California SB 459 Enacts Stiff Penalties for Employers Willfully Misclassifying Workers as Independent Contractors

Adding to the recent changes in laws regarding the use of employment credit checks and E-Verify by employers in the Golden State, California Governor Jerry Brown has approved Senate Bill 459 (SB 459) that enacts stiff penalties – including fines of $5,000 to $10,000 for first violations and up to $25,000 for repeat violations – for employers found to have “voluntarily and knowingly” misclassified workers as independent contractors. To read the full text of SB 459, which will take effect January 1, 2012, visit: http://leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_459_bill_20111009_chaptered.pdf.

Introduced by Senator Ellen Corbett (D-San Leandro), SB 459 provides for fines, recordkeeping requirements, notice to workers classified as independent contractors, and liability for third parties advising intentional misclassification. Specifically, SB 459 adds Sections 226.8 and 2753 to the Labor Code, relating to employment:

SECTION 1. Section 226.8 is added to the Labor Code, to read:

226.8.
(a) It is unlawful for any person or employer to engage in any of the following activities: (1) Willful misclassification of an individual as an independent contractor. (2) Charging an individual who has been willfully misclassified as an independent contractor a fee, or making any deductions from compensation, for any purpose, including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or fines arising from the individual’s employment where any of the acts described in this paragraph would have violated the law if the individual had not been misclassified.
(b) If the Labor and Workforce Development Agency or a court issues a determination that a person or employer has engaged in any of the enumerated violations of subdivision (a), the person or employer shall be subject to a civil penalty of not less than five thousand dollars ($5,000) and not more than fifteen thousand dollars ($15,000) for each violation, in addition to any other penalties or fines permitted by law.
(c) If the Labor and Workforce Development Agency or a court issues a determination that a person or employer has engaged in any of the enumerated violations of subdivision (a) and the person or employer has engaged in or is engaging in a pattern or practice of these violations, the person or employer shall be subject to a civil penalty of not less than ten thousand dollars ($10,000) and not more than twenty-five thousand dollars ($25,000) for each violation, in addition to any other penalties or fines permitted by law.
(d) (1) If the Labor and Workforce Development Agency or a court issues a determination that a person or employer that is a licensed contractor pursuant to the Contractors’ State License Law has violated subdivision (a), the agency, in addition to any other remedy that has been ordered, shall transmit a certified copy of the order to the Contractors’ State License Board. (2) The registrar of the Contractors’ State License Board shall initiate disciplinary action against a licensee within 30 days of receiving a certified copy of an agency or court order that resulted in disbarment pursuant to paragraph (1).
(e) If the Labor and Workforce Development Agency or a court issues a determination that a person or employer has violated subdivision (a), the agency or court, in addition to any other remedy that has been ordered, shall order the person or employer to display prominently on its Internet Web site, in an area which is accessible to all employees and the general public, or, if the person or employer does not have an Internet Web site, to display prominently in an area that is accessible to all employees and the general public at each location where a violation of subdivision (a) occurred, a notice that sets forth all of the following: (1) That the Labor and Workforce Development Agency or a court, as
applicable, has found that the person or employer has committed a serious violation of the law by engaging in the willful misclassification of employees. (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. (4) That the notice is being posted pursuant to a state order.
(f) In addition to including the information specified in subdivision (e), a person or employer also shall satisfy the following requirements in preparing the notice: (1) An officer shall sign the notice. (2) It shall post the notice for one year commencing with the date of the final decision and order.
(g) (1) In accordance with the procedures specified in Sections 98 to 98.2, inclusive, the Labor Commissioner may issue a determination that a person or employer has violated subdivision (a). (2) If, upon inspection or investigation, the Labor Commissioner determines that a person or employer has violated subdivision (a), the Labor Commissioner may issue a citation to assess damages set forth in subdivisions (b) and (c) in addition to any other penalties or damages that are otherwise available at law. The procedures for issuing, contesting, and enforcing judgments shall be the same as those set forth in Section 1197.1. (3) The Labor Commissioner may enforce this section pursuant to Section 98 or in a civil suit.
(h) Any administrative or civil penalty pursuant to subdivision (b) or (c) or disciplinary action pursuant to subdivision (d) or (e) shall remain in effect against any successor corporation, owner, or business entity that satisfies both of the following: (1) Has one or more of the same principals or officers as the person or employer subject to the penalty or action. (2) Is engaged in the same or a similar business as the person or employer subject to the penalty or action.
(i) For purposes of this section, the following definitions apply: (1) “Determination” means an order, decision, award, or citation issued by an agency or a court of competent jurisdiction for which the time to appeal has expired and for which no appeal is pending. (2) “Labor and Workforce Development Agency” means the Labor and Workforce Development Agency or any of its departments, divisions, commissions, boards, or agencies. (3) “Officer” means the chief executive officer, president, any vice president in charge of a principal business unit, division, or function, or any other officer of the corporation who performs a policymaking function. If the employer is a partnership, “officer” means a partner. If the employer is a sole proprietor, “officer” means the owner. (4) “Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.
(j) Nothing in this section is intended to limit any rights or remedies otherwise available at law.

