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In the last post, we looked at strategies to deal with second marriages using trusts. In this post, we look at the risks of divorce on the farm transition plan and strategies to minimize the risk.
Marital Versus Separate Assets
To address the issue of divorce, it is first helpful to know what assets are subject to a divorce. According to Ohio law, marital assets are to be divided “equitably” in the event of a divorce. Equitable does not necessarily mean equal although an equal division of marital assets between the spouses is often the result. Divorces can be especially threatening to farmland because of the “land rich, cash poor” dilemma for farmers. In a farm divorce, it is usually not equitable for one spouse to receive all the farm assets if there are not sufficient non-farm assets for the other spouse. Thus, both spouses may receive farmland in the divorce settlement. Once the farmland is divided, either spouse can sell or transfer the land out of the family.
It is important to note that Ohio law only requires “marital” assets to be divided. Non-marital assets, referred to as “separate” assets, are retained by the spouse who brought the assets to the marriage. Understanding the difference between a separate asset and a marital asset is critical when attempting to mitigate the risks of divorce.
Separate assets include the following:
- Property acquired by a spouse prior to the date of the marriage.
- Passive income and appreciation from separate property received by a spouse during the marriage.
- An inheritance received by a spouse during the marriage.
- A gift received by a spouse during the marriage.
The above list would seem to make it an easy exercise to determine which assets are marital and which are separate in a divorce situation. However, like many legal issues, the application of the concept is more complicated than it may appear. This is because Ohio law also provides that income or appreciation on separate property can become a marital asset.
Ohio law includes as marital property:
“… all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses that occurred during the marriage. ”
So, it is possible for an asset to be partially separate (the initial property) and partially marital (the income and appreciation on the property).
Consider the following example:
Andy and Beth are farmers in the process of divorcing. Shortly after they were married, Beth inherited a 100-acre farm from her grandmother. When she inherited the farm, it was valued at $600,000. A few years after inheriting the farm, Andy and Beth’s farming operation paid for and installed $80,000 of drainage tile on the farm. The current value of the farm is $1 million.
In this example, the farm was Beth’s separate asset upon inheritance. However, the tile that improved the quality and value of the farm was a result of Andy and Beth’s joint farming operation. Andy likely has a valid claim that at least part of the $400,000 increase in value is a marital asset due to the tile installation.
Perhaps Andy further argues that most of the increase in value was due to fertilizer, tillage and other soil improvements made while Andy and Beth farmed the land. It is in Andy’s interest to make the $400,000 increase in value a marital asset. Conversely, Beth could argue that the increase was not a result of the marital farming operation but was merely a passive value increase due to market pressure. It is in Beth’s interest to argue the $400,000 increase as her separate asset.
As this example illustrates, an asset that is initially a separate asset can become, at least in part, a marital asset. Both Andy and Beth have valid arguments. It is not hard to imagine how much time and legal fees could be spent resolving or litigating the issue in a contentious divorce.
Co-mingling assets can also cause a separate asset to become a marital asset. If the spouse owning the asset voluntarily allows the other spouse to become an owner of the asset, it is likely to become a marital asset. Using the example above, after Beth receives the farm, she adds Andy’s name to the deed as co-tenant. Because she voluntarily added Andy to the deed and gave him half ownership, Beth has likely changed the property from a separate to a marital asset.
Another example might be as follows:
Beth receives a $100,000 inheritance from her grandmother. Beth deposits the money in a bank account owned by both her and Andy.
By co-mingling the inherited money with other money owned jointly with Andy, Beth has probably made the $100,000 inheritance a marital asset. If Beth would have deposited the money in an account owned only by her, the inheritance would have remained a separate asset. While co-mingling does not automatically make an asset become marital property, the spouse owning the asset should avoid co-mingling if wanting to keep the asset separate.
Assets acquired during a marriage will almost always be considered marital property. This is true even if one spouse provided little or no contribution towards the acquisition of the asset. Ohio law considers marriage to be a partnership regardless of the contribution of the spouses. For example, farmland purchased during the marriage will be a marital asset even if only one spouse operates the farm and the other spouse is not involved with the farmland or farming operation.
Prenuptial and Postnuptial Agreements
A prenuptial agreement can help alleviate the issues with marital assets. This type of agreement entered into prior to marriage designates what assets each person is bringing to the marriage, what assets will be separate, and what assets will be marital. Especially for people who have accumulated some wealth prior to marriage, a prenuptial agreement is a good option to avoid future disputes regarding the nature of assets in a marriage and potential risks to farmland.
To be valid and enforceable, a prenuptial agreement should:
- Be in writing and signed by the parties;
- Be prepared, reviewed and executed long before the marriage;
- Provide each spouse’s assets, including values;
- Be reviewed by separate attorneys representing each spouse.
Prenuptial agreements can become outdated, especially when marriages last many years. A married couple who enters into a prenuptial agreement when they are 25 may have very different assets and goals when they are 65. Until recently, married couples in Ohio were stuck with their prenuptial agreement regardless of how unfair or obsolete the agreement had become. Recently, legislation was adopted to allow for postnuptial agreements.
A postnuptial agreement is similar to a prenuptial agreement in that it identifies which assets are to remain outside of the marriage and what assets are considered joint, marital assets. A postnuptial agreement is signed sometime after marriage begins. There are no term requirements for a postnuptial agreement – it can be entered into shortly after marriage or many years after marriage.
For a prenuptial agreement to be terminated or amended or for a postnuptial agreement to valid, the law requires the following:
- The agreement be in writing and signed by both spouses,
- The agreement is entered into freely without fraud, duress, coercion or overreaching,
- There was full disclosure, or full knowledge, and understanding of the nature, value and extent of the property of both spouses,
- The terms do not promote or encourage divorce or profiteering from divorce.
