Ruling heralds return to broader test on worker classifications

Phil Castle
Phil Castle

Phil Castle, The Business Times

Michael Santo welcomes a return to a broader evaluation in distinguishing between independent contractors and employees following a ruling from the Colorado Supreme Court.

“It’s finally back to where it should be, back to where the Legislature intended,” said Santo, a partner with the Grand Junction employment law firm of Bechtel & Santo who served as lead attorney in representing a Western Colorado business involved in the case.

The broader implication for all Colorado businesses is that disputes over the classification of workers will be determined on a case-by-case basis and consider all of the circumstances, Santo said. “For businesses, it’s a really good decision. … It allows businesses to take into account all the factors out there.”

Bechtel & Santo represented Softrock Geological Services in Durango. As a result of an audit conducted by the Colorado Division of Employment and Training, the state alleged the Durango firm misclassified a geologist hired by the firm as an independent contractor rather than an employee and owed back taxes for unemployment insurance premiums. 

The ruling was based in part on what Santo characterized as what for more than 20 years had been a “one-factor hurdle” in Colorado: whether or not the contractor worked for others during the contract period. Since he had not, other factors weren’t considered, Santo said.

Softrock appealed the determination to a hearing officer, who ruled in favor of the firm, Santo said. But the state appealed to the Industrial Claims Appeals Office, which ruled in favor of the state.

Softrock appealed again to the Colorado Court of Appeals, which ruled in favor of the firm in concluding audits should consider nine factors set forth in state statute in evaluating whether a worker is an independent contractor or employee.

The state appealed to the Colorado Supreme Court. The high court upheld the appellate court ruling, but further ruled the classification of contractors and employees must be based on an even broader evaluation that includes not only statutory factors, but other circumstances that fully define the relationships between workers and employers, Santo said.

The state Supreme Court ruled the same way in a separate, but similar, case involving Western Logistics, a Denver-based freight hauling firm, and the classification of delivery drivers.

In broad terms, classifications will consider whether or not contractors are, in fact, engaged in business, Santo said. “Are they acting like a business should act?”

The high court ruling not only overturned the one-factor hurdle, but also  a retroactive evaluation that made no sense, Santo said. The only way a business could know whether or not a worker was a contractor was to wait until the end of the contract period and determine whether the contractor worked for others. 

Moreover, state statute mentions specifically that contractors may choose to work exclusively for an employer during the contract period, he added.

The classification of independent contractors and employees is an important one, Santo said, in that nearly everyone hires contractors — businesses as well as consumers.

In addition, he said Colorado law not only allows the state to conduct audits of classifications, but to fine employers deemed to have willfully misclassified employees — up to $5,000 per employee for a first offense and up to $25,000 per employee for subsequent offenses.

While classifications going forward will consider all the circumstances, Santo said businesses still should perform due diligence in hiring contractors.

Employers should have a contract in place that sets out in writing the terms of the relationship. Employers also should check references as well as check with the Colorado Secretary of State’s Office to determine if the contractor has registered his or her businesses, Santo said. Employers should make checks payable to a business rather than an individual. 

What employers shouldn’t have to do, Santo said, is provide training or tools to a contractor.

Still other factors that indicate whether contractors are, in fact, engaged in a business is whether or not they maintain a business location and telephone number, advertise their services, employ others and carry insurance, he added. “You want them to look and act like a business.”