BILL ANALYSIS �
SB 459
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Date of Hearing: June 22, 2011
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Sandre Swanson, Chair
SB 459 (Corbett) - As Amended: May 27, 2011
SENATE VOTE : 24-12
SUBJECT : Employment: independent contractors.
SUMMARY : Enacts a number of provisions of law related to the
classification (or misclassification) of individuals as
independent contractors. Specifically, this bill :
1)Makes it unlawful for any person or employer to engage in any
of the following activities:
a) Willful misclassification of an individual as an
independent contractor. ("Willful" is defined as voluntary
and intentional).
b) Charging an individual 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 individual had not been
misclassified.
2)Provides 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.
3)Provides that any person found guilty of a repeated pattern or
practice of these violations shall be assessed a civil penalty
of not less than $10,000 and not more than $25,000 for each
violation.
4)Requires a person retaining an individual as an independent
contractor to do the following:
a) Maintain (for not less than two years) specified records
related to all independent contractors retained by that
person.
b) Make these records available upon request to the
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Department of Industrial Relations (DIR) or the Employment
Development Department (EDD).
c) Provide each individual retained as an independent
contractor with a written notice developed by EDD that
includes specified information.
5)Provides that a person who knowingly advises an employer to
treat an individual as an independent contractor and to avoid
employee status for that individual shall be jointly and
severally liable if the individual is found not to be an
independent contractor. This provision does not apply to: (1)
a person who provides advice to his or her employer, or (2) a
licensed attorney who provides legal advice in the course of
the practice of law.
6)Makes other related and conforming changes.
FISCAL EFFECT : According to the Senate Appropriations
Committee, this bill would result in increased enforcement costs
of between $400,000 and $2 million annually.
COMMENTS : This bill is the latest attempt in an ongoing effort
to develop legislation to combat the misclassification of
employees as independent contractors. Legislation in recent
years has addressed most of the individual components contained
in this bill. However, this bill takes a more comprehensive
approach and attempts to address each of these elements in one
measure.
Independent Contractor vs. Employee Status Generally
Under California law, employment generally occurs when an
employer engages in the services of an employee for pay. The
Industrial Welfare Commission Wage Orders define an "employer"
as any person who directly or indirectly, or through an agent or
any other person, employs or exercises control over the wages,
hours or working conditions of any person. A common law
employee is an individual who is hired by an employer to perform
services where the employer has the right to exercise control
over the manner and means by which the individual performs his
or her services.
In contrast, California common law generally defines an
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independent contractor as any person who renders service for a
specified recompense for a specified result, under the control
of a principal as to the result of his or her work only and not
as to the means by which such result is accomplished.
The party seeking to avoid liability as an employer has the
burden of proving that persons whose services he or she has
retained are independent contractors rather than employees. In
other words, there is a presumption of employment. S.G. Borello
& Sons, Inc. v. Dept. of Industrial Relations, (1989) 48 Cal. 3d
341; Labor Code Section 3357.
In determining whether an individual providing service to
another is an independent contractor or an employee, there is no
single determinative factor. Rather, it is necessary to closely
examine the facts of each service relationship and to then apply
a multi-factor or "economic realities" test. Borello at 351.
An important, but not necessarily determinative, factor involves
the independent contractor's right to control the manner and
means of accomplishing the desired result. Other factors
considered in this determination, as set forth by the Borello
court, include the following:
1) Whether the person performing services is engaged in
an occupation or business distinct from that of the
principal;
2) Whether or not the work is part of the regular
business of the principal;
3) Whether the principal or the worker supplies the
instrumentalities, tools, and the place for the person
doing the work;
4) The alleged employee's investment in the equipment or
materials required by the task;
5) The skill required in the particular occupation;
6) The kind of occupation, with reference to whether, in
the locality, the work is usually done under the
direction of the principal or by a specialist without
supervision;
7) The alleged employee's opportunity for profit or loss
depending on his or her managerial skill;
8) The length of time for which the services are to be
performed;
9) The degree of permanence of the working relationship;
10) The method of payment, whether by time or by the job;
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11) Whether or not the parties believe they are creating
an employer-employee relationship
These "individual factors cannot be applied mechanically as
separate tests; they are intertwined and their weight depends
often on particular combinations." Id. As discussed above,
although no single factor is decisive, the right to control the
manner and means used is generally the most important factor.
In addition, some administrative agencies have broadened the
test to include other factors.
Brief Background on Employment Misclassification
Employee misclassification has become a serious problem in the
United States, and particularly in California. When companies
misclassify 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 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 (May 8, 2007), pg. 1.)
