One of the More Devastating Consequences of Misclassifying Workers as Independent Contractors

Business owners generally understand that misclassifying workers as independent contractors is a bad thing, and there are fines and other consequences for misclassification. Most business owners are not aware, however, that consequences of misclassification easily and often amount to tens of thousands of dollars – including into six figures – in back taxes, penalties, and interest. They are even less aware of one little known, but thoroughly devastating, consequence of misclassification.  This is where an independent contractor is badly injured or dies, and the cost of such injury or death is covered by L&I and passed on to the employer. In such cases, the “simple” act of misclassifying a worker can end up costing a business several hundred thousand dollars.

Consider the following scenario.

You own a business and hire a worker to provide services as an independent contractor/subcontractor. While the worker is providing the services under the contract, he or she is injured (or worse, dies), thus prompting an investigation by L&I into the injury or death. To make the determination regarding whether the injury is covered under L&I’s workers’ compensation/insurance program, L&I’s first order of business is to analyze whether the worker is a true independent contractor (who is not entitled to benefits), or an employee or “covered worker” (who is entitled to benefits). L&I’s investigation finds that your worker was in fact not an independent contractor because he or she failed parts of L&I’s strict independent contractor test. As discussed in this blog, the ways to fail are many, and a worker can easily fail if he/she worked under your direction/control, did not operate an independent business, did not file taxes, or did not have a business license, etc. Each of these deficiencies is individually sufficient to fail the test. Once it is determined that the injured or deceased worker is not an independent contractor (i.e. the typical result, and the result pursued by L&I, as a practical matter), L&I will make the determination to pay for the worker’s treatment. In the event of the death, L&I will make the determination to provide death/pension benefits to the appropriate beneficiary. These costs can be tens of thousands, and in the event of an accidental death, the cost will be several hundred thousand dollars. While L&I will grant those benefits to the injured or deceased worker, it will then turn to you as the employer and assess a Claim Cost Penalty for the injury/death, thus holding you financially responsible for the medical cost of treating the worker or paying death/pension benefits. In other words, by misclassifying a worker as an independent contractor, you become his/her insurer – a financial consequence that not many businesses can withstand.

The above scenario isn’t speculative, nor is it a hypothetical scenario that never happens. Indeed, our firm has had several of these cases this year.  The Claim Cost Penalty assessment truly can be one of the more devastating consequences of misclassifying workers as independent contractors, particularly for businesses whose workers are at a greater risk of injury or death.  So be careful with the independent contractor classification. It is my plea.

Leave a Reply

Your email address will not be published. Required fields are marked *

phone: (206) 569-4920 | email: