How can you tell whether a worker is an independent contractor or an employee? You can find all about the tests that Texas uses to determine whether a worker is an employee or independent contractor in my latest podcast episode. In the episode, I cover the classical twenty factor test adopted from the common law test to determine whether a worker is an independent contractor and I also review the new test used for workers in the gig economy. It is absolutely critical that companies use the correct test to classify their workers.
Many employers fail to properly classify independent contractors. Employers that perform an analysis to confirm whether a worker is an independent contractor can often avoid misclassification problems. No employer wants to be one of these companies that end up with huge fines and the loss of morale of new “employees” that now believe the company was cheating them out of the money that they were owed. It is obviously much better to correctly determine whether a worker is an independent contractor.
Unfortunately, misclassification is one of the most common employment law problems. But most employers can correct these issues by reviewing the independent contractor tests and carefully applying the tests to their workers, which is why you don’t want to miss this episode.
The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.
The information provided is my own and does not reflect the opinion of my firm or anyone else.
Are you properly categorizing your workers as employees? Are they actually independent contractors? How can you tell if a worker is an independent contractor instead of an employee in Texas? Lucky for you Texas, or at least the Texas Workforce Commission (TWC), has a twenty factor test that you can use to determine whether your worker is an employee or independent contractor. A worker can be found to be an employee even if they do not meet each factor. Courts will examine each of the factors in turn to determine whether a worker is an employee or independent contractor. If a worker has most of the factors demonstrating an employee relationship, then they are most likely an employee. If the worker has most of the factors demonstrating an independent contractor relationship, then they are most likely an independent contractor.
The Texas Workforce Commission’s Twenty Factor Independent Contractor Test
An employee receives instructions about when, where, and how the work is to be performed. An independent contractor does the job in his/her own way. Basically, an independent contractor does the job without instructions. They are given the task (i.e. contract) and perform it.
Training
Employees are trained and required to attend meetings or take courses. Independent contractors services do not receive training. For example, an employee may be required to take sexual harassment or other training courses as required by a company.
Integration
Employees are merged into the operations of the business. Independent contractors’ services are separate from the business. For example, a janitorial service would be unlikely to have janitors as independent contractors. But the workers that mow the lawn each week of the company’s building could be independent contractors.
Personal Service
Employees personally render services. Independent contractors may assign their duties to someone else in their place.
Hiring, Supervising, and Paying Helpers
Employees are supervised by other employees of the company. Independent contractors select, hire, pay, and supervise any helpers used and are responsible for the results of their labor. In addition, this factor is important when avoiding joint employer status with a staffing company. Generally, staffing company employees should be supervised by managers of the staffing company.
Continuing Relationship
Employees continue to work with the same employer month after month. Independent contractors are normally hired for one job of limited or indefinite duration.
Set Hours of Work
Employees have set hours of work. Independent contractors may work the days and hours that they choose.
Full Time Required
Employees normally devote their full time to an employer. Independent contractors cannot be required to devote their full time to one firm.
Location
Employees work where an employer tells them to work. Independent contractors work where they choose.
Order or Sequence
Employees perform the work in the order set by the employer. Independent contractors are free to perform the work in any order that they want and are only liable for the finished product.
Oral or Written Reports
Employees must submit regular reports about progress. Independent contractors are normally not required to do so.
Payment Frequency
Companies pay employees in regular amounts at regular intervals. Businesses pay independent contractors by the job or upon the submission of a bid
Payment of Business and Travel Expenses
Employees typically have business travel paid or reimbursed by the employer. Independent contractors are not normally reimbursed.
Furning of Tools
Employees normally have tools provided to them. Independent contractors provide their own tools
Significant Investment
Employees have little or no investment in the business. Independent contractors have a significant financial investment in their business.
Realize Profit or Loss
Employees do not realize profit or loss. Independent contractors may realize profit or loss depending on expenses and revenues.
