New Law Adds Teeth to California's Independent Contractor Misclassification Laws

by Nils Wright, Risk Media

A new law in California would add teeth to laws on misclassifying employees as contractors by imposing hefty fines of up to $25,000 per violation.

The law, the result of Gov. Jerry Brown signing Senate Bill 459, also includes a scarlet-letter provision that would require employers who breach the law to have to post a notice admitting guilt on their website or prominently display the notice in a place that the public and company employees can see it.

Corporate law firms say the law, which takes effect Nov. 9, carries significant risk to employers.

Besides the stepped-up enforcement, it is coming against a backdrop of a vague definition of independent contractor in California’s Labor Code, which business attorneys say leaves a lot of gray area. The law will take effect just 30 days after it is signed, which leaves a short ramping-up period for employers.

When it was just a bill, it was obviously a non-starter with the business community and the California Chamber of Commerce has labeled it a “job killer.”

Sponsors of the bill assert that 10-30% of employers misclassify their workers as independent contractors and that the state only catches a handful of companies that are doing it. In 2008, the state’s Tax Audit Program conducted 6,356 audits and investigations, which identified 64,539 previously unreported employees. That in turn led to $194 million in assessments being levied on the employers. 

The law adds two new Labor Code sections, 226.8 and 275.3, which set forth the provisions that would apply to all California employers.

The first new section states that it would be unlawful to misclassify an individual as an independent contractor and, if an employer had willfully misclassified someone, it would also be prohibited from charging the worker a fee or making any deductions from their compensation.

Prohibited fees and deductions include goods, materials, space rental, services, licenses, repairs, maintenance and fines.

It also would impose penalties between $5,000 and $15,000 for each violation, in addition to any other penalties permitted by law. That’s not just per employee. Any and each deduction or fee charged to the employee would be considered an additional violation.

Additionally, if the Labor Workforce Development Agency or a court determines that the employer engaged in a pattern or practice of violations, the fine would be increased to between $10,000 and $25,000 per violation.

If cited, the employer would have to post a notice in a prominent place on its website for employees and the public to see. And if the company doesn’t have a website, it would have to post the notice in a place visible to both its employees and the general public.

The notice would state that:

  1. the employer had committed a serious violation of the law by engaging in the willful misclassification of employees;
  2. the employer had changed its business practices to avoid further violations; and
  3. any employee who believed they were being misclassified may contact the Labor Workforce Development Agency.

The notice must be signed by a company officer or the owner and must be left up for a year. And if a licensed contractor were found to have broken the law, they would also be required to report to the Contractors’ State License Board, for disciplinary action.

One big concern about the law is the vague definition of independent contractor. According to a statement on the Department of Industrial Relations website: “There is no set definition of the term ‘independent contractor’ for all purposes, and the issue of whether a worker is an employee or independent contractor depends upon the particular area of law to be applied.”

Generally, a person is considered an employee if the employer retains the right to control the manner and means of the work they perform. In contrast, an independent contractor is under the control of the principal only as in regards to the result of his work and not as to the means by which such result is accomplished. Courts have established a multi-factor test to differentiate between these two standards, and outcomes can differ depending on the facts of the case.

Besides the possibility of substantial penalties under the new law, if a court finds the employer has engaged in a practice of willful misclassification, the fines can add up quickly, particularly if auditors identify multiple individuals that have been misclassified.

But one employment law defense firm cautions that much will hinge on the interpretation of “willful misclassification.” The bill defines it as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”

This standard was established in order to avoid the “unintended consequences” of the law. An analysis of the legislation by committee staffers stated that willful misclassification is a high litmus test that may make it more difficult to find a violation. An earlier version of the bill wanted to issue penalties if there was “intentional or voluntary” misclassification.

 

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