Unemployment tax – independent contractor

Posted by: Oct 18, 2017By Brian Stutheit

Varsity Tutors LLC (Varsity) provided an online platform that connected tutors with students. Varsity had individual contracts with
tutors, who advertised their services on Varsity’s website. Students who were interested in working with particular tutors contacted Varsity. Varsity put the tutors and students together by providing contact information. Students and tutors contacted one another to arrange
tutoring sessions. Varsity and tutors agreed to an hourly rate that Varsity would pay them for tutoring, and Varsity charged students
about twice that rate.  The Division of Unemployment Insurance of the Colorado Department of Labor and Employment audited Varsity’s
2013 books and claimed that at least 22 tutors were Varsity’s employees, not independent contractors.  The Division assessed Varsity back unemployment taxes for those tutors.  Varsity claimed that the tutors were independent contractors and it was not obligated to pay unemployment insurance taxes on wages it paid to them.

The question whether Varsity owed taxes because its tutors were actually its employees went to the Colorado Court of Appeals.  The Colorado unemployment statute provides that a business can show that a worker is an independent contractor by proving by a preponderance
of the evidence that the worker was (1) “free from control and direction in the performance of the service” under any “contract for the
performance of the service” and “in fact”; and (2) “customarily engaged in an independent trade, occupation, profession, or business related to
the service performed.” Whether or not a worker is independent is a case by case evaluation.  The courts call it a “totality of the circumstances” test.  Note that the burden of proof is on the employer, not the State.

Alternatively, a business can establish that its workers are independent contractors by a written document signed by the business and the worker, documenting that the business did not do nine things listed in Colo Revised Statutes section 8-70-115(1)(c). Such a document creates a rebuttable presumption of an independent contractor relationship as long as it also contains a disclosure in specific font that the worker as an independent contractor “is not entitled to unemployment insurance benefits” unless the worker or “some other entity” provides them and the worker must “pay federal and state income tax on any moneys paid pursuant to the contract relationship.”

Varsity’s contracts with the tutors stated in bold, “Independent Contractor Agreement for Services.”  The term “independent contractor”
appears 16 times in the contract. The contract does not provide the tutors with training and provides minimal oversight of the tutors’
work, and does not establish a curriculum or require tutors to use specific materials. Applying the totality-of-the-circumstances test,
the Court of Appeals found that the evidence established that Varsity satisfied its burden of proving that the tutors were independent contractors because they were customarily engaged in independent businesses related to the tutoring services they were performing.
Varsity Tutors LLC v. Industrial Claim Appeals Office (July 2017).