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Retainage on Private Construction Contracts: New Rules In Washington State

On July 23, 2023, new rules for how retainage is handled on private construction projects went into effect in Washington state. The new legislation now provides some safeguards to contractors and subcontractors on private projects, with some limited exceptions.

The new rules limit how much retainage may be withheld, provide a deadline by which retainage is to be disbursed, and for interest to be paid if that is delayed past a certain point. The goal is to help reduce unjustified and lengthy delays in paying contractors and subcontractors when a job is completed. It applies to all private construction projects except single-family residential projects of fewer than 12 units. The legislation was supported within the construction industry, and passed without opposition.

Retention is now capped at 5% of the contract price on private construction projects. The owner, contractor, or subcontractor must pay interest at the rate of 1 percent per month on the final amount overdue to the contractor or subcontractor. The interest begins accruing 30 days after the contractor or subcontractor has completed, and the owner has accepted, the work under the contract. Interest accrues until final payment is tendered.

To start the clock running, the contractor or subcontractor must provide notification of completion of their work to the party who hired them. The party receiving that notice then has 15 days in which to either accept the work, or to notify the contractor or subcontractor of work that remains to be performed.

If within those 15 days, the party does not accept the work or does not notify the contractor or subcontractor of work yet to be performed, the interest begins accruing 30 days after the end of the 15-day period. With these timelimes, it is recommended that all parties calendar the relevant due dates, and have an effective “tickler” system with reminders.

A contractor’s obligation to pay interest to a subcontractor will not begin until the contractor has received payment for the subcontractor’s retainage, so long as the contractor has submitted the subcontractor’s retainage request to the owner or upper-tier contractor within 30 days after receipt from the subcontractor. This appears to address the reality of “pay-when-paid provisions”, so that contractors don’t get stuck between a subcontractor’s retainage request and a slow-paying customer.

In lieu of retainage, a contractor or subcontractor may tender a retainage bond not to exceed 5 percent of the moneys earned by the contractor.

The new rules will not eliminate disputes about work, but should help speed up final payment when projects are completed.

These rules were passed in Engrossed Substitute Senate Bill SB 5528, and will be codified as a new chapter in RCW Title 60. 

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New Requirement in WA: Include Wage With Job Posting

In 2022, the Washington State legislature passed, and the Governor signed, changes to RCW 49.58.110.  Starting January 1, 2023, an employer with 15 or more employees must provide certain information in each posting for each job opening.  Employers must disclose: (1) the wage scale or salary range, and (2) a general description of all the benefits and other compensation to be offered to the hired applicant.   

What qualifies as a job “posting”? The statute says “any solicitation intended to recruit job applicants for a specific available position, including recruitment done directly by an employer or indirectly through a third party”.  This includes “any postings done electronically, or with a printed hard copy, that includes qualifications for desired applicants.” 

Is there a penalty for those employers who don’t provide this information? Yes.  Per RCW 49.58.060, an employee can file a complaint with the state Department of Labor & Industries.  If there is a violation, the Director of L & I will first attempt to resolve the violation by conference and conciliation. If no agreement is reached, the Director can issue a citation and notice of assessment, and order the employer to pay damages to the employee. Damages can be the actual damages or five thousand dollars, whichever is greater. On top of that, interest will apply, and the violator may owe repayment to Labor & Industries for the cost of the investigation and enforcement.  Per RCW 49.58.070, the employee may also file a lawsuit against the employer. 

This builds on the requirements of RCW 49.58.110 that have been in place since 2019, namely, that employers of 15 or more employees must provide the minimum wage or salary for the position upon an applicant’s request for the information. If there is no minimum wage or salary, the employer “must provide the minimum wage or salary expectation set by the employer prior to posting the position…”.   

In short, when seeking applicants for job openings (even to internal applicants or for promotions) it is important to include the wage scale or salary range, and the benefits, wherever the job opening is published. 

