BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2011-2012 Regular Session


          SB 459 (Corbett)
          As Amended March 23, 2011
          Hearing Date: April 26, 2011
          Fiscal: Yes
          Urgency: No
          TW
                    

                                        SUBJECT
                                           
                        Employment:  Independent Contractors

                                      DESCRIPTION  

          This bill would prohibit any person or employer from engaging in 
          willful misclassification of an employee as an independent 
          contractor and would provide for civil penalties.  This bill 
          would require employers to provide to independent contractors a 
          form developed by the Employment Development Department (EDD), 
          as specified.  This bill would require employers to maintain for 
          at least two years the records of all independent contractors 
          hired by the employer, as specified.

          This bill would provide that a person who knowingly 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 if the worker is not found to be an independent 
          contractor.  Exempt from this provision are a person who 
          provides advice to his or her employer and attorneys authorized 
          to practice law in California or another United States 
          jurisdiction who provides legal advice in the course of the 
          practice of law.

                                      BACKGROUND  

          Employee misclassification has become a serious problem in the 
          United States.  When companies classify workers as independent 
          contractors instead of as employees, these workers do not 
          receive worker protections, including minimum wages, overtime 
          pay, and health and vacation benefits, to which they would 
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          otherwise be entitled.  Standard employee protections such as 
          anti-discrimination laws and safety regulations also do not 
          apply to independent contractors.  Additionally, businesses do 
          not deduct taxes, 401(k), Social Security, or Medicare payments 
          from the paychecks of independent contractors, which results in 
          a loss of state tax income from the businesses as well as a 
          potential loss of income from the individual worker who may not 
          properly report income.  Because employers do not pay 
          unemployment taxes for independent contractors, workers who are 
          misclassified cannot obtain unemployment benefits if they lose 
          their jobs.

          A number of reports in the last several years have chronicled 
          the societal consequences of and impacts upon American workers 
          of misclassification of workers as independent contractors 
          versus employees.  The United States Government Accountability 
          Office conducted a study of misclassification of workers as 
          independent contractors and found that employee 
          misclassification cost the United States government $2.72 
          billion in revenue from Social Security, unemployment and income 
          taxes in 2006 alone.  (GAO, Employee Misclassifications:  
          Improved Outreach Could Help Ensure Proper Worker 
          Classification, GAO-07-859T (Washington, D.C.: May 8, 2007) 
          www.gao.gov/cgi-bin/getrpt?GAO-07-859T as of Apr. 15, 2011, pg. 
          1.)

          Similarly, the California Employment Development Department 
          (EDD) reported that the number of misclassified employees 
          increased 54 percent from 2005 to 2007, reaching 15,751 workers 
          in 2007. During this 3-year period, the EDD recovered a total of 
          $111,956,556 in payroll tax assessments, $18,537,894 in labor 
          code citations, and $40,348,667 in assessments on employment tax 
          fraud cases.  (See California Employment Development Department, 
          Annual Report: Fraud Deterrence and Detection Activities, report 
          to the California Legislature (June 2008) 
          http://www.edd.ca.gov/pdf_pub_ctr/ report2008.pdf as of April 
          15, 2011.)  A Daily Journal article reported on the recent 
          increase in worker misclassification and one person interviewed 
          for the article noted that worker misclassification is 
          attractive to employers because they can cut their labor costs 
          by up to 30 percent by moving to an independent contractor 
          model.  (Ho, Independent Contractor Status Raises IRS Eyebrows:  
          Contractor Status is Cheaper for Employers; Some Workers are 
          Crying Foul, Daily Journal (May 17, 2010).)

