“One of the most common mistakes businesses make … is misclassifying their employees as independent contractors.”
– Washington State Employment Security Department
Ignoring or otherwise failing to address independent contractor law compliance issues carries real and significant risks. First, it increases the likelihood that your business will be targeted for an L&I audit, ESD audit, or IRS audit. Second, it subjects your business, needlessly, to devastating fines.
7 Reasons Businesses are Selected/Targeted for Audits
While it may be tempting to ignore independent contractor risks, and to hope (with eyes closed and fingers crossed) that your business won’t be selected for an audit, note that your business could be selected or targeted for an audit for a variety of reasons:
Complaints
• Your business may be selected for an audit if your independent contractors (or competitors) disagree with your independent contractor classification and complain to agencies about your worker classification practices.• L&I notes that in pursuing the “underground economy” (which includes contractor misclassification), it relies strongly on tips from public, and has employees who listen to every single complaint.
• Your business may be selected for an audit if your independent contractors (or competitors) disagree with your independent contractor classification and complain to agencies about your worker classification practices.• L&I notes that in pursuing the “underground economy” (which includes contractor misclassification), it relies strongly on tips from public, and has employees who listen to every single complaint.
Increased Enforcement by Agencies
• Cracking down on independent contractor misclassification has become a priority for state and federal agencies.
• The US Department of Labor and IRS have launched initiatives to detect and deter contractor misclassification. Washington’s agencies have partnered with DOL and IRS in these efforts.
• Cracking down on independent contractor misclassification has become a priority for state and federal agencies.
• The US Department of Labor and IRS have launched initiatives to detect and deter contractor misclassification. Washington’s agencies have partnered with DOL and IRS in these efforts.
Industries with High Non-Compliance Rates
• Agencies are familiar with industries with high rates of non-compliance. L&I, for example, identifies the construction and janitorial industries as problem industries, and is accordingly vigilant of independent contractor practices in such industries.
• Agencies are familiar with industries with high rates of non-compliance. L&I, for example, identifies the construction and janitorial industries as problem industries, and is accordingly vigilant of independent contractor practices in such industries.
High Revenues, No Employees
• If your business generates high revenues, while reporting few or no employees, this could prompt agencies to check that your worker classification is correct.
• If your business generates high revenues, while reporting few or no employees, this could prompt agencies to check that your worker classification is correct.
Information Sharing Among Agencies
• Agencies share information in deciding what businesses to audit. Thus your interactions with one agency could result in you becoming a target for an audit either by that agency, another agency, or both.
• For example, between 2010 and 2012, ESD conducted numerous audits of nail salons, and assessed substantial back taxes as a result. In 2012, the US DOL issued a press release identifying the Seattle-area nail salon industry as a problem industry, and indicating that it would pursue enforcement in the industry as a result.
• Agencies share information in deciding what businesses to audit. Thus your interactions with one agency could result in you becoming a target for an audit either by that agency, another agency, or both.
• For example, between 2010 and 2012, ESD conducted numerous audits of nail salons, and assessed substantial back taxes as a result. In 2012, the US DOL issued a press release identifying the Seattle-area nail salon industry as a problem industry, and indicating that it would pursue enforcement in the industry as a result.
Random Audits
• While agencies mostly conduct targeted audits (i.e., audits triggered by tips and complaints), agencies also conduct random audits. Only a small percentage of audits are random, however.
• While agencies mostly conduct targeted audits (i.e., audits triggered by tips and complaints), agencies also conduct random audits. Only a small percentage of audits are random, however.
Contractors Seeking Benefits/Contractor Lawsuits
• Agencies may select your business for an audit if a contractor seeks unemployment benefits or worker’s compensation coverage, claiming that he or she should have been classified as your employee, and not an independent contractor.
• Contractors are increasingly pursuing legal action, including class action lawsuits, against businesses for owed wages and improper denial of benefits.
• Agencies may select your business for an audit if a contractor seeks unemployment benefits or worker’s compensation coverage, claiming that he or she should have been classified as your employee, and not an independent contractor.
• Contractors are increasingly pursuing legal action, including class action lawsuits, against businesses for owed wages and improper denial of benefits.
