California law imposes huge penalties on any business found to “willfully” misclassify workers as independent contractors. The penalties come amid a growing crackdown by the federal government and other states on businesses that try to avoid compliance with employment laws by treating regular employees as independent contractors.
What is ‘Willful Misclassification’?
Under California Labor Law, Section 226.8, “Willful misclassification” happens when a business avoids “employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Payroll service companies in California are advising their clients that the penalties range from $5,000 to $25,000 per violation, and will require businesses to publicize violations on their website.
Section 226.8(a) also makes it unlawful for any employer to charge fees or take deductions from compensation for any purpose — including space rental, materials, repairs, licenses or fines — when such fees or deductions would have been impermissible had the individual not been misclassified.
What is the Penalty for Misclassifying Workers?
California Labor Code Section 226.8(b) provides that, for each violation, a business can face a penalty of between $5,000 and $15,000. If either California’s Labor and Workforce Development Agency (LWDA) or court determines that a business had a “pattern or practice” of misclassifying workers, then the penalties may be increased to between $10,000 and $25,000 per violation.
Any business that violates Section 226.8(b) will be ordered to prominently display a notice on the website for one year–signed by a corporate officer– stating that the business (1) committed a serious violation of law by engaging in the willful misclassification of employees, (2) has changed its business practices to avoid further violations, and (3) any employee who believes he or she is misclassified should contact the Labor and Workforce Development Agency.
Payroll service companies in California say that the ultimate impact of the new Labor Code will depend on how the California Labor board and the courts interpret the term, “willful misclassification.” There isn’t any statutory definition of “voluntarily and knowingly” misclassification, so California business owners can expect the courts to take an expansive view favorable to workers.
In addition to the penalties imposed by California law, the IRS also imposes it’s own penalties and liabilities as described in IRS Code 3509.
How Can You Properly Classify Workers?
Determining whether an employee is an independent contractor can be complex. It requires an evaluation about how much control that worker has over the business operation, as well as all meaningful aspects of the business relationship, such as price, job hours, control over business processes and the right to deal directly with buyers, among other factors. The more control an employee has over the performance and quality of work performed, the more likely they will be to appear to the courts as an independent contractor. But control over the work process is only one component of how the courts evaluate independent contractor status.
For a very general overview of the rules for determining whether a worker is an employee or an independent contractor, please refer to this payroll resource: http://www.paydayonesource.com/client-resources/payroll-101/employee-or-contractor/. However, keep in mind that the laws are complex, and be sure to review the resources at the end of this article and speak to your lawyer regarding your particular situation.
Some lawyers are recommending businesses include arbitration agreements when hiring independent contractors, and include a class action waiver to minimize their risk. If you have any doubt about how your business is classifying workers, or if you regularly use many independent contractors, please refer to the following resources at the end of this article. Seek legal advice and register for PAYDAY’s HR on Demand service.
PAYDAY Workforce Solutions can provide you with an HR Consultant who can guide you through this process.
California Department of Industrial Relations, FAQs about Independent Contractors: http://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm
IRS Article on Worker Classification: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-%28Self-Employed%29-or-Employee%3F
IRS Penalties for Worker MisClassification: http://www.law.cornell.edu/uscode/text/26/3509
California Labor Law Section 226.8: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_459_bill_20111009_chaptered.html