Tips

Who’s in control? Avoiding the misclassification of “employees” as “independent contractors.”
By:  Reasha Hedke

Over the past several years, both the U.S. Department of Labor (“DOL”) and the Texas Workforce Commission (“TWC”) have been cracking down on the issue of misclassifying employees as independent contractors.  The misclassification of employees as independent contractors presents a serious problem for both misclassified employees and business owners.  The misclassified employees often are denied access to critical benefits and protections, such as family and medical leave, overtime compensation, minimum wage, and unemployment insurance, to which they are entitled.  Correspondingly, misclassification can create economic pressure for business owners who have correctly classified the workers as employees and incur the extra costs associated with employees, thus making it difficult to compete with those who are (wrongly) paying their workers as independent contractors. Failing to correctly classify and therefore compensate workers could end up costing a business countless dollars in an uphill battle of appeals to the TWC and/or DOL as well as in back wages owed to the misclassified employees and taxes and interest owed to the state regulatory agency.

The key to correctly classifying workers lies in the answer to the question, “Who’s in control?” – if the purchaser of a worker’s services has the right to control the details of when, where, and how the work is done as well as the final results, an employment relationship will be concluded. There are 20 different factors the TWC assesses to determine who is in control.¹ The TWC and the courts will examine each of the 20 factors in light of the facts of each particular case to determine whether the worker should be classified as an independent contractor or an employee.² These factors can be broken down into four main areas: (1) the worker’s freedom to complete the work in any manner he or she sees fit, (2) the worker’s independence from the employer, (3) the worker’s investment in his own craft, and (4) liability if work is not completed.

First, freedom to complete the work in any manner the worker sees fit means that the worker should not be given instructions or training about how the work is to be performed.  Requiring the worker to work set hours or perform the services in a specific order tends to indicate that the worker is an employee rather than an independent contractor.  Additionally, to be a true independent contractor, the worker should be free to assign his tasks to another person of his choosing, and hire others to help complete the commissioned work. Moreover, an independent contractor usually is not required to submit reports about the work in progress.

Second, the worker’s independence from the employer involves him being free to work for others, which means independent contractors typically do not work full-time hours for one firm or provide services exclusively to one client.  Furthermore, the services of an independent contractor often are not such an integral part of the client’s business that they necessitate a continuing relationship between the independent contractor and the business or must be performed on the client’s premises.  Rather, independent contractors are usually hired to work on a single project at a time, with the project generally being outside the nature of the client’s business.

Third, the TWC analyzes whether the worker has invested financially in building up his business, such as whether the worker has all the equipment needed to complete the work he provides, if the worker pays all of his own business or travel expenses out of his pocket, or if the worker’s management of his business will determine a profit or loss.  Related to this is the method of payment for the services – if the worker gets paid an hourly or weekly amount for a variety of services and does not receive payment in exchange for a particular job, the TWC would likely favor an employee classification. The TWC also considers whether the alleged independent contractor advertises his services, has business cards and a business name, holds a separate business license, or has his own location or storefront where he performs his services.  By the same token, the TWC looks to see if the worker has invested in his own training and developed his own methods of performing the purchased services.

The final factors the TWC examines to determine whether a worker is an independent contractor or an employee are whether the contractor or hiring party will be liable for breach of contract if either the contractor is fired or quits in the middle of a project.  In Texas, employers are able to fire their employees at will and employees are free to quit at any time, unless contracted otherwise.  However, because an independent contractor is typically hired for a specific job, he is responsible for job completion and would be liable for breach of contract if he quits.  Furthermore, if the independent contractor’s work meets the contract terms, the employer cannot fire him without liability for breach of contract.

Reasha Hedke is an attorney at Polsinelli PC in Dallas, Texas, where she focuses on corporate and transactional law.  She can be reached through email at rhedke@polsinelli.com or by phone at (214) 661-5539.  More information about Polsinelli is available on their website: www.polsinelli.com.

¹ See 40 Tex. Admin. Code § 821.5.

² I.e., see Critical Health Connection, Inc. v. Texas Workforce Comm'n, 338 S.W.3d 758, 763-68 (Tex. App.—Austin 2011).