Top Ten Tips Disclaimer
The above points are all general factors, but there are many details that can be helpful in determining whether given workers are independent contractors or employees:
Cash flow - how the money gets from the customer or the client to the worker is important. If the client pays the employer in general, and the employer pays the worker either by the hour, by salary, or by commission, the worker looks more like an employee. If, on the other hand, the employer pays the contract price for work completed, the worker would appear to be an independent contractor. Alternatively, if the client pays the worker, and the worker remits an agreed-upon fee or percentage to the employer, that would look more like an independent contractor situation. If the worker merely collects the pay from the client, passes it along to the employer as an agent would, and receives a share of it back, he would appear more like an employee than an independent contractor.
"Rent" - closely related to the cash flow issue is that of the compensation the worker gives the employer for the use of its facilities or equipment. Keep in mind that the opportunity for profit or loss is an important hallmark of an independent contractor. An employer normally provides its employees with everything needed to do their work. A business contracting with an independent contractor normally expects the contractor to supply what is needed to accomplish the project. If the worker uses the employer's facilities and equipment at no cost, he looks like an employee. If the worker must pay some negotiated amount in rent or usage fees regardless of the contract price or of how much he takes in from customers, that looks very much like the kind of profit or loss opportunity any independent business that rents commercial space or equipment would have. It is important to note that this kind of compensation does not have to be separately invoiced or structured as "rent" in order to be a factor in the profit or loss equation. The price for the work in the underlying contract can simply be adjusted to reflect the reasonable value of the employer's assets used by the contractor in performing the work. Any such adjustments should be specifically noted in the contract.
Hours of work - clearly, any worker who is told to work certain hours does not have control over her own schedule, an essential component of the profit or loss equation. If the worker has a key to the facility and can work during hours outside the normal operating times of the employer, she will look more like an independent contractor. If an independent contractor wants to take time off, that should be up to her. If she can do that and still meet her contract obligations, that should not matter to the employer. That is not to say that the contract can not specify that the contractor will be available within certain guidelines for purposes of consultation or progress checks. However, the more control the employer exercises over the hours of the worker, the greater the risk is that the situation will be considered employment.
Assignments - closely related to the issue of hours of work is that of how the work comes to the workers. A worker receiving assignments from the employer as they come up is likely to be indistinguishable from a regular employee. An independent contractor, having been engaged to perform a specific job or project, derives his "assignments" from the terms of the contract and determines what his daily tasks will be in fulfillment thereof.
Insurance - if the employer provides liability insurance for the workers, the situation would likely be held to be employment, since the workers would not have ordinary business liability as a risk of doing business.
Advertising and listings - the employer should not be providing advertising for the workers. Independent businesspeople provide their own advertising, such as business cards, business stationery, Yellow Page listings, brochures, and so on. In addition, workers who are independent contractors should have their own listings in the phone book, if not also separate numbers. If they are listed in ads and directories as being associated with a particular business, the risk is that they may be considered employees, rather than self-employed businesspeople.
Benefits - an employer who provides benefits such as vacation and sick leave, health insurance, bonuses, or severance pay will almost inevitably be considered the employer of the workers. The power to award benefits carries with it the power to deny them, and that kind of power is exercised by employers. Think about it: a business that contracts to have its roof fixed would not be telling the roofers whether they could or could not go on vacation. It would be up to the roofing contractor to decide whether workers could go on vacation and still have the roof fixed by the contract deadline. By the same token, the business would not be extending its employee health plan to the roofing company's workers. The same considerations apply to any industry.
Termination of the relationship - a business that has the right to fire a worker at will is generally considered the employer of that worker. An independent contractor will usually have some kind of contractual recourse if fired before completion of the work, and the contract will generally specify conditions that must be met if the contract is to be cancelled.
These are the main types of factors TWC will consider when determining whether certain workers are employees or independent contractors. TWC's official test is a variation of the old IRS twenty-factor test (see Appendix E of this article). No one factor will determine the entire case, and not every case will involve all the factors discussed herein. Each case is decided on an individual basis after weighing all of the factors present. The bottom line in any case in this area will be whether the facts show that the worker in question is in effect an independent business entity in a position to make a profit or loss based upon how he manages his own enterprise. Employers in doubt over any of their workers are encouraged to request a ruling on the status of such individuals from TWC's Tax Department and to call their local TWC tax office for further information.
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