For people who are considering getting remarried or for those that are already remarried, a prenuptial or postnuptial agreement should be considered. These agreements can establish how assets are to be divided in the event of a divorce and perhaps relieve some worries regarding farm transition planning. Prenuptial and postnuptial agreements should be drafted in consultation with an attorney.
For more information on farm transition strategies to address second marriage issues, see the new bulletin FARM TRANSITION PLANNING STRATEGIES FOR SECOND MARRIAGES available at farmoffice.osu.edu.
In this rendition of the Ag Law Harvest, we bring you some contracts! Over the course of February, there were three Ohio cases that demonstrate the importance of having a written contract, the ability to form a contract through your actions, and the need to make sure specific terms within a contract can be enforceable.
Handshake Agreements Can Be a Double-Edged Sword.
In this case we are introduced to two brothers (the “Plaintiffs”), who were equal partners in a farming business that included buying and selling livestock. As part of their business, Plaintiffs sold cattle to Defendants between 2009 and 2017. The parties did not have a formal contract in place and conducted business on a “handshake agreement.”
The Plaintiffs claim that the Defendants acted as intermediaries, purchasing heifers from them, and reselling them to other dairy farmers or at market. According to Plaintiffs, it was customary for the Defendants to pay for the cattle immediately upon delivery or within 30 days. However, around 2016, Defendants allegedly wrote checks for seven transactions but asked Plaintiffs not to cash them due to insufficient funds. Plaintiffs assert that Defendants never honored these checks, resulting in an outstanding amount of $128,950. Despite Plaintiffs' attempts to collect, Defendants denied owing any money, arguing that Plaintiffs were fully paid through later payments or third-party transactions. This disagreement led to the filing of Plaintiffs' lawsuit.
In February of last year, the trial court granted Plaintiffs summary judgment and awarded them $120,150. Defendants appealed the trial court’s decision arguing that summary judgment was inappropriate because whether or not Defendants owed Plaintiffs any money was in dispute. The appellate court agreed.
In its opinion, the appellate court stated that it was clear that “the trial court weighed the credibility of the parties. . .” The appellate court also made it clear that “[s]ince resolution of the factual dispute will depend, at least in part, upon the credibility of the parties or their witnesses, summary judgment in such a case is inappropriate.” Furthermore, the court noted that because there was no written contract between the parties, the only evidence to demonstrate the particulars and common practices of the handshake agreement comes from the personal knowledge of the Plaintiffs and Defendants. Therefore, because both parties disagree as to whether Defendants owe any money to Plaintiffs, the trial court should not have ruled in favor of Plaintiffs on summary judgment. Consequently, the case is remanded to the trial court for further proceedings, potentially including a trial.
This case shows us two things, the importance of having a written contract and the importance of recordkeeping. The parties to this lawsuit must now argue that their recollection of events is the true and accurate recollection. Both parties will likely be judged by a group of jurors and one party is bound to be out a large sum of money. A written contract could have avoided much of the dispute by including language about the process for payment, record keeping requirements, and other terms and conditions that would have governed the relationship of the parties. Now, because there is no written contract, this case becomes a case of “he said-he said.”
Implied Contracts Can Be Formed Based on a Tacit Understanding.
The second case demonstrates that the surrounding facts and circumstances can create an implied contract even when no signed contract exists. In this case Plaintiff, a residential construction company, provided the Defendant-homeowners with two written quotes for roofing and other work at their home. The quotes included various services and specified a 30% upfront payment with the remainder due upon completion of the work. Although the Defendants did not sign or date the quotes, they paid Plaintiff $6,815, which was stated to be a 30% prepayment for the total quoted amount of $22,717.
After completing the roof, Plaintiff submitted a bill to the Defendants for the balance due on the roof. The Defendants took issue with the invoice for two reasons: (1) the price did not match the quotes, and (2) Defendants believed that payment would not be due until all items on both quotes were completed. Ultimately, the parties parted ways and Defendants asked Plaintiff to not return to their home leaving the remainder of the work listed on the two quotes uncompleted.
Plaintiff sued the Defendants alleging breach of contract, seeking payment for the finished roof. The matter proceeded to a bench trial where the trial court found that the two quotes and the 30% payment operated as an implied contract and not an express one. The trial court also held that Plaintiff did partially perform the agreement and should be paid for the roof installation.
The Defendants appealed, arguing that Plaintiff could not recover in this case because Plaintiff only alleged a breach of an express contract and did not seek recovery for breach of an implied contract. The appellate court disagreed. The court noted that under Ohio law there are three types of contracts: (1) express contracts, (2) implied in fact contracts, and (3) implied in law contracts.
The court went on further to explain when the three different kinds of contracts are created. An express contract is created when there is an offer and acceptance of written terms. An implied in fact contract requires a “meeting of the minds” and that “is shown by the surrounding circumstances which [make] it inferable that [a] contract exists as a matter of tacit understanding.” Lastly, with an implied in law contract “there is no meeting of the minds” but the law will create civil liability for a person in receipt of benefits which they are not justly entitled to retain.
The appellate court held that the trial court correctly found there was no express contract between the parties, rather there was an implied in fact contract. The court reasoned that the two written quotes and the 30% prepayment created a tacit understanding amongst the parties. Furthermore, the court concluded that because an implied contract existed amongst the parties, Plaintiff is entitled to recover for the work they did do. Lastly, the trial court noted that Defendants should have been aware that Plaintiff’s breach of contract claim would not only apply to express contracts but also to implied contracts.
Noncompetition Agreement Found to be Unenforceable.
In our final case we are introduced to a salesman that was being sued by his former employer for breach of a non-competition agreement (the “NCA”) after going to work for a direct competitor. Plaintiff, Kross Acquisition Co., LLC (“Kross”), is a basement waterproofing contractor. Kross provides service in southwestern Ohio, southeastern Indiana, and northern and eastern Kentucky. Kross’s former employee Roger Kief left to work for Groundworks Ohio, LLC (“Groundworks”). Groundworks is engaged in substantially the same business as Kross and serves the entire state of Ohio as well as Kentucky, Indiana, and many other states.
