The Myth of Contract Labor

My clients sometimes fall for the myth of “contract labor”, which is about as real as Bigfoot and the Loch Ness monster. The Texas Workforce Commission’s mythbusters explain it this way:

“Contract labor” may be the most widely used misnomer in business today. The issue is really whether a given worker is an employee or an independent contractor. In basic terms, an employee is someone over whose work an employer exercises direction or control and for whom there is extensive wage reporting and tax responsibility. An independent contractor is self-employed, bears responsibility for his or her own taxes and expenses, and is not subject to an employer’s direction and control. The distinction depends upon much more than what the parties call themselves. . . . It is important to note that it does not matter that one or both parties may call their arrangement “contract labor”.

I can’t tell you how many employers I know who still try to claim that an employee is “contract labor”, a “subcontractor” or an “independent contractor”. The IRS and the TWC will very likely see your situation differently . . . even if the employee has signed a contract labor agreement . . . even if your employee agrees to this arrangement . . . even if you’ve always done it this way . . . even if your employee doesn’t work full-time . . . etc.

While there is no easy test, let’s just put it this way: The person performing work for you is your employee. Unless the worker advertises his services in the phone book, works by the job and has lots of other clients besides you, the government is probably going make a finding that he is your employee.

If you really, strongly, firmly believe that your situation is unique and you really do use independent contractors instead of employees, talk to your employment lawyer before deciding that you can get away with not following the tax and employment laws as to any particular worker. Otherwise, get ready for a TWC payroll tax audit, a Department of Labor overtime investigation or an IRS audit. Or maybe all three.

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