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Ohio Focuses on Worker Misclassification

Back in February, Ohio Attorney General Richard Cordray announced that his office, would collaborate with the Ohio Department of Job and Family Services, Ohio Department of Taxation and Ohio Bureau of Workers’ Compensation to reduce the number of employers that are misclassifying workers as independent contractors.

A report issued 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 workers’ compensation premiums and almost $180 million in State income tax revenues. Additionally, misclassification is estimated to have cost Ohio cities and villages more than $100 million in local income tax revenues in 2006, and cost school districts $7.8 million in 2008. Using data from the Ohio Department of Jobs and Family Services, the Department of Taxation and the Bureau of Workers’ Compensation, the report estimates there were 92,500 misclassified workers in Ohio in 2005.

Employee misclassification is part of an “underground economy” in which an employer improperly classifies individuals as independent contractors or pays them “off the books” to avoid taxes and other required payments. As a result, the state and local governments lose hundreds of millions of dollars annually.

In a press statement Cordray stated that, “This is a problem that affects everyone, but most people don’t know about it. By cutting corners, some employers are in effect stealing from the rest of us. Through unemployment compensation, Bureau of Workers’ Compensation premiums, and state income tax revenues, state and local governments in Ohio are losing hundreds of millions of dollars each year. This is inexcusable in any economic environment, but absolutely unforgivable today. It is time to level the playing field for those businesses that play by the rules.”

With the Ohio Attorney General 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. Employers risk potential federal, state, and local taxes, fines, and penalties as well as workers’ compensation premiums and penalties. Additionally, several multi-million dollar lawsuits have been brought against employers for failing to pay proper wages, including overtime, under the Fair Labor Standards Act (FLSA). Employers with Employee Retirement Income Security Act (ERISA) retirement and welfare benefit plans that do not contain fail safe provisions also run the risk that the misclassified workers will be determined as employees who are retroactively entitled to benefits under those plans. For 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.

It is important to know that the existence of an independent contractor agreement, by itself, will not create an independent contractor relationship where an employer-employee relationship actually exists. However, if there truly is an independent contractor relationship, the agreement should include sufficient information to support the existence of that relationship.

Employers should also review their independent contractor relationships to be sure that the relationships have not changed over time into employment relationships.

While there is no one standard to properly classify a worker as an independent contractor, one of the most prevalent tests is provided by the IRS. The IRS provides the following three areas to consider when evaluating the status of a worker:

• Behavior Control: Who has control or the right to control what the worker does and how the worker does the job? An independent contractor is usually not as controlled.

• Financial Control: How are the business aspects of the worker’s job controlled? These include how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies. An independent contractor is usually paid by the job and will provide the tools and supplies.

• Type of Relationship: Are there written contracts or employee-type benefits? If so, the worker is likely an employee.

© 2008 Ott & Associates Co., LPA

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