • The company must maintain a record of business deals, products, prices, the direct sellers employed etc.

By

Ayushi Singh

1st Year, NLU Lucknow

The Employment Exchanges (Compulsory Notification of Vacancies) Act,1959 – Brief Notes

Employment Exchange as per section 2(d) is means a Government maintained an office or established a place for the place of furnishing and collecting information by keeping of registers or otherwise with respect to-

d) persons seeking employment

e) persons who seek to engage employees

f) vacancies to which persons seeking employment can be appointed.

It includes the public sector (Government or department of government, corporation, including a co-operative society, local authority) and private sector (where 25 or more persons are employed) establishments.

According to Section 4, the employer of a private or public establishment shall notify the vacancy to such employment exchange, however, the employer has no obligation to recruit employees through such employment exchange in case of a vacancy. This Act does not apply in the vacancies for the following employment-

(i) in agriculture and. horticulture in any establishment in private sector;

(ii) in domestic service;

(iii) where the period of employment is less than three months;

(iv) to do unskilled office work;

(v) connected with the staff of Parliament;

(vi) proposed to fill through promotion or by absorption of surplus staff;

(vii) which carries a remuneration of fewer than sixty rupees a month.

  • Under this Act, an establishment may be any place of industry, trade, trade, business or occupation. It covers both private and government establishments.

  • In case the local employment exchange has to be notified, it must be done so a week before interviews of the applicants may be conducted whereas for Central employment exchange, the notice must be provided 3 weeks before.
  • It is the responsibility of the employers of every establishment in public sector, under section 5, to provide information regarding any vacancies, present or prospective, to the exchange.
  • Failure to do so is by a fine up to Rs. 250 for the first offence and up to Rs. 500 for the continuous offence.
  • An authorised Officer of the government has the right to access any documents or records that the employer has and is required to furnish under section 5. The officer can carry out inspections at any reasonable time and acquire copies of said documents.

Building and Other Construction Workers Act,1996 – Brief Notes

This Act is applicable to Building and other construction workers. This main objective of the Act is to provide adequate safety, health and welfare measures to the workers employed in a Building or other Constructions.

This Act is very similar to the Factories Act, 1948. Building Worker means “a person who is employed to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work for hire or reward, whether the terms of employment be expressed or implied, in connection with any building or other construction work” as per Section 2(e) of the Act.

In the case of Lanco Anpara Power Ltd. V. State of Uttar Pradesh & Others, the construction workers were entitled to welfare measures under the Building and Other Construction Workers Act and not under the Factories Act,1948 was established.

  • The Act mandates that within 60 days of the act being applicable to the establishment, from the date of commencement or later, the employer has to apply for registration of the establishment to the registering office.
  • The relevant government fixes the hours of work for a building worker along with providing one day off per week. If work has been done on the day of rest, it provides for wage not less than the specified overtime wage under section 29 of the Act.
  • Section 31 prohibits people known to be deaf, have defective vision or tendency to giddiness from working in the building or construction work that might cause harm accidentally to the person or anyone else.
  • The employer must provide sufficient supply of drinking water, access to toilets, Creches, first aid, canteen and free of charge temporary accommodation within the site or near for the period of construction work.
  • It is the responsibility of the employer to carry out supervision activities on the site to ensure safety measures and prevent accidents.

Shops and Establishment Act,1953 – Brief Notes

The Department of labour regulates the Shops and Establishment Act. As it is promulgated by the state it differs from state to state. This act regulates the working of commercial establishments, charitable trusts, societies, printing establishments, educational institutions that are established for making a profit, premises where banking, stock or share brokerage, insurance is carried on. It also regulates time and conditions of payment, weekly holidays, wages for holidays, working hours, rest intervals, opening and closing hours, deductions from wages, leave policy etc.

Any shop or commercial establishment that has commenced operation must apply for a license to the Chief Inspector. Once the Chief Inspector is satisfied that all the requirements are complied with in the application, he will grant the certificate of registration to the occupier.

The certificate has to be renewed periodically and must be displayed in the Shop or Establishment. On the closure of the Shop or Commercial establishment, the occupier has to notify the Chief Inspector within 15 days and after reviewing of the request the name of the establishment shall be removed from the register and the certificate shall be cancelled.

  • Every State enacts a Shop and commercial establishment legislation and there are variations in the specifications of each Act.
  • The Act governs a varied range of aspects of business such as opening, working and closing hours, holidays, T&C of wages, structural regulations, fire precautions, maternity leave, overtime etc.
  • Department of Labour regulates the Act and it is extended from shops that engage in the sale of goods, retail or wholesale or in providing services to customers to charitable organizations, hotels, restaurants, entertainment venues etc.
  • Shops and establishments need to be registered within a specified duration of opening such as 30 days fixed by Karnataka.
  • A child under 14 cannot be employed while women cannot work during the night

The Trade Unions Act, 1926 – Brief Notes

The Trade Union Act,1926 primarily deals with the registration of Trade Unions. It also ensures that the rights of these unions are protected, their liabilities and funds are properly utilised. This Act is also applicable to the association of employers.

