Thursday, January 12, 2012

Misclassifying Worker as Independent Contractor - New California Law Plus Implications where Business Operates

In October 9, 2011, Governor Jerry Brown signed into law the Senate Bill 459 (Ellen Corbett) which prohibits willful misclassification of a worker as an independent contractor.  

As of January 1, 2012, this new California Law took effect with Section 226.8 has been added to the Labor Code.

The following are its provisions; 
1. Willful misclassification of an individual as an independent contractor.
2.  Charge an individual who has been willfully misclassified as an independent contractor a fee, or making any deductions from compensation, for any purpose, including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or fines arising from the individual’s employment would have violated the law if the individual had not been misclassified.

When a violation has been determined, a person or the employer would be;
1. Subject to a civil penalty of not less than five thousand dollars ($5,000)
2. And not more than fifteen thousand dollars ($15,000) for each violation, in addition to any other penalties or fines permitted by law

When a violation has been determined that an employer or a person has engaged in any of the enumerated violations of subdivision; (a) and the person or employer has engaged in or is engaging in a pattern or practice of these violations,
1. Subject to a civil penalty of not less than ten thousand dollars ($10,000)
2. and not more than twenty-five thousand dollars ($25,000) for each violation, in addition to any other penalties or fines permitted by law.

When it is determined that the person or an employer is a licensed contractor company pursuant to the Contractors’ State License Law and has violated subdivision (a), State Agency shall transmit a certified copy of the order to the Contractors’ State License Board for disciplinary action.

An employer who is determined as a violator of the law, it will be required to do the following;
1. Must post a notice on its website that; (a) it has committed a serious violation of the law by engaging the willful misclassification of employees, (b) it has changed the business practices to comply with the law, (c) it provides any employee who believes that he or she is being misclassified as an independent contractor may contact the Labor and Workforce Development Agency. The notice shall include the mailing address, e-mail address, and telephone number of the agency. (d) the notice is being posted in pursuant to a State order.

In addition the employer also shall satisfy the following requirements in preparing the notice:
(1) An officer shall sign the notice.
(2) It shall post the notice for one year commencing with the date of the final decision and order.

An inspection to the compliance of the law may take place at any time. Violators of non-compliance to issued order will be given a citation in addition to the penalties or damages that are otherwise available at law.

When an employer does not have a website, such notice must be posted prominently in areas that are accessible to employees and the public.

1. Any person or employer who will hire an independent contractor must understand the full responsibility of the function and not the same or similar to someone who is employed in the organization.
2. The Rule of Thumb, check the IRS IC Test to determine whether the position is classified correctly as an independent contractor versus a supervised or managed employee.
3. It will be worthy to understand the example provided by the IRS regarding their description of a Common Law (Employee)

Common Law Rules (source:
Facts that provide evidence of the degree of control and independence fall into three categories:
a. Behavioral - does the company control or have the right to control what the worker does and how the worker does his / her job?
b. Financial - are the business aspects of the worker's job controlled by the payer? (these include things like how worker is being paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
c. Type of relationship - are the written contracts or employee type benefits (1.e. pension plan, insurance, vacation pay, etc.) identifiied? Will the relationship continue and is the work performed a key aspect of the business?

4. When in doubt about the responsibilities of the role and cannot determine whether or not it falls in a correct classification, sought the guidance of an experienced human capital consultant or employment attorney

Many argue that this law is a "job creation killer". For any follower of laws, a correct classification of every worker will take place upon hire. For any non-follower of laws, an employee who may not qualify to perform the role of an independent contractor may be classified as one for purposes of convenience and cheap labor.

This law has a backbone to protect hard working individuals and be classified as independent contractor. This new law also allow anyone within the organization to report to the State Agency, that there is someone working within the premises who was misclassified.

The ICs are business people who deliver the quality of work without the help of micro-managers.

Business Operation's Location as a Consequential Evidence of Greater Interest:
When executing an independent contractual agreement, do not ignore to identify the actual location of the job being performed by the Independent Consultant / Contractor, required by the contracting business. It is equally essential to identify the actual location of the hiring party whether within the state or outside the state. The relationship between parties must demonstrate the impact of "materially greater interest" when the job is being performed. Both locations help determine the location of materially greater interest.

The most recent case that illustrated such conflict which emphasized the business operations location and its greater interest was the case of Ruiz v. Affinity Logistics Corporation.

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