USING “INDEPENDENT CONTRACTORS” CAN BE RISKY

It is tempting for employers to consider engaging "independent contractors" instead of hiring new employees. The business reasons can be compelling - in an employment relationship, employers are potentially liable for claims under an expanding array of discrimination and wage and hour statutes, and are also subject to payroll taxes, tax and withholding obligations, and the like.

In theory, an independent contractor relationship can avoid these and many other issues. But employers need to be careful when exploring whether to engage independent contractors. Misclassifying employees as independent contractors can result in serious liability issues for employers which will far outweigh the potential benefits to be gained by avoiding an employment relationship.

Classifying Workers - Different Standards Apply
The overarching standard in determining whether an individual is an employee or an independent contractor is whether the person engaging the services has retained the right to control the manner and means by which the work is accomplished. In a typical employment setting, the employer will normally want to reserve the right to supervise and control the employee's daily activities; in other words, to determine how the employee performs his or her job functions.

In an independent contractor relationship, generally the person engaging the services wishes to control the actual results of the services being performed, but not necessarily the manner and means in which the results are accomplished. Factors that generally determine whether the "right to control" is present include: who furnishes tools and equipment needed to perform the job functions; how payments are made; whether the right to terminate is reserved; and whether the right to control how the services have been provided has actually been exercised.

Some courts or agencies have also used a so-called "economic realities" test in determining whether an independent contractor relationship exists, focusing upon the overall relationship between the parties to determine whether it is different than one would expect in a typical employer/employee setting.

There are also several statutory tests used to determine whether an independent contractor relationship exists. An Oregon statute (ORS 670.600) is used to determine whether a person is an independent contractor for purposes of several state-related issues, including income taxes, workers' compensation, and unemployment benefits. That test focuses on whether the purported contractor is held out to the public as an independent business, whether business risks are assumed, whether such services have been performed for two or more different entities, and whether there is significant financial investment in the enterprise. In the past, it has been extremely difficult to establish the existence of an independent contractor relationship under this Oregon statute. However, the legislature recently modified this statute, making it at least feasible to qualify. This is a multi-faceted statute that should be carefully reviewed before finalizing an independent contractor relationship.

Finally, to improve the likelihood that an independent contractor relationship will be recognized, it should always be in writing, to give it the stature of a formal contractual relationship. Such a contract will also allow the parties to put in writing those essential factors that can be critical in an after-the-fact review.

Consequences of Misclassification
Should it be determined that an "independent contractor" should have been properly classified and treated as an employee, serious consequences can result. Employers who have not been withholding taxes or paying payroll taxes will be subjected to penalties and interest. There may be issues relating to noncompliance with minimum wage and overtime requirements. If the relationship has ended, there may also be questions as to whether Oregon's strict "final paycheck" requirements have been satisfied. Again, penalties and attorneys' fees can be assessed for non-compliance.

If the employer is large and has been improperly using "independent contractors" there is also the real risk of class action litigation. These lawsuits are very much in vogue recently, and can be extremely costly and disruptive.

Take Action to Minimize Risk
Employers are strongly encouraged to proceed carefully before engaging an independent contractor. Review the relevant factors to ensure that this should not be an employer/employee relationship instead. Again, the penalties, defense costs, and internal disruptions associated with misclassifying workers far outweigh the potential benefits to be gained.

If you would like more information about classifying workers, please contact Randall L. Duncan, Chair of our Closely Held Business Team, or Jack Cooper, a senior partner in Dunn Carney's employment law practice group. We will be happy to accommodate your request.

Closely Held
Business Team

The Closely Held Business Team - Dunn Carney is dedicated to assisting business owners in navigating through the opportunities and challenges the law presents to advance each owner’s success in business. They understand the multifaceted issues business owners face each day and the need for responsive and proactive legal counsel.

Team members include:
Randy Duncan, Team leader
Bob Allen
Shane J. Antholz
Ric Ashe
John Barhoum
Merrill Baumann
David Buono
Brian Cable
Jack Cooper
Ken Davis
Tim Hering
Frank Hilton
Elizabeth Howard
Scott Jonsson
Robert Kerr
JoDee Keegan
Kelly Martin
Eric Smith
Kyle Stinchfield
Matt Wilmot
Bob Winger
J. David Zehntbauer