What Does Oregon’s Independent Contractor Statute Mean by “Free from Direction and Control”?

September 23, 2014


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 they are truly independent contractors. On the other hand, if a business’s so-called “contractors” are actually employees mislabeled as contractors, it may be setting itself up for a legal and financial disaster.

In recent years, Oregon’s government has focused considerable attention on 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, accompanied by substantial accrued interest and 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. Under this statute, a service provider will be deemed an 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.” Any business that regularly uses contractors to provide services—and any accountant or attorney who advises businesses on the propriety of their “contractor” classifications—should be intimately familiar with this statute and how Oregon agencies and the Oregon courts interpret and apply it.

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 will be publishing a series of articles discussing these decisions. This first installment examines 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.

What Is “Direction & Control,” for Purposes of ORS 670.600?

Section 471-031-0181 of the Oregon Administrative Rules (OAR) defines what it means to be “free from direction and control,” for purposes of ORS 670.600.[1] As a preliminary matter, the rule states that being “free from direction and control” means that a contractor is “free from the right of another person to control the means or manner by which the independent contractor provides services.” OAR 471-031-0181(3)(a)(C) (emphasis added). Thus, “[i]f the person for whom services are provided has the right to control the means or manner of providing the services, it does not matter whether that person actually exercises the right of control.” Id. Rather, retention of the right to control the means or manner of performing the services – even unexercised – is fatal to independent contractor status.

Conversely, a hiring entity does have a prerogative to control the quality of the services or the final product provided by an independent contractor, as opposed to his means or manner of providing or producing them. See OAR 471-031-0181(3)(b) (“Specifying the final desired results of the contractor’s services does not constitute direction and control over the means or manner of providing those services.”). Thus, contract provisions that are confined to ensuring the quality of the final product or the services, without interfering with how they are generated or provided, do not show the type of “control” indicative of an employment relationship.

With respect to the “means” of performing the contracted services, the administrative rule states that being free from direction and control over the means of providing services means that the contractor “must determine which resources to use in order to perform the work, and how to use those resources.” OAR 471-031-0181(3)(a)(A). The rule states that “means” of performing services include such things as “tools or equipment, labor, devices, plans, materials, licenses, property, work location, and assets, among other things.” Id. With respect to the “manner” of providing services, the rule defines “manner” as the “method by which services are performed,” explaining that an independent contractor must “determine how to perform the work.” OAR 471-031-0181(3)(a)(B). The only specific examples of a “manner” of performing work that the rule gives are “work schedules” and “work processes and procedures,” but the rule notes that these examples are not exhaustive. Id.

Thus, the administrative rule provides some helpful guidance. However, it also leaves some important questions unanswered. These include:

  1. Exactly how “free” must the contractor be? Does she need to have complete freedom with respect every means and manner of performing the services? Does the hiring entity’s control over one method or means of performing the services compel a finding of employee status? Or, is it enough that the contractor is free from control with respect to most of the means and manners of performing the services?
  2. Should the factors generally viewed as indicators of economic dependence or financial control under the common-law “economic realities” test also be viewed as evidence of control for purposes of ORS 670.600? Or, should the statutory language be read literally – i.e., as confining the inquiry to how the service provider actually “provid[es] the services,” and whether the hiring entity controls that (e.g. closely supervises how the work is performed on an ongoing basis)? ORS 670.600(2)(a).
  3. Are constraints on the manner of performing services that emanate from third parties, other outside sources, or the very nature of the business itself properly weighed as evidence of “control”?

Fortunately, recent decisions from the Oregon Court of Appeals provide the answers to these questions. For example, in Avanti Press, Inc. v. Employment Department, the court stated that the “direction and control” language in ORS 670.600 was intended to codify the common-law “right to control” test, which has “never required that an ‘independent contractor’ be free from all direction and control.” 248 Or App 450, 461 (2012) (emphasis in original). There, the court applied the interpretation of “direction and control” contained in the administrative rule (OAR 471-031-0181), but also applied the “right to fire” factor from the traditional, common-law right to control test (even though it is not mentioned in the rule), because that factor has always been considered important under the common law. Id. at 471.

