Our Badly Broken Independent Contractor Law Framework – And the Fix (Part I)

Folks, it’s no secret that our independent contractor law framework is very badly broken, or at best, unworkable.  Below is an outline of a few of the problems with the framework. Part II of this article (still to come) will outline my recommendations.

One of the primary reason businesses hire independent contractors is to avoid unnecessarily incurring expenses associated with hiring employees, including worker’s compensation premium payments and unemployment insurance premium payments. In Washington State, a business that engages independent contractors must pay these premiums to the Department of Labor & Industries (L&I) and Employment Security Department (ESD) unless it is be able to show that its independent contractor satisfies each part of a six- or seven-part test. To summarize/simplify the requirements, the independent contractor must:

1)      Be free from direction or control, and

2)      Work away from the employer’s place of business, and

3)      Operate as an independently-established business, and

4)      Be responsible for filing their own taxes, and

5)      Be a fully licensed and registered business, and

6)      Maintain their own books and records, and

7)      Have a valid contractor registration or electrical contractor license (for contractors and electricians only)

The problems with the test are myriad, as anybody who has dealt with the test (including people charged with enforcing it) will tell you.

First, freedom from direction and control is not a proper indicator of independent business/contractor status.  No service provider is free from direction and control…ever. The moment a service provider is engaged to provide a service, the party paying for the service must necessarily exercise a certain amount of direction/control over the provision of services being provided. This is why every business-to-business relationship is governed by lengthy contracts and addendums detailing what needs be done under the contract, and that grants the paying party express right to supervise/monitor the performing party, and to take action against the service provider when there are deficiencies. To require that a service provider be free from direction and control from the party paying for the service is nonsensical. Yet, as illogical and divorced from the real world as it is to equate independent business/contractor status with freedom from direction and control, this part of the test is frequently used as a basis – often, the sole basis – to find that a service provider is not an independent contractor.

Second, Part 3 of the test requires that a business be customarily engaged in an independently established trade, occupation, profession, or business.  By its terms, an independent contractor may be either an independent business, or an independent profession, or an independent occupation, or an independent trade. But never once has an agency ever exempted a contractor on the basis that a contractor was operating an independently-established profession, or occupation or trade, rather than an independent business. Rather the law is read to require that all contractors must be independent businesses, and rest of the wording of the law is as good as meaningless. Business owners therefore cannot trust that the law they are charged with complying with means what it says.

Third, the test penalizes businesses for their independent contractor’s deficiencies. Parts 4, 5, 6, and 7, for example, require independent contractors to file their own taxes, operate as fully licensed and registered businesses, and maintain their books and records. These are all responsibilities that are exclusively within the control of the contractor, yet it is the business that is penalized if the contractor fails to comply.  There is no corresponding penalty to those contractors who fail to comply. Further, in an audit, if an independent contractor does not respond to questionnaires sent by the auditor to ascertain IC status, the auditor will conclude that the business fails the test, even if the business itself has been fully cooperative.

Fourth, the conjunctive nature of the test is an absolute killer. The test requires that an employer satisfy each part of the test, and failing any part results in mandatory failure of the entire test. The result of this is that a business can be 90 percent compliant – i.e. have an “A” rating where compliance is concerned – and still fail the test, for reasons such as a contractor’s license lapsing (thus failing part 5 and 7), or by providing advice to, or fielding questions from, a contractor regarding performing the contract (thus failing part 1), and so on. Further, for businesses that engage independent contractors without knowledge of the test and each part that must be satisfied – i.e. most businesses – the likelihood that they can pass each part of this test is next to nil.  Even businesses that know the test and seek to comply, struggle mightily in obtaining the requirement of 100 percent compliance. I probably should repeat that, and offer it as an indictment against the workability of the test: i.e. Even businesses that know the test and seek to comply, struggle mightily in obtaining the requirement of 100 percent compliance.

Fifth (and this list really could go on for a while), there is a clear disparity and unfairness in how the law is applied. It is an open secret that agencies don’t generally go after big businesses and their deficiencies in hiring contractors. Thus certain businesses can hire independent contractors with no real concern of an auditor swooping in and penalizing them for doing it incorrectly. The businesses that get audited and slammed for noncompliance are consistently small businesses who tried to use independent contractors to get their business of the ground, or for their businesses with small profit margins to survive. For large businesses, on the other hand, either they don’t get audited, or things tend to work out.  Uber, for example, would absolutely, absolutely, absolutely ( I feel like throwing in another “absolutely”) fail the independent contractor test if it was ever audited. Uber and its powerful lobbyists, however, recently obtained a change in law – yes, they got politicians to change the law – to specially exempt their drivers. Meanwhile small businesses who could use a regulatory break, continue to deal with this terrible, horrible, no-good,  very bad law.

Feels as if I haven’t even scratched the surface regarding all that is messed up about the law and how it is enforced. This list really could go on.

So how do we fix? Stay tuned for Part II.

One thought on “Our Badly Broken Independent Contractor Law Framework – And the Fix (Part I)

  • I would like to work to change this law.
    I helped on the campaigns of State Senator Bruce Dammeier,and State Representatives Hans Zeiger & Melanie Stambaugh and should be able to talk with them directly about this issue.

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