Correctly distinguishing between employees and independent contractors is critical for employer compliance under applicable wage and hour and benefits law; both federal and state. Whether a worker is classified as an employee or independent contractor affects unemployment insurance, workers’ compensation insurance, payroll taxes, and possibly even healthcare benefits.
The “right of control” test. To determine job classification status, Colorado utilizes a “right of control” test. That is, whether a worker is an employee or independent contractor depends on whether the worker is free from control and direction in the performance of the service (both contractually and in fact) and the worker is engaged in an independent business related to the work being performed.
The Analysis. This determination is based on an evaluation of the employment relationship as a whole. The analysis includes the following considerations:
- whether the worker is required to work exclusively for the employer;
- whether the quality of work is reviewed by the employer;
- compensation structure (e.g. hourly, salary, fixed rate);
- whether the employer can terminate the worker during the contract period (for reasons other than a violation of the contract);
- whether the employer provides more than minimal training to the worker;
- whether the employer provides tools or benefits to the worker (other than materials and equipment);
- whether the employer dictates specific hours during which the worker must complete the project;
- whether the worker is paid individually or as a separate business entity; and
- whether the business operations of the worker and employer are distinct from each other.
The more an employer exerts control over when, where, and how work is completed, the more likely it is the worker should be classified as an employee. Workers that have more autonomy over their work, are not supervised by the employer, who are engaged in a separate business or trade (i.e. they are in business for themselves), and provide their own equipment, are more likely to be classified as independent contractors.
Consequences for Misclassification. Why is proper job classification so important for employers? If an employer misclassifies an employee, the employer must pay all unpaid (or back) unemployment insurances premiums, plus interest. Colorado law also authorizes the Division of Employment and Labor to fine employers up to $5,000 if the misclassification was made with willful disregard to the law. The employer can be fined up to $25,000 for subsequent misclassifications. In the event two or more instances of misclassification are discovered, the employer is prohibited from contracting with or receiving funds from the state of Colorado for up to two years.
What does this mean for Employers? Employers who are unclear as to proper job classifications for workers should work with legal counsel or their human resources department to conduct a thorough analysis of the employment relationship. If employees are improperly classified as independent contractors, misclassifications should be remedied immediately.
Elizabeth Francis, a litigation attorney at Caplan and Earnest, can be reached at 303-443-8010 or firstname.lastname@example.org.