What Are Independent Contractors?
Independent contractors, while much discussed in Texas law, are actually not defined as such in any single statute. Rather, the term refers to an individual who provides services to a company based on a written contract that establishes their status as a non employee. An independent contractor performs their work and controls the manner and means of accomplishing the result, rather than having it subject to the control of the company. Put another way, an independent contractor/firm is the master of their own operations, while employees are the subject of the control of their employer.
Although the IRS has promulgated various tests and regulations to determine if a worker is an employee or independent contractor for taxation purposes, the inquiry under Texas law is somewhat simpler. Instead, the determination of a worker’s status as employee or independent contractor typically turns on the right of the hiring party to exercise such control . If circumstances show that the worker is subject to the control of the company, they are properly characterized as an employee. Nevertheless, what constitutes "control" under Texas law is not clearly delineated, leaving the status of a worker as employee or independent contractor open to question in many cases and subject to continuing litigation.
For example, in the contract construction industry, a firm may bring in a subcontractor to provide services on a discrete project. If it has a written contract with such subcontractor, the designation of the subcontractor may be sufficient evidence to prove that the subcontractor is an independent contractor, but that determination will be influenced by the broad range of factors considered in making the determination of an independent contractor/employee relationship.
Standard and Tests
Determining whether an individual is an independent contractor or an employee for Texas payroll and tax purposes often devolves into a fact-intensive analysis considering the relationship between the parties. The state’s courts and administrative bodies have inherited the agency law concept of "control," which is at the heart of the federal common law independent contractor definition that provides for neither control nor independence from control as keys to classification.
As such, the Texas Workforce Commission ascribes many factors in its analysis of independent contractor classification (see Texas Labor Code § 312.005(b)). These include the following considerations: Similarly, the IRS has developed thirteen factors for evaluating independent contractor status (see IRS Rev. Rul. 87-41). Like the TWC, the IRS focuses on "behavioral control" for assessing whether the employer is directing or controlling how the work gets done. This standard includes the following criteria: The IRS also weighs "financial control" – including whether the worker has un-reimbursed expenses, whether the worker has invested in the equipment and materials necessary to perform the job, and whether the worker stands to realize a profit or loss from the work. Finally, the IRS assesses the type of relationship between the parties – including whether there is a written contract, benefits provided, work being performed as part of the regular business activity, and how the relationship ends. In addition to these "common-sense" tests, the states and IRS have adopted certain statutory presumptions that provide significant (and sometimes conclusive) presumptions that a worker or group of workers is an independent contractor or an employee. More often than not, those presumptions favor independent contractor status. Labor Code § 82.001 declares that "a licensed real estate professional is deemed to be an independent contractor where there is a written agreement and the person performing the activities does not receive any compensation normally associated with an employer-client relationship." Tax Code Section 171.052 triggers a strong presumption that a person hired to provide services is an independent contractor "unless it is established that the person is the common-law employee of the company…. A common-law employee is a natural person who performs services for another under a contract of hire, subject to the other’s control or right of control as to the details of the work performed." Following the passage of the Affordable Care Act, Tax Code § 1468 bolstered the presumption that certain vegetarian and organic food delivery services, including those selling "locally grown" produce directly to consumers, are independent contractors. This statutory presumption applies to members of a limited liability company providing a "community supported agriculture" (CSA) program including both farmers and drivers for a CSA program. However, as noted above, these presumptions can be trumped by other legal standards, including the ultimate determination of a "right to control" the manner and means of the work. Moreover, additional statutory prohibitions, including the Texas Payday Law and Title VII and ADA, impose additional duties that do not necessarily mesh with independent contractor status. Therefore employers seeking to contract for services in the state must conduct a careful analysis of the parties’ relationship. Classification is particularly important in Texas where some exemptions for private lawsuits are contingent on independent contractor status. Under the Texas Unemployment Compensation Act, a party can sue for unpaid billing fees only if the parties are considered to be employer and independent contractor. Similarly, the Texas Whistleblower acts allows "independent contractors" to bring claims for retaliation. In Texas, the stakes of independent contractor misclassification can be high. Employers mistakenly classifying employees as contractors may face statutory wage payment claims, penalties, and even civil lawsuits by their workers. In addition, misclassification can lead to civil and criminal liability under the IRS and state laws.
