Independent Contractors vs. Employees
Authored By: Partnership for Legal Access
Independent Contractor or Employee
· What is the difference between an independent contractor and an employee?
In a very general way, an independent contractor is a self-employed person who operates her own business and is able to carry out that business independently of the other businesses with whom she contracts - her customers. An employee is a person who is not in business for himself but works in a business owned by someone else and is dependent on that business for the terms and conditions of his employment and for his continued employment.
· What difference does this distinction between independent contractor and employee make?
There are many legal protections, liabilities and relationships vary depending on whether the working relationship involved is between an employer and employee or rather between an independent contractor and a customer of that contractor's services.
· What difference does this distinction between independent contractor and employee make with respect to employment protections?
Specifically with regard to employment rights, most statutory employment protections apply to employers and employees but do not apply to independent contractors. For example the requirements the state and federal minimum wage laws and federal overtime laws protect only employees who are employed by an employer. The Texas Payday Law protects only an employee who is employed by an employer. None of these laws protect an independent contractor - even if the independent contractor was paid less than minimum wage or overtime or was not paid at all for her work.
· What difference does this distinction between independent contractor and employee make with regard to employment benefits?
The other reason the distinction matters is that most employment-related social safety-net benefit programs are set up mainly to protect employees. Employees for example, are covered by workers compensation and unemployment insurance laws, while independent contractors are not. Employers are required to pay half of the FICA tax contributions for their employees (7.65% of gross wages), while independent contractors have to pay the entire FICA tax themselves (15.3% of gross wages). Similarly private employment benefits, such as health insurance or retirement plans, are much more likely to be available to employees and much more rarely to independent contractors especially if they are low-income.
· Why do we guarantee fewer employment protections and benefits for independent contractors than employees?
The theory is that independent contractors are owners and operators of their own businesses and therefore they have enough economic power to drive a hard bargain and take care of themselves. So they don't need the protections of the law the way employees do.
· Why has it become so difficult to determine who is an independent contractor and who is an employee?
The law defining the difference has never been completely clear cut. There have always been some variations in the definition of independent contractor and employee from one law to the next and variations from one court ruling to the next. But in recent years more and more businesses have begun to reclassify people who formerly were considered employees to now consider them independent contractors. Some businesses have seen this as a way to try to escape responsibility for complying with employment laws (for example overtime laws) and for shifting costs from the business onto the worker (for example FICA taxes and workers compensation premiums).
· If a worker is called an "independent contractor" does that mean they don't have the employment rights of an employee?
Not necessarily. Just labeling a worker as an "independent contractor" does not by itself mean that he is an independent contractor. Even if he believes he is an "independent contractor," that may only be because that is what he has been told. It is necessary to apply the legal test to determine whether he really is an independent contractor or an employee.
· So what is the legal test for determining who is an employee and who is an independent contractor?
This is a little complicated because somewhat different tests are used by different agencies and different laws. But most of the tests are similar and there are some common rules of thumb that help to separate independent contractors from employees. One version of the test that is helpful is the test used by the Texas Workforce Commission under the Texas Payday Law. This test spells out 20 questions that clarify who is an employee and who is an independent contractor.
The TWC test for independent contractors vs. employees
· The following 20 factor test has been formally adopted by the Texas Workforce Commission for determining who is an employee and who is an independent contractor under the Texas Payday Law. As a practical matter is it also the test the TWC uses when enforcing the minimum wage and overtime requirements under the federal Fair Labor Standards Act and the Texas Minimum Wage Act. http://www.twc.state.tx.us/ui/tax/forms/c8.pdf
EMPLOYMENT STATUS - A COMPARATIVE APPROACH
Under the common law test, a worker is an employee if the purchaser of that worker's service has the right to direct or control the worker, both as to the final results and as to the details of when, where, and how the work is done. Control need not actually be exercised; rather, if the service recipient has the right to control, employment may be shown.
Depending upon the type of business and the services performed, not all of the twenty common law factors may apply. In addition, the weight assigned to a specific factor may vary depending upon the facts of the case.
If an employment relationship exists, it does not matter that the employee is called something different, such as: agent, contract labor, subcontractor, or independent contractor.
An Employee receives instructions about when, where and how the work is to be performed.
An Independent Contractor does the job his or her own way with few, if any, instructions as to the details or methods of the work.
Employees are often trained by a more experienced employee or are required to attend meetings or take training courses.
An Independent Contractor uses his or her own methods and thus need not receive training from the purchaser of those services.
Services of an Employee are usually merged into the firm's overall operation; the firm's success depends on those Employee services.
