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Varsity Tutors LLC v. Industrial Claim Appeals Office of State

Court of Appeals of Colorado, Second Division

July 27, 2017

Varsity Tutors LLC, Petitioner,
v.
Industrial Claim Appeals Office of the State of Colorado and Division of Unemployment Insurance Employer Services-Integrity/Employer Audits, Respondents.

         Industrial Claim Appeals Office of the State of Colorado DD No. 5162-2016

          Announced July 27, 2017 Polsinelli PC, Bennett L. Cohen, Denver, Colorado, for Petitioner

          Cynthia H. Coffman, Attorney General, Evan P. Brennan, Assistant Attorney General, Denver, Colorado, for Respondents

          No Appearance for Respondent Division of Unemployment Insurance Services-Integrity/Employer Audits

          JUDGE BERNARD

          ¶ 1 The Internet has changed how we work in many ways. For example, it provides opportunities for consumers seeking services to find businesses offering them. One way businesses provide such services fits a standard employer-employee model: Businesses use the Internet to recruit workers; the businesses and the workers have a standard employer-employee relationship; and the workers provide services to consumers.

         ¶ 2 There are other models that do not fit the standard employer-employee model. Some businesses may not want to have employees, and some workers may not want to be employees. But businesses may have a large enough Internet presence that they can provide certain advantages those independent workers cannot match. The Internet provides a convenient forum for businesses to introduce workers to consumers. As the "middle man, " the business takes a fee to make the introduction, but the workers and the consumers work out most of the details of the business relationship between them. In such circumstances, workers may often be independent contractors instead of employees.

         ¶ 3 Courts in Colorado have historically looked at a variety of different circumstances when determining whether workers are employees of a business or independent contractors. But some of the circumstances that point to workers being independent contractors have lost some of their descriptive force in the Internet Age. Two examples are that independent contractors tend to have their own business cards and their own offices. While these examples still ring true in many cases, the Internet has, for some workers, made business cards and offices obsolete. Workers can solicit business online, and they can work from anywhere - a home, a coffee shop, a hotel room, an airplane, a car - they can connect their laptops to the Internet.

         ¶ 4 How, then, in the Internet Age, can we differentiate between employees and independent contractors? We apply, as we always have, a test that the legislature has established. We describe it below. But, in applying this test, we must also recognize how the Internet has changed and continues to change the business world.

         ¶ 5 We are asked in this appeal to decide whether several workers are the employees of a business or whether they are independent contractors. The business, Varsity Tutors LLC, recruits tutors to teach students. Varsity claims that the tutors fall on the independent contractor side of the line. The Division of Unemployment Insurance Employer Services ― Integrity/Employer Audits for the Colorado Department of Labor and Employment, which we shall call the "Division, " thinks that the tutors fall on the other side of the line, so they were Varsity's employees.

         ¶ 6 The difference between independent contractors and employees was the crux of this appeal. If the tutors were employees, then Varsity was obligated to pay unemployment taxes on any wages that it paid the tutors. But, if the tutors were independent contractors, then Varsity did not have to make such payments. See generally Colorado Employment Security Act, §§ 8-70-101 to 8-82-105, C.R.S. 2016. (We refer to this act by its initials, "CESA.")

         ¶ 7 The dispute between Varsity and the Division found its way first to a hearing officer and then to a panel of the Industrial Claim Appeals Office. The hearing officer and the panel decided that twenty-two tutors who performed services for Varsity in 2013 were in "covered employment" - meaning that they were Varsity's employees - for CESA's purposes. As a result, the hearing officer and the panel agreed with the Division, and they ordered Varsity to pay delinquent unemployment insurance taxes.

          ¶ 8 Varsity appeals the panel's final order. We reverse because we conclude that the tutors were independent contractors, not Varsity's employees.

         ¶ 9 (In reaching this conclusion, our analysis does not address the question whether the tutors were independent contractors under federal law for purposes of either Varsity's or the tutors' federal income tax liability.)

         I. Background

         ¶ 10 Varsity provided an online platform that connected tutors with students. To facilitate the process, Varsity entered into contracts with individual tutors, who, in turn, advertised their services on its website to students who were members of the general public. The process went as follows: Students who were interested in working with particular tutors contacted Varsity. Varsity then put the tutors and the students together by providing contact information. Students and tutors then contacted one another to arrange tutoring sessions.

         ¶ 11 Varsity and the tutors agreed to an hourly rate that Varsity would pay them for providing tutoring services. Varsity generally charged students about twice that much.

          ¶ 12 In 2014, the Division audited Varsity's books for calendar year 2013 to determine the nature of the employment relationship between Varsity and the tutors. The Division decided that at least twenty-two tutors were Varsity's employees. So the Division issued a liability determination that required Varsity to pay $133.73 in unemployment taxes on the amounts that it had paid the tutors.

         ¶ 13 Varsity asked for an evidentiary hearing before a hearing officer. The hearing officer found that the written agreements between Varsity and the tutors did not create a rebuttable presumption of an independent contractor relationship. Accordingly, Varsity then had to assume the burden of proving that the tutors were independent contractors for CESA's purposes. See § 8-70-115(1)(b), C.R.S. 2016.

         ¶ 14 Although the hearing officer found that the tutors were not subject to Varsity's direction and control in the performance of their services, he also decided that Varsity had not proved that the tutors were customarily engaged in an independent trade, occupation, or profession related to the services performed. He therefore concluded that the tutors were in covered employment during calendar year 2013 for CESA's purposes.

          ¶ 15 Varsity appealed. The panel affirmed the hearing officer's decision. It noted that, because the agreements between Varsity and the tutors did not satisfy the requirements of section 8-70-115(2), Varsity had the burden to prove that the tutors were customarily engaged in independent businesses. Consequently, because Varsity had not provided significant evidence that the twenty-two tutors had been involved in ongoing businesses, the panel decided that the hearing officer had not erred when he had found that the tutors were Varsity's employees for CESA's purposes.

         II. Standard of Review

         ¶ 16 "The determination of an employment relationship is a question of fact . . . ." John W. Tripp & Assocs. v. Indus. Claim Appeals Office, 739 P.2d 245, 246 (Colo.App. 1987). Whether a business has met its burden of proving that a worker was an independent contractor is also a question of fact. Visible Voices, Inc. v. Indus. Claim Appeals Office, 2014 COA 63, ¶ 11.

         ¶ 17 "[W]e will not disturb the agency's factual findings if they are supported by substantial evidence." Id.; see also § 8-74-107(4), C.R.S. 2016. "Substantial evidence" is evidence that is "probative, credible, and competent, of a character which would warrant a reasonable belief in the existence of facts supporting a particular finding, without regard to the existence of contradictory testimony or contrary inferences." Allen Co. v. Indus. Comm'n, 735 P.2d 889, 890-91 (Colo.App. 1986) (quoting Rathburn ...


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