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New Colorado Law Punishes Employer for Misclassifying "Employee" as "Independent Contractor

A new law, effective June 2, 2009 is of vital importance to employers in Colorado. The law imposes substantial fines and other punishment to any employer who misclassifies an employee as a subcontractor. The fine for a first willful violation is up to $5,000 for each misclassified employee. For a second willful violation, the fine is up to $25,000 for each misclassified employee and a two year disqualification pf the employer from contracting with any agency of the state.
The purpose of the bill is to protect rights to unemployment and workers compensation to those who should be classified as employees, to ensure that employers pay appropriate taxes to the state, and to prevent an unfair competitive advantage to those employers who misclassify persons as independent contractors over those who properly classify persons as employees.
An employer may request a written opinion from the Director of the Division of Employment and Training in the Department of Labor and Employment, concerning whether the employer should classify a person as an employee or independent contractor. The Director’s opinion is merely advisory and not binding. Thus, in the event any person files a complaint against the employer, and a hearing is conducted pursuant to the rules set up by the Director, an individual may be deemed by the Director to be an employee, notwithstanding an earlier informal opinion that the individual is an independent contractor.
It is interesting to note that nowhere in the law are there any definitions or guidelines concerning how to classify an individual. Thus, it would seem that the employer makes the classification at his, her or its peril.
Colorado court opinions give some guidance in this area. For example, in the 1993 case of Brighton School Dist. v. Lyons, the Court of Appeals notes that there are two tests for determining whether a relationship is one of employer-employee or independent contractor, the “control” test, and the “relative nature of the work” test.
Under the “control” test, the most important factor in determining employment status is whether the alleged employer exercises control over the means and methods of accomplishing the contracted service. This test also considers factors such as whether compensation is measured by time or lump sum and which party furnishes the necessary tools and equipment to perform the work.

The relative nature of the work test requires consideration of several additional factors. These include, first, the character of the claimant’s work, i.e., how skilled it is, the extent to which it is an independent trade, occupation, profession, or business, and whether the claimant and others in his position can reasonably be expected to carry their own accident burden; secondly, this test considers the relationship of the work to the alleged employer’s business, i.e., whether it is a regular part of the employer’s regular work, whether it is continuous or intermittent, and whether the duration of the employment is sufficient to amount to the hiring of continuous services as distinguished from contracting for the completion of a particular job.
While Colorado cases give some guidance and examples, they fail to give discrete definitions of “employer” and “independent contractor” sufficient in every situations to make a proper classification under the law. In fact, in the Lyons case above, the Colorado Supreme Court disagreed with and reversed the decision of the Colorado Court of Appeals on the facts in that case. How, then, is an employer, unschooled in the law able to make the correct classification of the individual?
While the new law applies to all employers, it can have an especially important effect on the construction industry, where there are contractors, subcontractors, materialmen and suppliers, each with their own employees or independent contractors. Each employer must make the proper classification or risk the law’s substantial penalties. If the employer refers the matter for an attorney’s opinion, and acts consistent with the attorney’s advice, it is unlikely that it would later be determined that the employer “willfully” violated the law. This should also be the case where the employer gets an opinion from the Director of the Division of Employment and Training.