State of Oregon: Independent Contractors - Frequently Asked Questions

What is "direction and control?"

“Direction and Control” is one of the key criteria used by all state agencies to determine whether a worker is an independent contractor or an employee (for a complete list, check out our state agency criteria chart).

To be considered an independent contractor, any worker performing services for you must be free from your right to direct or control how those services are performed. If the worker is not free from direction and control, he or she will be considered an employee by state enforcement agencies.

Evidence of “direction and control” can include practices like:
•    Telling the worker how to dress or act on the job.
•    Telling the worker he or she can only work on the job at specific times.
•    Requiring the worker obtain approval for decisions to hire or fire other workers.
•    Requiring the worker to complete a training program you administer.
Be sure to check out the full text of the legal definition of “direction and control” used by the agencies which apply ORS 670.600 (Oregon Department of Revenue, Employment Department, Construction Contractors Board, and Landscape Contractors Board).

Note: To be considered an independent contractor under ORS 670.600, a worker must meet all the criteria of that law (not just the requirement concerning direction and control).

Keep in mind that certain agencies must follow different worker classification criteria. Additional agency-specific information on worker classification is available from Workers' Compensation Division and Bureau of Labor and Industries.

What is an "independently established business?"

An “independently established business” is one of the criteria used by state agencies to determine whether a worker is an independent contractor or an employee (for a complete list, check out our state agency criteria chart).

To be considered an independent contractor under ORS 670.600, a worker must (among other things) maintain an “independently established business.”

An “independently established business” is defined as meeting any three of the following five requirements:

(1) The person maintains a business location:
   •    That is 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 the business.
(2) The person bears the risk of loss related to the business or the provision of services as shown by factors such as:
   •    The person enters into fixed-price contracts;
   •    The person is required to correct defective work;
   •    The person warrants the services provided; or
   •    The person negotiates indemnification agreements or purchases liability insurance, performance bonds or errors and omissions insurance.
(3) The person provides contracted services for two or more different persons within a 12-month period, or the person routinely engages in business advertising, solicitation or other marketing efforts reasonably calculated to obtain new contracts to provide similar services.
(4) The person makes a significant investment in the business, through means such as:
   •    Purchasing tools or equipment necessary to provide the services;
   •    Paying for the premises or facilities where the services are provided; or
   •    Paying for licenses, certificates or specialized training required to provide the services.
(5) The person has the authority to hire other persons to provide or to assist in providing the services and has the authority to fire those persons.

The requirement to maintain an independently established business does not apply if the person files a Schedule F as part of an income tax return and the person provides farm labor or farm services that are reportable on Schedule C of an income tax return.

Note: To be considered an independent contractor under ORS 670.600, a worker must meet all the criteria of that law (not just the requirement concerning an “independently established business”).

Keep in mind that certain agencies must follow different worker classification criteria. Additional agency-specific information on worker classification is available from Workers' Compensation Division and Bureau of Labor and Industries.

What is the difference between a Form W-2 and a Form 1099-MISC - and what does it mean?

According to the Internal Revenue Service, both of these forms are called information returns. The Form W-2 is used by employers to:
•    Report wages, tips and other compensation paid to an employee.
•    To report the employee's income tax and Social Security taxes withheld and any advanced earned income credit payments.
•    To report wage information to the employee, and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.
A Form 1099-MISC is:
•    Generally, used to report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.
•    Required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or compensation are paid.
•    Provided by the payer to the IRS and the person or business that received the payment.”
The common misconception is that a given worker’s classification as either an employee or as an independent contractor is somehow determined by which information return form you provide to the worker at the end of the year.

A classification determination is always made on the basis of whether the worker meets the specific legal criteria for an independent contractor under Oregon law.

For more information on how the IRS handles its classifications determinations, check out their website. If you think someone is an independent contractor and you want the IRS to decide, you can request a determination by way of Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Does the way I pay a person determine whether that person is an independent contractor?

