General Law

Proper Independent Contractor Classification: The Legal Ramifications

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Texas Builder Magazine of the Texas Association of Builders
8/23/2013
by Leslie L. Hunt

Most individuals in the construction industry know someone who has been the target of a wage and hour investigation. One of the common issues evaluated during this type of investigation is whether a company’s “independent contractors” have been properly classified. In other words, can the company prove that its “independent contractors” should not be treated as an employee?

Whether a worker who performs services for another person is an employee or an independent contractor is not always easy to determine. The proper classification is important, however, because the distinction between employee and independent contractor affects legal rights and obligations, including liability for employment taxes, the right to workers’ compensation benefits, the employer’s potential liability for a workers’ tortious acts, and wage rights such as minimum wage and overtime. Anyone who performs work for a company is presumed to be an employee by the Texas Workforce Commission, the Department of Labor and the Internal Revenue Service (“IRS”). This means a company bears the burden of rebutting this presumption and convincing the governing authorities that a worker is an independent contractor.

Generally speaking, if a company has the right to control what will be done by a worker and how it will be done, an employer-employee relationship exists giving rise to, among other things, wage reporting and tax responsibility. An independent contractor, on the other hand, is self-employed, bears responsibility for his or her own taxes and expenses and is not subject to an employer’s direction and control. Many companies erroneously believe that so long as you give someone a 1099 and call them an independent contractor, that they are properly classified as an independent contractor. However, this is not the way governing authorities view it. Whether a worker is an independent contractor or an employee depends upon much more than what the parties agree to call themselves. It depends on a thorough analysis of the relationship between the individual and the company.

The Supreme Court of Texas has written that the test to determine whether a worker is an employee or an independent contractor is whether the company has the right to control the progress, details and methods of operations of the individual’s work. The company must control not merely the end sought to be accomplished, but also the means and details of its accomplishment as well. Examples given by the Court regarding the type of control normally exercised by an employer include when and where to begin and stop work, the regularity of hours, the amount of time spent on particular aspects of the work, the tools and appliances used to perform the work, and the physical method or manner of accomplishing the end result.[1]

In order for an independent contractor to be properly classified, he/she must truly be independent; therefore, a business must focus on the degree of control versus the degree of independence when determining how to classify a worker. Analyzing the following factors will increase the likelihood of making an accurate determination: (1) instructions given to the worker; (2) training given to the worker; (3) the extent to which the services rendered are an integral part of the principal’s business; (4) any requirement that the services by the worker be rendered personally; (5) the worker’s ability to hire, supervise, and pay assistants; (6) the continuity or permanency of the relationship between the employer and the worker; (7) whether the employer sets hours of work; (8) a requirement to work full-time; (9) the location of the work (on the employer’s premises or at the worker’s home/elsewhere); (10) setting the order or sequence of work; (11) requiring oral or written reports; (12) paying the worker by the hour, week, or month; (13) the payment of the worker’s expenses (business and/or traveling); (14) providing the worker’s tools and materials; (15) significant investment by the worker; (16) the worker’s opportunities for profit or loss; (17) working for more than one business at a time; (18) availability of the worker’s services to the general public; (19) the firm’s ability to discharge the worker; (20) the worker’s right to terminate the relationship; and (21) the amount of the worker’s investment in facilities and equipment.

Governing authorities’ claim that no one factor listed above is weighted a particular way and that there is no magic formula for determining how to classify a worker. In other words, this is a gray area and even a thoughtful analysis offers no guarantees. In cases where businesses want reassurance, the IRS has a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding that can be filed requesting that the IRS review certain facts and circumstances and officially determine a worker’s status. Although it can take at least six months to receive a determination, it is a step that could prove beneficial, especially for businesses that frequently hire the same types of workers to perform particular services.

In the past, it was common for a business to receive notice of an investigation through written correspondence from a governing agency. Today, however, more and more investigators, especially those working for the Department of Labor (“DOL”), are showing up at jobsites unannounced, and requesting to conduct immediate reviews of business records. The information requested during a surprise DOL investigation is likely to be the same as the information requested through a more traditional notice of investigation received through the mail.

