BILL ANALYSIS �
SB 459
Page 1
Date of Hearing: June 28, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 459 (Corbett) - As Amended: May 27, 2011
As Proposed to be Amended
SENATE VOTE : 24-12
SUBJECT : EMPLOYMENT: INDEPENDENT CONTRACTORS
KEY ISSUE : SHOULD THE STATE ENACT ADDITIONAL MEASURES TO
PREVENT, DETER AND PENALIZE THE MISCLASSIFICATION OF EMPLOYEES
AS INDEPENDENT CONTRACTORS?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill continues the efforts by the author and others to
address the problem of misclassification of employees as
independent contractors, a violation of law that has significant
consequences not only for the employee but for fair business
competition, the economy, and the state budget. This bill would
prohibit the willful misclassification of an employee as an
independent contractor and would provide for civil penalties for
a violation. In addition, in order to inform persons whose
rights are affected by misclassification, the bill requires
employers to provide to independent contractors a form developed
by the Employment Development Department (EDD) regarding the
factors affecting and significance of being classified an
independent contractor. This bill would require employers to
maintain for two years a record of all independent contractors
hired by the employer. Finally, to combat the use of
unscrupulous consultants, the bill provides 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, with specified exemptions.
Supporters believe these steps will help address the serious
problem of employee misclassification. The bill is opposed by
business interests who argue that the bill unfairly exposes them
to potential liability because the classification of employees
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is an uncertain undertaking that is not controlled by a single
objective test. They also contend that the standard for
willfulness under the bill is too low. Opponents also object to
the form requirement, contending that it is burdensome and
unnecessary.
SUMMARY : Regulates the misclassification of employees as
independent contractors. Specifically, this bill :
1)Prohibits any person or employer from engaging in willful
misclassification of an employee as an independent contractor
or charging a fee to an employee who has been willfully
misclassified as an independent contractor, 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.
2)Provides that, if the Labor and Workforce Development Agency
(LWDA) or a court finds that any person 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 the person has engaged in a pattern or practice
of these activities. This bill defines "willful" as voluntary
and intentional.
3)Requires employers to provide to independent contractors a
form developed by the Employment Development Department (EDD)
regarding their status as an independent contractor, with
specified content.
4)Authorizes EDD to process a request for advice by an
individual as to whether that individual is an independent
contractor or employee.
5)Requires employers to maintain for at least two years the
records of all independent contractors hired by the employer,
as specified.
6)Provides 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
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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 that provides
legal advice in the course of the practice of law would be
exempt from this provision.
EXISTING LAW :
1)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.)
2)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.)
3)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: the individual has the right to control
and discretion as to the manner of performance of the contract
for services; the individual is customarily engaged in an
independently established business; and 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 not severable or terminable at will by the
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principal but gives rise to an action for breach of contract.
(Lab. Code Sec. 2750.5)
4)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.)
5)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.)
6)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.)
7)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.)
COMMENTS : In support of the bill, the author states:
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 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.
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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.
SB 459 helps remedy this in the following ways:
Prohibits the willful misclassification of an
employee as an independent contractor.
Provides that a consultant who knowingly advises
an employer to treat an individual as an independent
contractor to avoid employee status for the worker shall be
jointly liable with the employer if the worker is not found
to be an independent contractor.
Requires employers to provide to an independent
contractor with information about their classification,
their tax obligations and eligibility for labor and
employment protections, and how to request a determination
from the State Employment Development Department a
determination as to whether they should be classified as an
employee or independent contractor.
The co-sponsor, California Labor Federation, adds:
The latest census data shows the greatest gap between the
rich and poor that has ever
existed. Fundamental economic changes have shrunk the
middle class by replacing good
jobs with low-wage work. But low wages are only the
beginning.
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
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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
void 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 Problem of Employee Misclassification. Employee
misclassification is believed to be 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
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
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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.
New Penalty For Willful Misclassification and For Imposing Fees
or Deductions on Employees Who Have Been Willfully
Misclassified. The bill proposes a new Labor Code section
establishing that it is unlawful for any person or employer to
engage in the following activities:
(1) Willful misclassification of an individual as an
independent contractor.
(2) Charging an individual who has been willfully
misclassified as an independent contractor a fee, or making
any deductions from compensation for any purpose.
A violation of these provisions would be subject to a civil
penalty by the Labor and Workforce Development Agency, or any of
its departments, divisions, commissions, boards, or agencies, or
a court in an amount between $5,000 and 15,000. If the Labor
and Workforce Development Agency, or any of its departments,
divisions, commissions, boards, or agencies, or a court finds
that person has engaged in or is engaging in a pattern or
practice of these acts, the civil penalty would increase to
between $10,000 and $25,000.
The bill defines "willful" as "voluntary and intentional."
New Form to Provide Information To Persons Classified As
Independent Contractors. A second provision of the bill
requires a person employing labor to provide independent
contractors with a form to be developed by the Employment
Development Department that includes all of the following:
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(1) A notice that the individual has been retained as an
independent contractor.
(2) The factors the Employment Development Department uses to
determine whether an individual is an employee or an
independent contractor.
(3) A statement explaining the impact that the individual's
status as an independent contractor has on his or her tax
obligations and his or her eligibility for labor and
employment protections.
(4) A notice of the individual's ability to seek advice from
the Employment Development Department or the Labor
Commissioner as to whether that individual is properly
classified as an independent contractor. The notice shall
provide the telephone number for both the Employment
Development Department and the Labor Commissioner.
