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Classification of Employees and Independent Contractors

Texas businesses face a task with difficult and potentially costly legal implications when determining whether to classify workers as employees or independent contractors. Certain businesses may have an economic incentive to classify workers as independent contractors because employees are subject to tax withholding and entitled to additional legal protections and benefits that may increase the overall cost of labor to the business. But misclassifying employees as independent contractors could result in litigation under laws such as the Fair Labor Standards Act (FLSA).

Unfortunately, the path is not clearly marked for businesses intending to correctly classify workers. Classifying workers correctly is generally not informed by how the business prefers to classify a worker nor which classification would be most beneficial to the business; the business’s self-determined label for the employee holds almost no bearing on the legally correct classification. A variety of other factors are instead used to determine, within the totality of the circumstances, which classification is correct. But the factors and their sum are somewhat of a moving target, creating a challenge for employers.

A web of different legal tests exist that inform the proper classification for, among other things, social security tax purposes, federal income tax purposes, and FLSA requirements. In fact, the Texas Workforce Commission maintains a webpage that lists no fewer than four tests that may be utilized in various contexts to ascertain the correct classification. These “independent contractor tests” arose at different times to serve disparate purposes, and were created by judges, administrative agencies, or legislative bodies.

However, the United States Department of Labor (DOL) issued an Administrator’s Interpretation in July that provides consolidated and revised guidance on the application of the standards for classifying workers as employees or independent contractors. That Interpretation implies that there is an automatic presumption of employee status, meaning all workers will be assumed to be employees unless the business can show sufficient proof to the contrary. The test stated within the Interpretation lists six factors that inform the correct classification: (1) Is the worker an integral part of the employer’s business (2) Does the worker’s managerial skill affect the worker’s opportunity for profit or loss (3) How does the worker’s relative investment compare to the employer’s investment? (4) Does the work performed require special skill and initiative? (5) Is the relationship between the worker and the employer permanent or indefinite? and (6) What is the nature and degree of the employer’s control?

Business owners in Texas should seek guidance from a qualified lawyer to determine the correct hiring classification of workers. If there is a benefit to hiring independent contractors, an experienced attorney can help to ensure contracts are appropriately drafted and working arrangements well understood to conform to the current legal landscape.

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