          To combat employee misclassification, the Employee 
                                                                      



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          Misclassification Prevention Act of 2010 (EMPA) was introduced 
          in Congress.  The EMPA contained a number of provisions designed 
          to reduce employee misclassification, increase regulation of 
          worker classification practices, and set forth basic penalties 
          for businesses that do not maintain compliance.  (See Sen. No. 
          3254, 111th Cong., 2d Sess. (2010).)  Along with protecting 
          workers, the EMPA objectives are to promote competitive fairness 
          among businesses and narrow the tax gap and recapture revenue 
          that the government loses due to employee misclassification.  
          The U.S. Senate Committee on Health, Education, Labor, and 
          Pensions held hearings on this bill.

          California legislators have attempted to increase protections 
          for misclassified workers.  SB 622 (Padilla, 2007) would have 
          made it unlawful for employers to willfully misclassify an 
          employee as an independent contractor.  Section 1 of SB 459 is 
          substantially similar to SB 622, which was vetoed by Governor 
          Schwarzenegger because he believed sufficient remedies for 
          employer misconduct already existed and the bill could cause 
          businesses to avoid using independent contractors even where 
          appropriately utilized.  

          SB 1583 (Corbett, 2008), a bill that would have provided 
          employment consultant liability for advising unlawful conduct 
          through employee misclassification, was also vetoed by Governor 
          Schwarzenegger who argued that the liability created under the 
          bill would discourage consultants from giving employment advice. 
           Section 5 of SB 459 is substantially similar to SB 1583.

          SB 1490 (Padilla, 2008) would have required the Employment 
          Development Department (EDD) to create a form, including factors 
          used by EDD in determining independent contractor status, to be 
          distributed by employers to workers.  SB 1490 was held in the 
          Senate Committee on Appropriations.  Sections 2 through 4 and 6 
          through 7 of SB 459 are substantially similar to SB 1490.

          In addition to legislation, over the last several years, the 
          California Attorney General has prosecuted and prevailed in 
          multiple employee misclassification cases.  (See Brown Wins 
          Fifth Suit Against Port Trucking Companies that Violated 
          Workers' Rights (Feb. 4, 2010) 
           http://oag.ca.gov/news/press_release?id=2010&p=3&y=2010  as of 
          Apr. 15, 2011.) These cases primarily held that trucking 
          businesses were misclassifying their workers to avoid paying 
          state payroll taxes. 

                                                                      



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          This bill, sponsored by the California Labor Federation, 
          California Teamsters Public Affairs Council, and Communication 
          Workers of America, District 9, is intended to deter employment 
          consultants and employers from wrongfully misclassifying workers 
          as independent contractors.  

                                CHANGES TO EXISTING LAW
           
           Existing law  provides comprehensive requirements, rights, and 
          remedies relating to the employer-employee relationship, 
          including, but not limited to, wages and other compensation, 
          working hours, workers' compensation, labor code violation 
          actions, employment contracts, and working conditions standards. 
           (Lab. Code Secs. 200 et seq., 500 et seq., 2698-2699.5, 2700 et 
          seq., and 3200 et seq.)

           Existing law  defines a contract of employment as a contract by 
          which one, the employer, engages another, the employee, to do 
          something for the benefit of the employer or a third person.  
          (Lab. Code Sec. 2750.)

           Existing law  provides a rebuttable presumption affecting the 
          burden of proof that a worker performing services for which a 
          license is required, as specified, or who is performing such 
          services for a person who is required to obtain such a license 
          is an employee rather than an independent contractor. Proof of 
          independent contractor status includes satisfactory proof of the 
          following factors:
             (1)   the individual has the right to control and discretion 
               as to the manner of performance of the contract for 
               services;
             (2) the individual is customarily engaged in an independently 
               established business; and
             (3) the individual's independent contractor status is bona 
               fide and not a subterfuge to avoid employee status. A bona 
               fide independent contractor status is further evidenced by 
               the presence of cumulative factors such as control over the 
               time and place the work is performed, supplying the tools 
               or instrumentalities used in the work other than tools and 
               instrumentalities normally and customarily provided by 
               employees, hiring employees, performing work that is not 
               ordinarily in the course of the principal's work, 
               performing work that requires a particular skill, holding a 
               license pursuant to the Business and Professions Code, the 
               intent by the parties that the work relationship is of an 
               independent contractor status, or that the relationship is 
                                                                      



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               not severable or terminable at will by the principal but 
               gives rise to an action for breach of contract.  (Lab. Code 
               Sec. 2750.5)
           
          Existing law  , with respect to lawful obligations of the employer 
          such as worker's compensation coverage, defines "employee" to 
          mean 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.  (Lab. Code Sec. 3350.)

