Being Responsible for Your Independent Contractor’s Fraud

Recently, the Second District Court of Appeals in Ohio set some parameters for when a business may be held liable for the fraudulent conduct of its independent contractors. This represents an extension of potential liability risks, so any business that uses independent contractors ought to be aware of this issue.

In the case Auer v. Paliath (2013-Ohio-391), the court was forced to review a real estate transaction that ended poorly. Auer sued her real estate agent, Paliath, for fraud. Paliath, a local real estate agent, assisted Auer, a California resident, in the purchase of seven pieces of investment properties and gave advice regarding both the condition and the rentability of the units. Auer took Paliath at face value and purchased investment property worth several hundred thousand dollars. It turned out that Paliath’s representations were fundamentally wrong and Auer was damaged by relying on them.

The interesting part of this case is that Paliath’s real estate broker, Keller Williams Home Town Realty, Inc., was also found liable for Paliath’s tortious conduct. Traditionally, a business using independent contractors is not liable for the independent contractors’ actions. As is common in the industry, Paliath, as a real estate agent, was an independent contractor. In Ohio, agents need to be associated with a broker and Paliath was associated with the broker Keller Williams. However, the court noted, due to the nature of the relationship between the broker and the agent, it was legally impossible for the broker to shield itself completely from liability for the agent’s fraudulent conduct. Moreover, because the agent was supervised by the broker and there were representations that the agent worked for the broker, the court held that the broker was also liable.

It is easy to see this theory being extended from the real estate context to other business applications. When a business utilizes independent contractors but still exerts some degree of control over them, it is conceivable that a court may find the business liable for the conduct of those independent contractors. This is a separate analysis than one used for tax implications under the Fair Labor Standards Act.

Businesses that use independent contractors must be clear in the roles those contractors will play, as well as the degree of supervision provided. Failure to do so may result in unintended liability and financial loss.