Correctly classifying workers as either employees or independent contractors is one of the most important employment law decisions facing Colorado businesses. Misclassification can expose businesses to costly penalties, litigation and back payments of wages, taxes and benefits. This article offers an overview of the main legal tests used in Colorado to distinguish between employees and independent contractors; and explains the broad benefits Colorado law provides to employees.
I. Legal Tests: How Is Worker Classification Determined in Colorado?
Colorado and federal law use several tests to determine whether a worker is considered an employee or independent contractor in any given context. Each test focuses on different factors, and different legal issues may require application of different tests.
- “Right-to-Control” Test
- Context: This is the primary test for workers’ compensation, some wage laws, and many federal employment statutes.
- Factors Considered: The central inquiry is whether the business has the right to control not just the outcome of the work, but also the manner and method by which the work is done. Additional factors include whether the worker is paid by the hour or by project, who provides tools and equipment, the worker’s opportunity for profit and loss, the right to hire and fire, and whether the relationship is ongoing or project-based. No single factor is determinative, but employer control is key.[1]
- Relative Nature of the Work Test
- Context: Used frequently in workers’ compensation cases.
- Factors Considered: Focuses on whether the worker’s duties are integral to the employer’s business. If the worker provides services that are essential to the employer’s ongoing business (versus an isolated, ancillary function), this favors employee status. The relationship’s duration and whether the business supplies vital resources are also analyzed.[2]
- Totality of the Circumstances Test
- Context: Claims under anti-discrimination statutes, such as Title VII of the Civil Rights Act and the Americans with Disabilities Act (ADA).
- Factors Considered: Courts examine a number of factors including employer’s control over performance, skill required, who provides equipment and place of work, payment methods, duration, ability to terminate, and whether benefits such as leave are provided. The entire relationship is evaluated, and no single factor is decisive.[3]
- Economic Realities Test
- Context: Unemployment tax liability and benefits.
- Factors Considered: Whether the worker maintains their own business apart from the employer, advertises independently, has a business address, and supplies their own equipment. Engaging in an independent trade or profession and the presence of business risk are pivotal.[4]
II. Why the Distinction Matters: Employee Benefits and Protections
For Colorado businesses, incorrectly classifying employees as independent contractors can lead to substantial liability. Employees enjoy an array of legal rights and benefits, including:
- Workers’ Compensation: Employees injured on the job are eligible for medical and wage benefits; independent contractors are generally not covered.[5]
- Wages and Overtime: Employees are protected by wage and hour laws, including minimum wage and overtime requirements; independent contractors are not.[6]
- Unemployment Insurance: Employees may collect unemployment benefits if laid off or terminated without cause; independent contractors are not covered.[7]
- Anti-Discrimination Protections (ADA, Title VII, Colorado Anti-Discrimination Act): Employees are protected against discrimination based on race, sex, age, disability, and more; these statutes do not generally protect non-employee contractors.[8]
- Benefits and Payroll Tax Withholding: Employers must withhold and pay payroll taxes and frequently offer benefits such as health insurance or retirement plans to employees; such obligations are not required for independent contractors.[9]
- Whistleblower and Wrongful Termination Protections: Employees have legal remedies if terminated for protected activities; independent contractors do not.[10]
Given the steep penalties for willful misclassification — including potential fines of up to $25,000 per violation and back tax / benefit liability — Colorado business owners are well advised to carefully analyze worker roles and seek guidance from Principle Law if in doubt.[11]
Conclusion
Colorado law takes a multifactor, case-by-case approach to worker classification, and the consequences of error can be severe. To ensure compliance, small and medium businesses should regularly review their worker relationships and consult with the knowledgeable attorneys at Principle Law.
[1] Brighton School Dist. v. Lyons, 873 P.2d 26 (Colo. App. 1993); Wells v. Clackamas Gastroenterology, 538 U.S. 440 (2003); § 2:5 Tests for classifying workers as employees or independent contractors, 16 Colorado Practice Series, Employment Law & Practice (Theresa L. Corrada and Roberto L. Corrada; 3d ed.).
[2] Id.
[3] Lutfi v. Brighton Community Hosp. Ass’n, 40 P.3d 51 (Colo. App. 2001)
[4] SZL, Inc. v. Industrial Claim Appeals Office, 254 P.3d 1180 (Colo. App. 2011).
[5] 2:3 The significance of employment status, § 2:5 Tests for classifying workers as employees or independent contractors, 16 Colorado Practice Series, Employment Law & Practice (Theresa L. Corrada and Roberto L. Corrada; 3d ed.)
[6] Id.
[7] § 2:3 The significance of employment status, 16 Colorado Practice Series, Employment Law & Practice (Theresa L. Corrada and Roberto L. Corrada; 3d ed.); see also § 2:5 Tests for classifying workers as employees or independent contractors, and § 2:6 Misclassification of employees.
[8] Lutfi v. Brighton Community Hosp. Ass’n, 40 P.3d 51 (Colo. App. 2001); § 2:3 The significance of employment status, § 2:5 Tests for classifying workers as employees or independent contractors, 16 Colorado Practice Series, Employment Law & Practice (Theresa L. Corrada and Roberto L. Corrada; 3d ed.)
[9] § 2:8 Overview of consequence of meeting statutory definitions of employee and employer, 16 Colorado Practice Series, Employment Law & Practice § 2:8 (Theresa L. Corrada and Roberto L. Corrada; 3d ed.)
[10] § 2:3 The significance of employment status, 16 Colorado Practice Series, Employment Law & Practice (Theresa L. Corrada and Roberto L. Corrada; 3d ed.); see also § 2:6 Misclassification of employees and § 2:8 Overview of consequence of meeting statutory definitions of employee and employer.
[11] § 2:6 Misclassification of employees, 16 Colorado Practice Series, Employment Law & Practice (Theresa L. Corrada and Roberto L. Corrada; 3d ed.)