Not necessarily. The deciding factor in determining whether someone is an independent contractor is whether that person meets the requirements set out for an independent contractor in state law. (You can check out our summary of those requirements in chart form or read through a more complete discussion here.)

With that said, the way you pay a worker can be an indicator of whether that person meets those requirements. For example, ORS 670.600 requires (among other things) that independent contractors maintain an “independently established business,” and one of the potential indicators of such a business is that the worker enters into “fixed price contracts.” If you are paying a worker by way of fixed price contracts (as opposed to, say, an hourly rate of wage) that worker is meeting at least one of the requirements to be considered an independent contractor under the law.

Note: To be considered an independent contractor under ORS 670.600, a worker must meet all the criteria of that law (not just one, such as the requirement concerning an “independently established business”).

Keep in mind that certain agencies must follow different worker classification criteria. Additional agency-specific information on worker classification is available from Workers' Compensation Division and Bureau of Labor and Industries.

What if I have a signed contract saying the worker is an independent contractor?

State enforcement agencies (and the courts) apply specific legal criteria to determine whether a worker meets the requirements to be considered an independent contractor. If those requirements are not met, that worker is classified as an employee, regardless of how the relationship is characterized on paper. You can check out a summary of the state agencies’ criteria in chart form or click here for a more complete discussion.

Can I lay off an employee and bring him or her back as an independent contractor?

Although it can be tempting to reclassify an employee as an independent contractor, you should be aware that doing so will require several trade-offs in your current relationship with the employee and there is certainly a risk of liability if your reclassification fails to reflect the worker’s actual status under state law.

State enforcement agencies (and the courts) apply specific legal criteria to determine whether a worker meets the requirements to be considered an independent contractor. If those requirements are not met, that worker is classified as an employee, regardless of how the relationship is characterized on paper. (A summary of the state agencies’ criteria is available in chart form by clicking here.)

In general, a bona fide independent contractor must be free from "direction and control" as to how the work is performed and is almost always required to maintain an "independently established business." If you reclassify an employee as an independent contractor, but you do not give up control over how he or she does the work (or the worker does not run a business independent of your own) that worker is still an employee.

Can I hire a person from another state as an independent contractor?

A state boundary in itself does not establish an independent contractor relationship. If you hire a person from another state to work for you in Oregon, Oregon law would decide if they are an independent contractor. Likewise, if you send an Oregon resident to work in another state on a temporary basis for an Oregon employer, Oregon law would decide if the worker is an independent contractor.

If an employer from another state hires an Oregon worker to perform services in Oregon, Oregon law would decide the worker’s status.

To find out where workers are reported for unemployment insurance, see Employment Department informational flyer regarding Multi-State Employment.

Does a professional or trade license make someone an independent contractor?

No. A professional or trade license represents the legal right to perform services in a given trade or profession. It does not indicate, however, that the licensee has also met the requirements set out for an independent contractor in state law.

As an example, ORS 670.600 requires that independent contractors be responsible for obtaining any necessary licenses or certificates to provide services, however, under that law a bona fide independent contractor must also maintain an "independently established business" and perform his or her work free from the "direction and control" of another. So if a cosmetologist, for example, is not free from the direction and control of the establishment where he or she provides cosmetology services, that cosmetologist would not be an independent contractor, despite the fact that he or she is required to obtain a license from the Oregon Health Licensing Agency’s Board of Cosmetology.

Keep in mind that certain agencies must follow different worker classification criteria. Additional agency-specific information on worker classification is available from Workers' Compensation Division and Bureau of Labor and Industries.

Is there an independent contractor license?

No, Oregon does not issue an independent contractor license. Although various trades and professional occupations may have licensure requirements, merely holding such a license does not make anyone into an independent contractor. To be considered an independent contractor, the worker must meet the requirements of Oregon law.

For additional information on Oregon licenses, certifications, permits, and registrations, be sure to check out the Oregon License Directory online.

What are the pros and cons of engaging an independent contractor?

