Employee or Independent Contractor? Answering the Question in the Internet Age

Is a worker an employee or an independent contractor? Businesses have struggled with answering this question correctly for years. But with the advent of the internet and the ability to so easily connect providers and consumers in a virtual marketplace, does our traditional notion of what it means to be an employer need to be revisited? A recent decision from the Colorado Court of Appeals explores this question: “How, then, in the Internet Age, can we differentiate between employees and independent contractors?”¹

For a fuller explanation about independent contractors, read here.

Varsity Tutors, LLC v. Industrial Claim Appeals Office: The Facts

Varsity Tutors operated a business where it recruited tutors and then connected them with interested students using an online platform. Varsity would enter into a contract with the tutors, who then would advertise their individual services using Varsity’s platform. When a student was interested in using one of the tutors, Varsity would connect the tutor and the student, and then the tutor and the student communicated directly to arrange the tutoring sessions. Varsity would pay the tutors an hourly rate, and then Varsity would charge the students a premium for the service.

Varsity and the tutors’ contracts attempted to make clear that the tutors were independent contractors and Varsity pretty much treated them accordingly. And, as relevant here, Varsity did not pay unemployment taxes for them, as would be required if they were considered employees. But after the Colorado Division of Unemployment Insurance Employer Services conducted an audit and determined that Varsity had misclassified the tutors, it charged Varsity for unemployment taxes it claimed Varsity owed.

Varsity challenged the assessment through an evidentiary hearing. The hearing officer concluded that Varsity’s contracts had not created a rebuttable presumption that the tutors were independent contractors (as discussed below), so Varsity bore the burden of proving they were. The hearing officer concluded that Varsity came up short because Varsity had been unable to demonstrate that the tutors were “customarily engaged in an independent trade, occupation, or profession related to the services performed,” essentially because they did not run their own tutoring businesses on a regular basis.²

Varsity appealed first to an administrative panel, which affirmed the hearing officer’s conclusion. Because Varsity had not provided enough evidence that the tutors had been involved in an ongoing business, the hearing officer’s determination was upheld. Varsity then brought the issue to the Colorado Court of Appeals.

The Court of Appeals Reverses: The Tutors Were Independent Contractors

A division of the Colorado Court of Appeals reversed, concluding that the tutors were independent contractors. After laying out the legal principles governing whether a worker is an employee or an independent contractor, the panel gave eight reasons to support its conclusion that Varsity had satisfied its burden to prove that the tutors were independent contractors:

1. The lack of a compliant disclosure in Varsity’s contracts did not foreclose the conclusion that the tutors were independent contractors. Under Colorado statute, when a contract disclosure in large or bold-face type states that workers are “not entitled to unemployment insurance benefits” and are “obligated to pay federal and state income tax” on their income, this creates a rebuttal presumption that the workers are independent contractors.³ While Varsity’s independent contractor agreements did not create a rebuttal presumption because they lacked the large or bold-face type, the Court of Appeals looked at the reality of the contracts. They clearly communicated that the positions were independent contractors and the division noted that the absence of the large or bold-face type did not prevent it from considering the rest of the contract’s terms in its “totality of the circumstances” analysis.

2. The rest of the contracts’ contents suggested the tutors were independent contractors. The panel looked at the remainder of the contracts and noted that the contracts were clear regarding the independent contractor status.

3. Six of the nine factors typically used for determining whether a worker is an employee or independent contractor (from the relevant statute) pointed to independent contractor status. Next, the court examined the nine statutory factors for determining whether a worker is an independent contractor, highlighting facts like how Varsity did not require the tutors to work exclusively for it, and how it did not establish the time when the tutors were supposed to perform their work.

4. The panel below had not considered the totality of the circumstances. The Colorado Supreme Court has held that when determining independent contractor status, reviewing authorities should look at the statutory factors, in addition to other factors that may be useful, in a totality of the circumstances analysis. The administrative panel below had focused on the fact that the tutors did not have the “traditional” imprimatur of an independent business, like a separate business phone number and address, or business cards. But the Court of Appeals felt that placing too much weight on these facts ignored the requirement for the “totality of the circumstances” review that our Supreme Court mandates.

5. The panel did not consider other relevant factors. Similarly, the panel below had not sufficiently analyzed other factors that tended to show that the tutors were customarily engaged in their own business of tutoring.

6. The fact of whether the tutors provided similar services to a company other than Varsity could not be dispositive. While almost all of the tutors worked exclusively for Varsity, it did not mean that they could not have tutored other students. They easily could have. Thus, this fact was not dispositive.

7. Persuasive authority supported its decision. The Court of Appeals noted that a New York court had considered a similar case and decided that the tutors there were independent contractors.

8. The internet age is changing how people work. To this final point, the Court explained that the internet has changed the face of how independent contractors can engage in business. They no longer need business cards, or a formal business phone number in order to have a business. The internet enables people to work from anywhere, and to connect to potential business through middlemen like Varsity, whom they would consider more of a broker than an employer. The Court concluded:

[T]he question becomes “whether a multi-faceted product of new technology should be fixed into either the old square hole or the old round hole of existing legal categories, when neither is a perfect fit.” In this case, we are confident that the relationship between Varsity and the tutors, which is a product of the Internet, fits fairly comfortably into the old round hole of independent contractor, not the old square hole of employer-employee.⁴

Conclusion

The internet and the sharing economy are drastically changing how we live, work, and do business. And they are challenging traditional notions of what it means to be an independent contractor. This timely decision from the Colorado Court of Appeals provides a helpful roadmap for how similar cases might be decided, and gives a thorough analysis of how courts are looking at the reality of the impact of the digital age on the modern business.

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¹ Varsity Tutors LLC v. Indus. Claim Appeals Office, 2017 COA 104, ¶ 4.

² Id. at ¶ 14.

³ Id. at ¶ 47.

⁴ Id. at ¶ 62 (quoting McGillis v. Dep’t of Econ. Opp., 210 So. 3d 220, 223 (Fla. Dist. Ct. App. 2017)).