If a DOL investigator shows up at your worksite, you can expect to be asked to provide the following items: (1) names, addresses and telephone numbers of all business owners and company officers (e.g. President, Treasurer, Secretary, Board of Directors and other Corporate Officers) along with a company organization chart if one exists; (2) legal name of the company and all other names used by the company (e.g., “Doing Business As” names); (3) records demonstrating your gross annual dollar volume of sales for the past three years; (4) a list of all employees with their address, hourly rate or salary, descriptive job title, shift and whether you consider that employee exempt from overtime for all current and former employees for the investigative period; (5) payroll and time records for the investigative period, including a copy of the last two payroll completed and time records; (6) birth dates for all employees under age 18 who have performed work during the past 24 months; (7) 1099 forms and contract documents with any independent contractors, subcontractors or day laborers; and (8) federal employer identification number.

One of the best ways to prepare your business for a worker classification investigation is to maintain organized records and be able to demonstrate a good faith, reasonable basis for classifying a worker as an independent contractor. Businesses that demonstrate a reasonable basis for its classifications may be relieved from certain monetary consequences depending on which governing authority oversees the investigation.

The IRS recently added an optional program called the Voluntary Classification Settlement Program (VCSP) intended to encourage voluntary compliance with worker classification rules. The VCSP permits employers to prospectively reclassify workers as employees in exchange for limited federal employment tax liability, no interest or penalties, and without an IRS audit or administrative correction procedure.[2] This is something to consider for businesses that become aware that they are currently treating a class of workers as independent contractors but want to voluntarily reclassify the workers as employees going forward.

I am often asked whether it is a good idea for businesses to have contractual agreements with workers designating them as independent contractors. The answer to that question is an unequivocal yes. Using a contract that clearly sets forth the worker’s status as an independent contractor, such as the Texas Association of Builders’ Independent Contractor Base Agreement, can be dispositive of the parties’ relationship, so long as there is no outside evidence contradicting the terms of the contractual provisions. For example, if the contract states the worker will dictate his own hours of performing services, there cannot be evidence that the hours of work were actually controlled by the company. So long as the contractual agreement accurately reflects the independence of the relationship between the company and the worker, it will bolster the likelihood of being able to establish proper classification of the worker as an independent contractor.

Companies can decrease their chances of misclassifying workers in a variety of ways such as (1) routinely reviewing payroll records to determine how many workers are classified as independent contractors and to confirm that a reasonable basis for such classification exists; (2) allowing workers to control the details of a project such as starting and stopping time and the ability to delegate work duties to others individuals under the control of the worker; (3) paying the worker by the project; (4) having worker use his/her own tools or equipment; and (5) avoiding ongoing, continuous relationships with workers.

Companies should strive to maintain a good relationship with their workers. It is important to listen to concerns or questions raised by workers relating to their classification. These questions can often come in the form of questioning whether a worker or class of workers should be receiving overtime pay. If a worker voices concerns over overtime pay, take it seriously and analyze whether that worker is properly classified. If you discover the worker is misclassified and is owed overtime wages, it is advisable to consult with an employment attorney.

Companies should also encourage workers to come discuss any questions or concerns they have about classification or wage issues. Taking this step can prevent a disgruntled worker from filing a complaint with the Texas Workforce Commission or the Department of Labor, which would likely trigger a wage and hour investigation.

Businesses that take a closer look at existing worker classifications and that take proactive steps to comply with state and federal laws are less likely to be found liable for taxes, wages or other damages and penalties down the road.

Leslie_Headshot_2011%20bio
About the author: Leslie L. Hunt is a shareholder at Decker, Jones, McMackin, McClane, Hall & Bates, P.C. in Fort Worth, Texas. She earned her J.D. from Baylor Law School and her primary practice areas include employment law and business litigation.

Disclaimer: The content of this article is provided for informational purposes only and does not constitute legal advice.
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[1] Thompson v. Travelers Indemnity Co. of Rhode Island, 789 S.W.2d 277, 278 (Tex. 1990).
[2] Certain eligibility requirements apply.

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Texas Vehicle Mechanic’s Lien Foreclosure Process

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The vehicle mechanic’s lien process has changed in the State of Texas. The new process was implemented to prevent fraud but the process has actually made the process more complicated for small business owners. To help you understand the process and what is required, I have prepared a complete outline of the process to help get you through it.

NOTE: If you fail to do all the steps below, in the right order within the time limits, then the only way you can foreclose on a vehicle and sell the vehicle to get paid is to file a lawsuit in the Justice of Peace court.

