Wink-wink nudge-nudge attitude could cost you
To offset budget deficits and replenish depleted unemployment insurance funds, state and federal governments have increased their efforts to crack down on businesses that inappropriately classify workers as independent contractors in an effort to save labor costs.
Last year, Colorado enacted the Misclassifying Employers and Independent Contractors Act, which imposes penalties on employers who willfully misclassify workers to evade the state’s wage and unemployment security laws. On the federal level, the United States Senate Committee on Health, Education, Labor, and Pensions is considering the Employee Misclassification Prevention Act, pending in the Senate as S. 3254. Like Colorado’s law, the federal bill would impose fines on employers who knowingly misclassify workers.
What can Colorado business owners do to ensure they’re following the law? The Colorado Worker’s Compensation Act and the Colorado Employment Security Act provide guidance to the state’s businesses and workers to help avoid penalties for failing to correctly classify a worker as an employee or independent contractor.
These laws define an independent contractor as a worker who is (1) primarily free from control and direction in the performance of the service, both under the contract and in fact; and (2) customarily engaged in an independent trade, occupation, profession, or business related to the service performed.
This means that the business and independent contractor should enter into a signed and notarized written contract. Here are nine things both parties should acknowledge in a contract:
1. The individual isn’t required to work exclusively for the hiring party but can do so for a finite period of time set forth in the contract;
2. The hiring party doesn’t establish quality standards for the work performed, oversee the actual work, or instruct the worker as to how the work will be performed, except that both parties may agree that the work will be consistent with generally accepted industry standards for that service or product;
3. The worker won’t be paid a salary or hourly rate but rather a fixed or contract rate;
4. The work may not be terminated during the contract period (unless the contract is somehow breached);
5. The hiring party doesn’t provide more than minimal training;
6. The worker must provide his or her own tools and benefits, although the hiring party may provide materials and supplies;
7. The hiring party won’t dictate the time of performance, although a completion date or range of working hours may be agreed upon;
8. Amounts due under the contract will be paid to the worker’s trade or business name; and
9. The worker and the hiring party’s businesses will be separate and distinct operations.
State guidelines also require that the worker be an independent contractor in fact, not just on paper. As a result, a hiring party needs to make sure the position and relationship mirror the contract terms: the worker must actually be free to work for others, as well as do the work independently on his or her own time (other than a completion schedule) and with only minimal training.
When an independent contractor agreement is being reviewed or drafted, it’s important to discuss each of these elements to ensure the worker is truly an independent contractor. It’s not enough to simply say so in the contract.
So just as we would likely call something a duck if it looks like, quacks like, and walks like a duck, a business should only classify a worker as an independent contractor if intends to treat the worker like one. If not, the business should probably classify the worker as an employee.
Given federal and state efforts to crack down on businesses that don’t follow these guidelines, company owners who misclassify a worker to reduce labor costs with a “wink-wink, nudge-nudge” attitude may pay for it dearly later. For more details regarding independent contractor agreements, please contact an attorney or refer to the Workers Compensation Act and Employment Security Act (C.R.S. §§ 8-40-202; 8-70-115).
Gretchen Lipman is an attorney in the Denver office of the national law firm Polsinelli Shughart PC. She specializes in employment law, representing clients in employment-related disputes, as well as in drafting employment agreements, independent contractor agreements and employee policies. She also counsels her clients regarding internal human resources and employment matters.