07 Aug Texas Independent Contractors
Employers are generally required to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Alternatively, employers are not generally required to withhold or pay any taxes on payments to independent contractors. Moreover, according to the Internal Revenue Service (IRS), business owners or contractors who provide services to other businesses are generally considered self-employed.
Independent Contractor Tests
When determining whether a worker is an independent contractor or employee, Texas courts look to whether the entity has the right to control the work’s progress, details, and methods of operation, taking into consideration:
- The independent nature of the worker’s business
- The worker’s obligation to furnish necessary tools, supplies, and materials
- The worker’s right to control the progress of the work, except final results
- The time for which the worker is employed
- The method of payment, whether by the unit of time or the job
For unemployment purpose, the Texas Workforce Commission and Texas courts weigh the following 20 factors in making their determination:
- Instructions. An employee receives instructions about when, where, and how the work is to be performed. An independent contractor does the job their own way with few, if any, instructions as to the details or methods of the work.
- Training. Employees are often trained by a more experienced employee or are required to attend meetings or take training courses. An independent contractor uses their own methods and thus need not receive training from the purchaser of those services.
- Integration. Services of an employee are usually merged into the firm’s overall operation; the firm’s success depends on those employee services. An independent contractor’s services are usually separate from the client’s business and are not integrated or merged into it.
- Services Rendered Personally. An employee’s services must be rendered personally; employees do not hire their own substitutes or delegate work to them. A true independent contractor is able to assign another to do the job in their place and need not perform services personally.
- Hiring, Supervising, and Paying Helper. An employee may act as a foreperson for the employer; in such an arrangement, helpers are paid with the employer’s funds. Independent contractors select, hire, pay, and supervise any helpers used and are responsible for the results of the helpers’ labor.
- Continuing Relationship. An employee often continues to work for the same employer month after month or year after year. An independent contractor is usually hired to do one job of limited or indefinite duration and has no expectation of continuing work.
- Set Hours of Work. An employee may work on call or during hours and days as set by the employer. A true independent contractor is the master of their own time and works the days and hours he or she chooses.
- Full Time Required. An employee ordinarily devotes full-time service to the employer, or the employer may have a priority on the employee’s time. A true independent contractor cannot be required to devote full-time service to one firm exclusively.
- Location Where Service Is Performed. Employment is indicated if the employer has the right to mandate where services are performed. Independent contractors ordinarily work where they choose. The workplace may be away from the client’s premises.
- Order or Sequence Set. An employee performs services in the order or sequence set by the employer. This shows control by the employer. A true independent contractor is concerned only with the finished product and sets their own order or sequence of work.
- Oral or Written Reports. An employee may be required to submit regular oral or written reports about the work in progress. An independent contractor is usually not required to submit regular oral or written reports about the work in progress.
- Payments by the Hour, Week, or Month. An employee is typically paid by the employer in regular amounts at stated intervals, such as by the hour or week. An independent contractor is normally paid by the job, either a negotiated flat rate or upon submission of a bid.
- Payment of Business and Travel Expense. An employee’s business and travel expenses are either paid directly or reimbursed by the employer. Independent contractors normally pay all of their own business and travel expenses without reimbursement.
- Furnishing of Tools and Equipment. Employees are furnished with all necessary tools, materials, and equipment by their employer. An independent contractor ordinarily provides all of the tools and equipment necessary to complete the job.
- Significant Investment. An employee generally has little or no investment in the business. Instead, an employee is economically dependent on the employer. True independent contractors usually have a substantial financial investment in their independent business.
- Realize Profit or Loss. An employee does not ordinarily realize a profit or loss in the business. Rather, employees are paid for services rendered. An independent contractor can either realize a profit or suffer a loss depending on the management of expenses and revenues.
- Working for More Than One Firm at a Time. An employee ordinarily works for one employer at a time and may be prohibited from joining a competitor. An independent contractor often works for more than one client or firm at the same time and is not subject to a noncompete rule.
