What are the legal risks of misclassifying a contractor as an employee in Ohio?

Misclassification can result in back taxes, unpaid unemployment insurance, workers' compensation liability, wage claims, and potential audits or lawsuits from the IRS, Ohio BWC, and DOL.

Can I just use a contract to classify someone as a contractor?

No. A contract helps, but classification depends on the actual working relationship, not just the agreement. Courts look at how much control you exercise over the worker.

What should be included in an independent contractor agreement?

A valid contractor agreement should outline project scope, payment terms, tax responsibility, IP ownership, and make clear the contractor controls their own schedule and tools.

When is it better to hire an employee instead of a contractor?

Employees are better when you need long-term availability, oversight, team integration, or brand consistency. They also offer more legal rights and training investment opportunities.

Can I convert a contractor to an employee?

Yes. Many companies start with contractors and later transition them to employees. This requires new contracts, tax setup, benefit enrollment, and termination of the old agreement.

How does Ohio law treat contractor classification differently?

Ohio follows similar standards to federal law, but adds compliance duties related to unemployment insurance, workers’ comp coverage, and state income tax withholding.

What legal services can help me with worker classification?

You can work with a law firm to draft compliant independent contractor agreements, employment contracts, offer letters, IP assignments, and onboarding materials tailored to your business.

What are signs that a worker is really an employee, not a contractor?

If you set hours, provide tools, supervise closely, or treat them like staff, they're likely an employee. The more control you exert, the greater the risk of misclassification.

Does using a contractor protect me from payroll taxes?

Only if the classification is legally valid. Using a contractor to avoid taxes, when the worker functions like an employee, exposes you to audits and penalties.

Employee vs. Independent Contractor? What You Need to Know

Q: What is the difference between an employee and an independent contractor under Ohio law?

The key difference lies in control. Employees work under direct control of the business, while contractors control how the work is done. Ohio follows a multi-factor test based on behavior, financial arrangements, and the type of relationship.

Employee vs. Independent Contractor: Legal Differences, Business Risks, and How to Structure the Role You Actually Want

Hiring someone to work for your business isn’t just a question of “who”—it’s also a question of how. Whether you classify a worker as an employee or an independent contractor carries major legal, financial, and operational consequences. And for Ohio businesses, understanding those distinctions will save you time, money and headache.

In this article, we’ll break down the key differences between employees and contractors under Ohio and federal law, explain the risks of misclassification, and show you how to legally structure the relationship you actually want, while protecting your business along the way.

What’s the Legal Difference Between an Employee and an Independent Contractor?

The main distinction comes down to control. Under both federal standards (used by the IRS and U.S. Department of Labor) and Ohio law, a worker’s classification depends largely on how much control the hiring business exercises over the work and the manner in which it’s performed.

Employees:

Work under direct supervision or control of the business
Use tools or resources provided by the employer
Follow set hours and a defined schedule
May receive benefits (e.g., healthcare, PTO)
Are subject to withholding for income tax and payroll taxes (Social Security, Medicare, unemployment)
Are covered by labor laws such as wage and hour rules, workers’ compensation, and anti-discrimination laws

Independent Contractors:

Work independently and control how the work is completed
Often provide their own tools or workspace
Invoice the company for services rendered
Pay their own income and self-employment taxes
Are not covered by most labor and employment laws

Ohio courts and administrative agencies (like the Ohio Department of Job and Family Services) follow similar standards to the federal government, often using a multi-factor “right-to-control” test. No single factor is determinative, but taken together, they help identify the true nature of the working relationship.

Why Does Classification Matter?

Misclassifying a worker as a contractor when they’re legally an employee can lead to serious financial and legal consequences for your business.

Risks of Misclassification Include:

Back taxes, penalties, and interest owed to the IRS and Ohio Department of Taxation
Liability for unpaid workers’ compensation and unemployment contributions
Wage and hour claims under the Fair Labor Standards Act (FLSA) or Ohio Minimum Fair Wage Standards Act
Civil lawsuits for denied benefits, wrongful termination, or harassment (since contractors aren’t protected by the same labor laws)
Reputational harm and audits from the U.S. Department of Labor or the Ohio Bureau of Workers’ Compensation (BWC)

These consequences are especially painful for small businesses and startups—precisely the companies that most often rely on flexible, project-based workforces.

