Affectionately known as the "The Job Killer Act," California Senate Bill 459 was signed into law by Governor Jerry Brown on October 9, 2011. The new law imposes severe civil penalties on employers who "willfully" – whatever that means -- misclassify individuals (including truck owner-operators) as independent contractors. The law imposes penalties in an amount between $5,000 and $15,000 per violation, in addition to any other applicable penalties. If an employer is found to have engaged in a "pattern or practice" of willfully misclassifying its employees, the potential per-violation penalties increase to between $10,000 and $25,000. In comparison, penalties for other California Labor Code violations are typically between $50 and $200 per count, and there are often penalty caps of $1,000 to $4,000. The statute also authorizes similar, but additional, penalties to employers who charge fees or take certain improper paycheck deductions -- such as for equipment rental -- from a willfully misclassified independent contractor.
As if exorbitant penalties are not enough, anyone found to have violated the statute must prominently display a notice of its offense on its Internet Web site for one full year. Further, licensed contractors could face even greater punishment. The statute also mandates that violations be reported to the Contractors' State Licensing Board, which then must initiate disciplinary action against the contractor.
To compound the problem for employers, the threshold questions of (1) whether an employee has been misclassified and (2) whether that misclassification was "willful" are complicated, multi-factor, fact-intensive inquiries. The test for whether a putative employee is an independent contractor, for instance, hinges predominantly on the amount of control the employer has over the means, rather than just the results, of a particular task or project; an inquiry that is fertile ground for protracted, expensive litigation. Moreover, the definition of "willful misclassification" as it is used in this statute is vague and somewhat circular -- "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor". The high fines and other penalties, the complicated nature of the legal questions involved, and the potential for enormous class actions which are likely to result in costly litigation regarding interpretation of Senate Bill 419, not to mention the scrutiny of state and federal agencies which could include the California Labor Commissioner, the Employment Development Department and the IRS, seem intended to force employers, whether culpable or not, to seek to settle any action brought against them under this statute.
Still to be determined by the courts is what effect the law will have on carriers that are covered by the federal Safe Harbor provisions of §530 of the Internal Revenue Act. If you use independent contractors in the state of California, it is highly recommended that you have the classifications reviewed by legal counsel.
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