These are unions are protected from criminal or civil prosecution under this Act so that they can carry out their activities of working for the benefit of the employees or employers.

According to section 4, in order to register as a Trade Union, seven or more members of a Trade union must according to the rules of the Trade Union subscribe their names. Application for the registration of Trade Union Must be made to the Registrar. Once the Registrar is satisfied that all the requirements are of a Trade Union are complied with in the application will register the Trade Union and as per Section 8 of the Act, will be provided with a Certificate of Registration.

Certificate of registration can be withdrawn if the Registrar is satisfied that the certificate has been obtained by fraud or mistake, or the union ceases to have the requisite number of members or the Union ceases to exist or has contravened any provision of the Act.

  • The registration of the trade unions is not mandated but it is recommended as a registered trade union enjoy better benefits and rights under this act.
  • A registered trade union can acquire, sell or hold immovable and movable property, can sue and enter contracts.
  • According to the act, half of the office bearers of the trade union must be those employed in the same industry and half can be outsiders such as lawyers and social workers.
  • A union may dissolve according to its rules and within 14 days of dissolution, a notice signed by 7 members and secretary of the union must be sent to the registrar.
  • The fund of the union can be spent only on specific objects such as salaries, administrative expenses, defence or prosecution in any legal case for its rights, conducting trade disputes as well as compensating the loss caused by dispute, welfare of members etc.

The Factories Act, 1948 – Brief Notes

The main object of this act is to provide safety measures for the workers employed in a factory and also to promote their health. An establishment to be a factor must include fulfilling the following conditions-

a) A manufacturing process must be carried out

b) There must be a premise

c) Ten or more persons must be employed where a manufacturing process is carried with the aid of power. Where the manufacturing process is carried without the aid of power twenty or more persons must be employed on any day in the last 12 months.

Mobile units of armed forces, hotels, eating places, restaurants, mines, a railway running sheds cannot be termed as a factory.

An Adult (who has completed the age of 18), Child (who has not completed the age of 15 years), Adolescent (who has completed the age of 15 years but has not completed 18 years of age) can be employed in a factory.

  • No adult worker is allowed to work in a factory for more than 48 hours a week and is entitled to a holiday per week.
  • The structure of the factory must have proper lights, ventilation, drainage, temperature, drinking and bathroom facilities etc.
  • As a general rule, women cannot be employed in Night shifts but the act has been amended to allow night shifts for women employed in sectors like Special Economic Zones, IT sector and textiles while the employer must provide safeguards and transport.
  • The act provides that any inspection of a machine in motion can only be carried out by a trained male worker. Thus, it prohibits women workers to function on or near machinery in motion.
  • Under this act, penalties include imprisonment up to 1 year and/or fine up to 1 lakh rupees.

The Interstate Migrant Workmen (Regulation of Employment and Conditions of Services) Act, 1979 – Brief Notes

The Interstate Migrant Workmen (regulation of employment and conditions of services) Act is an Act which is enacted in order to protect inter-state migrant workmen from exploitation in states which is not their native state. The act creates a provision to employ workers from other states in case there is a lack of skilled workers in that particular state.

Following are the rights of inter-state workers:

-Equal or better wages for the similar nature of work performed by the local workmen or by adhering to the stipulations mentioned under Minimum Wages Act, whichever amount is more.

-Termination of contract after the lapse of time without any liability

-Displacement allowance

-Home journey allowance

-Medical facilities and proper accommodation free of charge

-Right to lodge a complaint with the authorities within 3 months of the occurrence of the incident.

  • All contractors that employ five or more interstate migrant workers have to be registered, need to provide details about the workers intermittently to the government and maintain a register of details of workers which may be made subject to government scrutiny.
  • Any case of serious injury or a fatal accident occurring during employment has to be reported by the contractor to authorities and next of kin of the worker.
  • The principal employer is responsible to appoint a representative in his place to look overpayment of wages and he is also responsible to pay the wages in case the contractor fails to do so.
  • The worker or in case of his death, his next of kin can apply for legal aid if he is a party to a dispute relating to the payment of wages, minimum wages or industrial disputes. The authorities will provide an advocate and take care of expenses if the application is approved.
  • Violation of the provisions of the Act attracts imprisonment up to 2 years and/or fine up to Rs. 2000.

The Apprentice Act, 1961 – Brief Notes

The main object of the Act is to provide practical training to the apprentice, to abide by the training standards prescribed by the Central Apprenticeship Council and to regulate the training programme of apprentices in the industry. A worker does not include an apprentice.

