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While California is often the first to legislate an issue surrounding employment, Washington often follows suit with similar laws. When doing business in Washington, you truly must take extra care to stay compliant with worker classification and labor laws.

Washington has strict rules and high stakes!

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Worker Classification in Washington

Federal rules around worker classification continue to make it harder for companies to classify workers as independent contractors. Each administration has its own approach, but democratic administrations tend to have their sights set on prioritizing accurate worker classification and punishing employers that don’t comply.

While every administration takes a slightly different approach, federal rules around worker classification continue to trend towards making it harder for companies to classify workers as independent contractors. Prioritizing accurate worker classification is good practice for every business, no matter how government polices ebb and flow.

What Makes Worker Classification Tricky in Washington?

True to form, California’s ruling in the Dynamex case resulted in some additional challenges when it comes to worker classification. While they spearheaded the changes, the cascading effects of the ruling are being felt in other states, including Washington.

In California, the Borello test was the long-time standard for determining whether a worker is an independent contractor or a W2 employee. The key point in the Borello test was determining whether the employer had a “right to control” how services were performed.

Secondary considerations—such as whether the worker was engaged in a distinct occupation or business, the skill required in the particular occupation, and whether the worker or the hiring entity supplied the tools used to perform the work and the place where the work was performed—also came into play. The case hinged largely on the meaning of the term “employ.”

The key point in the Dynamex case is that it replaced the Borello test with the ABC test. This iteration eliminated some of the gray areas in deciding whether a worker is an employee or not.

According to the ruling, a worker in California is assumed to be a W2 employee and can only be considered an independent contractor if all of the following apply:

  1. the worker is free from the control and direction of the hiring entity in connection
    with the performance of the work, both under the contract for the performance of the work and
    in fact;
  2. that the worker performs work that is outside the usual course of the hiring entity’s
    business; and
  3. that the worker is customarily engaged in an independently established trade,
    occupation, or business of the same nature as the work performed.

This is the narrowest definition of an independent contractor to date and puts more pressure on point “B” than ever before.

What's at Stake For The Government?

To date, determining the differences and properly classifying workers have been highly complicated tasks. It can depend on factors such as the ability to hire or fire a worker, the kind of occupation, the method of payment, location and more. According to the court’s ruling in the Dynamex case, “the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue.”

In short, the government is paying attention to worker classification because of lost revenue. Independent contractors write off business expenses and may underreport income, small businesses can avoid certain taxes with fewer W2 employees, and ICs are more difficult to track and tax accurately than W2 employees.

What Does it Mean For Business?

Some employers like having more employees, feeling it gives workers more ownership in the company’s success. Others say it makes their business model unsustainable.

It’s point “B” of the ABC test that’s most strongly challenging the way many small businesses operate. It states that a worker must perform “work that is outside the usual course of the hiring entity’s business” to be classified as an independent contractor.

Some companies have restructured operations completely to avoid hiring more W2 employees (new laws have a way of precipitating new ways to get around said laws). Another way to avoid reclassifying is simply to operate business as usual and wait to be challenged. Smaller companies have been known to get away with this approach indefinitely. It’s risky, but it does happen.

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What About The workers?

Washington’s approach to worker classification (among other topics) purportedly intends to protect workers and many consider Washington one of the most worker-friendly states.

Still, some independent contractors have been unhappy with the changes and expressed concern for their livelihood. Even if all the perks afforded an employee (healthcare, time off, etc.) bring them close to their original pay in practice, their paycheck may look a lot smaller on the surface. Many industries have been granted exemptions, indicating that, as always, there is no simple cut and dry to an issue this complicated.

Independent contractors set their own schedules and manage their own businesses. While ICs are still responsible for paying taxes, they can also take advantage of many write-offs. Along with the perks, they do have the responsibilities that come with owning their own business. They run their own books, pay quarterly taxes, advertise, purchase their own equipment, and deal with the seasonal nature of business. Independent contractors also don’t get paid time off and are responsible for purchasing their own health insurance.

Some workers prefer the stability and possibility for advancement that come with having a greater presence at the office and familiarity with the ins and outs of the company.

What Best Practices Mitigate Worker Classification Risks in Washington?

Unless a company is made up 100% of full-time employees, this subject is relevant to operations.

Failure to classify employees correctly could result in fines, back taxes, and even jail time. Stay well on top of worker classification rules and know the exemptions that may apply to your industry. Of course, if your business doesn’t have the bandwidth to stay on top of everything, engaging a partner is an excellent option. Working with an Employer of Record (EOR) or Professional Employer Organization (PEO) is standard best practice in this evolving freelancer economy.

While both provide payroll and insurance services, the differentiating factor is that an EOR relieves employers of much of the regulatory risk involved in working with independent contractors while a PEO operates as a co-employer and does not assume the employment risk.

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What Are The Stakes for Mistakes?

Big companies like Uber make headlines for their missteps and pay equally big fines for their worker classification choices. Still, it can be a costly mistake to think it’s only the big companies that face consequences. By rescinding the Trump Administration’s “Worker Classification Rule,” the Biden administration made it easier for workers to argue for minimum wage and overtime protections/compensation. In addition to having to pay back 100% of the matching FICA taxes they would have paid had they classified the worker correctly up front, employers can end up subject to additional penalties such as the following:

  • $50 fine for each W-2 form they failed to file
  • A penalty equal to 1.5% of the employee’s wages
  • $5,000 penalty for the first misclassified employee and up to $25,000 for each subsequent violation

Suffice to say, misclassifying workers does not save money in the long run. Perhaps scarier than the possibility of monetary damages, misclassification has landed some business leaders under house arrest.

In addition, class-action lawsuits, failed audits, and negative headlines can damage a company’s reputation to the point where both workers and consumers are hesitant to engage with a company. It’s just not worth it!

Bottom Line

The most common mistakes when engaging contractors in Washington are misclassifying workers, (of course!) and being lax about training requirements or privacy.

As the economic landscape shifts and independent contractors rise in prevalence, the financial stakes and potential for missed revenue rise, too. In response, government agencies have been ramping up their focus on the subject. The IRS and DOL are not alone. States are joining the fray, attempting to crack down on misclassification while tightening the reins on training requirements, and payroll guidelines.

Where the money goes, lawyers follow. There’s big money in class action lawsuits and new cases are always brewing. While fear is never productive, you should be very, very conscientious when engaging independent contractors in Washington. A high level of vigilance protects your business. It’s worth doing whatever it takes to stay compliant and reduce the risk for fines and unpleasant attention from the IRS.

When is Engaging a Partner a Good Idea?

If you don’t have the in-house team to do it yourself, it’s worth considering working with a partner. Doing business in Washington is complicated and the consequences of errors can be immense. While the onus is on employers to classify workers correctly and stay in line with the state’s changing requirements, the right partner can help you navigate a rocky landscape with relative ease.

In our world, accurate worker classification and top-notch risk management when it comes to overtime, meal wage, and other laws are always the priority. We are the first to be aware when change is in the air. We track rules in every state as well as on a federal level and offer services to help clients stay compliant.

If you think a partner would help your business, contact us now.