On June 2, Governor Bill Ritter signed into law HB 1310, which provides significant penalties for misclassifying individuals as independent contractors. For willful violations, a business may be fined up to $5,000 per misclassified employee for the first offense, and up to $25,000 per misclassification for subsequent violations. This new law only adds to the existing misclassification pitfalls, including potential fines, penalties and liability associated with failure to pay appropriate payroll taxes, minimum wage or overtime, and benefits. Such penalties add up quickly if a large number of individuals were misclassified.
To avoid these risks, organizations should carefully consider whether those they have retained, or might retain, as contractors should instead be classified as employees. Just because someone is working part-time or on a limited basis, or asks to be paid as a consultant, does not mean he is an independent contractor. Instead, a variety of state and federal agencies and the courts rely on numerous factors to make the determination on a case by case basis. For example, a person is likely an employee (and not an independent contractor) if she is required to: comply with detailed instructions, work set hours or a specific schedule, provide regular reports to a supervisor, work exclusively for your organization, do the work herself, attend training sessions for employees, and use a business card identifying herself as an employee. On the other hand, a true independent contractor typically owns a business, provides the same or similar services to others, has the potential for profit or loss from the engagement, can contract out the work to others, is subject to a written agreement identifying the individual as a contractor, and works independently.
If you have questions about the proper classification, the new law allows employers to seek “advisory” opinions from the Division of Employment and Training. But beware: failure to heed the advice in such opinions will almost certainly be used against the organization if there is a complaint down the road, which can support a finding that the misclassification was willful.
Given the risks and substantial penalties imposed by Colorado’s new law on the subject, think twice before deciding to call someone a consultant or contractor. There might not always be a clear right or wrong answer, but at a minimum you should consider all the pertinent factors and determine whether you have a good faith basis for calling someone a contractor instead of an employee.
If you have questions about HB 1310 or independent contractor issues generally, please contact Mark Wiletsky at (303) 473-2864 or mbwiletsky@hollandhart.com.
