On June 2, 2009, Colorado Governor Bill Ritter signed a bill allowing any person to file a complaint with the state alleging an employer is misclassifying an employee as an independent contractor. This new law, which became effective immediately, authorizes the Colorado Department of Labor and Employment to impose penalties of $5,000 per misclassified employee and up to $25,000 per misclassified employee for an employer’s second or subsequent offense. Repeat offenders can also be prohibited from contracting with the state for up to two years.  

These state-penalties are added to the already substantial consequences for employers’ misclassifying workers as independent contractors. Improperly categorizing workers as independent contractors who are, by law, employees, exposes employers to federal and state tax liabilities, liability to workers’ compensation programs, minimum wage and overtime violations, and claims under the Colorado Wage Claim Act, among others.  

Under the new law, the Director of the Division of Employment and Training has the authority to investigate allegations and impose penalties on employers who get it wrong. To do so, the Director must find that there has been “willful disregard” of the proper classification. Although the “willful disregard” standard provides some cover for employers, and good faith mistakes may not trigger penalties, employers should expect increased state scrutiny over their classifications.  

The good news is that the test of independent contractors has not changed in Colorado. That test, commonly referred to as “direction and control,” defines an independent contractor as follows:  

one who, exercising an independent employment, contracts to do a piece of work according to his own methods, and without being subject to control of his employer, except as to the result of his work.  

This is inevitably a fact-intensive evaluation. Courts often focus on several factors such as the employer’s right to control the details or performance, the right of either party to terminate the relationship without liability to the other, duration of the job, and whether the employer supplies the tools and equipment, among others.  

Perhaps recognizing that navigating this multi-factored test is difficult for employers, the new law contains another important feature that allows employers to request a written advisory opinion from the state as to how to classify a particular individual. But even with this state assistance, properly classifying workers will remain a challenge because of differences between state and federal laws on this issue. Employers with questions or doubts as to the proper classification of workers are encouraged to contact HRO a ttorneys who are here to advise them on comprehensive strategies to avoid these now stiffer consequences.