           Existing law  , with respect to lawful obligations of the employer 
          such as worker's compensation coverage, defines "independent 
          contractor" to mean 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.  (Lab. Code Sec. 
          3353.)

           Existing law  provides that any person who holds a valid state 
          contractor's license and who willingly and knowingly enters into 
          a contract with any person who does not meet the burden of proof 
          of independent contractor status, as specified, shall be subject 
          to a civil penalty of $200 per person so contracted with for 
          each day of the contract.  The civil penalties provided for by 
          this section are in addition to any other penalty provided by 
          law.  (Lab. Code Sec. 1021.5.)

           Existing law  provides that employers must provide reports, as 
          requested, to the commission, allow inspection of employment 
          records by the commission or Division of Labor Standards 
          Enforcement, and keep records of employee information, as 
          specified.  (Lab. Code Sec. 1174.)  Employers failing to do so 
          are subject to civil penalties of $500 and may be found guilty 
          of a misdemeanor.  (Lab. Code Secs. 1174.5 and 1175.)

           This bill  would prohibit any person or employer from engaging in 
          willful misclassification of an employee as an independent 
          contractor or charging an employee who has been willfully 
          misclassified as an independent contractor 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.

           This bill  would provide that, if the Labor and Workforce 
          Development Agency (LWDA) or a court finds that any person 
                                                                      



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          engaged in any of the above unlawful activities, that person 
          shall be assessed civil penalties 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.  The civil penalties 
          would increase when the person has engaged in any of the above 
          unlawful activities and there is evidence that the person has 
          engaged in a pattern or practice of these activities.  This bill 
          would define "willful" as voluntary and intentional.

           This bill  would require employers to provide to independent 
          contractors a form developed by the Employment Development 
          Department (EDD), as specified.

           This bill  would authorize EDD to process a request for advice by 
          an individual as to whether that individual is an independent 
          contractor or employee.

           This bill  would require employers to maintain for at least two 
          years the records of all independent contractors hired by the 
          employer, as specified.

           This bill  would provide that a person who knowingly 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 if the worker is not found to be an independent 
          contractor.  Under this bill, a person who provides advice to 
          his or her employer and attorneys authorized to practice law in 
          California or another United States jurisdiction who provides 
          legal advice in the course of the practice of law would be 
          exempt from this provision.

                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            According to the General Accounting Office, at least ten 
            million workers are classified as independent contractors 
            nationally, an increase of more than two million in just six 
            years.  The total cost to California in lost tax revenue has 
            been estimated at $7 billion.  When a worker is misclassified 
            as an independent contractor, he or she is not subject to 
            California minimum wage and overtime protection laws.  
            Additionally, the worker has no workers' compensation coverage 
                                                                      



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            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 
            misclassification of workers as independent contractors 
            creates an unfair playing field for responsible employers who 
            honor their lawful obligations to their employees.  The 
            misclassification of workers results in a loss of payroll tax 
            revenue to the State and increased reliance on the public 
            safety net by workers who are denied access to work-based 
            protections.
            
          The California Labor Federation, a sponsor of this bill, writes:

            The growth in contingent work has only exacerbated the abuse 
            of workers in California's underground economy.  The 
            underground economy, in which employers use cash pay to avoid 
            paying taxes, following regulations, and complying with labor 
            law, has thrived due to decades of inadequate enforcement.  
            Since 1980, the state population has grown 62 percent, while 
            the number of wage and hour inspectors rose just 7%.  Budget 
            cuts and furloughs have made already feeble enforcement 
            efforts even less effective.

