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Employees vs. Independent Contractors

Individuals often have difficulty distinguishing between employees and independent contractors. Understanding these differences are monumentally important for various reasons. What to learn more about these reasons? Let’s discuss.

100 Business Law Articles, by Texas Business Lawyers (832) 509-0445.


How do Agencies Differentiate Between Employees and Independent Contractors?

Making a determination whether an individual is an employee or an independent contractor cannot be made by a worker or an employer. Instead, the determination is made by the nature of the work done by the individual. Different tests exist that are used by distinct agencies in order to properly make the determination of whether one is an employee or an individual contractor.

The Texas Workforce Commission (TWC) uses a 20-factor comparative approach to determine whether one is an employee or an independent contractor. The Internal Revenue Service (IRS) uses a similar, but not identical, 11-factor approach.

Businesses with employees in Texas are subject to the Texas Unemployment Compensation Act (TUCA); these businesses are liable to pay unemployment taxes. Section 201.041 of TUCA outlines which individual is considered an employee. TUCA lists three essential elements of employment: service, wages, and direction and control.

What is an Independent Contractor in Texas?

There is a presumption in Texas that workers are employees, however this presumption may be challenged and the employer than has the duty to prove that the worker is an independent contractor.

How to Distinguish Between an Independent Contractor and an Employee?

According the TWC policy, the following factors are considered while determining whether a worker is an Independent Contractor or an Employee:

  1. Instruction: An employee requires instruction about the tasks to be done while an independent contractor does not.

  2. Training: An employee requires training by a more experienced employee while an independent contractor does not.

  3. Integration: An employee’s services are merged into the company, and the company depends on the services of the employee. While an independent contractor’s services are not merged with the overall success of the company.

  4. Services Rendered Personally: An employee may not delegate duties to another substitute, while an independent contractor may.

  5. Hiring, Supervising, Paying Helper: If an employee hires helpers, the employer is responsible for the helpers’ compensation; however, and independent contractor is responsible for the helpers’ payment and actions.

  6. Continuing Relationship: Employees are hired for a recurring duration, while independent contractors are hired for a limited duration.

  7. Set Hours of Work: An employee must work for a set number of hours or overtime, while an independent contractor sets own hours.

  8. Full Time Required: An employee may be required to work full time, while an independent contractor may not.

  9. Location Where Services Performed: An employer may indicate the location of which an employee performs services, while the independent contractor may choose the location.

  10. Order of Sequence Set: Employers may control the sequence in which tasks are completed by employees but not for independent contractors.

  11. Oral or Written Reports: Employers may require employees to submit oral or written reports but may not do the same for independent contractors.

  12. Payment by the Hour, Week, or Month: Employees are usually paid within certain intervals of time. Independent contractors are usually paid by the job.

  13. Payment of Business and Travel Expense: Independent contractors usually pay travel and business expenses. Employees’ business and travel expenses are reimbursed or paid by the employer.

  14. Furnishing Tools & Equipment: Employees are usually provided by tools and equipment by the employer, while an independent contractor provides all tools and equipment necessary to complete the job.

  15. Significant Investment: Independent contractors usually have a significant investment in the business provided, while employees do not.

  16. Realize Profit or Loss: Employees do not suffer when there is a loss in profit; employees are paid for services; an independent contractor may suffer loss in profit.

  17. Working for More than One Firm at a Time: An employee may be subject to working for one employer at a time by signing a non-compete; an independent contractor may work for more than one employer at a time.

  18. Making Service Available to the Public: An employee may not make services public except through the employer; while and independent contract may publicize services through the likes of business cards and advertisements.

  19. Right to Discharge without Liability: Employers may end the employee’s employment without liability. If an employer ends the contract with an independent contractor without just cause, legal action may be taken for breach of contract.

  20. Right to Quit without Liability: An independent contractor is legally responsible to finish a job as per the contract; while an employee may quit without cause, at any time, and without liability.

Why is the Distinction Important?

It is monumentally important for employers to make the distinction of whether workers are employees or independent contractors for several reasons. Employers must withhold what is called FICA, funds for the employee’s social security, income tax, and Medicare. An employer’s failure to do so may result in serious repercussions. It is monumentally important for individuals to study the factors listed above to avoid these repercussions.

You might also want to take a look at…

  1. What is the Texas Series LLC
  2. Common Types of Employment Agreements