For those of you who like to use “independent contractors” (contract lawyers, contract paralegals, freelance legal secretaries) take heed.  Your contractor may well be an employee.

The latest case to interpret ORS 670.600 is Compressed Pattern, LLC v. Employment Department Tax Section.

In Oregon, an independent contractor must be “customarily engaged in an independently established business.”  A person operates “an independently established business” if at least three of the following five requirements are met:

1. The person maintains a business location
2. The person bears the risk of loss related to the business or provision of services
3. The person provides contracted services for two or more different persons within a 12-month period, or the person routinely engages in business advertising, solicitation or other marketing efforts reasonably calculated to obtain new contracts to provide similar services
4. The person makes a significant investment in the business
5. The person has the authority to hire other persons to provide or to assist in providing the services and has the authority to fire those persons

In Compressed Pattern, LLC v. Employment Department Tax Section, the Petitioner hired Jason Singer as a “contractor” to provide drafting services.  During the course of their contract arrangement, Singer did projects for Compressed Pattern and others.  (Compressed Pattern was not his sole customer.)  While Singer adhered to deadlines provided by Compressed Pattern, he was otherwise in complete control of the projects assigned to him.  Singer:

• Set his own hours
• Invoiced Compressed Pattern for his work
• Received a 1099 from Compressed Pattern
• Used his own vehicle for travel
• Used his own tape measure, pens, pencils, and paper to perform services for Compressed Pattern
• Obtained a camera to use for photographing the job site
• Did not use Compressed Pattern’s equipment or supplies
• Was not provided with office or work space by Compressed Pattern
• Did not have a Compressed Pattern e-mail address or business card
• Was not held out to customers or the public as Compressed Pattern’s employee
• Independently studied for and paid his own examination fees to become licensed as an architect during the time he was working on projects for Compressed Pattern

When the Employment Department Tax Section mailed a Notice of Tax Assessment to Compressed Pattern for the “wages” paid to Singer, Compressed Pattern appealed the determination.  The ALJ found against Compressed Pattern, noting that Singer met only two of the requirements for an “independently established business:”

• He provided the same services to others, ORS 670.600(3)(c)
• He had the authority to hire and fire other qualified drafters, ORS 670.600(3)(e)

First Assignment of Error – Singer Failed to Maintain a Business Location

On appeal, Compressed Pattern first challenged the ALJ’s finding that Singer “did not maintain a business location.”  During the course of the project, Singer worked at Compressed Pattern’s building site.  He did drafting and 3D modeling work for Compressed Pattern at the offices of GBD Architects.  GBD Architects previously employed Singer as an intern, but laid him off earlier in the year.  GBD generously permitted Singer to use the company’s offices, computers, and CAD software at no charge.  The Court of Appeals affirmed the ALJ’s finding:  “… a business location must be both ‘maintained’ by the person and separate from the business or work location of the person for whom services are provided…. although Singer worked separately from petitioner’s place of business, Singer did not do anything to maintain a business location; he used, for free, the space and equipment of GBD Architects and did not otherwise do anything to maintain his own business location at their site.”

Lesson 1:  No good deed goes unpunished.  In this instance, GBD Architects was trying to help a former employee by providing office space and equipment at no charge.  Unfortunately, that was a deal-breaker.  Independent contractors must maintain their own place of business and provide services from that business location.  If you hire a freelance legal secretary and he uses his former employer’s office to do your work without paying rent to the former employer, you don’t have a freelancer.  You have an employee.  (Unless the freelancer can meet at least three of the other four criteria for engaging in an independently established business.)

Second Assignment of Error – Singer Did Not Bear the Risk of Loss

In affirming the ALJ applied the correct legal test, the court found:

• The parties had no written agreement (as to Singer’s pay)
• There was no indemnification agreement between the parties
• Singer, as the contractor, did not carry liability insurance or a performance bond
• Singer billed by the hour, rather than billing Compressed Pattern a fixed-fee – which might have been evidence that he bore some risk of loss if he underbid a job
• Singer was paid for the exact time spent on Compressed Pattern’s project

The fact that Singer was responsible for correcting defects in his drafting work at no charge was not sufficient, in and of itself, to show that he bore a significant risk of loss.

Lesson 2: Always enter into a written agreement when hiring a contractor. Terms of engagement should always be documented no matter what and your written agreement could influence the outcome in a contractor vs. employee dispute.  Query 1:  If you are a law firm hiring a contract lawyer, would you be in a better position to argue that your contract lawyer “bore the risk of loss” if he or she carried coverage with the Professional Liability Fund?  (My thought:  Yes.)  Query 2:  Should contract work be billed on a fixed-fee basis?  (Since the lack of a fixed-fee arrangement appears to have influenced the outcome here…)

Last Assignment of Error – Singer Did Not Make a Significant Investment in His Business

Although Singer covered the cost of architectural examination fees during the course of his drafting projects, obtaining a license as an architect was not required for any of the work he was hired to do.  The Court was not persuaded that payment of the fees constituted an “investment.”  Furthermore, Singer did not invest in any of the assets necessary to provide drafting services since he used GBD Architect’s CAD software and printers at no charge.

Lesson 3:  Surely a contract lawyer who pays her own bar dues, covers the cost of attending CLEs, obtains her own Professional Liability Fund coverage, and purchases the equipment and supplies needed to do contract work is “making a significant investment in her business.”

All Rights Reserved 2012 Beverly Michaelis