Colorado Courts Create Uncertainty for Attorneys’ Fees on Wage Claims

Colorado businesses that use independent contractors should be aware of a recent court of appeals decision that may prevent their recovery of attorneys’ fees—even if they successfully defend claims brought under the Colorado Wage Act (the “CWA”) regarding payment issues. As a result, it will be critical for such companies to carefully draft provisions in their consulting or other agreements with the independent contractors they engage.

In Mahan v. Capitol Hill Internal Medicine, P.C., the Colorado court of appeals held that an award of attorneys’ fees is improper when the reason the defending business prevails on a CWA claim is because the plaintiff is not found to be an “employee” under the CWA. While this opinion was consistent with an earlier opinion, the court of appeals had reached a contrary conclusion in 2004.

In 1985, in Hyland v. Pikes Peak Capital Corp. the court of appeals concluded, with little analysis, that for a winning party to be entitled to attorneys’ fees under former § 8-4-114 of the CWA, it was necessary for the claimant to be an employee. Nine years later, in Voller v. Gertz, the court permitted an award of attorneys’ fees to a winning party under the CWA, even if the claimant is found not to be an employee.

The Mahan court acknowledged the inconsistent prior caselaw, and relying on principles of statutory construction, declined to follow Voller, stating that the applicable provisions of the CWA expressly applied to disputes between an “employee” and an “employer.” The court further noted that when the Colorado General Assembly adopted comprehensive amendments to the CWA in 2003, it was deemed to have adopted the prior statutory construction applied by prior courts (in this case by the Hyland court) to the specific language used in the subsequent amendments.

Mahan emphasizes the split in authority on the issue of the availability of attorneys’ fees when independent contractors bring CWA claims. No petition for review by the Colorado Supreme Court has yet been filed to resolve this split in authority.

Mahan and the other cases discussed above involved slightly different statutory language than that put into place by the comprehensive amendment of the CWA in 2003. Under the current CWA, an employer is entitled to recover attorneys’ fees from the employee if, in a legal action, the employee recovers a sum less than the amount legally tendered by the employer, which the employer believes in good faith to be due the employee. Conversely, an employer is responsible for the employee’s reasonable attorneys’ fees if the employee recovers an amount greater than the amount tendered by the employer.

Because the current language retains the use of the defined terms “employer” and “employee” in the attorneys’ fee section, Mahan and the other cases likely will influence decisions arising under the revised CWA. As a result, a court following Mahan may require businesses to pay the costs of defending claims under the CWA brought by independent contractors. Consequently, until the Supreme Court or the Colorado Legislature provides further guidance on this issue, businesses and independent contractors will need to pay special attention to the negotiation and drafting of provisions in their independent contractor agreements.

Whether a person constitutes an independent contractor or an employee is a facts and circumstances test, and as a result there is always a risk for companies regarding the proper characterization of such persons. Consulting and other agreements with independent contractors typically contain a provision acknowledging that the service provider is an independent contractor as opposed to an employee. While these acknowledgements provide guidance as to the parties’ intent, simply agreeing that someone is an independent contractor does not make them one.

Nevertheless, in light of the recent decisions, it is good practice to expand acknowledgement provisions to limit the right of the independent contractor to sue under the CWA as a result of his or her independent contractor status or to recover attorneys’ fees under section 110 of the CWA. In addition, such agreements should include an enforceable attorneys’ fee provision to protect companies from groundless claims under the CWA or in the event they are the prevailing party in other disputes under the agreement.

In light of the split in authority, it is critical for companies that are involved in payment disputes with parties that are now claiming they are not an independent contractor or are threatening a claim under the CWA to consult with an attorney experienced in this area immediately. Important strategic decisions regarding how to defend such a claim could be influenced by the relevant requirements under the CWA regarding attorneys’ fees.

This legal update is for informational purposes only as a service to clients and other friends, is not a complete summary of the rules relating to the subject matter discussed above, and is neither to be construed as legal advice nor intended as basis for decisions in specific situations. For more information about this subject matter or other recent developments, please contact the attorneys in our Commercial Litigation or our Colorado Corporate Law practice groups or any other attorney in our firm with whom you normally consult by calling (303) 825-4200.