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Winter 2012

Lawsuit Prevention for Employers

In This Issue: MORE IMPORTANT CHANGES IN CALIFORNIA LABOR LAW FOR 2012

In our last issue, several significant new changes in California labor law for 2012 were discussed. We resume that discussion.

Independent Contractors

Newly added Labor Code Section 226.8 prohibits the “willful misclassification” of employees as independent contractors.

The new law authorizes the Labor and Workforce Development Agency (LWDA) or a court to award civil penalties of between $5,000 and $15,000 per violation, in addition to any other legally-prescribed fines or penalties.

This section further empowers LWDA or a court to issue civil penalties, ranging from $10,000 to $25,000 for each violation, if either finds that the principal/employer has engaged in a “pattern or practice” of misclassifying employees. This law adds new urgency to the author’s long-standing advice to employer-clients, which is, “If in doubt, treat workers as employees.”

Even before the passage of this statute, knowledgeable employers knew better than to make the mistake of misclassifying employees. One powerful reason, among many, is as follows. If a misclassified independent contractor is injured, and files a comp claim, the carrier will reject it, on the basis that the claimant is not an employee, and is consequently excluded from the employer’s comp coverage.

At this point, the issue shifts to whether the employee’s medical and other comp-covered expenses will be satisfied from the employer’s assets, by virtue of an award by the Workers’ Compensation Appeals Board.

In such a situation, the employer will not be provided a legal defense by the carrier, and the issue in controversy will be, simply, whether the individual satisfies the legal criteria establishing an employment relationship under California law. However, the employer suffers the added disadvantage resulting from a legal presumption, imposed by statute in such disputes, that the relationship was one of employment.

This legal analysis will focus on who retained control over how the object of the working relationship was performed. Although the legal standard enumerates several criteria, such as who provides the “instrumentalities” of the work (desks, computers, work space, etc.), and whether the parties themselves characterized the relationship as that of an independent contractor, the question of who controlled how the work in question was to be performed is by far the most influential to the analysis.

By way of illustration, let’s examine the relationship between a home owner and a house painting contractor, which represents a classic example of an independent contractor relationship.

Because the owner is normally concerned only with the color the house and trim will be painted, when the job will be completed, the project’s cost and little else, the owner retains little or no control over how the job will be done.

By contrast, the painter retains control over all details of whether and how sanding of original surfaces and other preparatory work, painting and cleanup work is done. These and many related considerations determine how painting the house – the object of the parties working relationship – will be performed. Classifications that expose employers to high risk are almost always readily distinguishable from the painter example above. These involve attempts by the owner to influence how the work is done, no matter how artfully the owner attempts to disguise such control as “friendly suggestions,” or “helpful guidance,” as opposed to mandatory instructions characteristic of employment.

Any attempts at “suggestions” or “guidance,” will be interpreted as the imposition of control, and should be avoided, even if they are not reduced to writing. If the work cannot be performed to the satisfaction of the owner without this input, it likely will be viewed as evidence of the owner’s retention of control, making the arrangement in all likelihood an employment relationship.

Many employers will be surprised to discover that a contractual agreement with the alleged independent contractor, even if it is in writing and signed, will be accorded little or no weight as part of this analysis, as will any consideration except that of retention of control.

In the event a misclassified “contractor” is injured on the job, the independent contractor defense is rejected and an employment relationship is found to have existed, the employer’s failure to provide workers’ compensation insurance constitutes an independent violation of law. As a result, the employer is potentially subject to substantial penalties, financial responsibility for the victim’s medical costs and lost earnings resulting from the injury. Depending on the severity of the injury, this could involve millions, with corresponding legal defense costs.

What is worse, is that this nightmare describes only the workers’ compensation implications of misclassification. There are numerous other serious exposure factors, such as penalties for failure to properly withhold taxes, failure to provide meal and lunch breaks as required by California law, failure to pay overtime and related wage-hour issues.

Further, misclassified “independent contractors” have probably not been provided an employee handbook, or required to sign an acknowledgment of receipt of same. Thus the employer’s at-will employment, mandatory arbitration and harassment policies likely do not apply to the alleged “contractor.” This subjects the owner to substantially increased liability for wrongful termination, workplace harassment and virtually every other area of potential legal exposure addressed by the employer’s written handbook policies.

Based on the foregoing, it is clear that, while the new law may command the attention of uninitiated employers, finally, it really represents the least of their worries when misclassifying employees as independent contractors.

Medical Premiums During Pregnancy Leave

Employees who are disabled by pregnancy, childbirth or related conditions, are entitled by law to four months of job-protected leave.

A new law amends current California law to prohibit employers from refusing to maintain and pay for coverage under a group health plan for employees on pregnancy leave.

Employers are now required to maintain coverage for the duration of the leave, up to a maximum of four months in a twelve-month period. Coverage must be maintained at the level and under the conditions that coverage would have been provided, if the employee had not gone on leave. In the event a covered employee fails to return to work at the expiration of the leave for reasons other than additional leave under the California Family Rights Act, or the same health condition necessitating the leave initially, the employer can recover from the employee the medical premiums paid on his/her behalf.

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