Is my Worker an Independent Contractor or an Employee?
For every business owner, large and small, knowing the difference between an independent contractor and employee is an important one. It is particularly important because, even though it is not always clear, the financial consequences of mistaking a contractor for an employee could be dire (taxes, penalties, and lawsuits could result). It is important to understand that a contractor may be considered an employee even if both the employer and contractor believe (and argue to regulators and others) otherwise.
Every state has an interest in classification of employees. Lets take the example of Oregon: what is the metric that the State of Oregon uses to determine who qualifies as a contractor? The answer: not one but several tests.
What is an independent contractor? Under Oregon law, an independent contractor must be:
- free from direction and control over the means and manner of providing the services, subject only to the right to specify the desired results;
- is customarily engaged in an independently established business; and
- is responsible for obtaining licenses or certificates necessary to provide the services.
A person is considered engaged in an independently established business if any three of the following requirements are met:
- the person maintains a separate business location;
- the person bears the risk of loss shown by factors such as:
- 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.
- the person provides contracted services for two or more different persons in a year, or the person routinely engages in business advertising, solicitation or other marketing efforts reasonably calculated to obtain new contracts to provide similar services.
- 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 or specialized training required to provide the services.
- the person has the authority to hire others to provide or to assist in providing the services and has the authority to fire those persons.
What are the Other Independent Contractor Tests in Oregon? While most rely on the above test, the Bureau of Labor and Industries (BOLI) and the Workers’ Compensation Division have several (that’s right, more than one) other metrics for determining if a worker is a contractor.
The traditional independent contractor test is the “right-to-control” test where four factors are weighed to determine whether a worker is free from control by the business receiving the worker’s services. There is also the “economic realities” test where five factors are weighed to determine whether a worker is a contractor as a matter of economic reality (think degree of control + degree of opportunity for profits). The final is the “nature-of-the-work” test where the character of the work or business is analyzed (this supplements the “right-to-control” test).
What if we have a signed independent contractor agreement? It is important to remember that a signed independent contractor agreement, while helpful for establishing that a worker is a contractor, is not sufficient to prove that an independent contractor relationship exists. Business owners who fail to behave as if the contractor is independent run the risk of an agency ruling that the contractor is, in its interpretation, an employee. This can have significant implications for a business, including taxation and wage issues, investigations into labor standards, insurance coverage requirements, and other issues.
When in doubt, consider your relationship with a contractor in light of the tests above. If it seems as though the relationship is unclear, seek assistance in clarifying your relationship. You can and should talk to the contractor about your concerns and suggest an independent contractor agreement. You can also ask for assistance from your HR professional, or from an attorney familiar with employment law.