BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 390| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 390 Author: Wright (D) Amended: As introduced Vote: 21 SENATE LABOR & INDUSTRIAL RELATIONS COMMITTEE : 5-0, 4/10/13 AYES: Lieu, Wyland, Leno, Padilla, Yee SENATE APPROPRIATIONS COMMITTEE : 5-2, 5/6/13 AYES: De León, Hill, Lara, Padilla, Steinberg NOES: Walters, Gaines SUBJECT : Employee wage withholdings: failure to remit SOURCE : California Rural Legal Assistance Foundation DIGEST : This bill provides that it is illegal for an employer to willfully or with the intent to defraud fail to remit withholdings from an employees wages pursuant to local, state or federal law to the proper agency, and also provides that if an employer fails to remit $500 or more in wage withholdings, the employer's violation is a misdemeanor and shall be punishable by imprisonment in a county jail for a period of not more than one year, by a fine of not more than $1,000, or both. ANALYSIS : Existing federal law: 1. Provides that any person who willfully fails to collect or CONTINUED SB 390 Page 2 truthfully account for and pay over taxes shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than five years, or both, together with the costs of prosecution. 2. Provides that any person who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. Existing state law: 1. Provides that it is illegal for an employer to willfully or with the intent to defraud fail to remit payments to a health or welfare fund, pension fund or vacation plan, or other similar plan for the benefit of the employees. 2. Provides that if an employer fails to remit $500 or more in payments to an above-described fund, the employer's violation is a misdemeanor and shall be punishable by imprisonment in a county jail for a period of not more than one year, by a fine of not more than 1,000, or both. 3. Provides that it is a violation of the law for any employer or employing unit to willfully fail or refuse to make any contributions which are due under the Unemployment Insurance or Disability Insurance programs. 4. Provides that, after an employer has been appropriately notified, any employer or person failing to withhold the personal income tax (PIT) amount due from any taxpayer and to transmit the same to the department is liable for such amounts. 5. Requires any employer or person required to withhold and transmit shall comply with the requirement without resort to any legal or equitable action in a court of law or equity. 6. Provides that any person or employer who, with or without intent to evade, fails to withhold or fails to pay over any CONTINUED SB 390 Page 3 personal income tax withheld, is guilty of a misdemeanor and, upon conviction, shall be fined an amount not to exceed $1,000, or imprisoned for not more than one year, or both the fine and imprisonment, at the discretion of the court. 7. Provides that any person required to collect, account for, and pay over any personal income tax or amount required to be withheld who willfully fails to collect or truthfully account for and pay over the tax or amount shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined an amount not more than $20,000, or imprisoned 16 months to three years, or both the fine and imprisonment, at the discretion of the court. This bill creates a criminal provision in the Labor Code, thereby allowing the Labor Commissioner to pursue a criminal misdemeanor prosecution against employers who do not remit payroll taxes. Specifically, this bill: 1. Provides that it is illegal for an employer to willfully or with the intent to defraud fail to remit withholding's from an employee's wages pursuant to local, state or federal law to the proper agency. 2. Provides that if an employer fails to remit $500 or more in wage withholdings, the employer's violation is a misdemeanor and shall be punishable by imprisonment in a county jail for a period of not more than one year, by a fine of not more than $1,000, or both. Comments Failure to Remit Taxes and Criminal Penalties . Both federal and California law require certain taxes to be withheld from an employee's wages. These include state disability insurance, PIT, and Federal Insurance Contribution Act (FICA) taxes, which fund Social Security and Medicare. These taxes are then remitted to the appropriate authority, which then deposits those funds into the appropriate trust fund. It is these payroll taxes and wage remittances that allow these programs to function. Noting the importance of these programs to workers, both California law and federal law provide significant criminal CONTINUED SB 390 Page 4 penalties, including both jail and civil penalties. For example, the federal government has held the owners of a business personally liable for unpaid FICA taxes since 1978 (see Slodov v. United States, 436 U.S. 238 (1978)). This liability can also extend to members of a board of directors (see Verret v. United States, 542 F.Supp.2d 526 (2008)). In one recent case, an operator of a temporary healthcare provider which provided nurses to hospitals was found guilty of tax fraud and sentenced to 37 months in jail and nearly $2.2 million in restitution. Prior legislation AB 469 (Swanson, Statutes of 2011, Chapter 655), also known as the Wage Theft Prevention Act of 2011, requires the provision of a notice at the time of hiring that lists the relevant details of a worker's employment. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes According to the Senate Appropriations Committee, the Department of Industrial Relations estimates that it will need two partial-year, ongoing positions totaling $130,000 (special funds) to implement the provisions of the bill. SUPPORT : (Verified 5/7/13) California Rural Legal Assistance Foundation (source) California Employment Lawyers Association Construction Employers' Association United Farm Workers ARGUMENTS IN SUPPORT : Proponents note that they are seeing a significant number of cases where workers are having their payroll taxes removed from their wages but then employers simply pocket the withholdings. Proponents also note that employees find out about it after they receive their W-2 Forms which show much lower wages than they actually received or when they receive a 1099 Form, illegally classifying them as independent contractors. Proponents argue that it is difficult for to pursue these cases, as the employers generally do not have any CONTINUED SB 390 Page 5 assets, leaving the employers unpunished and not penalized for their illegal conduct. Proponents believe that SB 390 is necessary because it will create a criminal provision in the Labor Code, allowing the Labor Commissioner to pursue a criminal misdemeanor prosecution. PQ:d 5/7/13 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED