Startups need extra help to grow, but choosing between hiring employees or independent contractors comes with legal and financial responsibilities. Understanding the differences helps businesses follow the rules and avoid costly mistakes.
How to classify workers
The IRS and Department of Labor set rules to determine whether a worker qualifies as an employee or an independent contractor. Businesses control employees by assigning tasks, setting hours, and dictating how to complete work. Independent contractors work on their own terms and use their own tools. Misclassifying a worker can lead to significant fines, back taxes, and legal trouble.
Taxes and benefits
For employees, businesses deduct payroll taxes and provide benefits, such as health insurance. On the other hand, Independent contractors handle their own taxes, and businesses do not need to offer them benefits. Hiring independent contractors can save startups money, but the business must ensure the independent contractors are truly “independent contractors” to avoid penalties. Over the years, many businesses have mischaracterized employees as independent contractors (intentionally or unintentionally), only to later face significant financial penalties of the mischaracterization.
Following employment laws
Texas labor laws follow federal guidelines but do not require additional state-mandated protections like mandatory overtime pay or paid leave. Texas law allows at-will employment, allowing businesses to terminate employees without cause, as long as the decision does not violate anti-discrimination laws. Independent contractors in Texas do not qualify for wage protections or benefits. Startups must correctly classify workers (as employees or independent contractors) and draft contracts that outline payment terms, work scope, and dispute resolution.
Ownership of work
Under Texas law, when employees create something for a company as part of their job, the business automatically owns the work. Independent contractors, however, retain ownership unless a written contract assigns rights to the hiring business. Startups should include intellectual property clauses in contracts to clarify ownership and avoid disputes over creative or proprietary work.
Startups must decide between employees and independent contractors based on their needs and budget. Employees provide long-term commitment, while contractors offer flexibility. Establishing clear agreements and following the law helps startups avoid problems and achieve sustainable growth.
