How To Classify Your Employees and Why: SB 459

Many business owners have a lot to deal with on a day-to-day basis, whether it is managing staff, dealing with clients, working through administrative paperwork—there are few California business owners who have the time to look at every Senate Bill that gets passed.

Here’s one that we think you should all know about: California Senate Bill 459. Do you have any independent contractors working for your company? How many? Did you send them all a 1099 form? And, most importantly, do they all legally qualify as independent contractors?

If you are surprised by any of the questions above, it’s a good thing you’re reading this.

In Senate Bill 459, penalties for misclassified independent contractors will increase. That means that if you know that you have classified someone working for you as an independent contractor when you know full well that they should be treated as an employee, the penalty that can be assessed against you has just increased.

How much? Violation of SB 459 can bring a civil penalty of between $5,000 and $15,000. Not just for violating it, but for each violation. SB 459 has authorized the Labor and Workforce Development Agency to enforce its statutes, and to assess the specific civil penalties to be levied against employers (or persons) violating the law. In addition, the bill requires the LWDA to take other “specified disciplinary actions” against these individuals.

What kind of disciplinary actions? There’s one that they have outlined that reminds us of the way people have been “named and shamed” in public, either in the newspaper or being forced to wear a sandwich board in front of a busy store. This disciplinary action requires the employers who have been found guilty of this misclassification to create a notice “to display prominently” on their website for one year. The notice, to employees and the general public, must announce that they have committed a serious violation of law by this misclassification, and it must be signed by a corporate officer.

Is there more bad news? Yes. If an employer has been found engaging in the past or present in “a pattern or practice of violations”, that penalty we mentioned earlier moves up to a range of $10,000 to $25,000—again, that’s per violation. And, of course, the law does not define what they mean by “a pattern or practice”, but we assume it means that an employer’s records make it clear that they’ve misclassified on numerous occasions, and it was clear it wasn’t an accident.

So the moral of the story is that it is always better and safer to add a person as a full employee, rather than an independent contractor, if you have any questions at all about their eligibility.

Next week we will talk about how to determine the business relationship between an employer and an individual, and how to classify them as an independent contractor, an employee, a statutory employee or statutory nonemployee.

Sound complicated? Then let us explain it for you. At Simons Accountancy, we are happy to sit down with you for a free, one-on-one consultation to understand your tax questions and problems, and see if we can help. Our award-winning firm has the experience and know-how to deal with almost every tax problem. We cut through the complex language of the IRS and translate it into words you can understand. Call now for your free consultation before it’s too late—1099s are due to your employees by February 29th! Click here to fill out our online form, or call us directly on (714) 637-4552.

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