Working for More than One Business
Employees generally work for one employer at a time. Independent contractors often work for more than one client and are not subject to non-competition rules.
Making Services Available to the Public
Employees do not make their services available to the public. Independent Contractors may hold a separate business license and advertise their business.
Right to Discharge Without Liability
Employers can discharge employees at any time without liability on the employer’s part. Companies cannot fire independent contractors without liability for breach of contract.
Right to Quit Without Liability
Employees can quit at any time without liability on their part. Independent contractors are legally responsible for job completion and upon quitting become liable for breach of contract.
What Else Matters When Determining Whether a Worker is an Independent Contractor
An independent contractor agreement is also evidence that a worker is an independent contractor. If you treat the worker like an employee in other ways, then that is also evidence that they are an employee. For example, if a company requires a worker to complete a I-9 for the when they are first hired, if the company completes a W-2 for the worker and files it, if the company pays employment taxes for the worker, if the business has the worker on the company health care plan, and if the business gives other benefits that are only given to employees, then these workers are going to be considered an employee.
Some Thoughts on Other Independent Contractor Tests
First, there is a new administration. Basically, this means that the rules that are at the federal level and were in my prior post are going to change at some point. There is the possibility that the various agencies (i.e. the Department of Labor, National Labor Relations Board, and Equal Employment Opportunity Commission) may even use different or conflicting tests. Only time will tell what these tests will be.
Second, Texas has special rules to determine whether workers that use a digital network are independent contractors or employees. A digital network is an app, software or website that connects the public with contractors that can provide the service. This rule essentially covers the food delivery, ride-sharing, and freelance apps. The TWC uses a nine factor independent contractor test that I outlined in my Independent Contractor or Employee post to determine whether these workers are independent contractors. Anyone looking to determine whether a worker that uses a digital network is an independent contractor should review my prior post.
Conclusion
It is critical to classify workers properly. Companies that improperly classify workers as independent contractors instead of employees pay hefty penalties and also must expend a lot of money in attorney’s fees. None of the twenty factors above alone are sufficient to determine whether a worker is an independent contractor or employee. Companies that want to make sure that a worker is an independent contractor should carefully analyze the independent contractor test and factors outlined above.
The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.
The information provided is my own and does not reflect the opinion of my firm or anyone else.
Are your workers independent contractors or employees? How can you tell the difference? What are the rules to determine whether a worker is an independent contractor in Texas or elsewhere? Why does this even matter?
California’s
AB5 law, which made it harder for a number of workers to be independent
contractors (as workers must meet all 3 of the ABC factors to be employees as
discussed below), may spread to other states. Even if it doesn’t, there will
still be the risk of a misclassification lawsuit in a number of states because
companies in the gig economy are generally seen by state governments and
plaintiff’s attorneys as misclassifying independent contractors and thus are a
target for lawsuits.
Proper
classification also matters for employees and the states that they work in (as
shown by New Jersey’s lawsuit against Uber). Misclassified workers can cost
states to collect less unemployment insurance, worker’s compensation insurance,
and income taxes. Workers lose out on unemployment insurance (unless they can
show in a proceeding that they were misclassified) and workers compensation
insurance as contractors. On the other hand, many workers prefer to be
independent contractors due to the benefits that they can obtain such as
certain tax write offs, more control of their business, and better
opportunities to profit. The most recent example of this are freelance writers and truckers in California.
What is an Independent Contractor?
States and
the federal government have a wide variety of tests that they use to determine
whether a worker is an independent contractor.
To determine whether a worker is an independent contractor under the Fair Labor Standards Act (which governs most wage and hour issues at the federal level) courts use the economic reality test. The test has the factors in the bullets below. All of these factors are considered, and a worker need not meet every factor to be an independent contractor.
The extent to which the services rendered are an integral part of the principal’s business.”
