On September 8, 2011, the California legislature passed Senate Bill 459 prohibiting the willful misclassification of individuals as independent contractors. Labeled by some as the “Job Killer Act,” this new legislation creates civil penalties of between $5,000 and $25,000 per violation. In addition to making it illegal to willfully misclassify individuals as independent contractors, the new law will also prohibit charging fees to or making deductions from the compensation paid to those misclassified workers. Although still requiring Governor Jerry Brown’s signature, it is anticipated that this legislation will become law within 30 days.

The Law

SB 459 adds two new Labor Code sections, 226.8 and 2753, which set forth the provisions of the new law with which all employers need to comply. Specifically, section 226.8(a) provides that it is unlawful for any person or employer to willfully misclassify an individual as an independent contractor. An employer who has willfully misclassified an individual is also prohibited from charging that individual a fee or making any deductions from the individual’s compensation where such fee or deduction would have been prohibited if the individual were not an independent contractor. Subdivision (a) of 226.8 also provides a list of the prohibited fees and deductions, including goods, materials, space rental, services, licenses, repairs, maintenance and fines. Subdivision (b) imposes penalties of between $5,000 and $15,000 for each violation in addition to any other penalties permitted by law. Under this new legislation, every deduction or fee charged to a willfully misclassified independent contractor could give rise to a separate penalty. Moreover, if either the Labor Workforce Development Agency (LWDA) or a court determines that the person or employer has engaged in a pattern or practice of violations, the penalty is increased to between $10,000 and $25,000 per violation. (§ 226.8(c)).

Section 226.8 also includes a non-monetary penalty. Any person or employer who has violated subdivision (a) must prominently display a notice on its Internet Web site (or if there is no Web site, in an area accessible to all employees and the general public) which states: (1) it has committed a serious violation of the law by engaging in the willful misclassification of employees; (2) it has changed its business practices to avoid further violations; and (3) that any employee who believes he is being misclassified may contact the LWDA. The notice must also include the mailing address, email address and telephone number of the LWDA. (§ 226.8(e)). Additionally, the notice must be signed by an officer (or owner) and must be posted for one year. (§ 226.8(f)). The new law also provides that any licensed contractor who violates section 226.8(a) must be reported to the Contractors’ State License Board, which must initiate disciplinary action against the offending contractor. (§ 226.8(d)).

To prevent employers from avoiding these penalties and notice requirements, successor corporations or businesses are liable for the former entity’s acts where one or more of the same principals or officers are engaging in the same or similar business. (§ 226.8(h)).

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