Printer Friendly

Costly advice: California's new employment law could extend liability for worker misclassification to insurance agents and brokers.


A new twist on an old employment law could make insurance brokers directly liable for their clients' employment mistakes, and even put them on the hook for staggering fines.

For years, California has prohibited employers from incorrectly classifying employees as independent contractors. The prohibition ensures that employers pay payroll taxes to the state and overtime wages to employees. The law was recently overhauled, however, to dramatically increase the penalties for misclassification, and to extend those penalties beyond the employee/employer relationship.

Employers now face civil penalties ranging 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.

Additionally, employers who have incorrectly classified their employees as independent contractors may be required to post notices on their websites about the misclassification, which would encourage any misclassified worker to contact California's Labor Workforce Development Agency to pursue potential claims.

Perhaps more importantly, the California Legislature has decided to extend its labor code liability beyond the employment context. California's new law places joint and several liability upon anyone who advises an employer to misclassify workers as independent contractors in exchange for any form of consideration.

"Joint and several liability" is equal and independent liability; in other words, advisers can be fined independently from the employer, and the advisers are equally liable for up to 100% of any fines.

Accountants and outside human resources consultants are the most obvious targets for adviser liability under the new law. However, insurance brokers and insurance salespeople are also at risk.

The new law is geared to go after workers' compensation fraud and employers that avoid wage and tax obligations by calling an actual employee a contractor.

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 may be held liable.

Insurance brokers or agents often ask their business clients to identify the number of employees when quoting employment practices liability or workers' compensation policies. The clients might want to classify some workers as independent contractors to lower their premiums.

In this context, the agent or broker and the client might have a discussion about who qualifies as an employee. The new law 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."

Plaintiffs' attorneys may attempt to argue that the fee an agent or broker receives for placing insurance is a form of "money or other valuable consideration" such that the broker or agent will be held for any misclassification of workers on insurance application forms.

This could lead to disastrous results and huge fines for the insurance broker or agent.

More States Involved

Although the new legislation is limited to California employers and their advisers, employers and advisers in other states should be cautious about misclassification as well.

Many states have their own laws which prohibit incorrectly classifying employees as independent contractors.


In 2010, Pennsylvania enacted a law that imposes fines on those who participate in misclassification of workers in the construction industry.

Specifically, Pennsylvania's law provides that anyone who "intentionally contracts with an employer knowing the employer intends to misclassify employees" is subject to the same penalties and remedies as an employer found to be in violation of the law.

Thus, California is not the only state to extend liability for misclassification to persons or entities other than the employer. It is just the most recent state to do so.

Additionally, the U.S. Department of Labor recently launched a "Misclassification Initiative" across the United States.

As part of the initiative, the Secretary of Labor signed a memorandum of understanding between the department and the Internal Revenue Service. Under this agreement, the agencies have agreed to work together and share information to reduce the incidence of misclassification of employees on a nationwide basis.

The purpose of this agreement is to help the IRS collect proper tax revenue and to improve compliance with federal labor laws.

Labor commissioners and other agency leaders representing 12 states also have signed memoranda of understanding with the department's Wage and Hour Division and, in some cases, with its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and the Office of the Solicitor.

These agreements enable the department to coordinate enforcement efforts with the states to ensure that employers properly classify their workforces, pay FICA and unemployment insurance taxes and workers' compensation premiums.

The 13 states presently involved in the Misclassification Initiative are California, Colorado, Connecticut, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.

The department is seeking agreements with more states as well.

Don't Give Advice

In light of these developments, producers should refrain from assisting clients in classifying their employees. In fact, best practices may require brokers or agents to provide written notification to their clients that they will not participate in or provide any advice with respect to classification of workers as employees or independent contractors.

Accurately classifying workers as independent contractors or employees is a difficult task that should be left to legal counsel. The analysis depends on a review of several factors, the most important of which is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the desired result.

Secondary factors include:

* Whether the worker is engaged in a distinct occupation or an independently established business.

* Whether the worker or the principal supplies the tools or instrumentalities used in the work, other than tools and instrumentalities customarily supplied by employees.

* Method of payment, whether by time or by the job.

* Whether the work is part of the regular business of the principal.

* Whether the worker has a substantial investment in the business other than personal services.

* Whether the worker hires employees to assist him.

Simply put, there are no easy answers to these questions and no general rules can be applied to all circumstances.

The facts of each situation must be analyzed independently.

These are just some of many reasons why insurance brokers or agents should never give their opinions on who is or is not an independent contractor.

Although liability under the new law extends to anyone who advises an employer to misclassify a worker, it does not extend to attorneys.

Accordingly, the only safe advice insurance brokers or agents can give their clients about this subject is that they should have an attorney answer all questions regarding worker classification.

Key Points

* The Situation: Government agencies are cracking down on employers that incorrectly classify workers as independent contractors to evade taxes and overtime wages,

* The News: California is the latest state to pass laws holding employers and their advisers liable and subject to stiff penalties,

* The Takeaway: These laws may expose insurance agents and brokers to liability if they take part in classifying employees for policy quotes.

Contributors: Spencer C. Skeen is a partner, and Jim Fessenden is an associate, at the San Diego-based firm of Fisher & Phillips LLP They may be reached at sskeen@ and jfessenden@
COPYRIGHT 2012 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2012 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Regulatory/Law: RIMS Package
Comment:Costly advice: California's new employment law could extend liability for worker misclassification to insurance agents and brokers.(Regulatory/Law: RIMS Package)
Author:Skeen, Spencer C.; Fessenden, Jim
Publication:Best's Review
Geographic Code:1U9CA
Date:Apr 1, 2012
Previous Article:Model behavior: insurers are turning to model risk management to avoid problems in the current post-crisis, highly regulated environment.
Next Article:What's your agency worth? The question of agency value underlies every decision an owner must make--whether to upgrade, grow, buy, sell or run off...

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters