S TRANGE AS I T M AY S EEM : T HAT I NDEPENDENT C ONTRACTOR M AY B E - - PDF document

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STRANGE AS IT MAY SEEM: THAT INDEPENDENT CONTRACTOR MAY BE YOUR EMPLOYEE

Naomi Haslitt, Susan Stahlfeld, Kristine Bingman I. INTRODUCTION: WELCOME TO THE MYSTERIOUS WORLD OF EMPLOYEE CLASSIFICATION. A. The setting. The American workplace is ever-changing. To battle high legal costs of employee benefits, many employers are attempting to classify workers as independent

• contractors. In certain arenas, however, classifying an employee as an independent contractor

causes only additional headaches to the employer—increasing potential legal liabilities particular to the employee's independent-contractor status. B. Meaningful mystery. The designation of a worker as an independent contractor or an employee can have great significance for both the employer and the worker. Highly skilled workers use the independent-contractor status not only to shield themselves from being an "employee" (and all the obligations arising from that designation (e.g., going to employer-required meetings, filling the coffeepot, and even certain tax situations)), but also to give themselves flexibility to control when, where, and for whom they will perform services. C. More than meets the eye. It takes more than just the label to make a person an independent contractor. This designation is only one factor in the various state and federal tests used to determine whether an employment relationship exists, and it is not the determinative factor. Instead, courts, legislatures, and regulators have developed broader tests to determine whether a person who provides services is an employee or an independent contractor. D. General liability rule. Generally, an employer is not responsible for an independent contractor any more than it is responsible for its vendors and other business partners. Rather, the independent contractor is largely responsible for his or her own business liabilities in the same manner as any

• ther business owner. On the flip side, the worker retains flexibility in his or her status as an

independent contractor, but may also be subject to certain requirements and limitations based on the statutes and case law discussed below. E. Traps for the unwary. There is a lack of consistency among public agencies in determining the validity

• f an independent-contractor designation because of the multiplicity of federal and state agencies

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and their purposes. This can result in an unwary employer's incurring liability for improperly classifying its workers. II. TAX IMPLICATIONS FOR EMPLOYER WHEN IT INCORRECTLY CLASSIFIES A WORKER AS AN INDEPENDENT CONTRACTOR. Primarily, disputes over an employee's status arise when the IRS or state authority attempts to collect taxes from the employer. Government taxing agencies, such as the IRS or its state counterparts, may challenge independent-contractor status, attempting to loop workers under the traditional "employee" designation in order to collect taxes from the employer for those workers under the appropriate federal or state law. A. Federal tax liability. 1. IRS determination of independent-contractor status. In determining whether a worker is an employee under federal tax laws, the IRS focuses on evidence of behavioral control, financial control, and the type of relationship between the parties. Additional information is available in the Employer's Supplemental Tax Guide: www.irs.gov/pub/irs-pdf/p15a.pdf. 2. IRS challenges to independent-contractor status. The IRS has challenged employer classification of workers as independent contractors to collect taxes under the Federal Unemployment Tax Act and the Federal Insurance Contributions Act, and federal income taxes that were not withheld by the employer or paid by the worker. Courts have held that an employer is liable for all these payments when it misclassifies an employee as an independent contractor. See, e.g., Bruecher Found. Servs., Inc.

• v. United States, 383 F. App'x 381 (5th Cir. 2010). When an employer is found liable for these

taxes, it must pay the taxes, plus interest and penalties, which can result in substantial liability. In addition to IRS challenges, some courts have recognized the right of an individual to challenge his or her own status as an independent contractor and force an employer to pay FICA and FUTA taxes. Ford v. Troyer, 25 F. Supp. 2d 723 (E.D. La. 1998). This is not a right expressly recognized by the statute, however, and other courts have refused to recognize such a claim. See, e.g., McDonald v. S. Farm Bureau Life Ins. Co., 291 F.3d 718 (11th Cir. 2002). 3. Code Section 409A rules. The IRS issued regulations under Section 409A of the Internal Revenue Code about deferred compensation plans that apply to employees and can apply to an independent contractor if the worker falls outside the specific definition of "independent contractor" outlined by the regulations. Among other things, the Section 409A rules impose strict requirements on when deferred compensation may be paid, and impose a strict prohibition on accelerating payment of deferred compensation. If the rules aren't followed, then the worker will suffer adverse tax consequences, including immediate inclusion of all deferred compensation, a

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20 percent penalty tax, and penalty interest. Service recipients can potentially be on the hook related to reporting and withholding failures if Section 409A issues arise. To avoid application of Section 409A, the independent contractor must provide "significant" services to two or more unrelated service recipients while actively engaged in the relevant trade or business. Determining whether a worker satisfies this rule is a facts-and- circumstances test, but if the worker receives less than 70 percent of total revenue from any of the service recipients, the worker will be treated as an independent contractor. a. "Plans" includes many types of payments. The IRS regulations defines a nonqualified deferred compensation plan as "any plan . . . that provides for the deferral of compensation . . . . Whether a plan provides for the deferral of compensation generally is determined at the time the service provider obtains a legally binding right to the compensation under the plan, and is not affected by any retroactive change to the plan to characterize the right as one that does not provide for the deferral of compensation." 26 CFR § 1.409A-1(a)(1). Additionally, "plan" is very broadly defined, and can be "any agreement, method, program, or other arrangement . . . that applies to one person or individual." 26 CFR § 1.409A-1(c)(1). A plan can include an employment agreement that provides for deferred compensation (such as severance or bonuses), a separation agreement, a reimbursement arrangement, a bonus arrangement, stock options, and commission arrangements. b. Independent contractors may be included. If an employer provides any compensation to an independent contractor that may fall within the IRS definition of "deferred compensation," whether under a written or unwritten plan, the employer should check to see whether it might be a deferred compensation plan subject to Section 409A. If so, the plan should be structured to comply with the 409A rules, to avoid tax penalties for both the independent contractor and the employer. B. Washington tax liability. 1. State's determination of independent-contractor status. Misclassification of workers as independent contractors can also lead to liability for workers' compensation premiums and state unemployment taxes, as well as interest and penalties for failing to report hours and wages for such workers. The liability can be substantial. Different states have different tests for determining whether a worker is covered by workers' compensation or unemployment tax laws, and what entities are potentially liable for payment of those premiums and taxes. Even within a state, the different agencies can have different tests. In Washington, if an employer must pay workers' compensation premiums on a worker, then unemployment taxes must also be paid for that worker.

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2. Independent-contractor test under Washington Industrial Insurance Act (RCW 51.08.195). Washington's industrial insurance laws define covered workers broadly (RCW 51.08.180), but except from coverage a worker providing services who meets the following tests: a. Control. The individual has been and will continue to be free from control or direction over the performance of the service, both under the contract of service and in fact; and b. Service type. The service either is outside the usual course of business for which the service is performed or is performed outside all the places of business of the enterprise for which the service is performed, or the individual is responsible, both under the contract and in fact, for the costs of the principal place of business from which the service is performed; and c. Custom. The individual is customarily engaged in an independently established trade,

• ccupation, profession, or business, of the same nature as that involved in the contract of service,
• r the individual has a principal place of business for the business the individual is conducting

that is eligible for a business deduction for federal income tax purposes; and d. Federal tax filings. On the effective date of the contract of service, the individual is responsible for filing at the next applicable filing period, both under the contract of service and in fact, a schedule of expenses with the IRS for the type of business the individual is conducting; and e. Department of Revenue filings. On the effective date of the contract of service, or within a reasonable period after the effective date of the contract, the individual has established an account with the Department

• f Revenue, and other state agencies as required by the particular case, for the business the

individual is conducting for the payment of all state taxes normally paid by employers and businesses and has registered for and received a unified business identifier number from the state

• f Washington; and

f. Books/records. On the effective date of the contract of service, the individual is maintaining a separate set of books or records that reflect all items of income and expenses of the business that the individual is conducting.

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3. Liability/potential damages on employer for incorrectly classifying worker and failing to pay appropriate taxes. The Washington Court of Appeals has held that an employer misclassified its cleaners as independent contractors rather than employees, and affirmed an assessment of $124,130 for unpaid workers' compensation premiums. This assessment was for just one 12-month period from nearly seven years before the court decision. Dana's Housekeeping, Inc.

