BILL ANALYSIS Ó
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: April 13, 2011 20011-2012 Regular
Session
Consultant: Alma Perez Fiscal:Yes
Urgency: No
Bill No: SB 459
Author: Corbett
Version: As amended March 23, 2011
SUBJECT
Employment: independent contractors
KEY ISSUE
Should California employers and the California Employment
Development Department be required to take specified actions to
decrease the incidence of misclassification of workers as
independent contractors?
Should the law governing classification of persons as
independent contractors provide civil penalties for willful
misclassification of an employee as an independent contractor?
PURPOSE
To make it unlawful to willfully misclassify workers as
independent contractors and to establish civil penalties for
such willful misclassifications.
ANALYSIS
Existing law provides numerous comprehensive requirements,
rights, and remedies relating to the employer-employee
relationship, including, but not limited to, wages and other
compensation, hours, workers' compensation, labor code violation
actions, employment contracts, and standards for working
conditions. Under existing law, the Employment Development
Department has the powers and duties necessary to administer the
reporting, collection, refunding to the employer, and
enforcement of taxes required to be withheld by employers.
Existing law establishes the following definitions:
"Employee" means every person in the service of an
employer under any appointment or contract of hire or
apprenticeship, express or implied, oral or written,
whether lawfully or unlawfully employed, as specified.
(Labor Code §3351) But excludes specified individuals such
as someone who is employed by his or her parent, spouse or
child. (Labor Code §3352)
"Independent contractor" means any person who renders
service for a specified recompense for a specified result,
under the control of his principal as to the result of his
work only and not as to the means by which such result is
accomplished. (Labor code §3353)
The contract of employment is a contract by which one,
who is called the employer, engages another, who is called
the employee, to do something for the benefit of the
employer or a third person. (Labor Code §2750)
Existing law requires an employer to keep and maintain, for a
period of not less than two years, a record of the names and
addresses of employees and also the payroll records relating
thereto at a central location in the state or at the plants or
establishments at which employees are employed. Existing law
also requires every person employing labor in this state to
furnish reports or information to the Industrial Welfare
Commission (IWC). In addition, existing law requires that
person to permit a member of the commission or employees of the
Division of Labor Standards Enforcement within the Department of
Industrial Relations free access to the place of business or
employment of that person to secure information or make an
authorized investigation. (Labor Code §1174)
Existing law provides for a civil penalty of $500 for a person
who willfully fails to maintain the required records and
specifies that a person who neglects or refuses to furnish the
required information or refuses access to his or her place of
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business is guilty of a misdemeanor. (Labor Code §1174.5/1175)
This Bill would prohibit willful misclassification, as defined,
of employees as independent contractors. Specifically, this bill
would:
Part 1
a. Make it unlawful for any person or employer to engage in
any of the following activities:
§ Willful misclassification of an employee as an
independent contractor;
§ Charging an employee who has been willfully
misclassified a fee, or making any deductions from
compensation for any purpose where the employer would
have been in violation of the law if the employee had
not been misclassified.
a. Provide that any person found guilty of the above
violations shall be assessed a civil penalty of not less
than $5,000 and not more than $15,000 for each violation,
in addition to any other penalties or fines permitted by
law;
b. Provide that any person found guilty of a repeated
pattern or practice of these behaviors shall be assessed a
civil penalty of not less than $10,000 and not more than
$25,000 for each violation, in addition to any other
penalties or fines permitted by law;
c. Define "willful" as voluntary and intentional; and
d. Provide that the bills' provisions are not intended to
limit any rights or remedies otherwise available by law.
Part 2
a. Require a person employing labor in California to
provide an individual hired as an independent contractor a
form developed by the Employment Development Department
(EDD) that includes:
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§ A notice that the individual has been hired as
an independent contractor;
§ The factors EDD uses to determine whether a
person is an employee or an independent contractor;
§ A statement explaining the impact that the
individual's status has on his/her tax obligations and
eligibility for labor and employment protections; and
§ A notice of the individual's ability to
request from EDD or the Labor Commissioner a
determination as to whether the individual has been
properly classified as an independent contractor.
a. Require an employer to maintain, for not less than two
years, specified records identifying all persons hired as
independent contractors and to make those records available
for inspection upon request of EDD, a member of the
Industrial Welfare Commission, or the Department of
Industrial Relations;
b. Expand the application of the existing civil penalty and
misdemeanor provisions to the compliance requirements for
record-keeping and access with respect to independent
contractors (above).
