What is an Independent Contractor?
For purposes of the specific independent contractor laws that govern this blog (Washington Paid Safe Time, Washington Minimum Wage Act, and Washington overtime), an independent contractor is generally defined as a person free from control or direction over the "means and manner of performance" under an agreement for "services." Unless otherwise defined, all terms (e.g., "means and manner") are construed according to their common and ordinary meaning. An independent contractor must also be engaged in an "independently established business." And another agency might add this: A person who performs services for remuneration is an employee unless it is shown that the person is an independent contractor. It is presumed that an employer-employee relationship exists when a hiring entity has the "right to control the manner and means" of the work performed by the worker. In certain situations, a hiring entity is relieved of the presumption if the hiring entity can show that the parties have created an alternative arrangement in which the worker has control over the relevant details of his or her work and the hiring entity can show a significant purpose for creating the alternative arrangement other than avoiding chapter 49.46 RCW liability. To help employers determine who is an independent contractor under the various statute administered by the department [Washington State Department of Labor and Industries] the department has developed a set of criteria to assist in this determination. The criteria are explained below: (1) The person for whom the services are performed has control only over the final product or result. This may also be described as control over the outcome or achievement of the contractual agreement.. Really…we stand behind this? (2) The person performing the services is free from the control of the person for whom the services are performed as to the "means and manner" of the services. This means the person performing the services determines how they are going to accomplish the task. Here are some examples: an accountant preparing a tax return and an attorney representing a client in court. (3) The person performing the services is "customarily engaged" in an independently established business. This means that the person performing the services must be customarily engaged in an occupation or business of the same nature as that involved in the work performed. Examples of the "same nature" include plumbers , electricians, carpenters, doctors, lawyers, car dealers, computer programmers, and corporate pilots. Although these occupations are of the "same nature," will not be performing work for the person for whom they are not customarily engaged within the meaning of WAC 296-128-650(5)(b) and RCW 49.46.010(3)(a), yet still may be considered independent contractors under the criteria established above. However, the department acknowledges that the hiring entity is not a traditional employer of the independent contractor where the hiring entity does not exercise control or direction over the means or the manner of the product or results through its regular course of business, and only contracts for the completion of the work on a final result basis. Where the hiring entity directs both the "means" and "manner" of how the work is to be performed, or where the hiring entity controls the method of determining the quality of the work product, the hiring entity is the legal employer of the independent contractor. Many of the obligations for overtime pay, minimum wage, and paid safe time do not apply to independent contractors.
Requirements to be Compliant Under Washington State Law
To assist with making a proper classification, Washington state law requires you to apply several tests to determine whether an individual is an employee or an independent contractor. These include the following:
- The control test: This test has two components. The first is the right-to-control test; the second is the actual control test. The right-to-control test considers the right of the party for whom the services are performed to dictate the details of the work. The actual control test considers whether the employer actually exercises control over the work.
- The profit or loss test: In order to be classified as an independent contractor, the individual must be customarily engaged in an independent business. The profit or loss test considers whether the individual has a significant investment and risk in the work provided that is not dependent on the work performed. This includes individuals that provide services or goods, but are not paid by the hour. On the other hand, an individual that loses no more than what they paid into the employment relationship is not considered to be an independent contractor, since the individual does not have a chance of making a profit. The eighth (8th) circuit Federal Court of Appeals ruled that a barber who provided his own tools but was not charged for any space nor did he advertise his services were insufficient to treat him as an independent contractor because he lost no more than what he paid into his employment relationship. However, the court held that someone who pays their own expenses and keeps a separate business account for an independent activity, and is free to lose money, would be an independent contractor who was entitled to unemployment insurance benefits.
- The skill or special knowledge test: The more highly-skilled the labor performed, the more likely the worker will qualify as an independent contractor. This usually applies to occupations requiring special education, training or expertise. The labor market demand factor is considered as well: Highly skilled work typically demands a higher wage and is in higher demand in the market. Further, it is difficult to find a willing worker for these occupations in local labor markets. It is important to note that the services must be customarily available in the market place, outside of your firm and business.
Frequently Misclassified Job Positions
Businesses often think they can designate any worker with few expectations as an independent contractor. In Employment Security Department v. Kennewick School District, the Court of Appeals of Washington held that a school district’s food service workers were employees instead of independent contractors. The ruling required the district to pay back over $100,000 in unemployment taxes, and the teachers’ union received the majority of that amount.
Common misclassifications include:
- Casual Labor: Employers cannot claim liability for unemployment payments did not arise from "casual labor." The law defines "casual labor" as "labor performed for wages not in the course of the employer’s trade or business and performed other than in the course of the employer’s trade or business."
- Apprentices: Washington State law requires that apprentices hold valid apprentice agreements and be working under the supervision of a journey-level craftsperson.
- Rental of Equipment: Owners of construction equipment who rent their equipment may be independent contractors provided their contract does not require them to secure fame or additional insurance; provide a bond, guarantee, or escrow of other funds to cover any alleged breach of contract; personally perform the work; employ others to perform the work; or furnish equipment operators or drivers.
- Volunteers: Any payment made to volunteers disqualifies them for volunteer status. For example, some organizations (such as operas and community theater companies) have attempted to define their employees as "free lance" artists. If their employees are under this definition compensated for their performances, they are considered employees.