Kief began working for Kross in 2017 and signed the NCA. The NCA prohibits Kief from disclosing confidential information and from working anywhere in Ohio or Kentucky for any competing company for a period of two years after leaving Kross. In February of 2022, Groundworks offered Kief an identical position with a start date of March 2022.
Kross filed lawsuit against Kief for failing to adhere to the NCA. The trial court found the NCA unenforceable and granted summary judgment in favor of Kief. Kross filed an appeal arguing that the trial court erred when it found the NCA unenforceable. The appellate court disagreed. The court noted that the following factors are used to analyze whether a noncompetition agreement can be enforceable:
1. Time and space limitations: Whether the agreement specifies a reasonable duration and geographic scope for its restrictions.
2. Sole contact with the customer: Whether the employee is the primary or sole contact with the employer's customers.
3. Confidential information or trade secrets: Whether the employee has access to and possesses confidential information or trade secrets of the employer.
4. Limitation of unfair competition: Whether the covenant aims to prevent unfair competition or if it overly restricts ordinary competition.
5. Stifling of inherent skill and experience: Whether the agreement unreasonably stifles the employee's inherent skill and experience in the industry.
6. Disproportionate benefit to the employer: Whether the benefit gained by the employer from the agreement outweighs the detriment imposed on the employee.
7. Bar on sole means of support: Whether the agreement bars the employee's only means of earning a livelihood.
8. Development of restrained skills during employment: Whether the skills restricted by the agreement were actually developed during the employee's tenure with the employer.
9. Incidental nature of forbidden employment: Whether the forbidden employment is merely incidental to the employee's primary employment with the employer.
Based on the foregoing factors, the court found that the geographic and time limitations “exceeded what is necessary to protect Kross’s legitimate business interests.” Therefore, the appellate court found the NCA unenforceable.
Second marriages present unique challenges for farm transition planning. This is especially true when the second marriage occurs later in life and the spouses have accrued significant assets and/or have children from prior marriages. The spouses in a second marriage obviously want to help provide for each other but may have a competing interest of providing for their children but not necessarily stepchildren. Without good planning, it is possible that farm assets will end up with a spouse or stepchildren who were not involved in the farming operation.
One of the challenges with second marriages occurs when one or both spouses have children from a prior marriage. The spouses usually intend to provide adequate income to the surviving spouse upon the death of the first spouse to pass away. Also, the spouses will usually want some or all of their assets to ultimately go to their children, not their spouse’s children. So, the issue becomes, how to establish a plan to take care of the surviving spouse while ensuring the deceased spouse’s assets go to their own children?
Consider the following example, a typical second-marriage, farm transition scenario:
Mark and Mindy each have two children from previous marriages. Mark has farmed his entire adult life and built a large farming operation prior to marrying Mindy. Mindy has two children and is not involved in the farming operation. Mark’s two children plan to take over the farming operation. If Mark dies before Mindy, he wants to make sure Mindy has adequate income for the rest of her life. However, he wants his assets to be inherited by his children and not Mindy’s children.
Let’s first look at what poor planning might look like. If Mark and Mindy do not have an estate plan or a simple estate plan where everything goes to the surviving spouse then to the children, Mindy’s children could end up with some or all of Mark’s assets. In this scenario, if Mark dies first, all of his assets will go to Mindy. At that point, Mindy will have total control of the assets and could sell them all or leave them all to her children. For second marriages, no plan or a simple plan is usually not adequate to meet the goals of a farm transition plan.
The better plan is to use a trust. A trust can hold the deceased spouse’s assets for the surviving spouse’s life, thus providing income. Then, at the surviving spouse’s death, the assets are distributed to the deceased spouse’s children. The surviving spouse never has ownership of the deceased spouse’s trust assets, so the assets are never in danger of ending up with the surviving spouse’s children.
Continuing the previous example, Mark establishes a trust with the following terms:
“Upon my death, my farm assets shall be held in trust for the life of Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. Upon the death of Mindy, my Trustee shall distribute the assets to my children.”
These trust provisions will meet Mark’s goals of providing for Mindy while having his children eventually inherit his assets.
Sometimes we may want some assets to go directly to the deceased spouse’s children at death and some held in trust. This is very common for farm plans. When children will be taking over the farming operation, we may not want to tie up the operating assets in trust but instead have those go directly to the farming children. To implement this plan, the trust may have provisions similar to the following:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions allow the farming operation to be inherited directly by Mark’s children, allowing a seamless transfer of the farming operation. The farmland is held in trust and leased by the children. The rental income from the farmland is provided to Mindy for the remainder of her life.
A third variation provides some assets outright to the children, some assets outright to the surviving spouse and some assets held in trust. This type of plan might be used when the spouses wish for some assets to go directly to the surviving spouse, without being held in trust. This is often done with cash or other financial accounts to provide immediate and freely available money to the surviving spouse. Trust provisions reflecting this type of plan may be as follows:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. My Trustee shall distribute my First National Bank account and Acme Financial Account to Mindy, outright and free of trust. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions provide cash to Mindy for which she has immediate access and control. The farm assets continue to go directly to the children so that they can continue the farming operation and the farmland is held in trust to provide income for Mindy.
In conclusion, a trust can be designed with a great deal of flexibility and creativity. The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children. A simple transition plan or no plan at all can result in some or all the deceased spouse’s assets being inherited by the surviving spouse’s children. Trusts are often an important component of a farm transition plan for second marriage scenarios.
In Part 2, we will discuss prenuptial and postnuptial agreements.
