Contractor Misclassification Claims Against a Texas Business

Why one worker can produce three different claims

Misclassification is not one claim. A business that treats a worker as an independent contractor can be challenged under federal wage law, Texas unemployment tax law and federal tax law, each with its own test and its own forum. The same facts can support a finding of employment in one and not in another, and a win before one agency does not bind the next.

The three that matter most to a Texas business are:

• a worker's claim for unpaid overtime or minimum wage under the Fair Labor Standards Act, filed in federal court;
• a Texas Workforce Commission determination that the worker's services were employment for unemployment tax purposes, usually triggered when a former contractor files for benefits or by a tax audit;
• an IRS determination that the worker was an employee for federal employment taxes.

A fourth consequence follows from the first two. The Texas Payday Law excludes independent contractors from its definition of employee, so a worker who is found to be an employee can also bring a wage claim at the Texas Workforce Commission for pay the contract treated as outside that law. The agency process for those claims is covered in what employers need to know about Texas Payday Law claims.

The federal test: economic reality

The FLSA defines “employ” to include “to suffer or permit to work,” a definition the Department of Labor and the courts have long read as broader than the common law. The question is whether the worker is economically dependent on the business or is genuinely in business for himself or herself. The Department's Fact Sheet 13, revised March 2024, lists six factors: the worker's opportunity for profit or loss through managerial skill; the worker's investment compared with the business's; the permanence of the relationship; the nature and degree of the business's control; whether the work is integral to the business; and the worker's skill and initiative. No single factor decides it. The fact sheet also says that where the work is performed, whether the worker holds a state or local license, and how or when the worker is paid do not determine status, and that agreeing to independent contractor status, including by signing an agreement, does not make a worker an independent contractor.

Where the 2024 rule stands as of 2026. The Department published a rule on this test in January 2024, effective March 11, 2024. On May 1, 2025, in Field Assistance Bulletin 2025-1, the Department told its investigators to stop applying the 2024 rule's analysis in enforcement and to use instead its 2008 fact sheet and a 2019 opinion letter, while it reconsiders the rule. The same bulletin states that the 2024 rule remains in effect for purposes of private litigation. On February 26, 2026, the Department published a new proposed rule and took comments through April 28, 2026. Until a final rule issues, a worker's lawsuit is argued under the 2024 rule and the long line of court decisions applying the economic reality factors, while a Department investigation applies the older guidance.

What a losing employer pays. Under 29 U.S.C. § 216(b), an employer that violated the overtime or minimum wage provisions owes the unpaid wages plus an equal amount as liquidated damages, and must pay the worker's reasonable attorney's fees and costs. The look-back is two years, or three for a willful violation. One worker can sue on behalf of all similarly situated workers who file written consents, so a single demand letter from one driver or installer can describe a collective action covering every person the company paid the same way.

The Texas test: direction or control

For unemployment tax, Labor Code section 201.041 defines employment as service performed for wages or under a contract of hire “unless it is shown to the satisfaction of the commission” that the worker's performance has been and will continue to be free from control or direction, both under the contract and in fact. The structure matters: service for pay is presumed to be employment, and the business has to make the showing that defeats the presumption.

The Texas Workforce Commission applies a common-law direction-or-control analysis using a 20-point comparative guide. The right to control the details of when, where and how the work is done is the center of it, and the agency says the right need not actually be exercised. A finding of employment means back unemployment taxes, interest and penalties, and it usually arrives after a former contractor applies for benefits and names the company as the last employer.

One Texas penalty is specific. Under Labor Code section 214.008, a person who contracts with a governmental entity to provide a service, and any subcontractor on that contract, must properly classify every individual it directly retains and pays on the contract, and owes the Commission a penalty of $200 for each individual not properly classified. The Commission has three years from the violation to collect it.

The IRS test: common-law factors

For federal employment taxes the IRS groups its common-law factors into behavioral control, financial control and the type of relationship: whether the company controls how the work is done, whether it controls the business side of the job such as expenses and tools, and whether there are written contracts, benefits, permanence, and work that is a key part of the business. Either the business or the worker can ask the IRS for a determination on Form SS-8. A business that treated an employee as a contractor without a reasonable basis can be liable for the employment taxes it should have withheld, with relief available in some cases under Internal Revenue Code section 3509, under the Section 530 safe harbor for businesses with a consistent, reasonable basis for contractor treatment, and through the Voluntary Classification Settlement Program for employers that want to reclassify going forward.

What the worker's lawyer will argue

• Control. Set schedules, required uniforms or scripts, supervision, performance reviews, discipline, exclusivity, and the inability to send a substitute.
• No real opportunity for profit or loss. Hourly or piece-rate pay set by the company, no ability to negotiate rates, no ability to take other clients, no meaningful business expenses.
• Integral work. The worker did the thing the company sells, alongside W-2 employees doing the same job.
• Permanence. Years of continuous, full-time work for one company, with no business of the worker's own.
• Willfulness. Evidence the company knew the classification was doubtful, such as an earlier audit, advice it ignored, or employees converted to 1099 status without any change in duties, which extends the FLSA look-back to three years.

Example

Suppose a Dallas-area cleaning company engages 30 cleaners as independent contractors. Each signs an agreement, receives a Form 1099, and is paid a flat rate per job set by the company. The company assigns the jobs, sets the arrival times, supplies the equipment and chemicals, requires its branded shirt, and prohibits taking cleaning work for anyone else. Most cleaners have worked only for this company for two to five years. One cleaner, after a dispute, consults a lawyer.

The lawyer's demand letter asserts an FLSA collective action for unpaid overtime on behalf of all 30, going back three years for willfulness. The economic reality factors run against the company on control, investment, opportunity for profit and loss, permanence and integral work; skill and initiative do not rescue it. The cleaner also files for unemployment, which prompts a Texas Workforce Commission tax audit under the direction-or-control test. The signed agreements and the 1099s do not change either analysis. The company's realistic path is to quantify the exposure quickly, decide whether to reclassify prospectively, and negotiate the back-pay claim before conditional certification of the collective action multiplies the cost.

How a business should respond to a claim

1. Identify which test and which forum. A demand letter citing the FLSA, a Texas Workforce Commission notice and an IRS letter call for different responses and different deadlines.
2. Build the factual record. Contracts, invoices, payment history, schedules, communications about how work was assigned and supervised, evidence of the worker's other clients, business registration, insurance and equipment.
3. Quantify the exposure honestly. Hours worked over 40 per week for each worker, for two or three years, doubled, plus fees. That number drives every later decision.
4. Do not retaliate. Terminating or cutting the work of a contractor who raised the issue creates a separate claim that is easier to prove than the original one.
5. Decide about the rest of the workforce. A claim by one worker is a claim by every similarly situated worker in waiting. Prospective reclassification, where the facts call for it, limits the growth of the problem without conceding the past.

Ownership of the work product is a separate question that often surfaces in the same dispute; it is covered in who owns the software, designs or content contractors created. A litigator who handles employment-related business disputes can tell a company, from the facts of the engagement, which test it is likely to fail, what the number looks like, and whether the right move is to defend, to settle, or to fix the structure before the next claim.