Cecily Zamora
In Texas, employers and employees must understand how employment law affects their workplace, including the difference between employees and independent contractors. Under common law, a worker is generally considered an employee if their employer has the right to control what will be done and how it will be done. This is the case even if the employee has freedom of action or works remotely. The IRS uses a 20-point guide, also known as the right-to-control test, to determine whether a worker is an employee or an independent contractor. This guide evaluates the degree of control and independence in the relationship, including behavioural control, financial control, and the type of relationship between the parties. In Texas, it is important to correctly classify workers as either employees or independent contractors, as misclassifying workers can increase taxes and result in penalties and interest.
| Characteristics | Values |
|---|---|
| Nature of work | The worker performs services for the employer |
| Control | The employer has the right to control the work done and how it is done |
| Employment status | The worker is paid by the hour, week, or month |
| Benefits | The worker receives employee benefits such as health insurance, sick leave, vacation pay, or retirement contributions |
| Employment contract | The worker has an employment contract with the employer |
| Employment relationship | The worker is expected to follow the employer's instructions and report to a supervisor |
| Work location | The worker performs their duties at the employer's premises or a designated workplace |
| Work tools and equipment | The employer provides the necessary tools and equipment for the worker |
| Work schedule | The employer sets the work schedule, and the worker is expected to work a minimum number of hours |
| Work exclusivity | The worker is expected to work exclusively for the employer and cannot work for other businesses or clients |
| Work evaluation | The employer evaluates the worker's performance and has the right to terminate their employment |
| Work environment | The employer is responsible for providing a safe work environment, and the worker has the right to refuse to work in unsafe conditions |
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What You'll Learn
Common law employee vs. independent contractor
In Texas, the main difference between a common-law employee and an independent contractor is the level of control exerted by the employer. A common-law employee is someone over whom the employer has control over the final results and the details of when, where, and how the work is done. The employer does not necessarily need to exercise this control, but simply has the right to.
Common-law employees are typically paid by the hour, week, or month, and often receive benefits such as health insurance, sick leave, vacation pay, and retirement contributions. Employers are responsible for withholding and paying Medicare and Social Security taxes, as well as unemployment insurance on wages paid to common-law employees.
On the other hand, independent contractors typically have more freedom and autonomy in their work. They usually work with various parties, using their own equipment and setting, and their duties may be limited in time and scope. Independent contractors are usually concerned only with the final product and set their own order or sequence of work. They typically negotiate the terms of their engagement and outline them in an agreement with the client. Independent contractors are usually paid by the job, either through a negotiated flat rate or a bid submission.
It is important for employers to correctly classify their workers as either common-law employees or independent contractors, as misclassification can result in increased taxes, penalties, and interest. The Texas Workforce Commission (TWC) provides a 20-point guide to help employers determine the classification of their workers. Additionally, the IRS offers guidance and can officially determine a worker's employment status through Form SS-8.
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Benefits and tax implications
In Texas, a common-law employee is defined by the Texas Workforce Commission (TWC) as a worker over whose service the purchaser has direction or control. This includes control over when, where, and how the work is done. The TWC uses a 20-point guide to determine whether a worker is an employee or an independent contractor.
The distinction between an employee and an independent contractor is important for benefits and tax implications.
Benefits
In Texas, common-law employees are entitled to the same benefits as those who have obtained a marriage certificate. For example, under the FMLA, employers may require workers to provide documentation to verify a family relationship when taking leave to care for a relative. In this case, a common-law spouse would be considered a family member.
Additionally, domestic partnerships are recognized by specific city and county employers in Texas, such as Austin, Dallas, Houston, and San Antonio. This means that these municipalities extend benefits to domestic partners of their employees, although this does not apply to other employers.
Tax Implications
Misclassifying a worker as an independent contractor rather than an employee can result in increased taxes, penalties, and interest charges for the employer. Under common-law rules, a worker is considered an employee if the employer has the right to control what will be done and how it will be done, regardless of whether this control is actually exercised. Therefore, employers should be cautious when classifying their workers to avoid these additional costs.
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Employment status determination
Common Law Employee:
A common-law employee, according to the Internal Revenue Service (IRS), is an individual whose work is controlled by their employer. The employer determines what tasks are performed and how they are executed, regardless of the degree of freedom given to the employee. This control is the defining factor in the employer-employee relationship, outweighing any labels or designations.
Independent Contractor:
An independent contractor, or self-employed individual, typically works with multiple clients and sets their own schedules and workspaces. They provide services that may be similar to those of an employee, but they are generally free from the employer's control. Independent contractors are usually responsible for their taxes and may not receive the same benefits as employees, such as health insurance or retirement plans.
