In Cejas Commercial Interiors Inc. v. Torres-Lizama, the Oregon Court of Appeals recently held that an employee working for a construction subcontractor was not an employee of the general contractor for purposes of Oregon wage law. But the Court also held that the more expansive “economic-realities test” applied to the issue, rather than the narrower and more employer-friendly “right-to-control test.”

Prior to this case, Oregon law was unclear regarding which test applied. The Court of Appeals previously suggested that the right-to-control test applied, but in later opinions suggested the issue was not settled. In Cejas, the Court explicitly overruled its prior decision and held that the economic-realities test applies. Under the economic-realities test, courts look to whether the alleged employee, as a practical matter, was economically dependent on the alleged employer. Under the right-to-control test, courts look to whether the alleged employer exercised actual direct control over the work of the alleged employee. Under the economic-realities test, a company can be held liable even where the company does not exercise direct control over the alleged employee’s work.

While applying the broader test, the Court ruled in favor of the general contractor, holding that in a “typical subcontractor situation,” a worker employed by a subcontractor is not an employee of the general contractor. Only if the general contractor interjects itself into the relationship between the subcontractor and its employee, or assumes direct control over the employee’s work, would the subcontractor’s employee be considered the general contractor’s employee as well.

Oregon’s adoption of the “economic-realities” test is bad news for employers. Oregon joins several other states, such as Washington and California in adopting this broad test. The Court of Appeals’ recent decision, however, puts some rational limits in place and protects the traditional separation between a company and its subcontractor’s employees.