September 22, 2017
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:
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
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.”).
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.