Lisa Autry at Pinnacle asks, “Is your worker really an independent contractor, as defined by law?”
This question is taking on new importance for employers in the state of California. Last month, Gov. Jerry Brown signed into law Senate Bill 459, labeled by its opponents as “The Job Killer Act.” The new regulation imposes significant civil penalties on employers who willfully misclassify individuals as independent contractors.
Penalties were established at between $5,000 and $15,000 per violation, in addition to any other penalties that may apply. On top of that, if an employer is found to have engaged in a pattern or practice of willfully misclassifying employees, penalties rise to between $10,000 and $25,000 per violation.
Lisa Autry at Pinnacle continues –
And there’s still more. Any employer who is found guilty of violating the law is required to prominently display a notice on its web site for a full year. Other provisions include:
Penalties for charging fees or taking improper check deductions from willfully misclassified independent contractors.
Disciplinary actions by the state licensing board against licensed contractors found to have violated the law.
Penalties for any person who, for money or other valuable consideration, knowingly advises an employer to classify an individual as an independent contractor to avoid employee statue. (People giving advice to their own employer or attorneys who provide legal advice in the course of their legal practice are exempt.)
So why is willful misclassification an issue? The federal government has a multi-part test to determine whether a worker should be classified as an employee or a contractor. Unfortunately, neither the federal Internal Revenue Service, nor the new California legislation, provides a hard-and-fast definition of who is an employee versus who is a contractor. In the case of the federal government, the IRS reviews a wide range of factors to determine the worker’s status. Because this leaves the matter open to interpretation, it’s easy for employers to make mistakes, even if they seek the advice of experts. Even courts disagree on how to evaluate independent contractor status.
In the California status, “willful misclassification” is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Again, this is vague and likely will lead to court actions for a more concrete interpretation of the law.
Employers also must beware that even an accusation of breaking this law could lead to costly and lengthy investigations. First, it must be determined whether an employee was misclassified. Then comes the issue of whether misclassification was “willful,” a subjective question that could require extensive inquiry which still would not necessarily result in a clear outcome.
Some employers may fear the potential penalties and tremendous risks of making a mistake to the point that they refuse to use independent contractors. This, in turn, could create even greater employment problems in an already troubled California job market.
If you use independent contractors in the state of California, consider these strategies when the law kicks in this coming January:
- Have your job classifications reviewed by legal counsel
- Retain the services of a vendor managed services company, which will employ the individuals you use for positions once filled by independent contractors
- Make sure contingent workers of all kinds are run through a program so that you have consistency in how non-W2 workers are classified and treated.
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