• v. Dep't of Labor & Indus., 76 Wn. App. 600, 886 P.2d 1147 (1995).

C. Oregon tax liability. 1. Independent contractor in Oregon? Under Oregon income tax and unemployment compensation laws, the test for determining whether an individual is an employee or an independent contractor is set forth by

• statute. ORS 670.600(2)(a).

a. A worker must satisfy the four factors set forth in the statute to qualify as an independent contractor. The individual must be: i. Free from direction and control over the means and manner

• f providing the services (the employer can indicate only the desired results of the individual's

work, not how those objectives are met); ii. Engaged in an independently established business (see below); iii. Licensed if the services he or she performs are of the nature that require licensure; and iv. Responsible for obtaining other licenses or certificates necessary to provide the services. It is the individual who obtains the license, not the employer. b. A person is considered to be "engaged in an independently established business" if any three of the following are met: i. The person maintains a business location separate from the business or work location of the person for whom the services are provided, or that is in a portion

• f the person's residence that is used primarily for the business;

ii. The person bears the risk of loss related to the business or the provision of services as shown by factors such as the following: the person enters into fixed- price contracts; the person is required to correct defective work; the person warrants the services provided; or the person negotiates indemnification agreements or purchases liability insurance, performance bonds, or errors-and-omissions insurance;

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iii. The person provides contracted services for two or more different persons within a 12-month period, or the person routinely engages in business advertising, solicitation, or other marketing efforts reasonably calculated to obtain new contracts to provide similar services; iv. The person makes a significant investment in the business, through means such as purchasing tools or equipment necessary to provide the services; paying for the premises or facilities where the services are provided; or paying for licenses, certificates,

• r specialized training required to provide the services;

v. The person has the authority to hire other persons to provide or to assist in providing the services and has the authority to fire those persons. Recent cases: Broadway Cab LLC v. Emp't Dep't, 265 Or. App. 254, 336 P.3d 12 (2014); Gross v. Emp't Dep't, 237 Or. App. 671, 240 P.3d 1130 (2010). 2. Oregon workers' compensation law. a. All workers are subject to workers' compensation coverage, except those specifically excluded. ORS 656.027. If a worker is an independent contractor, he or she is not eligible to be covered under an employer's workers' compensation coverage. Determining whether an individual is an independent contractor begins with a "right to control" inquiry. The following factors are examined: i. Direct evidence of the right to have, or the exercise of, control over the worker; ii. The method of payment; iii. The furnishing of equipment; iv. The right to fire. b. If the analysis of the "right to control" factors is inconclusive, the character of the work or business should next be considered: i. How much is the work a regular part of the hiring entity's business? ii. How skilled is it? iii. Is the work continuous or intermittent? iv. Is the duration sufficient to amount to the hiring of continuous services as distinguished from contracting for completion of a particular job? v. To what extent may it be expected to carry its own accident burden?

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3. What's the cost of getting it wrong? There can be stiff penalties for misclassifying a worker as an independent contractor: a. Oregon Workers' Compensation Law. Employers that are out of compliance with workers' compensation law are liable for penalties of two times what they would have paid in premiums or $1,000, whichever is

• greater. And with each additional occurrence of noncompliance, the penalty is $250 per day for

each day out of compliance. After a third offense, the employer is referred to the Department of Justice. If the misclassified worker is injured while employed by someone without workers' compensation insurance, the worker may still be eligible for benefits. The employer will have to reimburse all claim costs and a claims processing administration fee. Officers, members, or partners are separately and individually liable for the costs. b. Oregon Unemployment Compensation Law. Wages are retroactively reported, taxes assessed, and interest charged from the date due at 1.5 percent per month or fraction of a month. If the audit reveals any fraud, such as an employer's intentional attempt to avoid paying taxes, a penalty of 50 percent of the tax due can be assessed. Additional penalties may apply under certain circumstances. c. Oregon Tax Law. An employer can be held liable for penalties and interest for not properly withholding income tax for someone who should have been classified as an employee. Also, employers with employees working within the Tri-County Metropolitan Transportation District (TriMet) and the Lane County Mass Transit District (generally the Portland and Eugene metropolitan areas) are required to pay a transit district tax based on gross payroll. Failure to properly classify a worker as an employee (and the resulting failure to pay the transit tax) can result in liability for penalties and interest on unpaid taxes. III. PROCEED WITH CAUTION: EMPLOYER LIABILITY UNDER FEDERAL LAWS FOR MISCLASSIFICATION. A. Introduction. 1. As stated above, a worker's classification is more than just a label—just because someone is called an "independent contractor" does not mean that the worker is, and anytime a worker wants to assert claims under any of the statutes applying to employees, the worker will assert that he or she was in fact an employee. 2. The applicable test used to determine whether a worker is indeed an independent contractor varies depending on which laws are implicated by the worker's claim. As

