California Independent Contractor Law May Be Liability for Agents, Brokers

A new California labor law designed to punish employers for misclassifying workers has broad legal language that can possibly impact insurance agents and brokers who knowingly advise clients on employee classifications to the tune of thousands of dollars per misclassified worker.

The law now in effect was signed on Oct. 9, 2011 by Gov. Jerry Brown. The new legislation that took effect in January added monetary fines and expanded the state’s labor code. It was created by the passage of Senate Bill 459, authored by state Senate Majority Leader Ellen M. Corbett, D-San Leandro.

The law, found under labor code 2763, authorizes the California Labor and Workforce Development Agency to assess civil penalties on, and to take disciplinary actions against, persons or employers violating the new prohibitions.

As chaptered, the bill provides “that a person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for the individual shall be jointly and severally liable with the employer if the individual is not found to be an independent contractor.”

Depending on how it’s interpreted, that “person” may extend to anyone who gives paid advice to employers on employee classifications. The law excludes employees who offer this advice or attorneys who give this advice in the course of practicing law.

“I think this new law is unique in that it’s found in the labor code, but it applies to other people, rather than just employers,” said labor attorney Spencer C. Skeen, with Fisher & Phillips LLP in San Diego. “This law creates liability to people who advise employers regarding classification of workers.”

He added, “Advisors would not be looking for this law.”

Skeen is warning insurance clients and others in the industry to consider adopting best practices when advising their clients on issues like workers’ compensation, and employment practices liability insurance.

Jim Fessenden, also with Fisher & Phillips, said, “as far as we know this the first time the labor code has imposed penalties on people other than employers.”

Heavy Fines

A number of other states have enacted legislation that imposes fines for misclassification of workers, though they often tend to have limited the scope of the statutes, and typically concern the construction or landscaping industry, Skeen said.

California’s law is broader, and could be wide open to interpretation, he added.

“California’s is the only statute that imposes liability on those who advise employers for a fee,” Skeen said.

The law makes an adviser jointly and severally liable up to 100 percent. That means advisors can be fined independently from the employer, and they are liable up to 100 percent of any fines imposed.

Civil penalties for employers range from $5,000 to $15,000 per misclassified employee, and $10,000 to $25,000 per employee when “a pattern and practice” of misclassification is proven.

State Labor Commissioner Julie A. Su told Insurance Journal that the new law is geared to go after workers’ comp fraud and employers who avoid wage obligations and tax obligations “by calling someone who’s actually an employee a contractor.”

And Su said that if an insurance agent or broker gives an employer advice on classifying employees with the knowledge that the employer may be misclassifying those employees, then the broker or agent will be held liable.

“The law says you have to knowingly advise on the misclassification,” she said, adding, “But ignorance of the law is not sufficient to defeat a finding that it may have been willful.”

In other words, if it can be shown a broker or agent had any knowledge of the misclassification, they are liable and can be fined just as much as the employer doing the misclassifying.

There are those who argue the law won’t likely affect agents and brokers, as they are not qualified to make the call on employee classifications, and that doing so would overstep the bounds of what an insurance agent does.

“I do not view this provision as being likely to impose significant liabilities upon broker-agents for at least two reasons,” said Steve Young, senior vice president of Insurance Brokers & Agents of West, which advocates on behalf of independent insurance brokers and agents in California.

First, Young said, brokers and agents do not generally advise employers on how workers should be classified. And even if they were to offer such advice, liability could be imposed only upon evidence that the broker or agent had knowingly advised the employer to improperly classify a worker as an independent contractor, he added.

Second, the bill requires the person providing the advice to be paid for providing it, Young noted.

“It seems to me there is a potentially significant ambiguity regarding this requirement,” he said. “No broker-agent is going to charge a fee or receive any other consideration for providing advice on matters of labor law. He or she would receive compensation for the sale of insurance, but not for providing advice on labor law.”

Depending on how the law’s language is construed, a broker-agent might never receive “money or other valuable consideration” for providing such advice, Young added.

But Skeen the labor attorney believes that “creative plaintiff lawyers may argue that liability may be imposed.”

Agents may be considered to have been paid when placing EPLI or workers’ comp insurance when they instruct the employer how to fill out state paperwork when classifying employees, according to Skeen.

“Then arguably the broker has received compensation for telling you how to fill out the form,” he said, adding that brokers and agents would be advised to look at best practices and even consider drawing up a form to have their clients sign stating the agent had no hand in employee classification.

“I’m not saying that it will” affect agents and brokers, Skeen added. “But I’m sure saying ‘alert, alert, alert.’ If you don’t think the people who wrote this legislation are more concerned about misclassification on workers’ comp and EPLI, you’re sorely mistaken. This is definitely one of the targets on the bill, is to prevent misclassification on policies.”

Skeen added, “My insurance clients often sit with the client and they fill out the (paperwork stating how many employees a company has), and it’s often filled out in the agent’s handwriting.”

Joint and Several

Additionally, the term “joint and several” in the law’s language, meaning together and apart, translates to this, Skeen said: agents and brokers can be the last man standing in a bankruptcy.

If the agent or broker is the only viable entity left following the bankruptcy of an employer found to have misclassified his or her employees, Skeen added, “the broker could be easily liable for the fine. It basically gives the plaintive and the workforce agency another potential pocket from which to collect these fines.”

And there’s yet another danger the law poses to anyone found guilty of violating it.

If an employer, or advisor, is found guilty of misclassifying workers, they will be required to post a public notice on their website stating that they violated the law.

“We recognize the growing problem that employee misclassification is contributing to the underground economy, and this is a strong tool to remedy that,” Su said of the new law.

Insurance agent Derek Ross, president of ISU-Kulchin Ross Insurance Services Inc. in Tarzana, Calif., which writes a large amount of workers’ comp insurance, was only made aware of the new law when a reporter called him for his thoughts on how this would impact his business.

“I’m not aware of that change actually. It’s very concerning,” he said, deferring offering any further thoughts until he could examine the potential impacts of the law further. “We are looking at it now. Clearly this is something that we all need to be looking at.”

It is something to think about, Skeen said, adding that the trouble could start “when a broker asks how many employees do you have? The broker, I think, needs to steer clear of analyzing that issue. Best practices may require the broker to issue a letter or a memo or some sort of document that says: ‘I’m not participating in any classification of workers. The determination is made by you.'”

Topics California Legislation Agencies Workers' Compensation Contractors