Tcl - Independent Contractors in Colorado - December 2005 - Business Law Newsletter
| Publication year | 2005 |
| Pages | 53 |
| Citation | Vol. 34 No. 12 Pg. 53 |
2005, December, Pg. 53. TCL - Independent Contractors in Colorado - December 2005 - Business Law Newsletter
December 2005
Vol. 34, No. 12 [Page 53]
Business Law Newsletter
Independent Contractors in Colorado
by Bradley S. Abramson
(c) 2005 Bradley S. Abramson
This column is sponsored by the CBA Business Law Section to apprise members of current information concerning substantive law. It focuses on business law topics for the Colorado practitioner, including, but not limited to, issues surrounding antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, nonprofit entities, securities law, and small business entities.
Column Editors:
David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097, dpsteig@sparkswillson.com; Rob Fogler of Kamlet Shepherd & Reichert LLP - (303) 825-4200, rfogler@ksrlaw.com
This month's article was written by Bradley S. Abramson, an attorney with the Denver law firm of Thomas N. Scheffel & Associates, P.C. - (303) 759-5937, babramson@tnslaw.com.
This article discusses the legal distinction between independent contractors and employees and explains the common law test used to distinguish between the two types of workers. The article also introduces variations on the common law test found in some Colorado and federal statutes. Practical information designed to assist the practitioner drafting independent contractor agreements also is presented.
Many business lawyers will confront a variety of issues related to their clients' use of independent contractors. Therefore, when advising clients, practitioners should understand the legal distinction between these two types of workers. For reasons discussed in this article, businesses often consider it advantageous to attempt to categorize workers as independent contractors rather than employees. Many employers mistakenly believe that they may unilaterally decide whether to treat a worker as an employee or an independent contractor. In fact, whether a worker is, legally, an employee or an independent contractor depends on the factual nature of the relationship between the employer and the worker. Indeed, not even the worker can choose to be treated as an independent contractor if he or she is an employee under the law. Incorrectly categorizing workers who are employees as if they were independent contractors can have devastating financial consequences to the employer.
This article provides business lawyers with an overview of the law regarding independent contractors in Colorado. It discusses the Colorado common law test used to distinguish between employees and independent contractors, as well as potential consequences of treating workers who are, legally, employees as if they were independent contractors. This article also discusses relevant Internal Revenue Service ("IRS") regulations and the variations on the common law test used in federal cases and under the Colorado unemployment and workers' compensation statutes. Finally, some suggestions for drafting independent contractor agreements are provided. For purposes of simplification, throughout this article the term "employer" will refer to a person or entity who hires a worker, regardless of whether the worker is an employee or an independent contractor.
Worker Categorization And Employer Obligations
Categorizing workers as employees or independent contractors has important legal and financial ramifications. Because employers have different obligations toward employees and independent contractors, they must be careful to categorize workers correctly to avoid potential costly consequences of incorrect categorization.
Employer Obligations Toward Employees
As a general rule, employers are responsible for the acts of their employees. Employer liability can arise on a theory of direct negligence, such as negligent hiring or negligent supervision of the employee.1 In addition, under the doctrine of respondeat superior, employers can be held legally responsible for the acts of employees performed in the course of their employment. Respondeat superior liability arises not because of any negligence on the employer's part, but simply because the employee is acting on the employer's behalf.2
Employers also are obligated to make certain financial contributions to or on behalf of employees. Most employers of employees must contribute to the Colorado Unemployment Insurance Fund, provide employees with workers' compensation insurance, and make Social Security contributions on behalf of their employees. Employers also must withhold state and federal tax payments from their employees' pay.
Employer Obligations Toward Independent Contractors
Employers have relatively few obligations toward or responsibilities for independent contractors. Employers of independent contractors are not subject to liability under the doctrine of respondeat superior.3Also, they generally are not legally responsible for torts committed by independent contractors, unless the work involves inherently dangerous activities.4 Finally, employers need not contribute to the Colorado Unemployment Insurance Fund, provide workers' compensation insurance, or make Social Security contributions on behalf of independent contractors, nor do employers have to withhold taxes from independent contractors' pay.
Consequences of Incorrect Categorization
If an employer categorizes as independent contractors workers who are, by law, employees, the employer can be held liable for, among other things, the amount of federal and state taxes that the employer should have withheld from the incorrectly categorized workers' pay. The employer also may be liable for the amounts that should have been contributed to employee welfare programs such as workers' compensation and unemployment insurance.
Taxing, workers' compensation, and unemployment insurance authorities occasionally audit businesses suspected of incorrectly categorizing workers. If an audit results in a finding that an employer has incorrectly treated as independent contractors workers who are, legally, employees, the audited businesses may be retroactively assessed amounts the authorities conclude should have been paid had the employers not incorrectly categorized its workers. In many cases, such assessments can amount to sums significant enough to threaten the financial integrity of the audited business.
Colorado Common Law Test
The Colorado common law test used to distinguish between employees and independent contractors can, for purposes of convenience, be referred to as the "direction and control" test. In its simplest form, the test can be stated as follows: If the employer has the right to direct and control the worker as to how the work is performed, the worker is an employee. Conversely, if the employer does not have the right to direct or control the worker as to how the work is performed, the worker is an independent contractor.5
Several Colorado Supreme Court cases summarize the direction and control test. An early Colorado case6 defined an independent contractor as:
one who, exercising an independent employment, contracts to do a piece of work according to his own methods, and without being subject to control of his employer, except as to the result of his work.7
Similarly, the Colorado Supreme Court has stated that a worker is an independent contractor rather than an employee when the parties have a contract that gives the employer no right of control over the worker, other than the control that would "secure the proper result from the work."8 In contrast, the employer of an employee may direct the employee as to "the means as well as the end"9 of the work. Thus, the Colorado common law test focuses on whether the employer has the right to control the worker as to the details of how the work is performed.10
Although it is easy to annunciate the common law test, it is more difficult to apply it in the context of a specific case. Indeed, as early as 1925, the Colorado Supreme Court warned, "It is not always easy to determine when one performing labor for another is a servant and when a contractor."11 Almost forty years later, the Court again stated:
Review of the numerous decisions of this Court disclose that there is no hard and fast rule which can be followed with mathematical precision in determining whether a person is an employee or not. Certain tests have been laid down, no one of which is determinative, and in the last analysis the matter is finally resolved by a careful examination and evaluation of the facts and circumstances of the case at hand.12
However, some aspects of the direction and control test are clear. For example, all cases seem to agree that it is the right to control, as opposed to the exercise of that right, that is determinative. As the Colorado Supreme Court has stated, the power of control, rather than the fact of control, is the primary factor when distinguishing an employee from an independent contractor.13 The same principle has been reiterated in other cases.14
Furthermore, most cases seem to agree that any contract or agreement between the employer and the worker that purports to define the worker as an independent contractor is not controlling. Courts will consider the substance of the parties' relationship rather than merely the form of the contract.15 If courts did not consider the totality of the...
To continue reading
Request your trial