Contractor Protections and Rights
While contracting as an independent does not afford the same protections and legal rights as an employee, there are still a number of state statutes that protect independent contractors. For example, RCW 49.46 provides a contractor the right to receive minimum wage for "all hours worked" in the State of Washington, which could include work performed outside of the State if the work for an employer based in the State of Washington, if the contractor is deemed an employee under RCW 49.46. (This statute is discussed in more detail in section 4 above).
Contractors are also entitled to statutory protections for payment disputes. RCW 49.48 provides that contractors may recover attorneys’ fees and costs for payment disputes brought under RCW 49.48, as discussed above, and RCW 51.12.050 provides that contractors who prevail in an action for payment may recover attorneys’ fees and costs.
Contractors may also seek common law protections for the unjustified withholding of compensation under RCW 49.52 based on the theory that the contractor is afforded a right to compensation under RCW 49.48 for all work performed, and that under RCW 49.52 it is a crime to wilfully withhold any portion of wages. This theory was recently accepted by the Court of Appeals Division I in Brooks v. Valley Commc’n., 2017 WL 3846394 (Wash. Ct. App. Sept. 5, 2017) (unpublished). Washington courts, however, have noted that "there is a fine line between just compensation for services rendered and the compensation an independent contractor believes he or she would have received in the form of wages." Treasure Craft of Wash., Inc. v. Lydig Constr., Inc., 71 Wash. App. 885, 896, 863 P.2d 75 (1993); see also Hertz, Inc. v. Rodi, 155 Wash. App. 420, 426, 231 P.3d 1282 (2010) (quoting Treasure Craft of Wash.) Under Washington State law, independent contractor agreements cannot include compensation that is dependent on the completion of a subsequent job with a client or customer.
Harm from Federal vs. Washington State Law
The impact of federal regulations in the independent contractor arena is another area that employers should take into account. While the state of Washington has its own rules and regulations, the federal government also has a part to play in employee classification. When it comes to the question of independent contractors vs. employees, various federal agencies can weigh in to determine or evaluate the status of workers. These include the Department of Labor, Internal Revenue Service (IRS), and the National Labor Relations Board (NLRB).
The IRS uses its own test to determine worker status, called the common law test. This is done through Form SS-8, which the IRS can use to decide whether or not a worker is an independent contractor or employee. Although this form is not mandatory, if completed, the results are binding. Using the common law test, the IRS considers various evidence such as the type of training given, any employment benefits provided, and whether the employer controls the work being performed. If a worker is considered an independent contractor , the IRS may then refer back to its analysis of how to determine independent contractors vs. employees per the Fair Labor Standards Act (FLSA).
The FLSA prescribes minimum wage and anti-discrimination laws, and provides various guidance and interpretations when it comes to the classification of workers. The Employee Retirement Income Security Act (ERISA) establishes guidelines for employment benefits. Determining the applicability of these laws is where the NLRB would step in, which handles approval of union petitions based on incorrect classifications of employees. If an employer treats a worker as an independent contractor and applies ERISA rules under the assumption that the worker is not an employee, the IRS could have a general enforcement call.
Even if an individual meets the three criteria of at-will employment, there are broader discussions happening about independent contractors. Some states are already limiting the use of independent contractors in specific areas, such as the ridesharing industry. Washington State has not yet followed suit, but if some degree of nationwide standard is imposed, the state will have no leeway but to follow that standard.
How to Classify an Employee Correctly
Before any business undertakes independent contractor work with a worker, it is vital that the business carefully consider the business relationship as it relates to the factors used for determining whether an independent contractor exists. While there are essentially eight primary factors, this is not an all-inclusive list. The best approach is for a business to conduct their own assessment of whether an independent contractor relationship is proper before proceeding with the work. If there are gray areas or if the business is not certain whether an employee should be classified as an independent contractor, then the business should seek qualified legal assistance to ensure that it is in compliance with the law.
Key factors to consider include the following: In addition to the aforementioned factors, good practice includes the retention of a written contract with the worker as well as other supporting documentation and records that confirm the business’s intent as to the nature of the worker’s position. Documentation might include such things as:
Ultimately, the Sound Employment Law attorneys can review the situation to help develop best practices to ensure proper classification of workers as independent contractors.
Washington State Independent Contractor Resources
Resources for Washington State Independent Contractors
While it’s useful to have knowledge about the general issues affecting independent contractors, there are resources available for more specific and personal assistance.
Legal Aid. The Federal Bar Association, with the assistance of the Department of Labor, periodically sponsors wage and hour clinics through its pro bono representation project. In Washington State, these clinics are held in the Seattle area. For the Spokane, Washington, area, legal aid is offered through the Northwest Justice Project, a 501(c)(3) tax-exempt, nonprofit organization that serves low-income people in Washington state. More information can be found on their website at www.nwjustice.org.
Other Business Assistance. Every year, the City of Seattle Small Business Development Program offers free workshops and seminars that cover a wide range of business-related topics , including: business plan development; marketing strategies; state and local government contracting opportunities; finance; legal business structures; and advocacy for small businesses. For more information, visit the city’s official website at www.seattle.gov.
State Bar Association. The Washington State Bar Association (WSBA) has a number of free and subsidized resources for people who need legal assistance. Some of these include: the Washington State Bar Association Lawyer Referral Service (LRIS), which is open to everyone, with part of the fees earmarked to support a program that helps low-income people; WSBA’s Family Law Lawyer Referral Service, which is set up solely for those who are eligible for reduced fee or no fee; and the WA Members Pro Bono Network Directory, which helps connect low-income people with lawyers willing to represent them in cases for very little or no fee.