Oregon Court Provides Guidance on Independent Contractor Status

by Joel Christiansen

Yesterday, the Oregon Court of Appeals issued an opinion regarding independent contractor status in the case of Compressed Pattern, LLC v. Employment Department Tax Section (Full Text PDF). This marks the second time since Mid-August the Court of Appeals has issued an opinion in an independent contractor status dispute. Both rulings have been against small business employers.

For a number of reasons, I believe this opinion is bad news for small business employers and independent contractors. I believe the court’s very narrow construction of the independent contractor statute may force small business employers and independent contractors to incur increased costs in order to establish and maintain independent contractor relationships. Unfortunately, this is likely to have a negative impact on the many small businesses and individuals who rely on those relationships.

In this article, I describe how this independent contractor dispute made it to the Oregon Court of Appeals. I also summarize the facts of the case and provide a brief description of the law the court applied in reaching its decision. Finally, I discuss the court’s analysis of one of the three issues that was on appeal – whether a worker “maintain[s] a business location” under ORS 670.600(3)(a). If you would like to read about the other two issues addressed in the case, I encourage you to read the full opinion.

Please remember, this article is not legal advice. If you need legal help with a independent contractor status dispute in Oregon, please feel free to contact me. Now more than ever, it is very important for small businesses to ensure their independent contractor relationships comply with the provisions of ORS 670.600 and related statutes and regulations.

How Did This Independent Contractor Status Dispute Arise?

Like many independent contractor status disputes, this dispute started when the Oregon Employment Department (OED) Tax Section issued a Notice of Tax Assessment to a small Portland-based business. In this case, the business was Compressed Pattern, LLC. OED’s assessment alleged that Compressed Pattern failed to pay employment taxes for one of its workers. (These issues often arise when a worker files an unemployment claim.) The Employment Department concluded the worker was an employee, not an independent contractor.

Compressed Pattern contested the Employment Department’s assessment by appealing to an administrative law judge (ALJ) at the Oregon Office of Administrative Hearings (OAH). After a hearing, the ALJ ruled that Compressed Pattern’s worker was an employee and not an independent contractor. As a result, the ALJ upheld the Employment Department’s tax assessment.

Compressed Pattern appealed the ruling to the Oregon Court of Appeals. In a 13-page opinion, the Court affirmed the ALJ’s ruling that the worker was an employee, not an independent contractor.

The Facts of This Independent Contractor Status Dispute

The worker in this case is Jason Singer. The case addresses whether Singer was Compressed Pattern’s employee or its independent contractor.

Compressed Pattern is in the architectural design business. Singer provided drafting services to Compressed Pattern beginning sometime in 2009. Below is a brief description of the work arrangement between Singer and Compressed Pattern:

  • Singer’s agreed upon hourly rate was $35.00, which Compressed Pattern paid whenever Singer submitted invoices.
  • Compressed Pattern provided Singer a 1099 for the amounts it paid and did not pay employment taxes on the amounts it paid him.
  • The only direction Compressed Pattern provided Singer was design specifications and general deadlines. Otherwise, Singer set his own hours and completed the work as he saw fit.
  • Compressed Pattern did not provide Singer with office space, supplies, business cards, email address, or any other supplies.
  • Compressed Pattern did not hold Singer out as an employee to its customers or the general public.
  • Singer worked from an office he arrangement with his former employer, GBD Architects. GBD allowed Singer to use its offices, computers, and CAD software at no cost.
  • Singer used his own vehicle whenever he needed to travel to projects and he was not reimbursed for mileage.
  • Singer used his own tape measure, pens, pencils, and paperwork to perform his work. He also used a camera that he borrowed from his girlfriend.
  • Singer solicited and performed work for other clients during the same time he was working for Compressed Pattern.
  • Singer did not carry liability insurance or performance bonds for any of the services he provided.
  • During the time he was working for Compressed Pattern, Singer was in the process of completing examinations required to obtain his license as an architect. He paid several hundred dollars to take several in a series of tests.

The “Independently Established Business” Standard for Independent Contractors

The question before the court was whether Singer was an independent contractor under the law that applies to Oregon Employment Department tax determinations, ORS 670.600. More specifically, the court addressed one prong of that independent contractor statute – whether Singer was “customarily engaged in an independently established business.”

To prove an independent contractor is “customarily engaged in an independently established business” for employment tax purposes, an employer bears the burden of proving 3 of the 5 following requirements:

  1. The person maintains a business location
  2. The person bears the risk of loss related to the business or the 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

The ALJ ruled that Compressed Pattern had proved, at most, that Singer (1) provided the same services to others, and (2) had the authority to hire and fire other qualified drafters. The case therefore turned on whether Compressed Pattern was able to prove one of the remaining three requirements. The ALJ concluded Compressed Pattern had not met its burden of proof.

The Court of Appeals affirmed the ALJ’s ruling in whole. The court held that Singer’s office space at GBD did not count as “maintain[ing] a separate business location.” The court also held that Singer’s investments in the business were “insignificant” and that Singer did not bear the risk of loss related to the business or provision of services.

Below I discuss the court’s ruling on the business location issue, which comprises the lion’s share of this opinion. If you’re interested in my take on the other two issues, feel free to contact me.

Maintaining a Business Location – The Standard in Independent Contractor Status Disputes

A key issue in this case was whether Singer had maintained a business location under ORS 657.600(3)(a) by arranging for office space and equipment with his former employer, GBD. The court ruled that he had not.

Under ORS 670.600(3)(a), one component of independent contractor status is whether the person maintains a business location (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.

There was no dispute that Singer’s work sites (at GBD and on-site at Compressed Pattern’s client sites) were separate from Compressed Pattern’s client sites. The problem, according to the court was that Singer did not maintain the work sites. Specifically, the ALJ found “that those work sites, although separate from [Compressed Pattern’s] business, were not business locations that Singer maintained; as for the use of GBD Architect’s office space, the ALJ found that Singer did not pay rent for the space, was not charged for the equipment, and did not otherwise maintain that site as a business location.” The court reasoned that there was “substantial evidence in the record to support the ALJ’s order in that respect” and therefore affirmed the ALJ’s ruling.

The problem with this ruling, in my opinion, is that it disregards Singer’s 7 year prior employment relationship with GBD and subsequent layoff from that job. Ostensibly, that long-term relationship and its associated goodwill is what allowed Singer to use GBD’s space and equipment at no financial cost. It seems the ALJ and court discount Singer’s resourcefulness and ability to leverage his long-term relationships. Frankly, I don’t think small businesses should be prevented from contracting with talented people just because those people made arrangements for free office space and equipment. If Singer had an office location where he could perform his work, receive mail, and do all of the other things businesses typically do, I do not see how he was not maintaining a business location.