By Eric D. Morton
It’s by now common knowledge that incorrectly classifying workers as independent contractors instead of employees can have adverse consequences for employers. In addition to liability for payroll taxes and employee benefits, employers can be fined and sued. But criminal liability? Yes, in California, the misclassification of workers can also subject you to criminal liability. This issue is a subject of ongoing attention because California labor laws are changing. Now is the time for employers to take notice.
Last year, the California Supreme Court issued a decision that clarified how workers are classified as either employees or independent contractors. In the case of Dynamex Operations West, Inc. v. Superior Court, the court held that a worker can be classified as an independent contractor only if the worker:
A. is free from the control and direction of the company in the performance of the work, both under the contract for the performance of the work and in fact; and
B. performs work that is outside the usual course of the company’s business; and
C. is engaged, independently, in a trade, occupation, or business doing the same work for which the worker is hired (for example, a plumber hired to install toilets for a software company).
This is known as the ABC test. The worker must meet all three requirements in order to be considered an independent contractor.
Assembly Bill 5
The California legislature is about to pass a bill (Assembly Bill 5) that modifies the California Labor Code to codify the ABC test of the Dynamex case. For most businesses, the ABC test will be applied to their workers for almost all purposes.
AB 5 provides for certain exceptions to the ABC test. Excluded from the ABC test are insurance agents, attorneys, physicians, real estate agents, hair stylists, barbers, and others that meet older tests as independent contractors. However, this does not mean that workers in these occupations are always independent contractors.
AB 5 is expected to take effect in 2020. Business owners and their human resource professionals need to be familiar with the nuances of this law.
Criminal penalties
A business, and its owners, can be criminally liable under statutes related to classifying workers. For example, under the Unemployment Insurance Code, a business and its responsible owners or officers commit crimes when they fail to file a return, fail to account for and pay taxes, or fail to withhold and pay disability deductions. Under Insurance Code Section 11760(a), there are criminal penalties for misclassifying workers in order to reduce the number of employees reported when buying worker’s compensation insurance.
Some of these crimes are actually felonies. Results may vary from county to county, with some District Attorneys more likely to prosecute than others. In addition to potential prison time, the criminal penalties include substantial fines. Those fines are in addition to the back taxes, penalties and interest that they also pay in civil proceedings.
What to do
- Become familiar with the law and follow it.
- Audit your company’s workers and make sure that they are properly classified.
- Keep complete records.
- Get timely professional advice.
Eric D. Morton is the principal attorney at Clear Sky Law Group. He can be reached at 760-722-6582, 510-556-0367, or emorton@clearskylaw.com