Employees v. Independent Contractors

California has very confusing labor laws.

Failure to properly classify an employee or an independent contractor is a violation of state law that can result in huge penalties and the back-payment of wages and benefits.  But despite its desire to flog businesses with excessive punishments, California law never clearly defines what is or is not an employee.

Instead, California law relies upon a laundry list of employment circumstances, case law, and workplace conditions for each business to then decide for itself whether or not the worker is an employee or contractor.

Does the worker wear a uniform?  When they handle money, do they keep it or does it go to the business?  Does the worker control his or her own schedule?  Is a 1099 issued?  The totality of considerations goes on and on, and even state agencies will even disagree with one another on what set of circumstances results in classification as either an employee or contractor.

Consider your parenting skills:  what is the very first thing you establish when you want your children to do something?  Clearly define what is expected, and then set forth clear and consistent consequences.  Well California law does a great job of setting forth clear consequences, but it never ever provides clear definitions (or even examples) for businesses to follow.

That is why Senate Bill 459 (Ellen Corbett, Democrat, San Leandro), only added insult to injury and was very frustrating.  Right out of the gate, this poorly written legislation immediately created additional $5,000-$15,000 penalty enhancement for misclassifying an employee or contractor, and $25,000 for repeat offenses, but did nothing to clear up the ongoing confusion experienced by businesses.

Then, to make matters worse, it set the lowest possible threshold for triggering a violation by relying merely upon “willful” misclassification by the employer.  To most people the term “willful” means an act done of one’s own free will, intentional and voluntarily.

As it applies to the law, it simply translates to someone improperly filling out a form — not that they intended to fill out the form improperly, but that they filled out the form and it was done improperly.  In other words, guilty intent is not a requirement of a willful act.

So when SB 459 sought to make the penalties trigger upon mere “willful misclassification”, that didn’t mean the misclassification itself had to be intentional; rather, it only meant the misclassification occurred and then a review of the forms (intentionally and voluntarily filled-out) would show the wrong boxes were checked off which ultimately resulted in the misclassification.

One would think, if legislation was going to be written that impacted a large business segment, that businesses would be invited to the table as stakeholders to help craft the legislation (so as to avoid the pitfalls contained within SB 459).  That is how things used to be done before Term Limits robbed out Capitol of experienced lawmakers.

The nuances of understanding “willful” misclassification posed subtle yet significant distinctions that ultimately created a host of unintentional consequence; and making a world of difference in levying hefty fines against someone who just made an honest mistake.

To make matters worse, SB 459 made no allowance for affirmative defense against a misclassification, such as relying upon the advice of legal counsel, complying with case law, or adhering to industry-wide standards and historical practice.

That would mean 100% of all businesses with any misclassification would then be guilty and have to pay about $15,000 per offense!  No exception.

Even the IRS make accommodations (Section 530) for filers who can show they took reasonable steps to properly do something, and intended to follow the law.

But not SB 459.

That’s when CalSmallBiz, California’s premier small business association, jumped into action and put forth an aggressive campaign to get the bill amended and remove the offensive language from the SB 459.

A review of the bill’s history so far showed that it sailed through each policy committee on a straight party-line vote (Democrats versus Republicans), regardless of its problems.  The Senate did little more than rubber-stamp its approval on the measure.

This comes as no surprise when considering labor unions are the sponsors of the legislation as part of their effort to increase membership for their unions by increasing the pool of eligible employees.  The power of labor unions on California’s Capitol is unparalleled, though not entirely undeserved given their ability to mobilize and support candidates on various platforms.

For months, opponents to the measure had been trying to meet with Senator Corbett to work out amendments and tighten up the bill’s language.  These efforts were unsuccessful because ultimately labor unions controlled the legislation and they didn’t want to budge on the bill.

Frustrated, but still dedicated to fixing the measure, in preparation for the final policy committee, CalSmallBiz did a massive outreach and contacted nearly 232,000 businesses throughout the collective districts of the Democrat Assembly lawmakers on the committee, explained the situation with SB 459, and then urged them to become involved to discuss their business needs with their Assembly Member.

That’s some serious outreach!  And CalSmallBiz did it in just 4 days!

