The Oregon legislature passed Senate Bill 323 this session and moved a significant step closer to easing Employers’ burdens in maintaining an independent contractor for purposes of employment taxes and workers’ compensation coverage. The law goes into effect as of January 1, 2006. However, before Employers rush to reclassify their current employees as independent contractors, a close analysis of each specific circumstance is warranted. Employers must also understand that the “new” definition of an Independent Contractor only applies, as a general rule, to employment taxes and workers’ compensation coverage. The new definition does not apply to federal and state wage and hour laws. As a result, any decision to classify an individual as an Independent Contract must focus on the Employers right to control the employee. This right to control test has been incorporated into the new definition as will be discussed below.

The new law reads that individuals who provide services for remuneration are independent contractors if the person meets the following conditions: is free from direction and control over the means and manner of providing the services; is customarily engaged in an independently established business; is licensed under particular Oregon statutes for which a license is required under ORS Chapter 671 or 701; and is responsible for obtaining other licenses or certifications necessary to provide the services.

The Oregon Courts have listed four factors to consider when determining if the individual is free from the employer’s right to direct and control the means and manner that the individual provides the services. Those factors are as follows: (1) whether the employer retains the right to control the details of the method of performance, (2) the extent of the employer’s control over work schedules, (3) whether the employer retains the right to discharge the worker, and (4) the payment of wages.

The ability to be customarily engaged in an independently established business occurs if the individual business satisfies any three of the following factors:

• They maintain a business location that is separate from the business or work location of the party for whom the services are provided, or that is in a portion of the person’s residence and that portion is used primarily for the business.
• They bear the risk of loss related to the business or the provision of services as shown by factors such as: they enter into a price-fixed contract; they are required to correct defective work; they warrant the services provided; or they negotiate indemnification agreements or purchase liability insurance, performance bonds, or errors and omissions insurance.
• They provide contracted for services for two or more different clients within a 12-month period, or they routinely engage in business advertising, solicitation or other marketing efforts calculated to obtain new contracts to provide similar services.
• They invest significantly in their business, such as buying necessary tools or equipment; paying for the premises or facilities where the services are provided; or paying for licenses, certificates, or specialized training needed to provide the services.
• They have the authority to hire other persons to provide or assist in providing the services, and the authority to fire such persons.

While extremely important, the new law specifically reads that providing services through an established business entity such as a corporation or a limited liability company, “by itself”, does not create an independent contractor. Failing to have the services provided through a registered business, however, will almost surely doom any Employer trying to maintain the independent contractor relationship.

In establishing a brighter line test and taking a significant step toward alleviating an Employer’s burden when classifying an individual business as an independent contractor, the legislature removed several outdated statutory requirements. Among those previous requirements left behind is the mandate that Independent Contractors have the tools or equipment necessary for the contracted work; use commercial advertising, business cards or belong to a trade association; have a separate business telephone listing; and have a written contract with the person or entity for which the services are being provided.

Keep in mind, however that just because the legislature moved away from some of these requirements does not mean Employers should abandon sound business decisions that are also relevant to the direction and control test. Specifically, wise Employers will continue to insist upon a written agreement detailing both parties’ obligations and require the Independent Contractor to provide most if not all of the tools necessary to perform the contractual duties. Not only are these sound business practices to avoid later disputes over the terms of the agreement, the specifics relate directly to the initial requirement of establishing that the Employer does not have the right to direct or control the Independent Contractor’s performance.

At the end of the day, however, the Oregon Legislature moved in the right direction. While it still has a long way to go to both clarify and alleviate the burdens associated with establishing an Independent Contractor relationship, the steps taken in Senate Bill 323 are clearly steps in the right direction.