Among several employment-related bills signed into law by Governor Brown recently was SB 459, a bill that significantly raised the stakes in the continuing game of cat and mouse we know as the proper classification of independent contractors.  It includes the following provisions: 

  • A prohibition on "willful" misclassification of employees as independent contractors.
  • Civil penalties assessed by the Labor and Workforce Development Agency of $5,000 to $15,000 ($10,000 to $25,000 for an established pattern or practice).
  • Labor Commissioner may assess additional civil and liquidated damages.
  • Joint and several liability for a consultant that advises an employer to treat an employee as an independent contractor.
  • Reporting to the State Contractor's Licensing Board for contractor employers, and a requirement that the Board initiate disciplinary procedures for violators.  
  • Posting of a notice on the website or in a public area of the employer for one year if found to be in violation. 

Proponents of the bill praised it as a deterrent to employers intentionally misclassifying employees and as a way of leveling the playing field for those employers following the rules.  Opponents cited the difficulty in properly classifying employees, and pointed to the different standards used by various state agencies as proof that properly classifying employees can be tricky.  This bill, authored and promoted by labor unions, raises the penalties for employers that do not classify their employees properly, but doesn't give any additional guidance on how to reach the correct decision.   

And, lest employers take this as another reason to heed the siren call of the IRS's recent announcement of its Voluntary Classification Settlement Program, don't be too quick to take them up on it.  While the program does allow employers to voluntarily reclassify their independent contractors as employees in return for reduced payroll tax liability, the program does not impact any potential state ramifications of misclassification.  These can include penalties for failing to keep proper records and improper wage statements, waiting time penalties, unemployment insurance implications, and unpaid overtime.  In addition, participants in the IRS program are subject to a six-year statute of limitations moving forward rather than the usual three years.   

So, while SB 459 may add additional pressure to take advantage of the new IRS program, stop and take a breath, and consult legal counsel, before making any decisions regarding reclassification.