As a result of the economic downturn, business at the Bedrock Granite Quarry was not rocking along. Mr. Slate, the owner of the quarry, was forced to reduce his workforce and hire “independent contractors”, like Barney Rubble, to perform work on an as needed basis. Rubble has been working at the Bedrock Granite Quarry since 2008. Last month, despite prior warnings, Rubble was caught operating a company vehicle while not wearing shoes and was terminated. Rubble then filed an unemployment claim with the Bedrock Workforce Commission maintaining that he was a Bedrock employee and not an independent contractor. What is the significance of the Bedrock Granite Quarry characterizing Rubble’s employment as independent contractor vs. an employee?

While you may not think that it matters much whether an individual pays their taxes or you withhold them, the IRS, the Texas Workforce Commission and the Texas Attorney General (for child support) care a lot. Mischaracterizing an independent contractor as an employee has nominal consequences, but the consequences of mischaracterizing an employee as an independent contractor can be significant. When the TWC investigates, it will determine whether you have properly characterized the worker. If you lose, the TWC will make you responsible for back taxes and interest and will, most certainly, contact the IRS.

The TWC and the IRS start with a presumption that the person is an employee. The following is an amalgamation of the tests that provide insight into which category a worker falls:

  1. Instruction and control – this is a key factor. If you say where to go and leave it up to the individual to get the work done, they may be an independent contractor. If you tell the individual how to do it, they start to look more like an employee.
  2. Training – if you are training the person, they are probably an employee.
  3. Equipment and expenses – if you provide equipment and pay expenses, they are likely an employee.
  4. Benefits—if you provide benefits, like healthcare and 401(k), they are most definitely an employee.
  5. Other work – if the person works solely for you, perhaps has set hours of work and would not have time for another customer or employer, they are probably an employee. Independent contractors regularly work for numerous customers or clients.
  6. How paid—if you pay a weekly salary or draw that is not dependent on performance, they are probably an employee. Independent contractors are usually paid by the job and don’t get paid if a job is done unsatisfactorily.
  7. Terminating the relationship – if you can unilaterally let the person go in the middle of a project or they can walk away from work in progress, they are probably an employee. Independent contractors cannot usually be terminated in the middle of a project without someone having a right to damages.

Tilting the Scales Your Way:

Conduct a review of those who work for you. In most cases, you will quickly be able to ascertain the individual’s status. For those more difficult cases, the factors above will provide some guidance. The safest course is to characterize the individual as an employee. Very often, an independent contractor grows into an employee over time as they become a more integral part of your business. Employers should create written job classifications for each position in the company. Some employers make a written contract with all independent contractors which clearly delineates their status (but do not include a covenant not to compete – which is a clear sign of an employee).