Working with independent contractors has its share of pitfalls – pitfalls that subject businesses to substantial financial and legal consequences. Here, in no particular order (mostly because there is no good way to rank/order them), is my list of top 10 mistakes businesses with independent contractors make:
1. Hiring independent contractors who don’t have UBIs. Businesses frequently accept that their contractors are self-employed without checking whether they are properly registered to do business. A UBI/Department of Revenue Registration Number indicates that an independent contractor is registered with the state of Washington and is licensed to do business in this state. A contractor who does not have a UBI will fail to qualify as an independent contractor under state independent contractor tests, and may fail to qualify under federal tests.
2. Hiring independent contractors without a written contract. Businesses mistakenly see independent contractor agreements as a nice thing to have, but not a necessity. In fact, Washington State law requires businesses and independent contractors to agree, by contract, to several things, including that the independent contractor will be free from direction and control in the performance of services. Accordingly, having a properly written agreement with contractors is not only good practice, but a necessity for legal compliance.
3. Using deficient contracts. Just as dangerous as not having a contract, is having a deficient contract. During audits, agencies scrutinize contracts for deficiencies, and will often use contractual deficiencies – e.g. failure to include certain provisions – as basis to find that a business fails the independent contractor test. It is therefore important to have a properly drafted contract that not only includes “magic language” required by state law, but that avoids language and provisions that undercut independent contractor status.
4. Working with contractors who don’t work for others. An independent contractor, as a matter of law, must operate an independently established business. A contractor who does not work for others, but relies on one contract partner for all his/her business does not fit state agencies’ criteria for an independent business. That contractor is often viewed as an employee.
5. Working with independent contractors who don’t appear to operate real businesses. An independent contractor doesn’t need to be operating an elaborate business. However, he or she does need to operate a business. A contractor who shows little or no indicia of operating a business (i.e. no business cards, letterheads, invoices, office/home office, business expenses/investments, equipment) will not be viewed as an independent business during an audit. My advice to business owners is that if your contractor doesn’t look to you like she is operating a business, then she most likely isn’t. And an auditor will conclude the same.
6. Working with contractors who do not follow business formalities. In conducting audits, in addition to looking at a business’s practices, state auditors inquire into how workers classified as independent contractors are operating their business. A contractor who does not follow basic requirements for running his/her business – e.g. registering to pay taxes, setting up at least a home office, maintaining proper business records – will not be viewed as an independent contractor under state law. Businesses are often surprised to learn that what independent contractors do (or don’t do) in running their business often can and will hurt them.
7. Thinking substantial compliance with legal requirements is sufficient. Washington State sets strict, numbered requirements for a worker to qualify as an independent contractor. Whether a business fails just one or five of the 6-7 parts required to pass an independent contractor test, the end result is the same: failure. Accordingly, substantial compliance is not sufficient; businesses need to know the requirements, and fully comply.
8. Being too “hands-on” in managing contractors. Businesses inevitably feel the need to manage people who do work for them, whether employees or independent contractors. While the need/inclination is natural (unavoidable in some instances) businesses can fail independent contractor tests because state auditors often tolerate no instances of direction and control, and use even minor instances of instruction/supervision to find that the contractor is being directed and controlled in violation of independent contractor law.
9. Classifying workers as independent contractors based on industry practice. While relying on industry practice can often be a good way of making decisions on how to run one’s business, many businesses are finding that state agencies are challenging independent contractor classification without regard to how workers in the industry have historically been classified. Thus, it is no longer sufficient (in fact, it is ill-advised) for a business to presume that its industry’s practices automatically comply with state independent contractor law.
10. Not ensuring compliance with independent contractor law at the outset. Starting a business presents business owners with many concerns. Often, worker classification and compliance with obscure independent contractor laws aren’t on that list. The result is that many businesses fail to address worker classification at the outset, and are forced to address this foundational issue and resulting complications several years later. For businesses that choose to operate under an independent contractor business model, it is thus vitally important to ensure compliance at outset.
For more information on how to comply with independent contractor obligations, consult with an experienced independent contractor law attorney, and check out 1099 Review™, Washington’s State’s first online independent contractor risk assessment tool and resource center