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discussed above, for example, the IRS looks to three general factors (behavioral control, financial control, and type of relationship) when making a determination for federal tax purposes. 3. Employers have been found to have misclassified workers under the myriad federal employment laws and faced unanticipated liability as a result. B. Claims arising under ERISA, Title VII, the ADA, or the ADEA. 1. Under the Employee Retirement Income Security Act of 1974 ("ERISA"), Title VII of the Civil Rights Act of 1964 ("Title VII"), the Americans with Disabilities Act (the "ADA"), or the Age Discrimination in Employment Act (the "ADEA"), courts apply the "right to control" test established by the U.S. Supreme Court in Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-24, 112 S. Ct. 1344, 117 L. Ed. 2d 581 (1992). In Darden, the Court established the following test to determine the extent to which the employer controls the manner and means by which the product is accomplished, and therefore whether the worker is an employee or an independent contractor: a. The skill required; b. The source of the instrumentalities and tools; c. The location of the work; d. The duration of the relationship between the parties; e. Whether the employer has the right to assign additional projects to the worker; f. The extent of the worker's discretion over when and how long to work; g. The method of payment; h. The worker's role in hiring and paying assistants; i. Whether the work is part of the regular business of the employer; j. Whether the worker is in business; k. The provision of employee benefits; and l. The tax treatment of the worker. If, on balance, these factors indicate that the employer has the right to control the worker, then he or she will be considered an employee, not an independent contractor. See also Barnhart v. N.Y. Life Ins. Co., 141 F.3d 1310 (9th Cir. 1998). 2. As a recent example, in Murray v. Principal Fin. Grp., Inc., 613 F.3d 943 (9th Cir. 2010), the plaintiff was a career agent for the defendant, selling financial products and

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services, including annuities, disability income, 401(k) plans, and insurance. She brought a Title VII claim for sex discrimination. The success of her claim turned on whether she was deemed an employee or an independent contractor. The Ninth Circuit Court of Appeals used this case as an opportunity to clarify the appropriate test: The common-law agency test? The economic-realities test? The common-law hybrid test? Ultimately, the court held that there is no functional difference between the tests. The Ninth Circuit ruled that the employer was not liable because the plaintiff was an independent contractor, noting that courts should evaluate "the hiring party's right to control the manner and means by which the product is accomplished" in determining whether an employee is an independent contractor. Important factors in determining that the plaintiff was an independent contractor: She was free to operate her business without day-to-day intrusion. She also decided when and where to work and had her own office where she paid rent. Finally, and importantly, the plaintiff had declared herself as self-employed to the IRS. These factors overwhelmed other employee- related factors. C. Claims arising under the Fair Labor Standards Act ("FLSA"), Family and Medical Leave Act ("FMLA"), Equal Pay Act ("EPA"), and Migrant and Seasonal Agricultural Worker Protection Act ("MSPA"). Under FLSA, FMLA, EPA, and MSPA, courts and the Department of Labor (the "DOL") apply the "economic realities" test, considering the following factors in determining whether an employer is liable to the worker as an employee: 1. The degree of control exercised or retained by the employer; 2. The worker's opportunity for profit or loss depending on his or her managerial skill; 3. The extent of the relative investments in the business of the worker and the employer; 4. The permanence of the working relationship; 5. The degree of skill and initiative required to perform the work; and 6. The extent to which the work is an integral part of the employer's business. In making this analysis, no single factor is determinative, and all factors must be applied with an understanding that they are indicators of the broader concept of economic

• dependence. DOL Administrator's Interpretation No. 2015-1.