The lawmakers were then contacted by CalSmallBiz and provided with a courtesy copy of the message that was distributed, and provided a tally of the number of businesses in their district that were contacted about the legislation.(1)

When SB 459 came up for hearing in the Assembly Committee on Judiciary, the labor unions lined up and pounded the podium.  They spoke of oppressed workers and said the misclassifications extended throughout every industry; and they said it all was such a pervasive problem throughout California that while the total number of workers was unknown, but it was sure to be a massive number. (2)   Almost in the same breath the labor union representatives also said California could solve all of its budget problems if they collected employment taxes because all of these (unknown) workers added up to $20 billion in taxes (a miraculously convenient round number).

Lengthy testimonies by business groups who were opposed to SB 459 provided well-reasoned arguments as to why current law was faulty, certain industries deserved exclusions, and the reporting requirements within the bill were onerous at best.

But only CalSmallBiz pin-pointed the discussion on the faulty definition, which was at the heart of everything SB 459 sought to do, that was going to result in 100% penalties, and unfairly penalize well-meaning businesses along with the few bad actors.  Only CalSmallBiz provided real world examples of how the confusion over “willful misclassification” was going to be twisted around and abused by trial attorneys.

The Chair of the Committee, Assembly Member Mike Feuer (D-Los Angeles), a Harvard Law School graduate, readily recognized the problems with the definition, saw a need to fix the measure, and stood firm on making sure the legislation that passed out of his committee was responsibly written.  This is unmistakable integrity.

Of no less importance, Assembly Member Alyson Huber (D-El Dorado Hills), proposed a similar version of an amendment to fix SB 459, and both proposals were leaps and bounds better than the bill’s current version.

Finally, Assembly Member Toni Atkins (D-San Diego), who is a newcomer to the Legislature but very articulate and well-reasoned, expressed her valid concerns as well.

If we could keep this caliber of lawmakers in office, then maybe Term Limits won’t be so bad after all.

SB 459, a flawed piece of legislation that had already sailed through three other policy committees and off of the Senate Floor, was suddenly stopped in its tracks.  A reluctant Senator Corbett — still wanting to salvage what she could of the important labor bill — kept flicking her hair back as she stammered at the podium, but finally agreed to accept the amendments.

SB 459 is now undergoing amendments which will remove the “willful” misclassification definition and replace it with something along the lines of “voluntary and knowing effort to misclassify an employee” or “willful misconduct which is done consciously and intentionally in disregard of the law”.

Today the legislative process worked.  Diametrically opposed interests were able to come to the table, understand each others’ points of view, and cross party lines to work in partnership on developing a responsible piece of legislation that seeks to appropriately address a problem without creating unintended consequences.

For all of the griping that people do ever job approval rating, I think there is hope for the California Legislature after all.

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FOOTNOTES

1) As a professional courtesy, the mention of any lawmaker or staff in a media story, mailer, or outreach effort is followed-up with a complimentary copy of the piece to the lawmaker or staff so as not to catch them by surprise, should it later come up.

2) CalSmallBiz does not dispute that some workers are misclassified, and that reasonable worker protections are needed so as to avoid abusive work environments.  Further, when some businesses engage in unfair business practices (B&P 17200), it creates an unfair advantage over law abiding businesses that operate in good faith under the law.  However, it has not been shown to be a widespread problem that merits every single businesses being subjected to SB 459 so as to capture and address the misconduct of the minority group of offending businesses.

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About Capital Alliance, Strategic Advocacy & Public Relations Firm

A 20 year veteran of the Capitol, Matt Gray has worked on every major public policy issue to come before the California State Legislature. He has worked as both as a Deputy Chief of Staff to the Dean of the Legislature, and most recently as a contract advocate for numerous HiTech and information technology (IT) clients as well as a venture capital firm on developing emergent technologies. Formally educated in communications and public relations, as well as the organic chemistry, Matt has extensive technical experience. In 2010, Matt was elected by Sacramento voters to the City Council for the proposed formation of Arden Arcade as California's newest city. While cityhood for Arden Arcade was ultimately defeated, Matt remains an active member of his community, and is known for being a strong proponent of improving California's small business climate. Matt is often called upon by the media for interviews on public safety and energy matters, juxtaposed with the Governor, Speaker of the Assembly, and Senate Pro Tempore. He has also been a repeat guest on POWER 106 in Burbank, and on the Bruce Maiman show, Talk 1530 AM, KFBK, as well as The John & Ken Show, AM 640 in Burbank.
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