The promotional products industry has long relied on self-employed independent contractors to fill its sales ranks and serve other functions. But a new law in California could threaten that model by requiring 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, health insurance, minimum wage, overtime pay, 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, which took effect January 1, 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, Los Angeles Magazine reported, alleging AB5 unconstitutionally restricts free speech and the media. 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.

While 50 professions or types of businesses are exempt from the law (including doctors, insurance agents, lawyers, real estate agents, hairstylists and a variety of creative professionals), it remains unclear whether the promotional products industry will be affected. “Promotional products” isn’t specified in the legislation, but some “direct sales salespersons” and “marketing professionals” are declared exempt depending on how they’re 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,” says Brugger. “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.”

In the wake of the backlash, Assemblywoman Gonzalez took to social media to defend the bill and clear up misconceptions. In a post on Facebook in January, she wrote “Was it perfect? No. We said that as we were passing it last year.” However, she wrote, it was necessary to protect companies and clarify a 2018 California Supreme Court ruling that created a new set of rules – the ABC test – to classify independent contractors. According to Gonzalez and the Franchise Tax Board, in 2019 the state paid $118.5 million to more than 640,000 people designated as independent contractors or self-employed who filed for an income tax credit designed to supplement low or moderate incomes. Gonzalez says many of those workers are misclassified.

“Misclassification has been a huge problem in California affecting hundreds of thousands of workers,” she wrote. “And it cost all of us.”

“Companies that aren’t big enough to have their own people but still want a presence in California may lose their staff in the state.” Mike Brugger, Fully Promoted

In the wake of legislation, however, companies have been left scrambling to interpret the regulations, and many workers are facing the possibility of losing steady work or flexibility in when and how they work.

And it’s not strictly individuals that could fall under the purview of the law. 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 similar or the same services to other clients, and that the vendor is providing its services directly to the contracting business and not its customers.

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’re paid is a big concern of mine,” Brugger says. “Many people work for multiple distributors and suppliers. These people could be stolen from our industry. Companies that 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 says. “If I’m selling here 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,” says Ray Titus, CEO of United Franchise Group. “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 says. “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 reposition the law toward the gig economy.”

“Misclassification has been a huge problem in California, affecting hundreds of thousands of workers. And it cost all of us.” Lorena Gonzalez, California Assemblywoman

Memo Kahan, president of Top 40 distributor PromoShop (asi/300446), says 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 says. “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 for this article.)

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,” says 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.” 

John Corrigan is a senior writer for Counselor. Tweet: @Notready4Radio. Contact: jcorrigan@asicentral.com