After Failed Audit, Do I Have to Convert Contractors to Employees?

After you’ve failed an independent contractor audit, do you have to convert your independent contractors to employees? While a flunked independent contractor audit can be an indication that a worker was improperly designated as an independent contractor, sometimes that isn’t the case. Sometimes a failed audit with one agency simply means that for that one agency, the independent contractor designation is inappropriate, while it may nonetheless continue to be appropriate for other agencies.

For example, a contractor who fails L&I’s independent contractor test, may nonetheless satisfy Employment Security Department’s independent contractor test or qualify for some exemption from that agency.  Further, that contractor may then be able to satisfy the IRS’s independent contractor test, which is less strict than L&I’s and ESD’s test. Under these circumstances, then, a business owner may reasonably choose to treat the contractor as a covered worker for L&I’s purposes (i.e. pay premiums due to that agency) while continuing to treat the worker as an exempt contractor for the purpose of the other state and federal agencies.

So while it is very likely that one agency’s determination that a worker isn’t an independent contractor can be an indication of independent contractor status across the board, sometimes it may not be and it is wise to explore options. But to do so with all the care in the world. This is not something one dabbles with.

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