Employers who are found to have willfully misclassified their employees as independent contractors are required by a new California statute to admit their transgression on their website.  Why?  What was the intent of this statute?  The most immediate idea, I speculate, is that there is some cost associated with this action:  shame? Loss of quality employee applicants?  Loss of new deals?  Loss of vendor relationships? 

Basically, under this newly enacted statute any entity that “willfully misclassifies” an individual as an “independent contractor,” when that individual is determined to have actually been an “employee,” faces new stiff civil penalties and other repercussions. The law amends the Labor Code to add two new sections, Labor Code sections 226.8 and 2753.

In business school I learned of the “unintended consequences” in the way remedial legislation is enacted.  Basically, every law produces behavior that seeks to skirt the law or avoid its consequences, with the result that the new behavior is potentially as bad or worse than the original behavior.  An example is confining your child to his or her room for some domestic violation.  The child now takes his behavior outside of view, or makes up a story that she is dying of toxic mold in the shower, or looks for opportunities to spend in her room because she is now addicted to video games.  The point is that legislation has a stimulating affect on the creativity needed to avoid its original purposes. 

How do people calculate the cost of posting a “Scarlet Letter” on a company website?  It seems to me the first question is how big and publicized is the “letter?”  It may be in the statute, or in the regulations yet to define the requirement of the statute, but there is quite a difference in enormous font in scarlet on your company’s home page, and an obscure fine print on a page embedded in a maze of a pages.  Unless the law spells how exactly “where” and “how big,” you can be sure it will be small and obscure.

As for shame, how does a company feel anything, let alone shame?  The law, for example, does not allow a corporation to bring a case for “defamation of character” because the corporation has no feelings to be hurt, and therefore f no basis for damages.  It is problematic to think an officer of the company feels “shame.”  The officer seldom acts in isolation of other officers and seldom feels responsible entirely for a corporate decision.  The individual “shame,” if any, can be readily diluted and rationalized.

A writer in the Daily Journal [L.A. Legal Newspaper] quotes some company lawyers as stating the violating corporation will spin the bad press into a positive statement of “We made a mistake, and now we’re a wonderful company that loves its “new” employees.”   This conclusion just isn’t consistent with short-term corporate behavior.  Born again white house counsel Chuck Colson, convicted in Watergate, required years to overcome a skeptical public’s view of his work in prison ministry.  Corporations are notoriously short sighted because their decision makers are rewarded for quarterly profits.  Frankly, the turn over of executives in some companies is so fast (based on those quarterly results) that really reforming a practice is unlikely.  By “reforming the practice” I mean not just reversing the violation, but transforming the culture that produced the violation.   “Sure, says the current management.  Just do it by the end of the fiscal year.” 

The California Labor and Workforce Development Agency will begin enforcement of the new “Scarlet Letter” law on January 1, 2011.  The new law will impose penalties of $5,000 to $25,00 per infraction.  Now, if the number of infractions is per “employee” and over a multi-year period, I can see how someone in the Human Resources Department, the Finance Department, and maybe in the Corporate Governance department, could get their “feelings hurt” if heads “must roll.” 

But let’s be real:  Corporations speak only the language of “cost benefit.”  If the cost of non-compliance is less than the cost of compliance, then the decision model indicates non-compliance, at least until the cost of getting caught enters the calculation.  [I’m sorry to be so jaded.  I seem to see only the bad actors, not the good ones in my business as an employee advocate.]  Let’s see:  Five hundred employees times $10,000 per infraction equals $5,000,000.00. 

But don’t jump to the hasty conclusion that this will be an incentive to re-classify.  Add into the cost-benefit analysis the saved costs of non-compliance:  no workers’ compensation, no state and federal payroll taxes, no medical, dental, or 401k requirements, no extensive record keeping requirements, no employee reimbursement expenses, no overtime premium pay, and no need to deal with all those sexual harassment, discrimination, A.D.A. and Family Medical Leave regulations.  Could it be that the “unintended consequence” of this law will not be to re-classify so called “independent contractors,” but to replace current employees with real independent contractors or to outsource their positions?

Which leads me to this conclusion:  it is much easier to enact a law than it is to repeal it.  Would it not be a novel idea that every law must undergo a “probationary period” of one to three years to examine if it does what we hoped it would do?  Would it not be wise to spend at least much time on the “back end” of a law to study its effects as we spend on the “front end” to decide whether to enact it?   This “hope” of mine is probably as likely of implementation as Sacramento coming to grips with its proliferation of “unintended consequences.” “Fighting for the Little Guy”