Also known by the ominous nickname "The Job Killer Act," Senate Bill 459 -- signed into law by Governor Jerry Brown on October 9, 2011 -- imposes severe civil penalties on employers who willfully misclassify individuals as independent contractors. The bill will be codified in two new sections to the Labor Code: 226.8 and 2753.
Specifically, the statute levies penalties in an amount between $5,000 and $15,000 per violation, and this is in addition to any other applicable penalties. If the employer is found to have engaged in a "pattern or practice" of willfully misclassifying its employees, the penalty increases to between $10,000 and $25,000, again, per violation. Further, the employer will be put in the proverbial stocks: anyone found to have violated the statute must prominently display a notice of its offense on its Internet Web site for one full year. The statute also authorizes similar, but additional, penalties to employers who charge fees or take certain improper paycheck deductions -- such as for equipment rental -- from a willfully misclassified independent contractor. Licensed contractors could face even greater punishment, as the statute mandates that violations be reported to the Contractors' State Licensing Board, who then must initiate disciplinary action against the contractor.
These new penalties are troubling for employers not only because they are relatively high in amount (penalties for other Labor Code violations are typically between $50 and $200 per violation, and there are often penalty caps of $1,000 to $4,000) but also because the threshold questions of (1) whether an employee has been misclassified and (2) whether that misclassification was "willful" are complicated, multi-factor, fact-intensive inquiries. (The test for whether a putative employee is an independent contractor, for instance, hinges predominantly on the amount of control the employer has over the means, rather than just the results, of a particular task or project; an inquiry that is fertile ground for protracted, expensive litigation.) And because the consequences of a violation are so severe, employers may feel pressure to settle claims under this statute rather than attempting to defend their employment actions and risk facing enormous monetary penalties and a public shaming. Moreover, the definition of "willful misclassification" as it is used in this statute is vague -- "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor" -- and will likely lead to costly litigation regarding its interpretation.
This statute is made exponentially more concerning because of the success some plaintiffs' attorneys have had certifying classes of independent contractors with regard to the misclassification issue. These penalties may turn such class actions into an almost insurmountable weapon, against which few employers would be able to risk a judgment on the merits, not to mention the scrutiny of state and federal agencies which could include the California Labor Commissioner, the Employment Development Department and the IRS.
If you use independent contractors in the state of California, it is highly recommended that you have the classifications reviewed by legal counsel.