Disability Examination v. ICAO

• Court: Colorado Court of Appeals
• Decided: July 11, 2024
• Docket: 23CA2153
• Status: Unknown

Opinion

23CA2153 Disability Examination v ICAO 07-11-2024

COLORADO COURT OF APPEALS

Court of Appeals No. 23CA2153

Industrial Claim Appeals Office of the State of Colorado

DD No. 70279-2021

Disability Examination Services, LLC,

Petitioner,

v.

Industrial Claim Appeals Office of the State of Colorado and the Division of

Unemployment Insurance Employer Services – Integrity/Employer Audits,

Respondents.

ORDER AFFIRMED

Division VI

Opinion by JUDGE SCHUTZ

Lipinsky and Graham*, JJ., concur

NOT PUBLISHED PURSUANT TO C.A.R. 35(e)

Announced July 11, 2024

Miller & Urtz, LLC, Paul G. Urtz, Denver, Colorado, for Petitioner

Philip J. Weiser, Attorney General, Krista Maher, Senior Assistant Attorney

General, Thomas Julian Archer, Assistant Attorney General, Denver, Colorado,

for Respondent Industrial Claim Appeals Office

No Appearance for Respondent Division of Unemployment Insurance Employer

Services – Integrity/Employer Audits

*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.

VI, § 5(3), and § 24-51-1105, C.R.S. 2023.

1

¶ 1 In this unemployment compensation tax liability case,

Disability Examination Services, LLC (DES) appeals a final order of

the Industrial Claim Appeals Office (the Panel) concluding that DES

should have classified its workers as employees rather than as

independent contractors under section 8-70-115, C.R.S. 2023. We

affirm the Panel’s order.

I. Background

¶ 2 DES contracts with physicians, medical assistants,

technicians, and office assistants to facilitate examinations of Social

Security Disability Insurance (SSDI) claimants. DES in turn

contracts with the state agency that administers the SSDI program

in Colorado, Disability Determination Services (DDS). DES operates

in several locations around Colorado using leased office space,

recruits physicians and support staff to conduct exams, and

receives a flat fee from DDS for each exam. Each of DES’s workers

signs a contract with DES containing language purporting to

establish an independent contractor relationship.

¶ 3 The Colorado Department of Labor and Employment, Division

of Unemployment Insurance (Division), audited DES for the years

2018 to 2020. After reviewing DES’s contracts and questionnaires

2

completed by DES workers, the Division determined that ninety-

nine of the workers should have been classified as employees rather

than as independent contractors. As a result, the Division

concluded that DES owed the Division unemployment insurance

premiums for the ninety-nine workers.

¶ 4 DES appealed the Division’s determination, and a hearing

officer conducted hearings over five days. Dr. William Qutub, DES’s

founder, testified for DES, and auditor Juley Allee testified for the

Division. Three former DES administrative employees also

testified.

1

After hearing the witnesses’ testimony and reviewing over

1,200 pages of documents admitted into evidence, the hearing

officer determined that the contracts between DES and the workers

did not create a rebuttable presumption that the workers were

independent contractors because the contracts did not satisfy the

applicable factors set forth in sections 8-70-115(1)(c) and 8-70-

115(2). Specifically, he found that the contracts allowed DES to

terminate the contracts for any reason, at any time, without

1

These employees included Linda Cornell, a billing specialist, who

the hearing officer ultimately determined was an independent

contractor. No party contests that determination in this appeal.

3

penalty, and thereby controlled the way the workers performed the

services. He also determined that the individual worker, rather

than a business entity run by the worker, was the most likely

recipient of DES’s payments. He further noted that DES’s contracts

with the physicians included a noncompete clause. Finally, the

hearing officer found that the contracts failed to include the

disclosure language specified in section 8-70-115(2).

¶ 5 Because the contracts did not establish the necessary

provisions to create a rebuttable presumption that the workers were

independent contractors, it was DES’s burden to prove that the

workers were free from DES’s control and direction, and that the

workers customarily engaged in an independent trade, occupation,

profession, or business related to the services they provided to DES.