There are different types of Apprentices under the Act, they are,

  • Graduate or Technical Apprentice
  • Trade Apprentice
  • Technician Apprentice

For a person to be an Apprentice, he should be not less than fourteen years of age and must have the prescribed level of education and physical fitness. According to Section 13 of the Act, the employer has to pay a stipend to the Apprentice at the rate specified in the contract of Apprenticeship and not on the basis of piece work, also, no incentives or bonus shall be paid to the Apprentice.

According to Section 15 of the Act, an Apprentice cannot be made to do overtime work unless it is with the approval of the Apprenticeship Advisor if he is satisfied that such overtime work is for the benefit of the apprentice or in public interest.

The working hours and leaves will be as per the working hours and leave observed at such an establishment. According to Section 20, in case of any disputes arising between the Apprentice and the employer, it will be referred to the Apprenticeship Advisor.

  • Under this Act, a person can do an apprenticeship under any industry or establishment may it be the public or private sector. Government has specified certain designated trades that may be engineering or non-engineering, technical or vocational training.
  • A person may enter into an apprenticeship contract with the employer willingly, or a guardian may do so in case of a minor for the benefit of the minor.
  • It is the responsibility of the apprentice to master his trade, attend all sessions, obey all lawful orders of the employer, should work for the decided period and take care of his responsibilities under the agreement.
  • Within 30 days of entering into an agreement with the apprentice, a duplicate of the agreement must be sent to the Apprenticeship marketing consultant.
  • The employer is under the obligation of reserving training locations for SC and ST trainees, sufficient training and quality instructions, pay prescribed minimum wages and cannot make the apprentice work overtime without permission from the Apprenticeship advisor.

The Industrial Disputes Act, 1947 – Brief Notes

This Act deals with Industrial Disputes which means the disputes between employers and employers, employers and workmen, workmen and workmen which is connected to the employment, the term of employment or conditions of labour.

The main object of this Act is to investigate and settle industrial disputes along with ensuring harmony between workmen and employers, ensuring social justice, settling disputes between the parties by way of arbitration, conciliation, to prevent illegal strikes and lockouts, to promote collective bargaining, to pay compensation in case of retrenchment and lay-offs. It also aims at preventing victimization of the workmen by the employer.

Following are the Authorities to settle disputes under the Act, they are as follows:

a) Work Committee

b) Labour Courts

c) Courts of Inquiry

d) Conciliation

e) Arbitration

f) Industrial Tribunals

g) National Tribunal

  • Industrial Disputes may be of various types such as Interest disputes that may arise as deadlocks in negotiations in case of collective bargaining, unfair practices like discrimination or illegal strikes, grievance disputes over wages etc, and recognition disputes of Trade unions.
  • Section 22(1) of the Act prohibits the employees from going on strike without a 6-week notice to the employer or when proceedings are underway for that dispute. If the workers continue they can be punished with one month or more imprisonment and fine up to Rs. 1000.
  • Without State intervention, the parties may resolve disputes through collective bargaining or voluntary arbitration.
  • Settlement can also be reached under the influence of the State through the prescribed methods of setting up bipartite committees, compulsory collective bargaining, compulsory investigation, compulsory arbitration and mediation etc.
  • The government may appoint a Labour Court for adjudicating any industrial dispute and one person of appropriate judicial qualifications presides over it.

The Industrial Employment (Standing Orders) ACT 1946 – Model Standing Order Only – Brief Notes

The Model Standing Order is one which is adopted for the period commencing on the date on which this Act becomes applicable to an establishment and ends on the date on which the standing orders is certified. Sections 13(2), Section 13A and section 9 shall apply to the model standing order like it does to the certified standing orders.

These provisions shall not apply to an industrial establishment in respect of which the appropriate government is the –

a) Government of Gujarat

b) Government of Maharashtra

In case, where there are two categories of workers, namely, daily rate workers and monthly rated workers, but the certified standing order are in respect of daily rated workmen only, then model standing order may be made applicable to the monthly rated workmen.

  • The aim of the Act is to consistently provide a Standing Order for workers in factories and other establishments so that the employee is aware of the terms and conditions of the employment and can avoid exploitation.
  • The Act includes under its purview specific industrial establishments with 100 or more workers such as factories, railways and industrial establishments defined under the Payment of Wages Act.
  • The employer must get the Standing Order certified by the relevant authority of the Labour Commissioner, regional Labour Commissioner or an authorised certifying officer by submitting five copies of the draft standing order. Failure to do so attracts a penalty of up to Rs. 5000.
  • The order must contain a classification of the workforce, ways of informing the employee of holidays and working hours, provisions regarding termination and notice period, act or omissions regarded as misconduct, grievance redressal mechanism in case of mistreatment, the procedure for applying for leaves etc.
  • If an employee is suspended or under investigation regarding misconduct or any complaint, he is entitled to receive subsistence allowance.