In June, Governor Perry signed House Bill 2015 into law establishing a $200 per person penalty for those employers who misclassify their workers on government contracts. Research from the University of Texas in Austin suggests that more than 40% of construction workers in the state are misclassified.
Recently approved legislation in California seems to suggest so. Their new laws prohibit the intentional misclassification of individuals as independent contractors, and state that these could be punishable by civil penalties ranging from $5,000 to $15,000 for each violation. There are also much larger penalties, up to $25,000, for employers engaging in a “pattern or practice” of violations.
“In addition to these fines, California also forces an employer, after being determined to be in violation of the law, to post on the company website or in a prominent public area, that the employer committed an infraction and has “changed its ways”. The Scarlet M if you will!”
Article by M. Christine Carty
The Senate Health, Education, Labor and Pension Committee is currently considering legislation introduced on April 8, 2011 intended to end misclassification of employees as independent contractors. Senate Bill 770 (S.770), known as the “Payroll Fraud Prevention Act” (“PFPA”), would amend and expand the Fair Labor Standards Act (“FLSA”) to include “non-employees” within the ambit of the FLSA minimum wage, hours and overtime protections. On its face, the PFPA is straightforward legislation, but the implications of some of its provisions are far-reaching and its activist approach conflicts with existing protections for companies that include independent contractors within their workforces.
The direct effect of S. 770, if enacted, will be to (i) require all employers to provide written notice to all employees and “non-employees” (i.e. independent contractors) of their status1 and refer the recipients to the U.S. Department of Labor (“DOL”) website for information about their rights, (ii) impose penalties of up to $5,000 for each misclassification, (iii) increase audits of companies in targeted industries, and (iv) increase referrals of perceived violations to the Wage and Hour Division from other divisions within the DOL. The proposed language of the mandatory notice is very specific: “Your rights to wage, hour and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you have been misclassified, contact the Department of Labor.” The PFPA also would require the DOL to set up a web page within six months that explains workers’ rights regarding classification. Finally, S. 770 establishes a private right of action for workers to enforce the provisions of the PFPA.
While these provisions are straightforward, other provisions of this legislation have less obvious and potentially more far-reaching effects. S. 770 directs that if an employer does not provide the required notice to a “covered individual” (i.e. independent contractor), there is a presumption that the individual is an employee, which can be rebutted only by “clear and convincing” evidence that the person is not an employee. This clear and convincing standard is much higher than the preponderance of the evidence standard (generally understood to be “more likely than not”) required to prove most civil suits. Further, if reclassified, a worker will be entitled to other FLSA protections, including a review of his or her wages for up to three years for compliance with minimum wage, hours and overtime requirements. If it is found that a company failed to comply with any of the minimum wage, hours or overtime requirements in compensating a reclassified worker during the three year period reviewed, the S. 770 prescribes that the employer must pay a “special penalty” in the amount of four times the actual unpaid minimum wages or overtime compensation. Of course, it is unusual for a company to pay overtime to an independent contractor, making the risk of exposure to a substantial penalty greater for entities that rely heavily on independent contractor relationships. Thus, potentially, a mistaken failure to provide an independent contractor with the statutory notice of rights could result in the worker’s reclassification as an employee by presumption followed by a significant financial penalty for each reclassified worker. The “special penalties” could easily become significant if the employer failed to give notice to a group of workers.
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.
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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CARSON CITY – Gov. Brian Sandoval has vetoed a second bill aimed at stopping employers from misclassifying workers to avoid paying more benefits.
Sandoval said the current system is adequate to ensure that businesses don’t classify their workers as independent contractors to pay minimum wage and avoid contributing to unemployment and workers’ compensation insurance.
But Sen. Mike Schneider, D-Las Vegas, says Sandoval “doesn’t know what’s going on in the big city.” He said “the governor’s philosophy is the free market will take care of it, but the free market is cheating.”
Schneider said neither the governor nor his staff contacted him as chairman of the Senate Committee on Commerce, Labor and Energy, which processed the bill and held hours of hearings.