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It seemed like an easy solution – get extra help. The company had transcription work that had to be done. So the company hired someone in the local community to help, based on the terms of a personal services contract (PSC). Problem solved?

Shortly after the PSC work was completed, the transcriber filed a claim for unemployment benefits with the employment department. The company learned of the claim upon receipt of a notice of claim from the employment department requesting the reason for the separation. The company responded that the person was not an employee, but rather an independent contractor, and provided a copy of the PSC to the employment department.

Unfortunately, the company had made one of the most common misclassification mistakes: It erroneously believed that a PSC created an independent contractor relationship because the PSC said so. The company was wrong.

When a claim is filed for unemployment compensation, two things happen. First, the employment department’s benefits personnel must determine whether the claimant is eligible to receive unemployment compensation. Second, the employment department’s tax personnel must confirm an account to charge for the payments if the claim is to be paid.

When tax personnel discover that no account exists, or otherwise question the relationship between the claimant and an employer, they conduct an investigation. In this case, the tax personnel will look at the PSC and the department’s evaluation of the independent contractor statute and its implementation of administrative rules.

Oregon Revised Statute 670.600 is the independent contractor statute. It provides that an “independent contractor” is someone who provides services for remuneration and who, in the provision of the services:

“(a) is free from direction and control over the means and manner of providing the services, subject only to the right of the person for whom the services are provided to specify the desired results;

(b) is customarily engaged in an independently established business;

(c) is licensed under ORS Chapter 671 or 701 if the person provides services for which a license is required under ORS Chapter 671 or 701; and

(d) is responsible for obtaining other licenses or certificates necessary to provide the services.”

The question of being “free from direction and control” is centered on the “means” and “manner” of providing the services. “Means” are the resources used or needed in performing the services. To be free of direction and control over the means, a contractor must be free to choose the tools, equipment, labor, devices, etc. For transcription work this would mean the transcription machine, the typewriter or computer and printer, the software, etc.

“Manner” is the method by which the services are performed. To be free from direction and control over the manner of providing the services the contractor must determine how to perform the work. For transcription work this could include the work schedule, the process and procedures used to complete the transcription, and the delivery methods of the finished product.

To be “customarily engaged in an independently established business” three of the following five elements must be met:

1. Contractor maintains a business location:

• Separate from the business or work location of the person for whom the services are provided; or

• That is in a portion of the person’s residence and that portion is used primarily for business.

2. Contractor bears the risk of loss related to the business or the provisions of services as shown by factors such as:

• Contractor enters into fixed-price contracts;

• Contractor is required to correct defective work;

• Contractor warrants the services provided; or

• Contractor negotiates indemnification agreements or purchases liability insurance, performance bonds, or errors and omissions insurance.

3. Contractor provides contracted services for two or more different persons within a 12-month period or person routinely engages in business advertising, solicitation or other marketing efforts reasonably calculated to obtain new contracts to provide similar services.

4. Contractor makes significant investment in the business through means such as:

• Purchasing tools and equipment;

• Paying for premises or facilities where the services are provided; or

• Paying for licenses, certificates or specialized training to provide the services.

5. Contractor 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 the situation under discussion here, when the employment department tax auditor calls the claimant to discuss the nature of that person’s business he learns that:

• She goes to the company office for four hours twice each week to work;

• The company provides the work station, including the computer, software, printer, and other equipment;

• Someone in the company instructs the person and directs how she is to perform her work; and

• She does work for only the company.

On these facts, the employment department tax auditor concludes that the person was not an independent contractor, but rather an employee. As such, the company becomes liable for payment of the unemployment claim if the person is otherwise eligible. This finding may also subject the company to additional penalties from the Oregon Department of Revenue and the Workers’ Compensation Board for failing to withhold taxes or to pay a premium for workers’ compensation coverage.

The lesson to be learned is that simply saying someone is an independent contractor in a personal services contract does not make it so. Further, every PSC should be evaluated in light of the independent contractor statute to make sure that the person or entity actually meets the necessary requirements. Failure to conduct this evaluation completely and carefully can have serious ramifications for any employer.

Ronald Guerra is an attorney in Jordan Ramis PC’s labor and employment law practice group. He is an employment litigator, and handles matters for private and public clients. Contact him at 503-598-5540 or [email protected].