How to Determine Whether a Worker is an Employee or an Independent Contractor
December 4, 2014
By: Michelle R. Magruder
Colorado law presumes that any individual who performs work for another is an employee. In order to rebut this presumption, it must be demonstrated that the individual classified as an independent contractor is:
[F]ree from control and direction in the performance of the services, both under the contract for performance of services and in fact, and such individual is customarily engaged in an independent trade, occupation, profession, or business related to the service performed.
Colorado law, as well as Federal law, considers specific criteria in determining whether an individual is truly an independent contractor versus an employee. Under Colorado law, these factors include, but are not limited to:
- The company and the independent contractor must have a written contract which is signed by both entities.
- The written contract states the purpose and intent of the written contract is to establish an independent contractor relationship.
- The written contract must contain the following language in bold type:
The independent contractor is not entitled to workers’ compensation insurance benefits by the company the independent contractor is performing work for; the independent contractor agrees he or she is obligated to pay all Federal and State income tax on any monies earned pursuant to this contract; the independent contractor is responsible for paying his or her own unemployment taxes to both the State and Federal government.
- The independent contractor must be free from control and direction in the performance of all services performed in the contract. This means that the company cannot oversee the actual work performed, or instruct the individual as to how the work will be performed.
- The independent contractor is customarily engaged in an independent trade, occupation, profession or business related to the services being provided under the written contract.
- The independent contractor must be free to perform similar services for other companies while performing work for your company.
- Under the terms of the written contract, the independent contractor must be paid on a fixed or contract rate. This means the independent contractor cannot be paid on a set salary or an hourly rate.
- The payments issued to the independent contractor must be made out to the name of the independent contractor’s business or trade name and not to an individual. The company should require the independent contractor register his or her business name with the Colorado Secretary of State.
- It is also recommended that the written contract be for a specified time period and is not an open-ended agreement.
- The contract should require the independent contractor to carry his/her own business insurance.
These same guidelines are generally used by the IRS and the U.S. Department of Labor, when determining whether an individual is properly categorized as an independent contractor. Currently, the U.S. Department of Labor is targeting industries and companies which it believes have incorrectly and improperly classified workers as independent contractors. A copy of the IRS “checklist” used by the IRS and the U.S. Department of Labor is attached.
If your company is considering using a worker as an independent contractor instead of an employee, you need to make sure that the above-listed criteria exist within a written contract. The contract should represent the true facts of the working relationship. Otherwise, it could be found by the State or Federal government that your company improperly categorized an individual as an independent contractor, when in fact the worker is an employee. This could subject your company to liability for back taxes, penalties, interest and fines.
This paper is for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
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