Employers in Ohio need to understand the legal definitions of an “independent contractor” and to know about the risks of employee misclassification. In Ohio and throughout the country, employers have certain responsibilities to employers, and misclassification can result in legal issues when an employee is misclassified as an independent contractor. The tests used for determining an independent contractor are those provided by the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS), but it is important to recognize that the factors used for determining an independent contractor are ever-evolving. Accordingly, it is critical to stay up-to-date on changes to the DOL and IRS tests. In addition, it is essential for employers to know that worker classification can also become an issue under the National Labor Relations Act (NLRA), and under state unemployment and workers’ compensation programs.

Our Ohio business law attorneys can provide you with more information about worker classification and the differences between an independent contractor and an employee.

Current DOL and IRS Tests for Worker Classification

Both the DOL and IRS have tests for worker classification, which employers can use to determine whether a worker should be classified as an employee or as an independent contractor. As the DOL explains, “the U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA.” Instead, the U.S. Supreme Court has emphasized that employers should consider various factors in determining whether the “total activity or situation” suggests that the worker is an independent contractor or an employee. The DOL currently cites the following as significant factors:

• Extent to which the services rendered are an integral part of the principal’s business;
• Permanency of the relationship’
• Amount of the alleged contractor’s investment in facilities and equipment;
• Nature and degree of control by the principal;
• Alleged contractor’s opportunities for profit and loss;
• Amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
• Degree of independent business organization and operation.

 
The IRS explains that an employer “should consider all evidence of the degree of control and independence” in the “relationship between the worker and the business.” The IRS specifically cites the following categories as those that employer should consider when determining how to classify a worker:

• Behavioral control;
• Financial control; and
• Relationship of the parties.

 
Within the category of behavioral control, the employer should consider their “right to direct and control what work is accomplished and how the work is done.” Financial control focuses on factors such as how the employer pays the worker, whether the worker can be reimbursed for business expenses, and whether the worker can “realize a profit or incur a loss” in connection with the business. The relationship of the parties includes factors such as existing contracts between the parties, whether the worker receives benefits, how permanent the relationship is between the employer and worker, and whether the worker’s services “are a key aspect of the regular business of the company.”

Proposed DOL Rule on Classifying Employees and Independent Contractors

Employers in Ohio and throughout the country should know that the DOL recently announced a proposed rule on classifying employees and independent contractors. According to the news release, the proposed rule is designed to give clearer guidance to employers so that workers are not misclassified. Some of the key aspects of the proposed rule include:

• Returning to a six-factor “economic reality” test;
• Restoring an approach that focuses on the totality of the circumstances; and
• Making sure that employers consider all factors rather than heavily weighting certain factors.

 
In addition, the proposed rule would have the DOL assist employers with worker classification and would rescind the Independent Contractor Rule from 2021. When you are classifying a worker, it is critical to consider the factors discussed here and to remain up to date with any changes to independent contractor tests. In addition, you should understand the risks of misclassification, which can be serious. Employers that misclassify employees as independent contractors could face fines and penalties, could be responsible for unpaid benefits and could be required to pay back taxes.

Contact an Ohio Business Law Attorney

If you have questions about worker classification or require assistance with legal issues concerning misclassification, an experienced Ohio workplace lawyer at Wells Law, LLC can assist you. Contact us today for more information.