On January 6, 2021, the U.S. Department of Labor issued a final rule intended to clarify who is an independent contractor and who is an employee under the Fair Labor Standards Act (FLSA). This rule would supersede all previous federal guidance on the issue but does not affect other state or federal tax laws. The new federal rule was to take effect on March 8, 2021.

On January 20, President Biden reportedly issued a freeze on all new regulations to give the incoming administration an opportunity to review how it should respond. The new administration had been expected to oppose the final independent contractor/employee rule.

The distinction between employees and independent contractors is important, though, because only employees are protected by the FLSA’s minimum wage and overtime provisions. This is even more urgent as questions swirl about initiatives to raise the federal minimum wage to $15. So, how are workers to know whether they are being correctly classified – or more to the point – correctly paid?

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Employee or Independent Contractor under the FLSA

The FLSA requires covered employers to pay their nonexempt employees at least the Federal minimum wage (currently $7.25) for every hour worked and overtime pay for every hour worked over 40 in a workweek. The FLSA sets a floor for hourly wages. Some states require a higher minimum; but Texas uses the federal rules. The law also mandates that employers keep certain records regarding their employees. None of these requirements apply to independent contractors, whose only legal protections come from the contract under which they work.

The FLSA does not define either “employee” or “independent contractor.” It defines “employ,” however, as “suffer[ing] or permit[ing] to work.” Courts have parsed the meaning of those words according to a multifactor test designed to determine whether, as a matter of economic reality, a worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for him- or herself (and is thus an independent contractor). Different states have developed their own interpretations of this multifactor inquiry.

In Texas, perhaps the most user-friendly tool for applying this multifactor test is set forth in a chart adopted by the Texas Workforce Commission pursuant to the Texas Payday Law. It sets out 20 factors, including whether:

• The worker receives instructions from the employer.
• The worker is trained by the employer or another worker.
• The worker’s services are integrated into the operation of the business.
• Services are rendered personally, or whether the worker may delegate them to someone else.
• The worker may hire, supervise, or pay helpers.
• The relationship is continuing.
• There are set hours of work.
• Full time is required.
• Services are performed at a location determined by the employer.
• The employer sets the order or sequence of tasks.
• The worker must submit oral or written reports.
• The worker is paid by the period worked (hour, week, or month) or the job.
• The employer reimburses business expenses and travel expenses.
• The worker furnishes his or her own tools and equipment.
• The worker has a significant investment in the business.
• The worker can realize profit or loss.
• The worker may work for more than one business at a time.
• The service is available to the public.
• The employer may discharge the worker without liability.
• The worker has the right to quit without liability.

The ultimate results are not uniform from situation to situation, and they are hard to predict. This is a problem the new final rule proposes to fix.

Two Core Factors and Three Guideposts – Pros and Cons – Independent Contractor or Employee

The new guidance replaces the old multifactor test with two core factors for courts to consider. If the result is still unclear, it posits three additional guideposts to ponder.

First, the two core factors examine the control that a person has over his or her own work and second, the opportunity for profit or loss because of personal investment. The three additional factors, which may be applied if necessary, consider the amount of skill required for the position, the permanence of the working relationship, and how integrated the worker’s role is to the organization’s overall operation.

If the DOL’s final rule goes into effect, it would presumably compress the twenty-factor determination that Texas employers and courts now use to five. Proponents argue that this will be simpler than the old test and will produce more uniform results.

Opponents argue that it tips the scale heavily in favor of employers, who would often prefer to consider workers as independent contractors. In particular, the new final rule abandons the analysis of whether the worker has a significant investment in the business (number 15 on the list above). In this way, the January 6 rule makes it easier to classify an individual as an independent contractor. A former DOL official and director of policy at the Economic Policy Institute has suggested that the new rule could cost U.S. wage workers at least $3.7 billion annually.

What about Unemployment Compensation, Workers Compensation and Tax Withholding?

But the guarantee of a minimum wage and overtime are not the only legal protections that workers get when they are classified as employees rather than independent contractors. The new DOL guidance has no effect on the Texas Unemployment Compensation Act (TUCA). The TUCA uses a broadly inclusive test, known as the “direction or control” or “common law” test, for deciding who is an employee. By implication, an independent contractor would be a person whose services do not meet the above test. It is possible, if unlikely, that an individual might be an independent contractor for wage and hour questions but an employee when it came to unemployment compensation.

Texas employers are generally responsible for withholding federal taxes, including Social Security and Medicare tax for employees, but not independent contractors. The Internal Revenue Service has its own criteria for determining who is an employee. This multi-factor test focuses on behavioral control, financial control, and relationship, and looks at some of the same factors considered by the DOL. It would also not be affected by the new DOL guidance.

Texas does not require most private employers to have workers’ compensation. Employers who contract with government entities must, however, provide workers’ compensation coverage for employees working on a project. Independent contractors are generally responsible for their own coverage. Courts generally look at whether the employer has the right to control the progress, details, and methods of operations of the employee’s work.

The issue of who is an independent contractor and who is an employee and for what purpose is clearly complex. But complexity tends to be the problem of employers and those charged with administering the law. Wage workers face the far more immediate problem of how to get paid what they are entitled to.

Reach out to our Employment Lawyers for Wage Help for Independent Contractors and Employees

If you think you are being improperly paid as an independent contractor rather than an employee, call us to talk about your situation. The same is true if you have encountered other workplace problems, such as harassment or unfair hiring practices. Our Texas employment lawyers know the law and understand your situation. We offer a free evaluation of the facts of your case. Use this link Contact Us to get the conversation started.