Recent Colorado Supreme Court Decisions Address Independent Contractor/Employee Distinction

By Dana L. Eismeier

The Colorado Supreme Court recently issued two significant decisions involving the Colorado Employment Security Act (“CESA”).  In Industrial Claim Appeals Office v. Softrock Geological Services, Inc., 2014 CO 30 and Western Logistics, Inc. v. Industrial Claim Appeals Office, 2014 CO 31, the Court resolved a split among divisions of the Court of Appeals as to how an individual is classified as an employee or independent contractor for purposes of paying unemployment tax.  In opinions potentially positive for employers, the Court requires consideration of the totality of the circumstances, rather than one or a limited set of factors.

CESA creates an unemployment insurance fund to pay unemployment benefits.
C.R.S. § 8-70-101 et seq.  This fund is financed by employers who pay premiums based on wages paid to current employees and the amount of claims made by former employees.  Services performed by a person for another are presumed to be in an employment relationship and subject to tax liability unless the putative employer can show that the person is actually an independent contractor.  The Division of Unemployment Insurance (and on appeal the Industrial Claim Appeals Office) is charged with determining whether an individual requesting compensation is an employee (and thus entitled to compensation) or an independent contractor (and not entitled to unemployment compensation).  To satisfy its burden under C.R.S § 8-70-115, the employer must show that the individual is:  (i) free from control and direction in the performance of the services; and (ii) that such individuals customarily engage in an independent trade, occupation, or business related to the service.  In Softrock and Western Logistics, the Colorado Supreme Court did not disturb the law regarding the first prong—control and direction in the performance of services (although in Western Logistics, the Court indicated that this issue is potentially interrelated with the second prong).  Instead, the Court addressed the meaning of the second prong—“engaged in an independent trade or business.”  Softrock, ¶ 12; Western Logistics, ¶ 14.

In both opinions, the Supreme Court analyzed the underlying and conflicting Court of Appeals cases.  In Western Logistics, a division of the Court of Appeals had held in 2012 that, in circumstances other than short-term work, to satisfy the independent business requirement, a worker must actually and customarily have provided similar services to others while working for the putative employer.  No other factor would be considered.  Also in 2012, in Softrock, a different division of the Court of Appeals considered the same issue and broadened, but still limited, the factors to be considered.  The Softrock Court of Appeals division noted that, with respect to written contracts, C.R.S. § 8-70-115(1) lists nine factors that a document must contain in order to enjoy a rebuttable presumption of creating an independent contractor relationship.  That court held that those nine factors (e.g. employer will not dictate time of performance, provide work materials, etc.) were also the criteria to be considered as to whether an individual was an independent contractor.  Id. at ¶ 15.

The Supreme Court rejected/modified both these approaches and further broadened the factors to be considered.  It held that whether an individual worked for another is not dispositive of whether the individual was engaged in an independent business.  Likewise, it held that the list of nine factors for determining whether a written document establishes a presumption that a putative employee is an independent contractor does not limit the factors that may be considered for determining whether an individual is an independent contractor.  The Supreme Court noted that CESA does not explicitly provide a test and therefore looked to legislative intent and interplay with other sections of CESA.  Reading the statute as a whole, the Supreme Court held, “requires an inquiry into the nature of the relationship between the individual and the employer.”  Softrock, ¶ 14.  It held that the factors considered in Softrock and Western Logistics by the Court of Appeals were relevant factors, but that the Division in the ICAO should be free to evaluate a wide range of factors, not limited by the statute.  Instead, the Supreme Court held that whether an individual is customarily engaged in an independent business can be resolved only by considering the totality of the circumstances.  The Division and ICAO are not limited by a single factor or a single set of factors.  Thus, in the future, the Division, the ICAO, and Colorado courts will be free to consider all facts presented by the putative employer or putative employee in deciding whether an employment relationship exists.