Byline: SHERRI BURI McDONALD The Register-Guard

BLACHLY - In the four years that Migel Santana assembled miniature flashlights at his home for Laughing Rabbit Inc., a manufacturer in this tiny rural community about 40 miles west of Eugene, he never once thought of himself as an LRI employee.

Instead, he figured he was an independent contractor. He knew LRI didn't pay for unemployment insurance or workers' compensation insurance or half his Social Security payroll tax, as it would for a regular employee. LRI didn't give him paid vacations or medical insurance, either.

All this was fine with Santana. But it wasn't fine with the state, which aims to protect workers from being exploited.

The Oregon Employment Department scrutinized LRI, and a department hearings official ruled that LRI's at-home workers should be classified as employees and given all the perks that employees are due. The Oregon Court of Appeals affirmed the department's decision in August.

Santana and other LRI at-home workers insist they weren't being exploited by LRI. The company wants the state to back off and is trying to get the Oregon Legislature to change the independent contractor rules next year.

Since the state clampdown, LRI has stopped using independent contractors, so Santana and nearly 70 other Blachly-area residents no longer make LRI's Photon Micro-Lights in their homes. The well-known lights are sold worldwide and are used by military personnel, outdoor enthusiasts and even astronauts.

LRI has hired as full-time employees about 16 of the former at-home workers - including Santana - who now must punch in at the company's offices.

All this puts LRI's current and former workers - a mix of stay-at-home moms, farmers, ranchers, jacks-of-all-trade, and elderly and disabled people - at the center of a messy dispute over what constitutes an independent contractor.

The distinction is important, labor experts say, because independent contractors aren't covered by basic worker protections such as unemployment insurance or workers' compensation, which the vast majority of Oregon employers are bound by law to provide.

"What (LRI) is asking for would open a huge hole in the law that would allow employers to exempt employees from the minimum pay and workplace protections that apply to all workers, and invite competition among employers that already employ low-wage workers to lower their wages even more," said Tim Nesbitt, president of the Oregon AFL-CIO.

Small firms nationwide have struggled with inconsistencies between federal tax rules and state laws defining independent contractors. Small-business owners at a 1995 White House conference called the issue a priority.

The topic bubbles up at the Oregon Legislature most sessions. At the request of business interests, Oregon has passed more than 20 exceptions that let some workers be classified as independent contractors. These include newspaper deliverers, golf caddies, referees for recreational soccer, language translators or interpreters, home child-care providers, food product demonstrators, and church employees.

LRI owners David and Dallas Allen have allies in the Legislature eager to champion their cause in the session that begin next month. Chief among them is Rep. Alan Brown, whose district covers Blachly.

The GOP lawmaker said he will work on legislation to help LRI stay in Blachly and farm out work to residents.

His plan would make it easier for workers to qualify as an independent business and thus gain the status of independent contractor. Current law requires such workers to meet at least four of six criteria. Brown's proposal, which is backed by the Oregon State Grange, would require workers to meet only two of the six criteria.

"It's not to create some exception for (LRI) to get around employment laws," Brown said. "This is a different situation. It's very important to this community. It's a good industry. It provides well-paying jobs to people in that community.

"The employees weren't objecting to it; the bureaucracy was objecting," he added.

Oregon's ongoing economic slowdown lends urgency, Brown said. "We need to help people get jobs," he said, "not find ways to keep them from working."

Failed to meet standards

The Employment Department says the law is the law, and it must be followed.

"You aren't an independent contractor because you want to be, or your employer wants you to be," department spokesman Tom Fuller said. "There are a series of standards in the law."

The rules were largely put in place in 1989. They aim to distinguish between workers whose livelihood genuinely comes from independent ventures, and those who are essentially dependent on a single employer.

Administrative law judge Ken Betterton, who oversaw the Employment Department hearing, found that assemblers for LRI failed to meet most of the state standards for independent contractors. He concluded that the assemblers did not show that they had the authority to hire and fire their own employees. Also, none of the operators filed business Schedule C forms with their tax returns in the year before they started working for LRI, which would show that they already had an independent venture under way.

Also, the judge said the assemblers failed to show that they met at least four of the following conditions: had a work space set aside at home; advertised their services commercially or had business cards; had a business telephone listing separate from their home; worked for more than one client in a year; had written contracts with clients and carried liability insurance for negligence.

Some workers argue they met the necessary standards. For example, Santana said he had a work space in his home, plus business cards, a separate business phone line, and a written contract with LRI

Migel Santana and his wife, Charleen, own Santana Productions. In addition to assembling flashlights, they make toys, emu egg novelties and emu oil lotions. They also raise emus.

