Stiff New Penalties for Misclassification of Impartial Contractors

There was a development in recent times for corporations to deal with employees as unbiased contractors as a way to keep away from the executive tasks and further prices relevant to workers (payroll taxes, employees’ compensation insurance coverage, unemployment insurance coverage, extra time pay, and numerous worker advantages). In response, each the Inside Income Service and state businesses have stepped up compliance audits to verify whether or not companies are correctly classifying their employees. An employer who has made incorrect classifications faces an array of governmental fines and penalties, in addition to legal responsibility to the misclassified employees.

California has raised the stakes with a brand new legislation, efficient January 1, 2012, which provides Sections 226.8 and 2753 to the Labor Code. Part 226.8 prohibits any particular person or employer from willfully misclassifying a person as an unbiased contractor, or from making any prices or compensation deductions (e.g., for items, supplies, or house rental) to such particular person if it could be illegal to make such prices or deductions to an worker. Part 226.8 imposes penalties of $5,000 to $25,000 for every violation.

The legislation doesn’t specify how typically a “violation” is deemed to happen, leaving open the chance that a number of penalties may very well be assessed with regard to a single employee. A willful misclassification is outlined as one that’s “voluntary and realizing.” It’s not clear how this commonplace will probably be interpreted by the courts.

Part 226.8 additionally requires any employer discovered to have violated the legislation to show prominently on its web site for one yr a specified discover referring to the violation.

Violations of the legislation by licensed contractors will probably be reported to the Contractors’ State License Board, which can provoke disciplinary motion in opposition to the contractor.

Beneath Part 2753, an individual who, for cash or different helpful consideration, knowingly advises an employer to deal with a person as an unbiased contractor to keep away from worker standing for that particular person shall be collectively and severally liable with the employer if the person is discovered to not be an unbiased contractor. This provision might be anticipated to influence outdoors advisors akin to accountants and human sources consultants. Staff advising their employer and attorneys offering authorized recommendation are excluded from legal responsibility underneath Part 2753.

Compliance with the brand new legislation is difficult by the truth that the legislation doesn’t present a transparent take a look at as as to whether a employee is an worker or an unbiased contractor. Beneath pre-existing legislation, a employee typically is taken into account an worker if the principal has the ability to direct and management the way and means through which the work is carried out. Nevertheless, numerous different components will probably be taken into consideration, with completely different checks underneath California and federal legislation, necessitating a fact-intensive evaluation for every case.

One compliance technique for a enterprise that desires to keep away from the burdens of employment administration and the dangers of improper classifications is to safe employees by a separate companies firm, which employs the employees supplied to the enterprise, versus having the enterprise straight retain unbiased contractors.

In any occasion, corporations who wish to use unbiased contractors ought to seek the advice of with authorized counsel, given the problem of creating correct classifications and the doubtless steep prices of failing to take action. Acquiring competent skilled recommendation can cut back the chance of incorrect classifications, and in addition may give an employer a foundation for sustaining {that a} misclassification was not “willful.” As well as, fastidiously ready agreements with contractors and different applicable documentation (e.g., a contractor’s enterprise license and proof of insurance coverage held by the contractor), whereas not at all determinative, may help an organization to substantiate the legitimacy of an unbiased contractor relationship.

Originally posted 2023-02-10 17:20:26.