Tags: second marriages, farm transition planning
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Are you a baker ready to sell your home-baked goods? Are you a farmer looking for value-added opportunities for crops you’ve grown or livestock you've raised? Are you an entrepreneur aiming to use local agricultural products to make value-added foods?
If you’ve answered yes to any of these questions, then the new Food Business Central online course can equip you with knowledge and strategies to launch a successful farm-raised or home-based food business in Ohio.
Navigating food regulations, establishing a new business, and applying best practices for food safety can be challenges for food entrepreneurs. This course is designed to serve as a centralized hub to connect you to information and resources regarding all types of food products you might want to make and sell.
We're part of the teaching team that created the course, which also includes Emily Marrison, OSU Family & Consumer Sciences Educator, Nicole Arnold, OSU Food Safety State Specialist,and Garth Ruff, OSU Field Specialist in Beef Cattle and Livestock Marketing. Our goal is to help food business entrepreneurs start off organized, safe, compliant, and strategic. The self-paced course asks key questions with considerations to explore and actions to take on your journey to start a food business. The cost of the course is $25, and registration is at go.osu.edu/foodbusinesscentral .
The Food Business Central online course was partly funded through North Central Extension Risk Management Education, whose goal is to help farmers and ranchers effectively manage risk in their operations. This assistance comes from the United States Department of Agriculture through the National Institute of Food and Agriculture.
Tags: food business, cottage foods, home bakery, Beef, poultry, eggs, food law
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Co-authored by Glen Arnold, OSU Extension Field Specialist in Manure and Nutrient Management
This week’s snow was a reminder that we’re still in the middle of winter in Ohio, with more cold weather yet to come. Winter weather is a challenge for those who handle manure, and it’s equally challenging to know the laws for applying manure on frozen and snow covered ground. Those laws vary according to several important factors: whether ground is frozen or snow covered, whether a farm is operating under a permit, and the geographical location of the land application. Here’s a summary of the different winter application rules and standards in effect this winter.
What is frozen ground? Ohio’s rules don’t define the term frozen ground, but generally, ground is considered frozen if you cannot inject manure into it or cannot conduct tillage within 24 hours to incorporate the manure into the soil.
Farms with Permits. Farms with permits from the Ohio Department of Agriculture (ODA) or Ohio EPA operate under different rules than other manure applications in Ohio, and they cannot apply manure in the winter unless it is an extreme emergency. Movement to other suitable storage is usually the selected alternative. Several commercial manure applicators have established manure storage ponds in recent years to help address this issue.
Applications in the Grand Lake St. Marys (GLSM) watershed. There is a winter manure application ban from December 15 to March 1 for the GLSM watershed, 8ODA has the authority to allow an application, but that is not likely during the winter period. After March 1, applications on frozen ground or ground covered in more than one inch of snow may occur only if the manure is injected or incorporated within 24 hours of surface application. The rule is in OAC 901:13-1-11.
Applications in the Western Lake Erie Basin (WLEB) watershed. In those parts of western Ohio that are in the WLEB watershed, below, the House Bill 1 restrictions established in 2016 are still in effect. The law prohibits any manure application on frozen ground. Applications are permissible on snow-covered soil if the manure is injected into the ground or incorporated within twenty-four hours of surface application. The law is in ORC 939.08.
Other parts of Ohio. It’s important to note that the NRCS Nutrient Management Conservation Practice Standard Code 590 (NRCS 590) now applies statewide in Ohio (but does not replace the GLSM and WLEB restrictions). NRCS 590 was revised in 2020 and states that the surface application of manure on frozen and snow-covered soil is not acceptable unless it is an emergency. An emergency is a temporary situation created by unforeseen causes and only after all other options have been exhausted. In this emergency situation only, limited quantities of liquid manure may be applied to address manure storage limitations only until non-frozen soils are available for manure application. The Ohio Department of Agriculture will enforce NRCS 590 in counties outside of GLSM and WLEB only if there is a manure discharge from the field. If a citation is issued for a discharge, liability for the discharge will be based on the 590 standards.
All applications of liquid manure to frozen and snow-covered soils must be documented in the producers’ records and must be applied in accordance with ALL of the following criteria:
- The rate of application shall not exceed the lesser of 5,000 gallons/acre or P removal for the next crop.
- Applications are to be made on land with at least 90% surface residue cover (cover crop, good quality hay or pasture field, all corn grain residue remaining after harvest, all wheat residue cover remaining after harvest).
- Manure shall not be applied on more than 20 contiguous acres. Contiguous areas for application are to be separated by a break of at least 200 feet.
- Applications should be in areas of the field with the lowest risk of nutrient transport such as areas furthest from streams, ditches, waterways, and with the least amount of slope.
- Application setback distances must be a minimum of 200 feet from grassed waterways, surface drainage ditches, streams, surface inlets, water bodies and 300 feet from all wells, springs and public surface drinking water intakes. This distance may need to be increased due to local conditions.
- For fields exceeding 6% slope, manure shall be applied in alternating strips 60 to 200 feet wide generally on the contour, or in the case of contour strips on the alternating strips.
Stockpiling. For farmers with solid manure, stockpiling could be an option. There are two different types of stockpiles: short-term and long-term.
The short-term stockpile standards are in NRCS Field Office Technical Guide 318, Short Term Storage of Animal Waste and Byproducts Standard (“NRCS 318”). Essentially, short- term stockpile is a pile of solid manure being kept temporarily in one or more locations. It is considered a temporary stockpile as long as the pile is kept at the location for no more than 180 days and stockpiled in the field where the manure will be applied. Setback distances listed in NRCS 318 should be followed to prevent discharge to waters of the state. There are multiple recommendations listed in NRCS 318 that speak to location, timing, and preventative measures to use while stockpiling the manure short term.
