In This Issue: 1 Correctly Using ICs in Oregon 10 Taxation in Popular Culture 12 Legislative Highlights from the 2015 Oregon Legislative Session VOLUME 19, NUMBER 1 Winter 2016 13 Heather Kmetz Newsletter Bio 14 Hon. Jill A. Tanner to be awarded 2016 Roberts Award 14 Award of Merit CORRECTLY USING INDEPENDENT CONTRACTORS IN OREGON: 14 Future Events Understanding ORS 670.600, Oregon’s Independent Contractor Statute Executive Committee By Dan Webb Howard, Attorney-at-Law1 Barbara Smith, Chair Dan Eller, Past Chair Businesses commonly use contractors, in lieu of employees, to provide certain Jennifer Woodhouse, Chair-Elect services to their customers. For example, a business may use contractors to help deliver Ryan Nisle, Secretary the merchandise or install the products that it sells, provide transportation to and from its Heather Anne Marie Kmetz, Treasurer business location or special events that it sponsors, or provide troubleshooting or repair Members services. Using contractors to provide such services can be a very efficient and cost- Kent Anderson effective business model if they are truly independent contractors. On the other hand, if Jeremy Babener a business’s “contractors” are actually employees mislabeled as contractors, it may be Jonathan Cavanagh setting itself up for a legal and financial disaster. Matthew Erdman In recent years, Oregon’s agencies (especially the Employment Department) have Cynthia Fraser dedicated considerable attention and resources to cracking down on businesses that they Christopher Heuer believe misclassify their employees as independent contractors. Investigations by state Lee Kersten agencies frequently result in the “reclassification” of a business’s contractors as employ- Tricia Palmer Olson ees, with some harsh consequences, including assessments of years of back employment Daniel Robinson taxes, accompanied by accrued interest and stiff penalties. Worse, an adverse finding Scott Schiefelbein by a state agency can prompt a class-action lawsuit seeking back overtime wages and Hertsel Shadian employee benefits on behalf of current and former “contractors,” which can involve stag- gering legal costs and massive potential liabilities. One of the most important contractor classification tests in Oregon is set out in a Newsletter Committee statute, ORS670.600, that defines who is an “independent contractor” (and, by implica- Jeremy Babener tion, who is an employee) for purposes of state employment taxes. Any business that Brent Berselli regularly uses contractors to provide services—and any accountant or attorney who Erik Larsen advises businesses on the propriety of treating certain service providers as “contractors” Mimi Luong for employment-tax purposes—should be well acquainted with this statute and how the Erin MacDonald Oregon courts have interpreted and applied it. Jonathan Mishkin Under ORS 670.600, any individual or entity that provides services to a business for Hertsel Shadian remuneration will be deemed its employee unless that individual or entity, in addition to Laura Takasumi possessing any license necessary to lawfully provide the services in question, is: (a)free Dallas Thomsen from direction and control over the means and manner of providing the services; and (b) Jennifer Woodhouse “customarily engaged in an independently established business.” To pass the “indepen- Previous newsletters are posted on dently established business” test, the hiring entity must prove that three or more of the the Taxation Section website. following criteria are present: (1) the service provider maintains a separate business loca- tion; (2) the service provider bears the risk of loss related to the provision of the services; (3) the service provider provides similar contracted services for two or more persons within a 12-month period (or routinely engages in business advertising, solicitation, or other marketing efforts “reasonably calculated” to obtain new contracts to provide similar services); (4) the service provider has a significant investment in the business; (5) the Articles in this newsletter are informational service provider has the authority to hire other persons to provide or to assist in providing only, and should not be construed as provid- the services, and the authority to fire those persons. See ORS670.600(3). ing legal advice. For legal advice, please consult the author of the article or your own 1 tax advisor. Dan Webb Howard is an attorney with the law firm Gleaves Swearingen LLP. In the past few years, the Oregon Court of Appeals has Thus, the administrative rules provide some helpful issued a number of important decisions interpreting and guidance. However, they also leave some important ques- applying ORS 670.600. This article examines what those tions unanswered. These include: decisions tell us about how to interpret the statute’s “direc- 1. Exactly how “free” must the contractor be? Does tion and control” test, and each criterion of its “indepen- she need to have complete freedom with respect dently established business” test. every means and manner of performing the services? Does the