Under a new administrative rule adopted by the Texas Workforce Commission (the TWC), effective as of April 29, 2019, many Texans working in the ever-growing “gig economy”—that sector of the labor market in which workers provide on-demand services, typically connecting with customers using digital platforms hosted by companies such as Uber and Lyft—are likely to be treated as independent contractors rather than employees. The new rule insulates companies that provide such digital platforms from paying unemployment taxes, since the individuals comprising their workforces will not be treated as employees under the Texas Unemployment Compensation Act.

The TWC’s decision to adopt this new rule has generated significant controversy, with many asserting that it overstepped its rule-making authority in adopting the new rule and others arguing that the rule will harm workers. According to the TWC, the increasing prevalence of marketplace digital platforms necessitated clarification regarding how to classify workers providing services through such platforms.

There is a presumption in Texas law—as in many states—that a worker who provides services in exchange for wages under an express or implied contract for hire is an employee unless the worker’s services are “free from control or direction under the contract and in fact.” In 1998, the TWC adopted a rule setting forth twenty factors to consider in determining whether a worker is sufficiently subject to another’s control or direction to be classified as an employee rather than an independent contractor. The TWC’s new rule reduces the number of factors considered to nine for “marketplace contractors”—i.e. workers who have entered into agreements with marketplace platforms that provide digital networks to connect those workers to the public. If a marketplace contractor meets all nine factors under the new rule, the worker will be classified as an independent contractor and not an employee. The nine factors are:

1. All or substantially all of the payment paid to the contractor shall be based on a per-job or transaction basis;

2. The marketplace platform does not unilaterally prescribe specific hours during which the marketplace contractor must be available to accept service requests from the public (including third-party individuals and entities) submitted through the marketplace platform’s digital network;

3. The marketplace platform does not prohibit the marketplace contractor from using a digital network offered by any other marketplace platform;

4. The marketplace platform does not restrict the contractor from engaging in any other occupation or business;

5. The marketplace contractor is free from control by the marketplace platform as to where and when the marketplace contractor works and when the marketplace contractor accesses the marketplace platform’s digital network;

6. The marketplace contractor bears all or substantially all of the contractor’s own expenses that are incurred by the contractor in performing the service or services;

7. The marketplace contractor is responsible for providing the necessary tools, materials, and equipment to perform the service or services;

8. The marketplace platform does not control the details or methods for the services performed by a marketplace contractor by requiring the marketplace contractor to follow specified instructions governing how to perform the services; and

9. The marketplace platform does not require the contractor to attend mandatory meetings or mandatory training.

Responding to criticism that it exceeded its rule-making authority in adopting this new rule, the TWC noted it previously utilized the same authority to implement the traditional, twenty-factor guideline followed since 1998. The TWC asserts that the new nine-factor test clarifies how the control and direction analysis should be applied to marketplace contractors and is tailored specifically to this emerging market sector. Challenging the notion that the new rule is less rigorous than the traditional guideline, the TWC noted that not all twenty factors of the traditional guideline apply to every type of business, whereas all nine factors of the new test must be met before a marketplace contractor is treated as an independent contractor.

The TWC also cited feedback received from the U.S. Department of Labor, which found that the new rule does not “present a conformity issue vis-à-vis federal unemployment compensation law.” The Department of Labor’s comments to the new rule further acknowledged that states “are free to designate marketplace contractors as independent contractors, and thus exclude them from the state’s (Unemployment Compensation) UC law ….”

The adoption of this new rule in Texas is significant. Most gig-economy companies are first confronted with challenges to the classification of gig-economy workers when they file for unemployment when companies end the relationship. This new rule will help reduce unemployment claims by gig-economy workers in Texas, but companies should insure that they satisfy all nine factors laid out by the TWC. Also, employers should be mindful that states use different tests to determine whether a worker should be classified as an employee for purposes of qualifying for unemployment benefits, and most of those tests: (1) generally favor a determination that the worker is an employee and entitled to benefits and (2) the questionnaires and other tools used by DOL auditors and investigators are outdated and—unlike the Texas test—do not apply to the practical functionality of the gig-economy