Recent Colorado Supreme Court Case Clarifies Independent Contractor Test

The use of independent contractors is widespread across a diverse group of industries.  Independent contractors can be a valuable source of specialized short term talent.  For employers there are a number of advantages, both business and tax, for using independent contractors.  But, using independent contractors also carries risks. For example, if the IRS audits a company and determines that its independent contractors were misclassified and should have been treated as employees, the penalties and tax ramifications can be severe.

Many companies use independent contractors on repeated long term projects.  Often, those independent contractors work exclusively for one particular company.  This can be risky.  In the past Colorado courts have often found that such relationships, while perhaps called independent contracting, are in fact an employer/employee relationship.  The case of note was the Colorado Court of Appeals’ opinion in Carpet Exchange of Denver v. Industrial Claim Appeals Office, 859 P.2d 278 (Colo. App. 1993). The court of appeals analyzed C.R.S. § 8-70-115(1)(b) and, after applying the factors, decided that the workers in question were employees rather than contractors because they were not “customarily engaged in an independent trade, occupation, profession, or business related to the service performed.” Since that case was decided, Colorado courts have relied on this one-factor test (often referred to as the “outside employment test”) to determine whether long-term workers are employees or contractors.

The Colorado Supreme Court recently decided an important case, further clarifying the independent contractor/employee test and reversing this prior precedent:  Industrial Claim Appeals Office v. Softrock Geological Services, 2014 CO 30 (Colo. May 12, 2014).  In the Softrock case, the Colorado Supreme Court rejected the outside employment test as dispositive of whether a worker is an employee or an independent contractor, ruling instead that the totality of the circumstances must be considered and no single factor can be dispositive in deciding whether an individual is customarily engaged in an independent business or trade.

For the Colorado Supreme Court’s full opinion see: 

http://www.cobar.org/opinions/opinion.cfm?opinionid=9355&courtid=2

Of note is the following quote from the  CO Supreme Court:

“We agree with the court of appeals that whether an individual is “customarily engaged in an independent trade, occupation, profession, or business related to the service performed” is a question of fact that can only be resolved by analyzing several factors; whether the individual worked for another is not dispositive of whether the individual was engaged in an independent business. Softrock Geological Servs., Inc. v. Indus. Claim Appeals Office, 2012 COA 97, ¶¶9, 23–26. We disagree, however, with the court of appeals’ conclusion that whether an individual is engaged in an independent trade or business can be determined by applying a nine-factor test developed based on the list of nine factors that a document must contain to create a presumption of an independent contractor relationship under section 8-70-115(1)(c). See id. at ¶24. Instead, we hold that the determination must be based on a totality of the circumstances test that evaluates the dynamics of the relationship between the putative employee and the employer; while the factors listed in section 8-70-115(1)(c) may be relevant to this determination, the section does not provide an exhaustive list of factors that may be considered. As such, we affirm the judgment of the court of appeals and remand the case to that court to return the case to the Industrial Claim Appeals Office for proceedings consistent with this opinion.”

This case will have long lasting impacts on employers and independent contractors.  If your business regularly engages independent contractors and you are concerned about the possibility of them being considered employees by the IRS, give our firm a call.  We regularly represent companies and independent contractors and can help put the proper documentation and policies in place to protect your business.

(Mallon Lonnquist Morris & Watrous, PLLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado business lawyer with MLMW, based in Denver, Colorado. Craig regularly represents clients on both sides of independent contractor agreements. Craig can be reached at cwatrous@mlmw-law.com.)