• Business Law, Employment Law

    Posted on May 27th, 2010

    Written by Bryan


    Legislation was recently introduced in the Ohio General Assembly to revise the term “independent contractor”, as used for tax purposes. I propose that this bill is not favorable to Ohio Businesses and will result in higher taxes, and increased liability. In addition, the Federal Government will require that all people or companies to whom you pay $600 or more, must receive an IRS 1099. See CNN Money.

    House Bill 523 establishes a seven point test, summarized as follows:

    “Employee” does not mean an individual who performs services for an employer and to whom the following conditions apply:

    • (a) Individual control over how to complete performance;
    • (b) Customarily engaged in an independently established trade, occupation, profession, or business;
    • (c) Separate and distinct business entity from the employer;
    • (d) Incurs main expenses and has continuing or recurring business liabilities related to the service performed;
    • (e) Liability for breach of contract for failure to complete the service;
    • (f) An agreement, written or oral, express or implied, exists describing
      (1) the service to be performed,
      (2) the payment, and
      (3) the time frame for completion; and
    • (g) Services are outside of the usual course of business of the employer;

    This new rule would replace the current case law which uses the following simple test:

    “Whether one is an independent contractor or in service depends on the facts of each case. The principal test applied to determine the character of the arrangement is that if the employer reserves the right to control the manner or means of doing the work, the relation created is that of master and servant, while if the manner or means of doing the work or job is left to one who is responsible to the employer only for the result, an independent contractor relationship is thereby created.” Bostic v. Connor (1988), 37 Ohio St. 3d 144 (citing Marshall v. Aaron (1984), 15 Ohio St. 3d 48, 15 OBR 145, 472 N.E. 2d 335Richardson v. Mehan (1982), 69 Ohio St. 2d 52, 23 O.O. 3d 90, 430 N.E. 2d 927;Behner v. Indus. Comm. (1951), 154 Ohio St. 433, 43 O.O. 360, 96 N.E. 2d 403.)

    Asking for Litigation

    HB 523 add unnecessary confusion to this relationship which will require decades of court decisions to clarify. Because the test requires the contractor to meet all seven requirements, courts will not have the ability to identify independent contractors on a case-by-case basis. Failing to meet any one of the requirements will preclude a finding of independent contractor and make that person your employee, irregardless of strong facts showing a clear independent contractor relationship.

    First, the new law adds three tests (b), (c), and (g) requiring the contractor to be engaged in a business distinct from the employer. Who is going to decide whether your contractor is an independently established trade, occupation, or business? Hospitals traditionally hire some doctors as independent contractors to staff emergency rooms, radiology, and other departments,  yet, these doctors are in the same business as the hospital. General Contractors in construction hire sub-contractors on large projects to do everything from electrical and concrete, to carpentry and plumbing, but many of these general contractors perform the same tasks on other projects. Veterinarians frequently hire relief doctors to work during vacation days, but these doctors are in the exact same occupation, trade, and business. Each of these common examples fails test (g) because the workers are performing services in the usual course of business of the employer. Yet, in each of these instances, courts today would not hesitate to find that the workers are independent contractors because they have control over the methods of performance, and are primarily responsible for the result of their work.

    Second, this law, in section (f), requires you to have an agreement with the independent contractor which defines three specific terms: (1) the service to be performed, (2) the payment, and (3) the time frame for completion. While this is certainly good advice, and I would insist that my clients have a written agreement with every independent contractor covering these terms and more, failure to obtain agreement on these terms should not make every worker your employee. It is not uncommon for the extent of services or time frame to be open terms, or vague terms such as, “services as requested” to be paid “when complete”. It is unclear from this statute what minimum definition is required to establish an independent contractor agreement.

    Finally, it is unclear how this statute will impact existing case law. The concept of an independent contractor is important for tax purposes and liability for negligence. The test created here could be used by courts for both purposes.

    What are they thinking?

    Representative Debbie Phillips has said her purpose in sponsoring this bill is to “…create a more uniform definition of employee to be used by Ohio agencies in defining benefits and taxes. By working to ensure that all businesses are paying in to the system in a fair manner, we can help control the rising costs of some programs as well as create a more competitive and level field for honest businesses.”


    There are other ways to accomplish the goal of ensuring taxes are paid. Some alternatives:

    1. Require independent contractors to provide statements of tax and financial responsibility;
    2. Use the newly required 1099 filings to track compliance.
    3. Educate the public about the distinction with brochures, websites, television commercials, and print advertising.

    I urge you to write your Ohio representatives and ask them to vote no on H.B. 523.

    Find your representatives: Ohio House | Ohio Senate

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