On Tuesday, May 25, 2010, Representatives Phillips and Driehaus introduced in the Ohio General Assembly a bill that effectively would create a single definition of “employee” for purposes of Ohio workers’ compensation, unemployment compensation, payroll taxes, minimum wage and other purposes. Presently, each statute contains its own test for determining whether an individual is an employee or an independent contractor, often resulting in conflicting results.

If passed, this legislation would create a single seven-factor test for evaluation whether an individual truly is an independent contractor.

For an individual to be an independent contractor under H.B. 523, all of the following factors would have to be met:

  1. The individual has been and continues to be free from control and direction in connection with the performance of the service.
  2. The individual customarily is engaged in an independently established trade, occupation, profession, or business of the same nature of the trade, occupation, profession, or business involved in the service performed.
  3. The individual is a separate and distinct business entity from the entity for which the service is being performed or, if the individual is providing construction services and is a sole proprietorship or partnership, the individual is a legitimate sole proprietorship or a partner in a legitimate partnership.
  4. The individual incurs the main expenses and has continuing or recurring business liabilities related to the service performed.
  5. The individual is liable for breach of contract for failure to complete the service.
  6. An agreement, written or oral, express or implied, exists describing the service to be performed, the payment the individual will receive for performance of the service, and the time frame for completion of the service.
  7. The service performed by the individual is outside of the usual course of business of the employer.

In addition to prohibiting an employer from failing to designate an individual who performs services for the employer as an employee unless the conditions described above exist, the bill also prohibits any employer from retaliating through discharge, or in any other manner, against any individual for exercising any rights granted under the bill.

Additionally, an employer cannot retaliate against an individual if the individual does any of the following:

  • Makes a complaint to an employer, coworker, community organization, or to a federal or state agency or at a public hearing, stating that the bill’s provisions allegedly have been violated;
  • Causes to be instituted any proceeding under or related to the bill;
  • Testifies or prepares to testify in an investigation or proceeding under the bill; or
  • Opposes misclassification.

Finally, the bill would prohibit employers from attempting to compel individuals from waiving provisions of the bill. Employers would be prohibited from entering into predispute waivers with individuals or even requesting that an individual enter an agreement that results in their misclassification as an independent contractor, or which does not accurately reflect the individual’s proper working relationship with an employer.

If enacted into law, H.B. 523 would establish criminal penalties for violations in addition to creating private causes of action for aggrieved parties. Potential aggrieved parties would include an employee, an employee association, “an interested party,” and a labor organization. In addition, any person violating the law would be subject to sanctions from the Department of Commerce.

The bill requires the Director of Commerce, the Director of Job and Family Services, the Tax Commissioner, and the Administrator of Workers’ Compensation to share information concerning any suspected misclassification by an employer or entity of one or more of the employer’s employees as independent contractors in violation of the prohibition against employee misclassification under the bill.

Clearly, this bill represents another major step forward in the state’s efforts to curb misclassification of workers as independent contractors and to replenish the state coffers for amounts it believes to have been lost due to misclassification. In that regard, the effort is certainly understandable. In significantly narrowing the definition of employee and creating an expansive enforcement mechanism that includes criminal sanctions, civil penalties and the wide range of remedies available to persons other than the allegedly misclassified worker, however, the bill is far reaching and beyond what is necessary to achieve those goals. This bill definitely warrants monitoring as it winds its way through the legislature and we will keep you posted.