Independent Contractor
A person or entity engaged to perform services but not as an employee, retaining control over manner and means of performance, providing services to multiple clients, bearing economic risk, and not subject to direct supervision. Classification has substantial tax, employment-law, and benefits consequences.
An independent contractor is a person or entity engaged to perform services for another, but not as an employee, retaining control over the manner and means of performance, providing services to multiple clients, bearing economic risk, and not subject to direct supervision in the manner of an employee. The independent-contractor classification has substantial tax, employment-law, and benefits consequences.
Federal common-law factors
The IRS evaluates the right to control the manner and means of work, considering: behavioral control (instructions, training, supervision); financial control (investment in equipment, opportunity for profit/loss, payment method); and the relationship between the parties (written contracts, employee benefits, permanency, regularity).
FLSA economic realities test
Under FLSA, the economic realities of the working relationship, not the parties' label, control. Factors include: opportunity for profit or loss; investment by the worker; permanence of the relationship; degree of control by the employer; whether the work is integral to the employer's business; and the worker's skill and initiative.
Texas classification (TWC)
TWC applies its own twenty-factor test under 40 Tex. Admin. Code § 815.134, similar to but not identical to the federal IRS factors. Misclassification under Texas law triggers unemployment insurance liability and penalties.
Consequences of misclassification
Misclassification of an employee as an independent contractor may result in: (1) unpaid employer-side payroll taxes (Social Security, Medicare, FUTA); (2) unpaid overtime under FLSA; (3) liability for unprovided benefits (health insurance, retirement contributions); (4) workers' compensation coverage gaps; (5) penalties under federal and state law.
Independent-contractor classification is one of the most consequential employment-law decisions a Texas business makes. The classification affects tax liability, regulatory exposure, benefits costs, and litigation risk. Sophisticated practice involves applying both federal and Texas tests rigorously, documenting the business reasons for classification, and structuring the relationship, written agreement, payment method, control structure, to support the chosen classification.