New California Law Discourages Independent Contractors And Sole Proprietorships By Potentially Penalizing Businesses That Use Their Services

In the last hours of his opportunity to veto new legislation, California Governor Jerry Brown signed SB 459. Similar to a bill previously vetoed by former Governor Schwarzenegger and dubbed the "Job Killer Act" by business, SB 459, effective January 1, 2012, might be called by some critics the "Small Business Killer Act." Championed by organized labor and supported by Democratic legislators, the practical consequences could prove to discourage businesses from utilizing independent contractors based in California, while also discouraging service-providing sole proprietorships and other independent contractors from providing services to other businesses in California.

What Does This Law Do? The Highlights

The new law:

Potentially discourages the engagement of independent contractor/sole proprietorships by penalizing employers who commit a "pattern and practice" of "willfully misclassifying" such service providers up to $25,000 per violation. Provides for joint and several liability for consultants (excluding practicing lawyers) who advise employers on such independent contractor engagements. Makes it unlawful to charge "misclassified" independent contractors any fee or take deductions from the compensation paid such contractors. Provides that the penalties are in addition to existing penalties, interest and taxes that may be imposed at the state level for misclassifying contractors. Appears to concentrate enforcement with the Labor Commissioner, but also provides for private action, potentially including Private Attorney General Act (PAGA) lawsuits. Does nothing to clarify who is an independent contractor versus an employee, although it defines "willfully misclassifies." Effectively requires a one-year public prominent posting (on a website or at a worksite) of notice that the entity was found to have willfully misclassified an independent contractor. Basically, under this newly enacted statute any entity that "willfully misclassifies" an individual as an "independent contractor," when that individual is determined to have actually been an "employee," faces new stiff civil penalties and other repercussions. The law amends the Labor Code to add two new sections, Labor Code sections 226.8 and 2753.

New Penalties for Misclassification

Under this new statute, the California Labor and Workforce Development Agency can fine an entity that "willfully misclassifies" an "employee" not less than $5,000 and up to $15,000 per violation. Further, if that entity is found to have engaged in a "pattern or practice" of misclassification, then those fines are ratcheted up to a minimum of $10,000 per violation, with a cap of $25,000 per violation.

"Willful misclassification" means avoiding employee status for an individual "by voluntarily and knowingly misclassifying that individual as an independent contractor." As with penalties for willfully failing to pay employees their final pay, employers will argue that a good faith dispute over the individual's classification should defeat the necessary "willful" conduct.1 However, until the...