Washington courts have recently issued a handful of decisions that are instructive to employers.

On July 19, 2012, the Washington Supreme Court issued its opinion in Anfinson v. FedEx Ground Package System, No. 85949-3. The issue before the Court was to determine the proper test for classifying workers as employees or independent contractors for the purposes of the Washington Minimum Wage Act (MWA), RCW 49.46. In Anfinson, FedEx delivery drivers brought an action seeking overtime wages under the MWA. The MWA and its overtime provisions apply to “employees,” but not independent contractors. The parties disagreed on what test should be applied to determine whether the delivery drivers were “employees” under the MWA. The drivers argued that the “economic-dependence” test applies, which looks at whether an individual is dependent economically on the business to which he or she is rendering service. FedEx argued that the “right-to-control” test applied, that is, whether the employer possessed the right to control the alleged employee’s physical conduct in the performance of his or her duties.

The Washington Supreme Court affirmed the Court of Appeals’ determination that the correct standard is the “economic-dependence” test. The Court held: in determining whether someone is an “employee” under the MWA the relevant inquiry is “whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself.” The Court found that because the MWA adopted nearly verbatim the federal Fair Labor Standards Act definition of “employee,” there was a legislative intent to adopt the federal standards in effect at that time. The federal courts had already rejected the right-to-control test in favor of the economic-dependence test. Also, because the MWA is remedial legislation that is to be afforded liberal construction, the Court found that the economic-dependence test provides broader coverage than the right-to-control test.

This clarification of the correct independent contractor test provides employers with helpful guidance as they determine whether to classify workers as independent contractors or employees. It also provides an opportunity for employers to get ahead of potential lawsuits or government investigations, both by properly classifying workers at the outset and auditing their current independent contractor agreements to ensure proper classification under the “economic-dependence” test.

Potential costs to the employer if a worker is misclassified as an independent contractor include:

  • Payment of back pay and overtime compensation going back for a period of two years or more, as well as penalties equaling the amount of back and overtime pay;
  • Payment of the full amount of the worker’s income tax which should have been withheld, both the employer and the worker’s portions of the FICA tax, plus penalties;
  • Damages for failing to provide certain benefits made available to similarly situated employees; and,
  • Liability for attorneys’ fees, criminal sanctions, and other penalties against the employer and, if the employer is an entity, against its corporate officers personally.

In light of this new guidance, and the severe penalties associated with misclassification, we recommend that companies conduct an audit of their existing independent contractor agreements to determine whether the workers should be classified as independent contractors or employees under the Anfinson test. We also recommend that companies consider this guidance when determining whether to enter into a new independent contractor agreement.