Back in February, Ohio Attorney General Richard Cordray announced a collaboration between his office and the Ohio Department of Job and Family Services, Ohio Department of Taxation, and Ohio Bureau of Workers’ Compensation to release and exchange confidential information to reduce the number of employers that are misclassifying workers as independent contractors. A report issued at the same time by the Attorney General’s office estimated that the extent of annual costs to the state from worker misclassification totals $100 million in payments for unemployment compensation, more than $510 million in BWC premiums and almost $180 million in forgone state income tax revenues.
With the Ohio Attorney General’s enforcement eye now focused on the costs of misclassification, it is important for Ohio employers to understand the potential consequences if they are found to have misclassified workers as independent contractors. First and foremost, they risk potential federal, state, and local taxes, fines, and penalties and workers compensation premiums and penalties. In addition, several multi-million dollar lawsuits have been brought against employers for failing to pay proper wages, including overtime, under the FLSA. Finally, employers with ERISA retirement and welfare benefit plans that do not contain "fail safe" provisions run the risk that misclassified workers will be found to be employees who are retroactively entitled to benefits under those plans. Alternatively, as to plans that do contain fail safe provisions, employers may need to redo the non-discrimination testing to make sure that each plan’s tax-qualified status is not jeopardized by the omission of those employees.
There is no one test or standard that will ensure that a worker has been properly classified as an independent contractor for all purposes. The IRS now looks to which party has the behavioral and financial control over the work being performed as well as other factors relating to the parties’ relationship. For employee benefit purposes, the Department of Labor applies the "Darden" test, which is similar, but not identical, to the IRS test. The Ohio BWC focuses on a 20-factor test set forth in the workers’ compensation statutes. For wage-and-hour purposes, the Department of Labor and the courts will analyze the “economic realities,” which focus on whether, as a matter of economic reality, the worker is really an employee or in business for himself. As you can see, the existence of an independent contractor agreement, by itself, will not create an independent contractor relationship where an employer-employee relationship actually exists. It is important, however, that the agreement includes sufficient information to support the existence of an independent contractor relationship. Also, it is important to review those relationships you believe to be independent contractor relationships to be sure that independent contractor relationships haven’t morphed over time into an employment relationship.