As of January 1, 2012, SB 459 added two new California Labor Code sections addressing employer misclassification of “Independent Contractors.” Given the recent economic downturn, the California legislature has now expressed its concern that more and more companies and businesses are using independent contractors to fill vacant positions to reduce burgeoning administrative costs and which increased workers’ compensation insurance, payroll taxes, and health benefits have driven up. Accordingly, to help protect employee rights from eroding, California has now increased penalties against businesses that willfully misclassify workers as independent contractors.
Beginning January 1, 2012, California Labor Code sections 226.8 and 2753 established penalties and statutory liability for businesses and their vendors which have intentionally and voluntarily misclassified employees as independent contractors. The so-called “Job Killer Act”:
- Authorizes Courts and the State of California to assess fines (penalties) in the amount of not less than $5,000.00 and not more than $15,000.00 “for each violation” of an employer’s “willful misclassification” or unlawful deduction from wages. However, if a Court or the State of California finds the employer has engaged in a “pattern or practice” of “these violations,” it may assess a fine in the higher range of not less than $10,000 and not more than $25,000.00 “for each violation.” Apart from the uncertainty as to what constitutes a “pattern and practice” to know when the higher range of fines will attach, the statute also does not define what it means when it states that both ranges of fines (whether we are speaking of the $5,000-$15,000 not “pattern or practice” fines, or the $10,000-$25,000 “pattern or practice” fines) will attach “for each violation.” For example, does “each violation” mean for each subsequent pay period where misclassification or an unlawful deduction occurred —i.e. $25,000 fine x 52 pay periods=$1.3M per year if the employer pays contractors weekly (employee’s view); or does “each violation” mean (i.e. the employer’s view) for each initial unlawful decision the employer made to either willfully misclassify or unlawfully deduct from wages—i.e. a one-time fine of up to $25,000 for each employee adversely affected in the pattern or practice? Based on prior interpretations of other provisions in the Labor Code as to what constitutes a “violation,” we fear the California Labor Commissioner may seek to assess “pattern and practice” fines for each pay period an employer misclassifies an employee. Accordingly, if the employer were found to have misclassified 10 employees as independent contractors, the fines could look like this, we fear: $25,000 x 52 weeks=$1.3M x 10 misclassified employees=$13M…per year of misclassification if the employer pays the contractors on a weekly basis. Companies will have to await guidance and interpretation, and possibly litigation, to be further certain what the California legislature meant in passing this broad and inartfully drafted statute.
- Renders any person who knowingly advises an employer to misclassify an employee as an independent contractor (other than an employer’s agent or legal counsel) jointly and severally liable for the fines.
- Requires employers found to have willfully misclassified employees as independent contractors to post public notice of the violation either on its website or some other public area for a period of one year.
- Prohibits companies from charging employees a fee and from making an unauthorized deduction from an employee’s pay.
- Authorizes additional civil or liquidated penalties the Labor Commissioner may deem appropriate.
The only “positive” aspects of this bill for employers are that (1) only the state of California may enforce these penalty provisions; the bill does not create a “private cause of action” for a plaintiff lawyer; and (2) the new fines attach only to circumstances involving a “willful” or “maliciously intentional” misclassification. Please also note that the new Labor Code sections do not provide any new guidance to companies to analyze whether a worker is an “independent contractor” or an “employee.” Accordingly, companies with employees in California are encouraged to familiarize themselves with the existing legal tests to classify a worker as either an “employee,” or other than an “employee.” (For example, Fox, Wang & Morgan provides a major treatise regarding independent contractor classification. See the Publications section of our website).
NOTE: One potential defense a well-intentioned company might deploy to defeat a finding of “willfulness” should the state determine a company has misclassified, is to conduct an audit to exhibit an employer’s attempt to faithfully comply with the California wage-hour laws. We recommend that companies accomplish any such audit using lawyers who proceed under the Attorney-Client privilege.