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Seattle’s Independent Contractor Protection Ordinance

In June 2021, Seattle’s City Council passed an “Independent Contractor Protection Ordinance”, requiring certain information to be provided to an independent contractor prior to being hired, and upon payment, for work done in Seattle. The threshold for value of services is $600. If the compensation is to be $600 or more, and the work takes place in Seattle, the ordinance applies. It will be enforced by Seattle’s Office of Labor Standards. The ordinance can be found at Seattle Municipal Code § 14.34, and takes effect September 1, 2022. 

Seattle’s Office of Labor Standards will make model disclosure notices available in English, Spanish, and other languages, by September 1, 2022. 

Who has to provide the disclosures? What kind of contractors get the disclosures? What information has to be disclosed? In short: 

Who must provide the disclosures to contractors? Businesses large and small, including nonprofits. If the “hiring entity” is “regularly engaged in business or commercial activity [and] owns or operates any trade, occupation, or business, including a not for profit business, or holds itself out as engaging in any trade occupation or business”, then the hiring entity must follow the ordinance when it hires someone to provide services within Seattle. S.M.C. 14.34.020.   If a company is based inside of Seattle or outside of Seattle and hires an independent contractor to perform work within Seattle, the company must comply with the ordinance. 

However, those businesses who purchase services from “hiring entities that hire platform gig workers to provide prearranged services” don’t have to comply with the ordinance. That is, customers of companies that hire gig workers do not have to provide the required disclosures to the workers. If Company A uses Company B’s mobile app to get someone to help install office equipment, Company A, as the app user, does not need to comply with the ordinance. It is Company B whose app is used and who dispatches the worker to the customer’s assignment, that must comply with the ordinance.

It should be noted that the ordinance does not apply to people hiring contractors for personalprojects. For example, a homeowner hiring an interior designer to help with redesign of their Seattle home does not have to comply with the ordinance. But a company hiring the same interior designer to work on the remodel of a Seattle office must comply. 

Which contractors are entitled to the notice requirements? For purposes of this ordinance, an “independent contractor’ means a person or entity composed of no more than one person, regardless of corporate form…that is hired…as a self-employed person or entity to provide services in exchange for compensation.”  S.M.C. §14.34.020. For example, a janitorial service that has two or more employees is not an “independent contractor” for purposes of this ordinance, and is not covered by it.  But if a cleaning service is purely a one-person business, with no employees other than its owner, it is entitled to the protections of the ordinance, and to receive the mandatory disclosures from businesses that hire it. This is just one example.  The idea is that any business that hires a solo independent contractor will have to provide the disclosures. 

What information or disclosures must be given to an independent contractor? The ordinance requires the hiring entity to disclosures at two points in the relationship, “pre-contract” disclosures before work begins, and then provide “payment disclosures” when paying the independent contractor. 

The required pre-contract disclosures include:  

  1. date of the disclosure;
  2. independent contractor’s name;
  3. hiring entity’s name and contact information (physical and mailing addresses, phone and/or email);
  4. description of the work;
  5. location of the work;
  6. rate or rates of pay;
  7. pay basis (e.g., hourly, daily, weekly, monthly, fee per project, piece rate, commission);
  8. tips and/or service charge distribution policy, if applicable;
  9. typical expenses incurred in the course of work and will will be paid or reimbursed, if applicable;
  10. deductions, fees, or other charges that the hiring entity may subtract from payment, and accompanying policies for each type of charge, if applicable;
  11. payment schedule, and
  12. any other information that the Director of Seattle’s Office of Labor Standards may direct

Disclosures must also be provided with payment. The “payment disclosures” are are:

  1. date of the disclosure;
  2. independent contractor’s name;
  3. description of services covered by the payment (e.g., description of project, tasks completed, hours worked);
  4. location of services covered by the payment;
  5. rate of pay;
  6. tips and/or service charge distributions, if applicable;
  7. pay basis (e.g., hour, day, week, etc, with accounting of methods for determining payment earned during the pay period);
  8. expenses reimbursed, if applicable;
  9. gross payment;
  10. deductions, fees, or other charges, if applicable;
  11. net payment after deductions, fees, or other charges, and
  12. any other information that the Director of Seattle’s Office of Labor Standards may direct.

