A new case from the Oregon Court of Appeals, Compressed Pattern LLC v. Employment Department, provides some clarity about the “maintain a separate business location” prong of Oregon’s unique independent contractor statute, ORS 670.600.
First, the facts. In the summer of 2009, a design company retained a recently-laid-off architectural intern to provide drafting services on some of its projects. The design company’s owners agreed to pay him $35.00 an hour for his services, and paid him periodically based on statements of his work he prepared and submitted. The design company provided the architect-intern with general specifications and timelines for the drafting projects, but didn’t otherwise instruct him on how to complete them. It also didn’t provide him with scheduled hours, a workspace, supplies and equipment, an email address or business cards. In fact, the architect-intern performed his drafting work free of charge at the offices of the architectural firm that had laid him off. The architectural firm was not affiliated in any way with the design company. The architect-intern performed drafting services for clients other than the design company, and even hired a friend to help him with an especially big drafting project. Meanwhile, the architect-intern spent his spare time preparing for the exams necessary to become a licensed architect. The licensing authority charged the architect-intern hundreds of dollars to take each exam.
The Oregon Employment Department sent the design company a letter notifying it that it was past due on its employment tax payments because it hadn’t been paying taxes on the amounts it paid the architect-intern. The design company argued that it didn’t owe employment taxes for the architect-intern because he was an independent contractor under ORS 670.600. (Employers must pay employment taxes on wages they pay their employees, but not for amounts they pay independent contractors.)
The Definition Of "Independent Contractor" Under Oregon Law
ORS 670.600 says that, for purposes of Oregon’s unemployment and workers’ compensation laws, an individual is only an independent contractor if a multi-part test is satisfied. The test has several different elements:
- The individual must be free from the employer’s direction and control.
- The individual must operate an “independently established business,” which requires that three of the following five statements be true:
- The person maintains a business location separate from the employer
- The person bears the risk of loss related to the business
- The person provides services for two or more customers per year, or routinely engages in business advertising
- The person makes a significant investment in the business
- The person has the authority to hire and fire assistants.
At face value, the architect-intern appeared to satisfy the statute. The Employment Department agreed that he operated free from the design company’s direction and control and that he provided services to more than one customer per year. There was evidence in the record to show that the architect-intern indeed had the authority to hire and fire his assistants, and he completed his drafting work at a business location that didn’t belong to the design company.
Just the same, the Employment Department, an Administrative Law Judge (“ALJ”) and the Oregon Court of Appeals all agreed that the architect-intern was an employee rather than an independent contractor. So where did things go wrong?
First, the court concluded that the architect-intern didn’t “maintain” a business location as the law required because he used the offices of the architectural firm that had laid him off to complete his drafting work, not space that he paid for himself. The Court indicated that, to satisfy the “maintain” requirement, the individual must bear some responsibility to make the business location his own, although it offered few details about how that might be shown. Second, the Court concluded that the architect-intern didn’t make a significant investment in his business, even though he spent thousands of dollars on his architectural licensing courses, because the architect’s license wasn’t necessary to his performance of drafting services for the design company. Instead, the courses were necessary for his future career as an architect.
The Take Aways: How To Help Ensure Your Independent Contractors Are Really Independent Contractors
There are a few take-away points from the Court’s decision. First, if your business has retained independent contractors to perform certain tasks, it probably makes sense to ask some questions about where they perform their work. If they’ve set up shop for free at another business, without doing anything to suggest that the space is their own, the Court’s decision makes fairly clear that they won’t satisfy the separate-business-location element. Second, and more generally, if you’re unsure whether your relationship with an independent contractor will meet the statutory test, note how narrowly the Court parsed the requirements in this case. In a close case, the benefit of the doubt will almost certainly belong to the Employment Department.
In the recent case Hatkoff v. Portland Adventist Medical Center, the Oregon Court of Appeals affirmed enforcement of a company arbitration provision in an employee handbook requiring that a former employee bring his employment discrimination claims in binding arbitration. The Court’s opinion offers a straight-forward application of the law regarding the enforceability of arbitration agreements, and the outcome is probably not surprising. Nevertheless, it contains a helpful and well-reasoned survey of the current state of Oregon law in this area, and provides another helpful case for Oregon employers interested in resolving employment disputes using arbitration or similar alternative dispute resolution (“ADR”) procedures.
Arbitration Agreements Are Upheld Where They Are Not “Unconscionable”
Arbitration is a form of private ADR in which the parties agree to waive the right to go to court and instead adjudicate disputes privately before an arbitrator. In the employment context, arbitration can be a cost-effective and quicker alternative to litigation. While the details of arbitration agreements can vary greatly, they may frequently be confidential (lawsuits are public proceedings), provide more limited procedures (especially with respect to discovery), require trial before a neutral arbitrator (not a jury), and provide a limited right to appeal. In general, Oregon courts, like most courts, uphold such employment arbitration agreements as long as they are not “unconscionable,” either procedurally (with respect to how the agreement was formed) or substantively (with respect to its terms).
