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The classification of a new hire as an independent contractor should not be made rashly. Although it might be attractive, from an employer’s perspective, to avoid paying worker’s compensation insurance, paying for mileage reimbursement or other kinds of industry-related business expenses, the financial consequences of misclassifying an employee can be staggering when an employee sues.
Any employer who considers the use of independent contractors, or has already incorporated this classification into their business model, should re-think their decision, especially in light of newly added Labor Code Sections 226.8 and 2753, which prohibits employers from willfully misclassifying a person as an independent contractor -- subjecting employers to civil penalties of between five thousand to fifteen thousand dollars per violation.
The new law, signed by Governor Jerry Brown on October 9, 2011, imposes civil penalties from $5,000 to $25,000 per violation and requires businesses to publicize violations on their company websites.
Section 226.8(a) sets forth the law’s objective, making it unlawful for any person or employer to willfully misclassify an individual as an independent contractor, and prohibiting businesses from charging fees or making any deductions from compensation for any purpose, including goods, materials, space rental, services, licenses, repairs, maintenance and fines, when such fees or deductions would have been impermissible had the individual not been misclassified.
Section 226.8(b) provides that, for each violation, an employer can face a penalty between $5,000 and $15,000 in addition to any other penalties permitted by law. These penalties may be increased to between $10,000 and $25,000 per violation if either California’s Labor and Workforce Development Agency (LWDA) or a court determines that an employer has engaged in a “pattern or practice” of willfully misclassifying its workers as independent contractors. For those who think they can avoid penalties by closing up shop and re-opening under a new business name, note that Section 226.8(h) authorizes penalties against successor companies if one or more of the same principals or officers is engaged in the same or a similar business.
One of the most troubling aspects of the new law is the ability to seek fines and penalties from individuals in addition to business entities. Section 226.8(h) provides that an employer’s third-party advisors, such as financial, accounting and human resources professionals, can be jointly and severally liable with the employer for fines and penalties. Labor Code Section 2753 broadens the scope even further, extending “joint and several liability” to any person who, for money or other valuable consideration, “knowingly advises an employer to misclassify an individual as an independent contractor to avoid employee status.”
Section 226.8(d) requires businesses to publicize a finding by a court or the LWDA that a violation occurred. An employer found in violation must prominently display a notice on its company website (or if the company does not have a website, in an area accessible to all employees and the general public) stating that (1) it has committed a serious violation of law by engaging in the willful misclassification of employees, (2) it has changed its business practices to avoid further violations, and (3) any employee who believes he or she is misclassified may contact the LWDA (with the LWDA’s contact information provided). The notice must be signed by a corporate officer and posted for one year. Licensed contractors will also be reported to the Contractors State License Board, which will initiate disciplinary proceedings against the offending contractor.
The California Labor Commissioner is charged with investigating complaints and pursuing civil actions for alleged violations of Section 226.8. Section 226.8 does not expressly create a private right of action and, based on the California Supreme Court’s reasoning in Lu v. Hawaiian Gardens, 50 Cal. 4th 592 (2010), a statutory private right of action should not be implied. However, given the expansive use of California’s Private Attorneys General Act (PAGA), which allows citizens to pursue civil penalties on behalf of the LWDA, businesses should anticipate a spike in private lawsuits (including representative class actions) seeking recovery of fines and penalties under Section 226.8 for alleged misclassification of workers.
Labor Code section 226.8’s ultimate impact will depend on
how the LWDA and courts interpret the term “willful misclassification.” Section 226.8(i)(4) prohibits employers from
“avoiding employee status for an individual by voluntarily and knowingly misclassifying
that individual as an independent contractor.”
Without any clear statutory definition of these terms,
An analysis of the misclassification issue begins with the
seminal case, S.G. Borello And Sons, Inc.
v. Department of Indust. Relations, 48
The more employer control over the details of the performance and quality of the work performed, the more likely it will appear that the relationship is one of employer to employee. But control is only the first step in the analysis as the Court lists several other factors to be taken into consideration, none of which are dispositive. Because no one factor is dispositive, the employer must take chances; it’s a crap shoot. The additional factors which support a true independent contractor classification include the following:
(1) A lack of control by the hiring party;
(2) Independent contractors are typically not required to comply with instructions or polices of the hiring company;
(3) Are usually not trained by the company;
(4) Perform a service that is not integral to the nature of the company’s business;
(5) Conduct work which has an opportunity for profit or loss depending on their managerial skills;
(6) Are typically not required to perform work on the employer’s premises;
(7) Supply their own instrumentalities and tools;
(8) Have a significant investment in their business;
(9) Set their own work hours;
(10) Pay their own traveling and business expenses;
(11) Are usually paid by the job or at the end of the job;
(12) Are not hourly employees;
(13) Are generally able to delegate their work (i.e., substitute themselves or bring in an assistant);
(14) Do not have a long term continuing relationship with the hiring company;
(15) Determine the order and sequence of the work; and,
(16) Do not have to submit regular reports regarding the status of their work.
No reasonable employer wants to take their chances because the analysis is so complicated that the consequences for getting it wrong could be disastrous. If an employee is simply seeking a recovery for run of the mill wage and hour issues, i.e., wages for missed meal periods, unpaid overtime or waiting time penalties, the claims may total a couple of thousand dollars. But, if an employee is seeking costs for reimbursement for business expenses pursuant to Labor Code Section 2802, the costs can sky rocket easily into multiple thousands of dollars. Although reimbursement for work related expenses such as materials, training and business equipment may not initially seem totally cost prohibitive, imagine instead, costs for the misclassification of an employee who is hired to deliver products in his own car seeking reimbursement for three years of mileage calculated at the IRS rate. These kinds of claims can often exceed reimbursement for an individual over $50,000.
The only saving grace is that if litigation does ensue, the
trier of fact can also be misled with the sheer number of factors that need to
be sorted out in this kind of analysis. Consider Christler v. Express Messenger, 171