Does the Ordinance require anything else? Of course!  There is more to the Ordinance, but for now, be aware that failure to comply with it can lead to fines and penalties, or a lawsuit from the independent contractor.  Also, don’t retaliate against a contractor who is entitled to the notices (for example, don’t fire a contractor for requesting the pre-hiring or payment disclosures). Adverse actions can lead to penalties.

The ordinance goes into effect September 1, 2022. Here is a link to a “fact sheet” about the ordinance, published by Seattle’s Office of Labor Standards: http://www.seattle.gov/documents/Departments/LaborStandards/Fact%20Sheet_ICP_FINAL%20.pdf

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Must Employees in Washington State Wear Masks?

With the Covid-19 vaccine being widely administered in Washington state, many ask, “must employees continue to wear masks at work?”  The short answer is, it depends.

For many (but not all) employers, as of May 21, 2021, an employer may lift an employee mask requirement, but only if the employer obtains from each employee one of two documents. The employee must provide either: (1) proof of the employee’s vaccination, or (2) written confirmation signed by the employee that they have been vaccinated.  If the employee provides the documentation, the employer may choose to relax employee social distancing to less than 6 feet, or may choose to no longer require masks of the vaccinated employees.  See Proclamation 20-25.13 issued by Governor Jay Inslee. However, it is important to note this Proclamation does not override CDC guidance, does not override stricter rules of  local governments, and does not require businesses to abolish mask or distancing requirements.  https://www.governor.wa.gov/sites/default/files/proclamations/proc_20-25.13.pdf

To learn more about what rules may apply to your industry, seehttps://www.governor.wa.gov/issues/issues/covid-19-resources/covid-19-reopening-guidance

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Can Employers in Washington State Require Employees to Vaccinated Against Covid-19?

As vaccination against Covid-19 rolls out, employers want to know if they can require employees to get vaccinated. In Washington State, the short answer is, yes, but employers must do so in ways that comply with wage-and-hour rules, and other rules regarding employment. For example, requiring vaccination means the employee’s travel time, and time spent receiving the vaccine, are part of their work hours, and therefore such time is part of the employee’s paid time.  Not surprisingly, an employee cannot be prohibited from  using sick leave to recuperate from side effects they may have from the vaccine.  Depending on the needs of the business, some advance notice by the employee of their vaccine appointment may be appropriate.  If you are reluctant to require vaccination, an alternative option may be to encourage and incentivize employees to get vaccinated.  All in all, if you are a Washington employer and would like a vaccinated workforce, there are options.

Fortunately, Washington’s Department of Health and Department of Labor & Industries have each issued guidance to employers.  See: https://www.doh.wa.gov/Portals/1/Documents/1600/coronavirus/120-053-FAQStepsCriticalWorkersVaccination.pdf and  https://lni.wa.gov/agency/outreach/coronavirus-covid-19-vaccines-and-paid-sick-leave-common-questions

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Attorneys’ Fees Clauses-The Basics

You have probably heard of “attorneys’ fee clauses” (a/k/a “prevailing party” clauses) in contracts. But do you know how they work?  In the United States, when parties are involved in litigation, typically each is responsible for paying its own costs and legal fees.  This is fine for those who can afford to hire attorneys to pursue (or defend) a lawsuit.  But what are people (or companies) that don’t have sufficient funds supposed to do?  It can be a problem when a deep-pocketed party can pursue a claim that lacks merit.  It can also mean there is little consequence for pursuing a lawsuit that really has no merit.[1]  The idea that each party is responsible for their own attorneys’ fees is known as “the American Rule” – versus the “the British Rule”, in which the losing party pays the winning parties’ legal fees.  Many believe the American system is why there is so much more litigation in the U.S. than in Britain.