Part 3
a. Provide that a person who, for money or other valuable
consideration, knowingly advises an employer to treat an
individual as an independent contractor to avoid employee
status for that individual shall be jointly and severally
liable with the employer if the individual is not found to
be an independent contractor. With the exception of 1) a
person who provides advice to his or her employer, and 2)
an attorney who provides legal advice in the course of the
practice of law.
b. Give EDD the power to develop the form required by this
bill, to process a request for a determination, and to take
all steps reasonably necessary to carry out the duties
relating to independent contractors specified in this bill.
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COMMENTS
1. Need for this bill?
Over the years, committee staff has been advised by
stakeholders that misclassification of employees as
independent contractors is an on-going problem. According to
the National Employment Law Project (NELP), state-level task
forces, commissions and research teams have been using agency
audits along with unemployment insurance and workers'
compensation data to document the scope of independent
contractor misclassification. According to NELP, these state
reports show that 10 to 30% of employers, or even more,
misclassify workers, costing the state and federal governments
billions in lost revenues annually. (Independent Contractor
Misclassification Imposes Huge Costs on Workers and Federal
and State Treasuries, NELP 2010)
According to the most recent annual report on Fraud Deterrence
and Detection Activities developed by the Employment
Development Department, the Tax Audit Program as a whole in
2008 conducted 6,356 audits and investigations, resulting in
assessments totaling $193,761,599, and the identifying of
64,539 previously unreported employees. According to EDD,
payroll tax audits have disclosed misclassified workers in
virtually every type and size of business. However, certain
industries seem more prone to have a higher number of
misclassified workers than others. EDD states that
historically, industries at higher risk of having
misclassified workers include businesses that use construction
workers, seasonal workers, short-term or "casual" workers, and
outside salespersons.
Existing law and regulations set forth the conditions under
which a person may be classified as an independent contractor,
and thus not subject to many wage, overtime, working
conditions, and certain other labor standards. The EDD, the
Franchise Tax Board, and the federal government are the
primary entities that have established criteria for making a
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determination as to whether a person may be classified as an
independent contractor. EDD has developed a guide,
worksheets, and forms to assist businesses in determining
whether a worker is an employee or independent contractor.
This bill would increase penalties for intentional and
repeated misclassification of independent contractors and
would hold third parties accountable if they knowingly advise
employers to misclassify. Additionally, this bill would
require that workers classified as independent contractors get
notice of their classification and how to get help if
misclassified.
2. Proponent Arguments :
According to proponents, over the past few decades, the nature
of work has changed dramatically and the traditional
employer-employee relationship has eroded. Proponents argue
that some employers have become more sophisticated at evading
justice and perhaps the most effective way to get off the hook
for worker wage and hour violations is by misclassifying the
worker as an independent contractor.
According to the proponents, when a worker is misclassified,
he or she loses more than just minimum wage and overtime
protections. The misclassified worker has no workers'
compensation coverage if injured on the job, no right to
family leave, no unemployment insurance, no legal right to
organize or join a union, and no protection against employer
retaliation. The author argues that the misclassification of
workers as independent contractors creates an unfair playing
field for responsible employers who honor their lawful
obligations to their employees. Proponents argue that the
people of California should not have to subsidize businesses
that deliberately cheat the system.
In addition, proponents argue that the state also loses with
misclassification due to lost payroll tax revenue and
increased reliance on the safety net by workers who are denied
access to work-based protections. According to the author,
the General Accounting Office estimates that at least ten
million workers are classified as independent contractors
nationally. In addition, the author contends that total cost
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to California in lost tax revenue has been estimated at $7
billion. The author believes this bill will help the state
crack down on the misclassification of independent contractors
by increasing penalties for intentional and repeated
misclassification and holding third parties accountable if
they knowingly advise employers to misclassify. According to
proponents, the only way to effectively stop misclassification
is to create real economic disincentives. This bill will help
enforcement efforts and act as a deterrent and, in doing so;
it will level the playing field for responsible businesses and
protect vulnerable workers.
