Just in case you haven’t been following along, the TWC Conference for Employers is a series of seminars taking place across Texas for the next few months. These events provide valuable information on the types of policy and compliance issues the Texas Workforce Commission focuses on and what businesses can do to stay out of trouble.
Our founder, Natalie Lynch, is a private presenter this year. She knows that lots of businesses can’t attend, so she had us create these posts to share what she’s learned.
To date, we’ve written posts with information on wage issues, Title VII and investigations, avoiding costly workers’ compensation problems, and general issues surrounding workplace policies. We highly recommend going back and checking those pieces out if you haven’t already, because they are chock-full of useful information.
And don’t forget our monthly Zoom sessions covering the latest employment news. With things changing so rapidly these days, they’re the best way to stay up to date – and get caught up on anything you might have missed.
What’s on the docket for today? Independent contractor issues. Whether you have independent contractors, are thinking about using independent contractors, or, you know, aren’t completely sure whether some of the people you’re paying qualify as independent contractors, this is a must-read.
What Businesses Need to Know about Utilizing Independent Contractors
In today’s dynamic and constantly changing employment landscape, many companies appreciate the flexibility of using independent contractors. But this is an area of employment law with lots of rules and regulations attached to it, so it’s important to understand how it works and what you’re getting into.
Is how you classify a worker really that important?
Yes. Incredibly important. Worker classification affects how workers are treated under a variety of laws. Misclassification can lead to wage and hour issues, including violations of minimum wage and overtime pay requirements.
Moreover, misclassifying someone can lead to significant financial consequences, including audits and penalties. Recent agency investigations have resulted in significant penalties for companies that were misclassifying workers, such as $532,000 in Alabama and $139,000 in Texas.
It’s also worth noting that the U.S. Department of Labor has agreements with states to share information on misclassification.
The default assumption is that a worker is an employee unless proven otherwise. Because of this, employers have to provide evidence to classify a worker as an independent contractor.
What kinds of things make a worker an independent contractor?
There are several defining factors:
- Independent contractors manage their own business and are not subject to payroll taxes.
- They use their own tools
- They set their own hours
- They are not integrated into the hiring company’s core business.
These factors do not make up the complete picture of what makes someone an independent contractor, but they are at the core of that classification.
What tests do different agencies use to determine worker classification?
- The Texas Workforce Commission uses a direction and control test.
- The IRS uses a behavioral three-category test.
- The U.S. Department of Labor uses the economic reality test, which considers factors like direction and control, profit and loss, and integration of services.
- The DOL’s current test, effective from March 2024, evaluates the totality of circumstances without core factors.
That’s right. There are several tests, and all must be satisfied before you can regard a worker as an independent contractor.
How does the IRS’s worker classification test work?
The IRS test is divided into three categories:
- Behavioral control
- Financial control
- Type of relationship
Behavioral control focuses on who directs the work and how it is done. Financial control examines the economic aspects of the worker’s relationship with the company. Ultimately, the type of relationship is determined by the intent of the parties, which is often indicated by a written contract.
How does the TWC’s worker classification test work?
The TWC test assesses whether the individual’s performance of services is free from control or direction – both under their contract and in actual practice.
Why might the TWC audit your business?
Audits can occur due to unemployment claims being denied, reports of misclassification, be geographic/industry-based, or be completely random. The TWC is required to audit 1% of businesses annually.
What can you do to prepare for a TWC audit?
If you receive a notice that you are being audited, step one is not to panic. Read the audit notice carefully and organize your files.
We recommend that you consider hiring legal counsel for complex cases. Also, if you need more time, establish a dialogue with the TWC.
Are there some worker classification examples that might clarify how classification works?
Sure! Here are just a few:
- Nail technicians are classified as employees because their services and personal performance requirements are integrated into their work.
- Roofers are often classified as contractors because they work for other businesses and have their own teams.
- Plumbing apprentices are classified as employees due to legal requirements related to direction and control.
How do employment agreements (non-compete, non-solicitation, non-disclosure) work with independent contractors?
Non-compete agreements are a red flag that an employee has been misclassified as an independent contractor, as they indicate the integration of services.
Non-solicitation agreements are less problematic, and non-disclosure agreements are generally acceptable. Still not completely clear on independent contractors? It’s a topic that confounds lots of businesses. Our handy checklist may clear things up for you, but if you need additional clarity, we’re here to help.
