Employee

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By: Peggy Kirk Hall, Wednesday, May 25th, 2022

Farms and other businesses can benefit by using independent contractors to fill labor needs while not having the same financial and legal responsibilities the business has for its employees.  But state and federal laws allow those advantages only if the worker is truly an independent contractor.  When a worker classified as “independent contractor” functions as an employee in the eyes of the law, a business can be liable for failing to meet its employer obligations for the worker.   That’s exactly what happened in a recent case before the Ohio Supreme Court.

The company.  The case involved Ugicom (the company), paid by Time Warner Cable under a subcontract to provide workers to install underground cable.  Workers used the company’s website to select and document installation jobs and the company paid the workers at rates it determined.  The installers were required to wear badges and vests identifying the company and to pass drug tests and background checks, all coordinated by Time Warner.  The company required installers to sign a one-year independent contractor agreement containing a “non-compete clause” that prohibited them from providing installation services for competitors.  The contract also required installers to respond to service requests within two hours.  Installers had to provide their own hand tools, transportation, cell phones, and laptops, but used cable obtained from Time Warner.  They could work any day or time consented to by customers.  The company paid the installers by the job and did not withhold taxes or provide any benefits.

The Bureau of Workers Compensation (BWC) audit.  The BWC audited the company to decide whether it had paid the correct amount of workers’ compensation premiums for all of its employees.  The BWC examined the company’s treatment of workers it had hired to install cable as independent contractors.  Concluding that the company exercised “too much control” over the installers, the BWC determined that the installers were actually employees for workers’ compensation purposes and the company owed $346,817 in unpaid premiums for the employees.  The company unsuccessfully appealed the decision to the agency and the Tenth District Court of Appeals and the case ended up before the Ohio Supreme Court.

The Ohio Supreme Court review.  For purposes of the workers’ compensation program, Ohio law provides that the controlling determination in whether a worker is an independent contractor or an employee is “who had the right to control the manner or means of doing the work.”  There is not a bright-line test for making such a determination, however.  Instead, the Ohio Supreme Court explained, the BWC must consider a set of factors related to who controls the manner or means of the work.  Those factors include:

  1. Whether the work is part of the regular business of the employer
  2. Whether the workers are engaged in an independent business
  3. The method of payment
  4. The length of employment
  5. Agreements or contracts in place
  6. Whether the parties believed they were creating an employment relationship
  7. Who provides tools for the job
  8. The skill required for the job
  9. The details and quality of the work

The Ohio Supreme Court’s role was to determine whether the BWC relied upon “some evidence” when reviewing each of the factors to reach its conclusion that the company controlled the manner or means of the installers’ work.   The Court concluded that most, although not all, of the BWC’s conclusions were supported by at least some evidence and upheld the BWC’s decision.  The factors and evidence that received the most attention from the Court included:

  • Independence from the company.  The installers’ public image when working identified them as being with the company; they all wore the same badges and vests, and some had signs on their vehicles with the company’s name. 
  • Method of payment.  The company controlled the rate of payment, which was nonnegotiable and did not include a bid process as is typical for independent contractors. The “take-it-or-leave-it” approach indicated control over the installers.
  • Length of employment.  The installers had an ongoing relationship with the company and did not advertise their services to the community at large.
  • Agreements and contracts.  The company’s non-compete clause restricted the installers’ freedom to work and indicated a measure of control over the workers.
  • Skill requirements.  The BWC concluded that the minimal skill required to install the cable was not high or unique, and the company offered no facts to show that the installers required specialized skills.

Disagreement on the court.  Two of the Supreme Court Justices, Kennedy and DeWine, dissented from the majority opinion. Their primary point of disagreement was that there was no evidence supporting the BWC decision.  The evidence instead suggested that the company controlled only how the installers were paid, and the installers controlled the manner and means of doing their work.  The dissent criticized the BWC for jumping to a quick conclusion that the company’s true motives were “to evade the obligations associated with having employees.”

What does this mean for farm employers?   Farms often rely on independent contractors for seasonal and intermittent help with work like baling hay, running equipment, and doing books. Are these workers true independent contractors or are they employees?  That is a fact dependent question, but we can imagine many scenarios where the farm has a majority of the control over the mode and manner of such work.  Farms are subject to Ohio’s workers’ compensation law, so a farm could be audited by the BWC just as the company in this case was and could see similar results for misclassifying employees as independent contractors. 

