I’ve previously written about what constitutes an independent contractor versus an employee in April 2013 when I wrote: “Independent Contractors: Navigating the Legal and Regulatory Framework.” There, I highlighted some differences between IRS regulations, Workers Compensation, and Unemployment Insurance rules that are used in Colorado to determine whether a worker is an independent contractor or employee for whichever topic is at issue. In short, there are sort of two standards, and in either case, the question is fact-specific. In short, it comes down to: (1) whether the employer exercises control and direction over the worker; and, (2) whether the worker is customarily engaged in their own trade, occupation, profession, or business regarding the services at issue.
The Current Situation with Audits
Part of the reason this particular topic is getting attention recently is because the federal Department of Labor, the IRS, and in Colorado, the Department of Labor and Employment (Dept.), have stepped up their auditing of businesses’ treatment of workers as independent contractors In Colorado, for example, it seems the Dept. is simply going through its list of businesses and auditing them one-by-one.
The Dept. is tasked with collecting unemployment insurance premiums from employers that are then put into a fund which is used to pay unemployment benefits. As one might imagine, the bottom line seems to be that the fund has become somewhat depleted over the last five years as unemployment has been high while benefits have been regularly enhanced or elongated. As a result, the Dept. is looking to get more money into the account, and audits are certainly one way to accomplish this goal.
Softrock and Western Logistics Cases On Point
Whenever there is more enforcement, it also leads to disputes, which leads to appeals. The highest administrative appeal related to an audit goes to the Industrial Claim Appeal Office (ICAO) where it can then be appealed to the Colorado Court of Appeals, and then to the Colorado Supreme Court. In May, two cases where decided by the Colorado Supreme Court regarding how an independent contractor is determined under the unemployment statutes enforced by the Dept. These are the cases of Industrial Claim Appeal Office v. Softrock Geological Services, Inc., Case No. 12SC501, 2014 WL 1890598, and its companion case of Western Logistics, Inc. v. Industrial Claim Appeal Office, Case No. 12SC911, 2014 WL 1890464.
In general, people are fairly comfortable with the question of whether an employer exercises control or direction, partly because this is a common question regarding independent contractors across areas. However, the question of whether a worker is customarily engaged in their own business is a little more specific to Colorado statutory law. In short, the Dept. has regularly asserted that this means the worker must do the same services for others, and not solely for the particular employer. This is the main issue that came up in the cases decided.
In both Softrock and Western Logistics, the ICAO asserted that because the particular workers at issue only worked for the one employer, they did not have their own business. In short, this one fact resolved the question of whether they were engaged in their own business.
The Colorado Supreme Court used this opportunity to review the cases to hold that this one factor was not dispositive of the issue. The Court also noted that while there are nine factors listed in the statute connected to the question, none of them are dispositive either. Rather, the Court determined that the question of whether a worker was customarily engaged in their own business had to be determined by examining the totality of the circumstances relevant to understanding the dynamics of the relationship between the worker and employer.
Take Away from the Cases
Some Clarification, But Practically Speaking, The Down Side
The one thing that is for sure is that the Dept. cannot determine that a worker is an employee on the sole grounds that the worker did not work for others. Similarly, one would think this means that other individual factors often asserted by the Dept. are also not, by themselves, dispositive. These are things like whether the worker is operating as a registered entity versus in their personally capacity, whether the worker caries their own insurance, whether the worker has business cards or advertises, whether the worker is paid hourly instead of on a project basis, and so on. However, there remains a great deal of discretion with the ICAO about how to balance the factors, weigh them in relation to each other, and so on.
The Court reaffirmed that the ICAO’s findings of fact will be respected, and that its determination will be upheld, so long as it follows the correct legal standard. As a result, it seems the ICAO can get to the same result in most situations if it simply changes its stated process so its determination is not a reliance on one factor, but instead reliance on several factors with some rational evaluation that ends up on the side of the one factor. So long as they do the process of considering the totality of circumstances of the relationship, it is still a judgment call, and their judgment is likely to prevail if it makes any rational sense at all.
On the Up Side, Get a Contract, Change the Burden of Proof
On the bright side, the decisions might work in favor of workers and businesses who take the steps necessary to shift the burden of proof from the employer to the Dept. By default, when the Dept. inquires about workers, the burden is on the employer to prove the workers are independent contractors instead of employees. In other words, the workers are employees unless the employer can show otherwise. With a totality-of-the-circumstances evaluation, the employer can present all kinds of evidence, but in those close cases, they are generally going to be fighting an uphill battle.
In contrast, the statutes provide that if the worker and business put together a contract that includes specific emphasized language, the burden will shift. If that contract exists, the presumption will be that the worker is an independent contractor, and the Dept. will have the burden of proving that the worker is actually an employee. This was always an important advantage, but with the recent decisions, it likely strengthens the businesses’ position.
For example, previously, the Dept. might accept that it has the burden in such situations, but it would try to find one or two factors, like the fact the worker only worked for the one business, and rely on that to overcome the presumption entirely, even if every other factor was in the businesses’ favor. However, now that the Dept. cannot rely on a single factor, when it is faced with a presumption that the worker is an independent contractor, it has to do some kind of cumulative analysis of the evidence to overcome the presumption. Particularly in close cases, this is likely to favor the business and worker because the Dept. cannot rely on just some conflicting evidence, or one factor, it has to establish enough evidence to overcome the presumption.
The take away is that the cases seem to support that businesses and workers who take advantage of arranging their independent contractor status with an actual contract, with the right language, and in a way that works to utilize, rather than ignore, the factors at issue, will have an advantage in successfully establishing independent contractor status, and in responding to Dept. audits.