Over the years, we’ve been able to closely study the independent contractor classification, and how Washington and other states have attempted to manage/regulate the classification to ensure businesses are not taking advantage of, or misapplying, the independent contractor classification in their hiring practices. Below is my very high-level assessment of what independent contractor laws get right and should continue doing, and what they get wrong, and should not do.
Things independent contractor law and enforcement SHOULD do:
- The independent contractor classification should be monitored/regulated. Classifying a worker as an independent contractor can have detrimental impact on a worker who is misclassified as an independent contractor, as the worker could be deprived of a range of employment benefits and protections that they would otherwise be entitled to. So states and state agencies should absolutely monitor and enforce compliance with independent contractor laws and the proper classification of workers as independent contractors.
- Independent contractors should be licensed and registered. At their core, independent contractors are independent businesses. And bona fide business operations are all duly licensed and registered. One of the clear indicators that a worker isn’t an independent contractor is that the worker isn’t licensed and registered to operate their own business. States and state agencies should therefore expect bona fide independent contractors to be licensed and registered, and employers should be able to rely on a business license as a reasonable indicator that the contractor operates an independent business. And, with that in place (among other items discussed), when an employer hires a worker who isn’t a licensed and registered business, then it’s correct and warranted to reclassify the contractor into employment status.
- The contractor relationship should be governed by a written contract to ensure mutual consent. Independent contractor laws are often inflexibly applied, which can at times force contract partners into an employment relationship when neither party wants or intends to be in an employment relationship. Rather than the current paternalistic approach, independent contractor laws should allow for an employer and an independent business operator to enter into an independent contractor arrangement via written agreement documenting informed and mutual consent. As it stands, independent contractor laws can dictate whether a contractor is an employee without regard to the employment relationship the parties intend to form. While it is true that contracts alone should not be sufficient to make somebody into an independent contractor if they are actually employees, it should not be the case that independent contractor agreements are primarily used to undercut independent contractor status, rather than to help to confirm the independent contractor status. In short, the law should afford contracts significantly more weight than it currently does.
- Significant weight should be given to whether a contractor has other clients. In my own rather extensive experience working in this space, one of the clearest indicators that somebody isn’t an employee is that they operate a licensed and registered business and have multiple clients. It shows independence and an entrepreneurial spirit, which is a clear indication that a worker is not anybody’s employee. Instead, however, independent contractor laws place an outsized amount of weight on an employer’s right to control a worker which, as discussed below, should not be sufficient to turn a bona fide independent contractor into an employee. A better indicator is whether they have clients and/or are holding themselves out to the public as a business seeking clients.
- Penalties for misclassification should be appropriate. In Washington, it’s remarkably easy to be on the wrong end of a misclassification finding. This can be because the laws are not clear/intuitive, they are too strict as written, too strictly enforced, and because an employer can be held liable for things that aren’t the employer’s fault (e.g. contractors allowing their license to lapse). Notwithstanding the “innocent” or understandable ways that an employer could find itself out of compliance, the penalties prescribed by law and applied by enforcement agencies are often disproportionate to the infraction. Thus any overhaul of our independent contractor legal framework should ensure that penalties assessed are appropriate to the violations.
Things independent contractor laws SHOULD NOT do:
- Direction/control over a contractor should not be a decisive factor. There’s no greater flaw in independent contractor law framework than deciding whether somebody is an employee or independent contractor based on whether that person is subject to direction/control. The reason this doesn’t make sense is that every relationship involving payment for services involves some degree of direction and control. Indeed large companies will have incredibly detailed contracts documenting performance expectations, but nobody views contract details as evidence that that one contract party is less of an independent business as a result of the contractual control exerted by the hiring party. Yet in any independent contractor audit, those very provisions that are permitted in large contracts will be used to say that a small contractor is an employee because he/she is subject to direction and control. IT. MAKES. NO. SENSE.
- ABC Tests should not be used. “ABC tests” are widely used three-part independent contractor tests that require companies to pass each part of the test in order to considered an independent contractor. If one part of the test is failed, the entire test is failed. What makes ABC tests especially unforgiving is that, part A, requires contractors to be free from direction or control. Thus a simple/casual decision by an auditor that the contractor is subject to some direction or control, whether in contract or in fact, would subject that contractor to be considered an employee. Rather than ABC tests, independent contractor tests should be multifactor tests that consider many different factors in deciding whether somebody is more like an employee than an independent contractor (or vice versa), with the final decision based on the result of that weighing of factors. While multi-factor tests have their flaws, they’re way more likely to lead to a fair result compared to ABC tests that give auditors inordinate power to reclassify virtually every contractor as an employee.
- Businesses should not have to follow different independent contractor tests for different state agencies. In Washington State, in order to comply with independent contractor law requirements, one needs to comply with: 1) the six- or seven-part test applied by Washington State Department of Labor & Industries, and any available exemptions; 2) the three- or six-part test applied by Employment Security Department, and any of its exemptions; 3) the Economic Realities test applied by L&I for wage and hour issues. And on top of these tests, one also must comply with federal independent contractor tests applied by the IRS and US Department of Labor, and the common-law independent contractor test in civil actions. It’s hard to keep up with these tests; indeed nobody can keep up without a lawyer’s hand-holding, and even then, your lawyer would need to be highly experienced in this area. Independent contractor tests should not present a minefield for employers and should instead be simplified with one or two tests adopted by all agencies. It should never be the case that audits of the same worker by different agencies can lead to vastly different results.
There’s a lot more to say, but I’ve likely reached and surpassed a word-limit for blogs like this. I’ll save other thoughts for another day.