Pros include:
•    You are not responsible for providing workers' compensation coverage.
•    You do not pay unemployment insurance tax.
•    You do not pay Social Security tax.
•    You will not need to withhold income taxes or pay local payroll taxes.
•    Bookkeeping may be simpler since payments are based on a contracted amount without reporting requirements, other than Form 1099-MISC, which must be sent to the IRS in certain cases.
•    There is no need to keep timesheets, hour logs, or salary-based logs.
•    You do not need to provide tools, equipment, or materials.
Cons include:
•    You cannot supervise closely because the independent contractor chooses the manner and method of doing the work.
•    You cannot control who actually performs the service since an independent contractor has the right to hire and fire their own labor.
•    You may lose some flexibility in completing projects because independent contractors decide their own schedules.

What are my responsibilities as someone who hired an independent contractor?

Engaging an independent contractor can be a smart option for businesses with limited resources in a specific area of expertise. Given the potential consequences of misclassification, however, it is always wise to document the criteria you used to determine that a worker meets the legal requirements to be treated as an independent contractor.

The best time to make this evaluation is before you draw up and execute a contract. You may even wish to make it part of the hiring process for bidders to provide you with specific documentation of their independent contractor status. The Bureau of Labor and Industries and the U.S. Department of Labor consider the permanency of the relationship as part of their classification determinations, so you may wish to make sure your contract is subject to periodic review and is not automatically renewed; that way you can use your contract renewal period as an opportunity to re-verify the status of your contractor.

Most importantly, verify and document that the terms of the relationship set out in your contract are borne out by the actual reality between the contractor and yourself. State agencies and the courts have made it clear that it is the reality of your relationship with a worker (not its characterization on paper) that controls whether he or she will be considered an independent contractor.

What are my hiring options?

Engaging an independent contractor can be a smart option for businesses with limited resources in a specific area of expertise. Oftentimes, however, businesses will need to retain the right control how and when a given worker will go about the job. This is especially true when services are a core part of your business operation or in the case of an ongoing relationship. In such situations independent contractors cannot meet your business need; they must remain free of your direction and control over how they provide services.

Apart from hiring employees directly, however, businesses do have the option of contracting with a worker leasing company or a temporary staffing company. Depending on the specific arrangement, worker leasing companies can take on much of the administrative burden of managing a workforce. Be aware, however that leased or temporary staff are not considered independent contractors and Oregon law has specific requirements on which party is responsible for Workers Compensation coverage.

Doesn’t a registered business name (such as a corporation, partnership, or limited liability company) mean that I’m dealing with an independent contractor?

Not necessarily. Remember, the courts and regulatory agencies will consider workers to be employees unless they meet the definition of an independent contractor. In fact, ORS 670.600(5)(a) specifically states, “The creation or use of a business entity, such as a corporation or a limited liability company, by an individual for the purpose of providing services does not, by itself, establish that the individual provides services as an independent contractor.” It is critical, therefore, that you compare the reality of your relationship to a given service provider with the legal criteria for an independent contractor. (You can check out a summary of the state agencies’ criteria in chart form or click here for a more complete discussion.)

Can an independent contractor file a claim for unemployment?

Anyone can file a claim for unemployment benefits. Whether a person qualifies for benefits or has enough wages to establish a valid claim is reviewed on a case-by-case basis. Someone that has worked only as an independent contractor for the two years prior to filing for unemployment will usually not have sufficient wages to establish a valid claim because wages earned as an independent contractor are not subject to unemployment laws or taxes. If an independent contractor is incorporated and pays unemployment insurance taxes on themselves, then they may qualify for benefits.

On occasion, a worker will dispute whether they were actually an independent contractor. In circumstances where a worker disputes their employment classification and no wages are reported, the Oregon Employment Department will conduct an investigation to determine whether an employee/employer relationship exists. These investigations are conducted via telephone interviews and gathering of documents from the involved parties. If a determination is made that finds the worker to be a subject employee, wages can be added resulting in a recalculation of the unemployment claim. To file a claim for unemployment, click here.