The long-term stockpile standards are in NRCS Field Office Technical Guide 313 Waste Storage Facility Standard (“NRCS 313”). A long-term stockpile is directly related to solid manure being piled and kept at a facility for longer than 180 days at a permanent location. It is recommended that all permanent long term storage stockpiles follow the guidelines in NRCS 313 with the utilization of a stacking facility and the structural designs of fabricated structures. A stacking facility can be open, covered or roofed, but specific parameters should be in place to prevent manure runoff from the site—these recommendations are in NRCS 313.
Check with your SWCD office. Regardless of where you are in Ohio, it’s probably best to check with your county Soil and Water Conservation District office before considering winter manure application in Ohio. The rules have changed, and you should become aware of those that affect your operation in your area.
Tags: manure, land application, NRCS 590, western Lake Erie basin, grand lake st marys, nutrient management
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The U.S. Department of Labor (“DOL”) has introduced a new independent contractor rule, aiming to provide clarity and guidance for both employers and workers. The classification of workers as employees or independent contractors has become increasingly complex in recent years, resembling an endless carousel ride for many businesses, particularly those in the agricultural sector that frequently hire part-time and seasonal help. The DOL's new rule, published under the Fair Labor Standards Act of 1938 (“FLSA”), seeks to put an end to this perpetual uncertainty surrounding worker classification once and for all.
Background
The FLSA establishes federal standards for overtime pay, minimum wage, and child labor. Ohio law explicitly aligns its interpretation of the term "employee" with that of the FLSA for wage and hour purposes. For the FLSA to apply to an agricultural employer, an employment relationship must be established. This entails determining whether a worker is classified as an employee or an independent contractor.
However, the FLSA itself is silent on how to exactly distinguish an independent contractor from an employee. So, for years the DOL relied on the court system to develop the standard for determining whether a worker should be classified as an employee or an independent contractor. The court system developed an “economic realities test” to help determine whether an employment relationship exists with a worker. The economic realities test is a totality of the circumstances test – which means all factors should be weighed evenly – and relies on six factors. These factors are:
- The nature and degree of control over the work;
- The individual’s opportunity for profit or loss;
- The permanency of the work relationship;
- Whether the work being performed is an integral part of the Employer’s business;
- The worker’s investment in facilities and equipment; and
- Skill and initiative.
For decades courts and the DOL have applied these factors, or a similar variation of them, to help define employee and independent contractor under the FLSA. However, courts across the country have applied the factors inconsistently and have given certain factors different degrees of weight.
2021 Independent Contractor Rule
In 2021, the DOL sought to resolve the inconsistent and subjective application of the factors by publishing a formal independent contractor rule (“2021 IC Rule”). This 2021 IC Rule marks the DOL’s first attempt to establish a standardized test for distinguishing between independent contractors and employees.
The 2021 IC Rule used a variation of the economic realities test but gave greater weight to “two core factors” rather than applying each factor equally. The “two core factors” are:
- The nature and degree of control over the work; and
- The individual’s opportunity for profit or loss.
In the 2021 IC Rule, the DOL stated that the two core factors “are the most probative as to whether or not an individual is an economically dependent ‘employee’ . . . and each therefore typically carries greater weight in the analysis than any other factor.” The DOL also stated that if the two core factors “both point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification.” This is because, according to the DOL, the other factors are less probative and may not be probative at all and are “highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.”
In other words, the DOL established a rule that looked at two core factors to determine the economic reality of the relationship between a worker and an employer. Thus, under the 2021 IC Rule, the economic realities test looked something like this:
- Core Factors
- The nature and degree of control over the work; and
- The individual’s opportunity for profit or loss.
- Other Factors
- The permanency of the work relationship;
- Whether the work being performed is an integral part of the Employer’s business;
- The worker’s investment in facilities and equipment;
- Skill and initiative; and
- Any additional factors
New 2024 Rule
The carousel ride does not stop at the 2021 IC Rule, unfortunately. In January of 2024, the DOL published another rule, repealing the 2021 IC Rule and reverting back to a totality of the circumstances analysis of the economic realities test in which there are no core factors, and all factors are weighed evenly. The new rule, effective March 11, 2024, evaluates the following factors:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the employer’s business;
- Skill and initiative; and
- Any additional factors.
Below is a more detailed analysis of the above seven factors.
- Opportunity for profit or loss depending on managerial skill. This factor assesses whether a worker possesses managerial abilities that impact their capacity to generate profit or incur losses. Relevant considerations include:
- Negotiating pay for services rendered
- Having the freedom to accept or decline jobs
- Choosing the order or time in which jobs are completed
- Engaging in marketing, advertising, or other business expansion efforts
- Making decisions regarding hiring, purchasing materials and equipment, or renting space
If a worker lacks the opportunity for profit or loss, they are likely an employee.
- Investments by the worker and the employer. This factor examines whether a worker’s investments are capital or entrepreneurial in nature. Costs incurred by a worker to perform their job, like purchasing tools or equipment, are not indicative of entrepreneurial investment and suggest employee status. Conversely, investments supporting an independent business, such as expanding capabilities, reducing costs, or broadening market reach, suggest entrepreneurial investment and independent contractor status.
- Degree of permanence of the work relationship. If the work relationship is indefinite in duration or continuous, the worker is probably an employee. If the work relationship is definite in duration, non-exclusive, project-based, or sporadic because the worker is in business for himself or herself and marketing his or her services or labor to multiple entities, then the worker is probably an independent contractor.
- Nature and degree of control. This factor assesses the level of control the employer exercises over the work and economic aspects of the relationship. Greater control by the employer suggests and employee relationship, while more control by the worker indicates independent contractor status. Factors include the employer setting the worker’s schedule, supervising work performance, limiting the worker’s ability to work for others, using technological means for supervision, reserving the right to supervise or discipline workers, determining who sets the prices or rates for services provided by the worker, and the marketing of the services or products that the worker provides.
