Frequently I’ll have clients who have been through an audit with one government agency, and who, based on the outcome of that audit, will assume the following: (1) that they have a good understanding of where they went wrong with their independent contractor practices, and (2) that they know and can implement the fixes required. These assumptions are entirely reasonable, and indeed, this is the way a sensible independent contractor legal framework should operate. After all, it doesn’t make sense that a worker can classify as an independent contractor for one government agency, and yet fail to qualify as an independent contractor for a sister agency. It simply doesn’t make sense.
Yet, this is precisely the world we live in. I’ve had clients, for example, who have passed independent contractor audits by the IRS, but who have failed/would fail a subsequent independent contractor audit by the Employment Security Department or Department of Labor & Industries for failing to meet certain agency-specific requirements. For these clients, it’s a huge stunner to learn that their independent contractor (“certified” as such by an IRS auditor) really isn’t an independent contractor for all purposes, and that it was a costly mistake to make that assumption.
So how then should independent contractor law compliance be approached? The short answer is that a proper compliance effort requires that each individual agency’s requirements be viewed independently, with the independent contractor classification being the advised choice only if the classification works across the board, or if agencies have specific exclusions/exemptions that apply.
For example, let’s say your business engages hair stylists as independent contractors (IC), a proper independent contractor compliance analysis would require that you make the following independent determinations (among other things):
- Whether the stylist is an IC for IRS purposes. If not, and if the stylist is not protected by safe harbor or an exemption, you would owe Social Security and federal unemployment taxes on the stylist’s services.
- Whether the stylist is an IC for ESD purposes. If not, and if the stylist is not otherwise exempt by a specific ESD exclusion, you would owe state unemployment taxes.
- Whether the stylist is an IC for L&I purposes. If not, and if the stylist is not otherwise exempt by a specific L&I exclusion, you would owe state workers’ compensation/industrial insurance taxes to cover on-the-job injuries and lost wages.
- Whether the stylist is an IC for state and federal minimum wage/overtimes purposes. If not, and if the stylist’s compensation falls below minimum wage, or if the stylist’s hours make him or her entitled to overtime, then you would be liable for wage violations.
Further, misclassification in above situations could additionally lead to liability to the stylist for unpaid employee benefits; liability for violations of coverage obligations under the Affordable Care Act; liability for violation of rights employees are entitled to under antidiscrimination laws, the Fair Credit Reporting Act, and the FMLA, etc. Each analysis is independent and a determination must be made on an agency-by-agency, and issue-by-issue basis.
It can be a tangled weave at times, folks. A tangled and nonsensical weave.
Bottomline: if you’re serious about independent contractor law compliance (and you absolutely should be if you engage independent contractors), make sure your compliance efforts consider requirements of each regulatory agency and of all related issues. The last thing you want or need as an employer is to go through an independent contractor audit, to believe you’re compliant with IC law based on lessons learned, and to later learn you’re still in the same ol’ doggone compliance mess.
