The global pandemic has led to many shifts in the job market, including an increase in the number of independent contractors, or “gig workers.” Whether hiring an independent contractor or working as one, understanding their distinct roles and clearly communicating expectations are essential as businesses and workers adapt to changes in the work force.
Independent Contractor vs. Employee
Many tests and measures exist to help distinguish between an employee and a contractor.
The US Supreme Court offers a definition based on a five-step analysis of an employee’s economic dependence on the employer. United States v. Silk, 331 U.S. 704 (1947). Many states, but not Texas, use an ABC approach to defining an employee and an independent contractor. The Internal Revenue Service combines many of these questions and considerations into an 11-factor process.
Texas defines an employee as “each person in the service of another under a contract of hire, whether express or implied, or oral or written," and "includes: (1) an employee employed in the usual course and scope of the employer's business." That term does not include "an independent contractor or a person whose employment is not in the usual course and scope of the employer's business." In section 406.121(2) of the Texas Labor Code, 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."
- Texas Worker’s Compensation Act, § 401.012.
Basically, employees are economically dependent on one employer. Employees receive equipment, supplies, and training from the employer. They receive benefits such as insurance and sick leave, and employers withhold taxes from their paychecks. An employee/employer relationship is usually a long-term relationship. By contrast, independent contractors work for themselves and offer services and skills to a number of different employers. They provide their own supplies and equipment. Typically, they receive no benefits from the company and usually must monitor and report taxes themselves. An independent contractor usually works for a shorter time with a business, as defined within the contract.
The Independent Contractor Agreement in Texas
A contract should clarify the status of the independent contractor and the expectations for that person in order to avoid simple misunderstandings and more complex liability issues. The contract usually includes sections which address the following:
- A preamble, which identifies the contract and the person or business hiring them, along with the effective date of employment, usually the same date that the contract is signed.
- The services to be provided, which includes a detailed description of the job the independent contractor will complete.
- Fees and expenses, including exactly how and when the contractor will be paid. Since the company does not pay for supplies and equipment, the independent contractor should factor in those costs when determining fees for service.
- The duration of the contract, defining how long the independent contractor has to complete a task and whether extensions or amendments to the contract are an option.
- A confidentiality clause, outlining which information is proprietary, if any, and requiring the independent contractor not to disclose such information.
- Copyright and intellectual property rights, clarifying the ownership of information and work provided by the independent contractor. Generally, the independent contractor provides “work made for hire.” According to federal copyright law, this work belongs to the party who has requested it.
- A termination agreement, which details how and when the contract will end.
- A jurisdictional clause, which identifies where legal proceedings involving the independent contractor will occur if they become necessary. Generally, jurisdiction is in the home state of the business.
Independent contractor relationships may be an ideal situation for contractors and companies, but defining the parameters of an assignment and accurately conveying those parameters in a contract can be a challenge. Consulting an attorney familiar with business law will help both the independent contractor and the business hiring that contractor to create a successful working relationship.
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