Factors for Determination:
The IRS and TWC consider various factors when determining employment status. These include:
- Degree of Control: The primary factor is the right to control the work performed, including the final results and the details of when, where, and how the work is done.
- Nature of Work: The type of work performed, whether it is a key aspect of the business, and if it is performed on the employer's premises.
- Payment Structure: Employees are typically paid at regular intervals (hourly, weekly, etc.), while independent contractors are often paid by the job or through negotiated rates.
- Benefits: Employees often receive benefits such as health insurance, retirement contributions, sick leave, and vacation pay. Independent contractors generally do not receive these benefits.
- Duration of Work: Employees usually have indefinite job terms, while independent contractors may be hired for specific projects or periods.
The above factors are considered in various tests, such as the 20-point guide used by the TWC and the ABC Test used in some states, to determine employment status. Misclassifying workers can result in tax penalties and legal consequences.
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Direction and control
In Texas, the Texas Workforce Commission (TWC) is the state agency responsible for overseeing and providing workforce development services to employers and job seekers. The TWC uses a 20-point guide to determine whether a worker is an employee or an independent contractor.
The "right-to-control test", as it is known, is used to determine whether a worker is a common-law employee or an independent contractor. The IRS no longer uses this test, but elements of it are still used to determine a worker's status.
The common-law test states that a worker is an employee if the purchaser of their services has the right to direct or control the worker, including the final results and the details of when, where, and how the work is done. It is important to note that the control does not have to be exercised; the purchaser only needs the right to do so.
For example, an employee may be required to submit regular reports about their work, whereas an independent contractor is usually not. An employee is typically paid by the employer in regular amounts at stated intervals, whereas an independent contractor is usually paid by the job, either through a flat rate or a bid.
Additionally, independent contractors usually have their own workspace and pay for their equipment, whereas employees are granted benefits such as health insurance and retirement plans.
In summary, the distinction between a common-law employee and an independent contractor in Texas depends on the degree of direction and control exercised by the employer. The TWC's 20-point guide helps to clarify this distinction and determine a worker's status.
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Employment law in Texas
Employment law, also known as labour law, governs the relationship between employers and workers in Texas. These laws are based on federal and state constitutions, administrative rulings, court opinions, and legislation. While many workers and employers are aware of common labour laws, such as the federal minimum wage, anti-discrimination laws, and overtime pay requirements, there are several misconceptions about employment law in Texas.
Firstly, Texas is an at-will employment state, meaning an employer can fire an employee at any time and for any reason. However, it is important to note that employees cannot be terminated based on their protected group status as outlined in anti-discrimination laws. Additionally, employers must provide a workplace free from known dangers that could harm employees, as outlined in the Occupational Safety and Health Act of 1970 and supported by specific Texas laws such as the Texas Occupational Safety Act and Hazard Communication Act.
Another important aspect of employment law in Texas is the distinction between employees and independent contractors. Misclassifying workers can result in increased taxes and penalties for employers. While the IRS uses Form SS-8 to determine a worker's status, the Texas Workforce Commission (TWC) employs a 20-point guide and the common law test to differentiate between employees and independent contractors. Under the common law test, a worker is considered an employee if the employer has the right to direct and control the work, including the final results and details such as when, where, and how the work is done.
Indicators of an employer-employee relationship include the employer's right to mandate where services are performed, the requirement for employees to submit regular reports, and payment at regular intervals. Independent contractors, on the other hand, typically work where they choose, are concerned only with the finished product, and are paid by the job or a negotiated flat rate.
Furthermore, employees in Texas have certain rights and protections. For example, it is illegal for employers to deduct money from an employee's paycheck to offset a mistake unless it can be proven that the employee intentionally or grossly negligently caused financial harm. Additionally, when providing references, former employers can only disclose specific information, including the reason for termination, the employee's performance, and information about attendance, attitude, and effort.
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Frequently asked questions
A common-law employee is someone who performs services for an organization and is paid by the hour, week, or month. The employer has the right to control what will be done and how it will be done.
An independent contractor is self-employed and can work for multiple businesses or clients, whereas a common-law employee works for one organization. Common-law employees and independent contractors have different withholdings for federal income tax and Federal Insurance Contribution Act (FICA) taxes.
The Texas Workforce Commission uses a 20-point guide to determine a worker's status. Some factors to consider are whether the worker receives benefits such as health insurance, sick leave, and retirement contributions, and whether the worker's job is intended to continue indefinitely.
Employers must withhold and pay for Medicare and Social Security taxes, unemployment insurance, and unemployment tax on wages paid to a common-law employee.
A salesperson employed by an auto dealer or an appraiser for a museum can be considered common-law employees.
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