Articles

New California Law on Misclassifying Employees as Contractors

In October 2011, the California state legislature passed SB 459 giving the Labor and Workforce Development Agency the authority to issue higher penalties to employers who misclassify independent contractors and employees. The new bill calls for fines and mandates publication of offenses. Employers and employees should be aware of the factors that determine whether a worker is an employee or a contractor in order to protect workers' rights and avoid violating the law.

Fines

The new law allows the LWDA to fine employers who "willfully misclassify" employees as independent contractors between $5,000 and $15,000 per misclassification. Those employers whom the LWDA or the court finds engaged in a "pattern or practice" of misclassification face fines of $10,000 to $20,000. These fines are in addition to payment of back taxes and benefits that an employer must pay for misclassifying employees.

The law also prohibits employers from deducting expenses from a worker's pay, such as charges for goods, space rental or licenses, if it would be illegal to deduct those from the worker's pay if he or she were categorized as an employee.

Publication

In addition to paying fines for misclassification, employers who violate the new law will have to publish their offenses on their companies' websites. The notice must include the following statements:

  • The employer committed a serious violation of the law by misclassifying employees as independent contractors
  • The employer has changed its business practices so the violation will not happen again
  • Employees who believed they have been misclassified should contact the LWDA
  • The LWDA's contact information

If the company does not have a website, the employer must post this information in a place accessible to employees and the general public. Employers must post the notice for one year, and if the company changes names during that time the successor company must keep the notice posted.

Employee or Independent Contractor?

The LWDA and the courts use an "economic realities" test to determine whether a worker is an employee or independent contractor. The most significant piece of information under this test is whether the employer controls the work the worker does and the manner and means in which the worker performs the job. Other factors that the LWDA and the courts may consider include:

  • Whether the employer or worker supplies tool, supplies and materials
  • Whether the work requires special skill
  • The degree of permanence of the job
  • Whether the work is an integral part of the employer's business
  • Whether the worker engages in business distinct from that of the employer
  • Whether payment is based on time or jobs completed

Employers have a monetary incentive to classify workers as independent contractors. With the new law, lawmakers hope that the penalties employers face will lessen the financial rewards of misclassification. If you believe that you have been misclassified as an independent contractor, speak with an experienced employment law attorney who can discuss your situation with you and help you resolve the matter fairly.