At the close of the first legislative session after he was again elected Governor of California, Jerry Brown signed into law several bills that will impose significant burdens on California employers.  They include the potential of even more litigation against employers, including class actions.  This Alert highlights some of the important new employment-related legislation in California that will take effect on January 1, 2012:

SB 459 – “Willful” Misclassification of Independent Contractors

SB 459 adds Section 226.8 to the Labor Code, which will impose significant fines and other remedial actions on employers and others who willfully misclassify employees as independent contractors.  Section 226.8 will make it unlawful to:  (1) willfully misclassify an individual as an independent contractor; or (2) charge an individual who has been so misclassified a fee, or make any deductions from compensation, for any purposes, if the charge or deduction would have violated the law if the individual had not been misclassified (i.e., had been an employee).

A “willful misclassification” is defined broadly as “avoiding employee status for an individual by voluntarily and knowingly misclassifying the individual as an independent contractor.”  This expansive definition could result in a finding of “willful misclassification” whenever the individual thought to be an independent contractor is declared by an agency or court to be an employee, despite a previous reasonable belief in his or her independent contractor status.

Monetary Penalties

If the state’s Labor and Workforce Development Agency (“LWDA”) determines that a person or employer has engaged in “willful misclassification,” or improper deductions or charges, that person or employer will be subject to a civil penalty of $5,000 - $15,000 for each violation.  This penalty will be assessed in addition to any other penalties or fines permitted by law.

If the LWDA determines that a person or employer has engaged in a pattern or practice of “willful misclassification” or improper deductions or charges, the civil penalty increases to $10,000 - $25,000 for each violation.  A copy of any violation determination involving a licensed contractor will be sent to the Contractors’ State License Board, which will start disciplinary action proceedings against any contractor disbarred for this reason.

Employer Required To Acknowledge Misclassification

In addition to the stringent financial penalties, if the LWDA or a court concludes that a person or employer has committed a violation of Section 226.8, the LWDA or court also will order the person or employer to “display prominently” on its internet web site, or if no website exists, in an area accessible to all employees and the public at each location where a violation occurred, a stringent mea culpa notice that sets forth the following:    

  1. That the LWDA or a court, as applicable, has found that the person or employer “has committed a serious violation of the law by engaging in willful misclassification of employees;”
  2. That the person or employer has changed its business practices in order to avoid committing further violations;
  3. That any employee who believes he or she has been misclassified as an independent contractor may contact the LWDA, whose mailing and e-mail address and telephone number will be included; and
  4. That the notice is being posted pursuant to a state order. 

This notice must be signed by an officer of the business and posted for one year.  The Labor Commissioner, through its usual administrative hearing procedures, also may determine violations and impose the financial penalties and other remedies.

Advisors Are Also Liable

SB 459 also adds Section 2753 to the Labor Code, which states that any individual who is not a licensed attorney or employee of the employer, and who advises an employer to treat someone as an independent contractor to avoid employee status, shall be jointly and severally liable with the employer if the individual is found not to be an independent contractor.

California businesses should note that the Golden State has much stricter requirements than federal law for independent contractor status.  The lofty financial penalties required by this legislation will likely result in lawsuits, and their mere threat will probably be a barrier to the engaging of independent contractors.

AB 469 – California Wage Notice Requirement

AB 469 will make effective the Wage Theft Prevention Act of 2011, enacted as new Labor Code Section 2810.5.  AB 469 makes a number of changes to California labor law, but most notably requires employers to provide most newly hired non-exempt employees with a written wage notice.

Written Wage Notice Requirement

New Section 2810.5 of the Labor Code will require that at the time of hiring, an employer provide each covered employee a written notice that contains the following information:

  • The rate or rates of pay and its basis (hourly, day, week, salary, piece work, commission, or otherwise), including any rates for overtime;
  • Allowances, if any, claimed as part of the minimum wage, including meal or lodging allowances;
  • The employer’s regular payday designated by the employer in accordance with the Labor Code;
  • The formal name of the employer, including any “doing business as” names used by the employer;
  • The physical address of the employer’s main office or principal place of business, and a mailing address, if different;
  • The employer’s telephone number;
  • The name, address, and telephone number of the employer’s workers’ compensation insurance carrier; and
  • Any other information the Labor Commissioner deems material and necessary. 

The notice must be in the language the employer normally uses to communicate employment-related information to the employee. 

The Labor Commissioner has been ordered to prepare a template notice, which is to be made available to employers in “such manner as determined by the Labor Commissioner.”

In addition to the wage notice at time of hiring, employers also will be required to notify covered employees in writing of any changes to the information set forth in the initial notice within seven calendar days after the time of the changes, unless:  (1) the changes are reflected on a timely wage statement furnished in accordance with Labor Code Section 226; or (2) notice is provided in another writing “required by law” within seven days.  Failure to comply with this notice requirement could result in numerous technical violations of the law and provide another source of class action litigation.

