Independent contractor or employee? Be sure you know from the start.


Independent Contractor Agreement

The law treats employees and independent contractors differently. Independent contractors are usually exempt from labor and employment legislation, such as minimum wage and overtime pay and retirement contributions, while employees are usually covered by it. The failure to properly classify independent contractors and document their status as such at the beginning of a relationship can lead to liability for workers’ compensation and unemployment taxes, benefits lawsuits, and wage and hour claims at a later time—often because a relationship has soured or an individual feels an employer has taken advantage of them. 

Ordinarily, the determination of whether a worker is an independent contractor or an employee is made after examining the relationship between the worker and the employer. All evidence of control and independence is considered in determining an individual’s status, including behavioral control, financial control, and the parties’ categorization of the relationship itself. It seems like an easy determination to make.

However, a recent Ohio Supreme Court decision is a timely reminder that public employers should be deliberate in categorizing service providers as independent contractors rather than employees. In State, ex rel., Ugicom Enterprises, Inc. v. Morrison, 2022-Ohio-1689 (May 24, 2022), the Court reviewed the question of whether certain individuals were actually employees under Ohio’s workers’ compensation laws and found that they were. The Court’s decision resulted in $341,000 of liability to the employer for workers’ compensation premiums it should have been paying for its workers. The employer argued that these individuals—who set their own hours, brought their own tools, and signed agreements with noncompete clauses stating they were independent contractors—were not its employees. The Bureau of Workers’ Compensation and, after years of litigation, the Ohio Supreme Court saw it differently. The Bureau had reasoned that the substance of the work relationship rather than its stated form was the determinative factor. The Court agreed, explaining that there is no “bright-line” rule for determining whether a worker is an independent contractor or an employee and ruling that the key determination is “who had the right to control the manner or means of doing the work.” In the end, the Court found that company’s practice of paying its workers the amount that it unilaterally decided, which foreclosed the individuals’ ability to submit a quote for the work, was a means of controlling them and made them employees. The Court further deemed the noncompete clauses in the independent contractor agreements another means of control. Since the Bureau’s determination was supported by “some evidence in the record” before the Court, the Bureau’s classification of the workers as employees entitled to workers compensation benefits withstood judicial review.

The Ohio Public Employee Retirement System (OPERS) will also seek back contributions and penalties from public employers who misclassify workers as independent contractors, which can result in significant financial liability to a public employer because the employer is wholly responsible for both the employer and employee contributions, with interest. OPERS’ test for determining whether contributions should be made on behalf of a worker is set forth in Ohio Administrative Code 145-1-42(A). Its standard considers factors such as the parties’ rights established through written documents, how the worker is paid, and whether they are “controlled or supervised by personnel of the public employer as to the manner of their work." A public employer should have any individual who provides personal services to it but who is not considered an employee under these factors complete form PEDACKN within thirty (30) days of beginning to provide those services. The public employer should then submit the form to OPERS. Generally, any other individual performing personal services to the public employer is considered an employee for whom retirement contributions are made. 

The determination of workers’ entitlements to other pay and benefits, such as overtime pay and health insurance, are determined pursuant to federal law, which generally focuses on the degree to which the entity can control and direct the work of the individual. The same holds true for Medicare tax implications.

Experience has shown that the best of intentions can often lead to unintended consequences. No one (well, hardly anyone) enters into an arrangement expecting that it will result in years of contentious litigation. A public entity’s diligence in defining its relationship with workers before they provide services to it and then adhering to those established parameters will better ensure the result that everyone intended from the beginning.

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