What is an independent contractor? In essence, an independent contractor is self-employed, is responsible for their taxes and expenses, and is not subject to the direction and control of an employer. This seems rather straightforward, but in fact, the term “independent contractor” is one of the most widely misused terms in business. The determination of whether a worker is an employee or an independent contractor is not made based on what term is applied to a worker, but based on the underlying nature of the working relationship.
The various federal and state departments use different tests to make a determination of whether or not a worker is an independent contractor. In drafting company policies and agreements, and considering how your company will interact with its workers, it is crucial to consider the salient factors of these tests.
In section 406.121(2) Texas Workers Compensation Act, an independent contractor is defined as "a person who contracts to perform work or provide a service for the benefit of another and who ordinarily:
acts as the employer of any employee of the contractor by paying wages, directing activities, and performing other similar functions characteristic of an employer-employee relationship;
is free to determine the manner in which the work or service is performed, including the hours of labor of or method of payment to any employee;
is required to furnish or to have employees, if any, furnish necessary tools, supplies, or materials to perform the work or service; and
possesses the skills required for the specific work or service."
The two biggest factors across all the tests is the amount of control being exercised over the worker and how integrated they are into your company. That means control and integration in many forms, but not all forms. Some direction and control is necessary in any relationship, you just want to be cautious about not running afoul of the guiding factors. Ultimately, the less control being exercised over a worker and the less they are integrated into your company, the less likely they are to be classified as an employee.
A good example of an independent contractor is someone you hire to renovate your office. If they work on many other offices, they provide the knowledge and skill to do the work, and you are not telling them how to get the job done they are an independent contractor. You are providing guidance on what kind of renovation you want (colors, tiles types, carpeting, etc.) and when they will have access to your office to get it done. Here you are exercising some control, but not the type that exceeds the permissible guidelines.
Above all, if it is your goal to use independent contractors for your business, you will need to carefully consider the ramifications of that decision. Giving up a large amount of direction and control over the worker in order to ensure they retain their independent contractor classification should be weighed against taking on the heightened responsibilities of an employer-employee relationship. The Texas Workforce Commission provides a great resource for employers looking to learn more at: http://www.twc.state.tx.us/news/efte/ics_contract_labor.html. We can also audit your company policies, practices, and agreements to help you ensure that your independent contractor remains just that!