§ 8-70-115(1)(b); see also Indus. Claim Appeals Off. v. Softrock

Geological Servs., Inc., 2014 CO 30, ¶ 1. The hearing officer

concluded that DES did not meet that burden.

¶ 6 On appeal, the Panel affirmed. The Panel agreed with the

hearing officer that the contracts did not create a rebuttable

presumption of independent contractor status. The Panel also

concluded that DES had not met its burden to show that the

4

workers were free from its direction and control. Additionally, the

Panel determined that the workers were not customarily engaged in

an independent trade, occupation, profession, or business related to

the services performed. The Panel therefore affirmed the hearing

officer’s determination that the workers were employees.

II. Analysis

A. Standard of Review

¶ 7 As relevant here, we may set aside the Panel’s decision only if

the findings of fact do not support the decision or the decision is

erroneous as a matter of law. See § 8-74-107(6)(c)-(d), C.R.S. 2023.

We review de novo the Panel’s legal conclusions, including its

interpretation of a statute. See Cath. Health Initiatives Colo. v.

Indus. Claim Appeals Off., 2021 COA 48, ¶ 14. Although our review

is de novo, “we generally accept an agency’s statutory interpretation

if it has been charged with the statute’s administration and the

interpretation has a reasonable basis in the law, and is warranted

by the record.” Table Servs., Ltd. v. Hickenlooper, 257 P.3d 1210,

1217 (Colo. App. 2010).

¶ 8 We may not disturb a hearing officer’s factual findings if they

are “supported by substantial evidence or reasonable inferences

5

drawn from that evidence.” Yotes, Inc. v. Indus. Claim Appeals Off.,

2013 COA 124, ¶ 10; see also § 8-74-107(4) (a hearing officer’s

factual findings are conclusive when they are supported by

substantial evidence).

B. Applicable Law

¶ 9 The Colorado Employment Security Act (CESA), codified at

sections 8-70-101 through 8-82-105, C.R.S. 2023, establishes an

unemployment insurance fund financed by employer-paid taxes or

premiums. Colo. Div. of Emp. & Training v. Accord Hum. Res., Inc.,

2012 CO 15, ¶ 10. Under CESA, the Division collects taxes from

employers for payment into the fund and pays benefits to eligible

unemployed individuals. Id. An employer must pay unemployment

taxes on wages paid to employees but not on compensation paid to

independent contractors. Softrock, ¶ 1.

¶ 10 Section 8-70-115(1)(b) specifies that services performed by an

individual for another shall be deemed covered employment for

CESA purposes unless the putative employer shows “to the

satisfaction of the [D]ivision” that the individual (1) is “free from

control and direction in the performance of the service, both under

his contract for the performance of service and in fact”; and (2) is

6

“customarily engaged in an independent trade, occupation,

profession, or business related to the service performed.” The

putative employer bears the burden of proving that both conditions

exist to rebut the presumption of an employment relationship

between the parties. Visible Voices, Inc. v. Indus. Claim Appeals

Off., 2014 COA 63, ¶ 11.

¶ 11 The putative employer may show that “such individual is

engaged in an independent trade, occupation, profession, or

business and is free from control and direction in the performance

of the service” in one of two ways. § 8-70-115(1)(c). It “may . . .

show by a preponderance of the evidence that the conditions set

forth in paragraph (b) of . . . subsection (1) have been satisfied.” Id.

Alternatively, it “may demonstrate in a written document, signed by

both parties, that the person for whom services are performed” does

not take any of the nine actions specified in section 8-70-115(1)(c)(I)

through (IX). § 8-70-115(1)(c).

