Texas Independent Contractors vs. Employees – the Legal Difference
According to Texas and Federal law, independent contractors operate on a different legal basis in comparison to traditional full-time or part-time employees. An independent contractor is often thought of as a worker who is self-employed, and a person who enters with a company for compensation under the assumption that they are “free from control” in regards to the company who is paying for their services.
An employee is a person who is hired by a company to do a job and is expected to follow instructions from the business as to when, where and how they are to perform their duties. Misclassifying a worker as an independent contractor when he or she is an employee can result in serious problems for the company. Misclassification can cost the business in taxes and interest, and can result in a fine of $200 per worker if the employer is operating under a government contract. A written or oral agreement between the parties does not change the status of the worker.
Breaking Down Independent Contractor Engagement Law in Texas:
Typically, independent contractors work with various parties freely, using their own name or business name, their own equipment and in their own setting. The engagement between the independent contractor and a business is usually outlined in terms of an agreement between the two parties, and their duties may be limited in time and scope. While some independent contractors will use the company’s equipment or follow a specific schedule, still they’re classified as an independent contractor.
In Texas, the main difference between an independent contractor and an employee is based on the level of control that may be exercised by the employer. To summarize, an employer will have much less control over an independent contractor’s daily schedule or activities in comparison to an employee.
In addition to the level of control the company has over the independent contractor, a second differentiating aspect is the ability of the independent contractor to negotiate their own terms and work as an independent party.
For example, when an employer presents an offer to a potential employee that person can either accept or decline the terms — there’s usually little room to negotiate. As for an independent contractor, those terms are usually negotiated beforehand and then outlined in the agreement between the two parties.
Common Engagement Aspects of Independent Contractors:
- Does not receive or follow daily instructions.
- Uses their own methods and/or equipment.
- Has investment in an independent business.
- Is hired for a specific job.
- Determines their own hours of work.
- Is paid per job.
- Works for multiple clients/companies.
- Can choose their own location.
- Can advertise their own business.
- Cannot be terminated at will, if outlined in their agreement.
- Is liable for a breach of contract or non-completion of work.
How Employers Can Misclassify Independent Contractors:
There are various reasons an employer may try to classify their employees as independent contractors – the biggest incentives are for monetary and/or tax reasons. This is because when employees are hired, an employer will have added expenses and accounting obligations, such as payroll taxes, overtime wages, unemployment benefits, workers compensation, hourly rates and/or salary rates.
Therefore, when an employee is misclassified as an independent contractor there are financial and liability issues that arise.
If an employee is misclassified as an independent contractor then that employee may be losing out on earned benefits, bonuses, overtime pay, unemployment access and workers compensation. An employee may have a claim against the business for such lost benefits.
IRS Guidance on Independent Contractor vs. Employee:
Aside from potential penalties under Texas law, a misclassification may result in penalties and fines from the IRS. The IRS has its own classification criterion that are similar, but not exactly the same, as those of Texas. You can find the IRS guidance here.
As a business owner or manager, if you are unsure of the classification, then the conservative route is to classify the worker as an employee. If you need further assistance or clarification on the proper classification of a worker, then please contact us.
DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic. This article is not intended to be legal or tax advice, so if you need additional information, please consult a knowledgeable attorney.