or
EE?
For small business owners
Independent Contractors
& Employees
Navigating the differences — aligning expectations and improving communication with your bookkeeper.
Presented by Monica Colgan · April 10, 2026
What we'll cover.
- 01Why Correct Classification Matters
- 02Independent Contractor or Employee?
- 03Misclassification — Penalties & Risks
- 04Minimum Wage, Tips & Service Charges
- 05Rest Periods, Meal Breaks & Time Off
- 06Family Care Act & Protected Leave
- 07Independent Contractor Ordinance
- 08Key Takeaways
Their mission: keep Washington safe and working.
Dedicated to the safety, health, and security of millions of Washington workers.
Worker Health & Safety
Protect the health and safety of workers across every industry.
Injured Worker Support
Medical care and financial help for injured workers.
Wages, Hours & Breaks
Protect workers' wages, hours, and breaks.
Public Safety
Protect the public from unsafe work environments.
All local businesses have a responsibility to correctly classify workers.
Both employees and contractors!
Of U.S. employers have misclassified at least one worker.
Food service and agricultural workers are among the lowest paid in King County — despite our high minimum wage.
A worker is at risk of poverty when they don't have enough money to pay monthly expenses like food, rent, and utilities. Financial protections are rights.
Characteristics of an Independent Contractor.
Self-Employed
A person or business who operates an independent trade — and is self-employed.
Multiple Clients
Provides services to the general public or to multiple entities — not just to you.
Works Under Agreement
Generally provides goods or services under a specific written agreement.
Free from Control
- Sets their own schedule
- Uses their own tools & equipment
- Works where they like
- Decides how to do the work
In short… they are in business for themselves.
Ask yourself…
If you can answer "yes" to most of these, the worker is likely a true contractor:
- 01Can they come and go as they please?
- 02Do they have the required business licenses?
- 03Do they pay state sales + excise taxes?
- 04Do they maintain their own books and records?
- 05Do they invoice you?
- 06Do they perform this service for other clients?
Characteristics of an Employee.
Not Self-Employed
Does not operate an independent trade or business of their own.
Single Employer
Does not provide services to the general public or to multiple entities.
"At-Will" Laws
Generally provides services under "at-will" employment laws.
Can Be "Controlled"
- Their work schedule (as agreed)
- Tools & equipment they use
- Required to work at your location
- Must follow your procedures
You own a coffee shop and you want to sell cookies…
- Cookies are made at your kitchen using your oven
- Uses the recipe you provide
- Has a set schedule
- Reports to you
- Paid by the hour (or salary)
- Bakes cookies at their facility
- Has a wholesale license to sell to you
- Uses their recipe
- Delivers the completed product to you
- You mark them up and resell
- Provides you with an invoice
- Paid per cookie
- Has other clients
Strongly consider an employee classification when any of these are true.
- 01They have a set work schedule — or you control their schedule.
- 02They only work for you, or only do this type of job when working for you.
- 03They come to your workplace and use your tools to make your products or perform your services.
- 04You tell them how they should do their job.
- 05They don't have their own business license and don't pay excise taxes.
Note: Almost all shift workers should be classified as employees — unless they're provided through an agency (and they're likely the agency's employee, not yours).
Who cares about correct classification?
Internal Revenue Service (IRS)
Department of Labor & Industries
Employment Security Department
Employees themselves
Plus advocacy & oversight orgs
Employees are entitled to many state-mandated benefits.
If a worker is misclassified as a contractor, they lose access to these protections. Once correctly reclassified, they're entitled to:
- Minimum wage
- Overtime pay
- Employer Social Security & Medicare contributions
- Paid sick leave
- Paid rest & meal breaks
- Paid Family Medical Leave
- Workers' compensation
- Unemployment insurance
- Employer-sponsored benefits
Pay stubs help employees with employment verification for housing, car loans, home loans, and more.
It is very easy for people to file workplace rights complaints.
A few clicks. That's it.
The Washington Department of Labor & Industries operates an online wage complaint system. Any worker (current or former) can file in minutes.
"Keep yourself out of trouble by correctly classifying your employees as employees, and Independent Contractors as Contractors."
Penalties for misclassification.
Penalties can include any combination of the below. The exact mix depends on the violation and intent.
- Repayment of back taxes
- Repayment of missed overtime
- 100% of FICA taxes you didn't pay for the employee
- Up to 40% of FICA taxes the company failed to withhold
- Benefits & insurance repayment
- Includes paid leave, pension plan, workers' comp, severance pay, unemployment insurance, etc.
- Damages
- Fines up to 3% of the misclassified employee's wages
- Up to $1,000 per misclassified employee
- Class-action lawsuits + punitive damages + attorney fees
- Intentional misclassification to avoid tax → jail time is on the table
- Lasting reputational harm
Washington State minimum wage for employees.
