Independent Contractor Compliance Blog

A “One-Two Punch” for Businesses that Misclassify Workers

Under the Department of Treasury section:

“…The Administration also proposes more than $240 million for a targeted set of new, revenue-generating tax enforcement initiatives aimed at closing the tax gap—the difference between taxes owed and taxes paid. When fully in place by 2014, these new efforts are expected to yield about $1.3 billion a year in additional tax revenue.”

In California:

Almost every state is struggling to collect more revenue, but California is especially strapped and has begun implementing some of the most aggressive actions in the nation.

In October 2011, Governor Brown signed Senate Bill 459 into law that makes the “Willful Misclassification” of employees as independent contractors illegal.  The law gives California’s Labor Workforce Development Agency authority to assess very high civil penalties and take severe actions against a person or employer violating this new law.

Specifically;

This law allows California’s Labor Commissioner, or a court, to levy a civil penalty of $5,000 to $15,000 for each violation found to be “willful” (a single misclassified individual is one violation).
If the agency, or a court, determines there is a pattern and practice of these “willful misclassifications,” a civil penalty of $10,000 to $25,000 for each violation may be imposed.
These fines are in addition to any other assessments, penalties and fines that may be imposed under other laws.
These fines will be levied against business who are determined to “willfully misclassify” workers.

“Willful misclassification” is defined in the new law as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”

Courts have generally defined “knowing” in this context as including constructive knowledge, which can mean what an employer purportedly should have known…

This law also requires violators to post a letter

The law requires that an employer, who violates this law, post a letter:
“…prominently for one year on its Internet Web site, in an area accessible to all employees and the general public, or, in the absence of an Internet Web site, to display in an area that is accessible to all employees and the general public at each location where a violation occurred, a notice signed by an officer that contains 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 must 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.

Senate Bill 459 is California law, effective January 1, 2012.

It doesn’t take an IC Compliance expert to see that both state and federal governments are planning to turn up the heat on compliance this year.

Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.

 

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