Business owners often attempt to categorize workers as independent contractors rather than employees. Many employers improperly assume that simply labeling a worker as an independent contractor will suffice. That is an extremely risky assumption. Incorrect designations can result in significant financial consequences to the employer. Administrative agencies and courts will look at the totality of the circumstances before accepting the designation of a worker as an independent contractor. With knowledge and careful drafting, employers can minimize these risks.
There are several advantages for the independent contractor designation. An employer is legally responsible for the acts employees perform during the course of their work. That is not generally the case with independent contractors. Employers must contribute to unemployment insurance, workers compensation insurance and Social Security funds, and withhold state and federal tax payments. These requirements do not exist with independent contractors.
The most basic definition of an employee is whether the employer has the right to exercise direction and control over how the work is to be performed. (In this article, the term “employer” refers to a person or company who hires a worker whether the worker is an employee or an independent contractor.) Employers control certain aspects of both employees and independent contractor’s work. Independent contractors are properly subject to that control sufficient to ensure that the end result contracted for is reached. But they are not subject to control over the means and methods of accomplishing the result. Conversely, if the employer controls not only the end result of the job, but also the details of accomplishing the end result, then the worker is an employee.
This test appears simple and obvious in the abstract, but has been the subject of many disputes over the years. Colorado statutes and case law contain many important factors to consider. It is important to remember that while some factors are more important than others, no single factor is decisive.
The Colorado Supreme Court recently reviewed the statutory factors regarding unemployment insurance, and reiterated that there is no simple litmus test for categorizing a worker as an employee or contractor. In the Softrock decision, issued on May 12, 2014, the Colorado Supreme Court wrote:
“We conclude that rather than requiring a rigid check-box type inspection, a more accurate test to determine if an individual is customarily engaged in an independent business involves an inquiry into the nature of the working relationship…[W]hether an individual is customarily engaged in an independent business is a question that can only be resolved by applying a totality of the circumstances test that evaluates the dynamics of the relationship between the putative employee and the employer; there is no dispositive single factor or set of factors.”
Prudent business owners will recognize these factors and help to manage their risk by shaping the relationship so that it corresponds with the designation of employee or independent contractor depending upon the desired outcome. Drafting an independent contractor agreement can be helpful, but may not always be conclusive. Moreover, the employer must be very cautious to not impose detailed job and performance requirements. Such details actually create the direction and control that could lead to the conclusion that the worker is an employee.
The attorneys at Altitude Community Law P.C. can provide guidance to employers about these issues and drafting independent contractor agreements. If you would like more information please feel free to contact our Business Law Group partner, David A. Closson at [email protected].