The status of “employee” is defined in the Texas Unemployment Compensation Act. It defines employment as a service performed by an individual for wages or a salary under an express or implied contract of employment. The main factor appears to be that an independent contractor’s provision of their services or product is free from the control or direction of the entity to whom it is provided.
There are three necessary elements to employment in Texas as follows:
- The worker provides a service.
- The worker is paid in wages or a salary
- The employer directs and controls the worker’s activities.
An employer does not have to actually exercise direction and control. They only need to have the right to exercise it. If an employer has the right, then their workers are employees and not independent contractors.
In Texas, an independent contractor is an individual who is self-employed or a business entity that has a contract with another business entity to provide it with services. In both cases, the individual or business entity should have a contract with the entity to whom it delivers services. An independent contractor controls the manner in which their work is completed.
An independent contractor is not protected by employment laws. They do not have access to the Texas state unemployment system if they should lose a contract. They would not have access to the Texas worker’s compensation system if they were to be injured in the course of providing their product or services.
It is important for independent contractors to know that they are responsible for handling their own taxes. An entity that uses the services of an independent contractor must report payments for services they have performed for their trade or business if the following four requirements are met:
- Payment was made to an entity that is not the business’s employee
- Payment was made for services rendered in the course of the payor’s trade or business
- The payment was made to an individual, partnership, estate, corporation or sole proprietorship
- Total payments made to the recipient amounted to at least $600 during the year.
The payment would be reported to tax authorities as payment of non-employee compensation.
The independent contractor is responsible for making their own state and federal quarterly income tax withholdings and any other withholdings that may be required by law, e.g., withholdings for Social Security and Medicare.
As are all taxpayers, of course, an independent contractor must manage all of their federal and state tax and withholding issues themselves. If they work in more than one state, they may have to pay taxes in more than one state.
Again, a key feature of the independent contractor relationship is that, unlike traditional employees, independent contractors are not directly controlled by the entity that hires them when it comes to the methods and processes of their work. Instead, they maintain control over how their work is completed.
What Laws Protect Independent Contractors?
Independent contractors are going to rely mostly on the Texas civil law of contracts in their business operations. They are protected by a well-drafted independent contractor agreement, one that includes clauses and provisions that protect their interests.
Texas independent contractor laws do not require the contracts of independent contractors to be in writing. However, if a dispute arises about the business relationship, it is going to be easier for a contractor to prove what their contract provides if it is in written form.
Nonetheless, Texas courts and government agencies give priority not to contract language but to the way in which the actual working relationship functions. So a contractor wants to make sure that their contract and their practices in action are in alignment.
Among the critical provisions that a contractor would want to include are the scope of the work they are to perform, terms of payment, the duration of the relationship, and a clear statement of the contractor’s autonomy.
A good contract would state clearly that the contractor controls how the work is to be performed and which party is responsible for business expenses. A contractor would probably want a non-exclusivity clause that would clarify the contractor’s right to work for multiple clients. Contracts may also specify how disputes are to be resolved, whether through alternative dispute resolution procedures, such as mediation or arbitration, or through litigation.
In Texas, the Texas Workforce Commission (TWC) regulates the classification of workers. It is especially interested in claims for unemployment insurance. An employee would be entitled to receive unemployment insurance payments in certain circumstances after being laid off. An independent contractor never qualifies for unemployment insurance. Employers have a legal duty to pay into the state unemployment system.
When a worker makes a claim for unemployment benefits, the TWC reviews the worker’s relationship with their claimed employer. If the TWC determines that the worker has been misclassified as an independent contractor when they are, in fact, an employee, the employer may owe back unemployment insurance taxes. Employers can appeal TWC determinations, but they must be prepared to present evidence of the worker’s independence.
Federal agencies also investigate disputes involving the classification of workers as contractors or employees. The federal Department of Labor (DOL) enforces the Fair Labor Standards Act (FLSA), which regulates the employment relationship, but not that of an independent contractor.
The FLSA provides minimum wage and overtime protections for employees. If the DOL finds that a worker was misclassified as an independent contractor, it may claim back wages and other corrective measures from the employer.
The federal Internal Revenue Service (IRS) audits businesses to ensure that workers are correctly classified and that all the parties, whether employer and employee or parties to a contractual relation, comply with federal tax laws. If one agency investigates, others may follow and do the same.
What Are My Rights as an Independent Contractor?
An independent contractor’s rights are going to be largely defined by the terms of the contract they have with the individuals and business entities to whom they provide their products and services. The other significant factor would be Texas contract law.
For this reason, they would probably want to get good legal advice regarding the contracts on which they rely to establish a business relationship with a consumer of their product or service. They would want their lawyer to identify the language and clauses that they could add to their contracts that would best protect their interests in their relationships.
How Are Independent Contractor Laws Typically Violated?
Businesses may have an incentive to misclassify workers as independent contractors under Texas employment laws. This spares them expense and bureaucratic headaches such as making routine payments to the unemployment and worker’s compensation systems. It also spares them from having responsibility for tax and other withholdings.
However, misclassification deprives workers of benefits to which the law entitles them, such as unemployment benefits when they are laid off and worker’s compensation when they are injured on the job. In addition, it can expose businesses to lawsuits and fines.
Businesses want to avoid misclassification as it can prove costly in the long run by doing the following:
- Use well-written contracts that clearly define the nature of the business relationship
- Classify a worker based on the nature of the job done by worker
- Classify correctly, i.e., as a worker, if the work aligns more closely with that of an employee
- Seek the guidance of a Texas lawyer to ensure correct classification and compliance with all applicable laws.
Should I Hire a Lawyer for Help With Independent Contractor Issues?
If you are an employee, employer, or a party to an independent contractor relationship, you may need the advice of an employment attorney in Texas. It is important to all parties for workers to be classified correctly. LegalMatch.com can connect you to an attorney in Texas who can review the facts of your situation, make sure workers are correctly classified, costly mistakes are avoided, and every party’s rights are protected.
