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By now, most employers are familiar with the risks of misclassifying employees as independent contractors. In the tax context, misclassification can result in significant liability for unpaid employment taxes, interest and penalties.

A recent Oregon Court of Appeals decision revisits the definition of independent contractor in the context of employment taxes under ORS 670.600.

In AGAT Transport v. Employment Department, AGAT contracted with drivers to provide transportation services. AGAT entered into contracts with drivers whereby the drivers were free to accept or reject specific driving assignments. However, the drivers: could only hire other people to drive if the people were qualified by AGAT; were prohibited from carrying passengers; and were required to call AGAT’s dispatcher on a set schedule, as well as when instructed to do so.

The contracts also included a “lease to own” provision whereby drivers leased trucks from AGAT to use to perform delivery services. Drivers also had to: 1, carry cargo insurance and fire/theft/collision insurance; 2, get AGAT’s permission before performing repairs on the trucks; and 3, display signage and insignia as directed by AGAT.

The Oregon Employment Department concluded that the drivers were employees and, after a hearing, an administrative law judge (ALJ) agreed. On appeal, AGAT challenged the ALJ’s conclusion that the drivers were employees and not independent contractors. Specifically, AGAT disputed the ALJ’s conclusion that the drivers were not free from AGAT’s control over the means and manner by which they provided services.

On appeal, the court revisited ORS 670.600’s requirement that, to qualify as an independent contractor, a worker must be “free from direction and control, beyond the right of the service recipient to specify the desired result.”

The Court of Appeals first explained that the “direction and control” test addresses two aspects of a person’s work: “the means and the manner by which the person provides services.” The court then explained that the definition of “means” is “resources used or needed in performing services” and that to be free from direction and control over the means of providing services, a person “must determine which resources to use in order to perform the work, and how to use those resources.” Finally, the court explained that the “manner” by which a person performs services means the “method by which the services are performed.”

The court also acknowledged that a “person who is compensated for performing services virtually always will be subject to some level of oversight by the entity or individual for whom the work is performed,” but clarified that the critical question is “whether that oversight relates primarily to ‘specifying the desired results of the work, or, instead, to having authority to control the way in which the work is performed.”

Based on these principles, the court ruled that the drivers were employees, and not independent contractors. In particular, the court found that AGAT directed and controlled the means and manner in which the drivers performed their services because, even though the drivers leased their trucks from AGAT, as a practical matter, AGAT supplied the drivers with the primary piece of equipment they needed to be able to provide driving services.

And AGAT exerted control over how the drivers did their work because it prohibited drivers from carrying passengers, required drivers to contact dispatch at set times, and had to approve any delegation of driving by a contracted driver to another driver. Based on these facts, the Court of Appeals affirmed the ALJ’s ruling.

Although the court ultimately ruled that the drivers were employees, the decision discusses a number of facts that weigh against that classification. Specifically, the court found that the requirement that drivers meet customer expectations regarding pickup and delivery related to AGAT’s right to specify the desired results of the driver’s work and did not indicate control over the means or manner by which drivers could achieve that goal. Further, the decision suggests that the court’s analysis might have been different if the drivers entered into separate contracts to lease trucks which were not co-extensive with the service contracts.

The AGAT decision is a reminder that employers should tread carefully when classifying the workers as independent contractors and that, at least pursuant to ORS 670.600, the more control exercised, the less likely a worker will be an independent contractor.

Elizabeth Semler is chairwoman of Sussman Shank’s employment law group. Contact her at 503-243-1661 (extension 264) or at [email protected].