The price for erroneously classifying employees as independent contractors in California is likely to go up in a big way. On September 8, 2011, the California legislature passed legislation (Senate Bill 459) prohibiting the willful misclassification of individuals as independent contractors, the violation of which can lead to civil penalties of between $5,000 and $25,000 per violation. Governor Brown is expected to sign the legislation into law any day. Once it becomes law, Senate Bill 459 will apply not only to employers, but also to any "person" who willfully misclassifies an individual as an independent contractor. This language raises the possibility that the managers responsible for misclassification decisions may be held personally liable in some instances. Under the Bill, liability can amount to many thousands of dollars with respect to a single employee who has been misclassified. Multiply that by the number of misclassified independent contractors working for an employer, and you can see the potential gold mine Senate Bill 459 presents to zealous plaintiffs' attorneys looking for new opportunities to sue. Once it is signed into law, the Bill will effectively put a bull’s eye squarely on every business that uses independent contractors to make or deliver its products and services in California and will expose such businesses to potentially crippling costs and penalties beyond those already in existence for misclassifying employees under state and federal law.

Senate Bill 459 does three things that make the stakes so high. First, it provides that it is unlawful for any person or employer to willfully misclassify an individual as an independent contractor or to charge that individual a fee or make any deductions from that individual’s compensation that would have been prohibited were that individual not an independent contractor. “Willful misclassification” is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor” – a definition that leaves a lot of room for interpretation, particularly when the test for establishing whether a worker is an employee or an independent contractor is far from straightforward in California.     

Second, the Bill imposes penalties of $5,000 to $15,000 for each violation, and every deduction or fee charged to a willfully misclassified independent contractor could give rise to a separate penalty. To make matters worse, if either a court or the California Labor Workforce Development Agency determines that the person or company has engaged in a pattern or practice of violations, the penalties are increased to $10,000 - $25,000 per violation.

Third, an employer who is found to have violated the law must post a notice informing all employees and the general public that it has committed a serious violation in the willful misclassification of employees and advising any worker who believes he or she is being misclassified to contact the Labor Workforce Development Agency. This notice must be posted prominently on the employer’s Internet website, if the employer has one, and in the workplace if the employer does not have a website.   

California employers should seek the advice of counsel if they have any question about the legitimacy of the classification of those they now treat as independent contractors. Competent advice may not only help avoid costly mistakes, but will also assist in defeating any claim that the employer's treatment of workers as independent contractors, even if erroneous, was a “willful” misclassification.