Contracts
Entering into a well-tailored, comprehensive independent contractor agreement is a key component to the successful transition of a new hire from employee status to independent contractor status. Even if there is an existing employment agreement with a formerly employed individual, an employer should not assume that the mere conversion of that employee to an IC is sufficient to protect the company’s interests with respect to the newly established IC relationship. There are many reasons for this, and the written agreement can provide the IC and his or her clients with usable evidence in the event of a misclassification dispute.
What should an independent contractor agreement contain? It is essential that the agreement be mutually agreed upon by both the client and the contractor and that no evidentiary inference of control be available under its terms. Ideally, the terms should be written with an understanding of the realities of the relationship, and not just on the basis of hypothetical nuclear "what if" scenarios.
As with any contract, the intent of the parties should be honored, but independent contractor agreements should also address issues that naturally may not be anticipated by the parties. Some of the more relevant issues to be considered when drafting an independent contractor agreement include:
— CONFIDENTIALITY – Protection for a client’s business information, such as trade secrets, client lists, and/or proprietary information going forward in the event of a dispute.
— INDEMNIFICATION – Protection against loss of business and litigation damages.
— WORK PRODUCT – A resolution of the ownership of the work product created by the individual.
— GOVERNING LAW – A resolution of which state law governs the agreement.
— ATTORNEYS’ FEES – A resolution of the prevailing party’s entitlement to recover attorneys’ fees.
— SEVERABILITY – Retention of the enforceable portions of an otherwise illegal or unenforceable agreement.
— NON-SOLICITATION/NO HIRE – Protection against solicitation or hiring of the client’s employees or customers.
— NON-COMPETE -Protection against the creation of future competition.
Taxes
One of the biggest distinctions of an independent contractor classification is that contractors are responsible for their own taxes. Based on the amount that you already report on your W-9, contractors will receive a 1099 from their clients for that year that reports the total amount the client paid them. Independent contractors should consider filing estimated state and federal taxes quarterly. Texas and the federal government are generally reasonable in their enforcement of self-employment tax payments, but not paying or falling behind in your tax obligations can lead to complications you would not face as an employee. In Texas, independent contractors do have to pay self-employment tax, which means that you will pay both halves (your own and the company’s) of FICA taxes. The federal government’s self-employment tax rate is 15.3% of the net self-employment income you earned during the year. Your net self-employment income is your gross income minus any business expenses you are entitled to deduct. If your business expenses bring you into a loss for the year, you will not have any taxable income or self-employment tax obligations, but will not receive a refund on any taxes you paid during the year.
Independent contractors may deduct a variety of business expenses like travel and home office expenses. There are some limitations that apply to how much you may deduct for some business expenses, like meals, entertainment, and use of business vehicles. Generally, the most straightforward way of determining your deductible business expenses is through the standard mileage rate for any work-related travel. You are entitled to deduct the market value of your time, meal expenses, and entertainment expenses, but there are also standard rates for these types of expenses. Depending on the deduction methods you use, Ohio law may also allow you to claim a number of other deductions. These include the following: Independent contractors should consider keeping a record of and documenting all paid invoices, expenses, and receipts. In the event there is an audit, having proper documentation will be essential.
Rights and Protections for Independent Contractors in Texas
The rights and protections afforded to independent contractors in Texas are notably limited, particularly in comparison to those provided to employees. For the most part, the Texas Workforce Commission does not enforce state wage and hour laws that protect independent contractors. However, this does not mean that such workers do not have legal rights or protections. On the contrary, they have a number of legal protections that they should be aware of.