¶ 12 A written document that satisfies the applicable factors of

section 8-70-115(1)(c) creates “a rebuttable presumption of an

independent contractor relationship between the parties,” § 8-70-

115(2), if the document also contains the disclosure specified in

7

section 8-70-115(2). See § 8-70-115(1)(d) (“A document may satisfy

the requirements of paragraph (c) of this subsection (1) if such

document demonstrates, by a preponderance of the evidence, the

existence of such factors listed in subparagraphs (I) to (IX) of

paragraph (c) of this subsection (1) as are appropriate to the parties’

situation.”). Such disclosure must appear “in type which is larger

than the other provisions in the document or in bold-faced or

underlined type” and must state that the worker “is not entitled to

unemployment insurance benefits unless unemployment

compensation coverage is provided by the independent contractor

or some other entity, and that the independent contractor is

obligated to pay federal and state income tax on any moneys paid

pursuant to the contract relationship.” § 8-70-115(2).

¶ 13 But the putative employer can also establish that the worker is

not an employee even in the absence of such a written document by

satisfying a totality of the circumstances test. See Softrock, ¶ 2.

That test “evaluates the dynamics of the relationship between the

putative employee and the employer.” Id. The nine factors set forth

in section 8-70-115(1)(c) are not an exhaustive list of considerations

8

for purposes of the totality of the circumstances test. Softrock,

¶¶ 2, 10, 16-17.

C. Discussion

¶ 14 In its opening brief, DES raises four issues:

• Whether the Panel erred by concluding that the contracts

between DES and the workers did not establish a rebuttable

presumption that the workers were independent contractors.

• Whether the Panel erred by deciding that the workers were not

free from control and direction in the performance of their

services or were customarily engaged in an independent

occupation, profession, or business.

• Whether the Panel applied the wrong legal standard in

reviewing the hearing officer’s findings.

• Whether the Panel’s decision was clearly erroneous because it

is inconsistent with the hearing officer’s findings and the

weight of the evidence.

1. Rebuttable Presumption

¶ 15 We begin with an analysis of DES’s argument that its

contracts with the subject workers established the statutory

rebuttable presumption that the workers were “engaged in an

9

independent trade, occupation, profession, or business and [were]

free from [DES’s] control and direction in the performance” of the

services they provided to DES. § 8-70-115(1)(c), (2).

¶ 16 Under section 8-70-115(1)(c), a written document signed by

both parties will evidence that the worker is engaged in an

independent trade, occupation, profession, or business and is free

from control in the performance of the service if the document

shows that the person for whom services are performed does not:

(I) Require the individual to work exclusively

for the person for whom services are

performed; except that the individual may

choose to work exclusively for the said person

for a finite period of time specified in the

document;

(II) Establish a quality standard for the

individual; except that such person can

provide plans and specifications regarding the

work but cannot oversee the actual work or

instruct the individual as to how the work will

be performed;

(III) Pay a salary or hourly rate but rather a

fixed or contract rate;

(IV) Terminate the work during the contract

period unless the individual violates the terms

of the contract or fails to produce a result that

meets the specifications of the contract;

(V) Provide more than minimal training for the

individual;

10

(VI) Provide tools or benefits to the individual;

except that materials and equipment may be

supplied;

(VII) Dictate the time of performance; except

that a completion schedule and a range of

mutually agreeable work hours may be

established;

(VIII) Pay the individual personally but rather

makes checks payable to the trade or business

name of the individual; and

(IX) Combine his business operations in any

way with the individual's business, but instead

maintains such operations as separate and

distinct.

§ 8-70-115(1)(c). As noted above, to establish the statutory

rebuttable presumption that the worker is an independent

contractor, the written document must also contain the disclosure

specified in section 8-70-115(2).

¶ 17 The hearing officer and the Panel determined that DES’s

contracts did not satisfy all the applicable factors of section 8-70-

115(1)(c). Specifically, the hearing officer found that the contracts

did not satisfy subparagraph (IV) because the contracts were

terminable at will and did not meet subparagraph (VIII) because

DES paid the workers personally. Additionally, the hearing officer

found that DES’s contracts with the non-physicians did not meet

11

subparagraph (III) because DES paid those employees in a manner

equivalent to an hourly rate or salary.

