Misclassifying workers as independent contractors now carries an even steeper price.

California now has the nation's most punitive laws against worker misclassification.  While misclassification has always been illegal, businesses found to have incorrectly classified employees as independent contractors now face civil penalties ranging from $5,000 to $15,000 per employee, and $10,000 to $25,000 per employee in instances involving “a pattern and practice” of misclassification. 

On top of that, infringing businesses may be required to post notices on their website detailing the misclassification and directing misclassified workers to California's Labor Workforce Development Agency. These penalties are in addition to a long list of other penalties, fines and back wages that may be owed for failure to pay wages correctly.

The motivation for such drastic measures?  Money.  More specifically, tax revenue.  Workers classified as independent contractors are not taxed immediately with every paycheck as employees are, nor are employers required to pay payroll taxes on those workers.  The State apparently hopes that its punitive measures will deter businesses from even considering classifying individuals as independent contractors.

But the State’s reach does not end with the misclassifying businesses.  The Legislature also quietly included a provision designed to expand the scope of the new law.  Third parties who merely advise businesses to classify workers as independent contractors now face joint and several liability when that classification is wrong.  

Squarely in the State's cross-hairs are accountants and outside human resources consultants who provide consulting services to businesses. Attorneys who advise their clients and employees who advise their employer regarding classification of workers as independent contractors are not subject to such joint and several liability.

California’s new laws undermine a new voluntary self-reporting program instituted by the IRS to help businesses who previously misclassified workers.  Under that program, employers who have misclassified workers as independent contractors may significantly limit their exposure to the federal government by self-reporting previous misclassifications. Unfortunately, the program provides no immunity from penalties that may be imposed under California law, and participation in the IRS’s program may be used as evidence of liability under California law.

When can a worker be classified as an independent contractor?  There is no easy answer, but the analysis generally depends on a review of several factors.  The most important is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.  

Other “secondary” factors include:

(1) whether the worker is engaged in a distinct occupation or an independently established business;

(2) whether the worker or the principal supplies the tools or instrumentalities used in the work, other than tools and instrumentalities customarily supplied by employees;

(3) the method of payment, whether by time or by the job;

(4) whether the work is part of the regular business of the principal;

(5) whether the worker has a substantial investment in the business other than personal services; and,

(6) whether the worker hires employees to assist him.

Unlike most new laws, there is no grace period for the new law.  It became effective on October 8, 2011 - the day on which Governor Brown signed the bill.  Starting then, misclassification became an even riskier proposition.

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BIOGRAPHY

Jim Fessenden is an associate in the Fisher & Phillips LLP San Diego office. He represents employers in all aspects of employment law in both state and federal courts, and before administrative and governmental agencies. Jim has argued before the California Court of Appeals, numerous trial courts and administrative agencies. He has been a part of several arbitration and trial teams and recently he served as Second Chair in a jury trial resulting in a complete defense verdict. Jim also regularly defends clients in investigations by the DOL, EDD, OFCCP, DFEH, EEOC and other state and local agencies. Jim also devotes a significant portion of his practice to counseling clients and developing measures to prevent litigation and governmental investigations. Prior to joining the firm, Jim practiced employment and entertainment litigation in the San Diego office of a national firm. While in law school, Jim served as the Managing Editor of the San Diego International Law Journal.

Phone: (858) 597-9600
Fax: (858) 597-9601
Email: jfessenden@laborlawyers.com" data-mce-href="mailto:jfessenden@laborlawyers.com">jfessenden@laborlawyers.com
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