Hiring Help? What Oregon Small Businesses Need to Know About Employees vs. Contractors
By: Owner & Attorney Michael Jonas, JD, MBA
As a small business owner, getting help can be one of your biggest milestones and biggest risks. Whether you’re hiring your first employee or bringing on a contractor to support a growing workload, it’s essential to get classification right from day one.
Misclassifying workers isn’t just a technicality — it can trigger audits, back taxes, and major penalties. In Oregon, the distinction between employees and independent contractors is strictly enforced, and the state has its own compliance steps you can’t afford to ignore.
Here’s what you need to know to hire with confidence and protect your business in the process.
1. Understand the Legal Difference: Control Is Key
At the heart of worker classification is control:
Employees typically work under your direction, use your tools, follow your schedule, and are integrated into your day-to-day operations.They typically don’t choose which projects or clients to work on (of course employers that value their employees do seek their opinion).
Contractors operate independently. They decide how to do the work, set their own hours, use their own tools, and usually invoice for services rendered. This doesn’t mean that you can’t express preferences to a contractor working with/for you. In fact, it’s recommended that a very detailed scope of work is set forth if possible.
This isn't just about titles — it’s about how the relationship actually functions.
2. Classification Is a Totality of the Circumstances Test
Classifying a worker isn’t about checking off isolated boxes. It’s about how all the factors work together to reveal the true nature of the relationship.
For instance, consider a worker who:
Wears your company uniform every day and answers to your supervisors;
Uses their personal vehicle but drives it only on your company’s routes with your logo magnets attached;
Follows a strict schedule you set, including mandatory check-in times;
Works exclusively for your business, even if they bring some of their own tools;
Receives training from your staff and attends your team meetings regularly.
Each factor alone might not establish employee status, but when you add them all up, it points strongly to an employment relationship, not independent contracting.
Because courts and agencies look at the whole picture, even small signs of control or dependence can tip the scale. This “totality of circumstances” test means you need to carefully evaluate all aspects of how the work is performed — not just rely on a written label or one-off details.
3. Why Classification Matters
Misclassifying workers poses a high risk to your business. Penalties can come from multiple directions, including claims for back wages and unpaid overtime, as well as unpaid payroll taxes. Additionally, your business may face audits from state and federal agencies such as BOLI (Bureau of Labor and Industries), the Oregon Employment Department, the IRS, and the Department of Revenue.
For example, BOLI can impose penalties of $1,000 or more per violation. The IRS may require payment of 100% of unpaid employer and employee taxes. Oregon also enforces additional penalties for failing to provide workers’ compensation, unemployment insurance, and transit tax contributions.
The bottom line is that any short-term savings from misclassifying workers are not worth the potentially severe long-term consequences.
4. Oregon and Other Western States Presume Workers Are Employees — Employers Must Prove Otherwise
Oregon, along with Washington and California, has strict laws that presume workers are employees by default. This means if a worker claims they are an employee, the burden is on the employer to prove the worker is truly an independent contractor.
This presumption protects workers but increases the risk for businesses. If you treat someone like a contractor but the state disagrees, you could face serious penalties.
Because of this, small businesses must be especially careful with classification, contracts, and how work is structured. The safest approach is to assume employee status unless you can clearly demonstrate all the factors supporting contractor classification.
5. Vicarious Liability and Workers’ Compensation: Important Differences
When you hire an employee, your business can be held vicariously liable for their actions — meaning you may be responsible for damages caused by employees during the course of their work. This legal responsibility does not extend to independent contractors.
Additionally, workers’ compensation insurance is required for employees in Oregon. This coverage protects both the employee and your business if the worker is injured on the job. Contractors, on the other hand, are generally responsible for carrying their own insurance and are not covered under your workers’ comp policy.
This distinction is crucial because misclassification can leave your business exposed to costly claims and legal risk.
6. Employment Termination: At-Will vs. Contractual Protections
Employees in Oregon are generally “at-will,” meaning you or the employee can end the employment relationship at any time, for any legal reason, with or without notice.
Contractors, however, work under a contract, and that agreement usually includes terms about how either party can end the relationship. If you terminate a contractor without following the agreed terms (such as notice periods or specific reasons), you could be in breach of contract and face legal consequences.
Because of this, it’s critical to have a clear, well-drafted Independent Contractor Agreement that outlines:
How and when either party can terminate the relationship
Any required notice periods or conditions for termination
Clauses for termination “with cause” or “without cause,” if applicable
This clarity protects both your business and the contractor and helps avoid disputes down the line.
7. Contractor Requirements: What Compliance Looks Like
To hire a contractor the right way, make sure:
You both sign a written Independent Contractor Agreement
You give them a W-9 to fill out (and you collect it)
You issue a 1099-NEC if they’re paid $600 or more in a calendar year
In addition, they must:
Provide their own tools and equipment
Set their own schedule
Submit invoices for work completed
If they’re functioning like an employee but labeled a contractor on paper, you're taking a big risk.
8. Hiring an Employee? Follow Oregon’s Onboarding Steps
If you’re bringing on your first employee, there are several key steps to follow:
Register for a Business Identification Number (BIN) with the Oregon Department of Revenue
Set up payroll with a payroll company and withhold federal and state income taxes. We love using Gusto but there are so many great options.
Provide workers’ compensation insurance (required in most cases)
Post required workplace notices
Track hours and maintain wage records
Stay compliant with BOLI rules (meal breaks, sick leave, final paychecks, etc.)
This process can feel overwhelming — but it’s much smoother when done proactively.
Final Thoughts: Get Help Before You Hire
Before bringing someone on board, even part-time or freelance, talk with one or several professionals (an attorney, bookkeeper, CPA, and/or HR consultant) to make sure you're set up correctly. Classification issues are one of the most common and costly mistakes new employers make.
You don’t have to do it alone. With the right knowledge and support, you can grow your team the right way, and keep your business protected.
Want to chat about how best to legally grow your team? Get in touch.