$17.13 /hr
Applies to all workers in WA.
$21.30 /hr
Higher minimum within city limits.
- 01Overtime at 1.5x normal hourly rate (incl. dairy & agriculture).
- 02Minimum wage for a salaried worker exempt from overtime: $80,168.40/yr.
- 03Minimum compensation = hourly wage + tips + employer healthcare cost.
- 04Pay minimum wage for all hours worked — including opening/closing, trainings, and meetings.
Tips & gratuities — the rules.
- 01Must pay all tips to employees.
- 02Tips may not replace wages.
- 03Tip pools may not include salaried-exempt managers or business owners.
- 04Reporting tips — both credit card and cash.
- 05Tips can be paid out when earned or on the paycheck.
- 06Required to withhold taxes from tips.
- 07Not paying workers tips provided by customers constitutes wage theft.
Service charges.
A mandatory fee charged to customers for services that an employee provides.
- To customers, service charges may look like a tip — disclosure matters.
- Must clearly disclose on receipts and menus who receives the service charge.
- Service charges include mandatory gratuities and delivery charges.
Specific to businesses providing food, beverage, entertainment, and porterage services:
- Restaurants · Catering houses
- Convention centers
- Hotels, motels, overnight services
Surcharges unrelated to employee services (fuel, late, cancellation, parking) are not service charges.
Prohibited employment restrictions.
Can't restrict outside work…
Employers cannot restrict an employee's outside employment or self-employment unless they're paid more than 2× minimum wage.
In 2026, that threshold is $34.26/hr or $71,260.80/yr.
Non-compete agreements.
Only allowed if:
- Employee paid more than $126,858.83/yr
- Independent contractor paid more than $317,147.09/yr
- Exception: clear conflict of interest
Paying wages.
Pay frequency and allowable deductions.
Establish a regular payday.
No less frequent than monthly.
Beyond taxes, allowable deductions from gross wages:
- Agreed in advance, in writing, for deductions benefitting the worker.
- Short till, theft, damage — NOT permitted except for incidents in the final pay period that don't reduce wages below minimum AND were caused by a dishonest or willful act.
Always depends on specific details. Call L&I first.
Family Care Act & Protected Leave.
- 01WA Paid Family & Medical Leave Program (RCW 50A.04) — required for all employees. Administered by WA ESD.
- 02WA State Family Care Act (RCW 49.12.270) — uses paid time off or paid sick leave to care for qualifying family members. Cannot be used for the employee's own medical condition. Employers cannot dictate which leave type is used.
- 03WA Domestic Violence Act (RCW 49.76).
- 04Leave for Spouses of Military Personnel (RCW 49.77).
- 05Leave for Certain Emergency Services Personnel (RCW 49.12.460).
More info: lni.wa.gov/Workers-Rights/Leave/Family-care-Act · L&I Protected Leave specialist: (360) 902-4930
Vacation, holidays, rest periods & meal breaks.
- Not required by WA law.
- May not deduct holiday/vacation time from an overtime-exempt salaried worker who shows up for any amount of time in a day.
- Must be paid.
- 10 minutes every 4 hours.
- Given by the end of the 3rd hour into a shift.
- Must be paid if on duty or on call.
- Required: 30 minutes for every 5 hours worked.
- Should fall between 2nd and 5th hour of the shift.
Minor employees (under 18) and agricultural workers have different rules. Verify with L&I before scheduling.
Equal Pay & Opportunities Act.
- 01Provide equal pay and career advancement opportunities without regard to gender.
- 02Cannot mandate salary or wage secrecy.
- 03Cannot ask for salary history from applicants.
- 04If you have 15+ employees, job announcements must include the full salary/wage range plus a description of compensation and benefits.
Independent Contractor Ordinance.
In 2022, the City of Seattle implemented an ordinance to give rights to Independent Contractors. If you work with ICs in Seattle, you must:
- 01Provide disclosures prior to entering into a contract.
- 02Provide timely payment per the pre-contract disclosure — or within 30 days of contract performance.
- 03Provide a disclosure at the time of payment.
- 04Provide contractors with a Notice of Rights poster.
Key takeaways.
Independent contractors are self-employed business owners — they pay taxes, hold a business license, and are generally free from your control.
Employees are not self-employed. They have workers' rights, must follow your rules and guidelines (within reason), and you collect and pay taxes on their behalf.
Misclassification carries penalties from multiple government bodies — IRS, L&I, ESD — including back taxes, fines, lawsuits, and (in extreme cases) jail time.
Keep yourself out of trouble by correctly classifying employees as employees and contractors as contractors.
Class
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