hiring entity’s control over What Is “Direction & Control,” for Purposes of one method or means of performing the services ORS 670.600(2)(a)? compel a finding of employee status? Or, is it Sections 471-031-0181 and 150-670.600 of the Oregon enough that the contractor is mostly free from Administrative Rules (OAR), identical rules promulgated control with respect to most of the means and by the Employment Department and the Department of manners of performing the services? Revenue, respectively, interpret what it means to be “free 2. Should the factors generally viewed as indicators from direction and control,” for purposes of ORS670.600. of economic dependence under the common- As a preliminary matter, the rules state that being “free law “economic realities” test also be viewed from direction and control” means that a contractor is “free as evidence of control for purposes of ORS from the right of another person to control the means or 670.600? Or, should the statutory language be read manner by which the independent contractor provides ser- literally—i.e., as confining the inquiry to how the vices.” See OAR 471-031-0181(3)(a)(C) (emphasis added). service provider actually “provid[es] the services” Thus, “[i]f the person for whom services are provided has (see ORS 670.600(2)(a)), and whether the hiring the right to control the means or manner of providing the entity controls that (e.g. closely supervises how the services, it does not matter whether that person actually work is performed on an ongoing basis)? exercises the right of control.” Id. Rather, retention of 3. Are constraints on the manner of performing the right to control the means or manner of performing services that emanate from third parties, other the services—even unexercised—is fatal to independent outside sources, or the very nature of the business contractor status. itself properly weighed as evidence of “control”? Conversely, a hiring entity does have a prerogative to Fortunately, recent decisions from the Oregon Court of monitor and inspect the quality of the services provided Appeals provide guidance on these issues. For example, in by an independent contractor, as opposed to his means or Avanti Press, Inc. v. Employment Department, 248 Or App manner of providing them. See OAR 471-031-0181(3)(b) 450 (2012), the court stated that the “direction and control” (“Specifying the final desired results of the contractor’s language in 670.600 was intended to codify the common- services does not constitute direction and control over the law “right to control” test, which has “never required that means or manner of providing those services.”). Thus, con- an ‘independent contractor’ be free from all direction and tract provisions that are confined to ensuring the quality of control.” Id. at 461(emphasis in original). the final product or the services, without interfering with There, the court applied the interpretation of “direction how they are generated or provided, do not create the type and control” contained in OAR4710310181. However, it of “control” that creates an employment relationship. also applied the “right to fire” factor from the traditional, With respect to the “means” of performing the contract- commonlaw right-to-control test—even though it is not ed services, the administrative rules state that, to be free mentioned in the rule—because that factor has always been from direction and control over the means of providing considered important under the common law. Id. at 471. services, the contractor must have the right to “determine Based on a provision in its contract with the service pro- which resources to use in order to perform the work, and vider (Waiau) that allowed Avanti to terminate the contract how to use those resources.” See OAR 471-031-0181(3) without cause or liability on short notice (30 days), the (a)(A). They identify “means” of performing services court concluded that the “right to fire” was clearly present, as including such things as “tools or equipment, labor, definitively establishing at least one factor indicative of devices, plans, materials, licenses, property, work location, control. Id. at 472. and assets, among other things.” Id. With respect to the However, the court concluded that Waiau was an inde- “manner” of providing services, the rules define that term pendent contractor nonetheless, because “the various facts as the “method by which services are performed,” explain- bearing on the ‘right of control,’ with the notable exception ing that an independent contractor must have the right to of the right to fire, predominate[d] in favor of the conclu- “determine how to perform the work.” See OAR471031- sion that Waiau was an independent contractor.” Id. at 473. 0181(3)(a)(B). The only specific examples of a “manners” Thus, Avanti indicates that freedom from direction and of performing work that the rules give are “work sched- control should be found where factors indicating freedom ules” and “work processes and procedures,” but the rules “predominate” over facts suggesting control, even if some note that these examples are not exhaustive.