Independent Contracting Guidelines

Most people know that there is a distinction between becoming an employee and becoming engaged as an independent contractor. When the lines are not clear, problems arise. The distinction matters with:

*taxes
*insurance
*overtime pay
*liability
*statutory penalties for failure to pay properly
*attorney’s fees in litigation

It is VERY important to be clear about each of these issues at the outset of a relationship. With mandatory health insurance becoming a requirement for large employers, the temptation is strong to convert traditional employees into independent contractors. The temptation should be carefully scrutinized, and usually, avoided.

A review of Washington law is available at http://www.lni.wa.gov (workplace rights). The federal equivalent is found at: http://www.dol.gov.

The “old” rule was governed primarily by who had the right to control the manner, means, and methods of the work. The more control that was exerted by the party paying for the service, the more that relationship looked like traditional employment and less like an independent contractor relationship.

However, savvy employers seeking to avoid payroll taxes, liability for accidents involving employees, insurance costs and higher wages for overtime drafted contracts that, on paper, gave the service provider the look of an independent contractor. They created:

*Contracts
*Invoices
*Business entities

However, the ability to earn more money was governed solely by the ability to work more hours, and only if the employer deemed those hours necessary and available.

Today, courts follow the “economic realities” test. The inquiry focuses on whether one company is the sole source of an individual’s income. If so, the economic reality is that this individual does not really function independently.

The existence of a written agreement calling the relationship one of independent contractor does not change the economic realities. Nor would creating invoices instead of time cards. Nor would absence of hours worked, pay rate, or taxes on a check stub convert the payment into one for contract instead of an employee paycheck.

Accordingly, when faced with your own decision to hire or be hired as an independent contractor, ask: (1) What is the purpose of the arrangement? (2) Would a written contract really matter given the new economic realities test? (3) Does the service provider have other customers or accounts? (4) Is this to be a lengthy relationship? (5) Is there a better way to account for and deal with issues of taxes, insurance, liability, overtime and scheduling?

Care should be taken to consult with a legal professional that has a strong employment background before proceeding.