In the past few years, we have witnessed significant increased scrutiny by the Department of Labor (?Department?) as it has intensified enforcement efforts largely through the use of its auditing or investigatory function.? These audits often come in the form of Unemployment Insurance audits and sometimes arise in conjunction with Workers? Compensation and/or Wage and Hour audits.? Regardless of how initiated, the audits increasingly result in the Department concluding that the employer has improperly classified individuals as Independent Contractors, individuals whom the Department concludes are employees.? As a consequence of misclassification,? employers are assessed fines and penalties that have both short and long-term implications. These include immediate payment of significant amounts and long-term implications for federal and state tax reporting, since filings may need to be amended and employer costs will increase with having “employees”.
Colorado?s Supreme Court recently issued two opinions in which it effectively rejected the Colorado Department of Labor?s approach to assessing Independent Contractor status versus that of an Employee.? In the first case against Western Logistics, a company that operates a car parts delivery service under the name of Diligent Delivery Systems (?Diligent?), the Court held that the Department’s and the Industrial Claims Appeals Office’s (?ICAO?s?) almost singular reliance on the fact that the individuals in question were not working for other companies at the same time as they were working for Diligent was inappropriate.? Importantly, the Court noted that the focus on one factor alone is too narrow an analysis.
The second case involved a geologist who was a contractor for Softrock Geological Services (?Softrock?). ?The contractor used his own vehicle, equipment and had his own business cards, carried his own liability insurance and did not represent himself as a Softrock employee. However, the Department and the ICAO, using a statutory ?9 Factor Test?, ultimately determined that the individual was an employee — because he was not doing similar work with any other business at the time. ?Again, the Court held that a determination based on the ?9 Factors test? is too narrow. In overruling the ICA?s Determination, the Court explained that “[g]iven the wide array of factors that could be relevant, we conclude that rather than requiring a rigid check-box type inspection, a more accurate test to determine if an individual is customarily engaged in an independent business involves an inquiry into the nature of the working relationship.”
In other words, the 9 factor test is still relevant but so too is other information that provides context about the relationship between the employer and individual.
We at The AR Group view these decisions as largely positive.? We now know that although the 9 Factor Test is still relevant, so too are other facts that provide ?context? about the relationship between the employer and individual.? In our experience, we increasingly witnessed the DOL?s auditors applying overly formulaic ?analyses? in order to reach a determination that the employer should have classified nearly everyone as an employee and not an independent contractor.? Accordingly, we are optimistic that these recent rulings will provide employers with more room to establish the true nature of the independent contractor relationship.? That said, these rulings should not be viewed as a total employer victory because the language in the opinions is broad enough that a skilled advocate could argue the Court’s holdings support an opposing view. Still, these holdings provide us more latitude as counsel to business clients that rely on Independent Contractors for supplemental and project based assistance.
SMART TIP: The paper trail that is audited always involves the employer?s Independent Contractor Agreements and related documentation.? Employers are wise to have these Agreements reviewed to ensure that your own paper trail does not unnecessarily burden your defense.