But there are some exceptions to the American system.  For example, in Washington state, there are three situations in which the loser pays the winner’s costs and attorneys’ fees: (1) when it’s allowed by specific statute, (2) when it’s included in a contract, and (3) on “equitable” grounds (which is rarely ever found, so best not to count on it).

For example, when a party sues claiming violation of Washington’s Consumer Protection Act (RCW 19.86), the prevailing (winning) party can recover reasonable attorneys’ fees and other costs from the non-prevailing (losing) party (RCW 19.86.090).  This helps level the playing field when a customer is misled or otherwise injured by a seller of some product or services that violates the CPA, and encourage attorneys to take on cases against deep-pocketed parties.

But what about those lawsuits where the amount being fought over is less than $10,000?  By statute, the prevailing party is entitled to have its costs and reasonable attorneys’ fees paid by the other side.  RCW 4.84.250.  Not surprisingly, the idea is that the merits of the lawsuit should not be outweighed by the financial costs of suing or defending.  Likewise, when a winning party has to litigate how much fees they are to recover, they can get those fees paid by the losing party too.  See, e.g., Fisher Properties, Inc. v. Arden-Mayfair, Inc., 115 Wn.2d 364, 378, 798 P.2d 799 (1990) (“The general rule is that time spent on establishing entitlement to, and amount of, a court awarded attorney fee is compensable where the fee shifts to the opponent under fee shifting statutes.”). In other words, if you are on the losing side, it can be even more costly to argue too much about attorneys’ fees.

As for contracts, they can include a provision that, in the event of a lawsuit between them, the prevailing party will be entitled to recover their attorneys’ fees and costs. So long as it’s in a valid contract, the courts will generally enforce it.  The prospect of having to pay the other side’s legal fees gives everyone a reason to look very closely at the strengths and weaknesses of their case.  It gives the party that does not have the balance of the facts and law on its side an incentive not to drag things out, and to strongly consider negotiating a settlement to minimize risk of losing even more if the case went to trial.

In Washington, if there is an attorneys’ fee clause in a contract, it is deemed to apply to whichever side basically is the winner – even if the clause is drafted so that it looks like it favors just one of the parties.  For example, if a construction contract says the contractor can recover its attorneys’ fees if the customer unsuccessfully sues, the courts will read that clause as applying to both parties – so that the customer can recover its fees if it wins the lawsuit against the contractor.  RCW 4.84.320.

[1] Whether a lawsuit is actually “frivolous” is a harder question than one might think.

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Families First Coronavirus Response Act (“FFCRA”)

Alphabet soup of the “Coronavirus Aid, Relief and Economic Security” (“CARES”) Act got you confused? You already know about, and may have received funds from, various programs of the CARES Act such as the “Paycheck Protection Program “(“PPP”), or the expanded “Economic Injury Disaster Loan Program” (“EIDL”) from the U.S. Small Business Administration (“SBA”).

But are you aware of the FFCRA?  That’s the “Families First Coronavirus Response Act”.  It requires companies that have fewer than 500 employees to provide paid leave to employees for certain Coronavirus-related reasons.  The FFCRA went into effect April 1, 2020, and will remain in effect until December 31, 2020.

WHAT TO KNOW ABOUT THE FFCRA

REQUIRED WORKPLACE POSTER: As of April 1, 2020, a workplace poster from the US Department of Labor is required to be posted and/or sent (e.g., emailed) to employees.  A copy can be obtained from the US DOL.  The English version is available via this link: https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf   The poster is available in several languages, so check the US DOL website for copies that may be applicable for your employees (Spanish, Chinese, Hmong, Korean, Polish, Portuguese, Russian, Tagalog, Thai, Vietnamese).  The US DOL website has other workplace posters too, so while you are there, check to see if there are others that your business may be required to post. https://www.dol.gov/agencies/whd/posters

FFCRA BASICS: Businesses with fewer than 500 employees (“covered businesses”), must give employees paid sick leave if leave is needed due to the coronavirus. However, the rate of pay varies depending on the specific reason for leave.  The amount of leave available to the employee also varies depending on the reason for the employee having to take time off.

