Stiff New Penalties for Misclassification of Independent Contractors

There has actually been a trend recently for companies to deal with workers as independent contractors in order to avoid the administrative obligations and extra expenses suitable to employees (payroll taxes, employees’ settlement insurance coverage, unemployment insurance, overtime pay, and various employee benefits). In response, both the Internal Revenue Service and state agencies have stepped up compliance audits to inspect whether businesses are appropriately categorizing their workers. A company who has actually made incorrect classifications faces an array of governmental fines and charges, as well as liability to the misclassified workers.

California has actually raised the stakes with a new law, effective January 1, 2012, which adds Sections 226.8 and 2753 to the Labor Code. Section 226.8 restricts any person or company from willfully misclassifying a private as an independent professional, or from making any charges or payment deductions (e.g., for items, products, or space rental) to such individual if it would be unlawful to make such charges or deductions to a staff member. Area 226.8 imposes penalties of $5,000 to $25,000 for each offense.

The law does not specify how often a “offense” is considered to happen, leaving open the possibility that multiple charges could be evaluated with regard to a single worker. A willful misclassification is specified as one that is “voluntary and understanding.” It is not clear how this standard will be interpreted by the courts.

Section 226.8 also needs any company discovered to have actually breached the law to show prominently on its site for one year a defined notice relating to the infraction.

Offenses of the law by licensed specialists will be reported to the Contractors’ State License Board, which will initiate disciplinary action versus the professional.

Under Section 2753, an individual who, for loan or other important factor to consider, intentionally encourages a company to treat a specific as an independent specialist to avoid worker status for that individual will be jointly and severally liable with the company if the person is discovered not to be an independent specialist. This arrangement can be anticipated to effect outside advisors such as accounting professionals and human resources experts. Employees encouraging their employer and attorneys providing legal suggestions are excluded from liability under Section 2753.

Compliance with the brand-new law is made complex by the truth that the law does not offer a clear test as to whether an employee is a worker or an independent contractor. Under pre-existing law, an employee usually is thought about a worker if the principal has the power to direct and manage the way and means where the work is carried out. Nevertheless, numerous other factors will be taken into consideration, with different tests under California and federal law, necessitating a fact-intensive analysis for each case. Visit for more information.

One compliance method for a company that wants to prevent the concerns of employment administration and the threats of inappropriate categories is to secure workers through a separate services company, which uses the employees offered to business, instead of having the business directly keep independent specialists.

In any event, business who wish to utilize independent professionals ought to seek advice from legal counsel, provided the problem of making proper classifications and the potentially steep expenses of cannot do so. Acquiring proficient expert guidance can lower the probability of inaccurate classifications, as well as can offer a company a basis for maintaining that a misclassification was not “willful.” In addition, carefully prepared contracts with specialists and other appropriate documentation, while by no means determinative, can help a business to validate the authenticity of an independent specialist relationship.

Aline S. White

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