Contract Labor Laws in Texas

Under Texas law, a person is determined to be an independent contractor if they provide a service, are paid regular wages and are not subject to direction and control of a manager or supervisor.

Specifically, if the person’s service or work does not fit the Texas Unemployment Compensation Act (TUCA) Section 201.041 definition of employment, the state does not consider the person an employee.

The Texas Workforce Commission’s (TWC) 20-point comparative approach helps an employer to decide whether a worker is an employee or an independent contractor. The TWC's independent contractor test is a common law test not delineated in state statutes. The first five points of the test relate to:

• ‌Instructions:‌ Employee receives instructions about when, where and how the work must be performed. An independent contractor does the job in their own way with few instructions.

• ‌Training:‌ Employee is usually trained by a more experienced employee. They can be required to attend meetings or must take training courses. An independent contractor uses their own methods to complete their work.

• ‌Integration:‌ Services of an employee are usually merged into the firm's overall operation. An independent contractor’s services are typically separate from the client's business.

• ‌Services rendered personally:‌ Employee's services must be rendered personally. An independent contractor may assign another person to do the job in their place.

• ‌Hiring, supervising and paying help:‌ Employee can act as a foreman for the employer. An independent contractor may select, hire, pay and supervise helpers they use. The independent contractor is responsible for the results of a helper’s labor, meaning that they pay their helpers' wages.

Other points relate to:

• Hours.
• Location where services are performed.
• Payment of business and travel expenses.
• Right to quit without liability to the payer.
• Company’s furnishing of tools and equipment.
  

A person with questions for the TWC about independent contractors can contact its headquarters in Austin. If they need assistance from a Texas Workforce Solutions office that can help them hire employees in Houston, Dallas, or another location, they should search for such an office that is within their Zip code.

The general rule is that a person is an independent contractor if the payer retains the right to control and direct the result of the person’s work, but not what the person does and how they do it.

In January 2021, the U.S. Department of Labor (DOL) reduced the factors it considers to determine whether a person is an independent contractor to who has control over the work and the worker’s opportunity for profit or loss based on initiative and/or investment.

DOL announced the withdrawal of the prior standard for independent contractors, the “Independent Contractor Rule,” to maintain workers’ rights as to the minimum wage and overtime compensation protections of the Fair Labor Standards Act (FLSA).

DOL had found the Independent Contractor Rule to be in tension with the FLSA’s text and purpose, as well as relevant judicial precedent (holdings in legal cases prior to the 2021 decision).

The IRS defines a person as an independent contractor if the payer follows DOL’s rule. The IRS types individuals such as doctors, dentists and accountants in an independent trade as independent contractors. It sees an independent contractor as a self-employed person who pays self-employment tax and offers their services to the general public.

An employer reports employees’ wages when they pay the employees, rather when the employees earn or accrue the wages. An employer must report employee gross wages each quarter and are required to pay taxes on the first $9,000 earned per employee, per year.

Texas employment law defines employment as a service performed by a person for wages under an express or implied contract for hire. The exception is if it is shown to the Texas Workforce Commission (TWC) that the person’s performance of the service was, and will continue to be, free from control and direction under the contract.

If a person has been erroneously classified, the company contracting for the labor has the responsibility to correct it.

An independent contractor pays their own taxes, so they have the right to have the full amount of their wages paid upfront, with no taxes taken out. They often have the right to complete work at a place of their choosing, if the contract between them and their payer does not speak on that issue.

The company that contracts with the individual for labor does not offer them benefits, such as health care. At the end of the person’s term, or in the year following their service, the company provides a 1099-NEC (nonemployment compensation) form. This is why an independent contractor is called a “1099 employee.”

A company cannot fire an independent contractor. This is because the individual is not an employee. A company can choose to stop contracting with the independent contractor.

For example, if the contract specified that time was of the essence and the independent contractor did not finish the work by the set deadline, the company has good cause not to renew the contract with the individual for another term.

A written or oral contract or agreement between a company and an individual does not change the worker’s status. Erroneously classifying a worker can cost the company in taxes and interest. The state will also fine the company $200 per worker if the company is operating under a government contract.

A company that wrongly classified workers can be reported to the TWC. After the TWC receives an email message, it becomes part of the official record.

The accused, meaning the company hiring the worker, has a special right of access under Texas’ Public Information Act to review the official record. This contains the identifier for the reporting party’s email service provider. The company can also obtain copies of the record.