An Independent Contractor's services are usually separate from the client's business and are not integrated or merged into it.
4. SERVICES RENDERED PERSONALLY:
An Employee's services must be rendered personally; Employees do not hire their own substitutes or delegate work to them.
A true Independent Contractor is able to assign another to do the job in his or her place and need not perform services personally.
5. HIRING, SUPERVISING & PAYING HELPER:
An Employee may act as a foreman for the employer but, if so, helpers are paid with the employer's funds.
Independent Contractors select, hire, pay and supervise any helpers used and are responsible for the results of the helpers' labor.
6. CONTINUING RELATIONSHIP
An Employee often continues to work for the same employer month after month or year after year.
An Independent Contractor is usually hired to do one job of limited or indefinite duration and has no expectation of continuing work.
7. SET HOURS OF WORK:
An Employee may work "on call" or during hours and days as set by the employer.
A true Independent Contractor is the master of his or her own time and works the days and hours he or she chooses.
8. FULL TIME REQUIRED:
An Employee ordinarily devotes full-time service to the employer, or the employer may have a priority on the Employee's time.
A true Independent Contractor cannot be required to devote full-time service to one firm exclusively.
9. LOCATION WHERE SERVICES PERFORMED:
Employment is indicated if the employer has the right to mandate where services are performed.
Independent Contractors ordinarily work where they choose. The workplace may be away from the client's premises.
10. ORDER OR SEQUENCE SET:
An Employee performs services in the order or sequence set by the employer. This shows control by the employer.
A true Independent Contractor is concerned only with the finished product and sets his or her own order or sequence of work.
11. ORAL OR WRITTEN REPORTS:
An Employee may be required to submit regular oral or written reports about the work in progress.
An Independent Contractor is usually not required to submit regular oral or written reports about the work in progress.
12. PAYMENT BY THE HOUR, WEEK OR MONTH:
An Employee is typically paid by the employer in regular amounts at stated intervals, such as by the hour or week.
An Independent Contractor is normally paid by the job, either a negotiated flat rate or upon submission of a bid.
13. PAYMENT OF BUSINESS & TRAVEL EXPENSE:
An Employee's business and travel expenses are either paid directly or reimbursed by the employer.
Independent Contractors normally pay all of their own business and travel expenses without reimbursement
14. FURNISHING TOOLS & EQUIPMENT:
Employees are furnished all necessary tools, materials, and equipment by their employer.
An Independent Contractor ordinarily provides all of the tools and equipment necessary to complete the job.
15. SIGNIFICANT INVESTMENT:
An Employee generally has little or no investment in the business. Instead, an Employee is economically dependent on the employer.
True Independent Contractors usually have a substantial financial investment in their independent business.
16. REALIZE PROFIT OR LOSS:
An Employee does not ordinarily realize a profit or loss in the business.
Rather, Employees are paid for services rendered.
An Independent Contractor can either realize a profit or suffer a loss depending on the management of expenses and revenues.
17. WORKING FOR MORE THAN ONE FIRM AT A TIME:
An Employee ordinarily works for one employer at a time and may be prohibited from joining a competitor .
An Independent Contractor often works for more than one client or firm at the same time and is not subject to a non-competition rule.
18. MAKING SERVICE AVAILABLE TO THE PUBLIC:
An Employee does not make his or her services available to the public except through the employer's company.
An Independent Contractor may advertise, carry business cards, hang out a shingle, or hold a separate business license.
19. RIGHT TO DISCHARGE WITHOUT LIABILITY:
An Employee can be discharged at any time without liability on the employer's part.
If the work meets the contract terms, an Independent Contractor cannot be fired without liability for breach of contract.
20. RIGHT TO QUIT WITHOUT LIABILITY:
An Employee may quit work at any time without liability on the Employee's part.
An Independent Contractor is legally responsible for job completion and, on quitting, becomes liable for breach of contract.
Source: Texas Administrative Code, Title 40, Part 20, ' 821.5.
· How do use all these 20 different factors in combination with one another?
The most practical and effective approach is to apply each of the 20 questions to the facts of the case you are trying to evaluate. Pick out those 3, 4 or 5 questions that seem as a matter of common sense to most clearly capture the economic reality of the work relationship. Emphasize those factors in making your case to an opposing party, or an administrative agency, or a court.
· Does it matter if there is a written agreement signed by the worker, stating the she is an independent contractor?
Not really. What matters is the true economic reality of the relationship. If the worker had no real bargaining power in the relationship - which tends to suggest she is an employee - of course she would feel like she had to sign whatever document her employer required her to sign.