3. Opponent Arguments :
According to opponents, this bill seeks to hold employers
responsible for "willful misclassification" of an employee as
an independent contractor, without also clarifying or
outlining a clear and objective test that employers may
utilize to determine if an individual is an employee or
independent contractor. Opponents argue that determining the
status of a person is daunting for many businesses because the
process is so ambiguous and complex and provides no certainty
for decision-making. According to opponents, it is possible
for an individual to be considered an employee for purposes of
one law and an independent contractor under another.
Opponents argue that given the lack of uniform definitive
tests for employers to utilize in order to determine an
individual's status, it is completely unfair to subject
employers to statutory penalties, up to $25,000 per violation,
for the "willful misclassification" of an individual as this
bill seeks to do.
In addition, opponents argue that this bill requires an
employer at the time of hire to issue a notice prepared by the
EDD, yet allows any agency, board, or commission within the
Labor and Workforce Development Agency to determine if there
has been a "willful misclassification" of an employee for
purposes of imposing a statutory penalty. According to
opponents, the factors the EDD utilizes may not be the same as
the factors the Labor and Workforce Development Agency
utilizes when issuing a statutory penalty and this lack of
consistency creates a potentially impossible standard of
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compliance for employers.
Opponents argue that this bill will add another layer of costs
onto businesses due to the litigation fees and expenses they
will be forced to incur. According to opponents, instead of
imposing new requirements and liabilities regarding
independent contractors, the process should look to ways in
which to improve the ability of business to make accurate and
sound business decisions regarding the classifications of
their employees.
4. Double Referral :
If passed by this Committee, this bill will next be referred
to the Senate Judiciary Committee for a hearing.
5. Prior Legislation :
SB 1490 (Padilla) of 2008: Died in Senate Appropriations
Committee
SB 1490 would have required a person employing labor in
California to provide to an individual hired as an independent
contractor a form developed by the Employment Development
Department (EDD) that includes, among other things, a notice
that the individual has been hired as an independent
contractor and the factors EDD uses to determine whether a
person is an employee or an independent contractor. The
contents of SB 1490 have been incorporated into the current
version of the bill (SB 549 Corbett).
SB 1583 (Corbett) of 2008: Vetoed by the Governor
SB 1583 would have provided that a person who advises another
person for money or other valuable consideration to treat a
worker as an independent contractor to avoid employee status
for the worker shall be jointly and severally liable with the
employer for a civil penalty if the worker is not found to be
an independent contractor. The contents of SB 1583 have been
incorporated into the current version of the bill (SB 549
Corbett).
SB 622 (Padilla) of 2007: Vetoed by the Governor
SB 622 would have increased employer penalties for willful
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misclassification of employees as independent contractors.
The contents of SB 622 have been incorporated into the current
version of the bill (SB 549 Corbett). In his veto message,
the governor stated that SB 622:
"creates new mechanisms and incentives for litigation
where sufficient remedies already exist. In creating
new and redundant exposure to litigation and sanctions,
this bill may cause businesses to avoid use of the
independent contractor model even where it may be
appropriately utilized. This will ultimately
contribute to a negative perception of California as an
inhospitable business climate."
AB 1643 (Ridley-Thomas) of 2004: Chapter 828, Statutes of 2004
AB 1643 required the Employment Development Department to
conduct a study relating to small business to review, among
other things, how often a small business objected to a
reclassification and how often an owner of a small business
was determined by the department not to be the employer of a
worker.
SUPPORT
California Labor Federation - Sponsor
State Building and Construction Trades Council - Sponsor
American Federation of State, County and Municipal Employees,
AFL-CIO (AFSCME)
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Employment Lawyers Association (CELA)
California Nurses Association
California Teamsters Public Affairs Council
Consumer Attorneys of California
Engineers and Scientists of California
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
UNITE HERE!
United Food and Commercial Workers Union, Western States Council
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Senate Committee on Labor and Industrial Relations
OPPOSITION
California Chamber of Commerce
California Farm Bureau Federation
California Grocers Association
California Retailers Association
California Trucking Association
Messenger Courier Association of the Americas
Western Electrical Contractors Association
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Senate Committee on Labor and Industrial Relations