Are You Properly Classifying Employees and Independent Contractors?

Recently our Firm has noticed a trend with the Texas Workforce Commission ("TWC") in which the TWC finds employers are improperly classifying employees as independent contractors. In Texas, an employer must pay unemployment tax for each employee. An employer, however, does not pay unemployment tax for any independent contractors associated with the employer. TWC uses a twenty factor test to determine whether a worker is an employee or independent contractor and, therefore, whether employers must pay unemployment taxes associated with the worker.

Whether in response to the economic hardships we currently face or a belief that employers are manipulating the system, TWC appears to be auditing companies and industries with a history of classifying workers as independent contractors. Despite these companies' history of classifying workers as independent contractors, TWC has reversed prior decisions and determined these independent contractors should be classified as employees. The repercussions of TWC's determinations are devastating since employers now must pay several years of unpaid taxes and fines. Looking forward, the repercussions could become more severe as the long-standing business structure of many companies loses viability because of the increased unemployment tax. The real consequence, however, is not the minimal state tax (usually 2.7% in Texas). The real consequence is employers may owe the federal government nearly 15% for the same workers. Typically this amount is split 50-50 between employees and employers; employers who fail to withhold, however, may be forced to pay the entire amount.

What does this mean for you, the employer? If you use independent contractors in your business, even if you have used independent contractors for years, check with an attorney to determine if these workers are properly classified. An audit of your workforce should not take long and can save your company legal issues down the road.