For example, Texas Labor Code 61.051 protects independent contractors hired to perform work related to the transfer of ownership, improvement or repair of a home or "residential real property." Independent contractors providing these types of services are entitled to recover payment if an owner or general contractor fails to pay them. More specifically, independent contractors may do the following:
Independent contractors may also pursue fraud claims, breach of contract claims and similar civil actions against clients or other employers . For example, if a business misclassifies its employees as independent contractors, the victimized ICs may have a cause of action for fraud and/or fraud in a fiduciary capacity.
Texas law also protects independent contractors from non-payment of debt. Non-payment of debt could include failure to pay wages or fees due for services provided by an independent contractor.
Recent case law has also illuminated some of the rights of independent contractors. For example, in Paul v. Houston, the Court of Appeals of Texas found that the factors used to assess whether an employer-employee relationship exists could in some respects support the finding of independent contractor status. This case illustrated how nuanced the legal analysis of IC status can be.
The most important legal protection owed to independent contractors in Texas is a duty of good faith and fair dealing. When an independent contractor relies on another party for sustenance in performing a project, that party has a duty to act in good faith with respect to the work. In other words, the generalized duty of good faith and fair dealing owed to every contracting party applies.
The Gig Economy in Texas
The gig economy has had a pronounced impact on independent contractor laws in Texas. From taxi drivers to software engineers to caregivers, individuals who work as independent contractors are the face of the gig economy. With the growth of companies like Uber and Lyft, cities and states have been forced to consider whether relying on an independent contractor to drive their cars exposes companies to liability.
And it’s all well and good if you’re driving an Uber, or even doing some freelance writing from home, but millions of Texans rely on independent contractors for essential services. Taxicab drivers, for example, are still a massive part of the Austin transportation system. They make up a significant part of the workforce. Nissan has contracted out the manufacturing of their vehicles for years, and those employees have critical roles in the manufacturing process.
Protecting the interests of these workers has a ripple effect throughout the state economy, and it’s becoming increasingly complicated to make sure that everyone gets the benefits they need without saddling the businesses they work for with complex rules and regulations.
Other states have taken different approaches to pieces of the gig economy, with some cities like Austin and New York City taking an aggressive stance to expand the definition of employee and increase oversight of the industry, while others have opted for a more laissez faire approach.
For example, most of California’s gig economy workforce is classified as independent contractors, but this September, the state passed legislation requiring rideshare companies to classify more of their workforce as employees.
With the identification of employees having such a significant impact in determining eligibility for benefits, the distinction between independent contractors and employees looms large. Texas has been aggressive in taking a hands-off approach to gig companies; however, it remains to be seen whether that will hold now that other states are taking a more active role in shaping the relationship between gig companies and their independent contractors.
It is crucial for government officials to consider the interests of independent contractors and what solutions will best protect their interests wherein the Texas economy continues to grow and our lives continue to diversify.
Disputes and Legal Assistance
Independent contractors aren’t covered under the same workplace protections as employees; however, many contractual relationships have termination, confidentiality, and non-solicitation agreements that must also be abided by. If a dispute arises regarding your independent contractor relationship, there are a few best practices you should adhere to before seeking any type of legal resolution.
- Review the contract first. Most contracts will specify what the final means of resolution is, whether it be binding arbitration or a mutual agreement.
- Attempt to negotiate the terms of the dispute. Remember, you’ve chosen the contract terms through negotiation, and rarely is it beneficial to try to circumvent an already agreed-to contract. In other words, it may seem naïve to even attempt negotiation, but if you do not seek to negotiate, you may find yourself in breach of contract; or worse, the other party might seek to breach against you .
- Do not threaten breach of contract. Threatening breach will not endear you to the person with whom you have entered into a contract. Do your utmost to fulfil your contract terms, and if this appears impossible for some reason, attempt to amicably agree upon the terms of termination.
- Hire a lawyer if necessary. If one party is threatening breach, or has committed an act that suggests unilateral termination of the contract, you may be able to sue for damages or seek another form of relief. Lawsuits should only be considered a last resort, because they are expensive and can take significant time to resolve.
As with all legal matters, you may wish to speak with a lawyer if you believe you are entering into a partnership, alliance, or contract with another entity to resolve the terms of the agreement before beginning your work.