            Employers have also become more sophisticated at evading 
            justice.  Those who abuse workers' rights have learned how to 
            use labor contractors and temporary agencies as smokescreens 
            to hide who is really in charge.  But 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.

          The California Teamsters Public Affairs Council, a sponsor of 
          this bill, writes:

            Misclassification of employees as independent contractors for 
            the purpose of avoiding workers' compensation, unemployment 
            insurance, employment tax and general labor law requirements 
            is rampant in every employment sector in California.  This 
            trend is incredibly harmful to workers and their families. . . 
            .

            It is not only employees who are hurt by this nefarious 
            behavior, but also good actor employers and the State of 
            California, both of which must foot the bill for the 
            wrongdoings of these scofflaw employers.  It is estimated that 
            the California underground economy is between $60 to $140 
                                                                      



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            billion, which means billions of dollars of lost taxes for the 
            state, billions of dollars in lost wages for workers and 
            billions of dollars in additional premiums for workers' 
            compensation and payments for taxes borne by those employers 
            who do pay their fair share.

          2.  Liability of employment consultants for knowingly advising 
            employer to misclassify employee  

          This bill would provide for the joint and several liability of a 
          consultant and employer if an individual has been adjudged by an 
          administrative, court, or other legal proceeding to be an 
          employee and not an independent contractor.  Existing law does 
          not currently hold liable consultants advising employers to 
          wrongfully misclassify workers.  

          Employment consulting firms assist employers in analyzing their 
          administration of employment-related activities.  Employers seek 
          consulting advice typically to find ways to streamline the 
          business and cut costs.  Due to the recent economic downturn, 
          companies have been reducing costs of administration of 
          employment-related activities by misclassifying employees as 
          independent contractors.  Through misclassification, employers 
          avoid paying Social Security, Medicare, and unemployment 
          insurance taxes for those workers.  In the event the consultant 
          knowingly advises the employer to wrongfully misclassify 
          workers, this bill would provide that the consultant would be 
          jointly and severally liable with the employer.

          This bill would exempt licensed attorneys from joint and several 
          liability for knowingly advising an employer to misclassify 
          employees.  SB 1583 (Corbett, 2008) contained similar 
          provisions.  While SB 1583 was moving through the Legislature, 
          the State Bar of California voiced the concern that attorneys 
          authorized to practice law should be exempted from the bill's 
          provisions for a number of reasons, including that California's 
          Rules of Professional Conduct regulate attorney conduct in the 
          state.  Therefore, should an attorney run afoul of the rules of 
          professional conduct, and case law interpreting those rules, he 
          or she would be subject to an array of sanctions, including 
          disbarment.

          3.    Penalty and private right of action provisions  

          This bill would provide penalties for a violation of its 
          provisions.  The bill would also provide misclassified workers a 
                                                                      



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          private right of action if they suffer actual harm.  Proponents 
          of this bill argue that such penalties and a private right of 
          action for harmed workers are warranted in order to effectively 
          deter employers from deliberately misclassifying employees as 
          independent contractors.  The proponents argue that, because 
          governmental entities do not have the resources or time to go 
          after all employers who misclassify workers, and employers know 
          this, significant penalties and a private right of action are 
          the most effective deterrents to the wrongful conduct.  

          4.  Opposition arguments  

          This bill is opposed by, among others, the California Chamber of 
          Commerce, the California Farm Bureau Federation, the California 
          Grocers Association, the California Manufacturers & Technology 
          Association, the California Newspaper Publishers Association, 
          the California Retailers Association, the California Trucking 
          Association, the Messenger Courier Association of the Americas, 
          the Personal Insurance Federation of California, the Western 
          Electrical Contractors Association, and the Western Growers 
          Association.  These opponents argue that there is no uniform, 
          definitive test issued by all state agencies for employers to 
          follow when determining independent contractor status.  These 
          opponents argue that EDD has a set of factors for employers to 
          use, yet the Department of Industrial Relations admits that 
          different tests are utilized by different state agencies when 
          determining independent contractor status.  These opponents 
          argue that "İt]his lack of consistency creates a potentially 
          impossible standard of compliance for employers."

