Like any other industry, builders regularly classify contract labor as either employees or independent contractors (1099 workers). Generally, if the contract labor is going to work under your company’s direct control/management, there’s no question that the worker should be classified as an employee, and thereby entitled to minimum wage, workers’ comp insurance, unemployment insurance, tax withholdings, etc. However, it is often economically beneficial for the business relationship to seek labor from an independent contractor — someone who does not need to be directly supervised, who can autonomously tackle discreet construction activities on your behalf — and, therefore, your company has no legal risk or financial responsibility beyond the contract value of the labor.

You may be thinking, “We always hire a company. We never hire individuals, so this doesn’t matter for us.” You could be wrong. Unless you can guarantee that the “company” you are hiring is in good legal standing and following all these rules, you may end up on the wrong side of litigation if one of their workers on your job is injured, terminated or brings a wage claim.

Understanding Colorado and IRS independent contractor guidelines can save you some headaches and money, particularly in the recently proactive regulatory environment at Colorado’s Department of Labor, which has been targeting the construction industry for wage claim investigations — misclassification comes with huge penalties.

When it comes to independent contractor vs. employee, what are the differences? There are two legal frameworks that must be followed, at the federal and state level.

The IRS’s Three-Factor Test

Behavioral Control

Does your business have a right to direct and control how the work is done, through instructions, training or other means?

• Are there regular reports to a manager regarding the contractor’s work?
• Is the contractor’s performance regularly evaluated?
• Is the contractor provided with occasional training related to the job?
• Is the contractor free to work anytime and anywhere convenient?
• Is the contractor tied to the company’s rules and regulations?
• Does the contractor have a fixed work schedule?

Financial Control

Does your business have a right to direct or control the financial and business aspects of the contractor’s job?

• How is the contractor paid and how regularly — monthly, weekly or fortnightly?
• Is the contractor eligible for reimbursements or unreimbursed business expenses?
• Does the contractor have access to any of the company’s resources or just resources supplied by the contractor?
• Does the contractor pay for their own health insurance, liability insurance and other insurance?
• Does the contractor have other customers?
• Can the contractor realize a profit or incur a loss?

Relationship of the Parties

• Does the contractor receive employee-type benefits like: fringe benefits, insurance, a pension plan, paid sick days and vacation leave?
• Does the contractor offer these specific services or are they catch-all labor for your company?
• Is there a written or oral agreement describing the intended relationship?
• Is there an invoice for every completed job or project?
• How permanent is the relationship?
• Are the contractor’s services a key aspect of the company’s regular business?

For more information about the IRS’s Three-Factor Test, read Publication 15-A.

Colorado Test

Under Colorado Law, an individual is presumed to be in covered employment unless and until it is shown that the individual is free from control and direction in the performance of services, both under contract and in fact, and that the individual is customarily engaged in an independent trade related to the work performed. The presumption shifts to independent contractor status if there is an Independent Contractor Agreement that includes provisions to demonstrate that the contractor is not an employee. However, the contract must include statutory disclosures and cover the general aspects described in the IRS test above.

Read more about the Colorado Test for independent contractors.

Best Practices

A good independent contractor agreement will:

• Define the contractor’s tasks, compensation and the time frame for completion. 
• Provide the framework for maintaining the contractor’s independent business in accordance with Colorado and IRS provisions. See C.R.S. §§ 8-4-202(2)(b)(II) and 8-70-115(1)(c).
• Include a disclosure (in bold/large font) that the contractor is responsible for paying federal and state income taxes on their earnings and will not receive any benefits from the company, such as worker’s comp or unemployment insurance.
• Be notarized.
• Address issues of insurance, lien waivers, confidentiality, non-solicitation, adherence to GC or owner safety protocols and contract drawings, dispute resolution, reimbursements/expenses, drug and site security policies, and intellectual property.

The use of a well-drafted independent contractor agreement is appropriate for many subcontractor relationships as well as 1099 contract labor. Once your company has a solid agreement ready for use, maintaining and justifying the independent contractor relationship becomes easier for your administrative and site staff to manage with confidence.