Employee vs. Independent Contractor: Key Considerations for Employers

Washington employers may be tempted to classify workers as independent contractors to avoid employment paperwork, payroll taxes, paying benefits, and other red tape.  But it’s risky business in Washington. Misclassifying an employee as an independent contractor can result in substantial penalties as well as liability for unpaid overtime hours, missed meal and rest breaks, late wage payments, failure to provide wage statements and maintain time records, failure to provide paid sick leave, failure to provide workers’ compensation insurance, unpaid payroll taxes (with interest and penalties), and a possible audit by Washington’s Department of Labor & Industries.

Correctly classifying a worker as an independent contractor is complicated by the fact that different federal and state tests apply in different contexts.  For example, the federal Department of Labor recently issued a six-factor “economic reality” test for federal wage statutes (as followed in Washington), while the Internal Revenue Service has another test that focuses on the degree of control the employer has over how, when, where the work is performed.  Risk-averse employers may choose to comply with the most stringent of these tests, which is the assessment used by the Washington State Department of Labor & Industries for worker’s compensation claims.  Under that test, the employer must show the following:

• The worker is free from control over how the work is performed;
• The services are either outside the company’s usual course of business, or are performed outside the places of business of the company;
• The worker is engaged in an independently established business;
• The worker is responsible for filing a schedule of expenses with the IRS;
• The worker has a UBI number and an account with the Department of Revenue; and
• The worker maintains a separate set of books reflecting all income and expenses of the business.

Given the complexity and risk associated with misclassifying workers, it is vital that employers collaborate with legal counsel to ensure workers are properly classified in accordance with current laws.  PRK Livengood’s Labor & Employment Group regularly collaborates with employers to make thoughtful classification decisions in accordance with the employer’s risk tolerance.  Contact us today at 425.462.4700.