Independent Contractor Compliance Blog

California Has Raised the IC Misclassification Stakes

In October, 2011, Governor Brown signed Senate Bill 459 into law making it illegal to willfully misclassify employees as independent contractors. The law provides authority to the California’s Labor Workforce Development Agency to assess civil penalties and take action against a person or employer violating the new law.

This law allows California’s Labor Commissioner to levy a civil penalty of $5,000 to $15,000 for each violation. One violation is a single misclassified individual. If the agency determines there is a pattern and practice of such violations, a civil penalty of $10,000 to $25,000 may be imposed.

These fines will be levied against business who are determined to “willfully misclassify” workers. “Willful misclassification” is legally defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Courts have defined “knowing”, in this context, as including constructive knowledge, which can mean what an employer purportedly “should have known”.

This interpretation opens up a very loose definition for “willful misclassification” and could expose employers who make honest mistakes to these penalties. The initial investigator or auditor who performs the review normally makes the determination of “willful”.

Violations under this new law could lead to a series of unfortunate events. The Department of Industrial Relations (DIR) and the Employment Development Department (EDD) are sub-entities of the California’s Labor Workforce Development Agency and have missions to uncover misclassified workers and impose assessments and fines against employers who misclassify workers:

  • The EDD enforces California’s payroll taxes, including unemployment, disability, employment training, and personal income tax withholding.
  • A division of the DIR, The Division of Labor Standards and Enforcement (DLSE), has the authority to issue citations/fines and orders to close down businesses, if they are found to be out of compliance with labor laws (employee misclassification, Cal OHSA rules, overtime, minimum wages, etc.)
  • Both agencies share information with each other. In addition, the EDD also shares misclassification information with the IRS.

Senate Bill 459 also requires the agency to notify the Contractors’ State License Board of violating licensed contractors and require the board to initiate an action against the licensee. The bill also requires employers found to be in violation to post a letter. This letter shall be posted “prominently for one year on its internet website, in an area accessible to all employees and the general public, or, in the absence of a website, 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:

  • 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.
  • That the person or employer has changed its business practices in order to avoid committing further violations of this section.
  • 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.)
  • That the notice is being posted pursuant to a state order.

IC compliance regulations have become expensive and strictly enforced. Do not wait until a state or federal agency audits your company, incurring huge fines, and exposing you to other agencies. It is time for your company to become serious about your IC compliance program and engage an expert to help you.

Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as 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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