The DOL will also pursue worker-misclassification claims on behalf of workers who are improperly classified as owners/members in, for example, limited liability companies.

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See Investigation in Utah and Arizona Secures Wages and Benefits for More Than 1,000 Construction Workers Who Were Wrongly Classified, DOL News Release, No. 15-0518-NAT, 2015 WL 1849263 (Apr. 2, 2015). D. Claims arising under the National Labor Relations Act (the "NLRA"). Under the NLRA, the National Labor Relations Board (the "NLRB") also applies the common-law "right to control" test. Courts and the NLRB have, however, held that such a determination should place more emphasis on whether the individual had an actual, and not merely theoretical, significant entrepreneurial opportunity for gain or loss. See FedEx Home Delivery, 361 NLRB No. 55 (2014); NLRB v. Friendly Cab Co., 512 F.3d 1090, 1097-98 (9th Cir. 2008); Corporate Express Delivery Sys. v. NLRB, 292 F.3d 777, 780 (D.C. Cir. 2002). E. Seeing is believing: A case example. Independent contractors and leased employees of Microsoft bring a class-action lawsuit against the company, arguing that they should be entitled to participate in the company's fringe-benefit plans, including an ERISA 401(k) savings plan and a non-ERISA employee stock purchase plan. As support for their argument that they were actually employees of the company, they point to an IRS finding that they were common-law employees of Microsoft. In 1995 and 1997, the Ninth Circuit, which holds jurisdiction over Oregon and Washington, held that these workers should have been allowed to participate in the benefit plans. Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996) (Vizcaino I), rev'd and remanded, 120 F.3d 1006 (9th Cir. 1997) (Vizcaino II). When the case was sent back to the trial court, the trial court ruled that the "independent contractors" were eligible for stock benefits, but that leased employees were not eligible. The Ninth Circuit overturned the trial court in 1999 and held that the leased employees could have been employees of both Microsoft and the leasing company and could therefore potentially collect stock benefits from Microsoft. Vizcaino v. U.S. Dist. Court for W.D.

• f Wash., 173 F.3d 713 (9th Cir. 1999) (Vizcaino III).

As a result of the Microsoft litigation, employers should consider the following preventive measures:

• Any employer should specify in its benefit plans not only who is eligible for

benefits, but also who is not. Thus, independent contractors and leased employees should be specifically excluded as participants or beneficiaries if that is the employer's intent. See Edes v. Verizon Commc'ns, Inc., 417 F.3d 133, 137 (1st Cir. 2005); Jaeger v. Matrix Essentials, Inc., 236 F. Supp. 2d 815 (N.D. Ohio 2002).

• The employer should also consider requiring staffing agencies to provide benefits

coverage equal to or greater than that provided by the employer.

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• The employer should attempt to strengthen the agency-employee relationship and

lessen any factors creating an employment relationship between the employer and the leased employees. Doing so may decrease the employer's liability under ERISA and other employment laws. In addition to the risk of a class-action lawsuit by workers, the DOL also has the right to initiate a lawsuit on behalf of misclassified workers. See Herman v. Time Warner Inc., 56 F. Supp. 2d 411 (S.D.N.Y. 1999). F. The murky future: pending federal laws. 1. The Independent Contractor Tax Fairness and Simplification Act. In May 2015, Rep. Erik Paulsen (R-MN) and cosponsors Rep. Kenny Marchant (R-TX), Rep. John Kline (R-MN), and Rep. Matt Salmon (R-AZ) introduced a bill that would generally prohibit retroactive assessment of employment taxes for periods after December 31, 1978, unless the employer had no reasonable basis for not treating the worker as an employee. It would also, if passed, establish a safe harbor on which a service recipient may rely in classifying a service provider as an independent contractor. 2. The Fair Playing Field Act. In September 2010, Sen. John Kerry (D-MA) and Rep. Jim McDermott (D-WA) introduced a bill that would curtail the federal "safe harbor" that allows businesses to treat workers as independent contractors for federal employment tax purposes, regardless of the employees' actual status under the common-law test. The legislation was resurrected in 2014 and if passed would, among other things, require the Secretary of the Treasury to issue prospective guidance

• n worker classification for federal employment tax purposes.