The bill specifies that records of all independent contractors
are to be retained for at least two years, stating the name,
address, social security number, and, if applicable, federal tax
identification number of each independent contractor. These
records are to be made available upon request of specified
investigators. Willful failure to maintain these records in an
accurate and complete fashion or to allow inspection of these
records would be subject to a civil penalty of $500. In
addition, it would be a misdemeanor to neglect or refuse to
furnish information requested, to refuse access to the person's
place of business or employment to specified investigators or to
hinder them from securing information. Likewise it would be a
violation to fail to keep the specified records.
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
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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
at the request of the State Bar, which noted that Rules of
Professional Conduct regulate attorney conduct and subjects
attorneys to an array of sanctions for violation, including
disbarment.
ARGUMENTS IN OPPOSITION : A coalition of business interests lead
by the Chamber of Commerce argues against the bill as follows:
SB 459 ? 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.
As stated by the California Department of Industrial
Relations on their website regarding the determination of
independent contractor status:
"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
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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 S8 459 seeks
to do. Noticeably, SB 459 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, SB
459 also subjects employers to additional litigation under
the Private Attorney General's Act. This will add another
layer of costs onto businesses due to the litigation fees
and expenses they will be forced to incur in defending such
actions. Moreover, S8 459 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
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which to improve the ability of business to make accurate
and sound business decisions regarding the classifications
of their employees.
By contrast, 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 worker 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."
The Personal Insurance Federation of California is opposed
unless amended to create an exemption for that industry. PIFC
argues,
Insurance agents and brokers have long been classified as
independent contractors, with an extensive history of
federal court cases and Internal Revenue Service (IRS)
determinations that establish that this classification is
proper. Agents and brokers are individuals that own,
operate and manage their own businesses, receive 1099 forms
from their contracted insurers, and are individually
licensed by the California Department of Insurance. They
each operate in conjunction with insurance companies with
that relationship clearly outlined in agency contracts.
This bill would subject insurance companies and
agents/brokers to new burdens and requirements that are
unnecessary given the settled nature of independent
contractors in the insurance industry. In addition to the
costs associated with providing a form to each agent and
broker, and maintaining specific records for two years,
insurers are subject to criminal misdemeanor penalties in
the event that a record is misplaced or if it cannot be
proven that the form was provided.
Similarly, the Direct Sellers Association states, "While we
appreciate the assurances that this bill is not targeted at
direct salespeople, as the bill is currently written, they will
be subjected to the legislation's burdensome paperwork
requirements and prosecuted for a misdemeanor for inadvertently
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failing to comply with these requirements. Most importantly,
direct selling companies already provide their distributors with
notice of their independent contractor status in their
contracts. To require another and separate notification form
would not only be redundant and unnecessary, but would also
cause confusion for Californians pursuing direct selling as an
income opportunity. Additionally, for those salespeople trying
to expand their sales teams, this duplicative form will not only
be another piece of expensive red tape (up to $2 million
annually in enforcement costs) for the State of California, but
could dissuade potential distributors from joining. Most
troubling, as noted above, under the bill's notice requirements
(which will generate millions of pieces of additional paper),
distributors could be prosecuted for a misdemeanor if they
forget to provide individuals the additional form when they
recruit."
Governor Schwarzenegger's Vetoes of Prior Related Legislation.
This bill is similar to the enrolled versions of SB 622 (2007)
and SB 1583 (2008), both of which were vetoed by Governor
Schwarzenegger.
Author's Technical Amendments. To clarify the bill, the author
proposes the following helpful amendments:
226.8. (a) It is unlawful for any person or employer to engage
in any of the following activities:
(1) Willful misclassification of an individual as an independent
contractor.
(2) Charging an individual who has been willfully misclassified
as an independent contractor a fee, or making any deductions
from compensation, for any purpose, including for goods,
materials, space rental, services, government licenses, repairs,
equipment maintenance, or fines arising from the individual's
employment where the employer would have been in violation of
the law if the individual had not been misclassified.
(b) If the Labor and Workforce Development Agency, or any of its
departments, divisions, commissions, boards, or agencies, or a
court finds that person has engaged in any of the enumerated
violations of subdivision (a), a civil penalty of not less than
five thousand dollars ($5,000) and not more than fifteen
thousand dollars ($15,000) shall be assessed against the person
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for each violation, in addition to any other penalties or fines
permitted by law.
(c) If the Labor and Workforce Development Agency, or any of its
departments, divisions, commissions, boards, or agencies, or a
court finds that person has engaged in any of the enumerated
violations of subdivision (a ) this section and there is evidence
that the person has engaged in or is engaging in a pattern or
practice of these behaviors, a civil penalty of not less than
ten thousand dollars ($10,000) and not more than twenty-five
thousand dollars ($25,000) shall be assessed against the person
for each violation, in addition to any other penalties or fines
permitted by law.
(d) For purposes of this section, "willful" means voluntary and
intentional.
(e) Nothing in this section is intended to limit any rights or
remedies otherwise available at law.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation (co-sponsor)
California Teamsters Public Affairs Council (co-sponsor)
American Federation of State, County and Municipal Employees
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Employment Lawyers Association
California Nurses Association
Consumer Attorneys of California
Engineers and Scientists of California
Greater California Livery Association
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 Amway Distributors
California Chamber of Commerce
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California Delivery Association
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
CalSmallBiz
Direct Selling Association
Financial Services Institute
Messenger Courier Association of the Americas
Personal Insurance Federation of California
Securities Industry and Financial Markets Association
Western Electrical Contractors Association
Western Growers Association
Many private businesses
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334