Similarly, in California EDD reported that the number of
misclassified employees increased 54 percent from 2005 to 2007,
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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)) 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).)
At the federal level, in an effort to combat employee
misclassification, the Employee 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.
Elements of This Proposed Legislation
This bill contains three main proposals related to
misclassification: (1) civil penalties for the willful
misclassification of an individual as an independent contractor;
(2) a required notice that must be provided to individuals
retained as independent contractors; and (3) joint and several
liability for consultants who knowingly advise employers to
misclassify their workers.
(1) Civil Penalties for "Willful"
Misclassification
This bill prohibits (among other things) the willful
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misclassification of individuals as independent contractors.
"Willful" is defined in the bill as "voluntary and intentional."
In addition, this bill provides that if the Labor and Workforce
Development Agency (or a department therein) finds there has
been willful misclassification, a civil penalty of not less than
$5,000 and not more than $15,000 shall be assessed for each
violation. The bill also provides that any person found guilty
of a repeated pattern or practice of these violations shall be
assessed a civil penalty of not less than $10,000 and not more
than $25,000 for each violation.
Existing law (including provisions of law related to the payment
of employment taxes) does establish certain penalties for
failure to pay taxes or engaging in other fraudulent activities.
However, for several years proponents of this bill have
lamented the absence of a specific penalty for the willful
misclassification of individuals as independent contractors.
(2) Written Notice to Independent Contractors
This bill requires any person retaining an individual as an
independent contractor to provide that individual with a form
(developed by EDD) that contains all of the following
information:
A notice that the individual has been retained as an
independent contractor.
The factors EDD uses to determine whether an individual
is an employee or an independent contractor.
A statement explaining the impact independent contractor
status has on tax obligations and eligibility for labor and
employment protections.
A notice of the individual's ability to seek advice from
EDD or the Labor Commissioner as to whether they are
properly classified as an independent contractor.
Notably, a 2009 report on misclassification by the Government
Accountability Office (GAO) made the following recommendation:
"To enhance understanding of classification issues by
workers-especially those in low wage industries-we
recommend that the Secretary of Labor collaborate with the
Commissioner of Internal Revenue to offer education and
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outreach to workers on classification rules and
implications and related tax obligations. Such
collaboration should include developing a standardized
document on classification that DOL would require employers
to provide to new workers." (GAO, Employee
Misclassification: Improved Coordination, Outreach, and
Targeting Could Better Ensure Detection and Prevention,
GAO-09-717 (August 2009) (Emphasis provided).
(1) Consultant Liability
This bill would provide for the joint and several liability of a
consultant and employer if the consultant knowingly advises the
employer to wrongfully misclassify an employee as 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,
some have alleged that 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.
The Senate Judiciary Committee analysis of this bill states the
following:
"This bill would exempt licensed attorneys from joint and
several liability for knowingly advising an employer to
misclassify employees. SB 1583 (Corbett) of 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,
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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."
This bill also provides that this provision does not apply to a
person who provides advice to his or her employer (in-house
consultants).
ARGUMENTS IN SUPPORT :
The sponsors of this bill state the following:
"Over the past few decades, the nature of work has changed
dramatically. Industry by industry, the traditional
employer-employee relationship has eroded. Whether hiring
temporary workers, using labor contractors, or
misclassifying workers as 'independent contractors,' all
forms of contingent work arrangements are on the rise. In
this new model, workers have no guaranteed hours or shifts,
no job security, no traditional employee benefits, and no
long-term economic stability.
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
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and hour violations is by misclassifying the worker as an
independent contractor.
When a worker is misclassified, he loses more than just
minimum wage and overtime protections. He has no workers'
compensation coverage if injured on the job, no right to
family leave when a loved one is ill, and no unemployment
insurance if he loses his job. If he does not like the
working conditions and tries to join with others to ask for
more pay or a safer workplace, he has no legal right to
organize or join a union and no protection against employer
retaliation.
The use and abuse of independent contractors poses a
serious threat to workers' rights and undermines working
conditions for all workers. It creates an unfair playing
field for all the responsible employers who continue to
honor their lawful obligations to their employees.
The State also loses with misclassification, due to lost
payroll tax revenue and increased reliance on the safety
net by workers stripped of the protections of a traditional
employment relationship. 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?
?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."
