My Business Misclassifies Workers as Independent Contractors. So What?

Businesses understand clearly that they need to be careful about who they classify as independent contractors.  They further understand that if they mess up, government agencies will become involved, and bad things will happen.  Businesses are less clear, however, about what agencies will come knocking, what independent contractor law/tests will apply, and what consequences they could face.  Below is a quick summary (at least, it started out as a quick summary) of the agencies, tests, and consequences you should be aware of if you hire independent contractors.

Enforcement Agencies

In Washington State, several state and federal agencies monitor/audit businesses to ensure that workers are properly classified as independent contractors.  These agencies include: (1) Washington State Department of Labor & Industries (L&I) — determining when a business must pay workers’ compensation premiums on independent contractors; (2) Washington State Employment Security Department (ESD) — determining when a business must pay unemployment insurance premiums on independent contractors; (3) US Department of Labor (DOL) — federal overtime, minimum wage enforcement; and (4) Internal Revenue Service (IRS) — federal income taxes, Social Security and Medicare taxes (FICA), and unemployment tax (FUTA) enforcement).

In addition to enforcement action by these agencies, independent contractor laws are enforced by contractors themselves, who often know/suspect when they are misclassified as independent contractors, and accordingly report their employers to enforcement agencies, seek “employee” benefits (thus alerting agencies to their possible misclassification), or file civil suits to collect back pay and benefits. Click here for more information on how your business can be selected/targeted for independent contractor law violations.

Independent Contractor Tests

Businesses that hire independent contractors must comply with the following state and federal independent contractor tests, unless the business is exempt due to the nature of contractor’s service or profession:

  • L&I’s “Workers’ Compensation” Independent Contractor Test
  • ESD’s “Unemployment Compensation” Independent Contractor Test
  • WA Minimum Wage Act’s “Economic Realities” Independent Contractor Test
  • US Department of Labor’s “FLSA Economic Realities” Independent Contractor Test
  • IRS’s Independent Contractor Test
  • Other tests—i.e. Federal/State Anti-Discrimination Law, Fair Credit Reporting Act, Family and Medical Leave Act

These tests have differing requirements (i.e. satisfying one test does not mean you satisfy the others), and are each very strict.  Indeed, most businesses will find themselves deficient (even substantially deficient), unless they make full compliance a thoughtful and purposeful act.


Businesses that misclassify workers as independent contractors face serious legal and financial consequences including: substantial back taxes and penalties, fines under unemployment insurance statutes, penalties and lawsuits under workers’ compensation law, mandatory reclassification of independent contractors as employees, and liability to employees for violation of rights employees are entitled to under antidiscrimination laws, the FCRA, and the FMLA.  As the Affordable Care Act (Obamacare) is implemented, businesses will face penalties under the ACA from $2,000 to $3,000 per misclassified employee.

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.

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