Based on a provision in its contract with the service provider (Waiau) that allowed Avanti to terminate the contract without cause or liability on short notice (30 days), the court concluded that the “right to fire” was clearly present, definitively establishing at least one factor suggestive of control. Id. at 472. However, the court concluded that Waiau was an independent contractor nonetheless, because “the various facts bearing on the ‘right of control,’ with the notable exception of the right to fire, predominate[d] in favor of the conclusion that Waiau was an independent contractor.” Id. at 473. Thus, Avanti indicates that freedom from direction and control should be found where factors indicating freedom “predominate” over facts suggesting control, even if some factors indicating control plainly exist.

Avanti also provides answers to the second question posed above. As Avanti explains, in determining whether the hiring entity retained authority to control the service provider, an Administrative Law Judge must focus on “the nature of the services [the contractor] agreed to provide in the services agreement.” 250 Or App at 468. In other words, it is error to find “control” based on the hiring entity’s retention of control over tasks or matters that it did not hire the contractor to perform or oversee. See id.(“Avanti did not control the manner in which Waiau set prices or accepted orders, because those were not part of her services in the first place.”). Instead, Avanti instructs, the proper focus is on whether the hiring entity retained control over the contractor’s means or manner of performing those services that she actually agreed to provide and that the hiring entity paid her to provide. Id. at 468-69.

Thus, in Avanti, that Avanti assigned Waiau her customers, provided the product for which she solicited orders, provided the promotional materials that she used to sell that product, provided Waiau with business cards, and provided Waiau with her sole source of income during the time period in question might have suggested financial control and economic dependence, but those facts did not suggest control over how Waiau performed the contracted services. See id. at 455-56 (noting that Waiau received all of her income from Avanti, did not advertise or market her services as a product sales representative to others, and passed out Avanti business cards), 467 (noting that Waiau’s agreement required her to visit specific Avanti customers a least once every 12 weeks), 470-71 (noting that Waiau’s use of trademarks, trade names, and other promotional material pertained “more to what she solicits than to how she solicits”) (emphasis in original). ORS 670.600(2)(a) puts the focus on how the service provider “provid[es] the services,” and the specific services Avanti contracted Waiau to provide were soliciting orders and promoting Avanti’s products. Id. at 470-71. Therefore, the foregoing factors were not evidence of “direction and control,” for purposes of ORS 670.600, because they were not relevant to how Waiau actually performed her sales duties. Id. at 467 (observing that there was “no evidence that Waiau was required to use a specific sales technique when soliciting orders”).

A very recent decision from the Oregon Court of Appeals, Ponderosa Properties, LLC v. Employment Department[2], 262 Or App 419 (2014), reinforces the approach adopted in Avanti. In Ponderosa Properties, the ALJ recognized that the cleaners who worked for Ponderosa enjoyed freedom from direction and control in the sense that they worked independently and without supervision on each assignment, could accept or reject any work opportunities offered, and generally provided their own tools and supplies that they could use in whatever manner they chose. Id. at 427.  However, the ALJ nonetheless found that Ponderosa maintained “significant direction and control” based on the following facts: (a) Ponderosa set the rate of pay for each clean, and the rates were not negotiable; (b) Ponderosa assigned the work, deciding which jobs were offered to each cleaner; and (c) the cleaners were not authorized to negotiate directly with the unit owners. Id. at 427-28.

On review, the court found that the ALJ had erred in concluding that these factors established “direction and control” for purposes of ORS 670.600(2)(a). It concluded that the foregoing facts were “indicative of the results Ponderosa seeks from hiring a cleaner – that the rental unit will be clean when the tenant arrives at a reasonable and predictable price.” Id. at 428 (emphasis added); see also ORS 670.600(2)(a) (providing that the hiring entity can “specify the desired results” of an independent contractor’s services). They did not, however, demonstrate any control by Ponderosa over how the cleaners performed the services for which Ponderosa had hired them – i.e., the methods they used to clean and the supplies and equipment they used to clean. Id.

