Independent Contractor Versus Employee: New Law Ups the Ante for Misclassification

This blog post was prepared by Inna S. Wood and Michael Moradzadeh. 

Approximately one month is left for California employers to revise their employment contracts. The bill (SB 459) introduced by Senator Ellen Corbett on February 16, 2011 on employees’ misclassification was signed into law by California Governor Jerry Brown on October 9, 2011. It adds two new sections to the California Labor Code (i.e., Sections 226.8 and 2753) which establish the liability of employers for misclassifying their employees as independent contractors. The law becomes enforceable on January 1, 2012.

The issue of misclassification of employees as contractors is not a new one. Employers have been punished for these actions by different California agencies before. Now, however, the law has set forth specific liability for this misconduct on a statutory level, thus, making it less likely that such practices will remain unnoticed.

Specifically, Section 226.8 provides that employers shall be liable for “willful misclassification of an individual as an independent contractor” as well as for decreasing such individual’s benefits that she would have received as an employee (e.g., unpaid employment taxes, insurance, and business expenses). Although the law defines “willful misclassification” as a voluntary and knowing act, its application will become clear only when the law goes into effect.

On the other hand, the issue of the employer’s liability is more straightforward. For any of the above violations the employer shall be subject to a civil penalty in the amount from $5,000 to $15,000 to be imposed for each violation by the Labor and Workforce Development Agency (“LWDA”) or a court. Importantly, if the agency or a court determines that an employer “is engaging in a pattern or practice” of such violations of the law it will be able to demand higher penalties, i.e., from $10,000 to $25,000.

In addition to the monetary sanctions, the legislation also provides for other remedial measures. In particular, employers will be ordered to notify their employees and general public that they have “committed a serious violation of the law by engaging in the willful misclassification of employees”. The notice will have to contain some other information prescribed by the act including but not limited to the contact information of the LWDA.

According to Section 2753, the liability for noncompliance with the new legal rules will also apply to any person who, in exchange for a benefit, has recommended an employer to misclassify an employee as an independent contractor.

Based on the recent legislative developments and introduction of stricter sanctions employers are advised to reevaluate their current arrangements with independent contractors and determine whether their practice is compliant with the new legal requirements. The question whether a particular individual could be employed as a contractor is rather complex and requires analysis of different factors such as: the individual’s job function, place of work, period of employment, method of payment, etc. Importantly, all of them should be considered together as one “multi-factor” and not separately (See S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341). As a result, two similar cases might have different conclusions and consequences. Therefore, it is particularly recommended to seek professional legal guidance.

We will keep you informed about further developments in this area. You can find more detailed information defining independent contractors here:
http://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm.