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October 2011

The Costs of Misclassifying Independent Contractors Will Be More Expensive for California Employers Under the New Law

As most California employers already know, misclassifying a worker as an independent contractor can be an expensive error.   It may result in state and federal agency audits, individual and class action lawsuits, and payment of back wages, taxes, and benefits, attorney fees, and civil and criminal penalties.  On October 9, 2011, Governor Jerry Brown signed into law Senate Bill 459 (SB 459), which adds two new provisions to the California Labor Code (sections 226.8 and 2753) creating additional civil penalties for an employer's "willful" misclassification of workers as independent contractors.  A "willful misclassification" is defined as "avoiding employee status for an individual by   voluntarily or knowingly misclassifying that individual as an independent contractor."

In an overview of SB 459, the new law:

  • Imposes fines that range from $5,000 to $15,000 for each misclassification violation for first time offenders, in addition to any other penalties or fines permitted by law.
  • Imposes fines that range from $10,000 to $25,000 for repeat offenders.
  • Prohibits charging individuals who have been mischaracterized as independent contractors a fee or making deductions from their pay which would not have been permitted if they were properly classified as employees.
  • Provides the Labor and Workforce Development Agency with the authority to assess penalties and take other action against violators, and requires the agency to notify the Contractors' State License Board of a violator is a licensed contractor. 
  • Subjects non-attorneys who, for money or other valuable consideration, knowingly advise an employer to misclassify a worker to joint and several liability with the employer.

On January 1, 2012, this law will take effect and will also require any person or employer found to have willfully misclassified a worker as an independent contractor "to display prominently" on its website a notice that states (1) it has committed a serious violation of the law by engaging in the willful misclassification of employees; (2) it has changed its business practices to avoid further violations; (3) that any employee who believes he or she is being misclassified may contact the Labor Workforce Development Agency; and (4) that the notice is being posted pursuant to a state order.   If the employer does not have a website, the notice must be displayed "prominently in an area that is accessible to all employees and the general public."  The notice must be posted for one (1) year and be signed by an officer of the company.

The California Labor Commissioner is charged with enforcing this law, though employees may presumably bring enforcement actions on behalf of themselves and others though civil lawsuits under the Private Attorneys General Act.  In light of this new law, employers should review with counsel all workers classified as independent contractors.

Employment Law

Employment Law