- Extent to which the work performed is an integral part of the employer’s business. This factor evaluates whether the work performed is essential to the employer's business operations. It focuses on the function performed rather than the individual worker. If the service provided is indispensable for the employer's functioning, it favors an employee classification. Conversely, if the work is not crucial to the employer's core business, it leans towards independent contractor status.
- Skill and initiative. The skill and initiative factor evaluates whether the worker utilizes specialized skills and demonstrates entrepreneurial initiative in their work. If the worker lacks specialized skills or relies on employer-provided training, it suggests employee status. Conversely, if the worker brings specialized skills and exhibits business-like initiative, they are likely an independent contractor.
- Any Additional Factors. Additional factors may be relevant in determining the status of a worker. These additional factors may indicate whether the worker operates as an independent business entity or is economically reliant on the potential employer for work opportunities.
Under the new rule, no one factor is dispositive of determining whether a worker is an employee or independent contractor. For example, a landscaper may perform work that does not require specialized skills, but application of the other factors may demonstrate that the landscaper is an independent contractor (e.g. the landscaper may determine the price charged for the work, make decisions affecting opportunity for profit or loss, determine the extent of capital investment, work for many clients, and/or perform work for clients for which landscaping is not integral).
What does it all mean?
In announcing the new rule, the DOL said “[i]t is the Department’s obligation to administer and enforce the FLSA to ensure that workers who should be covered under the [FLSA] are properly classified as employees.” Many seem to suggest that this new rule is more employee friendly and makes it easier to classify a worker as an employee than the 2021 IC Rule.
The new rule, however, only affects a worker’s classification under the FLSA. The same standard does not apply to other federal laws, like the Internal Revenue Code. Nevertheless, those standards used in other federal laws may look eerily similar to the standard used here.
Lastly, the carousel ride may not yet be over. There are already legal challenges to the new rule that might put the DOL’s hopes of ushering in a new period of clarity at risk (See Warren v U.S. Dep’t of Labor, 2:24-cv-00007, N.D. Ga.).
Consequences of Misclassifying Workers.
Misclassifying a worker can come with harsh consequences. An employer that misclassifies a worker may be required to pay unpaid wages owed to the employee, civil money penalties, and/or attorneys’ fees associated with litigation. Furthermore, employers may be held criminally and/or civilly liable under other federal and state statues for misclassifying a worker. It is vital that agricultural employers take classification of a worker seriously because all it takes is one disgruntled misclassified worker or workplace injury to a misclassified worker to seriously jeopardize an operation.
Sources:
Independent Contractor Status Under the Fair Labor Standard Act, 86 CFR 1168
Employee or Independent Contractor Classification Under the Fair Standards Act, 89 CFR 1638
A federal court decision last week vacated the registrations of dicamba products XtendiMax, Engenia, and Tavium for over-the-top applications on soybean and cotton crops, making the use of the products unlawful (see our February 12, 2024 blog post). The decision raised immediate questions about whether the U.S. EPA would exercise its authority to allow producers and retailers to use "existing stocks" of dicamba products they had already purchased. Yesterday, the U.S. EPA answered those questions by issuing an Existing Stocks Order that allows the sale and use of existing stocks of the products that were packaged, labeled, and released for shipment prior to the federal court decision on February 6, 2024. For Ohio, the EPA's order allows the sale and distribution of existing stocks until May 31, 2024 and the use of existing stocks until June 30, 2024.
Here is the EPA's order:
- Pursuant to FIFRA Section 6(a)(1), EPA hereby issues an existing stocks order for XtendiMax® with VaporGrip® Technology (EPA Reg. No. 264-1210), Engenia® Herbicide (EPA Reg. No. 7969-472), and A21472 Plus VaporGrip® Technology (Tavium® Plus VaporGrip® Technology) (EPA Reg. No. 100-1623). This order will remain in effect unless or until subsequent action is taken. The issuance of this order did not follow a public hearing. This is a final agency action, judicially reviewable under FIFRA § 16(a) (7 U.S.C. §136n). Any sale, distribution, or use of existing stocks of these products inconsistent with this order is prohibited.
- Existing Stocks. For purposes of this order, “existing stocks” means those stocks of previously registered pesticide products that are currently in the United States and were packaged, labeled, and released for shipment prior to February 6, 2024 (the effective date of the District of Arizona’s vacatur of the dicamba registrations). Pursuant to FIFRA section 6(a)(1), this order includes the following existing stocks provisions:
a. Sale or Distribution by the Registrants. As of February 6, 2024, sale or distribution by the registrants of these products is prohibited, except for the
purposes of proper disposal or to facilitate lawful export.
b. Sale or Distribution by Persons other than the Registrants. Persons other than the registrants, including but not limited to co-ops and commercial distributors, who are already in possession of these products as of February 6, 2024, may sell or distribute these products until the end date for sale and distribution of existing stocks identified in Table 1; except that such persons may distribute these products after the date identified in Table 1 solely for purposes of proper disposal, lawful export, or to facilitate return to the manufacturer.
c. Distribution or Sale by Commercial Applicators. Notwithstanding paragraph 2.b, for the purpose of facilitating use no later than the relevant end date for use of existing stocks identified in Table 1, distribution or sale of existing stocks of these dicamba products that are in the possession of commercial applicators is permitted
until the relevant end date for use in Table 1.
d. Use of Existing Stocks. As of the date of this order, use of XtendiMax, Engenia, and Tavium is permitted until the relevant date identified in Table 1, provided that such use of existing stocks is consistent in all respects with the previously approved labeling accompanying the product.
What happens next?
