Say most of your company’s workers are employees, but for certain types of work you bring in independent contractors. You have been doing this for years, and everybody in your industry handles this kind of work the same way. You have nothing to worry about, right?

Not necessarily. Employers use independent contractors instead of employees for a variety of reasons and under a variety of circumstances. The decision to use independent contractors has never been without risk, including the risk of class action lawsuits. However, the stakes in California for misclassifying independent contractors were raised significantly when new Labor Code sections 226.8 and 2753 became effective on January 1, 2012. In addition to possibly having to pay the worker as an employee for past labor (including paying back employment taxes and maybe overtime wages), you now have to be concerned about the potential for additional civil penalties.

Willful Misclassification: California Labor Code Section 226.8 makes it unlawful to “willfully” misclassify individuals as independent contractors. “Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. This section also makes it unlawful to charge a willfully-misclassified contractor a fee or to make any deductions from compensation for any purpose, including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or fines.

  • What are the consequences? The penalties for violations of Section 226.8 are steep, ranging from $5,000 to $15,000 per violation (as determined by a court or the Labor and Workforce Development Agency (“LWDA”)), in addition to any other fines or penalties permitted by law. But that’s not all. If a court or the LWDA finds that the employer has engaged or is engaging in a “pattern and practice” of violating Section 226.8, the employer is subject to a civil penalty of not less than $10,000 and not more than $25,000 per violation. It is not difficult to see how these penalties can add up very quickly.
  • Anything else? There are other consequences for willful misclassification of independent contractors. For example, the Contractors State License Board can initiate disciplinary proceedings against licensed contractors who have been found to violate Section 226.8. And offending employers must post on their websites (or display prominently if the employer does not have a website) a notice that the employer has been found to have violated Section 226.8 and that the employer has changed its practices to prevent further violations.

Joint and Several Liability: Under another Labor Code provision, Section 2753, a person who, for money or other valuable consideration (such as an outside accountant), advises an employer to treat an individual as an independent contractor to avoid employee status is jointly and severally liable with the employer if the individual is found not to be an independent contractor.

  • Any exceptions? Section 2753 specifically excludes people who provide advice to their employers (i.e., company accountants, lawyers and other inside advisors) and attorneys who provide legal advice in the course of the practice of law.

What’s on the horizon? In addition to the above statutes, on January 30, 2013, the California Supreme Court accepted review in a case that poses questions, in a class action context, about how to determine whether common issues predominate when the putative class members were newspaper carriers classified as independent contractors, and the plaintiffs claimed they were really employees. Ayala v. Antelope Valley Newspapers, No. S2069874. The Supreme Court’s decision in Ayala, which will not appear before sometime in 2014 at the earliest, will likely have a significant impact on the viability of class actions involving the alleged misclassification of independent contractors.

Workplace Solutions: These new sections of the Labor Code are still in their infancy, and courts will be called on to determine the meaning of many of these provisions. For example, we are not yet sure what it means to voluntarily and knowingly (i.e., “willfully”) misclassify an individual as an independent contractor. Or how to determine a “pattern and practice” of violating section 226.8. What types of violations will merit a $15,000 penalty as opposed to a $5,000 penalty? These questions will eventually be answered. But employers can avoid some of the risks by carefully scrutinizing their independent contractor relationships to make sure the classifications are sensible and defensible.