Startups and small businesses are often cautious of taking on additional employees. This may leave potential employers wondering whether they can simply reach an agreement with individual workers who will be classified as independent contractors instead of employees. However, in Colorado as elsewhere, things aren’t quite so simple.
In Colorado, there is a presumption that workers are employees,FN1 but state and federal laws classify individuals as either an employee or an independent contractor based on a variety of factors that are not always the same. Regardless of the relevant factors, the classification will always depend on the so-called “economic realities” of the situation, as opposed to the strict language of an agreement. (But don’t stop reading now thinking that these agreements don’t matter – see below!)
The Tenth Circuit and Colorado courts have repeatedly been willing to disregard purported independent-contractor agreements when the facts of the situation suggest an employment relationship. In Baker, for example, “the Tenth Circuit considered and rejected an employer's characterization of rig welders as independent contractors despite the fact that each welder signed a document entitled “Agreement With Independent Contractor.”FN2
Last week the Colorado Supreme Court reaffirmed this position, determining that Colorado Custom Maid (“CCM”) – who considered itself to be merely a “referral service” that placed house cleaners with clients in need of home cleaning – was in fact the employer of those cleaners.FN3 As a result, CCM was liable for the unemployment taxes that should have been paid on the cleaners’ wages.FN4
CCM acknowledged the presumption in Colorado that workers are employees, but argued that, before the presumption can come into play, the workers should have to make a threshold showing that the services they provided benefited CCM in addition to, or in lieu of, their clients.FN5 The Colorado Supreme Court was not convinced by this argument.
...the Colorado Supreme Court reaffirmed that the presumption that workers are employees could only be overcome in one of two ways.
In rejecting it, the Court noted that the Colorado Employment Security Act ("CESA")FN6 was enacted to provide broad protection from involuntary unemployment to Colorado workers and that CCM’s argument could significantly curtail this protection by allowing purported employers to argue that its workers’ services benefit not the business itself but its customers or clients. Instead, the Colorado Supreme Court reaffirmed that the presumption favoring employment could only be overcome in one of two ways.
First, "the putative employer can offer facts to demonstrate by a preponderance of the evidence that (1) the worker 'is free from control and direction in the performance of the service,' and (2) the worker “'s customarily engaged in an independent trade, occupation, profession, or business related to the service performed.'"FN7
Second, "a putative employer may rebut the employment presumption by producing a written document signed by both parties and containing nine expressly stated limitations on the relationship that distinguish it from that of employer and employee."FN8 The nine limitations are that the purported employer does not:
Require the individual to work exclusively for the purported employer,
Establish a standard of quality or performance for the individual,
Pay a salary or hourly wage,
Terminate the individual's work prematurely,
Provide anything more than minimal training for the individual,
Provide tools or employment benefits to the individual,
Control the time of performance beyond a schedule for completion,
Pay the individual personally instead of making payments to a trade or business name, and
Combine business operations with the individual's business.FN9
A contract that does not expressly include all nine of these limitations generally indicates an employment relationship. As with the first way of overcoming the presumption, these agreed upon limitations boil down to the same "economic realities." Namely, (1) whether the purported employer has control over the worker's services as well as the conditions and continuation of that work and (2) whether the purported employee is part of an independent business or dependent on the employer for continued work.
While these nine limitations must be addressed by an effective independent-contractor agreement, they are also factors relevant to evaluating the realities of a worker’s conditions even in the absence of a written agreement. However, without a written agreement that expressly addresses these nine limitations, courts will consider the "totality of the circumstances" and may examine any factor that bears on the existence of an employment relationship.FN10
As a result, it is generally advisable to have independent contractor agreements in place. After all, when properly drafted and true to work conditions, these agreements can define the relationship as that of an independent contractor instead of an employee.
This is significant since the distinction between employees and independent contractors has important consequences and cuts across several areas of law. The unemployment tax implications of the CESA have already been discussed, but additional areas include labor and employment, federal tax, insurance, and agency (just to name a few). Moreover, this distinction is important for determining (a) whether intellectual property created for a business qualifies as a "work made for hire" or (b) whether a business can be held liable for a worker's negligence.
This is significant since the distinction between employees and independent contractors has important consequences and cuts across several areas of law...
Additional information about classifying independent contractors and employees is provided by the Colorado Department of Labor and Employment and can be found here. You can request an Advisory Opinion on worker classification from the Dept. of Labor and Employment here at the cost of $100.00 per opinion (non-refundable).
This article underscores the importance of properly classifying your workers. It is far too common for a supposed independent-contractor agreement to fail to define a worker as an actual independent contractor. When this happens a business may be liable for lost wages, unpaid taxes and a variety of other expenses.
But a well-drafted independent-contractor agreement that is true to work conditions can define a worker as an independent contractor instead of an employee. Having such an agreement in place from the start can save a business a lot of trouble and expenses down the road.
If you'd like assistance with creating enforceable independent-contractor agreements or determining worker classification, please Reach out, Today!