The Existing Stocks Order addresses dicamba over-the-top applications for the current growing season, but it's not the end of the dicamba controversy. One potential next step could come from the petitioners in the federal case that vacated the dicamba product registrations, Center for Biological Diversity v. EPA. The petitioners could file a motion asking the Court to review the Existing Stocks Order--an action that took place in the previous dicamba cancellation case, National Family Farm Coaltion v. EPA (Monsanto). The petitioners in that case unsuccessfully sought an Emergency Motion to enforce the vacatur and hold the EPA Administrator in contempt for issuing an Existing Stocks Order. A second next step that may yet play out is an appeal of the recent federal decision by the EPA, which has 30 days from the February 6 decision date to file an appeal. At least one thing is clear at this point: the long-term future of dicamba over-the-top products will continue to exist in a state of uncertainty.
Tags: dicamba, EPA, pesticides, herbicides, FIFRA, existing stocks
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As we enter the 2024 crop season, it's time for an update on economic and legal information that affects Ohio farmland leasing. Join our Farm Office team members on March 1, 2024 from 10 a.m. until noon for a special edition of our Farm Office Live webinars. In the Ohio Farmland Leasing Update, we'll share the latest information on these leasing topics:
- Cash Rent Outlook – Key Issues and Survey Data
- Negotiating Capital Improvements on Leased Farmland
- Dealing with Conservation Practices in a Farmland Lease
- Executing and Recording Farm Leases
- Legal updates and new Farmland Leasing Resources
Our speakers for the webinar include:
- Barry Ward, Leader, OSU Production Business Management
- Peggy Hall, Attorney, OSU Agricultural & Resource Law Program
- Robert Moore, Attorney, OSU Agricultural & Resource Law Program
There is no cost to attend the Ohio Farmland Leasing Update, but registration is necessary unless you're already registered for our Farm Office Live webinars. To register, visit go.osu.edu/register4fol.
Tags: farm lease, farmland leasing, Ohio farmland leasing update
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A federal district court in Arizona has vacated the registrations for dicamba products XtendiMax, Engenia, and Tavium, finding that the U.S. EPA violated pesticide registration procedures when it approved the product registrations in 2020. As a result of the decision in Center for Biological Diversity v. EPA, the dicamba products are no longer legally authorized for use and application in the U.S. Although there will likely be appeal of the decision, the new ruling creates uncertainty over the use of dicamba products for the upcoming crop season.
History of the case
If the court’s ruling feels familiar, that’s because it is a repeat of a 2020 Ninth Circuit Court of Appeals decision in National Family Farm Coalition v. EPA (Monsanto). In that case, the court vacated the first “conditional” dicamba product registrations granted by the EPA in 2018. The court found that the EPA had “substantially understated” and failed to acknowledge the risks of dicamba’s volatility and its effects on non-users. The EPA then cancelled the product registrations in June of 2020, but allowed producers to use “existing stocks” of already purchased products to apply the products until July 31, 2020. The Ohio Department of Agriculture shortened that timeline in Ohio due to growing conditions within the state, prohibiting applications of dicamba after June 30, 2020.
Bayer, BASF, and Syngenta immediately revised the label application instructions and restrictions for their dicamba products and resubmitted their registration requests to the EPA. In October of 2020, the EPA granted the applications and issued “unconditional” five-year registrations for over-the-top applications (OTT) of the products on cotton and soybean crops. The EPA did not provide a notice and opportunity for the public to submit comments before it made the registration decision. The National Family Farm Coalition, Pesticide Action Network, Center for Food Safety, and Center for Biological Diversity filed the current lawsuit, claiming that the EPA violated federal law by granting the unconditional registrations without a notice and comment period.
The court’s reasoning in this case
EPA’s error. The primary basis for the court’s decision is the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), Section 136a(c)(4), which contains the notice and comment requirement for registration of a “new use” of a pesticide or herbicide. It states that the EPA:
“. . . shall publish in the Federal Register. . . a notice of each application for registration of any pesticide that contains any new active ingredient or if it would entail a changed use pattern. The notice shall provide for a period of 30 days in which any Federal agency or any other interested person may comment.”
FIFRA further states that a “new use” of a product means, in part, “any additional use pattern that would result in a significant increase in the level of exposure, or a change in the route of exposure, to the active ingredient of man or other organisms.”
The EPA took the position that it did not have to provide the FIFRA notice and a comment period because the 2020 registration requests were not applications for a “new use” since EPA had previously approved the products. The court strongly disagreed, however, emphasizing the previous court decision that had vacated those registrations because the EPA had failed to fully consider the risks of the products. The EPA’s conclusion that the 2020 registrations were not for a new use “is so implausible that the Court cannot ascribe it to be a mere difference in view,” the court stated. Stakeholders who would be affected by the dicamba registrations should have had an opportunity to “meaningfully weigh in during the decision-making process before EPA concluded whether OTT dicamba has unreasonable adverse effects on the environment,” said the court.
Remedy for the error. The court explained that upon finding an agency has violated federal law, the presumed remedy a court must grant is to vacate the agency’s action. The law requires that only in limited circumstances, when equity requires it, should a court remand without vacating an agency decision. There are two factors the law requires a court to review in determining the remedy: the seriousness of the agency’s error and the disruptive consequences of vacating the agency’s decision. The court’s next step was to review those two factors and determine whether it should remand the issue with or without vacating the dicamba registrations.
Examining the first factor, the court concluded that the EPA’s error was “very serious” because it was likely that, had the agency considered field studies, data, and other information that would have been submitted during the comment period, the EPA’s registration decision likely would have differed from the decision it made to grant the five-year unconditional registration. The history of the dicamba registrations were important to the court, and the judge noted that there had not been a notice and comment period for stakeholders who were opposed to approving dicamba products since 2016, when the EPA considered the original registration. The court reiterated a long list of field studies, incident reports, and data generated since 2016 that the agency could have considered had it provided a comment period. Noting that the EPA was “highly confident that control measures would eliminate dicamba offsite movement to only a minimal effect,” the court pointed to years of incident reports on dicamba offsite movement and concluded:
“This Court believes hearing from all stakeholders is likely to change the OTT dicamba registrations at least from unconditional to conditional, with data gathering requirements reinstated. Hearing from non-users of OTT dicamba may change the EPA’s circular approach to assessing costs for risks from OTT dicamba offsite movement. Instead of simply concluding there is no risk and, therefore, no costs to these stakeholders, EPA is likely to include the costs to these stakeholders when balancing the risks and benefits for OTT dicamba. Accordingly, the Court finds the EPA’s procedural error to unconditionally issue the “new use” 2020 dicamba registration, without notice and comment, was serious.”
