What is an Independent Contractor?
An independent contractor is a worker with the right to dictate the results of the work performed. Because independent contractors are self-employed, they are not directing someone else on how and what work should be done. You are not an independent contractor if you provide services controlled by an employer.
What is an Employee?
An employee is a person hired by an employer to work on a regular basis for an established salary. In this case, the employee works under direct supervision and control of the employer. That means that the employer decides the time and place of work and provides the necessary training for the job. Additionally, the relationship between employee and employer is ongoing.
How is an Independent Contractor Different From an Employee?
Independent contractors are self-employed and have the freedom to accept work or not as they see fit. They own their own equipment and supplies and pay for their own training. They generally set their own hours.
While working, employees are controlled by their employer. An employer establishes what work the employee does and when and where they do it. The employer will train an employee and provide them with the necessary tools, equipment, and supplies.
Unlike an employee, an independent contractor cannot apply for unemployment benefits or workers’ compensation benefits and is not entitled to federal and state protections regarding minimum wage, family leave, and overtime. Independent contractors are also not eligible for employee benefits such as health insurance, 401(k), holiday pay, or paid sick leave.
| Independent Contractor | Employee | |
| Definition | An independent contractor is a self-employed individual who provides services to another person or organization for a fixed rate of compensation. | An employee is hired by an employer to work on a regular basis in exchange for a salary. |
| Works For | Multiple people or clients | One employer |
| Necessary Equipment | Independent contractor provides their own equipment like tools, materials, or resources in order to perform the task. | Employers provide the equipment or resources to perform the job. |
| Work Schedule & Location | Independent contractors decide their own work location and schedule. | Employers determine an employee’s work schedule and location. |
| Payment For Expenses | An independent contractor is responsible for the expenses incurred while performing the job. | An employer pays for any expenses incurred by the employee while performing the job. |
| Independence | An independent contractor works independently. | An employee works under the control of the employer. |
| Delegation Of Tasks | An independent contractor must personally perform the task. | An employee can delegate tasks. |
| Job Training | An independent contractor receives no training. | An employer provides the employee training. |
| Relationship | Independent contractors have temporary relationships with their clients. | An employer and employee relationship is ongoing. |
Why Businesses Classify Workers as Independent Contractors
Businesses often employ independent contractors because it gives them a financial advantage. Companies are not obligated to provide independent contractors with certain employment benefits that cost money, use administrative resources, and require regulatory compliance.
Employers can save money by misclassifying employees and independent contractors in the following ways.
- Employers do not pay payroll taxes on independent contractors
- Employers do not pay unemployment insurance tax on independent contractors
- Employers do not purchase workers’ compensation insurance coverage for independent contractors
- Employers are not required to pay independent contractors the minimum wage
- Employers do not have to grant independent contractors family leave
- The Fair Labor Standards Act does not cover Independent contractors
- Employers do not have to pay Independent contractors overtime pay, holiday pay, or paid sick leave
- Independent contractors are not eligible for employee benefits such as health insurance or 401(k)
The Benefits of hiring an Independent Contractor
Hiring independent contractors is a cost-effective solution for many companies. Self-employed independent contractors don’t receive benefits like health insurance, retirement options, unemployment, paid time off, and sick days.
Additionally, businesses don’t have to pay social security, workers’ compensation, or federal unemployment insurance when they employ independent contractors. Independent contractors can offer quality work without micromanaging or excessive supervision, saving businesses valuable time.
The Benefits of Hiring an Employee
There are several benefits of hiring an employee over an independent contractor. With employees, you’re more likely to see:
- Company loyalty
- Advantages of in-house brand ambassadors
- Streamlined training
Investing benefits and a salary into employees is often an investment in employee growth and development, which can lead to company loyalty. Employees are more likely to stick with and support a company that believes in them. This loyalty also builds the foundation for your employees to become brand ambassadors, helping your company grow.
Additionally, since the relationship between employer and employee is ongoing you can establish streamlined training requirements, which will save you time and money with current and future employees.
Employment Classification: It Doesn’t Matter How A Business Labels A Worker
Even if you hire an independent contractor under an agreement that states their self-employment status, it doesn’t matter. The IRS (Internal Revenue Service) and the DOL (Department of Labor) use tests to determine whether an individual is an independent contractor or employee.
The IRS, for example, looks at behavioral and financial control as two indicators of employee status. Those tests are not based on the contracts you draw up with your workers but rather on how you treat them. Essentially, the more control you have over a worker, the more likely it is that they will qualify as an employee.
If your independent contractors are required to work from 9 AM to 5 PM five days a week, you’re exerting control over their behavior in a way that could classify your relationship with them as employer to employee. These tests vary from state to state and business to business, so it’s important to understand which relationship is the most beneficial for all parties involved.
Employment Classification Factors that Washington Courts Consider
To ensure that your business or employer properly classifies employee versus independent contractor status, it’s important to understand which factors are considered in each state. While there are federally mandated tests from organizations like the IRS and the DOL, Washington has its own tests to determine the accurate classification of workers.
Some employment factors Washington Courts consider:
- The extent of the company’s right to control the details of the work
- If the worker is engaged in a distinct occupation or business that is part of the contract
- If the type of work being done is typically performed under direction of the company or a specialist without supervision
- The required skills
- If the worker supplies the necessary instruments and tools
- If the worker provides the location for the work being performed
- The length of time the worker is employed
- The payment method (by time or by job)
- If the work is a part of the regular business of the company
- If the parties believe they are creating the relationship between employer and employee
- If the worker is in business
Why Misclassification Matters in Washington State
When employers misclassify employees as independent contractors, the government collects less money for vital social services, and employees misclassified as independent contractors lack the protection and social safety net that employees enjoy. Independent contractors must pay Social Security and Medicare taxes themselves and cannot collect unemployment insurance or file a workers’ compensation claim.
