Employee Misclassification on the Rise, Lawsuits Follow

In 2012 Wal-Mart agreed to pay 4,500 employees over $4.8 million in back wages and damages after improperly classifying them as independent contractors so that they were not paid overtime, the Department of Labor announced in 2012.  More recently, FedEx has been sued with mixed outcomes, with some drivers found to be contractors and some employees.

According to Phoebe Ryles at the Epoch Times, “Misclassification is rampant in the construction industry, where carpenters, laborers and electricians working on large non-union construction projects are paid as independent contractors, saving the company thousands in workmen’s compensation and unemployment insurance, and costing states millions in unpaid taxes.

“Misclassification happens across a wide range of industries. Cable installers, cleaning workers, security guards, manicurists, local government workers, and even exotic dancers have won misclassification lawsuits in several states.”

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California Legislature Passes “Worker Misclassification” Bill

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)).

Read the rest of this article related to Worker Misclassification here >>

About the Author


Paul Cowie is a senior associate in the Labor and Employment Practice Group in the San Francisco office.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

The IRS Whistleblower Office

From the IRS Website

Source:  www.irs.gov

“The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

Who can get an award?

The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes,penalties, interest or other amounts from the noncompliant taxpayer.

The IRS is looking for solid information, not an “educated guess” or unsupported speculation.

We are also looking for a significant Federal tax issue- this is not a program for resolving personal problems or disputes about a business relationship”

For additional information visit the following page on the Internal Revenue Services website:


Massachusetts Attorney General Coakley, Company reach agreement

Massachusetts Attorney General Martha Coakley

BOSTON (Legal Newsline) – Massachusetts Attorney General Martha Coakley announced on Thursday that an Allston-based flooring company has been ordered to pay $26,000 in fines for labor violations.

Floor Sanders and Finishers of Massachusetts allegedly misclassified its employees as independent contractors and violated record-keeping policies.

Floor Sanders and its president, Varouj J. Nersesian, was cited for wage and hour violations in April 2008 and paid $5,500 for allegedly misclassifying employees and failing to pay the prevailing wage. The company agreed to a two-year debarment at that time for those violations.

The alleged new violations are related to flooring work performed before the debarment from November 2008 to December 2008 at the New Senior Center Construction public works program in Agawam.

“The independent contractor law is designed to ensure that all companies conduct business on a level playing field, and our office will continue to enforce that law, whether it is a first time offense or a repeat violation,” Coakley said.

Read the rest of this LegalNewsline.com article here >>