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In their latest efforts to crackdown on independent contractor misclassifications, California legislature passed and Governor Jerry Brown signed into law a new measure (SB 459) which imposes strict financial penalties on companies and individuals who “willfully” misclassify employees as independent contractors. 

The new law also extends this financial liability to consultants who advise businesses to engage into “misclassification.” The measure will become effective on January 1, 2012. 

What does “Willful Misclassification” mean?

The new law defines “willful misclassification” as a situation where an employer voluntarily and knowingly misclassifies an employee as an independent contractor.  The new law does not apply to those employers who honestly and reasonably believes the worker is a legitimate independent contractor.

Consequences of “Willful Misclassification

Sever Civil Penalties.  Once the Labor and Workforce Development Agency or a court finds  that an employer “willfully” misclassified  employees as  independent contractors, the employer will have to pay between $5000 to $15,000 for each violation.   These penalties almost double, if the Labor and Workforce Development Agency or a court determines that misclassification constitutes a pattern or practice. For each violation the employer is liable in the amount of between $10,000 to $25,000. In addition to these civil penalties, the employer may be held liable for damages under the California wage-and-hour law, including overtime, minimum wage and unlawful deductions. As you can see  the stakes are high, and any single “willful misclassification” may cost an employer a six-figure number.

Public Notice.  An employer found liable for “willful misclassification” is required  to  display prominently on its Internet Web site, a notice that states, among other things, that he engaged in the willful misclassification of employees, and that  the employer has changed its business practices in order to avoid committing further violations.

Possibility of Losing Contractor License.  The new law specifically targets construction industry. If the employer found liable for “willful misclassification” is a licensed contractor, the Labor and Workforce Development Agency can report the violation to the Contractors’ State License Board. The registrar of the Contractors’ State License Board is required to initiate disciplinary action against such employer.

Consultant’s Joint and Several Liability

An employer is not the only player who can be held liable for “willful misclassification.”  The new law extends misclassification liability to anyone who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for that individual shall be jointly and severally liable with the employer if the individual is found not to be an independent contractor.

Free Case Evaluation in San Francisco 

The new law is intent ended to punish only “willful” misclassification. However, just because misclassification is not “willful”, that does not mean that an employer is not liable.  Employers are always liable for damages caused to workers under the California labor code regardless whether misclassification is intentional or just an honest mistake.  If you have questions about this article or any other employment law related matter, feel free to contact our San Francisco employment law attorney.

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