California’s New Rules on Independent Contractors Could Impact Promo Firms

California has adopted a new method to determine whether a worker is an independent contractor or an employee, potentially changing the business model many distributors rely on.

The California Supreme Court last week ruled in favor of an “ABC test” that requires a company to establish three factors to show a worker is an independent contractor, The New York Times reported.

The factors are: Businesses must show the worker is free from the control and direction of the employer; performs work that is outside the hirer’s core business; and customarily engages in “an independently established trade, occupation or business.”

States such as Massachusetts and New Jersey have already implemented the ABC test, but California’s ruling uses a stricter adherence to Part B, requiring that all of the work is performed outside the usual course of business regardless of the location where the work is performed. Previously, California followed an 11-factor Borello Test, which primarily focused on whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service.

The ruling came in a class-action lawsuit against Dynamex Operations West Inc., a package and document delivery company. The suit charged that Dynamex misclassified its delivery drivers as independent contractors rather than employees.

For companies like Uber and Lyft, this may upend their entire business model. If they have to classify their drivers as employees, they’ll have to follow minimum-wage and overtime laws, while subsequently paying workers’ compensation, unemployment insurance and payroll taxes.

For the promotional products industry, distributors often work with salespeople as independent contractors. Distributors provide the sales pros the tools necessary to make the sale, but leave them to handle business. In the end, once the sale has gone through, there is some sort of profit split between salesperson and distributor.

Josh Frey, owner of On Sale Promos and The Swag Coach Program (asi/340317), argues that distributors may not be affected by the California ruling. For example, Swag Coach trains aspiring sales professionals and coaches them on best business practices. The trainees and Frey then partner with Top 40 distributors like Proforma, HALO and the AIA Corporation. The sales pros handle the front end of the business, while the bigger entities deal with the back end, such as production and shipping.

However, all the trainees run their own businesses with their own company names, and they’re not beholden to the bigger entities. “We’re truly independent – we are not W2 employees of another business,” Frey says. “There are no requirements in terms of what you do and how you do your business provided you don’t misrepresent or do something illegal. Their course of business is to not deal with the end-user; that’s where we come in.”

As the lines continue to blur, Jordy Gamson, co-owner of The Icebox (asi/229395), prefers to avoid the issue entirely by hiring only full-time employees. Since launching his Atlanta-based distributorship17 years ago, Gamson has refused to bring in independent contractors because he wants his company to own the customer relationship entirely.

Jordy Gamson

In addition to referrals, the company receives new leads by having its business development and marketing team devote resources to discovering new opportunities. “We’re the one that gets the customer interested in the first place,” Gamson says. “Of course, we still have to service and consult with them, which is what our sales team does. It’s a tag-team effort.”

According to Frey, the California ruling could actually help the promotional products industry get fresh blood. If the gig economy is threatened, perhaps millennials who prefer setting their own schedule and operating under their own terms will seek opportunity in the industry.

“We’re all independent business owners whether we outsource the back office or not,” Frey says. “Our business is perfect for millennials who want the ability to pick up and work from anywhere.”