Independent Contractor Misclassification Crackdown

Originally published in eGroomer Journal Fall 2011.

Misclassifying a worker as an independent contractor (I.C.) results in severe consequences, including back taxes, wages and benefits, and civil and criminal penalties. They can come from all sides, including individual and class action lawsuits, state and federal agency audits and enforcement actions, and even criminal prosecution.

At least 18 states are considering additional measures against employers misclassifying their works. In the forefront, the California legislature has decided all these sanctions are not enough. On October 9, 2011, Governor Jerry Brown signed into law Senate Bill 459. It adds two new provisions to the California Labor Code and creates additional penalties.

The new law adds two new sections to the California Labor Code (sections 226.8 and 2753) and applies to all employers. It creates civil penalties of between $5,000 and $25,000 for willful misclassifications of workers as independent contractors. These penalties don’t replace other sanctions, they are in addition to all other penalties and fines permitted by law.

What is Willful Misclassification?

The definition of “willful misclassification” is “avoiding employee status for an individual by voluntarily or knowingly misclassifying that individual as an independent contractor.” The new law also prohibits charging fees to or making deductions from the compensation paid to the misclassified workers if the fee or deduction would have been prohibited if the worker was an employee.

There are also steep civil penalties for each violation, and embarrassing to say the least. For example, any person or employer who willfully misclassifies a worker as a contractor must prominently display a notice on its website that 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; (3) that any employee who believes he or she is being misclassified may contact the Labor Workforce Development Agency; and (4) that the notice is being posted pursuant to a State order. The posting requirement lasts for one year and must be signed by an officer of the company.

The California Labor Commissioner is charged with enforcement of the law, though employees may presumably bring enforcement actions on behalf of themselves and others under the Private Attorneys General Act.
Groomer: I.C. or Employee?

Groomers classified as independent contractors are self-employed. They are not covered by employment and related tax laws or, typically, by benefit plans.

Employment law presumes that groomers are employees. Absolute determinations made by one firm rule just don’t exist. The classification is then based on “tests” to determine whether a groomer is correctly classified. According to Orrick, Herrington & Sutcliffe LLP, “…most tests center around three basic concepts:
Control: If the company exercises enough control over the worker and the work performed (e.g. closely supervises worker, sets work hours, assigns specific tasks, provides specific direction on how and when to perform work), the worker likely should be classified as an employee.

Contractor’s ability for profit and loss: If the worker cannot hire assistants or subcontract out the work, uses the company’s tools and/or equipment, is reimbursed for business expenses, cannot work for other companies simultaneously, and/or is paid an hourly wage or a salary as opposed to being paid by the project or job, the worker is more likely to be an employee.

Distinct Occupation: If the worker is performing the same type of work as the company’s employees, provides services that are integral to the company’s regular business, is working on the company’s premises, does not possess a specialized skill, and/or is working for the company for an extended period of time, the worker is more likely to be an employee.”

Get Compliant Now!

Few groomers are correctly classified as I.C.’s. Grooming business owners need to act fast, especially if the wave of new additional legislation against misclassification of workers continues and echoes the severe responses of the State of California. One easy measure is to consult an employment law attorney to examine your I.C. classifications.

Have your attorney thoroughly examine the status of your I.C. based groomers. If your groomers do not clearly meet the criteria, adjust the working relationship to properly meet the existing classification, cease the relationships or change the relationships to employees. Your I.C. classifications should be thoroughly documented in an I.C. employment agreement prepared your attorney.

Don’t risk misclassifying groomers as I.C.’s without proof of your determinations. The risk of potentially losing your business and facing severe financial penalties and embarrassment is not worth the short-term benefit of lowering payroll expenses. Instead find other ways to lower operating costs or raise prices to compensate for the additional cost of employee-based relationships. ▲