The notice requirement does not apply to legitimate overtime-exempt employees, or to non-exempt employees covered by a collective bargaining agreement (CBA) that expressly provides for the wages, hours of work, and working conditions of the employee, premium wage rates for all overtime hours worked, and a regular hourly rate at least 30% more than California’s minimum wage, which currently is $8.00/hour.

Employers will want to have covered employees sign and date a copy of his or her wage notice provided upon hire, and all subsequent change notices.  These should become part of the employee’s personnel file to provide proof of compliance with this new law.

Additional Requirements of AB 469

In addition to establishing the new wage notice requirements, AB 469 also includes the following revisions to existing law:

  • Expands the time for the Division of Labor Standards Enforcement to bring an action for the collection of a statutory penalty or fee from one year to three years from when the penalty or fee becomes final;
  • Expands the length of time an employer who has been convicted of a subsequent wage violation or who has failed to satisfy a judgment may maintain a bond in order to continue business operations.  An employer may now maintain a bond for 2 years; and
  • Makes it a misdemeanor if an employer willfully violates specified wage statutes or orders or willfully fails to pay a final court judgment or final order of the Labor Commissioner for wages due. 

AB 22 and SB 909  – New Restrictions on Employers’ Ability to Obtain Credit Reports for Employment Purposes, and New Disclosure Requirements When an Investigative Consumer Report Is Obtained

AB 22 makes significant revisions to California law regarding the permissible use of credit reports for employment purposes and significantly restricts an employer’s ability to obtain such reports.

AB 22 adds Section 1024.5 to the Labor Code, which provides that an employer or prospective employer shall not use a consumer credit report for employment purposes unless the position of the person for whom the report is sought is one of the following:

  1. A managerial position;
  2. A position in the state Department of Justice;
  3. A sworn peace officer or other law enforcement position;
  4. A position for which the employer is required by law to consider credit history information;
  5. A position that involves regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to (a) bank or credit card account information; (b) social security number; or (c) date of birth;
  6. A position in which the person is, or would be, any of the following:  (a) a named signatory on the bank or credit card account of the employer; (b) authorized to transfer money on behalf of the employer; or (c) authorized to enter into financial contracts on behalf of the employer;
  7. A position that involves access to confidential or proprietary information; or
  8. A position that involves regular access to cash of at least $10,000 of the employer, a customer, or a client during the workday.

If an employer obtains a credit report for an employee or applicant for one of the above positions, the notice must identify the specific basis under subdivision (a) of Section 1024.5 of the Labor Code for use of the report.

SB 909 will require a person who obtains or causes to be prepared an investigative consumer report for employment purposes to provide the consumer with the internet web site address or telephone number of the investigative consumer reporting agency where the consumer may find additional information about the agency’s privacy practices.  This requirement is in addition to existing disclosure requirements, which already require disclosure of the name and address of the agency conducting the investigation, the nature and scope of the investigation, and information concerning the consumer.

There has been a recent increase in class action lawsuits alleging employer non-compliance with the counterpart federal law, the Fair Credit Reporting Act.  Accordingly, we would not be surprised to see a similar increase in class actions starting in 2012 against California employers alleging non-compliance with this new state law.

SB 299 – Maintenance of Insurance Benefits for Women on Pregnancy Disability Leave

SB 299 amends Government Code Section 12945 to require employers to maintain health insurance benefits for women on pregnancy disability leave for the duration of the leave (up to a maximum of four months) at the same level as provided prior to the leave.  Of course, nothing prohibits a longer period of paid coverage.

An employer may recover from the employee the premiums paid by the employer during the leave only if both of the following occur:  (1) the employee fails to return from the leave after its expiration; and (2) the employee doesn’t return for a reason other than additional leave under the California Family Rights Act (“CFRA”), or the continuation, recurrence, or onset of a health condition that entitles the employee to pregnancy disability leave, or any other circumstance beyond the control of the employee.

The effect of this amendment is that an employee who is also covered by both the federal Family Medical Leave Act (“FMLA”) and the CFRA may be eligible to receive continued health care benefits for a period of up to almost seven months – 4 months for pregnancy disability leave and up to 12 weeks under the CFRA because a CFRA leave of absence does not run concurrently with a pregnancy disability leave.

Because SB 299 amends the Fair Employment and Housing Act, its requirements apply to all employers with five or more employees.  Additionally, unlike the eligibility provisions of the FMLA or CFRA, which require work for the employer for at least 12 months, and at least 1,250 hours during the 12 months immediately preceding the commencement of the leave, employees who take leave under California’s pregnancy disability leave laws do not have to satisfy any length of service or any hours worked requirement.