Worker Classification
Is it Risky to Engage Independent Contractors in Oregon?
Engaging independent contractors in any state is risky because of the high level of responsibility that accompanies the task. Still, some states always find their way to the top of the list of risky states. California has the well-earned reputation as the riskiest state for engaging independent contractors, and since Oregon often follows suit with similar laws, it is also high on the list. Any business that engages independent contractors in Oregon must take extra care to stay compliant with worker classification and labor laws.
Oregon has strict compliance rules and high stakes!
Worker Classification in Oregon
While Democratic and Republican governments have decidedly different approaches to worker classification, rules are trending in the direction of making it harder for companies to classify workers as independent contractors. Each administration has its own approach, but democratic administrations tend to have their sights set on prioritizing accurate worker classification and punishing employers that don’t comply.
In addition to the federal legislation, states have their own rules. It’s important for companies to pay attention to Oregon’s worker classification rules because violators can face penalties such as fines, possible jail time, and damage to their reputations.
What Makes Worker Classification Tricky in Oregon?
While California has spearheaded the changes, the cascading effects of California’s worker classification legislation are being felt in other states, including Oregon.
California led the way in modifying the long-time standard for determining whether a worker is an independent contractor or a W2 employee by replacing the Borello test with the ABC test.. Considerations include the “right to control” how services are performed as well as whether workers are engaged in a distinct occupation or business, how much skill is required in the particular occupation, and whether the worker or the hiring entity supplied the tools used to perform the work and the place where the work was performed. The bottom line is that the definition of an independent contractor is narrowing.
What's at Stake For The Government?
To date, determining the differences and properly classifying workers have been highly- complicated tasks. It can depend on factors such as the ability to hire or fire a worker, the kind of occupation, the method of payment, location and more. Court rulings tend to make it even more complicated, but for the government, the stakes are high.
Independent contractors have been known to write off business expenses and sometimes underreport income, small businesses have avoided certain taxes with fewer W2 employees, and ICs are more difficult to track and tax accurately than W2 employees. In California’s Dynamex decision, the court identified some of the challenges misclassification causes, saying it is “a very serious problem, depriving federal and state governments of billions of dollars in tax revenue.”
What Does it Mean For Business?
Some employers like having more employees, feeling it gives workers more ownership in the company’s success. Others say it makes their business model unsustainable. Whether a worker performs work outside the usual course of the hiring entity’s business is the main determination for which workers qualify as independent contractors.
Some companies have restructured operations completely to avoid hiring more W2 employees (new laws have a way of precipitating new ways to get around said laws). Another way to avoid reclassifying is simply to operate business as usual and wait to be challenged. Smaller companies have been known to get away with this approach indefinitely. It’s risky, but it does happen.
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What About The workers?
Oregon’s approach to worker classification (among other topics) purportedly intends to protect workers and many consider Oregon one of the most worker-friendly states.
Still, some independent contractors have been unhappy with the changes and expressed concern for their livelihood. Even if all the perks afforded an employee (healthcare, time off, etc.) bring them close to their original pay in practice, their paycheck may look a lot smaller on the surface. Many industries have been granted exemptions, indicating that, as always, there is no simple cut and dry to an issue this complicated.
Independent contractors set their own schedules and manage their own businesses. While ICs are still responsible for paying taxes, they can also take advantage of many write-offs. Along with the perks, they do have the responsibilities that come with owning their own business. They run their own books, pay quarterly taxes, advertise, purchase their own equipment, and deal with the seasonal nature of business. Independent contractors also don’t get paid time off and are responsible for purchasing their own health insurance.
Some workers prefer the stability and possibility for advancement that come with having a greater presence at the office and familiarity with the ins and outs of the company.
What Best Practices Mitigate Worker Classification Risks in Washington?
Unless a company is made up 100% of full-time employees, this subject is relevant to operations. Failure to classify employees correctly could result in fines, back taxes, and even jail time. Stay well on top of worker classification rules and know the exemptions that may apply to your industry. Of course, if your business doesn’t have the bandwidth to stay on top of everything, engaging a partner is an excellent option. Working with an Employer of Record (EOR) or Professional Employer Organization (PEO) is standard best practice in this evolving freelancer economy.
While both provide payroll and insurance services, the differentiating factor is that an EOR relieves employers of much of the regulatory risk involved in working with independent contractors while a PEO operates as a co-employer and does not assume the employment risk.
What Are The Stakes for Mistakes?
Big companies like Uber make headlines for their missteps and pay equally big fines for their worker classification choices. Still, it can be a costly mistake to think it’s only the big companies that face consequences. By rescinding the Trump Administration’s “Worker Classification Rule,” the Biden administration made it easier for workers to argue for minimum wage and overtime protections/compensation. In addition to having to pay back 100% of the matching FICA taxes they would have paid had they classified the worker correctly up front, employers can end up subject to additional penalties such fines for each W-2 form they fail to file, penalties equal to 1.5% of the employee’s wages, and a $5,000 penalty for the first misclassified employee and up to $25,000 for each subsequent violation.
Suffice to say, misclassifying workers does not save money in the long run. Perhaps scarier than the possibility of monetary damages, misclassification has landed some business leaders under house arrest.
In addition, class-action lawsuits, failed audits, and negative headlines can damage a company’s reputation to the point where both workers and consumers are hesitant to engage with a company. It’s just not worth it!
Bottom Line
The most common mistake when engaging contractors in Oregon is misclassifying workers. Being lax about any risk and compliance issues is a danger to your operations. As the economic landscape shifts and independent contractors rise in prevalence, the financial stakes and potential for missed revenue rise, too. Government agencies such as the IRS and DOL will continue to ramp up their focus on the subject. States are also attempting to crack down on misclassification while tightening the reins on training requirements, and payroll guidelines.
There’s big money in class action lawsuits and new cases are always brewing. Fear doesn’t serve you well, but businesses should be very, very conscientious when engaging independent contractors in Oregon. A high level of vigilance protects your business. It’s worth doing whatever it takes to stay compliant and reduce the risk for fines and unpleasant attention from the IRS.
When is Engaging a Partner a Good Idea?
If you don’t have the in-house capacity to do it yourself, it’s worth engaging a partner. Doing business in Oregon is complicated and the consequences for errors can be very damaging. While the onus is on employers to classify workers correctly and stay in line with the state’s changing requirements, the right partner can make a rocky landscape smooth.
For PayReel, accurate worker classification and top-notch risk management are always the priority. We strive to stay aware of changes in the regulatory climate, monitoring state and federal regulations to the best of our ability.
