For many years Oregon has had an objective set of tests to determine whether a worker is an employee or an independent contractor. Oregon’s test is not coupled with the common law test traditionally used by the Internal Revenue Service (the “IRS”). Thus, an individual may be an employee for federal purposes and an independent contractor for state purposes or vice versa. This result substantially complicates the reporting requirements for the employee/independent contractor’s earnings. The Oregon statutory rules have been revised, effective January 6, 2006, and the rules are now more closely aligned with the federal rules. In Oregon, an independent contractor must:
- Be free from directions and control over the means and manner of performing the work (although the entity receiving services can still specify the results);
- Be customarily engaged in an independently established business;
- Be licensed under ORS Chapter 671 or 701, if required; and
- Be responsible for obtaining the licenses necessary to perform the services.
Further, to establish an independent business, individuals must meet three of the five following criteria:
- The person maintains a business location;
- The person bears the risk of loss related to the business;
- The person provides contracted services for two or more different persons within a 12-month period, and the person routinely engages in business advertising, solicitation, or other marketing efforts reasonably calculated to obtain new contracts to provide similar services.
- The person makes a significant investment in the business;
- The person has the authority to hire other persons who will provide or assist in providing the services and has the authority to fire those persons.
Creating a business entity, such as a corporation, to provide services does not automatically establish that an individual provides services as an independent contractor.
The aforementioned common law test used by the IRS has traditionally considered the following twenty factors in making its determination. There is no magic number that an individual must meet, and the weight given to each factor varies depending on the specific facts and circumstances of the case. The twenty factors are as follows:
- Whether the individual receives instructions on where, when, and how to perform the job;
- Whether the individual has received training;
- Whether the individual’s services are separate from the client’s business;
- Whether the services are rendered personally;
- Whether the individual may hire, supervise, and pay helpers;
- Whether the individual has the expectation of continued employment;
- Whether the individual sets his own schedule;
- Whether the individual devotes all his time to one customer;
- Whether the individual can choose where to work;
- Whether the individual choose his own sequence of work;
- Whether the individual is required to submit oral or written reports;
- When and how the individual is paid;
- Whether the individual is reimbursed for his own travel expenses;
- Who furnishes the individual’s tools and equipment;
- Whether the individual has a significant investment in his business;
- Whether the individual can realize profit and loss;
- Whether the individual works with more than one firm at one time;
- Whether the individual’s services are available to the general public
- Whether the individual can be fired without liability
- Whether the individual can quit without liability.
Even though Oregon and the IRS have moved closer together, there is still no guarantee that an individual will have the same status under both federal and state law. The risk of wrongly determining that an individual is an independent contractor when he is an employee is substantial and can trigger tax penalties and interest or wage claims for back pay, penalties, and attorney fees.
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Tags: Business, Employment