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Implications of Willfully Misclassifying Workers
By Sara M. Scott, Esq.
Traditional incentives for properly classifying workers as employees or independent contractors include penalties imposed by the Internal Revenue Service (IRS), the state worker’s compensation board, and the U.S. Department of Labor (DOL), as well as vicarious liability imposed by the courts. Recently California Governor Jerry Brown signed into law a bill that subjects employers to further liability because it imposes heavy fines and penalties for misclassifying workers. California, like many other states, has done so in an effort to crack down on abuse.
Properly Classifying Workers
The courts have set forth many factors used to determine if the worker is an employee or independent contractor. First the court will review the facts under the “control test” to determine the amount of control the employer had over how the worker produced the product or performed the services. If the employer merely requested a specific end-product and made no specifications regarding how that end product should be reached, it is unlikely that a true employer/employee relationship existed.
The court does not stop its inquiry at the control test but also reviews the facts to determine:
• Whether the worker is engaged in a distinct occupation
• Whether the occupation is the kind that is usually done under the direction of the principal or specialist without supervision
• The skill required to perform the task
• Whether the worker or principal supplies the instrumentalities for the job
• The duration of the services
• Method of payment
• Whether the work is part of the principal’s regular business
• Whether the parties intended to create an employer-employee relationshipThe duration of the services
• Method of payment
• Whether the work is part of the principal’s regular business
• Whether the parties intended to create an employer-employee relationship
The inquiry is highly fact sensitive and a principal making the wrong determination under this inquiry could face major penalties.
Traditional Penalties for Misclassifying Workers
Generally employers are vicariously liable for the actions of their employees. Properly classifying the worker as an independent contractor can shield the employer from this vicarious liability in many instances. In addition, employers who improperly classify workers as independent contractors may be fined for failure to obtain Worker’s Compensation insurance covering the workers as employees.
California’s New Law
Senate Bill 459 became effective January 1, 2012 and added Sections 226.8 and 2753 to the California Labor Code. The new law allows either the California Labor and Workforce Development Agency (CLWDA) or a court to fine an employer that willfully misclassifies workers a minimum fine of $5,000 and a maximum fine of $15,000. If the occurrence is not the first time the employer has misclassified a worker and either the court or the CLWDA determines that the employer has engaged in a “pattern or practice” of willfully misclassifying employees, the minimum fine goes up to $10,000, with the maximum being $25,000. These fines are imposed on a per violation basis. Thus, an employer misclassifying large groups of workers could face extreme penalties.
In addition to monetary penalties, the employer may also face other penalties which might affect its business. Licensed contractors who engage in the practice of willfully misclassifying employees could lose their license. Moreover, those who are found to violate the new law will be required to post, in a conspicuous place at their place of business, a notice letting others know that the business violated this law. This scarlet letter must be left in plain sight for one year after posting.
Because of the potential for fines and the fact that any employer found by a court to have violated the statute must post notice of their violation for one year, worker plaintiffs may use potential violations of this statute as a scare tactic against employers. Instead of preventing employers from mistreating employees and denying benefits they are entitled to, as was the intent, lawmakers have made it easier for plaintiffs to push employers into settlement, despite the fact that the employer correctly characterized the worker as an independent contractor under the law. This new law may also pressure employers to classify every person that works for them as an employee and pay the costs that are involved, instead of validly hiring independent contractors to perform specific tasks. Employers may be less inclined to hire employees for traditional independent contractor type jobs or if they need these workers, benefits for existing full-time workers may decrease so the company can afford to hire more employees.
Conclusion
Because these are so new, no case law exists to define the contours of these new statutes. Based merely on the language of the statute it is clear that an employer who negligently misclassifies workers as independent contractors, as opposed to intentionally classifying them, is not subject to the fines imposed by SB 459. Thus, nothing changes for the employer who is merely mistaken.
To curb potentially expensive lawsuits and avoid overly large payouts, an employer might consider requiring, as a precautionary measure, the independent contractor to sign an arbitration agreement and class action waiver in case the worker does attempt to enforce his or her rights under this new law. Though it has not yet been tested under the new law, a co-employment agreement with a professional employer organization would relieve an employer of liability because under such an agreement the worker would be a W-2 employee of the employer. The professional employer organization takes care of the unemployment insurance and other benefit type issues for the worker while the employee merely pays taxes. Under this regime the employer can satisfy its tax requirements as well as the obligations to carry unemployment and worker’s compensation coverage for employees.
Contact Weintraub Law Group, PC, if you are seeking further legal advice as it applies to your situation. We will provide a free case review and determine if you need further legal assistance.
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