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CLIENT ALERT: Independent Contractor or Employee?

CLIENT ALERT

Independent Contractor or Employee?

Colorado Court of Appeals Further Clarifies the Totality of the Circumstances Test for Independent Contractor Status

On July 27, 2017, the Colorado Court of Appeals issued a decision in Varsity Tutors, LLC v. Industrial Claims Appeals Office, Case No. 16CA1358, 2017COA104.  The decision provides a detailed explanation of the totality of the circumstances test to be applied when determining whether a worker is “customarily engaged in an independent trade, occupation, profession, or business related to the service performed” and, therefore, is an independent contractor, rather than an employee, for purposes of the Colorado Employment Security Act, §§ 8-70-101 to 8-82-105 (“CESA”).  If a worker is an employee under CESA, the employer is required to pay unemployment taxes on any wages paid to the employee. 

CESA establishes the test that courts and the Colorado Department of Labor (“CDOL”) use to determine whether a worker is an employee or an independent contractor.  The statute provides that generally, “service performed” by one worker for another person “shall be deemed to be employment.”  8-70-115(1)(b).  However, the statute further provides two ways that a business can show that a worker is an independent contractor.  The first possible way is for the business to demonstrate both that the worker was (a) “free from control and direction in the performance of the service” and (b) “customarily engaged in an independent trade, occupation, profession, or business related to the service performed.”  8-70-115(1)(b), (c).  The second possible way is for the business to show, in a written document signed by the business and the worker, that the business did not do nine different things with regard to the worker.  These nine things are enumerated in 8-70-115(1)(c)(I)-(IX), and listed below as part of the totality of the circumstances test.  The only aspect of the statutory test addressed in Varsity Tutors is the “customarily engaged” analysis, since the parties conceded that the “free from control and direction” test was not at issue and the contract did not on its face meet the statute’s requirement that the provisions identifying that the worker is responsible to pay income tax and is not entitled to unemployment insurance benefits must be in bold or underlined type or in larger font than the rest of the document. 

In Varsity Tutors, the Court of Appeals applied and fleshed out the Supreme Court’s guidance on determining whether a worker is “customarily engaged in an independent trade, occupation, profession, or business related to the service performed” provided in Industrial Claim Appeals Office v. Softrock Geological Services, Inc., 2014 COA 30. 

Next, the Varsity Tutors panel proceeded to enumerate the eight factors relevant to the analysis in the case of Varsity Tutors, LLC.  The eight factors, and the panel’s determination of their relevance to the analysis, are as follows:

  1. Did the contract include provisions clarifying that the worker is responsible to pay state and federal taxes and that the company independent contractor relationship/requirements, even if those provisions were not underlined, bolded or in larger font size?
  2. Are there other provisions in the agreement that demonstrates that the worker is an independent contractor?
  3. Do the nine factors enumerated in 8-70-115(1)(c)(I)-(IX) weigh in favor of the worker’s status as an independent contractor?  The nine-factor statutory test looks to whether the written agreement demonstrates “that the person for whom services are performed does not”:
  4. Require the individual to work exclusively for the person for whom services are performed; except that the individual may choose to work exclusively for the said person for a finite period of time specified in the document;
  5. Establish a quality standard for the individual; except that such person can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed;
  6. Pay a salary or hourly rate but rather a fixed or contract rate;
  7. Terminate the work during the contract period unless the individual violates the terms of the contract or fails to produce a result that meets the specifications of the contract;
  8. Provide more than minimal training for the individual;
  9. Provide tools or benefits to the individual; except that materials and equipment may be supplied;
  10. Dictate the time of performance; except that a completion schedule and a range of mutually agreeable work hours may be established;
  11. Pay the individual personally but rather makes checks payable to the trade or business name of the individual; and
  12. Combine his business operations in any way with the individual's business, but instead maintains such operations as separate and distinct.
  13. Decisive weight may not be placed on any particular factors; rather, all factors must be considered under the totality of the circumstances test.
  14. All undisputed evidence must be considered; evidence cannot be wholly dismissed or entirely overlooked under the totality of the circumstances test.
  15. The single factor of whether the workers provided similar services to a company other than the employer-company cannot be dispositive.
  16. Any applicable case law from other jurisdictions should be considered.
  17. “[T]he Internet Age is changing how people work,” so archaic notions of how an independent contractor would demonstrate non-employee status should not be inflexibly required.

Finally, the Varsity Tutors panel applied the undisputed evidence to the totality-of-the-circumstances test factors, and ultimately concluded that the workers were independent contractors. 

Important Take-Away Points from Varsity Tutors

  • Review and revise language and formatting of independent contractor agreements
    • Including underlined, bolded or larger-font sized disclaimer provisions in an independent contractor agreement that the independent contractor is not entitled to unemployment insurance benefits unless unemployment compensation coverage is provided by someone other than the company and that the independent contractor is obligated to pay federal and state income tax on monies earned pursuant to the agreement  creates a rebuttable presumption that the worker was an independent contractor.
    • Even if the disclaimers regarding unemployment compensation coverage and payment of income tax are not formatted differently from the rest of the agreement, so long as the agreement contains those provisions and the other specified items in 8-70-115(1)(c)(I)-(IX), the determination of independent-contractor status will end there. 
    • Only where an independent contractor agreement does not strictly adhere to the statutory requirements explained in the above two bullets does the decision-maker need to turn to the totality-of-the-circumstances test.
  • The totality of the circumstances should be considered.
    • The Colorado Supreme Court and the Court of Appeals have both signaled that the analysis of whether a worker is an independent contractor should not disproportionately rely on certain factors that may be identified in a statute or a case.  Instead, all undisputed facts regarding the relationship between the worker and the company should be considered.

Other Jurisdictions

Companies doing business with independent contractors in jurisdictions other than Colorado may have fewer factors to consider to ensure the independent contractor status of the worker.  For example, New Mexico law defines the distinction between an independent contractor and an employee by considering only three factors.  N.M.S. § 51-1-42(F)(5).  See also Solar Age Mfg. Inc. v. Employment Sec. Dept., 714 P.2d 584, 585 (NM 1986) (applying statutory definition of “employment”); Korba v. Atlantic Circulation, Inc., 231 P.3d 118, (N.M. App. 2010) (referencing Solar Age and noting that there, the Supreme Court did not supplement the test with the Section 220(a)-(j) Restatement right to control factors).

On the other hand, in an approach more similar to Colorado, Texas decision-makers analyze the totality of the circumstances with regard to a twenty-factor test to determine whether a worker is an employee or independent contractor.  See Texas Administrative Code, Texas Workforce Commission, §§ 815.134, 821.5; see also Texas Labor Code § 201.041 (“‘employment’ means a service, including service in interstate commerce, performed by an individual for wages or under an express or implied contract of hire, unless it is shown to the satisfaction of the commission that the individual's performance of the service has been and will continue to be free from control or direction under the contract and in fact.”). 

Conclusion

If your company maintains agreements with independent contractors, BHGR can assist in advising on how those agreements may be viewed under Colorado’s statutory and totality of the circumstances tests, and whether you may be at risk of liability for payment of unemployment compensation insurance premiums for workers you consider to be independent contractors.