Recently the IRS rolled out a new, voluntary worker classification settlement program. Employers will have an opportunity to reclassify their independent contractors as employees and escape a good share of tax liability and penalties that would otherwise attach to such a reclassification.

To be eligible:

• an applicant must have consistently treated the workers in the past as nonemployees;
• must have filed all required Forms 1099 for the workers for the previous three years;
• must not currently be under audit by the IRS; and
• must not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No other interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers should note, however, that for the first three years under the program, they will be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

The Stick

SB 459: California Imposes New Penalties for Employee (Independent Contractor) Misclassification.

Effective January 1, 2012, this new law imposes greater civil penalties for employers who willfully misclassify their workers as independent contractors. Penalties include civil penalties ranging from $5,000 to $25,000 per violation, which could be assessed by the Labor Commissioner or, presumably, under the California Private Attorney General Act (“PAGA”).

Other remedies include a “Scarlet Letter provision,” requiring an employer to display on its website, or other area accessible to employees and the general public a notice that explains that the employer has been found guilty of committing a serious violation of the law by willfully misclassifying employees, along with other required information. The law also prohibits charging misclassified independent contractors fees or deductions from compensation (such as rental fees for space or equipment), if those fees and deductions would not permissible to charge an employee.

Quick Tips on How to Avoid the Stick and Get the Carrot

1) Employers should consider a timely and thorough self-audit of such classifications.

2) Identify when an independent contractor morphs into an employee or if the employer at some point overreaches and exerts a new, higher level of control over the work at issue. The employee versus independent contractor determination turns on control—how much control does the employer exercise over how the worker accomplishes his or her task?

3) Turn to the statutes for guidance: California and federal statutes, case law and regulations provide some guidance regarding such “control” and overlap in many respects. In particular, the IRS administrative guidelines, although not dispositive, provides some fairly straightforward “employee versus independent contractor” concepts.

4) In performing a self-audit of worker classifications, it is critical to obtain assistance from labor and employment counsel, human resources experts, or both.

IRS News Release Link

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The content contained herein is published online by Gibbs, Giden, Locher, Turner & Senet LLP ("GGLTS") for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel. For specific questions about any of the content discussed herein or any of the content posted to this website please contact the article attorney author or send an email to info@gglts.com. The transmission of information on this, the GGLTS website, or any transmission or exchange of information over the Internet, or by any of the included links is not intended to create and does not constitute an attorney-client relationship. For a complete description of the terms of use of this website please see the Legal Notices section below. This publication may not be reproduced or used in whole or in part without written consent of the firm.

Unclean Hands Provide a Defense for a California Employer

By Monte K. Grix,Esq.

In Salas v. Sierra Chemical Co, _____Cal.App.4^th ___ (3d Appellate District, 2010) an employee sued a former employer for disability discrimination under the Fair Employment and Housing Act and wrongful failure to hire in violation of public policy. 

This case arises from a seasonal employee’s failure to be rehired after suffering a workplace injury during prior term of employment.  On a motion for summary judgment, the employer presented undisputed evidence that the Social Security number used by the employee belonged to another person living in North Carolina.  The trial court granted summary judgment to the employer on the basis of the after Acquired Evidence doctrine and the doctrine of “Unclean Hands.”  The Court of Appeal affirmed.

The Doctrine of Unclean Hands:

It is against public policy to provide equitable relief to a person who has engaged in misconduct. 

Federal Law:

Applicants for employment are required to make certain representations, pre-employment, that establish that they are legally authorized to work in the United States.  Among other things, applicants must fill out a federal “I-9” form and submit certain documents, such as a California Driver License and a Social Security card, that evidence such employment authorization. 

The I-9 form requires, among other things, the applicant to sign a statement, under penalty of perjury, that the documents are genuine and the information presented is correct.  The employer must likewise sign off on the apparent authenticity of the documents presented for inspection.  

In this case, based on such federal legal requirements, the employer submitted materially undisputed evidence that, as a matter of company policy and compliance with federal law, it would not hire anyone not legally authorized to work in the United States.  The employer accordingly established that, had they known that the plaintiff was ineligible to work in the United States, they would not have hired him or offered him employment.  The California Court of Appeal concluded that the employee had no actionable claim for wrongful refusal to hire or disability discrimination because he had no right or ability to work for defendant or any other United States employer.

