Businesses commonly use contractors, instead of employees, to provide certain services to their customers. For example, a business may use contractors to help deliver the merchandise or install the products that it sells, provide transportation to and from its business location or special events that it sponsors, or provide troubleshooting or repair services. Using contractors to provide such services can be a very productive, efficient, and cost-effective business model if these service providers are truly independent contractors. On the other hand, if they are actually employees mislabeled as contractors, a business may be setting itself up for a legal and financial disaster.
In recent years, Oregon’s legislature and its state agencies have dedicated considerable attention and resources to cracking down on businesses that misclassify their employees as independent contractors. Investigations by state agencies frequently result in the reclassification of a business’s “contractors” as employees, with some very harsh consequences, including assessments of years of back employment taxes, along with accrued interest and some very stiff penalties.
One of the most important independent contractor classification tests in Oregon is set out in a statute, ORS 670.600, that defines who is an “independent contractor” and who is an “employee” for purposes of state employment taxes. Any business that regularly uses contractors to provide services—and any accountant who advises businesses on the propriety of treating certain service providers as “contractors” for employment tax purposes—should be intimately familiar with this statute and how the Oregon courts have interpreted and applied it.
Under ORS 670.600, any individual who provides services to a business for remuneration will be deemed its employee unless he or she, in addition to possessing any license necessary to lawfully provide the services in question, is: (a) free from direction and control over the means and manner of providing the services; and (b) “customarily engaged in an independently established business.” To meet the “independently established business” test, the hiring entity must prove that three or more of the following five criteria are present: (1) the service provider maintains a separate business location; (2) the service provider bears the risk of loss related to the provision of services; (3) the service provider provides contracted services for two or more persons within a 12-month period (or routinely engages in business advertising, solicitation, or other marketing efforts “reasonably calculated” to obtain new contracts to provide similar services); (4) the service provider makes a significant investment in the business; (5) the service provider has the authority to hire other persons to provide or to assist in providing the services and has the authority to fire those persons. See ORS 670.600(3).
In the past couple of years, the Oregon Court of Appeals has issued a number of important decisions regarding how to interpret and apply ORS 670.600. To help spread knowledge of these important cases, I am publishing a series of articles discussing these decisions. My first installment examined recent decisions from the Oregon Court of Appeals regarding what it means to be “free from direction and control,” for purposes of ORS 670.600(2)(a). This second installment examines recent decisions from the Oregon Court of Appeals regarding what it means to “maintain a business location,” for purposes of ORS 670.600(3)(a).
What Does “Maintains a Business Location” Mean?
The precise statutory language states that this first criterion of the independently established business test is met only if the service provider “maintains” a business location that is: (a) “separate from the business or work location of the person for whom the services are provided”; or (b) “in a portion of the person’s residence and that portion is used primarily for the business.” ORS 670.600(3)(a).
In a 2012 decision, Compressed Pattern, LLC v. Employment Department, 252 Or App 254, a panel for the Oregon Court of Appeals confirmed what this statutory language suggests, holding that it is not enough to simply show that the service provider performs the services away from the hiring entity’s premises. Id. at 260-61. Rather, the hiring entity must present proof that the service provider actually invests (or has invested) in having a separate location for his or her business.
To conclude otherwise, the court reasoned, would render superfluous the word “maintains.” The court could not ignore the presence of that that word in subsection (3)(a), if it was possible to logically interpret that statutory provision in a manner that gave the word meaning, because a key Oregon statute on statutory construction compels the Oregon courts to give meaning to each term contained in a statute, wherever possible. See ORS 174.010.
In the case before the court, the service provider was providing drafting services for an architectural design company, and he performed this work entirely offsite (i.e., away from the hiring entity’s premises). However, he performed the work at the offices of his former employer, which let him use an office and essential equipment for free. Consequently, the court concluded that there was no evidence that the service provider “maintained” a business location. After all, he was not required to pay any rent for the office space that he used, nor to pay for his use of other essential resources that he used to provide the services (e.g., drafting tables). Id. at 259-61.
Another recent case that has relevance to the “business location” factor is Chelius v. Employment Department, 258 Or App 72 (2013). There, the court’s focus was actually on the “direction and control” element of ORS 670.600(2)(a). However, relevant to the court’s determination that the alleged employer maintained “direction and control” was its observation that it contractually controlled the service provider’s "work location" by telling her where to work (an office in her home) and limiting how she could use that work space (for work purposes only). Id. at 81-82. Thus, Chelius shows how important seemingly minor differences in drafting can be. Likely, the hiring entity imposed the work location controls specifically to establish the "maintains a business location" factor of ORS 670.600(3)(a). However, by being too controlling, it unwittingly doomed itself on the statute’s "direction and control" element, and its service provider was therefore reclassified as an employee.
If a business plans to rely on the "maintains a business location" criterion of the "independently established business" test, to support its classification of a service provider as an independent contractor, it must ensure that: (a) the service provider invests (or has invested) significant resources in a specific business location; and (b) that this location is dedicated to his or her business, specifically (i.e., that the service provider does not use it primarily for personal, non-business purposes). Moreover, if the contract is for ongoing services for an indefinite period, the hiring entity may wish to include provisions in its written contract with the contractor that are aimed at ensuring that this state of affairs continues throughout the parties’ relationship. For example, the parties’ contract could require proof, every six months or so, that the contractor is still paying rent for office space. It might also contain a provision requiring the contractor to immediately notify the hiring entity if he or she gives up her separate business location (e.g., elects to start working from home, instead).
Such provisions are well within the rights of a hiring business, without disturbing the essential character of the independent contractor relationship. On the other hand, as the Chelius case demonstrates, a business should avoid contract provisions that direct the contractor where to work, which could possibly convert an otherwise valid independent contractor relationship into an employment relationship. Instead, a business is better advised to use contract recitals reflecting the true fact that the contractor maintains a separate business location, together with an obligation that the contractor provide periodic proof that he or she is continuing to do so, over the course of the service relationship.
Dan Webb Howard is an employment law attorney and appellate practitioner with the law firm Gleaves Swearingen LLP. If you have any questions regarding this article, he can be reached at email@example.com.
DISCLAIMER: The information in this article is offered for general information and educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. You should not act on the information in this article before seeking the advice of an attorney.