Worker Classification: Texas and Federal law both involved

The balance between state law and federal law is always a delicate one in America.  In terms of political theory, it’s a fascinating interaction. After all, how can two sovereigns share the same space at the same time?

In practical terms, the issues involved in implementing this balance are interesting and inevitable. In Texas, one of them going on right now is the state’s consideration of new rules on whether certain workers are to be classified as employees or contractors for tax and employment law purposes.

The deliberations in Texas have come as the IRS conducts many tax audits looking for employers who may be trying to avoid taxes by deliberately classifying employees as independent contractors. Indeed, in recent months the IRS has offered incentives to voluntarily reclassify certain workers.

It should be pointed out, however, that uncertainty among employers about the classification of workers is understandable. As we discussed in our March 20 post, the uncertainty may be because of the law’s complexity, not because employers are trying to game the system.

To be sure, employment taxes, workers’ compensation costs and overtime pay are factors to be considered for any business. But the fact is that the rules on who is a contractor and who is an employee are very detailed and often difficult to interpret.

Moreover, it isn’t only Congress and the IRS that are involved in establishing guidelines on worker classification. State governments have a role as well.

In Texas, a proposal in the legislature during the most recent session called for greater restrictions on employers’ classification of workers as contractors. These workers are also sometimes called 1099 workers because they receive a 1099 form from the employer, not a W-2.

A key motivation for the Texas proposal was concern about workers in the construction industry. By some estimates, about half of the workers in that industry are undocumented immigrants.

We will continue to follow evolving issues regarding worker classification in future posts. 

Source: Houston Business Journal, “Bills to restrict employee misclassification likely dead this session,” Shaina Zucker, May 16, 2013