While a company might say it “refers out” workers as independent contractors, and doesn’t employ them, the “economic realities” test will have the last word.
The Colorado Supreme Court found that a “referral service” for house cleaners in fact employed the cleaners under the Colorado Employment Security Act. The company, Colorado Custom Maid, is therefore on the hook for paying unemployment taxes on the cleaners’ wages. Employment attorneys say the case is an example of how a company’s description of its business model only goes so far in determining whether a worker is an employee versus an independent contractor. It’s also a reminder to employers to have their independent contractor relationships spelled out in writing.
The Colorado Employment Security Act requires employers in Colorado to contribute to the state’s unemployment insurance fund by paying premiums on the compensation of their employees but not their independent contractors.
CESA presumes workers to be employees unless the putative employer had them agree, in writing, that their relationship is “limited” in nine specific ways that distinguish it from an employer-employee relationship. Without that agreement, putative employers then have to show, by a preponderance of the evidence, that the worker is:
• free from the putative employer’s control and direction in performing their services, and
• engaged in an independent trade or business.
The Colorado Department of Labor and Employment’s Division of Unemployment Insurance audits employers to ensure they’ve properly classified workers under CESA and are paying premiums on all actual employees. The Colorado Custom Maid case arose out of one of these CDLE division audits.
The division had determined that the cleaners were CCM’s employees despite CCM’s insistence they were contractors. The self-described “referral service” sends a cleaner to the customer, and the customer makes a payment to CCM for the cleaning. CCM then gives 47% of the payment to the cleaner.
The company appealed the division’s finding to a hearing officer, who then reversed. As described in Tuesday’s Supreme Court opinion, the hearing officer determined “that the cleaners were free from CCM’s control and direction and that they customarily engaged in an independent business of providing cleaning services.”
After a back-and-forth between the CDLE’s Industrial Claim Appeals Office Panel — which concluded the cleaners were employees — and the hearing officer — who maintained they were independent contractors — the matter ascended to the Colorado Court of Appeals.
CCM argued that the CESA requires a “threshold” where the burden is on putative employees to show that their services are for the benefit of the putative employer.
The Court of Appeals agreed that there was a threshold but determined the employees had met it. The court found that the cleaners performed services for CCM’s benefit and that the company benefited from the cleaners’ work because of their ongoing relationship with the cleaners and customers.
The Supreme Court rejected the Court of Appeals’ finding of a “threshold” being necessary to show the workers were employees, however.
CCM likened itself to a talent agency in the 2015 Court of Appeals decision in Employer Services v. Industrial Claim Appeals Office where the appellate court employed a threshold. In that vein, CCM contended that it referred the cleaners to “third-party” households, who it said are the ones who derive the benefit of the cleaners’ services.
For that reason, “CCM argues that the employment inquiry must end at this threshold question,” the Supreme Court noted.
But the Supreme Court said CCM’s position would allow “a wide range” of employers to avoid paying unemployment taxes. “Under CCM’s reading of the law, employers across service industries could justify classifying employees as independent contractors by alleging that the individuals perform services ‘for’ the customers or clients, not ‘for’ the employer,” according to the opinion written by Justice Melissa Hart. “There is no such loophole to be exploited in CESA.”
The Supreme Court looked at the “totality of the circumstances” surrounding the work arrangement to judge whether CCM had a general right to control and direct the cleaners in the performance of their service. The company would tell cleaners to train other cleaners who were performing poorly.
It also retained the right to approve any assistants that the cleaners brought on to help them clean. As for whether the cleaners had independent businesses, the court noted that some cleaners did work for clients besides CCM’s — a fact that pointed toward an independent contractor classification. But that fact was “just one of many to be considered,” the court said.
Bronwyn Pepple, an employment attorney and co-managing director of Lewis Bess Williams & Weese, said a written contract outlining CESA’s nine independent contractor factors is important for deciding worker classification under the statute.
“If you’ve got a written agreement that checks all these boxes, then you have this presumption that they’re an independent contractor, not an employee,” Pepple said.
She noted that CESA’s definition of an employee-employer relationship doesn’t differ much from what the IRS of Department of Labor uses, though it’s worded differently.
A written agreement outlining the work relationship is vital regardless of whether the IRS or a state agency is looking at it, she added.
Leni Plimpton, an associate with Fortis Law Partners whose practice focuses on labor and employment litigation, said the Supreme Court didn’t really change its “totality of the circumstances” test for employees under CESA.
She also said that the CDLE division got a lot of deference from the court in how it weighed the facts in that test, and that underscores the need for the employer to lay out the independent contractor relationship in writing. “Get a signed agreement that meets the conditions so you aren’t fighting an uphill battle.”
The court wasn’t sold on CCM’s self-description as a “referral service” and other language it used to position itself away from being the cleaners’ employer.
“I think the lesson is you can call yourself whatever you want, but the test is the test,” Plimpton said. “It’s going to look at the economic realities.”
— Doug Chartier