June 18, 2025

Tips on classifying independent contractors and employees

As an employer, you work hard to protect your employees and your business. Part of that means having workers' compensation coverage you can count on, and it starts with an accurate quote. Your quote is partially determined by how many employees you have and their associated payroll, so it's important to provide correct information.

We know that determining who to consider as an employee can be a complex task, especially considering that classifying your employees for your Texas Mutual policy may differ from other business tasks like taxes. To help you avoid unwelcome premium and loss surprises, this article covers the key differences between employees and independent contractors including definitions, common characteristics and misconceptions.

Employee and independent contractor definitions

An employee is providing services on behalf of an employer who has the right to provide direction and control over them. Employees receive time-based compensation, resources and tools needed to perform their service. They might also receive company benefits such as health insurance and access to retirement plans.

An independent contractor presents themselves as a business to the public. Independent contractors are free to perform tasks in the time and manner they deem appropriate. They also provide their own tools, equipment and supplies needed to perform their services.

Common characteristics of independent contractors

The Texas Workforce Commission (TWC) offers an Independent Contractor Test to help determine if someone is an employee or independent contractor. Texas Mutual uses this test as one part of our evaluation to help interpret the Texas Labor Code provisions.

Below you’ll find a quick reference of the common characteristics of independent contractors from the TWC test to help you recognize the differences. It’s important to note that no single factor makes the determination, and not every situation will involve each factor.

Typically, an independent contractor:

• Does not receive instructions and does not need to receive training
• Has significant investment in their independent business
• Is hired for a specific job and there is no continuous relationship
• Sets own hours of work and supplies their own tools
• Receives payment per job and can realize profit or loss
• Can advertise their business as available to the public and works for multiple companies
• Is liable for non-completion or breach of contract

You can also find definitions for contractors as it relates to workers’ compensation in sections 406.121 and 406.141 of the Texas Labor Code.

Common characteristics of employees

As with independent contractors, no single factor makes the determination that an individual should be classified as an employee. Typically, an employee:

• Is more likely to receive instructions on when, where, and how to perform the job
• Is often trained by a more experienced person, or are required to attend meetings and take training courses
• Does not have an investment in the business, unlike an independent contractor
• Is dependent on the employer for the work
• Is often subject to non-competition rules and can be let go at will

Frequent misconceptions

While many employers issue 1099 forms to their independent contractors, a 1099 alone does not confirm that someone is an independent contractor. Determining if an individual is an independent contractor has to do with the nature of his or her relationship with an employer.

Here are three important tips to keep in mind when determining employment status:

1) The Texas Labor Code definition of an employee is very broad. Assume that all individuals are employees regardless of method of payment or tax reporting basis.

2) There are several types of employees that could be exempted or excluded from workers’ comp coverage but you may elect to be included. Employments that could be exempt include:

• Master or seaman of a vessel
• Certain domestic, farm or ranch, professional athletes, real estate sales and individuals subject to federal compensation laws
• Certain contractors of motor carriers and building/construction trades described in the Texas Labor Code
• Business owners and executive

3) The standard workers’ comp policy allows carriers like Texas Mutual to charge premium for individuals that could receive benefits if an injury or illness occurs on the job.

If you have any additional questions, we encourage you to speak with your insurance agent. Agents can speak with their Texas Mutual underwriter about any specific policy questions.