A common legal challenge facing small businesses and entrepreneurs is whether or not they can use the Independent Contractor status for people they employ. Many small businesses would rather use Independent Contractors. With no workers’ compensation, no withholding tax, no payroll tax, no employment law liability; running your business is easier and less costly and time-consuming.
Millions of workers in the U.S. are retained as “independent contractors” rather than “employees”. Home health aides, nannies, truck drivers, gardeners, general contractors, taxi drivers, limousine drivers, barbers, hair stylists and many others are hired as Independent Contractors.
Many of these workers prefer the independent contractor status for its flexibility, including the ability to decide how and when to work and for whom.
But a new law recently signed by Gov. Jerry Brown raises a large red flag for anyone using independent contractors in California because it dramatically raises the chance for businesses found to have willfully misclassified workers.
In October of 2011,California enacted a new law prohibiting “willful misclassification of independent contractors.”
Governor Brown signed the legislation that prohibits the willful misclassification and creates civil penalties of between $5,000 and $25,000 for each willful misclassification of a worker.
226.8. (a) It is unlawful for any person or employer to engage in any of the following activities:
(1) Willful misclassification of an individual as an independent contractor.
(2) Charging 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 where any of the acts described in this paragraph would have violated the law if the individual had not been misclassified.
(b) If the Labor and Workforce Development Agency or a court issues a determination that a person or employer has engaged in any of the enumerated violations of subdivision (a), the person or employer shall be subject to a civil penalty of not less than five thousand dollars ($5,000) and not more than fifteen thousand dollars ($15,000) for each violation, in addition to any other penalties or fines permitted by law.
In summary, under the newly enacted statute — Labor Code §226.8 — any entity that “willfully misclassifies” an individual as an “independent contractor,” when that individual is determined to have actually been an “employee,” faces stiff civil penalties.
The law signed by Brown (effective Jan. 1, 2012) amends the Labor Code to add two new sections specifically aimed at the perceived practice of misclassification of employees as independent contractors and the purported loss of substantial dollars in unpaid taxes.
If you are a small business owner or a worker with questions about job classification, you will benefit from contacting a labor attorney specializing in this area.