3. The Employee Misclassification Prevention Act. In December 2011, Rep. Lynn Woolsey (D-CA) introduced legislation that would impose new notice and recordkeeping requirements on employers that hire independent contractors, and impose stricter penalties for misclassification. The legislation, if passed, would also require any DOL office to report any misclassification of an employee that it discovers to the DOL's Wage and Hour Division (the "WHD"), and authorizes the WHD to report that information to the IRS. IV. LOCAL PHENOMENA: EMPLOYER LIABILITY UNDER WASHINGTON LAWS FOR MISCLASSIFICATION. A. Tax implications. As discussed previously, if the issue involves workers' compensation or unemployment taxes, courts use the statutory test listed above in Section II.B.2 (RCW 51.08.195).

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B. Liability under Washington employment laws. The DOL and state employment and manpower departments also have vested interests in the classification of workers as either independent contractors or employees. Classification affects the treatment of workers not only in the area of federal unemployment insurance, but also under state-run programs such as workers' compensation. Employers are not liable to true independent contractors under most Washington employment laws (e.g., state minimum wage, break and meal period requirements, Family Care Act, Family Leave Act, etc.). But employers can be held liable to true independent contractors under any of the following types of claims:

• An independent contractor can bring claims against the hiring entity for

breach of the contract that he or she is working under.

• It is also important to keep in mind that if a worker is an independent

contractor, the worker is not the company's employee under the workers' compensation plan. That means that if the person is injured on company property, the worker may be able to sue the company for the injuries under various common-law negligence theories.

• An employer may be liable to a worker, even if truly an independent

contractor, under the Washington Law Against Discrimination (RCW ch. 49.60) for discriminatory hiring. 1. Test for determining whether an employee is a true independent contractor. If the claim does not involve workers' compensation or unemployment taxes, courts determine an employee's status based on the "economic realities test," which includes analysis of the following factors. Larner v. Torgerson Corp., 93 Wn.2d 801, 613 P.2d 780 (1980). a. The extent of the hiring entity's right to control the details of the work; b. Whether or not the worker is engaged in a distinct occupation or business that is the object of the contract; c. Whether the type of work to be done is usually performed under the direction of the hiring entity or by a specialist without supervision; d. The skill required; e. Who supplies the instrumentalities and tools; f. Who supplies the location for the work to be done;

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g. The length of time for which the hired party is employed; h. The method of payment, whether by the time or by the job; i. Whether or not the work is a part of the regular business of the hiring party; j. Whether or not the parties believe they are creating the relation of master and servant; and k. Whether or not the hiring party is in business. 2. Case examples. a. Anfinson v. FedEx Ground Package Sys. Inc., 174 Wn.2d 851, 281 P.3d 289 (2012). A group of FedEx pickup and delivery drivers sued the company under the Washington Minimum Wage Act ("MWA") for overtime pay. The court held that for purposes

• f MWA claims, the "economic dependence" test employed by federal courts in deciding FLSA

cases should be used to determine whether a worker is an independent contractor or an

• employee. According to the court, "[t]he relevant inquiry is 'whether, as a matter of economic

reality, the worker is economically dependent upon the alleged employer or is instead in business for himself.'" 174 Wn.2d at 871 (quoting Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir. 2008)). b. Kamla v. Space Needle Corp., 147 Wn.2d 114, 52 P.3d 472 (2002). An injured employee of a contractor brought suit against a jobsite owner, claiming that the jobsite owner "retained control" over the contractor and was therefore liable for the individual's

• injuries. The court looked to "whether there is a retention of the right to direct the manner in

which the work is performed, not simply whether there is an actual exercise of control over the manner in which the work is performed." 147 Wn.2d at 121. The court found that the jobsite

• wner did not retain the right to control the contractor, so the contractor remained independent

and the owner could not be liable for the individual's injuries. But see Kinney v. Space Needle Corp., 121 Wn. App. 242, 85 P.3d 918 (2004) (holding that the jobsite owner may have retained control over the individual because the jobsite owner's facilities manager testified that it was part

• f his job to ensure that the workers were using proper safety precautions).

c. Affordable Cabs, Inc. v. Dep't of Emp't Sec., 124 Wn. App. 361, 101 P.3d 440 (2004). The court held that a taxicab driver was an employee and that the company was required to make unemployment contributions under the Employment Security Act because the driver performed personal services for wages under a contract and did not meet the exemption in RCW 50.04.140(1). V. THE OREGON VORTEX OF PROPER CLASSIFICATION. A. Why does it matter? Minimum-wage, overtime, and other employment laws do not apply to independent

• contractors. Therefore, many employers seek to avoid the costs and responsibilities associated

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with employees by calling some workers "independent contractors." Oregon employers must make sure that they are properly classifying their workers in order to avoid liability in the event

• f misclassification.