Both the federal government and Washington State have a vested interest in the proper classification of workers as employees, both for those workers’ welfare and as an income stream subsidizing social services for which those workers should be eligible.
Washington State’s Economic Realities Test
Washington’s Department of Labor uses the “economic realities” test to determine a worker’s status, considering the following six factors:
- The degree of control the employer has over the worker
- Whether the worker absorbs the cost of doing business and may profit or operate at a loss
- Whether the worker is invested in equipment or materials
- The degree of skill required to do the worker’s job
- The permanence of the working relationship between the employer and the worker
- Whether the service rendered by the worker is an integral part of the employer’s business
A delivery driver may be an independent contractor if they enter into and fulfill many delivery contracts over time, they own their truck and bear the costs of upkeep and maintenance, and they establish their own schedule. Another delivery driver may be an employee if they use the company truck, the truck is maintained and insured by the employer, and the employer sets the driver’s schedule.
It was this exact situation that some FedEx drivers found themselves in In 2004. They filed a class action suit against FedEx for, among other things, overtime pay and uniform expenses, arguing that they were not independent contractors but employees. The Court of Appeals found that FedEx controlled enough aspects of the work that the drivers were indeed employees.This was the beginning of Washington State’s “economic realities” test.
Internal Revenue Service Three-Factor Test
The IRS uses a strict three-part test to determine whether a worker is an employee or an independent contractor.
Behavior Factor: Does the Employer Control their Workers’ Behavior?
The more control an employer has over their workers’ behavior, the more likely the IRS will consider that worker to be an employee. The IRS will look at whether or not the employer:
- Sets work hours
- Sets work location
- Provides tools and equipment
- Trains workers
- Provides supplies
- Is in the business of the work the worker performs
- Regularly evaluates the worker’s performance
Financial Factor: What is the Financial Relationship Between the Employer and the Worker?
Does the employer provide the tools and equipment necessary to do the job, or did the worker make that investment? Is the employer the sole source of income for the worker, or does the worker perform that work for others? Does the employer pay per job or a salary or hourly wages?
Relationship Factor: What is the Nature of the Employer-Worker Relationship?
An independent contractor is usually hired per job for a specified amount of time and works independently to fulfill the terms of the contract. An employee has an ongoing relationship with the employer, draws a salary or hourly wage, receives benefits of employment, and is governed by an employee handbook.
The Department of Labor and Industries Independent Contractor Test
The Department of Labor and Industries uses an independent contractor test to determine whether businesses should offer workers’ compensation benefits. If your company uses independent contractors, they must pass this test to confirm that they’re exempt from receiving such coverage.
If your business answers “yes” to most of the questions below, you will likely not have to provide workers’ compensation coverage.
- Does the worker bring more than their personal labor (like equipment)?
- Is the worker working without your direction and control?
- Does the worker have their own separate business?
- Does the worker have a business established before you started working together?
- When you began your engagement with the worker, were they filing business tax returns with the IRS?
- Does the worker have an open Department of Revenue account and all required licenses and registrations for the business?
- Does the worker maintain separate books or records to track business income and expenses?
- If the worker is a construction contractor, do they have a valid contractor registration?
Important Provisions to Include in an Independent Contractor Agreement
You should include several important provisions when drafting an independent contractor agreement to protect yourself, your company, and the worker. The following requirements provide business owners with security, knowing that they’re supporting their workers in a way that best reflects the professional relationship.
Title and Status: The contract should have the right job title to avoid miscommunication or confusion. That might be something like “Independent Contractor Agreement” along with an identified “independent contractor” status. It’s also important to exclude words like “employer” and “employee” to maintain clarity around the nature of the engagement.
Expenses: Business owners should include language that indicates that the independent contractor is responsible for all expenses incurred and materials necessary to perform the job. Additionally, the wording should say the company will not reimburse the worker for any costs.
Payment Method: As a business owner, you should select a different payment method for your independent contractors than the one you use for your employees. If your employees are paid monthly, for example, the independent contractor may be paid upon completion of the job and would not be compensated for overtime.
Duties: While the agreement should outline the expected services, it should not control how the contractor will work. Independent contractors should be able to set their schedules and work their own hours to finish their assignments.
Length of Engagement: The agreement should identify a term for the agreement. An engagement that’s a short duration or terminates after the project is complete usually implies an independent contractor status.
Benefits: Independent contractors are not entitled to sick leave, paid time off, health insurance, or other benefits typically offered to employees. The agreement should clearly state that the contractor will not be eligible for the benefits given to company employees.
Training: The independent contractor agreement should include that training will not be provided. If business owners offer additional instructions and training to the worker, there’s a higher likelihood that the relationship would be that of an employer and employee.
Non-Compete: Independent contractors often work for many clients or companies. The independent contractor agreement should identify that the contractor can work for other companies and is not beholden to a non-compete clause. To protect your business, you should also have confidentiality, non-solicitation, and non-disclosure agreements in place.
How to Proceed if You’ve Been Misclassified as an Employee
If you believe your classification as an independent contractor is incorrect, call us. Your employment benefits, eligibility for social safety net programs, and protection under state and federal law are at stake. Fix your employment status now, before you need unemployment benefits or workers’ compensation benefits.
Call the Seattle employment lawyers at Rekhi & Wolk at (206) 388-5887 to discuss your case. We look forward to helping you get everything you deserve.