On October 9, 2011, Governor Jerry Brown signed a new law imposing monetary penalties on employers that “willfully” misclassify workers as independent contractors.  S.B. 459 takes effect on January 1, 2012.  Employers who violate this law will be fined a civil penalty between $5,000 and $15,000 for each violation.  If the company engages in a “pattern or practice” of “willful” misclassification, it will be fined from a low of $10,000 to a maximum of $25,000.

The new law defines “willful misclassification” as avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.  An action under this new statute may be initiated by an individual filing a complaint with the Labor and Workforce Development Agency (“LWDA”).  If the LWDA or a Court determines that an employer has violated this new law, in addition to the civil penalty, the employer will be required to “display prominently on its Internet Web site,” available to employees and the public at-large, a notice regarding its violation.  If the company does not have a web site, it must prominently display a notice that is accessible to all of its employees and the general public at each of its locations where the violation(s) occurred.  

The notice on the web site or publically displayed must include (1) a statement that the LWDA or a Court has found that the employer committed a “serious” violation of law; (2) a statement that the company has changed its business practices to comply with the law; (3) a notice to employees that if they believe they are misclassified, they have the right to complain to the LWDA; and (4) that the notice is being posted pursuant to a state order.    At least one commentator has called this requirement a “Scarlet Letter” provision.  

Although the concept of posting a notice of “guilt,” is not new (the National Labor Relations Board requires similar postings after a finding of a violation of the National Labor Relations Act), this requirement in California goes further.  The new law requires the company to post the notice, not only for its employees, but for the public in general.

The new law will also put licensed contractors in jeopardy of disciplinary action, up to disbarment.  Specifically, if the employer found guilty of violating this law is a licensed contractor pursuant to the Contractors’ State License Law, LWDA will certify the violation to the Contractors’ State License Board.  The Board is then required to initiate disciplinary proceedings against the company within 30 days.

Another section of this law makes an individual liable for a violation in addition to the employer.  The law exempts, from this provision, attorneys providing legal advice and employees of the company who advise his or her employer on the classification.  However, any other person who knowingly provides advice, for money or other consideration, to treat an individual as an independent contractor in violation of this law, will be jointly and severally liable for the violation.

California employers need to consult with experienced employment counsel before designating any worker as an independent contractor.  Because of the Internal Revenue System’s efforts to share information with state agencies, employers may find that other government agencies, both state and federal, will be investigating the status of the workers.  Such investigations can lead to substantial additional penalties.  See my earlier blog: “Government Agencies Are Going after Employers Who Wrongly Classify Employees as Independent Contractors,” on September 19, 2011.