Independent contractors are an important part of a growth strategy. They can increase your capacity without the barriers of hiring a regular employee. Independent contractors are responsible for their own insurance, burden rates, and payroll. The first step to hiring an independent contractor is to ensure that they are indeed an independent contractor. It is a common mistake for businesses to believe they are working with an independent contractor when in fact that individual should be considered an employee.
Determining whether a worker should be classified as an employee or an independent contractor is important for small businesses, as it has significant implications for taxes, labor laws, and other legal obligations. In Washington State, the Department of Labor and Industries (L&I) provides guidelines to help businesses make this determination.
Here are some key factors to consider when determining whether a worker is an employee or an independent contractor in Washington State:
Control and Independence:
Behavioral Control: Consider how much control your business has over the worker's activities. If you have the right to direct and control the worker's actions, they are likely an employee. Independent contractors should have a higher degree of independence.
Financial Control: Examine how the worker is paid. Employees are typically paid a regular wage, while independent contractors are often paid by the job or project. Independent contractors should have significant financial independence and investment in their own tools and equipment.
Type of Relationship:
Written Contracts: Having a written contract that specifies the relationship between your business and the worker can be an important factor. However, the existence of a contract alone does not determine the worker's status.
Permanency: Consider whether the relationship with the worker is ongoing or temporary. An indefinite, long-term relationship may suggest an employment relationship.
Skill and Initiative:
Independent contractors are often hired for their specialized skills or expertise. If the worker is highly skilled and operates independently, they are more likely to be classified as an independent contractor.
Risk and Profitability:
Independent contractors often have a higher degree of financial risk and the potential for profit or loss based on their business decisions.
Integration with Your Business:
If the worker's services are an integral part of your business, they are more likely to be considered an employee.
It's important to note that Washington State, like many other states, uses a presumption of employment. This means that workers are presumed to be employees unless they meet specific criteria as independent contractors. Therefore, the burden of proof usually lies with the employer to demonstrate that the worker is correctly classified.
The Washington State Department of Labor & Industries has provided two basic tests to ensure you are hiring an independent contractor and not an employee.
The first test is the personal labor test:
Personal Labor Test
One of these statements must be true:
-The individual brings their own employees to perform the work, and you don’t control the individual or their employees.
-The individual brings heavy or costly specialized heavy equipment and their expertise to operate it, and you don’t control the individual (Examples: MRI machine, earth-moving equipment, ultrasound machine). https://lni.wa.gov/insurance/insurance-requirements/independent-contractors/#personal-labor-test.
If the organization or worker does not pass the Personal Labor test than move to the 6-Part and 7-Part tests.
All 6 parts of this test (7 parts for construction) must be true
-Be free from your control or direction.
-Must pass 1 of the following 3 options:
-The service is outside the usual course of business.
-The service is performed outside all of the places of business.
-The individual is responsible for the costs of the principal place of business from which the service is performed.
-Must pass 1 of the following 2 options: The individual:
-Is customarily engaged in an independently established trade, occupation, profession, or business, of the same nature as that involved in the contract of service.
-Has a principal place of business that is eligible for a business deduction for IRS purposes.
-The individual is responsible for filing a schedule of expenses with the IRS.
-The individual has established an account with the WA Department of Revenue and other state agencies as required.
-The individual is maintaining a separate set of books or records that reflect all items of income and expenses.
-For construction only: The individual is properly registered as a contractor or has a valid electrical contractor license.
If you're uncertain about a worker's classification, you can request a "Worker Status Determination" from the Washington State Department of Labor and Industries. They will review the facts of the work relationship and provide an official determination.
Misclassifying employees as independent contractors can result in penalties, back taxes, and other legal consequences, so it's crucial to get it right. Consulting with legal counsel or seeking advice from the Department of Labor and Industries can be beneficial in making this determination accurately.