Independent Contractors Vs. Employees: Legal Risks For Ohio Small Businesses
Small businesses in Ohio rely on independent contractors for their flexibility and ability to manage costs. However, it is crucial to understand the legal difference between independent contractors and employees so that you can avoid legal and financial penalties for your business.
Why worker classification matters
The type of category the employee falls under determines the amount of taxes, wages, and benefits. Employees are entitled to a number of benefits, such as minimum wage, overtime, unemployment, and workers’ compensation benefits. On the other hand, an independent contractor is someone who owns his/her own business and is responsible for his/her own taxes.
If a company classifies an employee as an independent contractor, the government can impose a penalty on the business.
Ohio and federal authorities evaluate classification
There is no single factor that determines if a worker is an independent contractor or an employee. The whole picture is used to make this decision. Some of the things that are considered are:
- Who controls the way the job is done
- Does the worker provide their own equipment
- How independent is the worker
- Is the work an integral part of the business
- How the worker is paid
Merely calling a worker an independent contractor does not make them so, and the actual working situation is much more important than the label used to describe it.
Risks of misclassification
Misclassification can also invite scrutiny from the IRS, Ohio Department of Taxation, and the United States Department of Labor. Some consequences include:
- Payment of back wages and overtime
- Unpaid payroll taxes
- Fines and penalties
- Lawsuit and class action risks
These costs can be devastating for small businesses and threaten their continued operation.
Key contract terms that help protect businesses
Although contracts cannot contradict the law, a good independent contractor agreement can help reduce risks. The agreement should cover:
- Scope of work and project-based compensation
- Confirmation of independent business status
- Taxes and insurance
- Limitations on control of day-to-day work
- Termination
Having these contracts reviewed by a lawyer will help ensure that they reflect how the business really works.
Best practices for Ohio small businesses
To minimize risk, it is recommended that businesses:
- Review their workers’ classifications regularly
- Do not treat contractors like employees in their day-to-day business operations
- Have documentation supporting their independent status
- Seek legal advice before expanding their contractor workforce
Reviewing workers’ classifications early on is far less expensive than defending an enforcement action or lawsuit later.
When to involve legal counsel
If your business works with independent contractors or is considering doing so, an attorney can help ensure you don’t trip over federal and state law.
Don’t wait for something to go wrong before seeking legal advice. Proactive steps now can protect your business, your finances, and your future.
Talk to a Columbus, OH, General Business Counsel Attorney Today
Kohl & Cook, Law Firm, LLC, represents the interests of Columbus businesses looking to hire independent contractors. Call our Columbus general counsel lawyers today to schedule an appointment, and we can begin discussing your next steps right away.
