New Law To Require Employers That "Willfully" Misclassify Employees As Independent Contractors To Pay Penalties And Wear Scarlett Letter

As we previously reported herethe consequences of misclassifying a worker as an independent contractor who should have been classified as a non-exempt hourly employee can be substantial. For example, if, because of misclassifying a worker as an independent contractor, the business failed to provide the worker with required meal and rest periods, failed to pay the worker for all hours worked, failed to pay premium pay for overtime hours, and/or failed to provide properly itemized wage statements, the business could become liable for substantial damages for unpaid wages, for various civil penalties, and for attorney's fees. 

On October 9, 2011, Governor Jerry Brown signed into law Senate Bill 459 sponsored by State Senator Ellen M. Corbett (Dem. Alameda County), which will become effective January 1, 2012, which will impose significant additional consequences against employers that "willfully" misclassify an employee as an independent contractor.  Among other things, the new law will:

1.  Make it a violation of the Labor Code for an employer to "willfully" misclassify an employee as an independent contractor. "'Willful misclassification' means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor."

2.  Make it a violation of the Labor Code for an employer to charge a person who has been "willfully" misclassified as an independent contractor "a fee, or making any deductions from compensation, for any purpose, including for goods, materials, space, rental, services, government licenses, repairs, equipment maintenance, or fines arising from the individual's employment where any of the acts . . . would have violated the law if the individual had not been misclassified."

3.  Impose civil penalties of at least $5,000.00 and up to $25,000.00 for each violation.

4.  Require that violations be reported to the State Contractors' License Board if either the Labor and Workforce Development Agency or a court determines that the employer violated the requirements of the new law if the employer is a licensed contractor.  Further, in such cases, the registrar of the Contractors' State License Board is required to initiate disciplinary proceedings against the employer if the order resulted in disbarment of the employer.

5. Require that the Labor and Workforce Development Agency or court order in addition to any other remedy(ies) ordered, "order the person or employer to display prominently on its internet Web site, in an area which is accessible to all employees and the general public, or, if the person or employer does not have an internet Web site, to display prominently in an area that is accessible to all employees and the general public at each location where a violation . . . occurred, a notice that sets forth all of the following:

(1) That the Labor and Workforce Development Agency or a court, as applicable, has found that the person or employer has committed a serious violation of the law by engaging in the willful misclassification of employees.
(2) That the person or employer has changed its business practices in order to avoid committing further violations of this section.
(3) That any employee who believes that he or she is being misclassified as an independent contractor may contact the Labor and Workforce Development Agency.  The notice shall include the mailing address, e-mail address, and telephone number of the agency.
(4) That the notice is being posted pursuant to a state order."

Further, when such a notice is required, it must be signed by an officer of the employer and the notice must be posted for one year commencing on the date of the final decision or order issued by the  Labor and Workforce Development Agency or by a court.

As we previously reported here, also, California courts will look beyond parties' agreements when evaluating whether a person is an "employee" or an "independent contractor" for purposes of determining whether the numerous provisions of the Labor Code applicable to employees apply. Typically, the more control a business exercises over how work is done, the more likely it is a California court will find the relationship to be an "employment" relationship and therefore subject to the numerous requirements of the Labor Code and of the Industrial Welfare Commission wage order applicable to the particular industry or occupation.  For example, in  S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341, the California Supreme Court held there are several factors that must be considered in determining the existence of an employment relationship; while the employer’s right to control the work is the most significant, other factors that must be taken into consideration include “(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties belief they are creating the relationship of employer-employee.” (Id. at 351.)

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