Contractors' Questions: Is this a pitch to work via a Pyramid-style scheme?

Contractor's Question: A temporary labour ‘solution’ that is based overseas (outside the EU) but which serves the UK contractor market via an affiliate company over here has approached me with a lucrative-sounding proposition.

Although potentially interested, I’m concerned about the lack of details on their website and by the fact that they will only address my queries over the phone, rather than in writing.

Also, it seems the main way to achieve the high income they assure me I’ll make with them is by me referring other contractors to them. There are a few other benefits and cash payouts they offer, but isn’t this referral model akin to a pyramid scheme? I doubt I’ll have the time to generate leads for the provider and if I don’t, or the provider can’t convert them, do I risk not getting the sums they promise? I’d really like to know how the scheme would likely work, in practice. I obviously want to avoid any financial pain if I proceed.

Expert’s Answer: Firstly, you are not alone in having these questions. A few contractors have approached us with queries about the financial make-up of this type of arrangement, which I will address generally and for guidance purposes only. You should consult a specialist compliance adviser and provide such a professional with the specific details of the scheme you are referring to, if you want advice that you can rely/act upon.

However, having looked into these types of models on your behalf it is clear that they can indeed be a thinly veiled pyramid scheme, insofar as the cash you are being told you will derive from your involvement in the scheme is typically a slice of the fees paid by scheme members who are lower down.

So I agree with you that this type of model appears to be a pyramid scheme which, in principle, is any business structure where users can make more money from referring people into the structure’s next tier than they can directly (from its other payouts).

For example, if you get a fixed fee for your own contribution, but a percentage of all referral fees below you in the pyramid, on paper you might expect a large referral income in a relatively short space of time. In practice, the number of people you would need to refer can become very large very quickly - making it all but impossible to earn substantial amounts from your own referral base.

In arrangements such as the one you are considering, the contractor can be asked to pay up to a significant chunk of their earnings directly to the provider and, in return, receive certain benefits. Although this package of benefits, often containing insurance, may sound attractive, its contents would normally cost no more than a few hundred pounds a year in total if you purchased the items yourself, independently of the scheme.

As you identify in your question, the main financial reward for joining the type of arrangement you are exploring often comes if you refer new members, in which case you receive a ‘kickback.’ Let’s call this payout ‘Cash Reward A.’ In addition with such schemes, the contractor is usually promised ‘Cash Reward B.’ This is, in effect, a ‘loyalty discount’ for remaining in the scheme for a long period of time.

Invariably, the values of these two Cash Rewards account for much of the income promised. The remainder usually comes from ‘Cash Reward C,’ which is quite misleading in our view because, typically, it derives from predicting that the contractor's net take-home pay will grow over time. It might not, or it might well do – even, of course, if the contractor chooses not to sign up to the scheme.

Overall, it is unusual to see referral fees like ‘Cash Reward A’ included as a primary factor in a breakdown of your total income from using a provider, and we recommend you consider steering clear of such an offering. The other ways to feed your income on such a scheme (likely to be Cash Rewards B & C) don’t inspire much confidence either, at least not from the contractors we have spoken with.

These hard-working professionals told us they were seeking a legitimate interim management consultancy, a temporary/contractor recruitment specialist or a fixed-term placement agency. The overwhelming majority of these three types of established and respected business models don’t estimate your achievable income with them by adding the value of your own organic growth as a contractor to ‘kickbacks’ from pyramid-style referrals.

The expert was Adam Home, a manager at cash recovery specialists Safe Collections.

Editor's Note: Further Reading -

All that glitters overseas to IT contractors may not be gold

Contractors' Questions: Is this tax scheme too good to be true?

All that glitters to IT contractors may not be gold

Profile picture for user Adam Home

Written by Adam Home

Adam Home is Managing Director of UK & International Debt Recovery Specialists Safe Collections. The company, founded in 1984, has more than three decades of experience in recovering unpaid invoices and contractual arrears anywhere in the world.
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