Essentially the question is whether the person performing work that is an essential part of the service that the business provides? A traditional plumbing company that only has plumbers that are independent contractors would not pass the test. Plumbers are a main part of the services provided by the plumbing company. In contrast, a worker that only mows the plumbing company’s lawn every 2 weeks is not an integral part of the plumbing business.
“The permanency of the relationship.”
Is there a definite end to the employment relationship or are
the services only provided periodically? A cleaning person that comes once a
week could be an independent contractor). Both factors would tend to indicate
that the workers are independent contractors.
“The amount of the
alleged contractor’s investment in facilities and equipment.”
If the contractor provides their own tools, then that is a good
indication that they could be independent contractors. If the company provides
all the tools, then that weighs in favor of a finding that they are employees.
“The nature and degree
of control by the principal.”
Does the worker have the ability to determine how to perform the
work? Are they able to determine the means that they use to complete the
project and perhaps the time that they use to complete the project? For
example, suppose you hire someone to develop an app for your company. If they
can determine the means that they use to develop the app; are free to work on
the development when they want; and can choose the programing language they use
to complete the app (even though the company decides what the app is supposed
to do), then this factor would tend to show that they are independent
contractors.
“The alleged
contractor’s opportunities for profit and loss.”
Independent contractors typically can make money, lose money,
and don’t have a fixed amount of money that they can make (or at least are
usually not getting paid an hourly rate).
“The amount of
initiative, judgment, or foresight in open market competition with others
required for the success of the claimed independent contractor.”
Do workers compete with others in the marketplace? Is it
possible for them to lose the business? Does the work require them to use
independent judgment to complete the work? If so, then this factor supports a
finding that they are independent contractors.
“The degree of independent business
organization and operation.”
Do they have their own business? Do they set
their own schedule? Do they send out invoices? Do they do the things that
separate businesses typically do? If so, then they are more likely to be
independent contractors.
The ABC Test for Independent Contractors
Many states,
like California, use the ABC test to determine whether a worker is an
independent contractor. The factors in the test are generally:
The worker is free from control (they determine how to do the work)
The work is outside the usual business of the company
The worker is customarily engaged in an independently established trade, occupation, or business.
In California, all 3 aspects must be met. Meeting all 3 factors can be difficult and is one of the reasons why there is such a fight over workers in the gig economy right now especially in California. Their main issue is whether the workers provide a service that is in the company’s usual course of the business (is Uber a company that provides a ride sharing service) or whether the companies merely connect providers (like Uber drivers or DoorDash workers) with potential clients that need their services. It is a question that will eventually be determined in the courts and legislative branches.
Independent Contractor Tests in Texas and Elsewhere
“’employee’ means each person in the service of another under a contract of hire, whether express or implied, or oral or written,” and “includes: (1) an employee employed in the usual course and scope of the employer’s business … .” That term does not include “an independent contractor or … a person whose employment is not in the usual course and scope of the employer’s business.” In section 406.121(2) of that law, an independent contractor is defined as “a person who contracts to perform work or provide a service for the benefit of another and who ordinarily:
A. acts as the employer of any employee of the contractor by paying wages, directing activities, and performing other similar functions characteristic of an employer-employee relationship;
B. is free to determine the manner in which the work or service is performed, including the hours of labor of or method of payment to any employee;
C. is required to furnish or to have employees, if any, furnish necessary tools, supplies, or materials to perform the work or service; and
D. possesses the skills required for the specific work or service.”
The Texas Unemployment Compensation Act does not directly define “independent contractor”. Instead, it sets forth a broadly inclusive test, known as the “direction or control” or “common law” test, for who is an employee: “’employment’ means a service, including service in interstate commerce, performed by an individual for wages or under an express or implied contract of hire, unless it is shown to the satisfaction of the Commission that the individual’s performance of the service has been and will continue to be free from control or direction under the contract and in fact”. By implication, an “independent contractor” would be a person whose services do not meet the above test. To aid in application of the common-law test, TWC has adapted the old IRS twenty-factor test for use by the agency (online at
Other agencies have their own tests. The National Labor Relations Board has a test called that is outlined here. As a reminder, the National Labor Relations Act applies to all companies with more than one employee whether unionized or not. The NLRB’s test is useful to determine whether workers are employees (and thus eligible to form a union) or independent contractors (the workers cannot unionize under federal law or at least not with the company that they work as independent contractors for. It is possible that they could be employees of another company where they could unionize.).
