Classifying workers as independent contractors in California - already a difficult minefield to navigate for employers - is about to get a bit harder, more convoluted and, unfortunately, more expensive.
Under existing California law, a worker is presumed to be an employee, rather than an independent contractor. The distinction is important because an employee is entitled to certain legal protections, and his or her wages are subject to various employment taxes and withholdings.
A worker may be classified as an independent contractor, and thus not entitled to similar protections or subject to similar taxation, if it is determined that the worker retains the right to control the manner and means of his or her performance. This determination is not simple, however, because the IRS, the California Department of Labor Standards Enforcement (“DLSE”), and California courts each identify numerous and somewhat inconsistent factors that must be analyzed and standards that must be met, before a worker may properly be classified as an independent contractor.
The California legislature recently passed Senate Bill 459. Expected to be signed into law within 30 days, Senate Bill 459 will prohibit employers from willfully misclassifying workers as independent contractors, and from charging fees to or making certain deductions from the compensation paid to those misclassified workers. Penalties for violations will range from $5,000 to $25,000 per violation, depending on the severity of the violation. And, although the California labor commissioner is charged with enforcement of this new law, individuals may file their own complaints. The new provisions do not appear to be listed under the Private Attorney General Act (PAGA), but may nonetheless give rise to PAGA representative actions.
The obvious question California employers are asking is “what does this mean for me?” It means that with Senate Bill 459, getting the independent contractor classification right becomes that much more critical. Rather than simply classifying workers as independent contractors on the basis of “that’s what everyone in the industry does,” or as a cost-cutting measure, employers should take the time to go through the independent contractor factors, preferably with an experienced employment attorney, to make certain workers are classified correctly. The penalties and damages employers may face are enormous – penalties for just one improperly classified worker could be in the tens of thousands of dollars.
The time spent on the front end will be well worth it, and could mean saving tens of thousands or hundreds of thousands of dollars on the back end. And frankly, does any employer really want the IRS, DLSE, EDD and others knocking on the door looking for money? Don’t be the cautionary tale.