Oregon Court of Appeals Clarifies When a Worker Is an Employee (Not an Independent Contractor) for Unemployment Tax Purposes

Oregon Court of Appeals Clarifies When a Worker Is an Employee (Not an Independent Contractor) for Unemployment Tax Purposes

 It is important to know when an individual is an employee, but statutes, regulations, and agency interpretations don't always use the same definition. Court decisions applying these rules repeatedly demonstrate that businesses cannot assume, without careful consideration, that a given worker is not an employee. In fact, a business and a worker may enter a contract specifying that a particular worker is not an employee for purposes of one or many laws or rules, but state and federal authorities may not agree. Chelius v. Employment Department is such a case [an enhanced version of this opinion is available to lexis.com subscribers]. In Chelius, the Oregon Court of Appeals held that despite an employer and a worker's having entered a contract that stated that the worker would "provide all services . . . as an independent contractor," and that the employer "would not ‘have the right to direct or control the means or manner in which [the worker] provides these services,"' that the worker was an employee, and the employer owed unemployment insurance taxes based on its payments to the worker.

This employer was not a traditional business; it was the sizeable estate of a deceased individual and the personal representatives needed help. They engaged Ms. Gabaldon to help, and when the workload diminished after a few years, they entered a contract with her titled "INDEPENDENT CONTRACTOR AGREEMENT." The contract provided an hourly wage for Ms. Gabaldon, provided for the estate to reimburse her for certain expenditures, and also purported to make her "responsible for all taxes and fees ‘payable on account of the services provided by her."' The contract went on to describe Ms. Gabaldon's job responsibilities in some detail—the responsibilities tracked her responsibilities when she was officially a full-time employee—and authorized her to hire an assistant at her own expense. Finally, the contract required Ms. Gabaldon to maintain her own office and specified that if it was in her home, she would "use it primarily for the business of providing bookkeeping and administrative services." When the parties entered into the "independent contractor agreement," the estate stopped paying unemployment insurance taxes relating to its arrangement with Ms. Gabaldon.

After some time, Oregon's Employment Department noticed that the estate was still making payments to Ms. Gabaldon, but that the estate had stopped paying unemployment insurance taxes. Upon investigation, the Department found that Ms. Gabaldon was still an employee, and demanded that the estate pay the unpaid unemployment insurance taxes, amounting to $379.16. The estate challenged this assessment.

Ultimately, the Court of Appeals upheld the finding of the Employment Department and concluded that Ms. Gabaldon had remained an employee even in the face of the contractual language to the contrary. The court first turned to the governing Oregon statute and rule, ORS 670.600 [an annotated version of this statute is available to lexis.com subscribers] and OAR 471-031-0181[annotated version], which together define who is an "independent contractor." The "key question" for the court was "whether the party contracting for services maintains control over the ‘means and manner' of performance or, instead, gives more generalized instructions" so that the worker can achieve "the desired results" specified by the business. To answer this question, the court focused on the actual relationship between the parties rather than the words of the contract.

The determinative facts were as follows: (1) the estate provided Ms. Gabaldon with materials for performing the work, and reimbursed her for expenses occurred, (2) upon termination of the relationship, Ms. Gabaldon was required to return the materials in question, (3) the estate controlled Ms. Gabaldon's work location by virtue of requiring her to work from Portland and specifying that if she worked from home, she would use the room "primarily" for work, (4) the tasks Ms. Gabaldon performed were a continuation of the tasks she learned to perform as an employee of the estate, and (5) she did not work for any other person or entity while working for the estate. These facts all tended to show that the estate controlled the "means and manner" of Ms. Gabaldon's work such that she was deemed an employee rather than an independent contractor. Although the court recognized that it was "a close case," the estate had failed to meet its burden of showing that Ms. Gabaldon was not an employee.

Chelius involved only one worker and a few hundred dollars, but a determination that one person is an employee rather than an independent contractor can affect an entire business because the application of many laws depends on how many employees a company has. A single misclassification can also be much costlier than the one at issue in Chelius. When in doubt, consult with counsel, and if doubt remains, err on the side of classifying the worker as an employee for purposes of complying with state and federal law.

Read more alerts by Barran Liebman attorneys.

Electronic Alerts are written by Barran Liebman attorneys for their clients and friends. Alerts are not intended as legal advice, but as employment law, labor law, and employee benefits announcements.

For more information about LexisNexis products and solutions connect with us through our corporate site.