The court then examined the second factor, the disruptive consequences of vacating the agency’s decision. The court recognized the benefits of dicamba products to the agricultural industry and that growers, through no fault of their own, would be in the difficult position of finding legal herbicides to protect their crops if the dicamba registrations were vacated. Nevertheless, the court agreed with the reasoning in the previous dicamba case, National Family Farm Coalition v. EPA (Monsanto), that the seriousness of the EPA’s failure to assess the risks and costs for non-users of dicamba warranted vacating the registration despite the disruptive consequences.
What happens next?
There are two issues to watch now in the wake of the court’s decision. First is whether the EPA will appeal the federal district court’s decision. The appeal would go the Ninth Circuit Court of Appeals, the same appellate court that reviewed the decision in the first dicamba appeal, National Family Farm Coalition v. EPA (Monsanto). If the EPA also requests a stay, the appeal would put the federal district court’s decision on hold.
If there is not an appeal, the second issue to watch for is how the EPA and state agencies will direct the use of existing stocks of dicamba products. The EPA could use its authority to allow continued use of existing stocks of dicamba products until a certain date, as it did in the previous case. If the EPA does issue an existing stocks order, states could also address the extent of existing stocks use within their borders, as Ohio did in the previous case.
Follow the Ohio Ag Law Blog for continued legal information about Center for Biological Diversity v. EPA and review the federal district court’s opinion through this link. Ohio growers should also refer to information from OSU’s Weed Science Extension Specialist, Dr. Allyssa Essman, available through OSU’s C.O.R.N. newsletter.
Tags: dicamba, EPA, center for biological diversity, bayer
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Barry Ward, Leader, Production Business Management
Large increases in the Current Ag Use Value (CAUV) of farmland throughout Ohio in 2023 has resulted in higher property taxes (some have seen significant increases) for farmland owners in 2024. Forty-one of Ohio’s eighty-eight counties will see property tax increases in 2024 due to higher CAUV. Several factors have led to this increase in ag use valuation.
The Current Agricultural Use Value (CAUV) Program is a differential real estate tax assessment program for owners of farmland. The program allows for the farmland parcels to be taxed according to their use value in agriculture (or their value related to income from agriculture) rather than the market value (defined as the value if the land were sold by a willing seller to a non-related willing buyer). To arrive at this “use value”, a formula is used that includes several variables to capitalize the net income from agricultural products.
Landowners with farmland and woodlands in Ohio are eligible to sign-up for the CAUV program through their county auditor’s office if they meet the requirements.
There are two paths for a parcel to qualify for the Current Agricultural Use Valuation (CAUV) Program. To qualify for CAUV, land must meet one of the following requirements during the three years preceding an application.
• Ten or more acres must be devoted exclusively to commercial agricultural use; or
• If under ten acres are devoted exclusively to commercial agricultural use, the farm must produce an average yearly gross income of at least $2,500.
Each of the approximately 3500 different soil types in Ohio is assigned a CAUV value each tax year. The value represents the expected net present value of an acre of land devoted solely to agricultural production for the dominant field crops in Ohio. To determine this value, an average of yields and prices for corn, soybeans, and wheat is used to determine gross income. Non-land costs are then subtracted from gross income for a measure of net income. Finally, this net income is divided by a capitalization rate based upon recent values of farm interest and equity rates.
Large increases in the Current Ag Use Value (CAUV) of farmland in Ohio in 2023 has resulted in higher property taxes (some have seen significant increases) for farmland owners in 2024. Counties are subject to an update in CAUV every 3 years so only a portion (41 of the 88 Ohio counties) have been updated in 2023 that have impacted 2024 property taxes. As counties see updated values only every three years, there is the opportunity for large changes as many farmland owners will see this year.
Several factors have led to much of this increase in ag use valuation. Higher crop market prices and increased crop yields included in the formula have been significant drivers in the higher current ag use values. Price increases have been substantial as compared to the prices used in the 2020 calculations.
Corn price increased 16%, soybean price increased 12% and wheat price increased 7.4%. Yields used to determine values for each soil type increased 7.3% for corn, 5.4% for soybeans and 7.2% for wheat as compared to the yields used for the 2020 calculations. These are substantial increases in both prices and yields in an historical context.
Low interest rates (capitalization rate) have also contributed to the increasing current ag use values as recent higher interest rates aren’t yet fully represented in the formula. The capitalization rate used in the formula in 2023 CAUV calculations was 8.0% as compared to the rate of 7.9% used in 2020, the last time these counties saw an update in CAUV. Recent higher interest rates will increase the capitalization rate (denominator in the CAUV calculation) in future years which will likely help to moderate current ag use values.
For a detailed look at the variables and calculations that are used to determine CAUV for farmland, access the Ohio Department of Taxation online publication “2023 Current Agricultural Use Value of Land Tables Explanation of the Calculation of Values for Tax Year 2023”.
The Ohio Department of Taxation annually publishes this explanation of the CAUV valuation method complete with the measures used to calculate CAUV and examples of the calculations for certain soil units for the present year. This year’s document is titled “2023 Current Agricultural Use Value of Land Tables Explanation of the Calculation of Values for Tax Year 2023” and is available online at:
https://tax.ohio.gov/government/real-state/cauv