Implications for all businesses.  The case carries several implications that raise needs for businesses that use independent contractors: 

  1. Recognize that state and federal tests can differ.  Many are familiar with the IRS test for independent contractors but note that the Ohio Supreme Court applied its unique Ohio test for determining independent contractors in regard to BWC premiums. State and federal laws differ.  It’s important to apply the appropriate test for the situation.
  2. Review the manner and means factors for each independent contractor.  For each worker claimed as an independent contractor, review the nine factors listed above to ensure that the business isn’t exerting the most control over the manner and means of the work.  Where possible, adjust practices that give the business unnecessary control over how and when the work is performed.  Consider these:
      • Use employees to do the regular work of the business and independent contractors for high-skill or unique tasks.
      • Ensure that the business isn’t controlling the public image of the workers.  The workers should not be branded or identifiable with the business through clothing, name badges, hats, vehicles, etc.
      • Require independent contractors to submit bids or proposals on the amount and method of payment for their work.
      • Avoid using the same independent contractor for an extended period of time and ensure that the worker’s services are available to other businesses.
      • Don’t restrict the worker’s freedom to work for others, especially via a contract or agreement.
  3. Maintain records and evidence of the work situation.  The BWC need only have “some evidence” that the nine factors indicate a high level of control over the mode or manner of work, but the business may offer facts and evidence to the contrary.  Good recordkeeping is imperative.  A business that can’t provide stronger facts and evidence in favor of the business, like the company in this case, might be at risk of an employee classification by the BWC.

While there are benefits of using independent contractors to meet labor needs, farms must recognize the associated risk of misclassification.  For workers' compensation purposes, farms can avoid those risks by ensuring that it is the independent contractor, not the farm, who controls the "manner or means" of doing the work.  Read the Ohio Supreme Court’s opinion in State ex rel. Ugicom Enterprises v. Morrison here.

 

Group of agricultural workers standing in front of a grain cart.
By: Jeffrey K. Lewis, Esq., Friday, August 13th, 2021

Agricultural workers are usually categorized in two ways.  They are either an “employee” or an “independent contractor.”  Depending on how an agricultural worker is labeled determines the duties and liabilities of the agricultural employer.  

Generally speaking, if an ag employer has the right to control the work of an ag worker, then the ag worker is probably an employee.  This means that the ag employer must abide by a whole host of federal and state laws that relate to labor and employment and can be found liable for any damages caused by their employees under the doctrine of vicarious liability.  Vicarious liability is a legal doctrine that may hold an employer responsible for the actions of an employee -- so long as the employee was acting in the ordinary course of business.  A good example of the vicarious liability doctrine in action is when a court decides to hold a farmer and/or farm business responsible for any spray drift damages resulting from an employee’s application of herbicide. 

On the other hand, ag employers that use independent contractors are usually not liable for any damages that result from the actions of an independent contractor.  This obviously makes the use of independent contractors very appealing but comes at a higher cost than using an employee to do the work.   

Simple enough right? Be careful with employees and spray drift or use independent contractors and be worry free.  Not really.  Although a big concern for ag employers are the liability issues that stem from employees’ actions, having employees requires ag employers to fulfill multiple obligations under state and federal labor and employment laws, obligations that otherwise would not exist if an ag employer used an independent contractor to complete the work.  Those obligations can include wages, overtime pay, hour restrictions, migrant and seasonal worker protections, tax concerns, and others.  So, you see, labeling a worker as an employee or independent contractor goes far beyond just preventing a lawsuit against the ag employer.  

Ag employers often think they are using independent contractors to complete work around the farm.  But innocently, the ag employer may actually be using an employee to complete work around the farm and is probably violating federal and state law and exposing itself to fines and lawsuits.  An ag employer must be careful when determining who is an employee and who is an independent contractor when looking for help on the farm.  Below is a brief summary of Ohio and federal law that determine when an ag worker is an employee and when an ag worker is an independent contractor.  

How do I determine who is an employee and who is an independent contractor? 

The simple answer to that is, it depends.  Different tests are used at the federal level and in Ohio.  However, one thing that all these tests have in common is the ag employer’s right to control the work being done.  This means that if an ag employer can direct, monitor, correct, or otherwise control how the work is being done, then the ag worker is likely an employee.  Even if an ag employer never exerts or directly controls how the work is being done, courts only care that the ag employer has or had the ability to do so. 

What are the tests to determine if a worker is an employee or independent contractor?

