Businesses constantly are challenged with correctly classifying workers as either employees or independent contractors. Of course, employers have good reason to be vigilant: misclassification can result in costly audits, assessments of back taxes, and stiff penalties. Under the Oregon independent contractor statute, the “independent contractor” must be engaged in an “independently established business.” This last term is interpreted restrictively and strictly by the state’s courts.

The Oregon Court of Appeals, the state’s intermediate appellate court, has released an opinion highlighting how restrictively and strictly it interprets the state’s independent contractor statute.

In Compressed Pattern, LLC v. Employment Dep’t Tax Section, Ore. App. 254 (Or. Ct. App. 2012), for instance, the Oregon Court of Appeals, the state’s intermediate appellate court,  considered a case of an architectural design firm’s classifying an individual who provided it with occasional drafting services as an independent contractor. The lower court ruled that Compressed Pattern had improperly classified the individual and the firm appealed.

Under their work arrangements, Compressed Pattern would provide the individual with design specifications and general deadlines to complete drawings on discrete projects. The firm did not provide him with any office space or materials. The individual set his own hours and performed services for other companies besides Compressed Pattern.

The Court of Appeals held that the drafter was not an independent contractor under ORS 670.600. Under the statute, a worker may be classified as an independent contractor if he (1) is free from direction and control over the means and manner of providing services; (2) fulfills certain licensing or certificate requirements necessary for some services; and, critically, (3) is “customarily engaged in an independently established business.”

The Court held that the drafter did not meet the last requirement. The statute provides that the “independently established business” prong is met only where a worker meets three of the following five criteria:

  1. Maintains a business location that is separate from the location of the service recipient, or in a portion of his own residence used primarily for business;
  2. Bears the risk of loss on his services, shown by factors such as being required to correct defective work, warranting the services provided, negotiating indemnification agreements or purchasing liability insurance;
  3. Provides contracted services for two or more different persons within a year, or routinely engages in efforts reasonably calculated to obtain contracts for similar services;
  4. Makes a significant investment in the business, such as by buying tools or equipment, paying for premises or facilities, or paying for licenses, certificates, or specialized training required to provide the services; and
  5. Has the authority to hire and fire other persons to provide assistance in performing the services.

The Court ruled that the drafter in this case did not maintain a separate business location (#1) because he did not “maintain” a separate workspace; he borrowed space from another company without paying rent and without being charged for using specialized drafting software. The Court also found that the drafter did not bear the risk of loss for his services (#2): he was “willing,” but not “required,” to correct mistakes; he did not carry liability insurance; and he charged by the hour (eliminating the risk that he would underbid a project). Further, the Court found the drafter had not made a significant investment in his business (#4). He used free space and equipment and had invested $1,500 to take architectural licensing exams, but this licensing was not strictly required to perform drafting services. Having concluded the individual did not meet three of the five criteria for an “independently established business,” the Court ruled the architectural design firm improperly classified the individual as an independent contractor.

As Compressed Pattern demonstrates, employers in Oregon should carefully and regularly perform audits of their independent contractor classifications. Even workers who are hired to perform services on a project-by-project basis, with complete independence, and without using the employers’ office space or equipment, may not meet the Oregon independent contractor test if the workers have not significantly invested in their own business, such as by maintaining a permanent workspace, investing in materials, or formally warranting their work.