There has been a trend in recent years for companies to treat workers as independent contractors to avoid administrative responsibilities and additional costs applicable to employees (payroll taxes, workers’ compensation insurance, unemployment insurance, payment of overtime and various employee benefits). In response, both the Internal Revenue Service and state agencies have stepped up compliance audits to check whether companies are properly classifying their workers. An employer who has made misclassifications faces a number of government fines and penalties, as well as liability for misclassified workers.
California has upped the stakes with a new law, effective January 1, 2012, adding Sections 226.8 and 2753 to the Labor Code. Section 226.8 prohibits any person or employer from misclassifying an individual as an independent contractor, or from making any compensation charges or deductions (for example, for goods, materials, or space rental) to such individual if it would be illegal to make such charges or deductions to an employee. Section 226.8 imposed fines of $ 5,000 to $ 25,000 for each violation.
The law does not specify how often a “violation” is considered to occur, leaving open the possibility of multiple penalties being imposed against a single worker. An intentional misclassification is defined as one that is “willful and knowing.” It is unclear how the courts will interpret this standard.
Section 226.8 also requires any employer who has violated the law to prominently display on its website for one year a specific notice related to the violation.
Violations of the law by licensed contractors will be reported to the State Contractor Licensing Board, which will initiate disciplinary action against the contractor.
Pursuant to Section 2753, a person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for that individual, shall be jointly and severally liable with the individual. employer if the individual is determined not to do so. be an independent contractor. This provision can be expected to affect outside advisers, such as accountants and human resources consultants. Employees who advise their employer and attorneys who provide legal advice are excluded from liability under Section 2753.
Compliance with the new law is complicated by the fact that the law does not provide clear proof of whether a worker is an employee or an independent contractor. Under pre-existing law, a worker is generally considered an employee if the manager has the power to direct and control the manner and means in which the work is performed. However, several other factors will be taken into account, with different tests under California and federal law, requiring an intensive analysis of the facts for each case.
A compliance strategy for a company that wants to avoid the burdens of job administration and the risks of misclassification is to insure workers through a separate service company, employing workers provided to the company, rather than that the company hires independent contractors directly. .
In any event, companies wishing to use independent contractors should consult with legal counsel, given the difficulty of making proper classifications and the potentially high costs of not doing so. Obtaining competent professional advice can reduce the likelihood of misclassifications and can also provide the employer with a basis for claiming that a misclassification was not “intentional.” In addition, carefully prepared agreements with contractors and other appropriate documentation (for example, a business license from a contractor and proof of insurance held by the contractor), while by no means determinative, can help a company verify legitimacy. of an independent contractor relationship.