“I know it doesn’t make sense, but here is what the law says, and how it is interpreted by auditors.”
In some form or another, this statement inevitably winds its way into conversations between attorneys and their clients regarding complying with independent contractor tests. In fact, one doesn’t have to look deep into any independent contractor test to find basis for this frustration.
Part 1 of L&I’s independent contractor test, for example, requires independent contractors to be free from the hiring party’s control or direction. The theory behind this requirement is that if a worker truly is an independent contractor (and not an employee), the worker will provide his or her services independent of direction or control from the hiring party. This notion of freedom from direction, however, conflicts with the plain reality of how businesses operate.
Today, virtually every business-to-business relationship involves a detailed contract specifying terms and conditions of performance, and consequences of deficient performance. The hiring business will specify in detail what must be done, exactly how it must be done, by whom it must be done, and when the project should be completed by, among other things. To most people, including such directions in contracts is simply a requirement — indeed an indispensable requirement — of doing business, and should not magically convert an independent business into a covered worker/employee.
In the context of an audit, however, contracts are scrutinized, and every instance of direction or control over the contractor is used as evidence that a contractor fails Part 1 of the test, and thus is not an independent contractor. As I write this, for example, I am looking at actual findings by an auditor that a business failed an independent contractor test because provisions in a contract: required a contractor to have insurance, and to submit invoices at specified intervals; disallowed the contractor from subcontracting away the job; and specified basis on which the contract could be terminated.
These findings are not unusual, unfortunately, and business owners are rightly perplexed as to why including such basic provisions in contracts leaves them at risk of failing the independent contractor test. If contracts don’t include detailed instructions, business owners ask, how else is the contractor supposed to know what must be done!? Yet such is the state of the law, and until the law (or at least nonsensical interpretation of the law) changes, such is the climate within which businesses that hire independent contractors must operate.
