BILL ANALYSIS
Senate Committee on Labor and Industrial Relations
Carole Migden, Chair
Date of Hearing: April 25, 2007 2007-2008 Regular
Session
Consultant: Rodger Dillon Fiscal:Yes
Urgency:No
Bill No: SB 622
Author: Padilla
Amended: April 19, 2007
SUBJECT
Employment: misclassification of employees as independent
contractors.
KEY ISSUE
Should the law governing classification of persons as
independent contractors provide civil penalties for willful
misclassification of an employee as an independent
contractor?
PURPOSE
To make it unlawful to willfully misclassify workers as
independent contractors and to establish civil penalties
for such willful misclassification.
ANALYSIS
Existing law provides numerous and comprehensive
requirements, rights, and remedies relating to the
employer-employee relationship, including, but not limited
to, wages and other compensation, hours, workers'
compensation, labor code violation actions, employment
contracts, and working condition standards. [Labor Code
Sections 200 et seq., 500 et seq., 2698-2699.5, 2700 et
seq., and 3200 et seq.]
Existing law defines an independent contractor as any
person who renders service for a specified recompense for a
specified result, under the control of his principal as to
the result of his work only and not as to the means by
which such result is accomplished. (L.C. Section 3353]
Existing law and regulation set forth the conditions under
which a person may be classified as an independent
contactor, and thus not subject to many wage, overtime,
working conditions, and certain other labor standards. The
California Employment Development Department (EDD), the
Franchise Tax Board, and the federal government are the
primary entities that have established criteria for making
a determination as to whether a person may be classified as
an independent contractor. EDD has developed a guide,
worksheets, and forms to assist businesses in determining
whether a worker is an employee or independent contractor.
This Bill would make it unlawful for any person or employer
to engage in any of the following activities:
Willful misclassification of an employee as an
independent contractor.
Willful payment of a nonexempt employee at a fixed salary
rate where the employer knew or should have known that
payment at that rate would result in the employee
receiving less wages than he or she would have had he or
she been paid based on regular hours and overtime hours
worked.
Charging an employee who has been willfully misclassified
as an independent contractor a fee, or making any
deductions from compensation for any purpose, including,
but not limited to, fees or deductions for goods,
materials, space rental, services, government licenses,
repairs, equipment maintenance, or fines arising from the
employee's employment where the employer would have been
in violation of the law if the employee had not been
misclassified.
Hearing Date: April 25, 2007 SB
622
Consultant: Rodger Dillon
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Senate Committee on Labor and Industrial Relations
This bill also provides that:
Any person found guilty of the above violations shall be
assessed a civil penalty of not less than $5,000 and not
more than $15,000 in addition to any other penalties or
fines permitted by law;
Any person found guilty of a repeated pattern of these
behaviors shall be assessed a civil penalty of not less
than $10,000 and not more than $25,000 in addition to any
other penalties or fines permitted by law;
Nothing in this section shall prohibit an employee who
has suffered actual harm or a labor union or organization
that represents that employee from bringing an action on
behalf of himself or herself or on a representative basis
on behalf of all employees of the employer who are
similarly situated to recover the penalties herein
described.
COMMENTS
1. Need for the bill?
Committee staff has been advised/made aware over the
years that misclassification of employees as independent
contractors is an on-going problem. Studies on the
"underground economy" often cite misclassifications as an
element of this problem. Sponsors of this bill state the
problem is widespread. The committee, however, has not
received, and is not aware of, any comprehensive studies
documenting the extent of the phenomenon.
2. Proponents Arguments
The author and sponsor argue that businesses/employers
intentionally misclassify workers as independent
contractors in order to avoid complying with the Labor
Code, federal rights and benefits, and state and federal
Hearing Date: April 25, 2007 SB
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Senate Committee on Labor and Industrial Relations
taxes associated with "employee" versus "independent
contractor" status. Supporters believe that while there
are prohibitions under existing law against
misclassifying employees, often employers decide that the
financial savings outweigh the risk of getting caught and
being held accountable. The author states the IRS
recently estimated that the federal government is losing
$195 billion a year in revenue due to the purposeful
misclassification of independent contractors. The loss
of revenue is also occurring at the state level. EDD has
found, for example, that SonicAir, and FedEx Ground
Package Services misclassified employees, and FedEx was
assessed $7.3 million in back taxes. The
misclassification is depriving workers of numerous
protections under workers' compensation, health benefits,
anti-discrimination laws, the National Labor Relations
Act, death and disability coverage, etc.
3. Opponents Arguments
Opponents believe SB622 creates a subjective and
undefined labor law violation with the use of the term
"willful" and that it proposes excessive employer
penalties. Opponents argue that the bill could create a
chilling effect on the use of independent contractors as
an entrepreneurial work force which would be damaging to
the viability of businesses that utilize the services of
independent contractors to address their specialized
needs. This will add to the pressures driving individual
businesses out of state. Opponents argue that existing
laws and penalties provide government agencies sufficient
authority to deal with this matter. They take note of
the fact that SB622 would permit not only an alleged
misclassified individual but also labor unions and other
organizations to bring an action on a representative
basis on behalf of all allegedly misclassified
individuals who are similarly situated.
4. Prior Legislation
Hearing Date: April 25, 2007 SB
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Senate Committee on Labor and Industrial Relations
AB1643 (Ridley-Thomas) of 2004 was approved and required
the Employment Development Department to conduct a study
relating to small business to review, among other things,
how often a small business objected to a reclassification
and how often an owner of a small business was determined
by the department not to be the employer of a worker. AB
2186 (Torrico) of 2006, prohibiting the misclassification
of employees as independent contractors, was introduced
but was not taken up in committee.
SUPPORT
California Teamsters Public Affairs Council (Sponsor)
California Applicants' Attorneys Association (CAAA)
California Conference Board of the Amalgamated Transit
Union
California Conference of Machinists
California Labor Federation, AFL-CIO
California Spa & Pool Industry Education Council
Engineers and Scientists of California
Professional and Technical Engineers Local 21
Strategic Committee of Public Employees, Laborers'
International Union of N. America
UNITE HERE!
United Food and Commercial Workers Union, Western States
Council
California Labor Federation
OPPOSITION
Associated General Contractors
California Building Industry Association
California Business Properties Association
California Chamber of Commerce
California Hotel and Lodging Association
California Manufacturers and Technology Association
National Federation of Independent Business
Hearing Date: April 25, 2007 SB
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Consultant: Rodger Dillon
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Senate Committee on Labor and Industrial Relations
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Hearing Date: April 25, 2007 SB
622
Consultant: Rodger Dillon
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Senate Committee on Labor and Industrial Relations