By Mark Wiletsky
Organizations sometimes hire independent contractors, instead of employees, to perform various tasks. Such arrangements avoid the costly payroll taxes, paperwork, and other benefits associated with employees. But determining who truly fits the definition of an “independent contractor” is not always easy because there is no uniform or bright-line test. And the consequences for misclassifying someone as a contractor, even if the mistake is unintentional, can be severe. A recent case from the Colorado Court of Appeals sheds some much needed light on this area, providing important lessons and guidance for companies that hire independent contractors.
Facts
Long View Systems Corporation hired independent contractors to provide computer consulting services for other companies. Even though the consultants signed agreements stating they were independent contractors, one consultant (Gino Lucero) filed for unemployment benefits at the end of his three-month stint for Long View. Lucero claimed that he and other Long View consultants were actually employees.
Long View challenged Lucero’s claim, but the hearing officer and appeal panel ruled in Lucero’s favor. Long View then appealed once again, this time to the Colorado Court of Appeals.
Court of Appeals’ Analysis
On appeal, Long View argued that its written contract proved Lucero was an independent contractor, not an employee. The Court of Appeals disagreed. To prove that Lucero was not an employee, Long View had to show that he was: (1) free from control and direction in the performance of the service, and (2) customarily engaged in an independent trade, occupation, profession, or business related to the service performed for Long View.
Although a written contract can support independent contractor status, Long View’s contract did not meet the criteria set forth in the unemployment statute. The contract showed that Long View paid Lucero personally, by the hour. The statute, however, generally requires payment to be made to a trade or business name, at a fixed or contract rate. Nevertheless, the Court of Appeals concluded that a new hearing was warranted based on the other evidence presented below.
Customarily Engaged in an Independent Business
The hearing officer concluded that Lucero was not “customarily engaged” in an independent trade because he did not work for others while providing services to Long View. But because Lucero worked for such a short period of time, the Court of Appeals concluded that his lack of contemporaneous work for others was not determinative.
A number of factors must be analyzed to determine whether Lucero maintained an independent business, including whether he: engaged in a trade or business separate and apart from any relationship with a particular company, that would survive the termination of that relationship; bore the risk of his own unemployment by virtue of engaging in his own economic enterprise; maintained a business card, business listing, business address, or business telephone number; had a financial investment such that he could be vulnerable to suffering financial loss in connection with the performance of the service; had his own equipment needed to perform the service; determined the price of the service; employed others to perform the service; and carried his own liability or workers’ compensation insurance. These factors are not exhaustive, and no one factor is determinative.
Direction and Control
The Court of Appeals also disagreed with the hearing officer’s conclusion that Long View had the right to direct and control Lucero’s work. The third party for whom Lucero provided services oversaw Lucero’s work, provided the tools he used, and established (with Lucero’s agreement) the schedule for the work. These findings showed that the third party, not Long View, directed and controlled Lucero’s work, and there was no evidence that the third party was Long View’s agent. Consequently, the hearing officer’s findings did not support the conclusion that Lucero was Long View’s employee.
Also, the consulting agreement contained a limited noncompetition provision. Such provisions can be viewed as inconsistent with the idea of an independent contractor, as contractors are expected to work for more than one person or entity. However, the Court concluded that the noncompetition provision did not affect the manner in which Lucero performed his services during the term of the consulting agreement. Therefore, the noncompete did not conclusively demonstrate that Lucero was an employee, and Long View was entitled to a new hearing to determine whether Lucero was an employee or contractor.
Practical Considerations and Consequences
As this case demonstrates, the consequences of mischaracterizing an individual as a contractor can be severe. If Lucero wins on remand, Long View could owe back unemployment and other taxes for all of its “contractors,” and penalties. The “contractors” might also claim to be employees for other purposes, such as back overtime pay, benefits (e.g., 401(k) contributions), or to seek the protections offered by federal anti-discrimination laws or the Family and Medical Leave Act. Although the test for employment status differs depending on the law at issue, a decision by a court or agency in one context may be used to support employment status in other areas.
To avoid these negative consequences, make sure you have carefully analyzed whether the person you hired or are using as a contractor meets all the pertinent criteria. A written contract alone is not enough. Nor does it matter if the individual asked to be treated as a contractor. These types of claims cannot be waived, and ultimately your organization is responsible for appropriately classifying the individual as an employee or contractor.
Congress and various agencies are focused now more than ever on this issue. Therefore, take some time to audit the status and agreements in place for your contractors. It might save a lot of money and headaches down the road.
For more information on this case or independent contractor issues generally, please contact Mark Wiletsky at (303) 473-2864 or mbwiletsky@hollandhart.com.
