Under the FTC Act (the “Act”), the FTC tasks brands, influencers, and possibly their agencies and PR firms with ensuring that influencers disclose any "material connection" to a brand with which an influencer has a relationship. It’s basically a social media form of “truth in advertising,” to assure consumers are aware when an influencer is receiving some sort of compensation or other value from a brand for positively discussing its product or service, as opposed to the influencer merely giving their opinion, in a shout-out or otherwise, about that product or service.
However, the Act makes it clear that the brands are ultimately responsible for what their influencers, agencies, and PR firms do on their behalf. The view seems to be that more brand control provides the FTC with more security about influencer endorsement disclosures.
Under the FTC Act (the “Act”), the FTC tasks brands, influencers, and possibly their agencies and PR firms with ensuring that influencers disclose any "material connection" to a brand with which an influencer has a relationship.
But, a recent unanimous, landmark California Supreme Court (the “Court”) decision may change how much power a brand can exercise in taking that responsibility. Dynamex Operations West, Inc. v. Superior Court interpreted certain provisions of California wage and hour law, finding that too much control by a business can turn an independent contractor, such as an influencer engaged by a brand, into that business’s employee, with all the HR and other financial burdens that go with it.
In Dynamex, the Court threw out the 30-year-old test for determining whether a person rendering services to a company is an employee or an independent contractor. The Court replaced it with a new, three-prong test, which makes it significantly more difficult for companies to prove that an independent contractor relationship exists with an individual with whom it has some sort of business relationship.
From now on in California, anyone providing services to a company is presumed to be an employee, unless the business can demonstrate that the individual satisfies all three of these prongs:
- The individual is free from the control and direction of the company that hires or engages them in connection with the performance of the work, both per the contract with the hiring/engaging company, and in fact;
- The individual performs work that is outside the usual course of the hiring/engaging company’s business; and
- The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work the individual is performing for the company.
Where a company cannot prove one or more prongs of the test, it faces significant liability for misclassifying its workers as independent contractors. Misclassification now carries statutory penalties of $5,000 to $15,000 for each "willful" violation, and can also expose the company to additional penalties and fines.
The third prong shouldn’t prove problematic for brands, as influencers are “customarily engaged” in providing various types of endorsement services to brands, including their own, under their own separate business/entity.
The second prong, however, could create an issue for brands. The Court used the example of a retail clothing store hiring a plumber to fix a leak as a situation that would satisfy this second prong. Plumbing clearly falls outside of the usual course of a clothing store’s business.
A brand could argue that brands rarely, if ever, employ full-time influencers, and influencers are in the business of providing independent influencer services to others.
However, part of the usual course of a brand's business is promoting and publicizing their goods or services, increasingly using social media — the same services for which brands engage influencers.
But, it’s the first prong — the individual being free from the hiring/engaging company’s direction and control, both under their contract with the company, and in fact — where this new California law can create brand-new problems for brands.
Recent consent orders detail the type of control the FTC expects brands to use with influencers, including:
- Provide each influencer a clear, written statement of the types of disclosures an influencer must make to comply with the Act, such as how and where to include clear and conspicuous “material connection” disclosures, and to obtain signed acknowledgements from each influencer of receipt of and consent to the statement;
- Establish, implement, and maintain a system to monitor and review what their influencers post, upload, or otherwise make available in connection with the brand; and
- Contractually provide for, and enforce, consequences for influencer noncompliance, such as immediate termination of the brand-influencer relationship and cessation of payments to any noncompliant influencer.
It seems clear that a company’s compliance with federal law (such as the Act) is worker-agnostic, necessary to ensure its right and ability to do business, and for certain types of businesses, its licensure.
But, how does a brand now accomplish what amounts to the balancing act mandated by Dynamex? How does a brand keep an influencer “free from (its) control and direction” over how they create and provide their services, while not violating the FTC's mandates that brands must in essence train influencers in how to comply with the Act (or at minimum, provide them with that clear statement of their disclosure responsibilities), then monitor, review, and enforce their influencers’ compliance, and punish any noncompliance?
It seems clear that a company’s compliance with federal law (such as the Act) is worker-agnostic, necessary to ensure its right and ability to do business, and for certain types of businesses, its licensure.
Unfortunately, there's no bright line.
The Court did make it clear that the decision in Dynamex is - at least for now - limited to issues raised under California wage orders, such as minimum wages, overtime, and meal and rest breaks for California employees.
But, Dynamex should serve as a heads-up to all brands in California of where the definition of “independent contractor” is headed. (Wild guess — where it generates more tax revenue for the state). It consequently shouldn’t come as a surprise to anyone to see California agencies and courts start adopting its three-prong test in other employment law contexts.
In light of the new independent contractor test in Dynamex, brands in California would be wise to have their agreements and statements of disclosure responsibilities with influencers reviewed and reevaluated, to see if the necessary balance between FTC compliance and maintaining their influencers as independent contractors can be more clearly accomplished.
Paul Menes is the Co-Head of the Entertainment & Media practice group at ADLI Law Group, a Los Angeles-based litigation firm. He can be reached at (213) 623-6546 or paul.menes@adlilaw.com.
