Joint and Several Liability for Employers and Third Party Advisors for Willful Misclassification Publication

In a previous blog entry, we highlighted the different factors that could be considered to properly classify workers as employees or independent contractors, and the legal consequences of misclassifying such workers as independent contracts by employers seeking to avoid payroll taxes and overtime. In this article, we want to focus on the new California law that makes it unlawful for employers and other third party advisors alike to willfully misclassify an individual as an independent contractor, which further holds such third party advisors jointly and severally liable for such misclassification with the employer.

These sections codify Senate Bill 459, passed in 2011. Under the newly added Section 226.8(a) of the California Labor Code, the legislation makes it unlawful for any person or employer to willfully misclassify an individual as an independent contractor. Labor Code Section 2753 further broadens the range of potentially liable parties to any party who, for money or other valuable consideration, knowingly advises an employer to misclassify an individual as an independent contractor to avoid employee status. Even an employer's third party advisor, such as a financial, accounting, and HR professional, can potentially be jointly and severally liable with the employer for fines and penalties assessed for willful misclassification of workers. Attorneys and employees who provide legal advice to the employer are, however, exempt from this joint liability section.

The penalties that can be assessed against the employer and its third party advisors are set forth in Section 226.8(b), which includes monetary penalties between $5,000 and $15,000. The penalty can increase to between $10,000 and $25,000 per violation if any of the appropriate agencies determines that an employer is a repeat offender and engages in a pattern of such violations. Employers can also be required to publicize the nature of the violation on its website or actual place of business for a period of one (1) year. The posting of the violation must include the fact that (i) the employer has engaged in the willful misclassification of employees, (ii) it has changed its business practices to avoid further violations, and (iii) any employee who believes he or she is misclassified may contact the Labor and Workforce Development Agency (with the Agency's contact information included).

If the employer is a licensed contractor under the California State License Law and is found to be in violation of willful misclassification, the employer will be reported to the Contractors State License Board, which will initiate disciplinary proceedings against the offending contractor. Moreover, if a successor company has one or more of the same principals or officers of the prior company engaging in the same or similar line of business, such successor company may be held liable for the former company's violations and will not be able to escape the monetary and disciplinary penalties.

The foregoing enactment of the new legislation under the Labor Code attempts to strongly discourage employers and third party advisors from willfully and knowingly misclassifying workers as independent contractors in order to avoid complying with the applicable employment laws. It is thus important for employers and third party advisors to consult with an employment law expert or the proper governmental agencies to properly classify workers, and to remain in compliance with employment laws.