Employers are often caught off-guard when a Washington Department of Labor and Industries’ workers’ compensation audit results in a daunting Order of Assessment demanding back payment of industrial insurance premiums, penalties and accruing interest due to the misclassification of covered workers.

Jennifer L. Truong

Simply labeling a contractor as “independent” does not take away the workers’ compensation protections afforded in the State of Washington if that worker provides personal labor.

Regardless of the type of business, an employee asserting an independent contractor relationship will need to pass the department’s Personal Labor Test to meet exemption status.

Specifically, the business owner must be able to establish one of these two qualifications:

• A contractor brings his own employees to perform the work and there is no control of the contractor or the employees.
• A contractor brings heavy or costly specialized equipment, utilizes his expertise to operate such equipment, and the work is executed without control.

If a worker cannot meet the requirements of the Personal Labor Test, the department next offers a six-part test to determine if the company must provide workers’ compensation coverage by paying industrial insurance premiums (seven-part test for construction companies).

The company must affirm all of the following questions:

• The individual must be free from the company’s control or direction.
• The individual must pass one of the following three options:
  • (a) The service is outside the usual course of business.
  • (b) The service is performed outside all of the places of business. 
  • (c) The individual is responsible for the costs of the principal place of business from which the service is performed.
• The individual must pass one of the following two options:
  • (a) is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the contract of service.
  • (b) has a principal place of business that is eligible for a business deduction for IRS purposes.
• The individual is responsible for filing a schedule of expenses with the IRS.
• The individual has established an account with the Department of Revenue and other state agencies as required.
• The individual is maintaining a separate set of books or records that reflect all items of income and expenses.
• For construction only:
  • The individual is properly registered as a contractor or has a valid electrical contractor license.

Navigating how to answer each question takes careful consideration. For example, whether an individual is determined to be providing personal labor or is free from the company’s control or direction is highly fact-dependent.

Employers who misclassify a worker can quickly be exposed to a hefty assessment. If the company did not recognize a worker was covered, it is likely that the company did not keep records of the work duties and hours. When records are missing, the department is within its authority to estimate and assign the greatest risk classification and daily hours worked for the past three-year period.

Engaging counsel for consultation early on may help identify and address misclassification errors prior to an audit. During the audit process, employers benefit when having an advocate to provide guidance during interactions with the department and ensuring information requested is in fact required to be divulged based on considerations of subject matter and/or time limitations.

Navigating through the appeal and reconsideration options will require an assessment of business objectives and the likelihood of success in challenging the department’s findings.

Jennifer L. Truong is an attorney with Reinisch Wilson Weier PC, headquartered in Portland, Oregon. This column is republished with permission from the firm’s website.