The Oregon Court of Appeals applied this analysis to find Portland Adventist’s “Grievance and Arbitration Procedure” in an employee handbook was not unconscionable. It found the agreement was not substantively unconscionable, because while it did waive the right to a jury trial (like all arbitration agreements), it did not unreasonably limit the employee's rights or remedies that would be available in court. Interestingly, the Court specifically held that the fact the agreement required that employees file a complaint within 90 days of the complained-of employment action was not substantively unconscionable, even though the applicable statute of limitations was one year. The Court also went on to find the agreement was not procedurally unconscionable: the employee, a sales and marketing professional, signed multiple acknowledgments that he received the employee handbook containing the arbitration agreement and was aware of what he had signed.
Law On Arbitration Continues To Develop
Despite the fact that many cases come out similarly to Hatkoff and the law on arbitration agreements is generally favorable for employers, the enforceability of such agreements is routinely litigated in employment cases. For that reason, and also because the unconscionability analysis is very fact-specific and the outcome can be very different in each case, arbitration continues to be a “hot” and fluid area of employment law both in Oregon and around the country.
Sometimes that fluidity leads to conflicts in the law, such as between courts and legislatures. For example, since 2008 Oregon has had a statute, ORS 36.620(5), that prohibits employee arbitration agreements under certain circumstances where the agreement does not contain “magic words” provided in the statute, and where the employee does not have at least 72 hours advance written notice before starting work (the legislature lowered the advance notice requirement to 72 hours in 2011; it originally required 14 days). However, that Oregon statute itself may be unenforceable, because it may be preempted by a federal statute, the Federal Arbitration Act (“FAA”), that strongly endorses the use of arbitration and contains no such limitation. Several federal district courts in Oregon have found that ORS 36.620(5) is preempted by the FAA, and have enforced arbitration agreements that did not provide the advance notice required by that statute, although no Oregon state appellate court has yet considered the issue (the agreement in Hatkoff preceded the Oregon statute, so it was not a factor in the analysis in that case).
Other potential conflicts exist not between state and federal law, but between different parts of federal law. As we have blogged about previously , just such a conflict has been brewing between the U.S. Supreme Court and the National Labor Relations Board (“NLRB”) over whether arbitration agreements can include waivers of class action claims—the Supreme Court says they can; the NLRB says they violate federal labor laws allowing employees to engage in “concerted activity” relating to working conditions. We are waiting to see how the federal appellate courts resolve that conflict.
Ultimately, Hatkoff will likely stand, not as a departure from existing law, but instead as the latest in a series of federal and state cases over the past few years that are broadly supportive of employer efforts to utilize arbitration and ADR to resolve employment disputes. But, as we've said, this continues to be an evolving area of employment law, so employers will need to stay tuned to new developments.
In the meantime, here are a few things employers should keep in mind when crafting arbitration agreements to maximize the chance they will be enforceable:
- Make sure your arbitration agreement, whether a stand-alone agreement or part of a handbook, is clear, understandable, and well publicized. Include the "magic words" in ORS 36.620 to make it expressly clear to employees that arbitration involves waiving some legal rights, especially the right to a jury trial. Employees should sign acknowledgments that they have received and understand the agreement.
- If you have employees who don't speak English as a first language, have a translated version of the agreement to ensure it is understood.
- Give new employees the 72 hour advance written notice required by ORS 36.620 wherever possible. While some courts have found that statute is preempted and unenforceable, there's no guarantee every court will.
- Under ORS 36.620, current employees can only sign arbitration agreements at the time of "bona fide" promotion or advancement. Again, courts may find this requirement is also preempted and unenforceable, but if you can comply with it, all the better.
- Arbitrators are paid by the parties, unlike judges. While in theory the parties can split the cost, the agreement should not impose costs on employees unreasonably in excess of what they would pay to file a lawsuit in court. Many employers agree to pay a large portion, or even all, of the arbitration fees.
- Specify the rules and procedures that will apply. The American Arbitration Association's ("AAA") specific rules for employment arbitration are one option; other state or local arbitration forums are other (and sometimes cheaper) options.
Above all, work with your employment counsel in the crafting and implementation of the agreement. Many enforceability pitfalls can be easily avoided with careful planning, but the devil can be in the details. That is especially true for any state-specific rules or "gotchas," as arbitration agreements may be perfectly enforceable in some states but not in others.