Personal Liability and Mandatory On-Line Flogging for Misclassifying Employees as Independent Contractors

We recently warned of the economic risks for an employer who chooses to cut corners by classifying a regular worker as an independent contractor.  A wide range of California and federal agencies have the power to impose back taxes, interest and penalties upon companies who unsuccessfully attempt the tactic.  See, “Independent Contractors and Employees Avoiding Misclassification of Hired Workers in California.”

The potential costs are about to escalate significantly. At midnight January 1, 2012, California Senate Bill 459 (S.B. 459) becomes Labor Code sections 226.8 and 2753, authorizing the California Labor and Workforce Development Agency, the state’s Labor Commissioner or a court to impose civil penalties between $5,000 and $25,000 for each instance of willful misclassification.   Employers, as well as any outside “person [but not a lawyer] who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status” can be liable.

The mathematics can be straightforward.  A business that has deliberately mislabeled even ten workers as independent is exposed to total fines between $50,000 and $250,000.  There are few small to moderately sized employers that can afford to that kind of a hit.

In the modern equivalent of the Elizabethan and Puritan stocks, the state agency or court directing payment of any such penalty must also direct the business or person to “display prominently on its [,her or his] Internet Web site … a notice” for one year, signed by a company officer (as applicable), specifying:

(1)     That the State of California or a California court “has found that the person or employer has committed a serious violation of the law by engaging in the willful misclassification of employee”;

(2)     “That the person or employer has changed its business practices in order to avoid committing further violations of this section”;

(3)     “That any employee who believes that he or she is being misclassified as an independent contractor may contact the Labor and Workforce Development Agency. The notice shall include the mailing address, e-mail address, and telephone number of the agency”; and

(4)     “That the notice is being posted pursuant to a state order.”

If the subject employer or other person does not have a website, then he, she or it must display the notice prominently “in an area that is accessible to all employees and the general public at each location where a violation occurred.”

With the potential costs of misclassification now higher than ever and with greater scrutiny by representatives of an income-hungry, deficit-challenged state government, California companies who regularly hire independent contractors should carefully review worker classifications before the new year.  Consult an experienced labor law attorney for assistance.