Tredway, Lumsdaine and Doyle LLP

CPAs, like attorneys, face a litany of circumstances in which their position is adversarial to that of the client. These include fee disputes, collections efforts and audits. The state of California has now given CPAs another circumstance in which interests will diverge. It comes in the form of joint and several liability with clients for misclassification of workers as independent contractors.

New Labor Code Section 226.8

A new 2012 law is Labor Code Section 226.8. This law, among other objectives, makes CPAs jointly and severally liable for willful misclassification of employees as independent contractors.

The purpose of Labor Code Section 226.8 is to increase fines and penalties to those companies who willfully misclassify employees as independent contractors. In general, businesses utilize the classification of a worker as an independent contractor because it is significantly less expensive. The business does not have to set up payroll, pay into unemployment and FICA, etc. However, this willful misclassification can put a company out of business. Both California and the federal government have programs to target misclassified workers, and the penalties for intentionally classifying a worker incorrectly can be HUGE.

Extraordinary Fines

For example, assume an individual is paid $20,000 in wages in 2011. If that individual is classified as an employee, the employer will be required to pay about $1,800 out-of-pocket costs toward the employee’s withholdings, unemployment insurance, FICA, etc. If the individual is paid as an independent contractor, the out-of-pocket cost above and beyond the wages is zero, which may seem like a great cost-savings to the employer.  However, if that employer is audited by the EDD, which determines that the independent contractor should have been paid as an employee, the additional cost to the employer will be $10,865 – before penalties. Clearly, the cost of willful misclassification easily can bankrupt a company.

Willful Misclassification Fines

New fines for willful misclassification are $5,000-$15,000 for each violation.  If there is a pattern or practice of misclassifying workers, the fine increases to $10,000-$25,000 per violation.  These new penalties are in addition to existing fines and penalties set forth above.

To read more of Brooke M. Pollard’s article, please click here.

In this video, I give a thorough explanation of what I call the “John Wayne Problem and the Bing Crosby Solution.”  If you have any questions on the following video feel free to contact me through my bio page.

Many working parents, including myself, rely on babysitters to watch our children while we work.  There is a new bill in the California legislature that may change the way many of us do business known as “the Babysitters’ Bill,” Assembly Bill 889, which will require employers to provide workers’ compensation benefits, rest and meal breaks and paid vacation time for all “domestic employees,” including babysitters, housekeepers, and caregivers. 

Currently, babysitters hired directly by an individual or family are not subject to the standard overtime, meal and rest break regulations that govern hourly employees.  Babysitters fall under the “personal attendant” exemption under California Wage Order 15-2001 §2J.  “Personal attendant” is defined in section (I) of IWC Wage Order 15 as follows: “’Personal attendant’ includes baby sitters and means any person employed by a private householder or by any third party employer recognized in the health care industry to work in a private household to supervise, feed, or dress a child or person who by reason of advanced age, physical disability, or mental deficiency needs supervision.  The status of ‘personal attendant’ shall apply when no significant amount of work other than the foregoing is required.”  Baby sitters employed by a private firm or agency are governed by general employment laws and do not fall under this exemption.

The “personal attendant” is not entitled to overtime compensation so long as general housekeeping duties performed do not exceed 20% of the weekly working time spent.  Housekeeping duties include cleaning and cooking.  Also, personal attendants such as baby sitters are exempt from rest and meal period breaks that are required for other household workers.  California Wage Order 15-2001 §2J; See Department of Industrial Relations Interpretation of IWC Wage Order (Nov. 23 2005).  Even though overtime and meal and rest period breaks do not apply, it should be noted that the state minimum wage covers all employees, including household workers. 

However, AB 889 may change all this.  Under AB 889, household “employers” (aka “parents”) who hire a baby sitter will be legally obligated to essentially hire a substitute caregiver every two hours to cover rest and meal breaks, in addition to workers’ compensation coverage, overtime pay, timecards and paycheck.  The only exceptions in this bill are for family members used as babysitters or caregivers. Failure to abide by these provisions could result in legal action against the employer for cumulative penalties, attorneys’ fees and costs.  The amount of litigation in this area will likely increase.  Ultimately, the higher costs and risks of this bill will discourage families from hiring nannies and baby sitters and increase the use of daycares and other institutionalized care.

AB passed in both the Assembly and the Senate in August 2011, but never made it to the desk of Governor Jerry Brown because the Senate Appropriates Committee put it in the “suspense file.”  The bill’s authors have another year to amend it for review at a later date.

Is it enough for employers to make meal and rest breaks available to employees, or do employers have to ensure those breaks are taken? That’s the central issue now being weighed by the California Supreme Court in Brinker Restaurant Corp. v. Superior Court after oral arguments were heard in November 2011.

Generally, California requires that hourly employees be given a paid, 10-minute break for every four hours worked. If fewer than 3.5 hours are worked in a day, no rest break is required. California law also requires that employees who work more than five hours in a day be provided with an uninterrupted meal break of at least thirty minutes.

In the Brinker case, the plaintiffs filed a class action lawsuit against Brinker Restaurant, Brinker International and Brinker International Payroll alleging various labor-law violations. Among other things, the plaintiffs allege that Brinker failed to provide its employees with meal and rest breaks.

Brinker operates more than 130 restaurants in California, including well-known eateries such as Chili’s and Macaroni Grill. The plaintiffs were a group of hourly employees at Brinker’s restaurants. Taken together, the number of plaintiffs would include more than 59,000 current and former employees.

Brinker had a written policy signed by each employee that set forth statutory meal and rest periods, stating the employee may be disciplined or terminated for failing to take those breaks. Brinker also required employees to clock out for meals so that the company could maintain accurate payroll records.

The central thrust of the plaintiffs’ claims is that the employer:
1) Failed to provide meal and rest breaks;
2) Required employees to take “early lunches” and then required that they work upwards of nine hours without any additional meal period; and
3) Required employees to work “off the clock.” The plaintiffs essentially argue that it is not enough that employers make rest and meal breaks available. Instead, the plaintiffs claim employers must “ensure” that the employee takes meal periods.

The trial court certified the case as a class action, despite defense attorneys’ arguments that Brinker had a policy expressly prohibiting “off the clock” work and defendants could not be liable for such conduct unless it “suffered or permitted the work.” Brinker appealed and in 2008, the court of appeals ruled the other way, finding that employers need only provide, not ensure, that rest breaks are taken.

The plaintiffs then sought review by the California Supreme Court. In early November 2011, after a three-year delay, the California Supreme Court heard oral arguments.
While by no means predictive, the Supreme Court’s questions during oral argument suggest they may be favoring the employer’s position. The newest addition to the bench, Justice Goodwin Liu, emerged as one of the high court’s most active questioners. He was dismissive of the idea that employers are obligated to ensure that workers take their breaks.

While it is often difficult to discern how the Court will rule based on the questions that justices pose during oral argument, it appears that a majority of the Court—perhaps even all of the justices—may hold that employers need not ensure their employees take their meal breaks. It was less clear, however, how the justices might rule on some of the other wage and hour issues raised. For example, the justices appeared divided over the question of whether employers must, pursuant to wage order regulations, provide a second meal break in a single work day if five hours have passed since the last meal break.

A record number of wage and hour suits have been initiated in recent years and many of those are brought as class actions. If the Supreme Court holds as anticipated, California employers may receive some relief from the recent wave of similar lawsuits.