Can You Just Use a Contract to Define the Relationship?

No, at least not in isolation. While a written agreement is essential, courts and regulators look at how the relationship works in practice, not just what the paperwork says.

That said, a clear and well-drafted independent contractor agreement or employment agreement is your first and best tool to align your legal exposure with your intent.

For example, a valid contractor agreement should:

Define the project scope or deliverables
Specify payment terms (per project or milestone — not hourly wage)
Clarify that the contractor controls their schedule and methods
Avoid references to “employment,” “hiring,” or benefits
Include IP assignment and confidentiality clauses
State that taxes and insurance are the contractor’s responsibility

What About Using a Contractor to Avoid Payroll Taxes?

This is a common goal, but it’s not worth the risk if the contractor is functioning like an employee. Trying to save on payroll tax by using a contractor who works 9–5 at your office, under your manager’s supervision, with your equipment, is a fast-track to legal trouble.

If you want a long-term, consistent worker who reports to your team and takes direction, you need to classify them as an employee.

What Are the Benefits of Hiring Employees?

While employees require more regulatory compliance and financial investment, they also offer benefits in terms of:

Stability and availability
Long-term commitment and loyalty
Legal rights to assign tasks and control workflow
Brand consistency, training investment, and quality control

If you’re building a core team or want full oversight, hiring employees is often the better fit.

In Ohio, forming a clear employment relationship with offer letters, employment contracts, and IP ownership clauses helps secure your rights and clarify responsibilities. You should also explore employee handbooks, NDA/confidentiality clauses, and at-will employment disclaimers for best control of the employment environment.

When Are Independent Contractors the Better Option?

Contractors are ideal when:

You need specialized expertise for a short-term project
You want to avoid long-term commitments
You don’t have long-term needs for their skillset
The person works for other clients and manages their own business
You’re outsourcing a business function (e.g., graphic design, web development)

Contractors can offer cost savings and flexibility, but only when used properly.

To protect yourself:

Use project-specific contracts
Avoid setting fixed work hours
Refrain from giving training or tools
Don’t treat them like staff in your workplace

Can You Convert a Contractor Into an Employee (or Vice Versa)?

Yes. Businesses often convert contractors to employees as roles evolve, or adjust classifications to reflect reality. However, you must document the transition properly.

For example:

Use an employment agreement or offer letter when onboarding a contractor as an employee
Provide updated IP and confidentiality terms
Terminate the old contractor agreement in writing
Ensure tax and benefit enrollment is updated accordingly

Likewise, shifting someone to contractor status (say, after downsizing) requires a new contractor agreement, and you must stop exercising the same level of control over their work.

Does Ohio Law Add Any Special Requirements?

Ohio follows federal guidance closely but has its own compliance obligations. For example:

Unemployment Insurance (ODJFS): Ohio requires employers to pay into the unemployment system for employees, but not for independent contractors.
Workers’ Compensation (BWC): Contractors must carry their own workers’ comp insurance. If they don’t, the business may be liable, so it’s an important requirement to include in contractor agreements.
Tax Withholding: Employers must withhold and remit state income tax for employees.

Failing to properly classify a worker under Ohio law can result in state audits, tax penalties, or liability for unpaid benefits.

What Legal Tools and Resources Can Help You Get Classification Right?

At Daniel Ross & Associates, we help Ohio businesses protect themselves with the right legal framework from day one. Some tools we frequently provide include:

Independent contractor agreements that comply with state and federal law
Employment contracts with clear terms and IP protections
Confidentiality agreements to protect sensitive information and trade secrets
Intellectual property ownership agreements to maintain ownership of your work product
Offer letters and onboarding materials
Operating agreements that define roles among partners and members
Consulting agreements and flexible hiring documents for hybrid structures

Whether you’re expanding an established business or bringing on your first freelancer, aligning your legal documents with the working relationship is critical to your legal health — and your bottom line.

Conclusion: Structure It Right From the Start

Misclassifying workers isn’t just a paperwork issue, it’s a serious legal risk that can affect taxes, liability, and the ability to grow. If you’re hiring in Ohio, now’s the time to align your contracts, policies, and classifications with what you actually want from the role.

Need help creating dependable employee or contractor agreements? Contact Daniel Ross & Associates for tailored, flat-fee legal support that protects your business and sets you up for success.