¶ 18 The Panel agreed with the hearing officer that the contract

terms did not meet subparagraph (IV) because they allowed for

termination of the contract at will. The Panel also agreed with the

hearing officer’s conclusion as to subparagraph (III) with respect to

the non-physician contracts. Additionally, the Panel found the

terms of DES’s contract with physicians did not meet

subparagraph (I) (must not require exclusive work) because the

contracts contained a noncompete clause.

¶ 19 Because the contracts did not comply with the applicable

section 8-70-115(1)(c) factors, we agree with the Panel that the

contracts did not create a rebuttable presumption that the workers

were independent contractors. And because a putative employer’s

compliance with the applicable factors of section 8-70-115(1)(c) and

inclusion of the disclosure required by section 8-70-115(2) are

necessary to create the rebuttable presumption, DES’s failure to

meet the criteria of section 8-70-115(1)(c) renders it unnecessary for

us to address the adequacy of the disclosure under section 8-70-

115(2).

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2. Control and Direction

¶ 20 But our analysis does not end here. We must also consider

whether DES satisfied the two-part test of section 8-70-115(1)(b)

based on the totality of the circumstances. Softrock, ¶¶ 2, 10, 16-

17. That analysis begins with an assessment of whether DES

established that the workers were not under its control and

direction.

¶ 21 The applicable statutes, Division regulations, and case law

make clear that, when evaluating a putative employer’s control and

direction over a worker, the fact finder must consider not only what

is expressed in contractual language, but also the actual

functioning relationship between the worker and the putative

employer. § 8-70-115(1)(b); see also Dep’t of Lab. & Emp. Reg.

17.1.4.2, 7 Code Colo. Regs. 1101-2 (worker who signs a purported

agreement to establish an independent contractor relationship can

still be deemed an employee if the facts related to the work

establish an employment relationship); Home Health Care Pros. v.

Colo. Dep’t of Lab. & Emp., 937 P.2d 851, 854 (Colo. App. 1996)

(noting that the ultimate issue is whether worker is, in fact, free

from the putative employer’s control and direction).

13

¶ 22 Section 8-70-115(1)(b) places the burden of proof on the

putative employer to demonstrate that the worker is free from its

control and direction. See Long View Sys. Corp. USA v. Indus. Claim

Appeals Off., 197 P.3d 295, 298 (Colo. App. 2008). If the employer

fails to establish this component, an employment relationship exists

for purposes of CESA. See Colo. Custom Maid, LLC v. Indus. Claim

Appeals Off., 2019 CO 43, ¶ 14; see also Visible Voices, ¶ 11.

¶ 23 “In evaluating whether an individual providing services is free

from direction and control, we consider the totality of the

circumstances, focusing on whether the putative employer has a

general right to control and direct the individual in the performance

of the service.” Colo. Custom Maid, ¶ 14. “An ‘employer’s firm hand

in controlling the details of the manner and method of job

performance’ evinces an overall right to control the actions of an

employee.” Id. (quoting Rent-A-Mom, Inc. v. Indus. Comm’n, 727

P.2d 403, 406 (Colo. App. 1986)).

14

¶ 24 The hearing officer found that most of the DES’s workers were

under its control and direction in providing services.

2

The Panel

affirmed that conclusion based on the following evidentiary

findings:

• DES had the contractual right to terminate the workers’

contracts for any reason.

• The workers’ contracts precluded them, during the term of the

agreement, from engaging in any business that competed with

DES.

• DES provided the workers with recommendations, tips, sample

schedules, templates, and guides for how to complete the

work.

• DES directed and controlled the means and methods of

performing the work by instructing the workers to smile and

make eye contact and perform the work in an office that DES

leased and operated.

2

The hearing officer found that the office assistants were free from

direction and control. The Panel, however, disagreed. For the

reasons stated infra, we need not address whether the Panel

exceeded its proper scope of review by setting aside the hearing

officer’s finding on this issue.

