What Exactly Is an Independent Contractor Agreement?
An independent contractor agreement is a contract that specifies the working relationship between a business and an independent contractor. In Colorado, it is a common tool used to protect both the business and the independent contractor. These agreements typically define the services to be rendered, the compensation for those services, the manner in which the contractor will be paid (hourly, by result, or other means), the duration of the services, the tools that will be used, the return of equipment, nondisclosure, non-competition terms , and termination of the agreement. In Colorado, it is important that independent contractors are correctly evaluated for employment versus independent contractor status. As such, the agreement itself sometimes contains terms and conditions to ensure compliance with the factors evaluated in determining employment status. The Colorado Department of Labor and Employment has an extensive description of the criteria it uses to determine whether a contractor is an employee or independent contractor for state wage and reporting purposes.
Components of a Typical Colorado Independent Contractor Agreement
Even though independent contractors are not entitled to the same legal protections given to employees, it is still important to spell out the terms of the working relationship. Even before 2019, the Colorado Department of Labor and Employment (the "Department") encouraged employers to use an independent contractor agreement as a best practice. This is even more so true now, given the increase in enforcement of the ABC test for independent contractors under the Colorado Wage Order rule changes made earlier this year.
In Colorado, there is no specific language that must be included in an independent contractor agreement. That being said, there are key elements that should make up any independent contractor agreement, including, at a minimum, the following:
Description of services. It is always a good idea to have a general description of what tasks or services will be performed by the independent contractor during the course of the contract.
Compensation. The agreement should include payment terms pursuant to which the independent contractor will be paid for the services provided. This may include hourly rates, flat fees, retainer payments, etc. Also, at a minimum, it should include when the compensation is due and how it will be paid (check, direct deposit, cash, etc.).
Term of contract. The agreement should include language addressing how the term is established and the process by which either party may terminate the contract.
Confidentiality and/or non-compete. While the enforceability of confidentiality or non-compete agreements is highly regulated within Colorado, it still may make sense to include such provisions in the contract if the independent contractor will be exposed to sensitive or proprietary information during the course of the relationship.
Independent Contractor Laws in Colorado
When we turn to Colorado, the Colorado Employment Security Act plays a major role in independent contractors in the area. Here the Employer must prove that the worker is truly an independent contractor and is not attempting to micromanage the cost of the employee in a way to prevent a claim for unemployment insurance. The test to be determined by the Department of Labor and Employment for an independent contractor is primarily a two part test to determine whether an individual is in employment or self-employment. The first part asks whether an individual is free from control or direction of the hiring entity. Secondly, the individual must ordinarily be engaged in an independently established trade, occupation, profession or business for other than the hiring entity. This is very similar to the IRS law in that it allows for the fact that someone can be peddling his or her deliveries such as a pizza delivery driver, a bookkeeping service that works for other people but also works for an employer. Because of the second test Colorado also has a provision known as the Seven Factors test which has been adopted by the Supreme Court in the case of Eacret v. Employment Security Agency, 697 P2nd 393 (Colo1996) and which consists of the following : 1) employee performs the services outside of the usual course of business for the employer; 2) the worker operates an independently established business; 3) the worker hires his/her own employees; 4) the worker maintains a fixed location for the business; 5) the worker makes his or her services available to the general public; 6) the worker enters into a written contract with the employer and 7) the worker has a real possibility of profit or loss. These factors are flexible and not every factor need be established for a finding of an independent contractor. Simply having a contract is not enough.
Employee Versus Independent Contractor in Colorado
Depending on the nature of your workforce, you may choose to hire employees or independent contractors. While defining these two terms may seem easy enough, there are a number of legal distinctions between employees and independent contractors that you should consider before beginning to draft an independent contractor agreement.
The Colorado Department of Labor and Employment has a detailed guide on its website for determining whether an individual is an employee or an independent contractor. The document first explains how Colorado law has different tests for determining independent contractor status. The document then goes through the criteria Colorado uses to determine whether an individual has the status of an employee or an independent contractor. Colorado defines an independent contractor as a person who is free from control and direction and who is also in a distinct occupation or business. A person must meet all of the following criteria to be considered an independent contractor under Colorado law: The document then goes through how these criteria are applied to determine whether someone is an independent contractor.
In addition to ensuring that your business does not run afoul of Colorado law when hiring employees or independent contractors, it is important for you to understand how still different the distinction between employees and independent contractors can be for broader purposes including tax, labor, and other business management issues. Because the distinction between employees and independent contractors is so important, there are a number of different tests and criteria that government agencies and courts use to determine whether an individual is an independent contractor or an employee. You will likely need to ensure that you have independent contractor agreements that comply with these different tests, criteria, and standards after considering whether you use these agreements in your business and human resources functions.
Drafting a Compliant Independent Contractor Agreement in Colorado
The drafting of an independent contractor agreement should take into account the requirements of Colorado law governing independent contractors. An effective independent contractor agreement in Colorado should establish the intention of the parties that the contractor is responsible for paying and collecting taxes, controlling how the contract work is done and paying for and responsible for the supply of tools and situating the contractor as a separate business entity from the principal.
In addition , the agreement should specify that the contractor has received the benefit of and has had the opportunity to read at least all of the following:
I recommend the review of Colorado statutory language by an attorney to ensure that an independent contractor fits the statutory test. For example, Colorado law specifies that if an independent contractor claims to operate an "independently established business" (meaning it has a physical business address and uses business cards, lettersheads, and advertisements in newspapers and otherwise) then they are presumed to be an independent contractor. I highly recommend that any written independent contractor agreement contain this language and others as needed.
Avoiding Common Mistakes
When it comes to independent contractor agreements in Colorado, businesses and employers should be aware of several common mistakes. For example, in some cases a business may omit a non-compete or arbitration clause for their independent contractors. But these provisions can impact the paycheck of an independent contractor; so it is important that a business or employer include these provisions when drafting an independent contractor agreement. It is important that an independent contractor (IC) in Colorado a.) sign an independent contractor agreement and b.) as part of signing that agreement, acknowledge they really are an independent contractor. Failing to do either can have negative consequences. In short, failing to have an independent contractor agreement or not accurately defining the relationship in an independent contractor agreement increases the risk an IC will successfully argue they are an employee under Colorado’s "economic realities" test.
Consulting with an Attorney in Colorado
Because of the complexity of independent contractor agreements and their sometimes confusing legal impact, we highly recommend that you get a local attorney to draft or review your agreement. Don’t try to "wing it" on your own.
The Colorado Bar Association maintains a lawyer-lookup service that can help you find a qualified lawyer near you who can help with your particular problem. Just go to its site , www.cobar.org, and look under "Find a Lawyer". You may also search for attorneys by areas of practice on the site of the Denver Bar Association.