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I. FORECLOSURE NOTICE:

a. Not later than 30 days after the day on which repair charges accrue, the person claiming the lien must notify the owner/lienholder of record by CRRR mail, of the charges due and request payment. The person claiming the lien must also include the following:

  1. The physical address where the repairs were made;
  2. The legal name of the person that holds the possessory lien;
  3. The taxpayer or employer identification number of the person that holds the possessory lien; and
  4. A signed copy of the SIGNED WORK ORDER authorizing repairs.

b. A copy of the notice and a signed copy of the work order must be sent to the county tax assessor-collector’s office in the county in which the repairs were made with an administrative fee of $25 within 10 days of sending notice in (a) above.

c. The notice must also be sent to the address that appears on the work order/document authorizing possession, if the addresses are different from the address on the motor vehicle record.

II. STORAGE FEES REQUESTED:

a. If any amount of the charges include storage fees, a second notification must be made by certified mail to the registered owner and lienholder.

b. A Storage Lien for Abandoned Vehicle or Private Tow, Form VTR 265-S, must also be completed.

c. A release of lien is also required if any portion of the amount due represents charges for storage, otherwise foreclosure must be through a court of competent jurisdiction.

III. PUBLIC SALE: After you send the notices above, if payment is not made on the 31st day the notice was mailed and filed with the tax assessor-collector’s office, the possessory lienholder may sell the vehicle at public sale without obtaining a release of lien. The proceeds must be applied to the payment of charges and the balance must be paid to the person entitled to it.

IV. TITLE: The highest bidder must be the one to apply for title.

V. EVIDENCE REQUIRED TO TRANSFER OWNERSHIP:

  • Form VTR-265-M properly completed by the statutory lienholder
  • Form 130-U – Application for Texas Certificate of Title
  • Verification of Title and Registration
  • Proof of Notification
  • Liability Insurance
  • Work Order
  • Vehicle Identification Number

The content of this article is provided for informational purposes only and does not constitute legal advice.

Guardianships over the mentally ill

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The United States has one of the highest rates of mental illness in the world, including major depression, schizophrenia, bipolar disorder, obsessive-compulsive disorder, panic disorder, post-traumatic stress disorder and borderline personality disorder.  The National Association for Mental Illness reports “without treatment the consequences of mental illness for the individual and society are staggering: unnecessary disability, unemployment, substance abuse, domestic violence, homelessness, inappropriate incarceration, suicide and wasted lives.”

Families with mentally ill children, siblings, or parents find that there is little they can do to help their mentally ill family member.  There is limited help from both the Probate Code or the Mental Health Code.

The Probate Code allows for guardianship over incapacitated persons.  “incapacitated person” being defined as an adult individual who, because of a physical or mental condition, is substantially unable to provide food, clothing, or shelter for himself or herself, to care for the individual’s own physical health, or to manage the individual’s own financial affairs. This sounds like a mentally ill person would qualify as an incapacitated person, and they do for a short period of time.  Once the guardianship is obtained, the party would regain capacity and the guardianship would terminate.  If you have ever dealt with a mentally ill person, the minute they are no longer forced to take medication they usually won’t take it!  Therefore, there is a gaping hole in the statute concerning mentally ill people.

The Mental Health Code does not specifically address the guardianship issue for mentally ill people.  The code currently defines mental illness as an illness, disease, or condition, other than epilepsy, senility, alcoholism, or mental deficiency, that: (A) substantially impairs a person’s thought, perception of reality, emotional process, or judgment; or (B) grossly impairs behavior as demonstrated by recent disturbed behavior.  This statute does allows for emergency detention of those who are a threat to themselves or others, to be held in a mental health facility and treated pending a court proceeding.  If the Court decides to keep the party, then they will get stabilized and eventually sent home with instructions to take their medication, which they rarely do and the process starts all over again.  If the Court decides to send the party home, then they will likely stop taking their medicine and the process starts all over again.

In Texas, the mental health code has not been revised since 1985, but it is seriously needs an overhaul.  Last year, the nonprofit advocacy organization, Texas Appleseed asked lawmakers to replace the existing mental health code with one that reflects contemporary mental health needs.  The Appleseed report’s recommendations include eliminating provisions in the code that call for law enforcement to obtain a warrant to detain someone in a mental health crisis and adding explicit laws that allow officers to confiscate firearms from people who become dangerous as a result of their mental condition.  Another recommendation calls for the adoption of a uniform one-page intake form for law enforcement officers to complete when they take someone in crisis to a mental hospital. Currently, forms across the state vary; some are many pages long and take hours to complete.   Representative José Menéndez, Democrat of San Antonio, filed House Bill 245, which would allow hospitals to detain mentally ill people for up to 24 hours.  This is because hospitals currently do not have legal authority to detain people who voluntarily enter their facilities in search of mental health care but then decide to leave.