Thus, taken together, Avanti and Ponderosa Properties establish in a fairly definitive manner that the economic dependence/financial control factors typically considered under the common-law “economic realities” test are not properly considered in determining the existence of “direction and control” for purposes of ORS 670.600. As a practical matter, perhaps the most significant consequence of this approach is that it clarifies that an independent contractor relationship can exist under ORS 670.600 even if the hiring entity is solely responsible for obtaining all work performed by the service provider and for maintaining the relationships with the end customers receiving the benefits of the services. The administrative law judges with Oregon’s Office of Administrative Hearings (OAH) have frequently reached the contrary conclusion in cases before them.   See, e.g., Ponderosa Properties, 262 Or App at 428 (quoting the ALJ’s reasoning that the “most significant[]” fact demonstrating control was that the cleaners “were not authorized to negotiate directly with unit owners”); In the Matter of the Final Premium Audit of Redding Transport (Proposed Order of OAH, Case No. INS 03 09-006, March 15, 2005), p. 8 (finding “fundamental control” where the transport broker “procured the contract with the customer and selected the owner/operator to perform the work”).[3] However, Avanti and Ponderosa Properties reject the reasoning in these cases, and ALJs are bound to follow Avanti and Ponderosa Properties going forward.

Finally, turning to the third question posed above, recent decisions from the Oregon Court of Appeals also indicate that control and restraints emanating from third parties, other outside sources, or circumstances – but not the hiring entity – are not properly considered as evidence of “direction and control” for purposes of ORS 670.600. For example, in AGAT Transport, Inc. v. Employment Department, 256 Or App 294 (2013), the court ultimately upheld the ALJ’s determination that the contract drivers in issue were employees because they were not free from AGAT’s control over the means and manner of providing the services. However, before reaching that ruling, the court specifically rejected certain findings of the ALJ, including, most notably, the ALJ’s finding that AGAT’s requirement that the drivers comply with certain requirements imposed by AGAT’s customers indicated “direction and control.” Specifically, the court opined that “AGAT’s requirement that its drivers meet the expectations of AGAT’s customers regarding pickup and delivery relates primarily to the ‘desired results’; it does not indicate control over the means or manner by which drivers could achieve that goal.” Id. at 304.

Ponderosa Properties also addresses the issue of constraints that limit a service provider’s freedom over the manner of performing the services, but which do not originate from the hiring entity. There, the court rejected the Employment Department’s argument on appeal that there were sufficient record facts to support a conclusion of direction and control over the cleaners’ “work schedules,” which the administrative rule specifically cites as one example of a “manner” of performing services. See OAR 471-031-0181(3)(a)(B). The court noted that the deadlines Ponderosa gave the cleaners were dictated by when the occupancy of a unit required the work to be completed, and observed that these schedule constraints “flow[ed] from the nature of the business, and not [Ponderosa’s] desire to direct or control how the cleaners performed their services.” See Ponderosa Properties, 262 Or App at 428.

In summary, with respect to the “freedom and control” element of ORS 670.600, opinions issued by the Oregon Court of Appeals within the last three years establish: (a) that freedom from direction and control exists, for purposes of the statute, even if a service provider is not completely free from control over the means and manner of providing the contracted services, as long as the facts indicating freedom over the means and freedom over the manner of performing the contracted services “predominate”; (b) the “economic dependence” or “financial control” factors of the common-law economic realities test should not be considered in determining freedom from direction and control for purposes of the statute; and (c) constraints and controls on the manner of performing the services that are imposed by third parties (e.g., the hiring entity’s customers), outside sources (e.g., laws), or outside circumstances (e.g., the inherent demands of the business) are not evidence of “direction and control” for purposes of the statute.

[1] Technically, OAR 471-031-0181 is the Oregon Employment Department’s rule, while the Department of Revenue’s rule is codified at OAR 150-670.600. However, the rules are identical. Thus, the interpretations of the former rule discussed herein are equally applicable to the latter.

[2] Not to be confused with Ponderosa Inn, Inc. v. Employment Division, 63 Or App 183 (1983), another case from the Oregon Court of Appeals addressing independent contractor classification.

[3] Available at:http://www.cbs.state.or.us/ins/admin_actions/actions_2006/wc_2006/billing_2006/03-09-006-p.pdf (PDF).

Dan Webb Howard practices employment law and appellate law with the law firm Gleaves Swearingen LLP in Eugene, Oregon.  If you have any questions relating to this article, you can reach him at howard@gleaveslaw.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.