But the Employment Department disagreed with the Santanas' interpretation.

In its audit, the Employment Department concluded that LRI should have paid $11,198 in unemployment insurance payroll tax on employees who had been misclassified as independent contractors. The Allens said they paid the amount immediately.

In the spotlight

The Allens are puzzled by the crackdown. The couple had lived in Blachly for 25 years and wanted to stay there after founding their flashlight business in 1994. Before inventing the Photon Micro-Light, David Allen worked as a jeweler and Dallas Allen worked as a massage therapist. They said they liked working at home while raising their children, Lily and Leo, and wanted to let others do the same.

"There's no (coercion)," David Allen said. "It's just, `Here's an opportunity.' Whose arm did we ever twist?" he asked.

At first, David Allen made all of the lights himself. As business picked up, "we went from employing a handful of our intimate friends to 20 to 30 contractors in 1999, then to about 75 contractors by 2000," Dallas Allen said.

LRI's annual sales skyrocketed from $2.5 million in 1999 to $8.5 million in 2001.

LRI paid at-home workers a piece rate: 22 cents for each Photon I pinch light and 40 cents for each Photon II light, which are more complex to build because they have an on/off switch.

Most assemblers made $10 to $12 an hour, Dallas Allen said.

The Allens thought they were following the law - until the department began an audit in April 2000. "It never occurred to me that what we were doing was incompatible with the rules," Dallas Allen said.

The department said the audit was spurred by an unemployment insurance application by assembler David Stockstill. At the hearing, Stockstill testified that he filed an unemployment insurance claim on his own construction company, his main source of income. In his claim, he also listed LRI as a source of income. Stockstill testified that he believed his part-time work at LRI did not qualify him for workers' compensation or other benefits.

"No one in all the years that we've worked ever complained," David Allen said. He thinks the Employment Department was looking for a reason to investigate the company.

Fuller said the agency was legally obligated to investigate after learning of the issue.

China an option

Since the Appeals Court ruling, the Allens have added 18 to 20 employees to LRI's payroll, assembling lights at the company's offices in Blachly. LRI owns the former Blachly Store, which dates to 1892 and was renovated in 1999. The company now has about 40 employees.

The Allens say the issue isn't company operating expenses - LRI spends about the same hiring these new full-time employees as it did paying for farmed-out piece-rate work to a far greater number of workers. Rather, it's about convenience - for the company and the area residents - they say.

Space is cramped at the Allens' offices, and they said they can't expand in Blachly. They've scouted sites in Eugene but said they don't want to force their employees into an 80-mile-a-day round-trip commute.

The Allens also use a factory in China to make some products, including LRI's Photon Fusion headlight/bicycle light, and the XLight, a key-chain flashlight with an electronic switch, which retails for $8, compared with the $16 Photon II.

"I could easily go to Eugene or move all production to China," David Allen said. "Do I want to? No. If I'm forced to will I? Yes."

Some take that as a threat.

"It's a little bit irritating to be told to loosen the laws here because of world competition, and lower the benefits because if you don't we're going to move the work to China," said state Sen. Tony Corcoran, D-Cottage Grove.

Having workers do assembly at home and classifying them as employees is out of the question, the Allens said, because each house would be considered a manufacturing site, and LRI would be unable to get workers' compensation or liability insurance.

EMPLOYEE OR CONTRACTOR?

Under Oregon rules, you're an independent contractor if you meet all of the following:

Your work is not controlled by the company you work for, except that you generate set results.

You obtain all needed licenses.

You provide the equipment for the work.

You have the authority to hire and fire people to do the work.

You are paid when you complete set parts of the project or by periodic retainer.

If you do construction, you do so under Oregon construction laws.

If you worked as an independent contractor the previous year, you filed federal and state income tax returns in the names of your business or a business Schedule C or farm Schedule F form as part of your personal income tax return.

You assert to the public that you are an independently established business.

Also, except when you file a Schedule F as part of the personal income tax returns and you perform farm labor or services that are reportable on Schedule C, you are an independent contractor when at least four of the following are true:

You work mainly at a place separate from your home, or you work mainly in a part of your home that is set aside for your business.

You buy commercial ads or business cards, or belong to a trade group.

Your venture has a separate telephone listing and service from your home phone.

You work only for written contracts.

You work for two or more people a year.

Your business venture assumes financial responsibility for your defective work.

CAPTION(S):

Laughing Rabbit Inc. makes Photon Micro-Lights. CHRIS PIETSCH / The Register-Guard Lisa Rice (top left) and Karen Bateman (left) join other workers at a makeshift assembly area set up at Laughing Rabbit Inc. in Blachly after Oregon's ruling on the status of LRI's independent contractors.