Willfully Misclassified: New Perils in Misclassifying Workers as Independent Contractors
By Andrew K. Jacobson
In an era of ultra-tight budgets, getting something for less is appealing. One such temptation is hiring someone to be an independent contractor, instead of as an employee. The Legislature and Governor Brown, however, have added to the downside of that calculation.
Hiring someone as an independent contractor instead of as an employee has its advantages: the employer doesn’t have to withhold taxes, and doesn’t have to pay the employer’s portion for medicare (1.45% of a paycheck) or social security (6.2% of a paycheck, up to $108,600 annually). They are also less subject to labor regulations, like minimum wage, twice-monthly paychecks, overtime and the like. The California government discourages independent contracting, because independent contractors are far less reliable in paying taxes, while being far more vulnerable to employer abuses.
The California Labor Commission frequently upholds claims of independent contractors who contend that they should have been classified as employees. This results in back taxes paid by the employer, plus penalties. Businesses required to pay thousands of dollars in back taxes and penalties for each worker are frequently crippled, in some cases, permanently. However, the Legislature and the Governor felt that a heavier penalties were needed, and passed new Labor Code sections 226.8, and 2753, effective January 1, 2012.
Willful Misclassification Prohibited. Cal. Labor Code § 226.8 prohibits an employer from willfully misclassifying someone as an independent contractor, charging civil penalties of $5,000 to $15,000 per violation, and those with a pattern of violating the independent contracting rules can be subject to civil penalties of $10-25,000 each. Further, the Contractors’ State License Board can initiate disciplinary actions, up to disbarment, against general contractors who have been found to have willfully misclassified workers as independent contractors. Cal. Labor Code § 2753 provides that non-attorneys who conspire with an employer to misclassify workers as independent contractors can be jointly and severally liable for these penalties.
What is an Independent Contractor? California common law defines an independent contractor as someone who is responsible to the employer only for the results of the work, and not how the work is done. When Bay Oak Law needs plumbing services, we leap to the phone to call our favorite plumber and let them to the work. We don’t stand over them, telling them what wrench to use, or how deep a hole to dig: we trust their expertise. That is a true independent contractor: temporary assignment, using the contractor’s own tools, doing something that is not the regular business of the employer, but is the specialty of the independent contractor.
Using a set of tests from a case called S.G. Borello & Sons v. Dep’t of Industrial Relations, 48 Cal. 3d 341 (1989), an employer can guess whether a worker would qualify as an independent contractor:
- Is the worker engaged in an occupation or business different from that of the employer?
- Is the work different from the regular business of the employer?
- Does the worker supply the tools, and the place where the work is done?
- Does the worker have an investment in the equipment or materials required?
- Are there special skills required in the worker’s occupation?
- Is the work usually done by a specialist without an employer’s supervision?
- Can the worker profit depending on his or her managerial skill?
- Is the work limited in time?
- Is the method of payment per job, or a part of the job?
- Do the employer and the worker believe they are not creating an employer-employee relationship?
An answer of “no” to one or two of these questions is not likely to result in a finding that the worker is an employee; plumbers, for example, usually work where the plumbing is, but they are still usually classified as independent contractors. California law recognizes that “individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.” Borello, 48 Cal. 3d at 351. However, the more negative answers to the checklist above, the more likely the worker is to be found to be an independent contractor.
A useful rule-of-thumb for California employers is that independent contractors should be the exception, not the rule. The costs of a mistake are much higher come January 2012, as the California government’s addition of penalties of willful misclassification has raised the stakes.