California Imposes New Penalties for Misclassifying Employees as Contractors

Earlier this month, California joined Pennsylvania and New York by adopting a statue that penalizes those who misclassify employees as independent contractors. California Senate Bill 459 (the "Bill"), which adds Sections 226.8 and 2753 to the California Labor Code effective January 1, 2012, will make it illegal to (1) willfully misclassify an individual as an independent contractor, (2) charge fees and expenses to an individual who has been willfully misclassified as a contractor that could not have been charged to an employee or (3) to advise an employer for valuable consideration (other than in the capacity of an employee of the employer or as an attorney for the employer) to treat an individual as an independent contractor to avoid employee status.

The Bill defines "willful misclassification" as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." Unlike the Pennsylvania and New York statutes — each of which sets forth an express test for determining whether a worker can be classified as an independent contractor — the Bill does not set forth such a test. Therefore, whether a worker is misclassified will depend on an application of California's common law test, which considers numerous factors, the most important of which is whether the employer controls the manner and means of accomplishing the work.

The Bill authorizes the California Labor and Workforce Development Agency ("LWDA") or the courts to award civil penalties of $5,000 to $15,000 per violation. The civil penalties increase to $10,000 to $25,000 per violation if the employer or person is found to have engaged in a pattern or practice of willful misclassification.

The Bill also includes language that has been referred to as the "scarlet letter provision." The Bill requires violators to "prominently" display on their Internet site a notice that includes the following information –

1. The LWDA or a court has found that the person or employer committed a "serious violation of law" by willfully misclassifying workers as independent contractors.
2. The person or employer has changed its business practices to avoid committing further violations.
3. Any employee who believes that he or she has been misclassified may contact the LWDA.
4. The notice is being posted in accordance with a state order.

If the person or employer does not have an Internet site, the notice must be posted in an area accessible to all employees as well as the public.

Finally, the Bill imposes joint and several liability on a person who, for money or other valuable consideration, knowingly advises another person or employer to misclassify an individual as an independent contractor to avoid employee status. This provision expressly excludes attorneys who provide legal advice and persons providing advice to their employer.

Unlike the Pennsylvania and New York statutes, which apply only to employers in the construction industry, California's Bill applies to employers in all industries. Therefore, employers who use workers in California — as well as non-lawyer labor consultants who advise employers in California — should reevaluate the status of workers who have been classified as contractors to ensure the validity of that determination. Additionally, employers who need to reclassify employees also may want to consider the IRS' new program regarding correcting worker misclassifications.