Understanding L & I Classifications for Construction Professionals - Its Always a Test
Regardless of how Internal Revenue Service (IRS), Washington Department of Revenue (DOR), or Washington Department of Employment Security (ESD), determine who is a independent contractor, Washington Department of Labor and Industries (L&I) has its own very specific criteria.
In fact, L & I's criteria, in most instances, for who qualifies as an independent contractor, such that no workers compensation taxes are owed, is far stricter than any other federal or state agency.
Labor and Industries will allow an individual to be considered an independent contractor or a “noncovered” worker if that individual satisfies either RCW 51.08.180 or RCW 51.08.181 (for construction trades) or RCW 51.08.195 (for nonconstruction trades).
Both RCW 51.08.181 and RCW 51.08.195 require each independent contractor to pass six separate tests. Each of the six tests must be passed, and failure to pass one test, means that the independent contractor will be deemed a covered worker and workers compensation premiums will be owed. That being said, some of the six tests have individual subparts, and, so long as one subpart of a test is satisfied, that entire test will be considered satisfied.
The six tests of RCW 51.08.181 and RCW 51.08.195 are as follows.
- First Test-(1) The individual has been and will continue to be free from control or direction over the performance of the service, both under the contract of service and in fact;
- Second Test- (2) The service is either outside the usual course of business for which the service is performed, or the service is performed outside all of the places of business of the enterprise for which the service is performed, or the individual is responsible, both under the contract and in fact, for the costs of the principal place of business from which the service is performed; (Note: Only one of these three subparts must be satisfied)
- Third Test-(3) The individual is customarily engaged in an independently established trade, occupation, profession, or business, of the same nature as that involved in the contract of service, or the individual has a principal place of business for the business the individual is conducting that is eligible for a business deduction for federal income tax purposes; (Note: Only one of these two subparts must be satisfied)
- Fourth Test-(4) On the effective date of the contract of service, the individual is responsible for filing at the next applicable filing period, both under the contract of service and in fact, a schedule of expenses with the internal revenue service for the type of business the individual is conducting; and
- Fifth Test-(5) On the effective date of the contract of service, or within a reasonable period after the effective date of the contract, the individual has established an account with the department of revenue, and other state agencies as required by the particular case, for the business the individual is conducting for the payment of all state taxes normally paid by employers and businesses and has registered for and received a unified business identifier number from the state of Washington; and
- Sixth Test-(6) On the effective date of the contract of service, the individual is maintaining a separate set of books or records that reflect all items of income and expenses of the business which the individual is conducting.
RCW 51.08.181, which only applies to the construction industry, has a seventh test which must be satisfied.
- Seventh Test-(7) On the effective date of the contract of service, the individual has a valid contractor registration pursuant to chapter 18.27 RCW or an electrical contractor license pursuant to chapter 19.28 RCW.
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