When work is assigned to an individual who holds himself out as an independent contractor, issues regarding taxation of compensation, unemployment, and common law liability can arise. In such situations, the business must decide whether the individual will be treated as an employee or as an independent contractor. The substance of the relationship, not the title assigned to the worker nor the number of hours worked, governs the worker's status. Misclassifying an employee as an independent contract can lead to penalties, fines and back taxes.
A written contract may be helpful in proving independent contractor status. If the parties make a written document to create an independent contractor relationship, the agreement must satisfy some combination of the statutory nine (9) factors provided below. However, the facts of the work relationship are more important that the words of the contract. If the actual facts differ from the written contract, the facts will control.
Colorado statutes will consider the following questions in reviewing an employment relationship or an employment agreement : 1) Does the individual work exclusively for the company for whom services are performed? 2) Does the company oversee the actual work or instruct the individual as to how the work will be performed? 3) Does the employer pay a salary or hourly rate or a per project price? 4) Can the employer terminate the work during the contract period unless the individual violates the terms or fails to produce the result that meets the specifications of the contract? 5) Does the employer provide more than minimal training for the individual? 6) Does the employer provide tools or benefits to the individual, not including materials and some equipment? 7) Does the employer dictate the time of performance? (Note that a completion schedule and mutually agreeable work hours may be established) 8) Does the employer pay the individual personally rather than a company? and, 9) Does the employer combine his business operations in any way with the individual's business, or instead maintains such operations as separate and distinct. C.R.S. § 8-70-115(1)(c)(I-IX).
For wages and compensation, the business must look for the definitions set forth by the Internal Revenue Service. According to the IRS, a worker is an independent contractor if the business for which the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. An individual is an employee if the business has the right to control what will be done and how it will be done. To help further classify workers, the IRS has broken down the right to control factors into three categories: 1) behavioral control; 2) financial control; and, 3) the type of relationship that the parties have created. If the business classified an employee as a contractor without a reasonable basis for doing so, it may be held liable for employment taxes for that worker. The IRS will determine employment status of workers for federal tax purposes, if the employee files a free form which can be found on their website; Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. A qualified compliance officer will investigate the worker's situation and deliver a written recommendation to the employer. If the IRS finds there was a misclassification, the employer may be liable for back taxes.
Colorado law addresses liability in tort and unemployment compensation when the working relationship ends. Unemployment compensation is governed by statute. A person hired to perform services for pay is presumed by law to be an employee unless the business can demonstrate: 1) the individual is in fact free from control and direction in the performance of the service; and 2) the individual is customarily engaged in an independent trade, occupation, profession, or business related to the service performed. C.R.S. § 8-70-115(1)(b). The business bears the burden of proof to show that both conditions exist. A party may be entitled to receive unemployment benefits even though the parties intended to create an independent contractor relationship.
An individual who believes they are being misclassified may also file a written complaint with the Department of Labor. After receiving a complaint, the Division of Employment and Training has thirty (30) days to determine whether an investigation is warranted. Colorado employers are required to cooperate with the investigation and provide information as necessary. If the business is found to have engaged in misclassification, it may be ordered to pay back taxes and interest. If the violation was willful, the Director may impose a fine up to $25,000.00 per misclassified employee.
Similarly, misclassification could result in the business being liable for back payments under the Colorado Wage Claim Act which includes possible penalties, attorney's fees, and liability for benefits to the employee. If you have a question about your classification at work or about how to classify your employees, contact an attorney to discuss your legal rights.