SEC. 2. Section 2753 is added to the Labor Code, to read:

2753.
(a) A person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for that individual shall be jointly and severally liable with the employer if the individual is found not to be an independent contractor.
(b) This section does not apply to the following persons: (1) A person who provides advice to his or her employer. (2) An attorney authorized to practice law in California or another United States jurisdiction who provides legal advice in the course of the practice of law.

The passing of AB 459 continues the recent trend of the Internal Revenue Service (IRS) scrutinizing worker classification, and companies using the services of workers classified as independent contractors in California should carefully review the classifications and ensure compliance with the new law. As reported earlier in the ESR News blog ‘Internal Revenue Service Launches New Voluntary Classification Settlement Program for Worker Misclassification Amnesty,’ the IRS recently launched a new Voluntary Classification Settlement Program (VCSP) that enables employers to resolve past worker classification issues by voluntarily reclassifying their workers and making a minimal payment covering past payroll tax obligations to get into compliance rather than waiting for an IRS audit.

This trend of scrutinizing worker classification relates to the background screening industry since some background screening firms use at-home workers to make verification phone calls that may be misclassified as independent contractors even though they are not. Employers need to be careful using background screening vendors that rely upon misclassified workers since if there is an audit, it may adversely impact the ability of the vendor to maintain services.

In his article ‘The Dangers of Treating Home Operators as Independent Contractors,’ Attorney Les Rosen, founder and CEO of nationwide background screening company Employment Screening Resources (ESR), reveals that some background screening firms treat at-home workers as independent contractors: “The screening firm often has regular employees at the main office doing the same work, so that the so-called “independent contractors” are doing what regular employees do, but without a regular salary, or any benefits.”

However, Rosen writes that the IRS and state agencies “have the authority, which they exercise, to conduct extensive audits of a business to determine if the classification was correct. If the IRS or state agencies determine that workers should have been classified as employees, then the business can be subject to fines, penalties, back taxes, and lawyer’s fees.”

As a result of trying to avoid treating at-home workers as employees, Rosen indicates that background screening firms can potentially face liability for federal and state payroll taxes that should have been paid for misclassified workers, substantial penalties to the IRS or state, fees and damages if litigation is involved, and responsibility for benefits and overtime pay the independant contractors would have received if classified as employees.

The full article is available at: http://www.esrcheck.com/articles/Dangers-of-Treating-Home-Operators-as-Independent-Contractors.php.

Employment Screening Resources (ESR) – a nationwide background check firm accredited by The National Association of Professional Background Screeners (NAPBS®) – does not rely upon home based operators to perform employment and education verifications. To learn more about ESR, visit http://www.ESRcheck.com.

About Employment Screening Resources (ESR):
Founded in 1997 in the San Francisco, CA area,
Employment Screening Resources (ESR) literally wrote the book on background screening with “The Safe Hiring Manual” by ESR Founder and CEO Lester Rosen. ESR streamlines the screening process and reduces administrative overhead though its proprietary technology solutions.  ESR is accredited by The National Association of Professional Background Screeners (NAPBS®), a distinction held by less than two percent of all screening firms. This important recognition was achieved by successfully passing a third party audit demonstrating compliance with the NAPBS Background Screening Agency Accreditation Program. By choosing an accredited screening firm like ESR, employers know they have selected an agency that meets the highest industry standards. For more information about ESR, visit http://www.ESRcheck.com.

Source:
http://leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_459_bill_20111009_chaptered.pdf