As you may know (if you have been reading our blog), Governor Jerry Brown recently signed California Senate Bill 459. This was a bill similar to the one that former Governor Schwarzenegger vetoed and also deemed it the “Job Killer Act”, which will be effective January 1, 2012 and soon be known as “Small Business Killer Act.” The bill imposes costly penalties on those employers who willfully misclassify employees. This is from recent growing efforts from federal and state levels to identify, reclassify, and prevent misclassifications of independent contractors, discouraging employers from doing so with significant penalties.

What is the new law? And What does this law do?

• To willfully misclassify an individual as an independent contractor; or
• To charge a willfully misclassified contractor a fee or make any deductions from compensation for any purpose including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance or fines.
• Imposes a civil penalty of between $5,000 and $15,000 for each violation;
• Increases the civil penalties to between $10,000 and $25,000 if the employer has engaged, or is engaging, in a pattern or practice of such violations;
• Provides for the Contractor's State License Board to initiate disciplinary action against any licensed contractor that has been found to have violated the Act;
• Requires that any person or employer who has been found to have violated the Act to post a website notice (or to display prominently if there is no website) that, the person or employer has been found to have violated the Act and that the employer or person has changed its practices to prevent further violations;
• Provides that violations and disciplinary actions shall "remain in effect" against successors if it has one or more principals or officers and is engaged in the same or similar business; and
• Provides for joint and several liability for any person, other than an attorney or an employee providing advice to his or her employer, who knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for that individual if the individual is found not to be an independent contractor.

Implement

Senate Bill 459 authorizes the Labor and Workforce Development Agency (LWDA) or a court to determine if an employer has violated the provisions of the new bill and to assess civil penalties. It also provides that the Labor Commissioner may enforce the statute and assess penalties through labor code section 98. Despite the Legislative Counsel’s statement that SB 459 authorizes an individual to file a complaint to request the Labor Commissioner to assess penalties, but the language of the statute does not expressly authorize any employee to bring such an action, either in court or before the Labor Commissioner.

Employees will likely attempt to recover Senate Bill 459 through the California Labor Code Private Attorneys General Act (PAGA). Under PAGA, aggrieved employees can bring a representative on their behalf to recover civil penalties in the Labor code that may be assessed by the LWDA. This could include civil penalties under Senate Bill 459. Penalties recovered by an employee in a PAGA action are distributed as followed: 75% to the LWDA, and 25% to the aggrieved employees.

Willful Misclassification

A violation of Senate Bill 459 requires a showing of “willful” misclassification, but the bill provides little guidance as what is actually “willful.” The bill doesn’t simply define what willful misclassification is, it says misclassification that is voluntary and knowing, which is vague.

There are certain factors that vary in Federal or under California law that can make an individual an employee or an independent contractor. There is no single factors that is controlling, the most important factor is whether the supposed employer has the right to control not merely a worker’s results but the manner and means used to obtain the results. This test is very vague and ambiguous. It would seem that finding of willfulness should be limited to only horrible cases. The only thing is that employers will have to answer numerous questions to attempt to comply with the willfulness standard.

Fees

Providing equipment or supplies or reimbursing a worker for expenses incurred is evidence of employment status. Thus, most business avoid from paying or reimbursing a contractor for expenses that were incurred to prevent a finding of employment status. Also, if the contractor were to use supplies or space provided by the business, the business will have to charge the contractor fees so that it cannot be argued that they business is paying for the contractors expenses. This practice would violate Senate Bill 459 if the contractor was willfully misclassified. Employers should be able to avoid violation of this fee provision even in the case of a willful misclassification, however, by requiring the contractor to obtain any necessary supplies, tools or equipment from unrelated third parties. The employer could still be liable under Labor Code section 2802, if that section, which requires employers to indemnify employees for expenditures or losses incurred in discharging employment duties, which applies to ordinary expenses, as some courts have held.

Other Ambiguities

As we discussed before, Senate Bill 459 provides for a range of civil penalties for each violation, but no guidance is provided as to what merits a $5,000 penalty versus $15,000 penalty. Also, there is no guidance as to what constitutes a “pattern or practice” that will result in larger civil penalties.

Recommendations

With the new law businesses should be taking the right steps to evaluate their existing independent contractors relationships. Here are some recommendations:

• Develop and publish a corporate policy on the engagement of independent contractors and the management of those relationships. As part of this policy, require that approval be obtained from a knowledgeable employee before any independent contractor relationship is established.
• Train employees who manage independent contractor agreements as to how to work with independent contractor relationships.
• Ensure that the company has a well-written independent contractor agreement for each contractor, that it is accurate, complete, and individually negotiated.
• Audit the company's independent contractor relationships, including a review of any past decisions or determinations concerning independent contractor status.
• Obtain a written legal opinion from counsel regarding the appropriateness of the classification of workers as independent contractors, based on counsel's understanding of the specific factual situations at issue.