There are two sets of leave:  (1) two weeks, i.e., up to 80 hours, and; (2) employees who have been with the employer at least 30 days may also be entitled to an additional 10 weeks of paid expanded family and medical leave if they have to be out in order to care for a child whose school or place of care is closed due to COVID-19 related reasons.  This means some employees may be entitled to up to 12 weeks of paid leave, in certain circumstances.

1.  First two weeks: the employer must give two weeks (up to 80 hours) of paid sick leave at the employee’s regular pay rate (up to $511/day) if an employee is unable to work because they are quarantined (quarantine is by government order or on advice of a health care provider), and/or is experiencing COVID-19 symptoms and is seeking a medical diagnosis.

However, if the employee is unable to work not because the employee is sick, but because: (i) they are caring for someone who is subject to quarantine by government order or on advice of a health care provider, or (ii) if the employee must care for a child younger than 18 whose school or child care provider is closed or unavailable for reasons related to COVID-19, then the employer must give up to two weeks (80 hours) of paid sick leave at two-thirds of the employee’s regular pay rate (up to $200/day).

2.  Additional ten (10) weeks: If the employee is caring for a child whose school or place of care is closed due to COVID-19 related reasons, the employee is entitled to take an additional 10 weeks of paid leave, at 2/3 the employee’s regular rate of pay (up to $200/day).

To help businesses provide paid leave, the FFCRA authorizes tax credits which can lower your tax bill.  Not surprisingly, the IRS has numerous rules about this, so contact your CPA for details.

The FFCRA is just one of several programs created to help businesses and employees manage during the COVID-19 crisis.  If you find yourself overwhelmed or just needing a bit of help navigating the maze, contact a lawyer today.

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Buying (or Investing in) A Brewery in Washington State? A Few Things To Keep In Mind

You love beer.  You’ve been making it at home for a few years, or are working in a brewery, and want to take the leap into running a microbrewery in the Seattle area.  How do you go about doing this? This article looks at a few important steps.

While you are dreaming about how you’ll open best brewery in the region, a good friend asks if you want to invest in his or her own microbrewery. A chance to get in to an existing operation!  It sounds like a great opportunity.  But even though you are friends, don’t forget to do your due diligence. It’s no insult to a solid business relationship to find out as much as possible about what, exactly, you are getting into – if there is resistance to you asking appropriate questions, it may not be the right fit. That said, it’s not uncommon for potential investors or buyers to be asked to sign a non-disclosure agreement (NDA) in order to keep confidential the financial and other proprietary information you want the company to share with you. The conditions can vary from one NDA to the next, so if you haven’t already hired a lawyer to help you navigate things, this is a good time to get one, not least because a properly drafted NDA is a contract.

Due diligence involves looking at a number of items, some of which don’t even relate to whether the beer is any good or how great the potential sales are or even how good or bad the company’s finances are.  For example, is the company’s own corporate paperwork in order?  Is the company complying with local rules regarding employees? Are its licenses up to date with both the state and federal authorities? Are there any outstanding tax or other liens?  What does the lease say about change in ownership of the tenant? Often change in ownership or control of the tenant company is considered a change in the tenant; is the landlord’s permission required for change in the tenant’s ownership? Is failure to get the landlord’s permission deemed a breach of the lease? These are just a few of the issues to consider before thinking about how great the beer will be.

But hold on. Before you can buy (or buy into) a brewery, remember that the state and federal licensing authorities must be notified of and approve the change in ownership.  A change in ownership by as little as 10% means the new investor (you), and the transfer to you, must be approved (see, e.g., Revised Code of Washington 66.24.025). A new owner is subject to background checks; both Washington’s Liquor and Cannabis Board (LCB) and the U.S. Department of the Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) have forms and procedures for this, and the process can take between several weeks and a few months. Even with no criminal background, an investor who is certified to be violating a child support order can be denied approval (or will have an existing license suspended. RCW 66.24.010). In short, without approval from the LCB and TTB, this path ends. Investing as a corporation or an LLC will not get around the requirements; not surprisingly, the LCB and TTB focus on the people who are involved, not just the entities.

