2010 saw significant efforts at both federal and state levels of government to aggressively curb perceived loss of revenue from misclassification of employees. In the case of Ohio businesses, these efforts can lead to an increase of targeted audits to determine if certain workers are misclassified as independent contractors to avoid premium payments into the state workers' compensation fund, the unemployment compensation fund, and to avoid Fair Labor Standards Act and like employer obligations.

The use of independent contractors is most common in the construction, trucking, sales and home health care industries. There are several factors that can be considered in determining whether a person is an "employee" or an "independent contractor." Under Ohio law, there are two tests used to make such a determination. The typical approach follows the common law "right to control" test set forth by Ohio courts. This approach analyzes factors primarily dealing with the amount of control reserved by the alleged employer over the manner and method of the worker's performance of his or her duties, including method of compensation, training, providing equipment or tools to perform the work, hours worked, and so on. The second, and more involved, approach borrows from the IRS "20-factors test." This 20-factors test is specifically applicable under Ohio Revised Code chapter 4123 to construction contracts in the workers' compensation context. The 20-factors test looks to similar control factors to the common law approach, but in a more specific and detailed manner.

Citing the revenue lost to federal and state income tax, and workers' compensation and unemployment funds, state and federal agencies have increased enforcement and targeted audits on businesses for suspected misclassification. In addition, measures have been introduced into the legislatures to give more teeth to these enforcement efforts in the form of back pay, penalties and interest upon a finding of misclassification.

Federal Update

On April 22, 2010, the Employee Misclassification Prevention Act was introduced into the U.S. Senate with the stated purpose to amend the Fair Labor Standards Act to provide workers with benefits they are not entitled to as independent contractors and to penalize those companies that improperly label workers as contractors. On the federal level, this kind of legislation would be geared to clarify an area of enforcement by agencies that has different tests to determine whether a person is an employee or an independent contractor. Right now, the Department of Labor and the IRS apply different tests. This proposed legislation remains in committee and its fate in 2011 with the new alignment of Congress is unknown. Nevertheless, Ohio companies must be prepared for stepped-up efforts by the Wage and Hour Division of the Department of Labor to continue to target perceived misclassification abuse in the form of audits.

State Update

On the state level, Ohio H.B. 523 was introduced in May 2010. This bill was designed to unify the various definitions of "employee" in all the Ohio employment laws, including workers' compensation. On December 8th, the Ohio General Assembly took up H.B. 523 for potential passage, but the bill failed to pass by just one vote. The Ohio House did not re-convene for the remainder of 2010, leaving this legislative effort unresolved with fate uncertain in 2011. In addition, the Office of State Attorney General Richard Cordray had convened an inter-agency task force with a goal of examining these misclassification issues more closely and to proposing steps for greater enforcement. Like the legislative effort however, with the transition of administrations in 2011, the fate of this task force is unclear.

What Ohio Businesses Can Do

While legislative priorities in the coming new year are still developing, increased government targeting of perceived misclassification is expected to continue in 2011. The expense of audits and appeals from those audits can be costly for Ohio companies. Those businesses who use or intend to use independent contractors for certain areas of their workforce need to keep apprised of these changes in the enforcement landscape and prepare for a potential audit or claim. In addition to a strong, written independent contractor agreement to define the relationship between employer and contractor, it is imperative that the relationship outlined in the agreement actually be put into practice with the contractor on a day-to-day basis.