Hunton Employment & Labor Perspectives

On October 9, 2011, California Governor Jerry Brown signed SB 459, legislation that creates new and significant civil penalties for employers that misclassify employees as independent contractors. The newly enacted Section 226.8 of the California Labor Code authorizes civil penalties under two circumstances: (1) “Willful misclassification of an individual as an independent contractor;” and (2) “Charging an individual who has been willfully misclassified as an independent contractor a fee, or making any deductions from compensation, for any purpose . . . .” In either case, the “person or employer” responsible for the violation “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.” Moreover, if there is a determination that a person or employer has engaged in “a pattern or practice” of 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.”

As is often the case with new legislation, there are vexing questions about how the Courts will interpret and enforce the statute. For example, “willful misclassification is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” There is significant uncertainty as to how the Courts will interpret the phrase “voluntarily and knowingly.” Similarly, it is unclear how the Courts will determine whether a “pattern or practice” of violations exist, or what constitutes a “violation” for purposes of computing the civil penalties. For example, suppose an employer has 50 persons classified as independent contractors, and has a policy that each month it will deduct certain, agreed expenses. Is the adoption of that policy a single violation, or is the employer potentially exposed to civil penalties for 50 violations per month?

Other questions remain about the enforcement of Section 226.8. The statute does not appear to create a private cause of action, but instead appears to permit enforcement by the Labor Commissioner through an investigation under Section 98 of the Labor Code or through a civil action. Even if the Courts determine that there is no private right of action under Section 226.8, employers can expect to see claims asserted under the California Private Attorneys General Act.

SB 459 also imposes joint and several liability against certain consultants that advise an employer to treat an employee as an independent contractor. Under Section 2753 of the Labor Code, “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.” This section does not appear to be limited to “willful misclassification,” but would make such a consultant jointly and severally liable to any person “found not to be an independent contractor.”

Not surprisingly, Section 2753 excludes “[a]n attorney authorized to practice law in California or another United States jurisdiction who provides legal advice in the course of the practice of law.” It also does not apply to a “person who provides advice to his or her employer.”

Other provisions in the legislation provide for discipline by the Contractors’ State License Board against a licensed contractor in violation of the statute, and for the posting for one year of a detailed notice stating that the person or employer “has committed a serious violation of the law by engaging in the willful misclassification of employees” and inviting “any employee who believes that he or she is being misclassified as an independent contractor” to contact the Labor and Workforce Development Agency.

What is wholly lacking in the new legislation is guidance for employers on whether an individual is misclassified. Companies remain subject to an array of different, and sometimes conflicting standards for determining when an individual is an independent contractor. The courts and agencies continue to assign different weights to the various “secondary” factors used to evaluate independent contractor status, making it difficult for companies to evaluate whether they are in compliance. Adding the concept of a “willful violation” further complicates an already uncertain set of issues.