In this economy, many small businesses and closely held corporations are trying to cut costs wherever possible. Increasingly, businesses are utilizing independent contractors to do the work that historically was done by full-fledged employees. Although there are many benefits to the utilization of independent contractors, such as reduced cost and tax liability, employers must be very careful. Often times an employer will treat a worker as an independent contractor even though the law says that person is actually an employee. This can have severe consequences.
In Washington State, the legislature has specifically addressed the distinction between an independent contractor and an employee, and the Department of Labor and Industries uses strict statutory guidelines for making any relevant determinations. The six-part test in the Revised Code of Washington 51.08.195 lays out concrete elements that must be met in order for a worker to properly maintain an independent contractor relationship with an employer. If any one of the elements is not met, then by law the employer must consider the worker an employee.
It is important to realize that if it is found that employees have been incorrectly classified as contractors, the Washington Department of Labor and Industries will seek payments for industrial insurance premiums, with interest and penalties. Also, the Employment Security Department will seek payments for unemployment insurance premiums, likewise with interest and penalties. It is not the worker’s responsibility to ensure the employer complies with state and federal employment laws relative to payroll taxes and industrial insurance. It is the employer's responsibilty.
In addition to state law, the IRS employs a twelve part test on form SS-8 to determine whether or not a worker is an employee or independent contractor. Important factors include the amount of control the employer has over the worker, how the worker is compensated and customs in the trade or industry. Similarly, the IRS will penalize employers who wrongly desgnate a worker as an independant contractor.
In sum, it is not enough to simply label a worker as an independent contractor rather than an employee and reap the benefits that this distinction entails. Employers must be very careful to structure their relationships such that compliance with state and federal law is strictly met. Talk to your lawyer if you have a doubt regarding the distinction between and independant contractor and an employee.