State of Wisconsin’s Strict Independent Contractor Classification Rules
The majority of states have adopted the so-called ‘ABC test’ to classify workers as employees or independent contractors (ICs). Yet, in an effort to ensure there is no room for error, the state of Wisconsin is adhering to a higher, self-imposed standard. Wisconsin has elected to evaluate IC classification controls against nine factors and, similar to the ABC test, requires a worker to meet all nine factors in order to qualify. Let’s examine the differences between the widely-used ABC test and Wisconsin’s nine factor test.
First, a recap of the ABC Test. This test has 3 parts to it:
- Who maintains control over the work? The IC or the hiring organization’s supervisors?
- Is the work being performed outside the normal course of the hiring organization’s business?
- Does the IC maintain other ongoing clients or is the hiring organization the IC’s only source of revenue?
To be deemed legitimate ICs, the workers have to meet all 3 of the conditions. They must be fully autonomous. They must not be required to work according to hiring organization’s time structures. The must be able to demonstrate they are not solely employed by just one organization. Often the most challenging condition to meet is the third in this list. Workers cannot simply elect to become an independent contractor. Instead they must be established as one previously which means they must actively be soliciting contract work from a wide enough array of unrelated businesses or organizations.
What Wisconsin is doing adds additional defining requirements to the classification process to ensure that certain key functions of a true IC aren’t being glossed over in the process. First evaluated in the Wisconsin process is control. Similar to the widely adopted ABC tests, the control test simply measures whether the worker is under the control or director of the client/employer or if they are free to control the work being produced. Very similar to the first of the three ABC test questions. Then things get a bit more granular.
To classify as an independent contractor in Wisconsin, that state requires an IC to:
- Maintain a separate licensed business including a published advertisement
- Specifically, posting of a resume or LinkedIn profile promotes the worker as looking for an employment situation (as opposed to positioning the worker as a business in a B2B relationship) and therefore specific advertising of the business in the form of webpages or marketing collateral is required.
- More broadly, the worker has to make their services available to other organizations. A worker such as a real estate agent or insurance sales person would not qualify.
- Obtain a federal EIN from the IRS and/or file self-employment income tax returns in the previous year;
- Produce specific contracts outlining the work to be performed as an independent contractor;
- Assume responsibility for operating expenses under those contracts and have it documented as such. Note the costs have to be greater than education and training;
- Be responsible for satisfactory work performance or provide re-work at their own cost;
- Receive payment per contract, per job or competitive bid;
- Be subject to profit and lost in performing the work (other than not receiving payment);
- Have reoccurring business liabilities and obligations such as rent, payroll, insurance premiums;
- Be in a position to succeed or fail when expense exceeds income;
Similar to California, Wisconsin has imposed specific state fines to fine for willful misclassification or those who provide false information to their Department of workforce development with $25,000 fines for each occurrence. These nine factors are far more stringent and require an IC to meet a threshold much more aligned with the actual, functional requirements typically shouldered by a bona fide IC. By instituting this more thorough set of requirements, Wisconsin may be making it more difficult for workers to achieve IC status. But at the same time, this stricter regimen yields an environment far more likely to prevent IC misclassification and the severe penalties and fines that often accompany misclassification cases.For tips to avoid worker misclassification, click here.These guidelines, while law in Wisconsin, are not required in other states. However, organizations with the desire to enact and maintain stronger compliance processes may wish to adopt this nine-point standard as a way to ensure they protect themselves from costly challenges.