Correctly classifying your workers is an important decision that should be evaluated when adding to your workforce. If you misclassify a worker’s status, your business could end up in some hot water at both the state and federal levels. Beginning in the late 90s and through the early aughts’ a Pacific Northwest Fortune 500 company was ordered to pay a large settlement for treating individuals employed as independent contractors like employees. Misclassifications are costly, and in this case, became a big class-action lawsuit. There are guidelines in place from both federal and state government agencies as well as courts that have created clear lines and definitions on how a business must classify those who work for them. Unfortunately, there is not a simple answer to the independent contractor versus employee question. Many factors come into play.
Let’s look at some of the guiding factors when considering how to classify a worker.
Washington State Courts consider some of the following factors:
- The extent of the company’s right to control the details of the work
- Whether or not the worker is engaged in a distinct occupation or business that is the object of the contract
- Whether the type of work to be done is usually performed under the direction of the company or by a specialist without supervision
- The skill(s) required for the job
- Whether the worker supplies the instrumentalities and tools
- Whether the worker supplies the location for the work to be done
- The length of time for which the worker is employed
- The method of payment, whether by the time or by the job
- Whether or not the work is a part of the regular business of the company
- Whether or not the parties believe they are creating the relation of employer and employee
- Whether or not the worker is in business
With the vast amount of testing available from different government agencies, both federal and state, a worker could be classified as an employee in one area and as an independent contractor under another.
Washington State Labor & Industries uses a Six-Step test (or seven depending on industry) that is designed and focused on clearly classifying a worker as either an employee or an independent contractor. This six-part test is found in the Washington State Legislature’s laws (RCW 50.04.140.) To reference the seven-part test for the electrical and construction industry, you can reference RCW 50.04.145.
At the federal level, the Internal Revenue Service uses its three-factor test in determining worker classification status:
- Behavioral – Does the company control or have the right to control the work done and how the worker does their work?
- Financial – Who dictates how the person doing the work will be paid? For example, generally, a contractor will say this is how much I will charge, this is how expenses will be paid, and I will or will not charge mileage.
- Type of Relationship – Are there written contracts or employee benefits? What is the timeframe of continued employment and is this work a key component of the business?
Understanding how laws and tests play a factor in how a business classifies their workers can help to make sure that the business is compliant. You can mitigate your risk by making informed decisions by properly classifying workers or reaching out for expertise when you are unsure.
The consequences of misclassifying employees as independent contractors can be quite costly. Businesses can be held liable for employment taxes, lawsuits for back wages, liquidated damages, attorney’s fees, court costs, civil penalties, and more.
There are many factors to weigh as you consider if your workers are either W-4 employees or independent contractors. From implementing best practices, navigating job classification audits, or simply answering any questions you may have, our team can help. If you are unsure and would like to speak to one of our HR experts for assistance, please Contact Us for more information. If you feel like chatting, give us a call at (800) 317-1378 x14.