March 21, 2012
P. K. SCHRIEFFER LLP
Dear Clients and Colleagues,
California has passed a new law, which took effect on January 1, 2012, that may require insurance agents and brokers to be careful in how they assist customers with workers’ compensation insurance forms that include the classification of employees. California is trying to improve its enforcement of State labor laws against employers who knowingly misclassify employees as independent contractors, which often harms the interests of employees and understates the cost of workers’ compensation insurance.
The new California Labor Code section 2753 states:
“2753. (a) 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 that individual shall be jointly and severally liable with the employer if the individual is found not to be an independent contractor.
(b) This section does not apply to the following persons:
(1) A person who provides advice to his or her employer.
(2) An attorney authorized to practice law in California or another United States jurisdiction who provides legal advice in the course of the practice of law.” (Emphasis added)
This law expressly exempts attorneys, but does not exempt insurance agents or brokers. Therefore, it is likely insurance agents or brokers will be deemed within the scope of this law’s provisions. In the February 7, 2012 Insurance Journal article, there was a comment from a government official who stated an insurance agent or broker could be held responsible under this law. The article stated:
“State Labor Commissioner Julie A. Su told Insurance Journal that the new law is geared to go after workers’ comp fraud and employers who avoid wage obligations and tax obligations “by calling someone who’s actually an employee a contractor.”
“And Su said that if an insurance agent or broker gives an employer advice on classifying employees with the knowledge that the employer maybe misclassifying those employees, then the broker or agent will be held liable.”
The article also stated that because insurance agents and brokers do not separately charge customers when helping such customers fill out insurance forms that include classification of employees, the law would not likely apply to agents/brokers. However, the law states it will apply to any “person, for money or other valuable consideration…” As trial lawyers, we believe there will be courts which may agree with a proposition that the insurance agent’s or broker’s mere “assistance” is part of the “consideration” of the commission the agent or broker earns. While we would strongly disagree with such a proposition, particularly as insurance agents/brokers owe a far more narrow duty to customers than a lawyer does with towards his or her clients, we nonetheless recommend insurance agents and brokers should be more cautious in their communications with employer customers’ regarding employee classification issues when procuring workers’ compensation insurance coverage.
This is particularly so because the language “joint and several” is included in the new statute. The phrase “joint and several”can be applied in the following situation: Assume an employer customer has filed for bankruptcy, and the employer customer stated to creditors, the insurer, or government officials, or even its own employees, “My broker told me to classify some employees as independent contractors, and others in less expensive classifications in order to lower my premium–even though we knew the proper classifications…” This “admission” is really an accusation against the agent/broker, with the result that former employees, the insurance company, the government or creditors could sue the agent/broker and seek to hold the agent/broker responsible for 100% of the employer’s liability and damages caused to these others.
Before this law became effective, such third parties would have to prove direct fraud against the broker, which most third persons would rarely pursue. However, this law places anyone who advises the employer in return for “valuable consideration” into a sort of conspiracy where the agent/broker may be almost completely innocent, and yet could be held 100% responsible if there is proof the agent/broker knew of the employer’s scheme, or “knew” the employer was mistakenly misclassifying employees.
If the agent or broker is aware of the employer customer misclassifying employees, the agent or broker should consider termination of its relationship with the customer if the customer refuses to correct the misclassifications. The State of California is now more serious than ever in stopping workers’ compensation insurance fraud, such that insurance agents or brokers may be caught in the crossfire that will result when that employer is found to have defrauded or even innocently misled a workers’ compensation insurer or the government.
Practice Pointer for the new law: Agents and brokers who advise customers regarding workers’ compensation insurance should prepare a document which the customer signs, which sets forth California Labor Code section 2753 in its entirety and states further that the customer acknowledges the customer, not the insurance agent or broker, determines the employee classifications. It will further state the insurance agent/broker is not participating in employment classification decisions and the agent/broker owes no duty to the customer or anyone else regarding those classification decisions. Such a document should be filed in the customer’s file the agent/broker keeps at the office. Whether the agent/broker sends an executed copy sent to the customer is up to each individual agent/broker.