This article originally appeared in the March 23, 2018 edition of the Vancouver Business Journal.
With the push for greater flexibility in today’s workplace and technological advancements that allow work to be done from almost anywhere, many roles previously filled by full-time, in-house employees are now being parsed out into temporary tasks or projects that can be completed by freelance professionals not involved in the primary business’ day-to-day operations. One of the many benefits of this arrangement is that the business can often get highly specialized expertise for targeted needs without creating a full-time position, while the freelance worker has the independence and freedom to complete the project on his/her preferred schedule, subject to necessary deadlines of course, and from wherever he or she wants to work. This new environment where project work and independent contracting relationships are prevalent, is often referred to as the “gig economy.”
Whatever the benefits, one challenge with this evolutionary concept is that it may not yet fit so seamlessly into the regulatory regime that governs the traditional workplace. Most notably, the laws that now exist in this area are generally weighted with the presumption that someone performing service for a business is an employee, and entitled to all the protections associated with employee status, unless a number of fact-specific criteria are met. To make things even more interesting, the tests that have been adopted, may differ depending on which agency is asking the questions (e.g., the Internal Revenue Service v. the Washington Employment Security Department) and for what purpose (e.g., for workers’ compensation insurance benefits v. antidiscrimination laws).
Courts, too, are being asked to weigh in on this issue more than ever, with differing and sometimes extreme results. A 2014 decision by the Ninth Circuit Court of Appeals held that a class of 363 full-time FedEx delivery truck drivers were employees, not contractors as they had been treated by FedEx, and thus were entitled to additional wages and overtime. This was a total upset to the entire industry, which had long been structured around the expectation that these drivers were truly independent contractors. On the other hand, just last month meal delivery service GrubHub successfully persuaded a Northern California District Court judge that its delivery drivers met the test and, so long as the matter is not overturned on appeal, were properly treated as independent contractors.
So why is the independent contractor v. employee classification so critical?
For taxing authorities, treating someone as an independent contractor/consultant rather than an employee results in lost tax revenue that has to be pursued if it is later determined to be incorrect. For other regulatory authorities, it means the worker may not receive the benefit of employment-related legal protections and other benefits that they would otherwise be entitled to. That makes the implications of making the wrong choice or failing to follow the necessary formalities, a truly “make or break” scenario for both parties.
In fact, getting it wrong can mean the hiring business may have to pay the freelancer additional compensation for wages and benefits that it had not budgeted or planned for, address associated taxes and withholdings, and risk possible fines, interest, and/or other penalties if the mistake is uncovered by a regulatory agency. It may also mean retroactive workers’ compensation insurance premiums and potential claims for workplace injuries. As you might imagine, the unanticipated costs can be staggering for even a single mistake. Where there are multiple errors, the figures grow exponentially.
Isn’t this as simple as looking at whether a 1099 or a W-2 was issued at the end of the tax year?
Unfortunately, no. As mentioned above, there is a patchwork of fact-specific tests that need to be considered. There are no less than three multi-factored tests that could apply under federal law, and Washington state also has a host of different tests that may apply depending on the purpose for which the relationship is being examined, and most other states do too. If work will be performed in other jurisdictions, it will be important to also consider the tests applicable in those states too.
Probably the most important thing for both consultants and hiring businesses to know at the outset is that what is generally NOT relevant to any of the tests is what the hiring business or the freelancer intended, or often even what the paperwork says. Instead, the best practice is to consider the applicable tests before commencing the work so that the relationship can be properly structured, and documented in a written agreement signed by both parties, to comply with the applicable legal standards. By properly applying the appropriate standards in advance, informed consultants can make the most of the opportunities in the new gig economy and hiring businesses can best avoid the foreseeable risks.
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