ARGUMENTS IN OPPOSITION :
A coalition of employer groups writes the following in
opposition to this bill:
"As stated by the California Department of Industrial
Relations on their website regarding the determination of
independent contractor status:
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'There is no set definition of the term "independent
contractor" for all purposes, and the issue of whether a
worker is an employee or independent contractor depends
upon the particular area of law to be applied. For example,
in a wage claim where employment status is an issue, DLSE
will often use the five-prong economic realities test to
decide the issue. However, in a separate matter before a
different state agency with the same parties and same
facts, and employment status again being an issue, that
agency may be required to use a different test, for
example, the "control test," which may result in a
different determination. Thus, it is possible that the same
individual will be considered an employee for purposes of
one law and an independent contractor under another.'
(emphasis added).
Given the lack of a uniform, definitive test issued by all
state agencies for employers to utilize in order to
determine whether an individual is an independent
contractor, we believe it is completely unfair to subject
employers to statutory penalties, up to $25,000 per
violation, for the 'willful misclassification' of an
individual as an independent contractor, which �this bill]
seeks to do. Noticeably, �this bill] requires an employer
at the time of hire to issue a notice prepared by the
Employment Development Department ("EDD") regarding the
factors the EDD uses to determine whether a person is an
employee or independent contractor, 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. As the Department of
Industrial Relations admits, the tests utilized to
determine independent contractor status differs amongst
state agencies. Accordingly, the factors the EDD utilizes
and discloses in the notice may not be the same as the
factors the Labor and Workforce Development Agency utilizes
when issuing a statutory penalty. This lack of consistency
creates a potentially impossible standard of compliance for
employers.
As being proposed as a new section in the Labor Code, �this
bill] also subjects employers to additional litigation
under the Private Attorney General's Act. This will add
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another layer of costs onto businesses due to the
litigation fees and expenses they will be forced to incur
in defending such actions. Moreover, �this bill] also
burdens 'any person or employer' with the requirement to
maintain records for two years of all independent
contractors that have been hired by that person or
employer, and imposes a penalty if the person or employer
fails to maintain the documentation.
Determining the status of a person as an independent
contractor versus an employee is daunting for many
businesses because the process is so ambiguous and complex
and provides no certainty for decision-making. 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."
In addition, the Direct Selling Association (DSA) requests that
direct sellers be exempted from coverage under this bill. DSA
contends that direct sellers (who sell goods and services
directly to consumers) are classified as non-employees under
state and federal employment tax laws. They argue that if this
bill were to apply to direct selling companies, it would have a
chilling effect on individuals becoming direct sellers. Direct
salespeople enjoy their independent contractor status, which
provides the flexibility of setting their own hours in addition
to the sense of pride they have owning their businesses.
PRIOR LEGISLATION :
SB 1490 (Padilla) of 2008 would have required a person retaining
an individual as an independent contractor to provide a written
EDD notice containing certain information, similar to the
written notice requirement contained in this bill. SB 1490 was
held by the Senate Appropriations Committee.
SB 1583 (Corbett) of 2008 contained provisions about joint and
several liability for consultants similar to the language
contained in this bill. SB 1583 was vetoed by Governor
Schwarzenegger, who stated the following in his veto message:
"Existing law governing the difference between an employee
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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 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."
SB 622 (Padilla) of 2007 would have established penalties for
the willful misclassification of individuals as independent
contractors, consistent with the provisions of this bill. SB
622 was vetoed by Governor Schwarzenegger, who stated the
following in his veto message:
"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."
REGISTERED SUPPORT / OPPOSITION :
Support
All Counties Courier, Inc.
American Federation of State, County and Municipal Employees,
AFL-CIO
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Employment Lawyers Association
California Labor Federation, AFL-CIO (co-sponsor)
California Nurses Association
California Teamsters Public Affairs Council (co-sponsor)
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Communication Workers of America, District 9 (co-sponsor)
Consumer Attorneys of California
Engineers and Scientists of California
Greater California Livery Association
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
SEIU United Service Workers
Speedway Delivery and Messenger Service
State Building and Construction Trades Council of California
UltraEx, Inc.
UNITE HERE!
United Food and Commercial Workers Union, Western States Council
Opposition
Blue Streak Couriers
California Chamber of Commerce
California Delivery Association
California Dump Truck Owners Association
California Farm Bureau Federation
California Grocers Association
California Manufacturers and Technology Association
California Newspaper Publishers Association
California Retailers Association
California Trucking Association
CalSmallBiz
Direct Selling Association
Dynamex Inc.
Financial Services Institute
Manco Delivery Systems, Inc.
Medical Delivery Services Inc.
Messenger Courier Association of the Americas
Network Global Logistics, LLC
Noble Logistics, Inc.
Personal Insurance Federation of California
Rapid Express Courier Systems
Securities Industry and Financial Markets Association
Western Electrical Contractors Association
Western Growers Association
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091
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