Independent Contractor Tests
Appendix A - Consultants - Comparison List
Appendix B - Tax Audits and Rule 13 Hearings
Appendix C - Independent Contractor Case Studies
Appendix D - IRS Independent Contractor Test
Appendix E - TWC Independent Contractor Test
"Contract labor" may be the most widely used misnomer in business today. The issue is really whether a given worker is an employee or an independent contractor. In basic terms, an employee is someone over whose work an employer exercises direction or control and for whom there is extensive wage reporting and tax responsibility. An independent contractor is self-employed, bears responsibility for his or her own taxes and expenses, and is not subject to an employer's direction and control. The distinction depends upon much more than what the parties call themselves.
The Texas Unemployment Compensation Act does not directly define "independent contractor". Instead, it sets forth a broadly inclusive test, known as the "direction or control" or "common law" test, for who is an employee: "'employment' means a service, including service in interstate commerce, performed by an individual for wages or under an express or implied contract of hire, unless it is shown to the satisfaction of the Commission that the individual's performance of the service has been and will continue to be free from control or direction under the contract and in fact". By implication, an "independent contractor" would be a person whose services do not meet the above test. To aid in application of the common-law test, TWC has adapted the old IRS twenty-factor test for use by the agency (see Appendix E to this article).
It is important to note that it does not matter that one or both parties may call their arrangement "contract labor". The above definition makes clear that the important consideration is the underlying nature of the work relationship. The law creates a presumption of employment and places the burden for proving otherwise on the employer. It sets forth the primary factor in an independent contractor relationship, namely, the absence of direction and control over the work.
In 2019, TWC adopted a regulation defining "marketplace contractors", a subset of workers who are regarded as non-employees for purposes of unemployment insurance wage reporting and taxes. The new regulation is 40 T.A.C. § 815.134(b), a clarification of how the existing 20-factor test (see Appendix E for this article) relates to "gig economy" workers / marketplace contractors. It applies to those who use digital apps to obtain projects, tasks, or assignments through a "digital network". If the digital network satisfies the three-part definition of a "marketplace platform", and the work relationship meets all nine criteria specified in subsection (b)(2), the worker can be considered an independent contractor with respect to the marketplace platform. The burden of proof is on a company wishing to assert that certain workers are not employees. PEOs and temporary help firms are excluded from the definition of marketplace platforms. The new rule applies only to UI claim and tax liability issues and does not affect definitions of employment for other laws, such as wage and hour, discrimination, and workplace safety statutes.
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