LEGAL GUIDE
Written by attorney Christopher Palmer | Nov 22, 2012

Oregon's Independent Contractor Law

I. General Overview

For Business Owners, the bottom line is of primary importance. Without a healthy bottom line, a business cannot remain viable. Because of this, Owners often look for every advantage to improve this critical business measurement.

Labor cost is a major contributor to the health of a bottom line. Employees are expensive and Business Owners search for alternatives to reduce this cost. One solution, instead of classifying individuals providing service to the business as Employees, is to classify these individuals as Independent Contractors.

Independent Contractors tend be less expensive than employees. Because of this fact, Business Owners are tempted to select this classification. Business owners will hire an individual using an Independent Contractor Agreement and think the business is protected. Others simply believe that if they don't tell the individual when or how to do the job, then the classification of Independent Contractor is appropriate. Both assumptions are incorrect and each could be costly.

In 2007, the Oregon Legislature attempted to clarify this confusing issue. It enacted a provision requiring those Boards and Agencies with an interest in the Independent Contractor definition to adopt uniform rules regarding this issue. Earlier this year, in Avanti v Employment Department, Oregon Courts finally had an opportunity to consider these new uniform rules.

In its holding, the Court of Appeal found that the Administrative Law Judge (ALJ) misapplied the new rules and reversed the ALJ’s decision.

The takeaway for Business Owners is this: If an Administrative Law Judge did not get it right, you should be very careful making the determination without legal assistance. If you still decide to go at it on your own, I hope this guide will help.

II. Definition

In Oregon, an Independent Contractor is a person who provides service for remuneration and satisfies the criteria set forth below. For purposes of this definition, a “person" is defined broadly and it includes corporations, limited liability companies, partnership, and more. However, be careful. Just because a Business Owner contracts with an entity – and not an individual – this does not, by itself, mean that an Independent Contractor relationship exists.

A. Person must operate an “Independent Business"

The uniform rules require that the person providing services operate an “independent business." Subject to only minor exceptions, a person operates an independent business if that person satisfiesat least threeof the following requirements: (1) they operate a distinct business location; (2) they assume the risk of loss; (3) they have made a personal investment in the business; (4) they have authority to hire and fire; and (5) they have either (a) a small book of business or (b) are actively marketing for clients. Let look at each test.

i. Distinct Business Location.

A distinct business location is a location that is separate and apart from the location where services are being provided. This may be a separate storefront or office location. The separate location can even be a home office. However, if the Independent Contractor is using the Business Owner’s location to conduct a majority of the Independent Contractor’s business, then the Business Owner might find it difficult to satisfy this test. Quick Tip: Check the Independent Contractor’s business card. Is the address different? If not, or if they don’t have a business card, then the Court might question the existence of a distinct business location.

ii. Risk of Loss

The person hired must bear a risk of loss related to the services provided. The Legislature offered guidance on this point. The Legislature listed specific examples of what should be considered “risk of loss." While each example would satisfy the test, the Court will be concerned with whether the Independent Contractor could provide the service andpotentially lose money. Quick Tip: If the person gets paid no matter what, then it is questionable that the person would satisfy this element.

iii. Personal Investment

To determine if a person made a significant personal investment in the business, the Court will ultimately look to whether or not the person has “skin in the game." Did that person purchase and use his or her own tools? Did that person put money into his or her business location? Did the Independent Contractor make a significant capital investment to operate the business? If not, then it would be difficult to satisfy this element. Quick Tip: If the Business Owner provides the place to work and the tools by which to complete the work, then the personal investment elements is likely not satisfied.

iv. Authority to Hire and Fire

Authority to do something and actually doing it are distinct concepts. The uniform rules do not require the Independent Contractor to hire employees, the uniform rules simply require that the Independent Contractor have the power to hire and fire employees. Quick Tip: Who pays the wages of the hired individual? If wages come out of the Independent Contractor’s account, then this element is likely satisfied.

v. Must Have Small Book of Business or Actively Market

This element looks at the Independent Contractor’s business activity. Rarely will an independent business survive without customers. Thus, to satisfy this element, the Court will look to whether the Independent Contractor actively solicits, or already has, customers. For example, if the Independent Contractor has performed service for two or more persons within a 12-month period, that qualifies (two jobs for the same person does not). If an Independent Contractor cannot satisfy the book of business requirement, the Court will then look to whether the person routinely engages in business advertising, solicitation or other marketing efforts and whether those efforts are reasonably calculated to obtain new contracts to provide similar services? Quick Tip: If the Independent Contractor works exclusively for one Business Owner and does not actively look for more business, this element will be difficult to satisfy.

B. Free from Discretion and Control

Assuming that Independent Contractor operates an independent business – by satisfying at least three of the five elements above – the Court will also address whether the Business Owner had a right to control the means and manner by which the Independent Contractor provided those services. Take note, the question for the Court is not whether the Business Owner “controlled" the means and manner of services, but whether the Business Owner had the “right to control" the services.

The uniform rule states that the Independent Contractor “must be free from direction and control over the means and manner of providing the services." Examples of the “means" by which a person provides services would include tools, labor, materials, licenses, location, etc. Examples of the “manner" by which the services are provided include schedules, processes, procedures, methods, etc. To be an Independent Contractor, the person providing services must be free to determine which resources to use to perform the work, how to use those resources, and the method by which the services will be perform.

III. In Conclusion

Ultimately, the Business Owner must decide how to classify persons providing service to his or her company. This decision should not be taken lightly. An incorrect classification can prove costly. While I would always advise speaking to a licensed attorney experienced with this issue before making the classification, I know that Business Owners tend to be independent, cost-adverse, and err on the side of protecting the bottom line. Thus, I hope this guide helps.

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