California has been a focal point for litigation and governmental enforcement regarding misclassification of employees as independent contractors. The state agencies have increased their audit efforts in the last few years attempting to reclassify independent contractors as employees and recapture the contributions that would have been made to the state for unemployment insurance and other taxes and penalties. On October 9, 2011, Senate Bill 459 was approved by the Governor further expanding the adverse consequences for misclassifying a person as an independent contractor rather than as an employee. This bill makes it unlawful for any "person" to willfully misclassify an individual as an independent contractor. This raises the specter of individual liability, in addition to the corporate liability of the true employer, for misclassification under the new law.
The bill also imposes penalties ranging from $5,000 to $15,000 for each violation, with enhanced penalties in the $10,000 to $25,000 range if there is a finding that a given person or company has engaged in a "pattern or practice" of violations. The law also provides that anyone found in violation must post on the employer’s website, or in the workplace if no website exists, a notice to employees and the public that the person or company has engaged in the willful misclassification of employees and advising any worker who believes he has been misclassified to contact the Labor Workforce Development Agency.
A "willful misclassification" under the new law is defined as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." This broad language leaves much room for debate as to its meaning in a legal arena where there is already increasing litigation over the standards applicable to these workers.
It isn’t news that California is a difficult and expensive state for employers, especially in the area of compliance with wage and hour laws. This bill expands the potential exposure both in terms of potentially liable parties (i.e., individuals such as the hiring manager) and the ultimate total costs of misclassification. Any entity or individual conducting business in the State of California which has not yet recently audited and analyzed its classification of workers as independent contractors is well advised to do so now.