Companies marketing through social media are likely familiar with social media influencers like the Kardashian/Jenners in cosmetics, DanTDM in gaming, and Kayla Itsines in fitness. California companies using the services of such influencers must be mindful, as always, of California peculiarities when it comes to classifying these individuals as contractors or employees.
As anyone who has seen the recent Fyre Festival documentaries knows, using social media influencers is an increasingly popular way to market products. The benefits of this method are clear—social media posts by influencers can be a low-cost way of reaching an enormous audience of potential consumers. However, advertising via influencers also carries potential legal risks.
As a primary issue, companies who use influencers need to be keenly aware of Federal Trade Commission (“FTC”) guidelines on advertising and endorsements, as well as the penalties for non-compliance. In California, the risk of using influencers is further enhanced by the standard governing classification of workers as independent contractors. And if the influencers are not being paid, but instead are being treated as volunteers, potential risks multiply. Failure to properly classify and pay influencers might violate numerous California employment laws and could even result in class action litigation. Misclassifying influencers could also invite an audit from the California Employment Development Department (“EDD”) into whether employment taxes may be owed.
A company considering using influencers should carefully evaluate each of three legal risks:
1. FTC Guidelines
FTC guidelines specify that an “endorsement” includes any advertising message that consumers are likely to believe reflects the opinions of a party other than the sponsoring advertisers. 16 C.F.R. § 255.0(b). A connection between an endorser and the seller of the product must be disclosed when that connection “might materially affect the weight or credibility of the endorsement.” 16 C.F.R. § 255.5. In the case of social media influencers, simply posting a picture of a certain product to a social media site could constitute an endorsement in the eyes of the FTC. Thus, if the influencer is paid for the post, or is asked to write a review of a free product, such a connection would have to be disclosed. Failure to do so could invite scrutiny and potential legal action from the FTC.
2. California Classification Laws
In addition to staying on the right side of the FTC, companies should also be careful to stay on the right side of the recent California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court. That decision lays out the “ABC” test, under which a worker qualifies as an independent contractor only if the hiring entity establishes:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
As the first prong of the test makes clear, the degree of control the hiring entity exercises over the worker remains an important factor in determining whether or not an employment relationship exists. Depending on the degree to which the company is involved in creating social media posts, determining their content, or dictating an influencer’s review of a product, the company may run the risk of not meeting one or more of the prongs of the ABC test, which could result in creating an employment relationship where none was intended. If that occurs, the influencer may be deemed an “employee” of the company and thus misclassified. Litigation could then ensue, and an adverse determination could result in liability and penalties for unpaid minimum wages or overtime, statutory penalties, and attorneys’ fees.
3. California Tax Laws
A determination that an influencer is an employee rather than an independent contractor (or volunteer) would implicate a host of California employment laws. The issue also implicates whether payroll taxes may be owed to the EDD for any such misclassification. In determining whether to audit potential misclassification, the EDD tends to consider whether a company is issuing 1099s to an individual, or to an LLC. If the company is issuing multiple 1099s directly to the influencer (or to a number of influencers), it could be courting an EDD audit.
Workplace Solution: The concept of influencers is still new and the governing law is developing. As a result, the guidelines for hiring and compensating influencers is limited and the risks are real. Before utilizing influencers, California companies should take time to consider the legal implications. If you would like to learn more about these issues, please contact a Seyfarth Shaw attorney for assistance.