Independent contractors are integral to businesses. They are used to provide specific skills or experience, assist with limited-scope projects or initiatives, address a remote work arrangement, or transition an employee toward retirement. But, businesses that improperly classify workers as independent contractors rather than employees may be subject to litigation (individual and class action), administrative action, liability for back pay, liquidated (double) damages, and attorney’s fees.
Unfortunately, no bright-line test exists to determine when a worker should be classified as an employee rather than an independent contractor. Federal government agencies such as the Department of Labor (DOL), the IRS, and some states, including Washington, have their own tests to determine independent contractor status. As such, it can be complex to classify a worker correctly. Employers should implement internal contracting policies and procedures and carefully review independent contractor roles using the rules outlined in each applicable federal and state law. Merely executing an “independent contractor agreement” or designating a worker as a non-employee because they requested the arrangement is insufficient; factors such as the worker’s duties, degree of supervision, and income dependence must be analyzed to make a reliable determination.
For minimum wage purposes, federal courts have applied the “economic realities” test and used the following factors to determine independent contractor status:
- The extent to which the services rendered are an integral part of the principal’s business;
- The permanency of the relationship;
- The amount of the alleged contractor’s investment in facilities and equipment;
- The nature and degree of control by the principal;
- The alleged contractor’s opportunities for profit and loss;
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor;
- The degree of independent business organization and operation.
- The source of supplies and tools;
- The work location;
- The duration of the relationship between the parties;
- The company’s right to assign additional projects to the worker;
- The extent of the worker’s discretion over when and how long to work;
- The payment method, whether by time or by job;
- The worker’s role in hiring and paying assistants;
- The regular business of the company and whether the work performed is part of that business;
- The company’s status as “in business”;
- The worker’s eligibility for employee benefits; and
- The worker’s tax treatment.
- The permanence of the working relationship between the parties;
- The degree of skill the work entails;
- The extent of the worker’s investment in equipment or materials;
- The worker’s opportunity for profit or loss;
- The degree of the alleged employer’s control over the worker; and
- Whether the service rendered by the worker is an integral part of the alleged employer’s business.
Even if a worker is properly classified as an independent contractor under the Washington State test, employers may still need to pay workers’ compensation and unemployment insurance premiums, which use even more restrictive tests.
In addition, independent contractor status is not a defense against a discrimination or harassment lawsuit under Washington law. The Washington Law Against Discrimination allows independent contractors to sue contracting organizations for discriminatory acts.
Eligible Archbright members can find a comprehensive checklist within the Legal Issues Involving Independent Contractors Keynote in the mozzo Resource Library. Members are also advised to contact the HR Hotline for legal counsel guidance on proper classification.