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News January 17, 2020

CA Gig Worker Law May Affect Promo Industry

Two areas of concern are securing national accounts and splitting sales reps.

By  John Corrigan

As of Jan. 1, a new California law requires companies to treat independent contractors like employees if their work is a regular part of the company’s business.

Assembly Bill 5, commonly referred to as the “gig worker” or “gig economy” law, was designed to provide freelancers and independent contractors with more stability, giving them access to workers’ compensation, unemployment and health insurance, minimum wage and overtime laws, paid sick days and other protections. Democratic Assemblywoman Lorena Gonzalez, who authored the bill, has said AB5’s goal is to protect workers who are being misclassified as independent contractors rather than employees, specifically those who work for Uber and Lyft.

Backlash against the legislation has come from both companies and workers in various industries. Uber and Postmates have filed a lawsuit, alleging AB5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms and those who make a living through them, The Los Angeles Times reported. Two groups representing freelance writers and photographers also filed a lawsuit in federal court in Los Angeles alleging AB5 unconstitutionally restricts free speech and the media, Los Angeles Magazine reported. So far, only independent truck drivers successfully challenged the law and received a temporary injunction because they are subject to federal statute, a Los Angeles judge ruled.

Over 50 professions or types of businesses are exempt from the law, including doctors, dentists, insurance agents, lawyers, accountants, real estate agents, hairstylists and a variety of creative professionals.

It remains unclear whether the promotional products industry will be affected by AB5. “Promotional products” isn’t specified in the legislation, but some “direct sales salespersons” and “marketing professionals” are declared exempt depending on how they are paid. Mike Brugger, president of Top 40 distributor Fully Promoted (asi/384000), urges business leaders in California to contact their state representative and express how the law will hurt their business. “This law will affect promotional products companies in California and people wanting to do business there,” Brugger told Counselor. “It has already held me back from landing a national account that has offices in California. I’m not doing anything additional at this time because I have to check with our legal department and see the latest news as our industry should be exempt.”

AB5 expands on a ruling made in a case that reached the California Supreme Court in 2018, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles. Instead of the previous, more flexible multifactor inquiry for determining whether independent contractors were properly classified, the California Supreme Court ruled that companies must use a three-pronged test (aka the ABC test). This test assumes that workers are employees unless the company that hires them can prove the following three things:

  1. The worker is free to perform services without the control or direction of the company.
  2. The worker is performing work tasks that are outside the usual course of the company’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Some states already use some form of the ABC test for purposes of qualifying for workers' compensation, unemployment insurance, wage and hour entitlements or for withholding taxes. In addition to the ABC test, independent contractor status for those that are exempt from AB5 will still be evaluated under the Borello test, a multi-factor analysis that focuses on economic realities. The most important factor is the hiring entity’s “right to control” the contractor (akin to Part A of the ABC test). The courts also consider other factors, many of which are similar to the ABC test. But, unlike the ABC test, not every factor has to be present when the Borello test is applied.  

In California’s case, the ABC test holds companies to a higher standard in proving workers are independent contractors than was previously used. By reclassifying independent contractors as employees, companies would be forced to alter their budgets in a major way. For example, Vox Media’s SB Nation has already fired all of its California contractors, as well as contractors from other states who wrote for California-based websites, and created a few new employee positions to run the California sites.

In addition to companies ceasing relationships altogether, potential downsides for workers include losing flexibility in when and how they work. More than 2.8 million Californians earned income in 2016 for nonemployee work, including freelance projects, independent contracting and gig-economy labor such as ride-share driving, The Wall Street Journal reported. That is nearly 14% of workers in the state who filed taxes or received tax documents from employers and clients.

Businesses that hire other businesses (i.e., vendors) are also in danger of liability under AB5. A vendor’s employees could claim they are also the employees of the “contracting business,” under the bill’s definition, unless the contracting business can satisfy 12 requirements in the statute, according to The National Law Review. Some of these requirements include: proof that the vendor provides the similar or same services to other clients, the vendor providing its services directly to the contracting business and not its customers, and the vendor advertising to the public.

Headquartered in West Palm Beach, FL, Fully Promoted has franchisee-owned locations in San Diego, Los Angeles County and pockets of Northern California. “Sharing salespeople and how they are paid is a big concern of mine,” Brugger said. “Many people work for multiple distributors and also multiple suppliers. These people could be stolen from our industry. Companies who aren’t big enough to have their own people but still want a presence in California may lose their staff in the state.”

