August 14, 2018

Colorado Court of Appeals: Internet has Made Some Aspects of Independent Contractor Test Obsolete

The Colorado Court of Appeals issued its opinion in Varsity Tutors LLC v. Industrial Claim Appeals Office on Thursday, July 27, 2017.

Employee—Independent Contractor–Unemployment Taxes.

Varsity Tutors LLC (Varsity) provided an online platform that connected tutors with students. Varsity had individual contracts with tutors, who advertised their services on Varsity’s website. Students who were interested in working with particular tutors contacted Varsity. Varsity then put the tutors and students together by providing contact information. Students and tutors then contacted one another to arrange tutoring sessions. Varsity and tutors agreed to an hourly rate that Varsity would pay them for tutoring, and Varsity generally charged students about twice that rate.

In 2014 the Division of Unemployment Insurance Employer Services—Integrity/Employer Audits for the Colorado Department of Labor and Employment (Division) audited Varsity’s 2013 books and decided that at least 22 tutors were Varsity’s employees for purposes of the Colorado Employment Security Act (CESA). The Division determined that Varsity owed $133.73 in unemployment taxes on the amounts it had paid the tutors. Varsity claimed that the tutors were independent contractors and it was thus not obligated to pay unemployment insurance taxes on wages it paid to them. A hearing officer and a panel of the Industrial Claim Appeals Office (Panel) decided the tutors were in “covered employment” and ordered Varsity to pay delinquent unemployment insurance taxes.

On appeal, Varsity asserted that the tutors were independent contractors and the Panel erred in concluding that Varsity was required to pay unemployment taxes. Varsity argued that the Panel erred by not applying the totality of the circumstances test.  CESA provides that a business can show that a worker is an independent contractor by proving by a preponderance of the evidence that the worker was (1) “free from control and direction in the performance of the service” under any “contract for the performance of the service” and “in fact”; and (2) “customarily engaged in an independent trade, occupation, profession, or business related to the service performed.” Both the panel and the hearing officer found the first part of this test was met. The second part of the test is guided by a totality of the circumstances analysis under Industrial Claim Appeals Office v. Softrock Geological Services, Inc. Alternatively, a business can establish that its workers are independent contractors by a written document signed by the business and the worker, documenting that the business did not do nine things listed in CRS § 8-70-115(1)(c). Such a document creates a rebuttable presumption of an independent contractor relationship as long as it also contains a disclosure in specific font that the worker as an independent contractor “is not entitled to unemployment insurance benefits” unless the worker or “some other entity” provides them and the worker must “pay federal and state income tax on any moneys paid pursuant to the contract relationship.”

Varsity’s contracts did not create a rebuttable presumption that the tutors were independent contractors. As to the second part of the CESA test, the contracts with the tutors stated in bold, “Independent Contractor Agreement for Services.” The disclosures in the contract are indicative that the tutors were independent contractors. The term “independent contractor” appears at least 16 times in the contract. The contract does not provide the tutors with training and provides minimal oversight of the tutors’ work, and does not establish a curriculum or require tutors to use specific materials. Applying the Softrock totality-of-the-circumstances test, the Court of Appeals found that the undisputed evidence in the record established that Varsity satisfied its burden of proving that the tutors were independent contractors because they were customarily engaged in independent businesses in 2013 that were related to the tutoring services they were performing.

The order was reversed.

Summary provided courtesy of The Colorado Lawyer.

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