New California Law Regarding Worker Misclassification

A new California law (SB 459) became effective January 1, 2012, to make it unlawful to voluntarily and willfully misclassify a worker as an independent contractor instead of an employee in the state.  The new law also states that businesses may not deduct from a misclassified independent contractor any fee or charge for work-related expenses where such amounts are not permitted to be charged against a regular employee's pay.  State civil penalties from $5,000 to $25,000 for each violation may be assessed.  In addition, licensed contractors can lose their state license to operate.  Advisors (other than employees or attorneys) who knowingly advise a business to misclassify a worker as an independent contractor may be jointly and severally liable for these penalties.

Businesses may try and save money by misclassifying their workers as independent contractors.  However, federal and state governments are cracking down on this abuse.  A misclassified worker not only loses out on potential unemployment and workers' compensation benefits, they may also lose out on benefits provided by the business to regular employees.  Furthermore, the government believes it is missing some employment tax revenue when a worker is misclassified because there is no withholding by the employer on the worker's compensation. 

Any mistakes in misclassifying workers should be corrected as soon as possible.  The IRS currently has a Voluntary Classification Settlement Program in effect that permits employers to correct past mistakes in misclassifying workers.  See my blog post dated October 3, 2011.