On October 9, 2011, California Governor Jerry Brown approved state legislation enacting strict penalties for employers found willfully (intentionally and voluntarily) to have misclassified workers as independent contractors. Known to some as the "Job Killer Act," SB 459 provides for stiff fines, requirements for recordkeeping and notice to the workers classified as independent contractors, as well as joint and several liability for third parties advising as to intentional misclassification. Specifically, the new law provides:

  1. Fines of $5,000 - 10,000 for the first violation, and up to $25,000 for repeat violations;
  2. rohibition on charging workers a fee or making any deductions from the worker's compensation where such fee or deduction would have been prohibited if the individual was an employee (including goods, materials, space rental, services, licenses, repairs and maintenance);
  3. Notice and recordkeeping, using a state-created form, requiring the principal to factually justify independent contractor classification for each worker so classified, and advising the worker of the tax ramifications of the classification and of his/her rights to challenge the classification; and
  4. Joint and several liability for any person who knowingly advises an employer to misclassify a worker as an independent contractor (employer's agents and legal counsel are exempt).

The new law continues the trend, already well underway at the Internal Revenue Service, the California Employment Development Department, and other states' taxing authorities, toward strict scrutiny of worker classification and significant penalties for principals who run afoul of the complicated classification rules at the federal and state level. Particularly in this era of cash-strapped government, companies using the services of workers classified as independent contractors in California should carefully review the classifications and ensure compliance with the new law.