The Economic Realities Test.  The Fair Labor Standards Act (“FLSA”) is the federal law that governs minimum wage, overtime pay, recordkeeping, and youth employment standards.  “Employee” is defined very broadly under the FLSA and more often than not, a worker is found to be an employee rather than an independent contractor.  To help determine who is an employee and who is an independent contractor, the FLSA uses an Economic Realities Test.  The Economic Realities Test looks at the reality of the economic relationship between the parties and if a worker is more reliant on the employer for economic gain and security, then the worker is more likely an employee.  Factors under this test include: 

  1. The degree of control that an employer can exert over the worker and the work being performed.  
  2. Whether the work being performed is an integral part of the employer’s business
  3. The permanency of the relationship 
  4. The amount of the worker’s investment in facilities and equipment.  
  5. The worker’s opportunities for profit and loss.  
  6. The amount of initiative, judgment, foresight, and skill required for the worker’s success.  

The Internal Revenue Service (“IRS”) Standard.  The IRS has a separate test to help taxpayers determine whether an individual should be considered an employee or independent contractor for tax purposes.  The IRS analyzes three areas – behavioral control, financial control, and the relationship of the parties.  

  1. Behavioral Control – a worker is an employee when the business has the right to direct and control the work performed.  Factors include: (a) the type of instructions given; (b) degree of instruction given; (c) evaluation of work done; and (d) training. 
  2. Financial Control – If a business has the right to direct or control the financial and business aspects of the worker’s job, then the worker is likely in employee.  A major factor is how the worker is paid.  Employees are guaranteed regular pay whereas independent contractors are paid by the job. 
  3. Relationship of parties – the IRS takes into consideration what the parties think their relationship is.  The IRS will look at written contracts, whether any benefits are offered, the length and permanency of the relationship, and whether the worker is performing work that is an integral part of the business of the employer.  

Ohio’s standard.  Ohio uses two separate, yet very similar tests to determine employee or independent contractor status.  For wage and hour purposes, Ohio uses the Economic Realities Test that is used by the FLSA.  

However, for workers’ compensation, unemployment insurance, and Ohio’s vicarious liability law, Ohio uses a “right to control” test.  Under Ohio’s “right to control” test courts consider the following factors: 

  1. Whether the worker is engaged in a distinct occupation or business; 
  2. Whether the worker or the employer supplies the place and tools to complete the work; 
  3. Whether the work is done by a specialist requiring a particular skill; 
  4. How the worker is paid; 
  5. The length of time a worker is employed; 
  6. Whether the work performed is part of the regular business of the employer; 
  7. Whether the employer controls the details and quality of the work to be performed; and 
  8. The terms of any agreements or contracts between the parties.  

Why is determining who is an employee and independent contractor important?

First and foremost, determining who is and is not an employee defines an ag employer’s obligations under the law.  If an ag employer has employees, then the ag employer must abide by federal and state wage, hour, antidiscrimination, unemployment insurance, workers compensation, and safety laws.  Those same obligations do not arise when using an independent contractor. 

Secondly, misclassifying a worker as an independent contractor when they are actually an employee can lead to severe legal fines and penalties.  Some of the consequences for incorrectly classifying a worker could include: 

  • Lawsuits for unpaid wages; 
  • Fines for failing to comply with federal and Ohio antidiscrimination laws; 
  • Discrimination and wrongful termination claims; 
  • Lawsuits for the negligence or other civil wrongs of the worker; and
  • Fines for failing to maintain Ohio Workers’ Compensation Insurance and Unemployment Insurance. 

Conclusion.  Determining who is and isn’t an employee defines an ag employer’s legal obligations, so it is always important to ensure that whenever someone is doing work for you, you categorize them correctly.  If you have any doubts, it’s always best to air on the side of caution and treat a worker as an employee.  If you should have any questions contact your attorney to help you determine what your legal obligations are as an employer, it can save you time, money, and stress.  

To learn more about distinguishing between an employee and an independent contractor visit: 

U.S. Department of Labor Wage and Hour Division, Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)

U.S. Department of Labor Wage and Hour Division, Fair Labor Standards Act Advisor: Independent Contractors

U.S. Department of Labor Wage and Hour Division, Misclassification of Employees as Independent Contractors

U.S. Internal Revenue Service, Understanding Employee vs. Contractor Designation

Ohio Administrative Code § 4141-3-05, Definition of Employment

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