- Making Service Available to the Public. An employee does not make their services available to the public except through the employer’s company. An independent contractor may advertise, carry business cards, hang out a shingle, or hold a separate business license.
- Right to Discharge Without Liability. An employee can be discharged at any time without liability on the employer’s part. If the work meets the contract terms, an independent contractor cannot be fired without liability for breach of contract.
- Right to Quit Without Liability. An employee may quit work at any time without liability on the employee’s part. An independent contractor is legally responsible for job completion and, upon quitting, becomes liable for breach of contract.
Depending upon the type of business and the services performed, not all of the 20 factors may apply. In addition, the weight assigned to a specific factor may vary depending upon the facts of the case.
For purposes of workers’ compensation, the Texas Supreme Court has stated that the test to determine whether a worker is an employee or an independent contractor is whether the employer has the right to control the progress, details, and methods of operation of the employee’s work. The employer must control not merely the end sought to be accomplished, but also the means and details of its accomplishment. Examples of the type of control normally exercised by an employer include:
- When and where to begin and stop work
- The regularity of hours
- The amount of time spent on particular aspects of the work
- The tools and appliances used to perform the work
- The physical method or manner of accomplishing the end result
In order to be considered an independent contractor, the contractor will need to demonstrate that they:
- Act as the employer of any person they contract with by paying wages, directing activities, and performing other similar functions characteristic of an employer-employee relationship;
- Are 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;
- Are required to furnish or to have employees, if any, furnish necessary tools, supplies, or materials to perform the work or service; and
- Possess the skills required for the specific work or service.
Commission on Human Rights Act
For purposes of employment discrimination, Texas courts have adopted a hybrid test composed of both an economic realities test and the common law right to control test to determine a worker’s status under the Commission on Human Rights Act. The economic realities part of the test focuses on whether the alleged employer:
- Paid the employee’s salary
- Withheld taxes
- Provided benefits
- Set the terms and conditions of employment
Tex. Lab. Code Ann. §§ 21.001 – 21.556.
Digital Marketplace Platform Workers
The Texas Workforce Commission uses a nine-factor test to determine whether a worker is an employee or independent contractor for workers who use a marketplace platform’s digital network to conduct their own independent businesses. Such workers are commonly referred to as “gig workers,” and Uber and Lyft are examples of the digital platforms to which the law relates. Companies that provide such digital platforms are not required to pay unemployment taxes because the individuals comprising their workforces are not employees under the Texas Unemployment Compensation Act.
A digital network is an online-enabled application, software website, or system offered by a marketplace platform for the public (including third-party individuals and entities) to use to find and contact a marketplace contractor to perform one or more needed services. A marketplace platform is a corporation, partnership, sole proprietorship, or other entity operating in Texas that:
- Uses a digital network to connect marketplace contractors to the public (including third-party individuals and entities) seeking the type of service or services offered by the marketplace contractors;
- Accepts service requests from the public (including third-party individuals and entities) only through its digital network, and does not accept service requests by telephone, by facsimile, or in person at physical retail locations; and
- Does not perform the services offered by the marketplace contractor at or from a physical business location that is operated by the platform in Texas.
Tex. Admin. Code tit. 40, § 815.134.
A marketplace contractor or contractor means any individual or entity that enters into an agreement with a marketplace platform to use the platform’s digital network to provide services to the public (including third-party individuals and entities) seeking the type of service or services offered by the marketplace contractor.
If a marketplace contractor meets the following nine factors, the worker will be classified as an independent contractor and not an employee (and will not be covered by the unemployment compensation law):
- All or substantially all of the payment paid to the contractor is 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.
- The marketplace platform does not require the contractor to attend mandatory meetings or mandatory training.
Wage and Hour
The test used for unemployment compensation is also used to determine a worker’s status under wage and hour laws.
Original content by the HR Support Center. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.