Businesses nationwide are turning to the independent workforce to weather uncertain economic times and waves of layoffs. Small businesses frequently rely on freelancers and gig workers when they need extra help for a project or busy time of year.
However, just because a worker is temporary or agrees to be paid as an independent contractor doesn’t make them one under federal and Texas laws. Here’s what you need to know about Texas employment law regarding worker classification and how worker classification is defined in Texas.
How Does Texas Employment Law Define an Independent Contractor?
In Texas, the distinction between an employee and an independent contractor is based on the 20-factor test used by the IRS to determine if the work is independent or dependent on personal services. Worker classification is done on a case-by-case basis, with not all factors given equal weight or consideration. These are the factors Texas labor law examines:
Instructions
Employees are given specific instructions on when, where, and how to work. Independent contractors can receive some guidance and examples, but they have the freedom to choose how, when, and where they want to do the job.
Training
Not all workplaces offer training, but employees are typically trained by an owner, manager, or more senior employee. There may also be required training sessions or coursework. Independent contractors have their own licensing, education, and credentials and generally don’t receive training beyond onboarding new programs.
Integration and Reliance
Organizations rely on their employees for successful operations. Independent contractors are usually brought in on a project basis or work separately from the client’s overall operations.
Services Rendered Personally
Independent contractors are able to farm out their gigs to other subcontractors or individuals. Even senior employees cannot delegate work they must personally perform to another employee.
Supervision and Help
Employees in management capacities may take on additional help, such as seasonal and temporary employees, interns, and new hires, but the employer pays these helpers. Independent contractors who need additional help are responsible for their results and for paying for their time.
Continuous Relationship
Permanent employees are expected to remain with the same employer for some time. Independent contractors usually work on a project basis or have a defined start and end date. While they may work with regular recurring clients, the relationship is never assumed to be in perpetuity like an employee-employer relationship.
Set Work Hours
Employees work at their employer’s discretion. They are told which days and hours they must work. Independent contractors have complete autonomy over the timeframes in which they work, deadlines notwithstanding.
Reliance on the Employer or Client
Employees are generally devoted to one employer, with the employer having the right to prioritize the employee’s time. Independent contractors virtually never devote themselves exclusively to one firm.
Location
Employers can dictate if employees can work at home or must report to the office or other job sites. While this depends on the nature of the work, independent contractors can work wherever they want. They also generally supply their own fixed base, such as a home or rented office, while employees rely on their employer to set this for them.
Sequential Order
Employees must perform tasks according to the employer’s instructions, demonstrating the employer’s control over them. Independent contractors focus solely on the results and submit them to the client on time. They decide on orders or sequences for how they work.
Reporting Requirements
Employees may be required to submit oral or written reports to their employers regarding their workloads, projects, and organizational objectives. Independent contractors may voluntarily provide these reports for large projects, but they are usually not mandated to submit such reports.
Payment
Employees are typically compensated at specific intervals, such as weekly payment for hourly wages or biweekly for a salary. Independent contractors are remunerated based on an agreed-upon project rate and invoice for their hourly work.
Business and Travel Expenses
Employee business and travel expenses are usually covered by the employer through company funds and credit cards or reimbursement of personal funds. Independent contractors generally pay for all of these expenses out of pocket.
Tools and Equipment
Employees are typically provided with the tools and equipment needed to do their jobs. While it isn’t out of the ordinary for employees to have their own hand tools, they usually are not buying large pieces of equipment.
Independent contractors, however, pay for their own tools and invest more significantly in their equipment than laptops and basic hand tools.
Investment
Even if an employee has some equity in their employer’s company, they are economically reliant on it otherwise. They usually don’t own the means of production. Independent contractors are substantially invested in their independent business and want to ensure it is profitable.
Profit or Loss
Employees are paid for their services regardless of how well the company is doing. Independent contractors realize a profit or loss based on their revenues and expenses.
Working for More than One Client or Employer
While second jobs and the “over employment” trend have gained popularity in the 2020s, most permanent full-time employees only work for one employer. Independent contractors are expected to do the opposite and never rely solely on one firm for revenue.
Public Availability
Generally, an employee’s service is between them and their employer. Their services are not made available to the public. Independent contractors make their availability known to the public in some way, be it through business cards, dedicated websites, social media presence, business licenses, and other types of promotion.
Ability to Quit
Texas is an at-will state, so employers can terminate an employee whenever they want without providing a reason. In turn, employees can quit at any time without being held liable to the employer.
Independent contractors may be held liable, even if the client doesn’t enforce it. They may be in breach of contract if they terminate the job before fulfilling their contractual obligations or must compensate the client if it takes them a long time to find a suitable replacement contractor.
Consequences for Improper Worker Classification
As the nature of work in the 21st century continues to evolve, many confusing labor compliance matters arise. Just because a worker works from home or has a flexible arrangement doesn’t necessarily mean they’re an independent contractor by default.
Employers don’t have to pay payroll taxes or contribute to the Texas unemployment fund when a worker is an independent contractor. Subsequently, the TWC fines employers for each instance of misclassification. The severity of the fine depends on whether it was willful or not, and the extent of the unpaid taxes owed. If your Texas organization has government contracts, there is an additional $200 per misclassified employee.
Additionally, there may be consequences at the federal level for not paying into the federal unemployment fund and insufficient employer FICA contributions. This is also based on whether the misclassification was willful or an honest mistake.
Ensure Compliance with Affiliated HR & Payroll
Worker classification is a complicated compliance area that is constantly changing due to tax and labor law shifts. Affiliated HR & Payroll’s compliance experts can help you stay compliant with TWC and IRS regulations regarding the correct classification of workers. Ensure your business stays compliant with Texas laws. Contact Affiliated HR & Payroll today for expert guidance on worker classification and other HR services.
Client Service Representative at Affiliated HR & Payroll Services