B. Tax implications. If the issue involves income tax withholding, workers' compensation, or unemployment taxes, courts use the tests listed above in Section II.C. C. Liability under Oregon civil-rights laws and common-law claims. For the purposes of Oregon's discrimination and common-law claims such as for wrongful discharge, the Oregon Bureau of Labor and Industries ("BOLI") and Oregon courts apply the "right-to-control" test: 1. Does the putative employer actually control or have the right to control the worker in performing his or her duties? If yes, then the individual is an employee, not an independent contractor. 2. No one factor is dispositive; courts look at the relationship as a whole, including any contracts. The courts consider four factors when making this determination:

• Direct evidence of the right to, or the exercise of, control;
• The method of payment;
• The furnishing of equipment; and
• The right to fire.

3. Case example: Ford-Torres v. Cascade Valley Telecom, Inc., No. 06-914- AA (D. Or. Feb. 26, 2008). Two companies entered into an agreement under which one company provided telemarketing services for the other. The plaintiff worked as a telephone

• perator and alleged that both companies were her employers for the purposes of her

discrimination and wrongful-discharge claims. The court found, in assessing whether she was an employee of one of the companies, that there was no direct evidence that the company used the plaintiff's services. Key factors: there was no evidence that the company ever controlled the plaintiff, paid her, furnished her equipment, or had the right to fire her. The plaintiff never received a W-2 from the defendant company, and it was the other company that paid her. D. Liability under Oregon Wage and Hour Law. 1. "Economic realities" test. For purposes of Oregon's wage-and-hour laws, BOLI and Oregon courts apply the "economic realities" test. The same five factors that are used in analyzing FLSA claims are analyzed to determine whether, under Oregon law, a worker is economically dependent on the

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employer (and therefore an employee), as a matter of economic reality. No single factor listed below is determinative of the worker's status as an employee or an independent contractor.

• The degree of control exercised by the alleged employer;
• The extent of the relative investments of the worker and the alleged employer;
• The degree to which the worker's opportunity for profit and loss is determined

by the alleged employer;

• The skill and initiative required in performing the job;
• The permanency of the relationship.

2. Case examples. a. Cejas Commercial Interiors, Inc. v. Torres-Lizama, 260 Or. App. 87, 316 P.3d 389 (2013). Overruling prior case law utilizing the "right to control" test and establishing the "economic realities" test as the applicable standard, the court held that a drywall contractor was not the employer of workers to whom it subcontracted production work because the contractor did not control their work, did not determine how much they would be paid, did not have the right to hire or fire the workers, and did not manage their payroll. b. Slayman v. FedEx Ground Package Sys., Inc., 765 F.3d 1033 (9th Cir. 2014). Applying Oregon law, the court concluded that FedEx delivery drivers were employees (and not independent contractors) under both the "right to control" and "economic realities" tests. E. Noncompete quandary. In 2008, the Oregon legislature amended the statutory requirements for covenants not to compete. ORS 653.295 now sets forth four broad requirements for what constitutes a legal noncompete agreement. Because of these expanded criteria, it is significantly more difficult to craft an enforceable noncompete agreement. This statute applies only to employees, however. An independent contractor may validly be subject to a noncompete. Or can she? ORS 670.600 sets forth four criteria for determining independent-contractor status, one of which is that the individual must "be customarily engaged in an independently established business." And an independently established business exists if three of five factors are established (see Section II.C.1.b.), one of which is that the individual "provides contracted services for two or more different persons within a 12-month period, or . . . routinely engages in business advertising, solicitation or other marketing efforts reasonably calculated to obtain new contracts to provide similar services."

