Last month, California Governor Jerry Brown approved a variety of state legislation affecting employers doing business in California. Discussed here is SB 459, which imposes strict penalties for employers found willfully (intentionally and voluntarily) to have misclassified workers as independent contractors. Known to some as the "Job Killer Act," SB 459 provides for stiff fines, joint and several liability for third parties advising as to intentional misclassification, and a "scarlet letter" provision requiring employers who are found willfully to have misclassified their workers to post public notice of the violation for a year. The Act adds new Labor Code sections 226.8 and 2753, effective January 1, 2012.

Inadvertently included in our summary last month of the Act’s provisions was a burdensome recordkeeping and notice requirement that appeared in pre-signed versions of the Act. We are pleased to report, however, that this burdensome requirement did not survive and is not part of the new Act. Following are notable provisions of the signed Act, with the stricken provision deleted:

  1. Fines of $5,000 – $10,000 for the first violation, and up to $25,000 for repeat violations;
  2. Prohibition on charging workers a fee or deducting anything from workers’ payments had the fee or deduction been prohibited to be taken from an employee’s pay (such as for goods, materials, space rental, services, licenses, repairs and maintenance);
  3. Notice and recordkeeping, using a state-created form, requiring the principal to factually justify independent contractor classification for each worker so classified, and advising the worker of the tax ramifications of the classification and of his/her rights to challenge the classification;
  4. Joint and several liability for any person who knowingly advises an employer to misclassify a worker as an independent contractor (employer’s agents and legal counsel are exempt); and
  5. A "scarlet letter" provision requiring employers who are found willfully to have misclassified their workers to post public notice of the violation.

Because the new law provides no guidance on how to review worker classification to ensure compliance, employers will be required to apply the fact-intensive tests in California case law and announced by the Employment Development Department. Adding to the challenge, federal and California classification standards vary to some degree.

The new law continues the push begun by the federal Internal Revenue Service, the California Employment Development Department, and other states’ taxing authorities to microscope worker classification and impose significant penalties for companies guilty of misclassifying at the federal and state level. Particularly in this era of cash-strapped governments seeking added revenue, companies using independent contractors in California need to make certain they pass all legal tests.