California Enacts New Law Prohibiting Willful Misclassification of Independent Contractors

Governor Brown signed legislation that prohibits the willful misclassification of individuals as independent contractors. The new law creates civil penalties of between $5,000 and $25,000 for each willful misclassification of a worker.

Summary of the Law

On October 9, 2011, Governor Brown signed legislation that prohibits the willful misclassification of individuals as independent contractors. The new law, which takes effect January 1, 2012, adds two new sections to the California Labor Code, sections 226.8 and 2753. Under section 226.8(a), it is unlawful for any person or employer to willfully misclassify an individual as an independent contractor, or to charge that individual a fee or make any deductions from the individual’s compensation where such fee or deduction would have been prohibited if the worker was an employee. A “willful misclassification” is defined as “avoiding employee status for an individual by voluntarily or knowingly misclassifying that individual as an independent contractor.” Section 226.8(b) imposes penalties of between $5,000 and $15,000 for each violation. The penalty is increased to between $10,000 and $25,000 per violation if either the Labor Workforce Development Agency (“LWDA”) or a court determines that the person or employer has engaged in a pattern or practice of violations.

In addition to the civil penalties, the new law requires any person or employer who willfully misclassifies a worker as a contractor to post a notice which states: (1) it has committed a serious violation of the law by engaging in the willful misclassification of employees; (2) it has changed its business practices to avoid further violations; and (3) any worker who believes he or she is being misclassified may contact the LWDA. This notice must be posted prominently on the employer’s website, if the employer has one, and in the workplace if the employer does not have a website.

Furthermore, under Labor Code section 2753, any person who 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 ultimately found not to be an independent contractor. The law specifically exempts attorneys providing advice in the course of practicing law and anyone who provides advice to his or her employer.

Practical Implications for Employers

The potential civil penalties arising from violations of Labor Code section 226.8 are extraordinary. Liability can amount to thousands of dollars with respect to a single misclassified employee. California employers should be vigilant to ensure that they have a sound basis for their decision to classify workers as independent contractors, and seek the advice of counsel if they have any question about the classification of their workers.