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The consequence of the collective reading of these two statutes: if you restrict a person's right to compete, you are potentially weakening the ability to argue that that person is an independent contractor for whom a noncompete agreement would normally be permitted. VI. OTHER STATES' TESTS. In Narayan v. EGL, Inc., 616 F.3d 895 (9th Cir. 2010), the court applied California state law in determining whether an individual was an independent contractor. Like the federal and Washington/Oregon tests, the California determination requires the court to consider many factors. The court noted that when its determination is based on the evaluation and balancing of multiple factors that are heavily intertwined, that determination should be left to the finder of fact at trial. Ultimately, the plaintiff had presented sufficient evidence to create a question of fact under California's multifaceted test to survive summary judgment. Compare Ruiz v. Affinity Logistics Corp., 887 F. Supp. 2d 1034 (S.D. Cal. 2012). VII. DEMYSTIFYING INDEPENDENT-CONTRACTOR CLASSIFICATIONS: TIPS AND TRICKS. A. What to do. 1. Have a written contract that clearly indicates the independent contractor's status. 2. When possible, pay independent contractors by assignment, not by time. 3. Provide contractual remedies for missed deadlines or targets, defective work or damages, or customer complaints. 4. Ensure that the contract encourages the contractor to obtain other customers or clients if desired or that the contractor already has other customers or clients. 5. Allow contractors to form separate business entities with separate taxpayer identifications. 6. Allow contractors to provide their own work space, supplies, equipment, telephones, business cards, liability insurance, etc., as much as possible. 7. Allow contractors discretion to hire others to help them perform services. 8. Allow contractors to pay their own premiums for workers' compensation insurance (if the contractors have employees). B. What not to do. 1. Provide supplies, equipment, or space to contractors, even if charges are assessed for the use of such items.

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2. Set specific hours of work. A contractor should operate independently on a day-to-day basis, but have a set time within which to complete the project. 3. Allow the service receiver to screen or direct the contractor's hiring process for employees. 4. Allow additional named insureds on corporate insurance policies. 5. Provide insurance coverage or other "employment" benefits for contractors. 6. Have a "seniority system" by which work is provided to contractors. 7. Have contractors do the same work as employees. 8. Hire unlicensed contractors. Contractors should take the necessary steps to obtain required licenses on their own. 9. Issue company credit cards, cell phones, pagers, computers, or other items to contractors. 10. Require contractors to attend regular employee or staff meetings unless attendance is necessary for them to perform the work that they contracted to perform. 11. Supervise contractors on a daily or regular basis, provide training on how to do the work, or otherwise direct the means by which they perform their work. REMEMBER: Some workers may be found to be contractors even if employers do not comply with all these tips, and some workers may be found to be employees even if employers do comply with these tips. The status of any given worker will depend on the work to be performed and the nature of the particular relationship.

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APPENDIX A The Darden "Common-Law" Test Adapted from the EEOC Compliance Manual § 2 (Threshold Issues) This determination requires consideration of all aspects of the worker's relationship with the

• employer. Factors indicating that a worker is in an employment relationship with an employer

include the following:

• The employer has the right to control when, where, and how the worker performs

the job.

• The work does not require a high level of skill or expertise.
• The employer furnishes the tools, materials, and equipment.
• The work is performed on the employer's premises.
• There is a continuing relationship between the worker and the employer.
• The employer has the right to assign additional projects to the worker.
• The employer sets the hours of work and the duration of the job.
• The worker is paid by the hour, week, or month rather than the agreed cost of

performing a particular job.

• The worker does not hire and pay assistants.
• The work performed by the worker is part of the regular business of the employer.
• The employer is in business.
• The worker is not engaged in his or her own distinct occupation or business.
• The employer provides the worker with benefits such as insurance, leave, and

workers' compensation.

• The worker is considered an employee of the employer for tax purposes (i.e., the

employer withholds federal, state, and social security taxes).

• The employer can discharge the worker.
• The worker and the employer believe that they are creating an employer-

employee relationship.

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This list is not exhaustive. Other aspects of the relationship between the parties may affect the determination whether an employer-employee relationship exists. Furthermore, not all or even a majority of the listed criteria need be met. Rather, the determination must be based on all the circumstances in the relationship between the parties, regardless of whether the parties refer to it as an employee or an independent-contractor relationship.

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