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CA Independent Contractor Misclassification Law

California Governor Jerry Brown Signs Employee Misclassification Bill Into Law – Takes Effect January 1, 2012


As you may recall TIA staff asked its members to write Governor Brown urging him not to sign SB 459 into law. Unfortunately, on October 9, 2011, Governor Brown signed the bill into law, and it will take effect January 1, 2012.

SB 459 introduced by California Senate Majority Leader Ellen Corbett strives to reduce the number of the employee misclassifications in the state of California. In 2007, the United States Government Accountability Office conducted a study of misclassification of workers as independent contractors and found that employee misclassification cost the United States Government $2.72 billion in revenue from Social Security, unemployment, and income taxes alone. From 2005-2007 California has seen a surge in misclassification increase to 54 percent, reaching 15,751 workers in 2007. The state of California was able to recover a total of $11.9 million in payroll tax assessments, $18.5 million in labor code citations, and $40.3 million in assessments on employment tax fraud cases.

The bill enacts a number of provisions of law related to the classification (or misclassification) of individuals as independent contractors. Specifically, the bill:

  • “Makes it unlawful for any person or employer to engage in the willful misclassification of an individual as an independent contractor and/or charging an individual who has been willfully misclassified a fee, or making any deductions from compensation for any purpose, where the employer would have been in violation of the law if the individual had not been misclassified.”
  • “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 does not include a person who provides advice to his or her employer or 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.)

Furthermore, the bill requires a person or employer retaining an individual as an independent contractor to maintain specified records related to all independent contractors retained, make these records available upon request to the Department of Industrial Relations (DIR) or the Employment Development Department (EDD), and provide each individual retained as an independent contractor with a written notice developed by the EDD that includes specified information.  

The bill also establishes civil penalties, for any person found guilty of misclassification. First time offenders shall be assessed a penalty of not less than $5,000 and not more than $15,000 for each violation. Persons found guilty of a repeated pattern or practice of these violations shall be assessed a civil penalty of not less than $10,000 and not more than $25,000 for each violation.

Additionally, 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 made a violation; the agency shall transmit a certified copy of the order to the Contractors’ State License Board, which could result in disbarment.

The court or agency in addition shall order the person or employer to display prominently on its internet website, or if the person or employer doesn’t have a website in an area accessible to all employees a notice of violation.

In determining whether an individual providing service to another is an independent contractor or an employee, there is no single determinative factor. The most commonly used factor involves the independent contractor’s right to “control the manner and means of accomplishing the desired result.”

The issue is also being considered at the Federal level, on October 13, 2011, Congresswoman Lynn Woolsey (D-6th/CA) introduced H.R. 3178, the “Employee Misclassification Prevention Act.” The bill currently has 18-cosponsors, but is unlikely to move in a Republican controlled House of Representatives.