By Martin E. Sullivan -
Business owners who employ independent contractors may wake up with more than a champagne headache on January 1, 2012. On this day, Senate Bill 459 will go into effect which imposes stiff penalties on employers who “willfully misclassify” an employee as an independent contractor.
The new Labor Code section 226.8 imposes a $5,000 to $15,000 penalty for each violation found by the Labor and Workforce Development Agency or a court. If the employer has engaged in a “pattern or practice” of willful misclassification, such employer “shall” be subject to a $10,000 to $25,000 penalty for each violation. Furthermore, charging or deducting fees and costs from a misclassified employee’s compensation—an acceptable practice with independent contractors—is a violation and triggers a host of other Labor Code penalties.
This law will certainly have its intended effect to dissuade nefarious employers from scheming to save on payroll expenses by misclassification. The law has more far-reaching implications, however, mainly due to its susceptibility to interpretation. The new law defines “willful misclassification” as “…avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” However, many courts construe “knowing and voluntary” merely as having imputed or constructive knowledge. My blog post from earlier this year cites to a 2011 California Court of Appeal case which states,
“[S]ome Labor Code penalties are imposed only for ‘willful’ or ‘knowing’ violations.” However, it is a “faulty premise” to assume that “willfulness-necessarily requires a particular mental state. The word ‘willful’ is used in different statutes with various shades of meaning. In some Labor Code contexts, willfulness simply denotes an employer’s failure to perform a required act. Even in penal statutes, willfulness generally requires ‘only that the illegal act or omission occur “intentionally,” without regard to motive or ignorance of the act’s prohibited character.’”
Heritage Residential Care, Inc. v. Division of Labor Standards Enforcement, 192Cal. App. 4th 75, 84 (Cal. App. 6th Dist. 2011)(internal quotations and citations omitted). Thus, it could be argued that while a clerical error resulting in misclassification would not be willful and knowing, an intentional act of classification in ignorance of the law might be.
And while a “pattern” of wrongdoing may be difficult to establish from a single violation of the law, a single violation could conceivably evidence an illegal “practice” and subject an employer to up to $25,000 in additional penalties. Add to this mix the very uncertainty of determining who is and who is not an independent contractor—there are multiple multi-factor tests—and you have a veritable “interpretive dance” that many employers would rather sit out.
In addition to monetary penalties, employers must post a public notice on their website (or if no website exists, in full view of employees and the general public) for a full year admitting the violation. The notice must state that the entity willfully misclassified an independent contractor and has ceased the illegal conduct. It must inform those who believe they have been misclassified about how to contact the LWDA. The California Chamber of Commerce has called the notice requirement a “Scarlet Letter.”
Employers with a California presence who currently have or will hire independent contractors should consider the implications of this law going forward. Should an employer require review of its personnel structure, or if you are an individual who believes that you may have been misclassified, contact an employment attorney.
 Licensed [construction] contractors and non-lawyer consultants who advise on independent contractor classification have additional responsibilities under this law, not discussed herein.