While the suggested changes are a great start, they do not go far enough.  We need to address the issue of how family members are supposed to help their loved one get the help they need to manage their life, stay on medication, find housing, etc.  If your family is affected by these issues, please do not hesitate to contact your representative to voice your concern!

How to respond to the eviction process.

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Receipt of Notice to Vacate: 

Do not ignore this notice.  Call your landlord immediately to understand what happened or to see if you can get more time to fix the situation.  Under Texas law, a landlord is required to give you 3 days written notice to vacate before filing an eviction lawsuit. This notice can simply be attached to your front door.

Did you really violate the lease as claimed?  Is the Landlord retaliating against you for some reason?  An eviction should be denied if your landlord is discriminating against you based upon race, religion, disability, sex, national origin, color, or having children. The landlord also may have miscalculated the rent owed because of the abuse of late fees.

Receipt of Court Eviction Papers:

Upon the filing of an eviction suit, a constable will hand deliver the eviction suit papers to your home. If the constable is unsuccessful in personally servicing you, they can simply post the papers to your door or mail you a copy.  Avoiding being served does not delay the process and hurt your case in the end. Upon receipt of the eviction papers, call the landlord and see if you can reach a settlement.

As soon as the landlord files an eviction suit, it becomes a permanent court record and will likely become a part of your tenant history record.  You can often make an agreement that may result in a dismissal of the eviction case and preserve your rental history.

Answering the Suit:

The eviction citation is signed by the court clerk and will tell you when you have to appear in court. You should call the court clerk and find out if this is your actual hearing date. In some counties you can answer the case any time prior to the deadline in person, in writing or even over the phone, and then the court will give you a date for your hearing. Find out what your court requires.  The Court will accept a handwritten letter explaining your position.  Be concise and to the point! Usually you will have six to ten days to file an answer.  If you do not answer or appear by the deadline given in the eviction papers, the court will award a default judgment against you automatically.

Eviction Hearing:

At the hearing you will need to be prepared to present your side of the story. Take copy of all your paperwork, including your lease, any pictures, letters, documents, receipts, or witnesses to show the judge as evidence. Bring live persons with you if you want the court to hear what they have to say. The judge or the jury will make a final decision after hearing the case. If the landlord wins, the law allows you five days to appeal the decision or move out. If you win, the landlord also has five days to appeal the decision.

Fraud does not protect parental rights!

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The Dallas Court of Appeals confirmed the trial court’s findings in a case concerning the termination of a parent’s rights whereby fraud was used to induce the parent to relinquish.  In RE: C.T.C. a mother used fraud to get the father to relinquish his rights.  The mother argued that Sec. 161.211(a) of the Texas Family Code provides that the father had only 6 months from the date the termination order was signed.  The father argued that the statute was not intended when fraud was used to procure a relinquishment.  The trial court agreed with the mother and they dismissed the father’s petition for bill of review for lack of jurisdiction.  This Sec. 161.211(a) provides that in certain circumstances a termination of parental rights is not subject to collateral or direct attack after six months and the Court of Appeals says that it doesn’t matter if fraud was used. For More information see the Case Findings.

Obama changes birth control rule

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President Barack Obama announced a plan to accommodate religious employers outraged by a rule that would require them to cover birth control for women free of charge.

The administration announced in January that religious-affiliated employers had to cover birth control as preventative care for women. Churches and houses of worship were exempt, but all other affiliated organizations were ordered to comply by Aug. 2013.

Opponents of the measure, including Catholic cardinals and bishops and Republican leaders, responded with intense anger.

For more information, check out this article on Huffington Post.  http://www.huffingtonpost.com/2012/02/10/obama-birth-control_n_1267677.html

Defending Yourself Against Stalking

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The Texas State Bar Journal February 2012 issue has a great article on stalking. It lists certain strategies you can take to help shield you from someone who is giving you much unwanted attention, such as keeping a diary, contacting law enforcement, getting a protective order, recording telephone conversations, keeping correspondences, telling everyone you know.  Here is the article in more detail.   “Defending Yourself Against Stalking