In recent years, legislation in several states has attempted to clarify the distinction between an independent contractor (IC) and an employee. The gig economy has generated a wide variety of opportunities for about a third of America’s workforce. Mixing the definitions of ICs and employees has created controversy in various states. Here’s a look at how these contractor law changes impact ICs and contractor insurance in Seattle, WA.
IC Vs. Employee—Why It Matters
Traditionally, an IC has been an individual who is their own boss and is outsourced by a separate entity, whereas employees work directly for employers. Usually, an employee is paid a regular salary or hourly wage based on a work schedule. An IC is typically paid based on completing a particular service at a pre-determined rate.
Companies that classify workers as ICs often do so to pay lower wages without benefits. Union leaders have criticized these non-union jobs in the gig economy as exploitation of labor at low cost. Various new gig economy firms have risen in popularity online because they are able to undercut the market partly by hiring cheap independent labor.
Federal Laws & Regulations for ICs
Both the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) view the IC vs. employee debate as a misclassification issue. In other words, certain employees are being misclassified as independent contractors in the workforce across several states. Rideshare companies Uber and Lyft have been targeted in the controversy of using ICs as employees with specific work schedules.
In September 2020, the DOL proposed an “economic reality” test to distinguish between ICs and workers. This test examines the nature of the work and how much control is given to the individual. Here are the ABC test factors:
- A: worker is free of hiring entity’s control and direction
- B: worker performs assignments outside of the buyer’s physical establishment
- C: worker engages in independent trade with other entities
State Laws and Regulations
Part of the confusion surrounding the debate that impacts contractor insurance in Seattle, WA, is that in some cases, state laws do not coincide with federal laws regarding job classification. Another part of the confusion is that a worker’s classification may require research since it’s based on multiple factors. Washington’s state website provides help in determining whether you should be classified as an IC or an employee in the state.
Classifying Ride-hailing Drivers
The misclassification debate centers on the business relationship between companies and outsourced independent services. Many times, ICs are willing to work for lower than minimum wage just to get work. In the process, they forfeit benefits, such as workers’ comp, health insurance, and a retirement plan. These workers typically aren’t covered under anti-discrimination or even safety laws.
Independent Contractor Laws Vary
Businesses that misclassify workers are facing fines and other penalties in some states. At the same time, rideshare drivers often choose independent work because it gives them freedom and enough cash to pay bills. So it’s still unclear how the IC vs. employee debate will evolve. IC laws are different from state to state. Some states are more friendly than others toward independent contract work.
The IC vs. employee definition debate is escalating in some states. For now, you should be concerned about how this debate affects ICs and contractor insurance in Seattle, WA. Do you have sufficient protection in case you are injured on the job? Contact us at Humble & Davenport Insurance to learn more about your coverage options, whether you’re an employee or independent contractor.