This creates strong incentives to falsely classify employees as independent contractors. The impact on low-ranked workers can include loss of benefits, bonuses, overtime pay, access to unemployment, and workers` compensation. The effect can be much worse if someone is misclassified but doesn`t treat themselves as such by making financial decisions like a self-employed person. Whether a person is considered an employee or an independent contractor depends on their particular situation, so courts are asked to consider a number of important factors, including: In Texas, the law assumes that an employee is an employee. In the event of an audit or dispute, it is the responsibility of the company to prove that the employee is an independent contractor. In principle, the company must prove that the employee is self-employed and that the company is only a customer of the employee. An employer pays its employees on a regular schedule, while an independent contractor is paid for the work. Employees are subject to all relevant federal and state labor laws, while independent contractors do not do so unless they are covered by certain state laws such as California`s AB5 for independent contractors and the gig economy. It is usually not enough to answer a few of these factors to convince a court that a person is an independent contractor.

For example, simple off-site work or flexible work schedules are not considered proof that a person is an independent contractor. In fact, even signing an agreement that explicitly states that a person is an independent contractor is not conclusive evidence of the nature of the employment relationship between two people. The most common method used to determine whether a party is an employee or an independent contractor is the application of the “right of control” test, which assesses the above factors in relation to the extent of control that the employing party can exercise. Analysis of this factor requires research into who sets the wage amounts and hours of work, and whether the employee is free to work for others or hire additional help. Similarly, an Employee Identification Number (EIN) or other documents showing that a person is providing a service as a limited liability company or any other type of business does not automatically make someone an independent contractor under the Fair Labour Standards Act. A. acts as the employer of an employee of the Contractor by paying wages, directing activities and performing other similar functions characteristic of an employer-employee relationship; –The marketplace shall not prevent the contractor from exercising another profession or undertaking; Many states, such as California, use the ABC test to determine if a worker is an independent contractor. The factors in the test are usually: The IRS test is available here. The IRS definition is obviously used for federal tax purposes.

Proper classification is also important for employees and the states in which they work (as evidenced by the New Jersey lawsuit against Uber). Low-ranked workers can cost states to charge less for unemployment insurance, workers` compensation insurance, and income taxes. Employees lose unemployment insurance (unless they can prove in a lawsuit that they have been misclassified) and workers` compensation insurance as a contractor. On the other hand, many workers prefer to be independent contractors because they can reap benefits from it, such as. B some tax deductions, more control over their business and better chances of winning. The most recent example of this is that of freelance writers and truckers in California. The federal government`s rule proposes a new, relaxed test to determine the status of an independent contractor based on the following key elements: If the contractor provides their own tools, this is a good indication that it could be an independent contractor. If the company provides all the tools, it weighs in favor of the fact that they are employees. On the other hand, those who are paid by the hour, an essential job of an employer`s business and who can be laid off at will are much more likely to be employees.

Unfortunately, it is not always easy to tell whether a party falls into the category of an independent contractor or an employee, thus misclassifying many workers. Texas clarified last year that gig workers are independent contractors under TAC 40 § 815.134 (the provision relates to unemployment insurance). To determine whether an employee is an independent contractor within the meaning of the Fair Labour Standards Act (which regulates most wage and hourly matters at the federal level), the courts use the economic reality test. .