Court Issues Cautionary Edict to Users of Misclassified Workers

On June 1, 2015, the California Court of Appeal (Second Appellate District) in Noe v. Superior Court of Los Angeles (Levy) (Case No. B259570) extended the scope of liability under California Labor Code section 226.8. Specifically, the court held that California Labor Code section 226.8, which makes it illegal to willfully misclassify an employee as an independent contractor, “also extends to any employer who is aware that a co-employer has willfully misclassified their joint employees and fails to remedy the misclassification.”

Anschutz Entertainment Group (“AEG”) contracted with Levy Premium Foods (“Levy”) to manage the food and beverage services at a number of entertainment venues throughout Southern California. In turn, Levy contracted with Canvas Corporation (“Canvas”) to provide workers to service the food and beverages at AEG venues. Several workers under contract with Canvas filed a wage and hour class action suit against Canvas, but also named AEG and Levy. The class alleged, among other claims, willful misclassification of laborers as independent contractors in violation of California Labor Code section 226.8.

Section 226.8(a)(1) provides that it is unlawful for “any person or employer” to willfully misclassify an individual as an independent contractor. “Willful misclassification” means “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” (Labor Code §226.8(i)(4).) The statute therefore prohibits employers from “engaging in” the act of voluntarily and knowingly misclassifying an individual as an independent contractor.

The trial court granted summary judgment in favor of AEG and Levy finding that section 226.8 only applies to employers who actually made the decision to classify workers as independent contractors. Two issues were submitted to the Court on plaintiffs’ appeal: (1) whether the prohibited conduct under section 226.8 is limited only to employers who affirmatively misclassify individuals as independent contractors and (2) whether AEG and Levy could be penalized under section 226.8 absent knowledge that Canvas willfully misclassified their joint workers.

In its decision, the Court of Appeal held that section 226.8 is not limited to those who make the affirmative decision to misclassify employees. The court interpreted “engage in” to mean that the Legislature intended to cast a wider net and penalize a “broader class” of employers, including those who “have knowingly participated or involved themselves in the willful misclassification” of individuals through their acts or omissions. However, the Court carefully noted that the phrase “engage in” requires that the employer must have been involved in the voluntary and knowing misclassification. “Merely employing workers who have been willfully misclassified by a co-employer is, standing alone, insufficient.” In other words, if a company has no knowledge of or involvement with the allegedly improper misclassification, it should not be held liable.

At the same time, the Court rejected plaintiff’s argument that a joint employer of an individual who has been misclassified by a co-employer is subject to penalties under section 226.8 by way of joint and several liability. Further, the Court concluded that this plaintiff class could not recover civil penalties under section 226.8 because the statute does not provide a private right of action. Rather, it is for the Labor Commissioner to enforce the section.

Noe is a cautionary tale to joint employers, including those who contract with other companies to provide labor – liability under section 226.8 is not limited to the employer who enters into contracts with companies that misclassify workers as independent contractors. The Court’s holding exposes the companies that benefit from misclassification to the risk of liability, holding that knowing participation in misclassification through acts or omissions may give rise to civil penalties under section 226.8.

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June 10, 2015