Essentially, there are a ton of rules to follow to determine whether someone is an independent contractor or employee. Almost every state has a different test (and sometimes more than one test for different areas of the law). Different tests may even lead to conflicting results.
Middle Ground
Currently
there is no middle ground between independent contractors and employees.
Someone is an employee or independent contractor.
The rule
defines a “digital network” as (essentially) an app or other piece of
software/website that is used to connect the public with contractors that can
provide a service that the public is looking for. A marketplace platform is a
company that operates a digital platform (ex. DoorDash owns and operates its
delivery app).
–All or substantially all of the payment paid to the contractor shall be based on a per-job or transaction basis;
–The marketplace platform does not unilaterally prescribe specific hours during which the marketplace contractor must be available to accept service requests from the public (including third-party individuals and entities) submitted through the marketplace platform’s digital network;
–The marketplace platform does not prohibit the marketplace contractor from using a digital network offered by any other marketplace platform;
–The marketplace platform does not restrict the contractor from engaging in any other occupation or business;
–The marketplace contractor is free from control by the marketplace platform as to where and when the marketplace contractor works and when the marketplace contractor accesses the marketplace platform’s digital network;
–The marketplace contractor bears all or substantially all of the contractor’s own expenses that are incurred by the contractor in performing the service or services;
–The marketplace contractor is responsible for providing the necessary tools, materials, and equipment to perform the service or services;
–The marketplace platform does not control the details or methods for the services performed by a marketplace contractor by requiring the marketplace contractor to follow specified instructions governing how to perform the services; and
–The marketplace platform does not require the contractor to attend mandatory meetings or mandatory training.
Essentially,
the law was passed as a way for Texas to clarify what it took for a worker to
be an independent contractor rather than an employee in the gig economy.
What
Rules Apply to Your Business
Ok, you just read a number of different laws about independent contractors. How do you know what applies to your business? Before I give a checklist, I need to reiterate that this is a complicated issue. There is a lot of case law about a variety of workers, duties, and positions under these tests. It is an incredibly fact specific question to determine whether a worker is an independent contractor and is often very confusing.
Here are some steps to consider to determine what law to apply:
Why are you trying to determine whether the worker is an independent contractor or employee? Is it a federal tax, federal wage and hour, unemployment insurance, unionization, or workers compensation insurance issue? Workers should almost always be classified the same under the different laws.
What state does your business operate in?
Based on what issue applies and the state, you would then need to examine the law for that area, the state, and potentially the federal laws.
You need to gather the relevant information about the individual worker under the test.
You then need to follow the test and review how courts have looked at cases similar to yours in the past to reach a determination on the proper classification.
Correctly Classifying Workers
As noted above, it is incredibly important that you correctly classify your workers. If you are in an industry that has a history of misclassifying workers, then you should take extra precautions. Common industries where misclassification occurs includes construction, certain medical professionals, and the gig economy.
To avoid
these problems, many employers benefit from conducting a review of a worker’s
duties and other information to determine whether or not they have been
properly categorized. To do this, you must also have good job descriptions. I’ve written about this
before in the context of ADA accommodations and white-collar exemptions, but it is also useful for
classifying independent contractors.
Conclusion
You need to classify workers correctly. If you fail to classify workers properly, then your company could be subject to an expensive lawsuit that could upend your business. Do your due diligence utilizing the tests available to ensure your workers are classified appropriately.
The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.
The information provided is my own and does not reflect the opinion of my firm or anyone else.
Brett Holubeck (of Houston, Texas) is the attorney responsible for this site.
