Over the years, companies both large and small — from FedEx and Microsoft to the local gym — have found themselves in deep water due to the misclassification of contractors. They use contractors as “part-time” or “overflow” workers, and those workers don’t meet the criteria to be classified as contractors. This past year, Google has been met with some negative media attention around its treatment of independent contractors. A recent article in Fast Company sheds light on the policies and procedures that Google uses to treat temps, vendors, and contractors (TVCs) as independent contractors rather than employees. A Google training document entitled “The ABCs of TVCs,” which lists policies and procedures for working with TVCs, was referenced in the article. Fast Company and other media have criticized the document and feel it unfairly promotes different treatment of independent contractors versus full-time employees aka ‘Googlers’. However, the article’s depiction of the treatment of independent contractors is not quite accurate.
The distinction between independent contractors and employees is intentional and clear under both state and federal law. As you hire human resources, you need to know the differences and structure the relationship correctly. In addition, you must properly document and manage the relationship in light of the classification of the worker. Both legal and tax issues surround these decisions. Fortunately, both the IRS and Washington State Department of Revenue have very specific guidance as to what characteristics qualify a party as an “independent contractor”. A contractor must operate its own business, file its own separate taxes and be outside of the direction and control of the hiring party. A good example of a contractor is your graphic design firm or IT firm that performs functions outside of your core business. If the role is one where you want to manage the what, where and how of the work, the worker is likely an employee.
One risk to a business is in an audit situation. If the taxing authority finds that you have misclassified an employee as a contractor, you will be responsible for back taxes and penalties associated with the amounts paid to the contractor. In addition, you could face risk when a contractor makes a claim for benefits. The liability your business carries as an employer compared with a contract relationship is very different with respect to worker’s compensation, unemployment insurance, and work product. Your contracts and policies must be clear for each and uniquely tailored to address these different risks.
The IRS Publication 15-A: Employer’s Supplemental Tax Guide and Washington State’s Department of Labor and Industries Independent Contractor Guide [https://www.lni.wa.gov/IPUB/101-063-000.pdf] provide information to help you ensure your “independent contractor” actually is one. For more information, you can also see our blog post: https://equinoxbusinesslaw.com/business/independent-contractor-vs-employee-classification/
Going back to Google’s policy, Google is right in its intentional disparate treatment of employees and contractors because these workers are legally different – and Google will be in better shape to defend their position because it’s clearly documented and communicated throughout the company.