15

• The medical assistants, technicians, and office assistants

received training on how to use DES’s electronic systems and

training about DDS’s requirements.

• DES provided the physicians with tools in the form of a

backup medical bag and laptop if they forgot their own tools.

• DES provided the medical assistants with the tools necessary

to perform their work, such as a blood pressure testing device.

• The workers were paid in their own names, and DES required

the workers to perform the services described in the contracts

personally.

• The workers did not employ anyone else to assist them in

completing their work for DES.

• The workers did not have a business card, business phone,

business name, or any other trappings of a business.

• DES’s contracting process resembled a traditional employee

hiring process, and DES advertised its need for workers

online.

• Applicants contacted DES to indicate their interest in

performing services for DES and submitted resumes, and DES

then communicated with the applicants to determine if they

16

had the education, skills, and experience necessary to perform

the work.

• The workers did not have a financial investment in any

business such that they might suffer a loss if their business

failed.

¶ 25 On appeal, DES argues that simply because the contracts

were subject to termination at any time is insignificant because the

“examinations are brief” and “the physicians, medical technicians,

and assistants may decide whether they want to work for DES

again.” But the Panel specifically addressed this argument,

explaining that “discharging a worker without liability is an

instance of control over the way she or he performs the work

because the threat of discharge emphasizes the company’s ultimate

ability to determine the direction of the work.” This determination

is consistent with the Colorado Supreme Court’s holding that the

power to terminate a contract for personal service at any time,

without liability, is an important factor in determining whether the

individual is free of control and direction, because the right

immediately to discharge “involves the right of control.” Allen Co. v.

Indus. Comm’n, 762 P.2d 677, 680-81 (Colo. 1988) (quoting Indus.

17

Comm’n v. Bonfils, 78 Colo. 306, 307-08, 241 P. 735, 735-36

(1925)).

¶ 26 DES contends that the hearing officer applied a more stringent

test than the law requires to “establish all, or nearly all, of the

factors” in section 8-70-115(1)(c). We disagree. The hearing officer

used the factors in that section as a framework to analyze the

evidence. This approach is consistent with Division regulations

providing that hearing officers should consider “the nine factors

enumerated under § 8-70-115, as well as any other relevant

factors.” Dep’t of Lab. & Emp. Reg. 17.1.2, 7 Code Colo. Regs.

1101-2; see also Softrock, ¶ 17. Accordingly, we find no error in the

Panel’s conclusion that the workers were not free from DES’s

control and direction.

3. Independent Business

¶ 27 The Panel disagreed with the hearing officer’s finding that the

workers were not customarily engaged in an independent trade,

occupation, profession, or business related to the service

performed. We need not address this prong of section

8-70-115(1)(b), however, because we have upheld the finding that

DES did not meet its burden on the “control and direction” element

18

of this section. SZL, Inc. v. Indus. Claim Appeals Off., 254 P.3d

1180, 1184 (Colo. App. 2011) (declining to address the control and

direction element because the putative employer did not meet its

burden regarding the independent business element).

4. Other Arguments

¶ 28 We reject DES’s remaining arguments on appeal that the Panel

applied the wrong standard in reviewing the hearing officer’s

findings and that the Panel’s determination is erroneous as a

matter of law. The relevant analysis is whether DES presented

sufficient evidence to establish a rebuttable presumption that the

workers were independent contractors, thereby shifting the burden

of proof. See Softrock, ¶ 1. We conclude that it did not. DES then

had the burden of proving its workers were independent contractors

under the totality of the circumstances test. Because the Panel

properly applied the law and the findings of fact support its

conclusion, we will not disturb its order. See Allen, 762 P.2d at 680

(holding that the Panel’s decision should not be disturbed if it is

supported by substantial evidence).

III. Disposition

¶ 29 The Panel’s order is affirmed.

19

JUDGE LIPINSKY and JUDGE GRAHAM concur.