1. Labor Commissioner's Office

Misclassification of workers as "independent contractors" rebuffed by the California Court of Appeal

In recent years many employers have reclassified their workers as "independent contractors" to avoid the costs of workers compensation and overtime pay associated with employment of workers classified as employees. This agency and responsible advisors to business have counseled against this practice. Yet a sizeable number of consultants and some attorneys have worked at enticing employers to attempt this risky maneuver.

A recently issued opinion of the California Court of Appeal, Sixth District, has once again highlighted the dangers faced by employers that improperly designate workers as independent contractors.

The case, JKH Enterprises v. Department of Industrial Relations (2006) 142 Cal.App.4th 1046, emanated from a Labor Commissioner inspection of a small courier business that had reclassified its drivers as independent contractors (on advice of counsel) after the Labor Commissioner issued a stop order pursuant to Labor Code section 3710.1 in a previous inspection. The second inspection resulted in another stop order and a penalty assessment of $1,000 per worker.

JKH appealed the stop order and penalty assessment, but the hearing officer determined that JKH had failed to meet its burden of proof of establishing that its workers were independent contractors. The hearing officer emphasized in her decision that the work performed by the drivers was integral to JKH's business of package delivery and thus indicative of an employment relationship.

JKH unsuccessfully challenged the hearing officer's decision through a petition for administrative mandamus in Superior Court. The hearing officer's decision was affirmed once again in the opinion of the District Court of Appeal. A petition to the California Supreme Court for review of the matter was denied on Dec. 20, 2006, and the decision is now final and authority for future enforcement actions by the Labor Commissioner and private parties.

JKH is a courier company, but the decision bearing its name is equally applicable to all industries. All employers are urged to be aware of this important decision and the myriad consequences of misclassification of employees including:

  • Stop orders and penalty assessments pursuant to Labor Code section 3710.1;
  • Liability for overtime premium, meal period pay, and other remedies available to employees under the Labor Code and Orders of the Industrial Welfare Commission;
  • Exposure for tort liability for injuries suffered by employees when workers compensation insurance is not secured (LC section 3706);
  • Exposure for unfair business practices (B&P section 17200);
  • Tax liability and penalties;
  • Criminal liability (LC section 3700.5)

All California businesses that have or are considering utilizing independent contractors to regularly perform work that is integral to the business of the company, should both seek qualified legal advice and carefully review the JKH decision. A copy of the decision in JKH Enterprises v. Department of Industrial Relations (2006) 142 Cal.App.4th 1046 is linked below.

California Court of Appeal Decision