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CALIFORNIA ENACTS 22 NEW EMPLOYMENT LAWS, INCLUDING ONE THAT CREATES NEW PENALTIES AND A "PERP WALK" FOR MISCLASSIFYING WORKERS


CALIFORNIA ENACTS 22 NEW EMPLOYMENT LAWS, INCLUDING ONE THAT CREATES NEW PENALTIES AND A “PERP WALK” FOR MISCLASSIFYING WORKERS …(SIGH)

 

Governor Jerry Brown assured California’s position as one of the most regulated states for employers by signing 22 new employment laws earlier this month.  Most of the laws will take effect on January 1, 2012.  Some of the more significant of these new laws:

 

·                     Require that all new hires must be given a statement by the employer of their rate of pay, allowances that will be taken as part of the minimum wage (if any), the pay day, the name and address and telephone number of the employer and the name and contact information for the company’s workers’ compensation carrier.  In addition, employers will be required to notify existing employees of any change to any of the information within seven days of the effective date of the change.

 

·                     Prohibit credit checks on applicants for employment unless the job for which they are applying is within specified categories, largely either required by some other law or within a position of trust.

 

·                     Redefine “gender” for purposes of California’s discrimination laws to include gender identity and gender expression.

 

·                     Make it unlawful for any individual to prevent or attempt to prevent the exercise of rights under the California Family Rights Act.

 

·                     Enhances penalties for the denial of insurance coverage to same-sex domestic partners if the coverage would have been provided to spouses in different-sex unions.

 

·                     Requires paid leave for employees who become organ donors (30 days per year) and for employees who become bone marrow donors (5 days per year).

 

None of the new laws adds as many complexities or will have as significant an effect as S.B. 459, however.  This new law creates civil penalties of $5,000 to $15,000 per violation if a court or the California state enforcement agency concludes that an employer doing business in California has misclassified employees as independent contractors.  If the finding is that the employer engaged in a pattern or practice of willfully misclassifying employees, the penalties increase to as much as $25,000 per violation.

 

In addition to the financial penalties, the law would require employers who are found to have misclassified workers to do the functional equivalent of a “perp walk-” posting on the company’s website (or, if the company has no website, by written notice to employees and the public) a notice that the employer had been found to have “committed a serious violation of the law.

 

Employers in every state have been struggling with understanding the definition of an independent contractor.  Using independent contractors is substantially less expensive than having employees do the work.  With employees come taxes, workers compensation, overtime wages, retirement plans and health/disability insurance.  All of these can be avoided by using independent contracts.  As a bonus, employers have less emotional attachment to independent contractors, making a reduction force less costly, both financially and emotionally. 

 

Misclassifying an employee as an independent contractor, however, results in huge liability which not only will wipe out all cost savings but also result in penalties.  Complicating the decisional process is that various government agencies, both state and federal, use different tests to determine whether a worker is an independent contractor or employee.  Some agencies and courts have gone to the three factor test, while others continue to hang on to the IRS’s list of 22 factors. 

 

California, in its new law, had the opportunity to bring some clarity to the issue, at least in that state.  Unfortunately, the new statutory definition succeeds only to muddy the already opaque water by being not only imprecise but circular:  willful misclassification “means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.”  Well, duh.

 

The best the California’s Division of Labor Standards Enforcement can do is say that the term “independent contractor” has no set definition and that the determination requires an examination of court decisions and guidelines from regulatory agencies.

 

Employers everywhere, not just in California, must be very careful when making a decision to classify a worker as an independent contractor because the stakes are so high and getting higher.  The slake of class actions alleging violations of the wage and hour law now popular among plaintiff’s lawyers is spreading full force into the area of misclassification of workers. 

 

Nowhere is the danger of private class, cooperative and representative lawsuits more extreme than in California because of that state’s Private Attorney Generals Act of 2004.  Under that law, private citizens (“bounty hunters”) may obtain 25% of the penalties assessed by the state agency for raising labor code violations.  As passed, S.B. 459 does not authorize private causes of action and it is not clearly covered by the Private Attorney Generals Act of 2004.  However, the failure to include the misclassification of workers as one of the labor code violations subject to the Private Attorneys General Act of 2004 may have been a legislative oversight, which may soon be corrected either by the legislature itself or the courts.  Without question, there will be plaintiffs’ lawyers who will try. 

 

Also unknown is the probative effect of an employer’s entry into the current IRS voluntary settlement program.  Under that relatively new program, an employer with workers which it suspects may be misclassified can avoid a significant part of the potential IRS back tax liability by agreeing to cure the difficulties and paying a small portion of the tax due.  The new California law does not carve out special treatment for these employers and, as a result, plaintiff’s lawyers may attempt to use that voluntary act as, at least, an implied admission, if not a roadmap to an easy payday.

 

The California legislature also made it more difficult for employers to avoid liability for willful violations by asserting that they relied on the advice of an outside “expert.”  Indeed, finding an expert in California willing to take the risk of providing such advice may be difficult.  Under S.B. 459, anyone who is paid for an opinion that an individual is an independent contractor for the purpose of avoiding the costs attached to employment may be jointly and severally liable for the penalties assessed if the Division of Labor Standards Enforcement or a court concludes that the individuals were misclassified. 

 

California has just become less friendly to employers…even more less friendly. 

 

 
 
 
 
 

James Redeker

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