Labor and Industries Releases New Guide to Hiring an Independent Contractors
July 2013 – Labor and Industries has released a new Guide to Hiring an Independent Contractor. Though there has been no new legislation on the subject, L&I is making an effort to make their interpretations of the standard consistent between contractors, auditors, and litigation specialists. The new guide also defines examples of evidence for many of the required tests of proof for subcontractors. Labor and Industries took input from several organizations, including Northwest Independent Contractors Association on specific examples and plain language to help draft the new Guide. Many Prime Contractors who think they have a grip on the Independent Contractor laws need to read this Guide, especially to see if they are keeping the correct documentation to verify their Subcontractors.
Why the need for a new guide? Many Prime Contractors (Prime) have been levied workman’s comp premiums, along with significant penalties and interest when L&I has re-classified their Licensed, Bonded, Registered, tax paying one person Subcontractors from an Independent Contractor (Subcontractor) to an Worker (Employee). How does this happen? The Prime contracting with the Subcontractor for personal labor did not verify that they met the definition of either RCW 51.08.180 (brings more than personal labor) or RCW 51.08.181 (a 7 point test). Many Contractors flat did not understand the rules. They assumed that a Contractor’s registration and an agreement between Prime and Subcontractor was enough to establish Independence. Also, the old guide did not give examples of many of the findings auditors used make determinations on each point. Prime Contractors had no idea what L&I considered “direction and control”, “principal place of business”, or “set of books”.
Usually, the issue is over a “one person company”. If the Subcontractor the Prime is contracting with, only brings themselves and their personal labor to the project (examples- Subcontractor is paid hourly, has no risk, Prime Contractor directs their work, the Subcontractor works with the Prime’s crew, or they perform a task one of the Prime’s employee already performs) they are considered to be an Employee (worker) and the Prime owes all related taxes, premiums, and is under all employee related wage and hour laws for that individual (L&I will say there are some exceptions to this, but SO FEW and hard to meet they are not worth mentioning). Their having a license or registration is immaterial to L&I (and most other related agencies like the IRS). In L&I’s defense, if this wasn’t a law, many employees would be basically forced into becoming Subcontractors by their employers and would have to give up worker’s rights, insurances, and safety protections, even though they only provide personal labor as an employee would for the Prime.
Subcontractors Must bring Employees or Heavy Equipment
RCW51.08.180 has been interpreted by LNI as, to be considered an Independent Contractor and NOT and employee, the Subcontractor would have bring more than just his/her personal labor. To be considered an Independent Contractor, the Subcontractor would need bring employees or heavy equipment to the job site where the work was being performed. Of significant note in the new guide is the examples of what heavy equipment IS, and what it is NOT (a Van does not count). To meet the requirements of many other laws, the individual would still need to be a licensed, bonded, registered contractor, with current DOR and IRS tax accounts, keep a set of books, and have a principal place of business. The Prime would contract with the Subcontractor with a written contract and verify all needed information. The Prime still could not have “direction and control” over the Subcontractor or their employees for the Subcontractor to be considered an Independent Contractor.
Guide Breaks Down the 7 Point Test
So what if you have a one person Subcontractor who wants to be considered a Independent Contractor? Unfortunately, L&I doesn’t explain that a Contractor’s registration is not a “License” and does not guarantee the individual will not be considered an Independent Contractor unless they meet every point the of 7 point legislative test. The test for those doing construction is RCW 51.08.181 (the test for other Professionals is 51.08.195). The new Independent Contractor Guides goes through each of the 7 tests under this RCW and explains what L&I will consider evidence of compliance. Following are some highlights.
Test 1 – Free from Direction and Control
The guide provides examples of what is and what is not considered direction and control. Though there are many examples listed (some will be shocking to Prime Contractors) in the guide, be aware that the wording in the law is very subjective. L&I liberally applies this section to establish direction and control on the part of the Prime.
Test 2 – Type of Service, Location of Service, or Principal Place of Business
This “OR” test gives you three options of how to meet the test. For many Subcontractors, part (c) Principal Place of Business (PPOB) is the only way to meet this standard. Pay particular attention in the Guide to the verification for PPOB, it involves contractual language, “obligation” and “costs” associated with the PPOB. The Prime must verify the Subcontractor is paying the costs associated with their PPOB.
Test 3 – Previously Established Business or PPOB Eligible for IRS Deduction
This section of the guide is subtle in that it is also an “or” test. The wording shows how “time and material” contracts will not pass the (a) portion of the test. Proof of the (b) portion includes getting a copy of your Subcontractor’s tax return to prove a PPOB that is eligible for an IRS tax deduction (this would most likely meet test 2(c) also). Again, make sure your contractual language meets the standard.
Test 4 – IRS Filing
Again, here is where getting a redacted (sensitive information blacked out) copy of your Subcontractor’s tax return will meet this test.
Test 5 – DOR Current
The Subcontractor must have an open, current DOR account at the time of the work being done for the Prime Contractor. Instructions are given in the guide to establish proof of this test.
Test 6 – Set of Books
Many Prime’s have taken this for granted in the past. Your contract must state that the individual maintains business financial records that are separate from their personal records. This should be verified by the Prime, as it could be required by L&I at any time.
Test 7 – Proof of Contractor’s Registration
This is probably the most verified test by Prime Contractors and the starting point for many Prime-Subcontractor relationships.
The New Guide may make you change your verification of subcontractors, business relationships with some subcontractors and even your business model. Both L&I and IRS has a renewed interest in Independent Contractor verification for many reasons. Expect audits if you use 1099s on your tax returns for labor.
Submitted by Kris Alberti, Director, Northwest Independent Contractors Association | nicatraining.com