BILL ANALYSIS �
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
(more)
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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 "�t]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 �Sections] 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 increasing�ly] 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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