The Builders Counsel: A Construction Law Blog from Washington Construction Lawyer & LEED AP Douglas S. Reiser

The 1099 game does not always work. Watch out for unintentional employees.

There has been a long standing rule that unregistered contractors cannot recover payment of contract sums for construction work. The theory is that a person or entity cannot actually perform construction work unless they are registered. If they cannot legally perform the work – they cannot legally obtain payment if they do it. Its like asking to be paid to steal cars. It cannot happen.

But, over the past few year I have noticed an epidemic in the contracting world: Contractors hiring people as 1099 “contractors”. Unfortunately, the 1099 game is a dangerous one, which could land you in trouble with Washington’s Labor &Industries, Employment Security Division, Department of Revenue, and courts.

Its time to discuss this contractual fallacy and dispel the rumors that this is a way around paying workers.

The Unregistered Contractor & Its Claims.

Here is the likely scenario: You have a registered contractor. He gets work and needs to hire laborers. He decides that a laborer is cheaper as a contractor, where he believes that he can avoid payroll taxes, insurance and other liabilities. So, he seeks out and hires 1099 “contractors.”

Unfortunately, many 1099 “contractors” are not registered as contractors. If you are not registered, take on the role of a 1099 “contractor,” and perform construction work – you are generally perceived as an unregistered contractor. In this scenario, you cannot file a lien (See RCW 60.04.041) or a lawsuit to recover payment of your contractual compensation (See Stewart v. Hammond, 78 Wn.2d 216, 219, 471 P.2d 90 (1970)).

So, are workers left in the cold? Does the hiring contractor get off, without having to pay these workers? Probably not.

When You Are an Employee & Not an Unregistered Contractor.

There is one potential argument that you can make to obtain compensation – that you are an “employee” under state law. While it is true that an unregistered contractor cannot file a lien for contract sums unpaid, an employee can file a lien for its unpaid wages, seek a lawsuit for wage claims and even make a claim against a contractor’s bond. This is in addition to the many penalties that can be levied against a registered contractor for failing to pay benefits, insurance and wages to an employee.

There is a long line of cases that determine what defines an employee versus an independent contractor. The law has been created for the purpose of preventing employers from avoiding worker rights and skirting responsibility for workers compensation, unemployment insurance and proper wages.

But, its very difficult to determine whether a worker is an employee or contractor, what with several statutes to give us a definition.There are definitions of an employment situation within the statutes of the Contractor Registration Act (RCW 18.27.090(15)), Wage & Hour Act (RCW 49.48.082), Industrial Insurance Statute (RCW 51.08.070), and Unemployment Statute (RCW 50.04.080). Its not easy to tell when a worker is an employee.

In the end, its best to start with the old common law definition of “servant” when determining your role Massey v. Tube Art Display case is a good start. This case indicates that there are several factors to consider when determining whether or not you are an employee or contractor. The list is a bit extensive for listing here, but Massey noted that the single most important factor is control, or supervision. If you are supervising these workers directly, then they might be considered employees.

In most circumstances, a contractor laborer is an employee.  L&I has even established a 5 point test for determining whether the worker meets the threshold for wages, workers compensation and unemployment. Though L&I’s publication does not perfectly meet the tests established by the courts, its a good start to determining whether a worker is an employee.

A hiring contractor should ask itself the following 3 questions:

1. Is the worker bringing other workers or heavy equipment? If yes, then the hiring contractormight be ok, if the hiring contractor is compensating them beyond wages, they are supervising themselves, they are providing something more than just labor, and they comply with #3 below. If not, proceed to #2

 

1. Is the hiring contractor supervising or exerting control over the workers? Supervision is direction or control over the work. If yes, then the hiring contractor is most likely the worker’s employer. If no (it is not ok to simply rely on the worker’s registration as a contractor), proceed to #3.

 

1. Does the worker have an established business? Even if you make it through those hoops, the hiring contractor will need to comply with the proper business activity prong. This requires that the worker has an independent business, supervises itself, a separate office location, its own books, pays taxes and, most importantly, its properly licensed and registered as a contractor. If these all apply – the worker is probably a contractor.

In most cases, an employment relationship is the general outcome. 1099 “contractors” are often hired to provide strictly labor and cannot meet all the prongs of a proper business. If that is the case, the worker may be exempt from contractor registration obligations under RCW 18.27.090(15). If the worker is exempt, it may have recourse to recover wages and may file a lien for the performance of labor on a construction job.

Liens & Bond Claims for Unpaid Wages to Employees.

If a worker is deemed to be an employee for purposes of insurance and wages, there are several resulting concerns for the hiring contractor:

 

• Pay Wages – The employer must comply with the Wage & Hour Act in paying the contractor. This means meeting minimum wage and overtime requirements.

 

• Pay Industrial Insurance – The employer must report the worker’s hours and pay premiums to cover the worker’s time on the job.

 

• Pay Unemployment – The employer must report the worker’s hours and pay premiums to cover the worker’s time.

 

• Face Wage Complaints & Lawsuits – The employer may face a wage complaint via L&I or a lawsuit in a court of law. Claims under $5,000.00 can go before a small claims court and most of the time the hiring contractor will be responsible for additional penalties and attorneys fees.

 

• Face Liens & Bond Claims – The worker may file a lien against the job and seek recovery against the hiring contractor’s bond.

The lesson of this article is that there are major concerns for hiring contractors and that there is hope for unregistered laborers being forced into 1099 relationships.

The Lesson for Hiring Contractors

Contractors should take care to ensure that they do background checks on their 1099 contractor workers, to ensure that they have an established business that is registered. A subcontractor agreement should memorialize the 1099 contractor’s obligation to supervise itself and its workers.

The Lesson for Unpaid Workers

Laborers who have been taken advantage of by contractors should know that they do have rights to recover their wages. They should consult with an attorney, immediately after being denied payment. Remember, you only have 90 days from your last day of work to file a lien, and preserve your right to payment.