Reminder: New California Law Regarding Worker Misclassification is Effective Jan. 1, 2012

December 14, 2011

With the New Year less than three weeks away, businesses in California should prepare to comply with a new law regarding worker classification that, as previously reported, is effective Jan. 1, 2012. Under the new law, which was signed by Governor Jerry Brown (D) on Oct. 9, 2011 (SB 459), shortly after the IRS announced its new Voluntary Classification Settlement Program (click here for more information) for classifying workers, businesses that “willfully” misclassify their employees as independent contractors will be subject to significant penalties.

Over the last several years, Congress and various state legislatures have considered legislation intended to prevent employers from misclassifying their employees as independent contractors. Such legislation is designed to protect workers, because independent contractors are often ineligible for state unemployment and workers’ compensation benefits. Another reason for such legislation, however, is the belief that preventing worker misclassification assists governments with collecting employment taxes. Indeed, while employers are required to collect employment taxes directly from their employees, and to remit their portion and the employees’ portion of such taxes to the government directly, businesses do not pay employment taxes on independent contractors. Rather, the independent contractor is responsible for paying applicable taxes to the government directly.

Under California’s new law, it is unlawful to voluntarily and knowingly (i.e., willfully) misclassify a worker as an independent contractor. SB 459 also makes it unlawful to charge a misclassified independent contractor a fee or deduct from such a worker’s pay for various work-related purposes, including for services, goods, materials, repairs, fines, equipment maintenance, space rental or governmental licenses, where it is unlawful to deduct or charge similar fees to a regular employee. Persons or employers that violate the law can face civil penalties ranging from $5,000 to $25,000 for each violation, depending on the circumstances, including whether the business has demonstrated a pattern and practice of violating the law. These penalties are in addition to other fines and penalties allowed by law, including federal penalties for misclassification violations. Licensed contractors can face the potential loss of their license for violating the statute as well.

In addition to imposing civil penalties for misclassification violations, the California Labor and Workforce Development Agency or a court is required to order offending businesses to post notices for a period of one year on their websites or at their offices advising workers and the public of their violation of the statute. Persons other than employees and attorneys who knowingly advise a business to misclassify a worker as an independent contractor may also be jointly and severally liable for violations of the statute if the advice was provided in exchange for money or other valuable consideration.

California businesses should be taking appropriate steps to ensure that their independent contractors are classified properly before Jan. 1, 2012, and, if not, take steps to reclassify their employment status as soon as possible.

For additional articles regarding worker misclassification, please see:

The Department of Labor and IRS Continue to Examine Worker Classification Issues
Obama Administration’s Revenue Proposals Address Worker Misclassification
IRS and DOL Sign MOU to Address Worker Classification
Proposed Federal Legislation Seeks to Remedy and Penalize Worker Misclassification
Proposed Legislation Likely to Classify More Workers as Employees
NY Legislation Would Presume Construction Workers are Employees