California aggressively enforces worker classification laws through multiple agencies and private litigation. Understanding the enforcement landscape is critical for businesses that use independent contractors.
Enforcement Agencies
Employment Development Department (EDD)
Focus: Payroll taxes - unemployment insurance (UI), state disability insurance (SDI), employment training tax (ETT)
Triggers: Worker files for unemployment, random audits, tips from workers
Lookback Period: 3 years (6 years for fraud)
Division of Labor Standards Enforcement (DLSE/Labor Commissioner)
Focus: Wage and hour violations - minimum wage, overtime, meal/rest breaks
Triggers: Worker complaints, Brinker referrals
Lookback Period: 3 years (4 years for written contract claims)
Franchise Tax Board (FTB)
Focus: Income tax withholding
Triggers: Information sharing with EDD, independent audits
DIR/Cal-OSHA
Focus: Workers' compensation coverage
Triggers: Workplace injuries, audits
Penalty Structure
Financial Penalties
| Category | Penalty Amount |
|---|---|
| PAGA Penalties (per violation) | $100 first violation, $200 subsequent (per pay period, per employee) |
| EDD Back Taxes | Full amount + 15% penalty + interest |
| Willful Misclassification (Labor Code 226.8) | $5,000-$15,000 per violation; $10,000-$25,000 for pattern/practice |
| Uninsured Employer (Workers' Comp) | $10,000+ per employee; criminal misdemeanor |
| Waiting Time Penalties | Up to 30 days wages per employee |
| Wage Statement Violations | $50 first violation, $100 subsequent (up to $4,000) |
Private Litigation
PAGA (Private Attorneys General Act)
California's unique law allows workers to sue on behalf of the state for Labor Code violations:
- 75% of penalties go to LWDA; 25% to workers
- No class certification required
- Penalties aggregate rapidly across workforce
- Settlement requires LWDA approval
Class Actions
Misclassified workers can bring class actions for:
- Unpaid overtime
- Missed meal and rest breaks
- Unreimbursed business expenses
- Minimum wage violations
Example Calculation: 50 Misclassified Workers over 2 Years
- PAGA penalties: 50 workers × 104 pay periods × $200 = $1,040,000
- Back wages/overtime: Varies widely, often $10,000-$50,000+ per worker
- EDD back taxes: ~7.5% of wages + penalties + interest
- Workers' comp: Back premiums + penalties
- Attorney fees: Plaintiff's attorneys typically recover fees
Total exposure: Easily $2-5 million+ for 50 workers
Criminal Liability
In egregious cases, misclassification can result in criminal charges:
- Labor Code 226.8: Willful misclassification can be referred for criminal prosecution
- Insurance Code 11880: Operating without workers' comp is a misdemeanor
- Tax Fraud: Willful failure to pay employment taxes
Protecting Your Business
- Audit contractor relationships against ABC Test and Borello factors
- Reclassify workers who don't meet independent contractor criteria
- Document the independent business of true contractors
- Use proper agreements that reflect the actual relationship
- Consider insurance for employment practices liability (EPLI)
- Consult counsel before EDD audits or worker complaints