Curious?  Stay tuned. But if you are seriously considering investing in or opening your own brewery, don’t wait for more blog posts – consult with a lawyer.  Law Office of Susan K. Fuller, PLLC, susanf@fullerpllc.com

© 2018 Law Office of Susan K. Fuller, PLLC

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Opening a Business? Don’t Forget a Lawyer! Licenses and Leases

Congratulations, you have decided to go into business for yourself! Tired of working for others, and you are ready to take the leap. If you are opening a business in Washington State, there are many things to keep in mind, and a lawyer can bring help make the process more manageable. More importantly, a lawyer can help minimize the chances you’ll make a costly, avoidable mistake.

Funding

If you are not applying for outside funding, you may not yet have put together a business plan. If you haven’t put together a business plan, do start with that. It will help you figure out how to get on a successful path. There are a lot of resources to help you with your business plan. This article does not tell you how to make a business plan. Instead, this and other articles focus on some legal issues to consider before opening for business. By now, you have already decided on a type of entity structure for your business (e.g., corporation, limited liability company, partnership or sole proprietorship). If you haven’t  yet determined the right entity structure, don’t worry, your lawyer will be ready to help you figure out some solutions.  But now, let’s look at licenses and leases.

Licenses

Most people know they need a business license to do business in this state, need to be listed with the Department of Revenue, and Department of Labor and Industries, and possibly also the Secretary of State’s office (depending on entity type you have chosen). But you may also need a license in the city you will be working in. It is safest to assume your business will need to be licensed in your city, but because each jurisdiction handles things a little differently, it’s important to know what your jurisdiction requires.

In addition to a basic business license, do you also need a specialty license? Food and beverage businesses (restaurants, bars, food trucks, artisinal food and small batch producers, etc.) are obvious examples. Be sure to check whether the type of goods and services you will provide have special licensing or permitting requirements in your jurisdiction.

Leases

Opening a storefront or office? Great! You’ll probably be looking to rent. Don’t forget to have a lawyer help you with that process. Leases are legal documents that are important to the lifeblood of your business. Most landlords have lawyers prepare their standard leases, and that lawyer’s duty is to protect his or her client – the landlord. Who will look out for your interests? YOUR lawyer. Level the playing field and have a lawyer on your side.

For example, besides the base rent, what are you – the tenant – expected to pay for? Is it a triple net lease? How long is the initial term – and is there an option to renew? How much will the rent change if the lease is renewed? What happens if the business takes off and you want to move to a different location (or if the business is less successful than you’d like) ; can you terminate the lease early? Is there a penalty to do so? How much notice must you give the landlord if you want to leave? What happens if the landlord sells the building – must the new owner honor your lease, or can you be kicked out? These and many other questions are an important part of negotiating for terms that best suit the needs of your business. Many important terms are in the “boilerplate” sections that cause most normal people to fall asleep. But remember, lawyers are the ones who draft the boilerplate, so get a lawyer on your side.

Unless the space was used for the same kind of items you plan to sell or services you will provide, the space will need some remodeling to suit your needs. Who will pay for that? Tenant improvements are often paid for by the tenant, but sometimes the landlord will contribute, or allow a reduced rent while the space is being renovated.   These issues are typically addressed in the lease.

Try to find out what your jurisdiction requires when a new business is going into a space that will be put to a new use, so you can plan your budget and timeline as realistically as possible. What permits (if any) do you need simply because a different use of the space is planned? Is the space in a location that is zoned to allow the type of business you want to open, or would a variance have to be sought? Is it in an historic building that might have restrictions on what renovations can be done? How much work will be needed to make the space right for you (and what is it estimated to cost)? It is helpful to look into these sorts of issues and consider negotiating for an exit provision in case the building codes prohibit the renovations needed for your particular venture (or make it prohibitively expensive).

As you know, there are a lot of things to be done before ever opening your doors; level the playing field by hiring a lawyer on your team.