Another concern, Brugger added, is working with national accounts. “I would be leery of selling into California,” he said. “If I’m selling here and my locations and their sales reps also sell in the state, I fail Part C of the test. That discourages all the Fortune 500 accounts that some of the top 20 in our industry work with. Now we have to change how we all do business.”

Fully Promoted is one of multiple affiliated brands, collectively known as United Franchise Group, which encompass approximately 1,600 franchisees in 80 countries around the world. AB5 contains no exceptions for franchisor/franchisee relationships and could potentially require reassessment of many such arrangements. “We have to fight this to protect our franchise owners,” said Ray Titus, CEO of the United Franchise Group brands. “I understand what they were trying to accomplish, but the unintended consequences of this law are crazy.”

Titus argues that franchisees have to get business licenses in California; therefore, how could they be considered business owner and employee? On the one hand, the state of California assesses taxes to the franchisee as a business owner. Now the state could also assess taxes on those same business owners as employees, even in the absence of taking a salary. Plus, there’s uncertainty as to whether AB5 applies retroactively.

“The law can’t conceivably go forward the way they have it structured,” Titus said. “It would hurt California incredibly. Most franchise companies would stay away from doing business in California. I don’t consider our franchisees’ employees to be gig workers. Just make the law toward the gig economy.”

Kamran Mirrafati, partner and litigation lawyer with Foley & Lardner LLP, works in the firm’s Los Angeles and San Francisco offices. A member of the firm’s labor and employment practice, he has been fielding questions from clients regarding AB5 for months now. His best advice also comes in a three-pronged process.

The least risky approach is to reclassify your independent contractors as employees. “If you only have a few workers, it won’t change your whole business model,” Mirrafati said.

The riskier approach is to reconfigure your operations to minimalize liability. Part B of the ABC test requires work performed by the contractor to be unrelated to the main purpose of your company. For example, if you’re a bakery and you hire an electrician to fix your oven, you’re in the clear. But if you bring in contractors to be your cake decorators, those workers would be classified as employees under AB5. “Companies are likely to litigate this particular issue in a lot of detail,” Mirrafati said.

The riskiest approach is to just wait and see. “The risk of a class-action lawsuit is pretty high right now,” Mirrafati said. “There is so much heightened scrutiny on independent contractors, companies are more likely to get hit with a suit and have those arrangements questioned. Judges will be hypercritical because they’re thinking differently. If a contractor was correctly classified five years ago, that arrangement may not be okay now.”

Roughly $20 million in additional funding in California Governor Gavin Newsom’s proposed 2020 budget will go toward enforcing Assembly Bill 5, San Francisco Examiner reported. That includes $17.5 million for the Department of Industrial Relations to “address workload” associated with more workers using workers’ compensation, and “investigations of labor law violations” related to worker status, wage claim filings and workplace health and safety inspections. It also includes $3.4 million for the Employment Development Department to train staff and administer the ABC Employment Test as mandated under AB5, and to conduct hearings and investigations on workers’ status. The Department of Justice will also net $780,000 to address increased enforcement actions expected under AB5.

“All it takes is one unhappy sales rep to go to an attorney,” Brugger said. “People interpret the law in different ways, but it was not designed for us. If Uber and Lyft are arguing they’re simply an app that connects people, well, we have technology platforms in our industry also. What’s not to say if they lose, we won’t be affected with our industry platforms?”

Memo Kahan, president of Top 40 distributor PromoShop (asi/300446), said the law is intrusive and extremely burdensome. However, at the urging of his attorney, his Los Angeles-based company has been preparing for such legislation, making sure most of the workforce consists of employees. “We’re at a disadvantage in this competitive environment because most people have independent contractors, especially larger companies,” Kahan said. “Now the competitive landscape will become more leveled. The commission structure has to change, and companies won’t be able to afford as many people as they do now.” Several Top 40 distributors declined to comment.

Because California’s economy is larger than any other U.S. state, legal and political developments tend to have a ripple effect across other states and at the federal level. Lawmakers in New York and Illinois have already considered introducing legislation similar to AB5.

“No matter how you feel about Assembly Bill 5, the more alarming trend is government at all levels increasingly looking to businesses as a form of social net,” said Bret Bonnet, president of Top 40 distributor Quality Logo Products (asi/302967) in Aurora, IL. “Some of the laws in recent years seem less about social justice or balancing social inequality and instead about offloading budget shortfalls, putting the burden on small businesses. Sadly, this is a trend that we’ll continue to see more and more until cities/states make the tough decisions necessary to become fiscally responsible.”