The ability to avoid payroll taxes and other regulatory aspects of hiring employees causes many small businesses to turn instead to hiring independent contractors. However, do not make the mistake of thinking that independent contractors and employees are interchangeable based merely upon what you choose to call them.
Don’t misclassify workers as “independent contractors” when, legally, they’re “employees.”
Laws exist to protect workers from being taken advantage of by people who hire workers as “contractors” or “1099 employees” as a way of getting around payment of minimum wage/overtime compensation and statutory benefits that are legally mandated.
Different laws have different tests for the purpose of determining whether a particular worker is an “independent contractor” or an “employee.” “Employee” is defined differently for purposes of tax withholding (federal and state) wage/hour (federal and state), unemployment, and workers compensation insurance. For wage/hour purposes under Colorado law, “employee” “means any person, including a migratory laborer, performing labor or services for the benefit of an employer.” Colo.Rev.Stat. § 8-4-101(5).
“Relevant factors in determining whether a person is an employee include the degree of control the employer may or does exercise over the person and the degree to which the person performs work that is the primary work of the employer; except that an individual primarily free from control and direction in the performance of the service, both under his or her contract for the performance of service and in fact, and who is customarily engaged in an independent trade, occupation, profession, or business related to the service performed is not an “‘employee.’” Colo.Rev.Stat. § 8-4-101(5).
Notice those words, “degree of control.” Do you see how the definition of “employee” for wage/hour purposes is dependent upon the facts of each situation? If you hire the neighbor’s kid to mow your lawn and you tell him or her to show up exactly at 10:00 a.m. on Tuesdays, to use your own mower, then use your own edger, then use your own leaf blower, you have probably just hired yourself an “employee.” And that would probably still be true if the kid mowed lawns for money for a few other neighbors as well. Contrast that with a true “independent contractor” relationship where you hire a company you found on the internet with four crews of two people each, that come on their own schedule, use their own machines, and have hundreds of customers. If you’re the one with the lawnmowing business and you intend to staff it with a bunch of teenagers who have their own lawn mowing businesses, but you’re providing machines and dictating work schedules, your probably going to be deemed to have “employees,” not true “independent contractors.”
Don’t assume that just because a worker is an “independent contractor” for one purpose, he or she is an “independent contractor” for all purposes.
The definition of “employee” is different under other statutes (taxation, unemployment, and workers compensation), so don’t believe it if anyone ever tells you there is a simple answer to the question, “is he/she an employee or independent contractor?” It is a complicated, fuzzy, fact-intensive inquiry—under each statute.
The back liabilities, penalties, legal expenses, accounting expenses, and lost sleep you WILL experience WHEN (not “if”) you are audited for misclassification of workers will make you wish you hadn’t done that. The SBDC offers materials, consulting, and webinars on proper classification of workers. Take advantage of them. Consult the IRS, U.S. Department of Labor, Colorado Department of Labor Wage/Hour Division, Unemployment Division and Workers Compensation Division for the rules for distinguishing “employees” from true “independent contractors” under the various statutes. When in doubt . . . the worker is almost certainly an employee.
Have a written Independent Contractor Agreement.
It is very important when hiring a worker that in any way could be construed to be an “employee,” you have a written independent contractor agreement. In particular, for Colorado unemployment insurance purposes, independent contractor relationships should be documented by a written agreement containing specific provisions. Some of the provisions must be written in ALL CAPS or Boldface. I suggest you hire an experienced employment law attorney to review any independent contractor agreement you come up with. Your average business attorney isn’t going to know about the Colorado unemployment guidelines for what independent contractor agreements should contain. Using qualified and experienced legal counsel can help you include in your form agreement all sorts of things you may not have thought of such as provisions for protection of trade secrets, non-competition provisions, an indemnification clause, alternate dispute resolution mechanisms, and a clause for recovery of attorney fees in the event of breach of the contract.
Check out your contractor’s licensing, insurance, and bonding situation.
Many lines of work are regulated by the Colorado Department of Regulatory Agencies also known as DORA, and people performing such work are required to be licensed. Even if you don’t need a licensed service, you may still want a service that has in place suitable liability insurance or bonding. Don’t be satisfied with just seeing a photocopy; call the supposed insurance company to make sure the policy is currently in effect.
© Copyright 2019, Gene R. Thornton, Attorney-At-Law, all rights reserved.