Raising a Nation of Young Black Entrepreneurs:  Part 1- Exposure 

Written by Tracey Jackson, Attorney at Law

Misclassifying the employment status of an independent contractor can be a costly mistake. The differences between a contractor and an employee are quite vast, and establish whether the employer will be held liable for violations of several federal and state laws. Many of these statutes carry stiff financial penalties and compensation, that will payable not only to federal and state governments, but the alleged contractor as well.

The possible federal and state violations include, the record keeping, minimum wage and overtime wage provisions of the Fair Labor Standards Act; the employee withholdings requirements of the Internal Revenue Code; certain directives involving employee benefits as outlined in the Employment Retirement and Income Securities Act (ERISA); and the unemployment and workers compensation insurance mandates of the Texas Administrative Code.

In addition, mislabeling the employment status of a contractor can also create federal and state legal defenses for the worker. Employees, unlike contractors, can invoke rights under federal and state anti-discrimination laws, such as The Civil Rights Act of 1964 (Title VII); The Family Medical Leave Act; The National Labor Relations Act; the Americans with Disabilities Act; the Age Discrimination in Employment Act; the Equal Pay Act; the Texas Labor Code, and the Texas Health and Safety Code, just to name a few.

Merely naming or construing a worker as an independent contractor generally is not adequate. Even if the nature of the relationship between the employer and worker is reduced to writing and the worker has agreed to the independent contractor status, employers can still be held liable under the laws previously mentioned. Texas and federal jurisdictions use similar approaches in assessing the employment status of contractors. The focus is whether the contractor has limited economic avenues and is financially dependent upon the particular business to which services are rendered.
The United States Supreme Court created the "economic reality test" in order to establish if a worker is an independent contractor. In determining independent contractor status, these five factors are considered: (1) the degree of control the contractor has over the work commissioned; (2) the extent of investments made be the contractor; (3) whether the contractor earns a profit or loss; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship.
Likewise, the Fifth Circuit Court of Appeals, looks to whether a financial dependency exists between the contractor and the employer. In making this evaluation, the Court will critique the following:

1. Whether the employer controls the manner in which the work is performed;
2. The contractor's opportunity for profit and loss;
3. Investments made by the contractor;
4. The skill and initiative needed for the job; and
5. How frequently the contractor works for the employer.

Texas uses a similar test known as the "direction/control" or "common law" test. A contractor is more likely to be considered an employee if:

1. The contractor does not control the sequencing of the job;