Are you an Employee or an Independent Contractor?
In today’s economy, the popularity of independent contractors has ascended for several years. Whether it is driving around strangers for money or building website pages from home, it seems like more people than ever are forgoing employee status and embracing life as an independent contractor. In fact, a recent Intuit study claims that slightly more than 40 percent of the nation’s workforce will be composed of freelancers in just three years.
Of course, there is a dark side to this as well. During the economic downturn, many employers were looking to cut costs and avoid paying for benefits like health insurance or unemployment. This led to a decision by some to start calling some former, current, or future employees independent contractors so that they could give them a 1099 and avoid paying benefits that were federally mandated. We have found that this practice was particularly prevalent in the construction trades.
Pros and Cons of Independent Contractor Status
There is little argument that working as an independent contractor can provide you with much more flexibility than traditional full-time employment. But life as an independent contractor has its share of pros and cons, such as:
- Independence – True independent contractors are their own bosses and can dictate their own schedules and income by choosing what jobs to take and how much they want to work. They can also hire employees to take on additional work if available and increase their earning potential.
- Higher pay – Typically, independent contractors earn more than full-time, in-house employees but with that comes the obligation to pay self-employment taxes, social security withholding, and personal insurance, so it is important to compare both after costs.
- Business deductions – Independent contractors are able to deduct a wide range of expenses on their taxes that include vehicle costs, tools, equipment, travel, and insurance.
- No income tax withholding – As an independent contractor, or 1099 employee, your “employer” does not withhold state or federal taxes. They also do not pay FICA taxes.
- Lack of job security – Independent contractors do not always have guaranteed paycheck every two weeks and may not have jobs lined up to secure a steady income.
- Lack of employee benefits – With health care costs higher than ever – and a political climate that does not favor providing some coverage – this can be one of the biggest drawbacks to freelance work.
- Business expenses – Even though independent contractors are able to deduct business expenses from the taxes, they still have to pay those expense upfront.
- No income tax withholding – All of those taxes that are not taken out of your income still have to be paid at the end of the tax year – by the independent contractor. For some, this can be a big shock when they get a big tax bill in April.
Finally, being an independent contractor also leaves you out of Colorado’s workers’ compensation and unemployment system since independent contractors are not generally covered by the employer’s workers’ compensation insurance. Because of this, independent contractors have to carry their own workers’ compensation insurance in Colorado if they want to be covered for injuries occurring in the course and scope of employment. For those independent contractors who have been put into this category by the employer seeking to avoid having to pay for coverage, there are cases which have found that some of those people called “independent contractor” were actually employees for the purposes of workers’ compensation or unemployment
How Does Colorado Workers’ Comp Define Independent Contractors?
Colorado statutes and case law have tried to define what differentiates employees from independent contractors. In Colorado, you are presumed to be an employee unless evidence is presented that the individual is “free from control and direction in the performance of services…and that the individual is customarily engaged in an independent trade, occupation, profession or business related to the work performed.”
This proved to be somewhat vague and open to interpretation so the Colorado General Assembly tried to revise the definition of an independent contractor for both unemployment and workers’ compensation by implementing a nine-point test that helps define an independent contractor.
Does the employer:
- Have the independent contractor work exclusively for the employer.
- Establish a quality standard for the independent contractor, oversee the actual work or instruct the independent contractor as to how the work is to be performed, except the parties may agree that the independent contractor’s services and products will be consistent with generally accepted industry standards for the independent contractor’s customary services and products.
- Pay the independent contractor a salary or hourly rate.
- Terminate the independent contractor’s current services for particular work the independent contractor accepts from the contractor unless the independent contractor fails to produce a result that meets the specifications of this Agreement.
- Provide more than minimal training for the independent contractor.
- Provide tools or benefits to the independent contractor.
- Dictate the time of performance, except that a completion schedule and a range of mutually agreeable work hours may be established through a written agreement mutually acceptable to both parties for particular work the independent contractor accepts from the contractor.
- Pay the independent contractor individually if the independent contractor is an individual; instead, the contractor will make all compensation checks payable to the trade or business name under which the independent contractor does business.
- Combine its business operations in any way with the independent contractor’s business, but instead both parties must maintain their own operations as separate and distinct.
These can answer some of the questions, but there are cases in which the employer has argued that someone is an independent contractor only to be told by an appeals court that the person was actually an employee of their company, so each situation is unique.
The Colorado Supreme Court recently decided that, for the purpose of determining if an individual is an independent contractor under the Colorado Employment Security Act, whether an individual is “customarily engaged in an independent trade, occupation, profession, or business related to the service performed” is a question of fact that can only be resolved by applying a totality of circumstances test that evaluates the dynamics of the relationship between the putative employee and the employer, as laid out in Industrial Claim Appeals Office v Softrock Geological Services, Inc Western Logistics, Inc. v. Industrial Claim Appeals Office, 2014 CO 31, 12SC911. This is a more reasoned approach and covers more situations, allowing for interpretation rather than a hard and fast application of the nine points above because in most cases there are some that apply and some that do not.
While it might seem appealing, being an independent contractor in Colorado is more complicated than it looks. Those complications could be tragic if you get hurt on the job. If you have been hurt in a work accident, do not assume that you have no rights simply because you work from home. It is important you get experienced legal advice before you sign or agree to anything. Get medical attention first, but then call one of our Colorado work comp lawyers as soon as you can for help through the system. Call 303-792-5595 or fill out a free case evaluation form right now.