Independent Contractor Relationships Are Now More Dangerous to Establish or Maintain

By Guy Puccio

Two measures regarding independent contractor relationships were just enacted into law by the California Legislature. These legislative measures signed by Governor Brown are AB 1396 (Committee on Labor and Employment) and SB 459 (Corbett). Effective January 1, 2013, AB 1396 requires whenever an employer enters into a contract of employment for services to be rendered within this state and the contemplated method of payment involves commissions (as defined), the contract is to be in writing and is to include the method by which the commissions are to be computed and paid. This measure amends Section 2751 and repeals 2752 of the Labor Code. The term “commissions” is apparently defined in 204.1 of the Labor Code.

SB 459 adds Sections 226.8 and 2753 to the Labor Code, effective January 1, 2012. Section 226.8 makes it unlawful to willfully misclassify an individual as an independent contractor or to make deductions from compensation for any purpose, including (but not limited to) goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or imposing fines which would have been unlawful if the individual had been properly classified as an employee. Employers who misclassify employees will be subject to civil penalties of not less than $5,000 or more than $15,000 for each violation (or not less than $10,000 or more than $25,000 for each violation, if engaged in a pattern or practice of such mischaracterization), plus additional penalties or fines and other remedies as authorized by law.

Employers are required to post a notice informing workers who believe that they are being misclassified of the right to contact the Labor and Workforce Development Agency presumably to file a complaint. The contact information is to be included in the notice. Further, Section 2753 provides any person who for money or other valuable consideration knowingly advises an employer to treat an individual as an independent contractor to be jointly and severally liable with the employer, if the individual is found not to be an independent contractor.

Apparently, this is to apply to accounting, bookkeeping, and tax professionals.

It has been reported, the joint and several liability includes the payment of income taxes, interest, and penalties resulting from the mischaracterization, but the statute does not specifically say that. Rather, it may be limited to the civil penalties and fines for which the professionals are jointly and severally liable. Unless regulations or public policy statements are issued, a legal opinion may be required to clarify this issue. A lawyer who provides legal advice in the course and scope of the practice of law is exempt from the provisions of Labor Code Section 2753.

IRS is also pursuing employers who utilize independent contractors in an apparent effort to reduce such relationships and to increase the number of individuals who are W-2 employees.

Reportedly, the U. S. Labor Department and IRS are now sharing leads along with a number of states on misclassified workers. IRS expects the pressure they are bringing to bear to encourage firms misclassifying workers to correct voluntarily the status of these individuals to employees.

This requires employers to agree to treat the workers as W-2 employees for future tax periods subject to a maximum penalty of 1.086% of the compensation paid to the workers for the previous year plus all taxes that would be due because of the mischaracterization. IRS describes in its announcement 2011-64 how to comply with the voluntary program. Each employer should discuss the independent contractor issue with its accounting, bookkeeping, or tax professionals (assuming these professionals will provide such advice), or this issue should be discussed with legal counsel representing the employer.

Remember, the FRB’s regulations on the payment of compensation to loan originators performing as salesperson or broker associates in federally related residential mortgage transactions require a W-2 employee relationship.

Contact us if you need assistance understanding and/or complying with the new laws.

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