More Than a Name: The Legal Reality of Hiring Independent Contractors

Posted on March 24, 2017 by Lasher Holzapfel Sperry & Ebberson

The Huffington Post recently ran the headline “Why We’re All Becoming Independent Contractors.”{http://www.huffingtonpost.com/robert-reich/why-were-all-becoming-independent-contractors_b_6731760.html}. The article recounts that GM and Uber are valued at $60 billion and $40 billion respectively, but that GM has over 200,000 employees while Uber has a paltry 850 employees. Uber has a simple, but concerning, explanation for this discrepancy – Uber’s drivers are not employees, they are “independent contractors.”

There are advantages to using independent contractors instead of employees; the result is an increasing number of companies are hiring independent contractors each day and looking to seize these advantages. So is it that easy? Can a company take its “employees,” rename them “independent contractors” and avoid the burdensome state and federal regulations of the employee-employer relationship? The answer is no. Being an independent contractor is more than just a title. As businesses have reframed their employer-employee relationship to fit the independent contractor model, the courts have been revisiting the legal test to determine who is truly an “independent contractor.” It is important for every business to understand how the courts have analyzed this employment relationship before hiring independent contractors.

In Washington state, a recent case on the issue that employers should understand is Anfinson v. FedEx, 174 Wash. 2d 851 (2012). In that case, three drivers sued FedEx claiming they had not been paid overtime or reimbursed for uniform expenses. By the time the case went to trial, 320 current and former FedEx drivers had joined in the action. FedEx’s defense was that all 320 drivers were not employees, but “independent contractors.” It argues that in light of their independent contractor status, the drivers were not entitled to overtime under state law. At trial, the jury actually agreed with FedEx and found that the drivers were independent contractors, not employees.

The drivers appealed this decision. On appeal, the Washington Supreme Court analyzed whether the jury had been instructed correctly regarding the “test” to determine if a worker is an independent contractor. The drivers argued the “economic dependence test” should apply, and FedEx argued the “right to control” test applied. The Court found both definitions of an independent contractor “reasonable,” but ultimately held that the legislature intended the “economic dependence test” to be the law in Washington. In the end, FedEx lost the appeal; the right to control test on which Fed Ex had based its business model was not the law in the state of Washington, and its team of “independent contractors” were now employees.

So what does this mean for your small business? First, a business that improperly classifies an employee as an “independent contractor” is exposed to tremendous liability for unpaid wages, state and federal wage withholding, and other protections that apply to employees. If a court determines independent contractors are actually “employees” it could severely damage business. Second, if an employer is going to use independent contractors it needs to really understand the “economic reality test.”

The purpose of the economic reality test is to determine whether the contractor is “economically dependent” on the business given all the circumstances of the independent contractor relationship. If the court determines the worker is economically dependent on the business, that worker is an employee. If the court determines the worker is not economically dependent on the business, that worker is an independent contractor. In making this determination, the court will look at a number of factors, including: (1) the nature and degree of control the business has over the worker; (2) the degree to which the work performed by the worker is supervised by the business; (3) the power the business has to determine the rate of pay or method of payment for the workers; (4) the right to hire, fire or modify the employment conditions of the workers; and (5) the preparation of payroll and the payment of wages by business. See Becerra v. Expert Janitorial, LLC, 181 Wn.2d 186, 196 (2014). The court is not bound to these factors, and will look to all aspects of the employment relationship.

All business owners need to be vigilant in their use of independent contractors.The use of independent contractors is growing due to the business advantages, however, an improper classification could bankrupt a small company. If your business currently uses independent contractors or is thinking of using independent contractors in the future, the employment law attorneys at Lasher Holzapfel Sperry & Ebberson can help you to determine if you can properly classify your workers as “independent contractors.”