California Independent Contractor Classification Law

Do you operate a business in California that retains independent contractors? If so, you need to be aware of a new state law that, according to the Monterey Herald.com, “penalizes businesses that ‘willfully misclassify’ employees as independent contractors.”

Under current law, businesses that engage in this kind of misclassification “are subject to consequences, including liability for payroll taxes, unpaid unemployment insurance contributions and penalties for failure to secure workers’ compensation coverage.” Moreover, “because the misclassified individuals have not been paid pursuant to wage and hour laws,” they are often entitled to overtime pay as well as compensation for “missed meal and rest periods.”

Many business owners believe that if they have an independent contractor agreement with the worker, they are in compliance with law. However, such an agreement alone does not necessarily determine whether a worker is an independent contractor. As the Monterey Herald.com further reports, “the most important factor is whether the business has control or the right to control worker as to the work done and the manner and means in which it is performed.”

Under Senate Bill 459, which will go into effect on January 1, businesses will be subject to hefty fines ranging from $5000 to $25,000 per violation if they:

• willfully misclassify a worker as an independent contractor or
• charge a person who has been “willfully misclassified as an independent contractor a fee or make any deductions for compensation.”

This new law interprets “willful misclassification” as “voluntarily and knowingly misclassifying” an individual as an independent contractor.

The message behind Senate Bill 459 is simple. If your California business uses independent contractors, be careful how your categorize them in your records: misclassification could cost you a bundle.