California State Law Change

Governor Brown recently signed into law a new bill that impacts California employers. 
Effective January 1, 2012, Senate Bill 459 (“SB 459”) will impose significant penalties for:

Willfully misclassifying employees as independent contractors.  “Willfully misclassifying” is defined as “voluntarily or knowingly misclassifying.”

  • Charging a misclassified independent contractor, or making any deductions from their compensation, for normally covered employee expenses such as materials, space rental, services, licenses, or equipment maintenance.

SB 459 further:

  • Imposes a penalty of $5,000 to $15,000 for each violation.
  • Increases the civil penalties to between $10,000 and $25,000 if the employer has been engaged in a pattern of such violations.  To add insult to injury, any employer found in violation will be required to publicly display on their website or place of business a notice of violation for one year.
  • Authorizes a state court or the Labor and Workforce Development Agency to determine if an employer has violated the new law.
  • Empowers the California Labor Commissioner’s Office to respond to any complaints by an individual that they have been misclassified as an independent contractor.


Related Federal Law Development

The IRS recently announced an amnesty program, the Voluntary Classification Settlement Program (VCSP), that provides partial amnesty to employers who reclassify their workers as employees for future tax purposes by providing significant relief from past federal payroll taxes, penalties and interest. 

The net outcome:

  • It sounds like a good deal, and it is, specifically regarding liability for federal employment taxes.
  • However, VCSP will not provide amnesty from claims by state taxing entities, workers compensation carriers and any misclassified workers.
  • This is important since the IRS will likely share its database of employers who apply for VCSP amnesty with state and local taxing entities.


Why this sudden flurry of activity about the correct classification of independent contractors? 

 Our guess is that it’s all about generating tax revenue.  The Obama administration has stated in budget documents that it believes that cracking down on the misclassification of independent contractors will yield at least 7 billion dollars over the next ten years.  Governor Brown has personal experience in generating revenue for California by going after companies who have misclassified independent contractors when he was California’s State Attorney General.  During his tenure, the California State Attorney General’s office won a $13 million dollar judgment against two companies that had misclassified janitors as independent contractors rather than employees.

Given this trend, we recommend that California companies carefully review the status of all of their independent contractors to determine if any of these contractors should be re-classified as employees.  Secondly, employers should establish internal policies that must be complied with for individuals to be classified as independent contractors. 

If you need help in reviewing your employment policies or procedures, or your employee classifications, please call your employment attorney at Carr, McClellan.