California Employer Defense Insight:

1)      Employers need to use their best, good faith efforts to comply with the United States immigration and work authorization laws.  Such efforts include close compliance with the requirements set forth on the federal I-9 form, and may include the use of E-Verify to establish employment eligibility. 

2)      If an employee or applicant later asserts an employment discrimination or wrongful termination claim and that employee in fact lacked authorization to work in the United States at the time of his or her hire, the employer may be able to use both the After Acquired Evidence and Unclean Hands doctrines as a defense if the employer can demonstrate that it has an established company policy of refusing to hire or to continue to employ ineligible workers. 

Questions or Comments? Contact Us at:
Gibbs, Giden, Locher, Turner & Senet, LLP
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The content contained herein is published online by Gibbs, Giden, Locher, Turner & Senet LLP ("GGLTS") for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel. For specific questions about any of the content discussed herein or any of the content posted to this website please contact the article attorney author or send an email to info@gglts.com. The transmission of information on this, the GGLTS website, or any transmission or exchange of information over the Internet, or by any of the included links is not intended to create and does not constitute an attorney-client relationship. For a complete description of the terms of use of this website please see the Legal Notices section below.

This publication may not be reproduced or used in whole or in part without written consent of the firm.

Q:  As to CA based employers, do California’s overtime laws apply to employees who are residents of other states, but who work part time here? 

A: YES (from California Supreme Court).

NEW CALIFORNIA SUPREME COURT RULING ON OVERTIME LAWS

By Monte K. Grix, Esq.

Case Summary:

In Sullivan v. Oracle Corporation, a class of former Oracle employees, residents of Colorado and Arizona, worked as instructors for that company, specifically, instructing Oracle clients at their places of business in the use of Oracle products.  In the course of such work these employees sometimes travelled to and worked in other states, including California.  These employees sued Oracle in a class action in the United States District Court, Central District of California, alleging that they were covered by California’s more generous overtime laws for the time they worked in California.  The District Court granted a motion for summary judgment in Oracle’s favor, but the Ninth Circuit Court of Appeals reversed, and then withdrew its decision, instead certifying certain questions to the California Supreme Court.  In what might be considered an understatement, the Ninth Circuit remarked that the issues presented had “considerable practical importance” and could have “an appreciable economic impact on the overall labor market in California.” 

To the point, the California Supreme Court was asked to address this central question: do California’s overtime laws apply to residents of other states for the days and weeks such employees worked in California.  By unanimous decision, the Supreme Court answered “yes.” 

Dispensing with Oracle’s arguments that application of California’s overtime laws was overreaching and infringed upon the sovereignty of the states where plaintiffs’ resided, the California Supreme Court stated, “That California would choose to regulate all nonexempt overtime work within its borders without regard to the employee’s residence is neither improper nor capricious.”  Among other things, the Court noted that California, like all states, has the constitutional “police power” to regulate employment matters.  With regard to a potential conflict of laws, the Court engaged in a comprehensive analysis and concluded that there was no actual conflict to resolve where California law, as to California-based employers, was applied to provide the employees at issue even greater protections than they would otherwise receive under the laws of their home states and under the Fair Labor and Standards Act.

The California Supreme Court then attempted to paint the limits of its decision by musing that “California law might not apply to nonresident employees of out-of-state businesses who enter California temporarily during the course of the workday,” and noting that the claims at issue in the present case concerned only entire days and weeks.  The Court also cautioned against extrapolating the logic of this decision to other aspects of California employment law such as mandatory meal and rest breaks: “one cannot necessarily assume the same result would obtain for any other aspect of wage law.” 

Insight:

It is clear that the Court’s decision represents a sizeable shift, which, unlike the promulgation of a revised statute, affects not only employer payroll issues and liability issues prospectively, but also, in some sense, retroactively:  companies with non-resident, non-exempt employees who have worked any number of days within the applicable statute of limitations (generally 3 years under the California Labor Code) could see a rise in wage and hour actions seeking unpaid overtime wages.  Although every employer’s situation is different and must be considered on the relevant facts, we recommend that you contact GGLTS to arrange for a consultation.  Under such circumstances, it may be wise to be proactive: to conduct an internal audit of the payroll records of the affected employees—including an analysis of whether potentially affected employees are properly classified as exempt or non-exempt—and to take appropriate action based upon the audit results.

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http://www.supremecourt.gov/opinions/10pdf/10-277.pdf

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