When addressing whether your business is operating in compliance with state and federal laws governing independent contractors, the end of the year is often the best time to conduct this review and to make necessary changes. This end-of-year review provides your business an opportunity for a new start with improved practices, supported by the proper legal documents. Based on what we have observed the past year, below is my list of top five issues to address as you go into 2016.
- Tighten compliance efforts if your business is built on referring work to subcontractors. Many businesses that hire independent contractors do so via a referral arrangement with contractors. That is, as the prime/first-tier contractor, they generate leads/jobs, and refer those jobs to independent contractors who then provide the services under contract with the prime. The referring business processes payment, and takes a commission/share of the fee billed for the contractor providing the services. These referral agencies, however, have come under scrutiny with agencies repeatedly finding reason to conclude that these contractors should be employees (or more precisely, “covered workers”). If you’re operating under this business model then, given the climate for these businesses over the past year (indeed, past few years), it is important to ensure, prior to an audit, that your practices are as tight as they can be, compliance-wise.
- Consider whether L&I’s Worker Coverage Determination Program is right for you. L&I’s Workers’ Compensation Coverage Determination Program is a new program that offers businesses a way to obtain a formal opinion from L&I regarding whether a contractor is in fact an exempt independent contractor under Washington law, or an employee/covered worker on whom taxes should be paid. If you participate in the program, and L&I approves your independent contractors as exempt, then your will insulated/immune from a subsequent determination that these workers are employees/covered workers. While L&I’s program in no way governs how ESD would classify a worker, a determination obtained in the program can be instructive as to what ESD would conclude if it conducted the analysis. The program is not for everybody, so consult with an experienced attorney who has familiarity with the program before deciding to participate.
- Consider whether you should switch to the employee model. The independent contractor business model, as you may know, is heavily regulated, with businesses being susceptible to worker classification audits from multiple agencies at any time. Further, compliance with independent contractor law is not only dependent on what you do as the business owner (which is difficult enough), but on what the contractors you engage do. Business owners will often learn in an audit that they failed the independent contractor test not necessarily because of what they did, but what their contractors did or failed to do in running their business as independent contractors. Given agency scrutiny, the general difficulty of complying with poorly written/interpreted independent contractor laws, and given the fact that your ability to comply with IC law rests not only on your shoulders, but on what your contractors choose to do, it can often be easier (and maybe even cheaper in the long run) to convert contractors to employees/covered workers, and thus avoid the numerous pitfalls associated with hiring independent contractors. If you’re contemplating this change, the best time to make the change is at the start of the new year. This ensures that, among other things, you’re not giving the same worker a 1099 and W-2 for the same year, which can be a red flag to agencies that you may have improperly classified your worker(s).
- Prepare/revise contract documents. Contracts are important to compliance. While they won’t ensure that you pass the independent contractor test, a poorly drafted contract in the hands of an auditor will assure that you will fail the test. See our earlier post on this. Some of my clients come to me with contracts that make me tremble a bit as I pass on to auditors requesting the documents. The reality is that most independent contractor agreements are deficient if they are not specifically drafted to comply with Washington’s independent contractor law. If you have a contract that wasn’t prepared to comply with Washington law, or worse, if you don’t have a contract, prioritize getting your contract revised or prepared.
- Stop making the 10 biggest mistakes that business with independent contractors make. There are some practices that are guaranteed to result in your business failing an audit, and with you owing substantial back taxes, penalties and interest as a result of this failure. Review my earlier post on the top 10 mistakes to avoid…plus one, and avoid them.
