Say most of your company’s workers are employees, but for certain types of work you bring in independent contractors. You have been doing this for years, and everybody in your industry handles this kind of work the same way. You have nothing to worry about, right?
Not necessarily. Employers use independent contractors instead of employees for a variety of reasons and under a variety of circumstances. The decision to use independent contractors has never been without risk, including the risk of class action lawsuits. However, the stakes in California for misclassifying independent contractors were raised significantly when new Labor Code sections 226.8 and 2753 became effective on January 1, 2012. In addition to possibly having to pay the worker as an employee for past labor (including paying back employment taxes and maybe overtime wages), you now have to be concerned about the potential for additional civil penalties.
Willful Misclassification: California Labor Code Section 226.8 makes it unlawful to “willfully” misclassify individuals as independent contractors. “Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. This section also makes it unlawful to charge a willfully-misclassified contractor a fee or to make any deductions from compensation for any purpose, including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or fines.
- What are the consequences? The penalties for violations of Section 226.8 are steep, ranging from $5,000 to $15,000 per violation (as determined by a court or the Labor and Workforce Development Agency (“LWDA”)), in addition to any other fines or penalties permitted by law. But that’s not all. If a court or the LWDA finds that the employer has engaged or is engaging in a “pattern and practice” of violating Section 226.8, the employer is subject to a civil penalty of not less than $10,000 and not more than $25,000 per violation. It is not difficult to see how these penalties can add up very quickly.