California may have banned “Assault Weapons” but that is not stopping them from “assaulting” the businesses in their own state. In the nearly bankrupt state, motor carriers that use independent contractors are again being targeted. All businesses in California, especially in the construction and transportation industries, will have a new law on January 1, 2012 to deal with concerning the classification of workers as independent contractors. California Senate Bill (SB) 459 was approved by Governor Jerry Brown on October 9, 2011, and this new law has some serious consequences for misclassification. A motor carrier could, in theory, be inundated by complaints from “unhappy” independent contractors because the new law authorizes ANY individual to “file a complaint” which forces the Labor Commissioner to open an investigation on the company.
The real risk in this new law does not come from the agency enforcement so much as it does from the threat of huge class action lawsuits. ANY individual can now file any complaint against a company and once a complaint is filed, that company must be investigated. The bill would authorize the Labor Commissioner to assess civil and liquidated damages against a person or employer based on a determination that the person or employer has violated the law. Further, certain non-lawyer advisors can also be held “jointly and severally liable with the employer” if the individual is found to be a misclassified employee. If you didn’t know it before, willful failure to pay employment taxes is a federal crime in almost all states.
Once the Labor Commissioner, a court, or the Labor and Workforce Development Agency has determined that an employer or other person has engaged in an unlawful practice, the employer or person is subject to a civil penalty that can range between $5,000 and $15,000 for each violation found, plus any other penalties or fines permitted by law. Moreover, if the employer or person is found to have engaged in a pattern or practice of such unlawful practice, the civil penalty which can be levied increases to a minimum of $10,000 and a maximum of $25,000 per violation. The legislation also permits the Labor Commissioner or a court to order the payment of damages to anyone injured by having been willfully misclassified. The Labor Commissioner further is authorized to seek enforcement of orders issued under SB 459 in the courts.
The final stab in the back is what I call the “Scarlet Letter” rule, going back to the 1850 novel by Nathaniel Hawthorne. The bill says that the violating employer will be required to publish, on the company’s official website, that it “has committed a serious violation of the law by engaging in the willful misclassification of employees.” The required notice on the firm’s website shall be posted for one year. Once again, this bill (SB 459) will be effective January 1, 2012. Once a “citation” is issued for violation of this new law, the employer will have the right to a trial/hearing on the merits of the citation. However, the hearing will be administrative and likely will be set very quickly, giving the employer very little time to prepare to defend itself against this very serious matter.
This new law, in my eyes, is very drastic and extremely dangerous for all businesses in California (and beyond) – especially those that are pushing the envelope on the use of independent contractors. May I remind all of my readers out there that most of the laws passed in California usually quickly spread across the country like a virus. The best defense for employers is to use only clear, common law independent contractors (those that are clearly engaged in an independent established business).
Additionally, within the last few months, the Internal Revenue Service (IRS), the US Department of Labor (DOL), and eleven states (eight democratic states and three republican states) have joined forces to launch a new set of initiatives to reduce the misclassification of workers. On September 19, 2011, Hilda Solis, the US Secretary of Labor, announced a joint effort between the DOL, the IRS and 11 states to share information and coordinate law enforcement among them with the goal of ending the practice of misclassifying employees to avoid providing employment protections. The participating democratic states include Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, New York and Washington, while the republican states are Missouri, Montana and Utah.
The US Equal Employment Opportunity Commission (EEOC) recently filed several lawsuits on behalf of truck drivers who allege that they were discriminated against by their employers at the trucking companies where they worked. The EEOC says it is just a “coincidence” that several large trucking companies are currently being sued by them, citing employment discrimination issues.
In addition to all of the recent lawsuits being filed, the IRS has also unveiled an employer forgiveness program called the Voluntary Classification Settlement Program. In this program, if an employer voluntarily comes forward and reports that they have been misclassifying their employees as independent contractors, the IRS would require that they only pay about 10% of the back taxes. The IRS also promises no audits and no penalties on unpaid taxes. However, the IRS has no control in courts as far as labor laws are concerned, so the companies that come forward will be opening themselves up for lawsuits for overtime pay.
If you suspect or have doubts that a state or federal audit might question the status of your independent contractors, then you are probably too close to the line. If so, you need to contact our NTA-endorsed attorney, Miles L. Kavaller at (818) 728-4821 or me, Wayne Schooling at (562) 279-0557, to schedule an appointment to review your operations. NTA (www.ntassoc.com) has plenty of Attorneys, CPAs, Bookkeepers, Business Consultants and others on-hand to help you and your independent contractors continue working together. Since many companies will be affected by this new law, we suggest that you make an appointment in advance to ensure you have the proper representation. Until next month, “Drive Safe – Drive Smart!”