Misclassifying an employee as an independent contractor can put a business at risk of tax assessments, penalties, and wage and hour claims. Understanding the difference between an employee and independent contractor is vital for any business to flourish in today’s ever-changing economy especially given the growth of the gig economy.

Oregon’s Independent Contractor Landscape

The state of Oregon has six agencies that regulate the employment of individuals in Oregon: the Department of Revenue, Employment Department, Construction Contractors Board, Landscape Contractors Board, Department of Consumer and Business Services’ Workers’ Compensation Division, and Bureau of Labor and Industries’ Civil Rights Division and Wage and Hour Division.

These agencies use different legal tests to determine whether or not an individual qualifies as an independent contractor. Thus, a finding of independent contractor status by one agency does not guarantee the same finding by another. For example, the Department of Revenue might find a worker to be an independent contractor, while the Workers’ Compensation Division might consider that same worker an employee.

The Department of Revenue, Employment Department, Construction Contractors Board, and Landscape Contractors Board apply a statutory test to determine independent contractor status. The Civil Rights Division and the Workers’ Compensation Division both apply a common law right-to-control test. And the Wage and Hour Division applies a common law economic realities test.

Common Pitfalls

There are many pitfalls for businesses to be aware of when retaining independent contractors. Here are a few.

Control over means and methods of services

Businesses may want to avoid exerting direction and control over the means and methods of their contractors’ services. In National Maintenance Contractors, LLC v. Employment Department, the Oregon Supreme Court stated the following: “Certainly, one can tell the carpenter the length of the beam, but it is another thing to dictate the brand of saw with which she makes the cut.” Contractors should generally have the ability to choose the tools of their trade and techniques for performing their services. Businesses may also want to avoid providing control in the form of scheduling, training, supervision, or discipline to contractors.

In the same case, the Oregon Supreme Court suggested that exceptions can exist in situations where controls are necessary to achieve the desired result, such as where “a certain brand of mower, and only that brand, leaves a distinctive pattern in the grass that is associated with the franchise.”

Independent contractor agreements

A poorly drafted independent contractor agreement is another pitfall. For example, in ACN Opportunity, LLC v. Employment Department, the Oregon Supreme Court found that direct-to-consumer sellers were employees because their independent contractor agreements conditioned their ability to hire others on the approval of the hiring party. If a worker is truly an independent contractor, the agreement must ensure that the contractor has unfettered authority to hire and fire other persons to assist in providing services.

Contracting with non-businesses

Contracting with an individual who is not customarily engaged in an independently established business is yet another pitfall. Contracting with a business entity rather than an individual does not—in and of itself—guarantee independent contractor status. Instead, a person is considered to be customarily engaged in an independently established business if any three of five requirements set out in Oregon Revised Statutes section 670.600(3) are met. These requirements include, among others things, that the worker make “a significant investment” in his or her business and bear “the risk of loss.” A “significant investment” includes buying “tools or equipment” and obtaining “specialized training” or education that can be used to perform the services. For example, in Portland Columbia Symphony v. Employment Department, the Oregon Supreme Court ruled that musicians with the Portland Columbia Symphony were independent contractors who supplied “the musical instruments themselves, which typically cost thousands of dollars to purchase and hundreds more annually to maintain.”

To bear the risk of loss, a contractor could enter into fixed-price contracts or bear the costs of fixing defective work. For example, in Ponderosa Properties, LLC v. Employment Department, the Oregon Supreme Court found that house cleaners bore the risk of loss when they entered into fixed-price assignments in which “[r]egardless of the condition of the unit or the time necessary to complete the task, they would be paid only the fixed rate.” Companies may want to address fixed-price arrangements and other risks of loss in their independent contractor agreements.

In sum, while the state of Oregon provides a high-level summary of the criteria each of its agencies use to determine independent contractor status, employers may want to proceed cautiously before making any classification determinations in order to avoid the various pitfalls discussed above.

Potential Changes to Independent Contractor Law

A recent attempt to modify Oregon independent contractor law failed in the 2019 legislative session when House Bill 2498 stalled. The bill’s key provision sought to prevent contractors from providing services that were within the “usual course” of the other person’s business. If the bill had passed, it would have rendered many contractors employees. New Jersey, Massachusetts, Vermont, and California, as well as other states, have successfully adopted similar strict definitions for independent contractors, and the laws have reshaped the employment landscape in those states.

The effort to modify the Oregon independent contractor law has so far not been renewed in the 2020 legislative session. However, businesses and independent contractors may want to keep an eye on the federal Protecting the Right to Organize Act of 2019 (PRO Act), which seeks to implement stricter requirements nationwide for determining independent contractor status. The PRO Act recently passed a vote in the U.S. House of Representatives and has moved on to the U.S. Senate. While many expect the PRO Act to fail there, we anticipate future legislative attempts to modify independent contractor law.