Last month, Texas Mutual hosted a webinar for our agent community to discuss the difference between employees and independent contractors. It's a hot topic that can cause a lot of confusion, but it's important to understand since your workers' compensation premium is partially determined by the number of employees you have and their associated payroll. In this webinar recap, we'll help you learn how to spot the differences and classify theses different types of workers properly.
First we'll cover why it's important to know the difference, the definitions of an independent contractor and common characteristics of this title. You'll also see a questionnaire to help you make the distinction.
Why it's important
A company's workers' compensation premium is determined by a few factors, but one of the most important is the number of employees. For some industries, a number of the people who perform work may not be employees, but rather independent contractors. It's important to correctly identify your workers' roles, so that you know your obligations to your workers in the event of a workplace injury.
Independent contractor definitions
To understand the difference between an independent contractor and an employee, we need to unpack the independent contractor definitions, which are determined by the Texas Labor Code.
The first definition applies to those working on residential structures and small commercial structures that do not exceed three feet in height or 20,000 square feet in area. According to TLC 406.141, “independent contractor” means a person who contracts to perform work or provides a service for the benefit of another and who:
Is paid by the job and not by the hour or some other time-measured basis
Is free to hire as many helpers as desired and may determine the pay of each helper, and
Is free to, while under contract to the hiring contractor, work for other contractors or is free to send helpers to work for other contractors.
The second definition applies to those working on large commercial jobs. According to TLC 406.121, “independent contractor” is a person who contracts to perform work or provide a service for the benefit of another or 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 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.
Common characteristics of independent contractors
The Texas Workforce Commission (TWC) offers an Independent Contractor Test to help determine if someone is an employee or independent contractor. Texas Mutual uses this test as just one part of our evaluation to help interpret the Texas Labor Code provisions.
Below you'll find a quick reference of the common characteristics of independent contractors from the TWC test to help you recognize the differences. It's important to note that no single factor makes the determination, and not every situation will involve each factor.
Typically, an independent contractor:
Does not receive instructions
Uses his or her own methods and does not need to receive training
Has significant investment in their independent business
Does not always personally complete services
Has control of their own assistants
Is hired for a specific job and there is no continuous relationship
Sets own hours of work
Does not receive progress reports
Receives payment per job
Supplies their own tools
Can realize profit or loss
Works for multiple companies
Is not exclusive to one firm
Has the right to choose location (typically)
Sets their own sequence of work
Can advertise their business as available to the public
Cannot be terminated at will if they meet their contract
Is liable for non-completion or breach of contract
Alternatively, employees are more likely to receive instructions on when, where, and how to perform the job. Employees are often trained by a more experienced person, or are required to attend meetings and take training courses. Unlike an independent contractor, they do not have an investment in the business. An employee is dependent on the employer for the work. They are often subject to non-competition rules and can be let go at will.
Questions to ask
Here are some important questions you should ask to help you come to a determination:
How is/are the independent contractor(s) paid? Are they paid by the job, hour, or by contract?
Is the independent contractor able to hire others to perform work? If yes, who pays the others hired?
Does the independent contractor work for anyone else?
Does the independent contractor have their own employees?
Who determines how the work is performed?
Who provides the tools, supplies, or materials?
What skills does the independent contractor possess?
We will share part two of our webinar recap in the coming days and continue our look into contract labor. We'll also cover what you need to know about 1099s and DWC forms for independent contractors. In the meantime, watch the webinar for yourself, or see what's new in employer webinars.
Click here for the "Independent Contractor or Employee?" video.
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