The correct classification of workers as employees or independent contractors is a matter of paramount importance for employers. The misclassification of a worker or workers by an employer could be very costly, resulting in backed employment taxes, tax penalties, backed overtime, or other civil penalties. Additionally, employees are covered by labor laws like the FLSA and ADA; independent contractors are not.
The determination is typically factor-based. IRS guidance considers the control over a worker’s behavior, pay, expenses, and the relationship between the business and the worker. For an in–depth discussion of the federal test, see Part 1 of our Telecommuting Employee series here. In Texas, the distinction hinges on “whether the employer has the right to control the progress, details, and methods of operations of the employee’s work” in light of five factors: (1) the independent nature of the worker’s business; (2) the worker’s obligation to furnish necessary tools, supplies and materials; (3) the worker’s control over the progress of the work (except as to final results); (4) the duration of employment; and (5) whether the worker is paid for time worked or per job worked. Thompson v. Travelers Indem. Co. of Rhode Island, 789 S.W.2d 277, 278 (Tex. 1990); Limestone Prods. Distrib., Inc. v. McNamara, 71 S.W.3d 308, 312 (Tex. 2002).
The test has been recently expanded and codified by the Texas Workforce Commission at Tex. Admin. Code § 821.5. The Texas Workforce Commission collects unemployment taxes from Texas employers, and the Texas Administrative Code specifically excepts marketplace contractors from the definition of employment for purposes of unemployment insurance. Tex. Admin. Code § 815.134. Marketplace workers include those performing jobs on demand via a digital network (like Uber or Favor) which connects marketplace contractors to the public seeking their services. Marketplace contractors are not treated as employees of the marketplace platform where the following conditions are met:
- The worker is paid on a per-job or transaction basis;
- The platform does not prescribe specific hours during which the worker must be available to accept service requests from the public;
- The worker is not prohibited from using other marketplace platforms;
- The worker is not restricted from engaging in any other occupation or business;
- The platform does not control when and where the worker works or when he accesses the digital network;
- The worker is responsible for his own expenses;
- The worker is responsible for providing tools, materials and equipment necessary to perform his services;
- The platform does not require a worker to follow specific instructions governing how his services are performed; and
- The worker is not required to attend mandatory meetings or training.
This rule specifically excepts services performed by public employees, employees of an Indian tribe, employees of religious, charitable, educational, or non-profit organizations, platforms regulated as professional employer organizations under Texas Law, and temporary employees or help firms defined by Texas law. See Tex. Admin. Code § 815.134(b)(3).
In the absence of more specific federal guidance, state legislation will likely continue to shape the classification of specific types of workers as employees or independent contractors. With Elon Musk’s arrival in Austin, the tech capital of the state is likely to see an even bigger increase in the number of digital startups calling the city home. Although this legislative development applies only to workers in the app-controlled service industry, further developments may inform employers across other industries as they attempt to classify their workers.
Kuiper Law Firm understands the importance of worker classification and other common issues faced by employers. We closely monitor all legislative sessions and provide clients with advice and assistance to develop their employment infrastructure. If you have any questions about how the information in this article applies to your business, do not hesitate to contact us.
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