Dozens of new California labor laws went into effect on January 1, 2012. One of these laws is California Senate Bill 459, affectionately known as the "The Job Killer Act." It was signed into law by Governor Jerry Brown on October 9, 2011 and imposes severe penalties on employers who "willfully" misclassify workers as independent contractors. The penalties range between $5,000 and $15,000 per violation for first time offenders, and $10,000 - $25,000 if an employer is found to have engaged in a "pattern or practice" of willfully misclassifying its employees as independent contractors. (Just to compare to penalties for other California Labor Code violations, they typically range between $50 and $200 per count, with maximum caps of $1,000 to $4,000).

To add insult to injury, employers found to have violated the statute must prominently display a notice of its offense on its business website for one full year! Further, licensed contractors could face even greater punishment as the new law requires violations to be reported to the Contractors' State Licensing Board, which then must initiate disciplinary action against the contractor.

Intensive Investigations

On the Federal level, the misclassification of workers has been a focus of attention by the Department of Labor. Labor Secretary Hilda Solis, recently stated, "The misclassification of employees as independent contractors is an alarming trend. The practice is a serious threat to both workers, who are entitled to good, safe jobs, and to employers who obey the law and are undercut when others use illegal practices."

The Labor Department is now sharing information concerning businesses that misclassify workers with the IRS, as well as with a number of states that have agreed to work cooperatively with the Labor Department. As part of their efforts, the Labor Department has also hired approximately 300 investigators to explore wage theft grievances.

The IRS has already collected almost $4 million of back wages in 2010, during the first of its three-year plan to audit some 6000 randomly selected, various sized companies. It is our understanding that eventual goal of the plan is to create an employment taxes scoring system.

Be Proactive to Protect Your Company

Employers who misclassify employees as independent contractors may eventually find themselves paying significant penalties, in addition to employment taxes and various benefits for which the misclassified employee may be eligible such as pension, health insurance, worker compensation, vacation and sick benefits, unemployment Employee Misclassification more. As such, it behooves all employers to be proactive in reviewing their employee job descriptions and reclassifying misclassified workers if necessary. A few tips:

Read through the Labor Department's rules and examine workers' job descriptions to determine whether classifications are correct.

Complaints should be investigated promptly. A worker claiming that they are entitled to a particular status or financial benefit should be heeded and employers should be sure to examine the case.

Review the IRS guidelines. The IRS provides clear eligibility parameters for determining independent contractor status. One must consider all information that helps determine the degree of control and independence maintained by the worker in relation to the company.