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Independent Contractors: What’s the Difference Between an Independent Contractor and an Employee?

Many small business owners would like to know when they can hire an “Independent Contractor” vs. an “Employee.” This article is a modest effort to help clear things up a bit.

What IS an “Independent Contractor”?

First and foremost, and Independent Contractor is a business just like any other in Washington. That means the contractor must have, at minimum: (a) a Uniform Business Identifier (UBI) number, (b) a WA state business license (c) possibly also a business license in the city or town where it conducts business, and; (d) a special license for the type of work being done if a license is required for that trade.

The UBI number establishes an account at the state Department of Revenue – as a business, the Contractor pays Business and Occupation (B & O) taxes.

Let’s say Jane Doe considers herself an independent contractor. She’s an electrician, and a sole proprietor. She advertises her business, makes bids on jobs, is her own boss and sets her own schedule. She owns her own tools. She is a duly trained and licensed electrician. She has a UBI number and a state business license. Jane works in Seattle, so she also needs a Seattle Business license. Since her business is in King County, she should also be registered with a Personal Property account with the King County Assessor’s Office and may (or may not) owe personal property tax on business equipment. Jane’s business is subject to state B & O taxes on gross income. For federal income tax purposes, she may owe Self Employment (SE) tax (similar to tax withheld from a paycheck).

Now let’s look at John Doe. John also considers himself an independent contractor. He’s not an electrician, he is a yoga instructor in Seattle. His friend Mary runs a yoga studio, and John teaches classes there 3 days per week. Mary sets his schedule, and decides which classes he should teach. He does not advertise his services; instead, he relies instead on Mary’s marketing of the studio. He does not have a business license or a UBI number. Mary pays him cash. Both John and Mary are happy with this arrangement.

Is John really an independent contractor? No. Does it really matter, since he’s happy being called an independent contractor? Yes, it matters. If the Department of Labor & Industries (or the IRS) determines that John is not actually an independent contractor, that means he is Mary’s employee, and Mary (or her company), will be liable for paying John’s employment taxes that should have been withheld, will be liable for paying into the state worker’s compensation fund for employee John, and may owe other taxes and fees. Note: for Labor & Industries, a worker is presumed to be an employee unless it can be proven otherwise. This puts the burden on the business owner to show that the worker is listed and paid correctly.

Moral of the story: just calling yourself (or your worker) an “Independent Contractor” does not make it so.

Why is Jane and “independent contractor” and John is not? Because Jane meets the criteria that are used to define an independent contractor. If you are looking to hire an independent contractor, you must look for these criteria. The worker is an independent contractor only if she meets all 6* of them: (1) the worker is free from your “direction and control” (that is, you do not control the means and methods for how to get the job done); and (2) (a) the person performs a service that is outside the course of your business, or (b) the service is performed away from your location or job site, or (c) the contractor is responsible, in contract and in fact, for the costs of her own principal place of business; and (3)(a) she is engaged in her own business of providing the services you are looking to hire for, or (b) she has a principal place of business that qualifies for an IRS business deductio; and (4) she complies with IRS rules for filing a business tax return with the IRS, and (5) she has an active UBI number with the Washington Department of Revenue, and (6) she maintains her own set of books and records showing business income and expenses.

*In addition, those in certain construction trades must also (7) have a valid contractor registration per RCW 18.27 or 19.28. Jane also meets this test.

Washington’s Department of Labor and Industries wants people to understand the rules and the criteria for independent contractors, and has published a handbook to help explain things. It can be found at: http://www.lni.wa.gov/FormPub/Detail.asp?DocID=2134

The Handbook discusses the basic criteria listed above. The Labor & Industry criteria are similar to the ones used by the federal Department of Labor. It is important to understand these criteria, because they are what the relevant agencies will look at. Knowing what the agencies use to define “independent contractor” will help minimize problems for your small business. The last thing any business owner wants is the surprise of extra costs; so get educated about the difference between “independent contractors” vs. “employees”, and plan accordingly.