Summary: Last week, the California Legislature passed SB 459, known as the “Worker Misclassification” bill. This bill prohibits the willful misclassification of individuals as independent contractors and imposes penalties of between $5,000 and $25,000 per violation. In addition to these monetary penalties, violators are branded with a “scarlet letter” requiring them to prominently display a notice of the violation on their website, which must remain posted for one year.
Additional Details: What is a “willful” violation? The term “willful” is typically interpreted to require an intentional act or omission, and is defined in the bill as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor”. Additionally, the bill provides penalties for employers who make deductions from compensation to misclassified independent contractors that would not be allowed if the individual was an employee (for example, charging for materials, space rental, repairs, etc.).
The Legislature was likely motivated in part by the desire to recapture some of what is estimated to be billions of dollars in lost revenue from the misclassification of employees as independent contractors. Opponents of the bill (the California Chamber of Commerce and other employer-based organizations) call it a “job-killer” and argue that it creates an additional hazard for employers in attempting to navigate the murky waters of classification.
With this new bill, expected to be signed by the Governor in the next 30 days, the potential cost of misclassifying employees as independent contractors ratchets up another few notches — starting at $5,000 to $15,000 per violation and increasing to $10,000 to $25,000 per violation where the employer is found to have engaged in a “pattern or practice of violations”. Therefore, it is more important than ever to for employers to have a classification process in place that they can rely on to establish that they did not “willfully” violate the law.
Advice to employers: This new bill provides yet another indication of both the federal and state government’s intention to look to independent contractor misclassification as a source of revenue. Employers can provide an additional layer of protection from this liability by outsourcing the classification function to a reputable and knowledgeable third party, taking it out of the hands of hiring managers or others who may lack this specialized training and may be viewed as acting in their employer’s economic interests (and not considering the situation through an objective set of eyes).
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WATCH OUT – California Targets Independent Contractor Misclassification with New PenaltiesSeptember 23rd, 2011Misclassification Is Not Always IntentionalMay 3rd, 2010A friend and I were talking the other day about how she had just visited a client who thought he was taking on his proper worker classification duty by the horns. The client had advised my friend that he was being vigilant when bringing aboard independent contractors. For the most part, the client was sending questionable independent contractors directly onto someones payroll. However, there were a few instances for which the client had taken the liberty of approving a worker’s independent contractor status. The workers whom he had been evaluating were set up as legitimate businesses, had significant investment in business, were paid on milestones, and the projects were relatively short term with little-to-no control. What the client wasn’t taking into account was that they were the independent contractor’s first and only source of revenue. Therein lies the problem. I’m not going to turn this blog into a public service announcement denouncing all independent contractors who are just starting out. Unfortunately they serve as just one example of how classifying workers is no easy task. Put yourself in this position: you’ve engaged a independent contractor for a short term project. Business continues to grow and before you know it, that initial three month project has turned into a nine month project. The independent contractor knows they’ve got a pretty nice gig, so there’s little chance that he/she is going to decline the extension. What could have potentially been a small percentage of the independent contractor’s income for the year has now turned into something bigger. Fast forward to the end of the project and the independent contractor finds themselves without another gig on the horizon. Days and weeks go by without work so what happens next? They have to pay bills so what do they do? They file for unemployment. Was the decision of the worker premeditated? Most likely not. Could it lead to an inquiry by the IRS or EDD? I wouldn’t bet against it. This is an example of a problem that could arise when dealing with any independent contractor, let alone a first time contractor. I would even go as far as to say that the example I have provided was somewhat extreme since I’ve rarely crossed paths with an independent contractor who was truly set up as a business or was being brought on to perform a project that was free from control. You could even swap out the unemployment portion and replace it with workers compensation and it would still draw interest from the government. So what’s the point to all of my babble? No matter how closely you’ve examined a worker and provided them with independent contractor status, it’s still out of your hands. You can only do so much to prevent an independent contractor audit. Whether the worker conducts themselves like a true independent contractor is a whole different story. I’ve used the examples of an independent contractor filing for unemployment and workers compensation. Not only does a company have to worry about those issues but also whether or not the independent contractor is filing his/her taxes. When does the worrying end? With so much to think about, I can see why companies hire part-time workers or utlilize third party agencies to payroll all non- employee workers: independent conractors or not. When speaking to clients, rarely have I encountered a company who didn’t want to do the right thing when it came to worker classification. Unfortunately, when companies let their guard down, audits strike. I used the conversation between a friend and I because I thought it summarized how most companies handle their independent contractor classification dilema. Whether you perform independent contractor evaluations yourself or outsource it to a vendor, no company thinks that a “harmless” company decision will ever land them in an audit.
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