Court clarifies landscape for independent contractors 

A recent Idaho Supreme Court decision that ended one company’s seven-year battle with the state over $6,000 in disputed taxes has shed new light on how state agencies should define independent contractors.

The unanimous decision, with one concurring opinion, urges the Idaho Industrial Commission and the Idaho Department of Labor to stick closer to state laws and regulations, including a 15-factor test the department codified in 1999 to determine whether workers should be treated as independent contractors or employees.
The court admonished the industrial commission for going astray in its adjudication of the tax dispute, calling elements of its legal reasoning “erroneous,” “simply incorrect” and supported by “neither logic nor evidence.”
The court’s opinion says the agencies failed to use the 15-factor test and instead relied on three irrelevant factors to determine whether 31 workers treated as independent contractors by Excell Construction of Coeur d’Alene should be classified as employees under Idaho’s Employment Security Law.
“The commission’s decision shows that it ignored the applicable factors in order to obtain a desired result,” Chief Justice Daniel Eismann writes.
Contractors watching the case say the stakes were high and that a win by the state could have had an impact not only on the 18,800 building contractors currently registered in Idaho, but on any small business that relies on a larger company for its work, such as an appraiser that works closely with a bank or a carpet-layer that relies on references from a larger flooring company.
 “It would have been terrible,” said Ron Mahuron of M&W Construction in Hayden and past president of the North Idaho Building Contractors Association. “The state could have just selected anybody, to start picking their coffers to pay for unemployment insurance.”
He said independent contractors who are in business for themselves and advertise their own services have always been responsible for their own unemployment insurance in Idaho.
“We believe that’s the way it always was, so for (Excell) to get attacked for all of that, that would have been a big hit for everyone and the state could have run wild with that ruling,” Mahuron said.
The case stems from a March 2001 compliance audit of Excell by the Idaho Department of Commerce & Labor, which has since been split into two separate agencies. The investigator concluded that some of the company’s contractors, such as sheetrock hangers and tapers, should be treated as employees for tax purposes. The department assessed $6,353 in unemployment insurance taxes and penalties from the previous two-year period.
Excell appealed. The case went before an appeals examiner and then the Idaho Industrial Commission, and both parties upheld the department’s determination. The company then appealed to the Supreme Court, which overturned the finding and sent the matter back to the department for more evidence.
The appeals examiner then ruled against the company a second time, but for different reasons, and the industrial commission upheld the result again.
That led to the recent Supreme Court decision, on June 4, which overturned the second finding and awarded attorney fees to Excell.
Trista Johnson, co-owner of Excell with husband Steve, said the case had put their company on the line as they racked up hundreds of thousands of dollars in potential legal bills and hundreds of hours of lost time.
“To settle the case, it would have cost us $6,000, but that was $6,000 we didn’t owe,” she said. “It was absolutely wrong. We had a valid case and we knew it.”
“It’s been a long eight years,” she added. “I don’t know that I’d ever do it again for what I put myself through.”
The case centered on the definition of an independent contractor.
Excell, which employs about 30 people and relies on about 50 subcontractors, allows its sheetrock workers to choose to be either independent contractors or employees, and most operate as contractors. During the two-year period at issue, none of the hangers and tapers worked exclusively for Excell, and many offered their services to other construction companies. They earned anywhere from .8 percent to 89 percent of their annual income from Excell, according to court records.
For the state to win the case, it had to prove two things: that the workers were not “free from control or direction” in their work and that they were not engaged in an independently established trade.
The Supreme Court’s first decision addressed the issue of freedom from control or direction, finding that the agencies had “misapplied the facts to the law” when they determined that the workers were not free from control.
The court’s second decision dealt with the issue of independently established trade after the appeals examiner and industrial commission determined that the workers were not independent during the second round of hearings.
The commission based its ruling on three inappropriate factors, according to the Supreme Court decision: how many business tax deductions the workers took, whether they maintained separate personal and business bank accounts and whether they had sufficient income from sources other than Excell to survive without the company.
Instead, the court said the ruling should have been based on the 15-factor test established by the labor department in the Idaho Administrative Code in 1999, including whether the worker determines his own hours, has the right to hire subordinates, owns or leases substantial pieces of equipment and chooses his own sales techniques.
Excell’s lawyer, Dana Wetzel, described the case as “the most frustrating case I’ve ever been on.”
“(Excell) consistently brought to the attention of the department and the industrial commission – provided X, Y and Z – and routinely that information and all of that testimony and evidence was just ignored,” she said. “The department had persuaded itself that it no longer had to abide by the law.”
A spokeswoman for the labor department declined to comment. Mindy Montgomery, director of the industrial commission, said the agency could not comment on the decision since several commissioners were traveling and hadn’t met as a group to discuss it.
Wetzel said the case was “an affront” to the contractors in the case and Idaho’s small, independent businesses. She said the sheetrock workers would have lost significant pay, faced more restrictions on the hours they worked and encountered more limitations on their operations.
“They were trying to make me an employee,” said Tony Konda, a contractor who testified for Excell, in a prepared statement. “I am not. I run my own business and I make pretty good money. They would be ruining my way of life.”
The only saving grace for the industrial commission and labor department in the case may have been a concurring opinion written by Justice Jim Jones, which says that state law has become so complicated that “one could understand if the commission were somewhat befuddled in determining whether a person is engaged in an independently established business.”
 “The court should clear up the matter by developing a common sense test that can be consistently applied,” he wrote.
Even so, Jones said the agencies had “produced some recent results of troublesome nature” and had skewed their analysis in the case.

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