          However, another opponent of the bill, California Dump Truck 
          Owners Association (CDTOA), suggests that existing law regarding 
          employee misclassification is sufficient.  CDTOA argues that "a 
          statutory presumption exists that a workers is an employee 
          rather than an independent contractor should an employment 
          status dispute arise (Labor Code İSections] 2750.5, 3357).  Our 
          State agencies already vigorously enforce California's 
          misclassification laws and regulations. . . . Furthermore, the 
          federal government and our civil court system currently provide 
          additional protection against such misclassification 
          improprieties."

          Opponents also believe that this bill will subject employers to 
          litigation under the Private Attorney General Act (PAGA) and add 
          another layer of costs onto businesses.  Notably, this bill does 
          not specifically list its provisions under PAGA.  Further, 
                                                                      



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          opponents argue that businesses will be burdened by maintaining 
          independent contractor records for two years and face potential 
          penalties for failing to do so.  The author argues that 
          businesses are already required to maintain employee records and 
          presumably have a system for doing so, so incorporating 
          independent contractor records into this system will not be a 
          substantial burden.

          5. Governor Schwarzenegger's vetoes of SB 622 (2007) and SB 1583 
          (2008)  

          This bill is substantially similar to the enrolled versions of 
          SB 622 (2007) and SB 1583 (2008).  In vetoing SB 622 (2007), 
          Governor Schwarzenegger stated:

            Although this bill is intended to promote the worthy goal of 
            ensuring employees are not intentionally misclassified as 
                                                                      independent contractors, thus deterring employers from conduct 
            which may give them unfair economic advantages against their 
            competitors, this bill also 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.

          In vetoing SB 1583 (2008), Governor Schwarzenegger stated:

            Existing law governing the difference between an employee and 
            an independent contractor is confusing to employers.  As the 
            Legislature has failed to address this confusion, many 
            employers turn to consultants for help in determining how best 
            to classify individuals for employment purposes.  The new 
            liability imposed by this bill will make consultants wary of 
            providing services to businesses, leaving these employers 
            without any guidance in an increasingİly] litigious 
            environment.  I encourage the Legislature to focus on 
            addressing the confusion caused by current law, not punishing 
            those trying to create and grow jobs in California.


           Support  :  American Federation of State, County and Municipal 
          Employees, AFL-CIO; California Conference Board of the 
          Amalgamated Transit Union; California Conference of Machinists; 
                                                                      



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          California Employment Lawyers Association; California Nurses 
          Association; Consumer Attorneys of California; Engineers and 
          Scientists of California; International Longshore & Warehouse 
          Union; Professional & Technical Engineers, Local 21; State 
          Building and Construction Trades Council of California; United 
          Food and Commercial Workers Union, Western States Council; UNITE 
          HERE!

           Opposition  :  California Chamber of Commerce; California Dump 
          Truck Owners Association; California Farm Bureau Federation; 
          California Grocers Association; California Manufacturers & 
          Technology Association; California Newspaper Publishers 
          Association; California Retailers Association; California 
          Trucking Association; Messenger Courier Association of the 
          Americas; Personal Insurance Federation of California; Western 
          Electrical Contractors Association; Western Growers Association

                                        HISTORY
           
           Source  :  California Labor Federation; California Teamsters 
          Public Affairs Council; Communication Workers of America, 
          District 9

           Related Pending Legislation :  None Known

           Prior Legislation  :  See Background.

           Prior Vote  :  Senate Committee on Labor and Industrial Relations 
          (Ayes 5, Noes 2)

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