Don't Play Loose with Independent Contractors

California does not make life easy for business owners.  In October 2011 our state leaders enacted SB 459 which creates Labor Code section 226.8 and becomes effective on January 1, 2012.  This law imposes a fine between $5,000 and $15,000 on any person or employer who:  (1) Wilfully misclassifying a worker as an independent contractor; or (2) charging a fee for making a deduction from the worker's compensation for any purpose if doing so would have been prohibited if the worker had been properly classified as an employee.  The penalties increase to $10,000 to $25,000 if the person or employer is found to have engaged in a pattern or practice of the prohibited behavior.  

SB 459 also creates Labor Code section 2753 which imposes liability on any other person who, for consideration, knowingly advises an employer to treat a worker as an independent contractor.  Thankfully attorneys are exempted from this provision! 

The penalties are even more draconian if the person or employer is a contractor.  If the Labor and Workforce Development Agency or a court determines that a contractor violates the law, a copy of the order is transmitted to the Contractors' State License Board.  The Board is required to take disciplinary action against a contractor if the LWDA or court order resulted in disbarment. 

Of course, this is not good enough for the do-gooders of Sacramento.  The new law also requires the LWDA or court to post on its website (or at the location of the violation if the company does not have a website) a notice indicating that it has committed a serious violation of the law by engaging in the willful misclassification of an employee, that the company has changed its business practices, and that if anyone else believes (s)he is also misclassified as an independent contractor, to contact the LWDA. 

SB 459 also allows the Labor Commissioner to impose the monetary penalties.  In fact, this will probably be a common method by which the issue is raised -- a disgruntled worker will file a complaint with the Labor Commissioner.  A hearing will take place and the hearing office will render a decision on whether the person or employer violated section 226.8 by willfully misclassifying a worker. 

So what is "willful misclassification"?  The bill says it is "knowingly misclassifying an individual."  Wow.  Now that's helpful.  I anticipate that the Labor Commissioner or a court will ask the typical questions relating to the right to control the means or methods of operations.  Perhaps courts will ask the IRS 20 Questions test to help make the determination. 

What is clear, however, is that employers take substantial risks when classifying workers as independent contractors.  The "historical" risks continue to apply:  Liability for unpaid PIT or payroll taxes, workers' compensation complications, liability to a third party, etc.  Now businesses must assess the business risk of getting hit with the new penalties associated with SB 459.