Hiring Medical Device Contractors in Texas: What You Need to Know About Compliance and Liability

The Surprise That Costs You $50K

You hired a contractor. Seemed like the right fit. They've been working for you six months. Generating revenue. Everyone's happy.

Then you get a letter from the Texas Workforce Commission.

The person you hired as a contractor? They might actually be an employee. And you owe back payroll taxes, benefits, workers compensation, and penalties.

This happens more often than it should. Most Texas medical device companies don't fully understand the legal test. They think "contractor" means "not on payroll." That's not what the law says. Not even close.

And the costs of getting it wrong are real. I've seen Texas companies owe $30K-$100K in back taxes plus penalties because they misclassified someone.

Before you bring another contractor on, understand what the IRS and Texas actually care about.

The IRS Test (And It's Not What You Think)

The IRS doesn't care what you call someone. They care about how they work.

The test has multiple factors, and the IRS looks at all of them together. It's not "answer three of five and you're good."

Control. Who controls how the work gets done? You or them? If you're telling them when to show up, how to do the job, what tools to use, you're controlling their work. That's employee behavior.

If they're deciding their own hours, their own approach, their own schedule - that's contractor behavior.

Economic dependence. Is this person dependent on you for their income, or do they have other revenue streams? Can they work for other companies?

If they're making 90% of their income from you and can't work for others, they look like an employee.

Integration. Is their work essential to your core business? Are they working on your core function, or are they more independent?

If they're deeply integrated into what you do day-to-day, they look like an employee.

Investment. Do they have their own tools, technology, business infrastructure? Or are you providing everything?

If you're providing their laptop, their CRM, their phone, their workspace - they look like an employee.

Relationship. Do you have an ongoing employment expectation? Are they getting benefits? How do you describe the relationship?

If it feels like employment, it probably is.

The IRS doesn't use one factor. They look at the pattern. And the pattern matters. You can score high on one or two factors and still be misclassified if the overall pattern looks like employment.

What a Real Contractor Actually Looks Like

If you're going to hire contractors correctly, they should actually look like this:

They manage their own schedule. They're not coming to your office Monday through Friday. They're working when and where they want. They might do some office time, but it's not required.

They work on commission or project fees. Paid by results, not by the hour or by salary. When they don't close, they don't earn. When they kill it, they earn more.

They work for other companies. They've got other clients. Other revenue streams. They're building their own business, not working for you exclusively.

They have their own infrastructure. Their own CRM. Their own email. Their own business structure. They're not using your systems.

They can't be fired for performance. You don't fire a contractor because they're not hitting numbers. You just stop the contract. It ends. That's it.

They have a contract. Actual written agreement that says this is a contractor relationship. Defines the scope, the compensation, the term, what happens when it ends.

They're responsible for their own taxes, insurance, business expenses. They're not on your payroll. They're not getting 401K. They're not getting health insurance from you.

If your "contractor" doesn't hit most of these, you probably have a classification problem.

How Texas Companies Get This Wrong

I've seen the same mistakes repeatedly with Texas device companies.

Mistake 1: Requiring office presence. "Come in Monday through Friday. 8 AM. Staff meetings."

If you're dictating office hours and location, that contractor looks like an employee to the IRS.

Mistake 2: Paying hourly or salary. "We'll pay you $4K per month."

Contractors get paid by results. Commission. Project fee. Not hourly and not salary. If you're paying hourly or monthly salary, even if they're not on your payroll, that's employee behavior.

Mistake 3: Keeping them too long without converting. Three years in one territory for one company with no other income streams and no offer of employment.

That's basically employment. If someone's been with you that long, either hire them or it's going to look suspicious.

Mistake 4: Not having a written agreement. Just paying commission, no contract.

That's a red flag. Contractors need agreements. It defines the relationship, the scope, what happens when it ends.

Mistake 5: Thinking contractor status protects you from liability. "They're independent. We don't need to worry about what they say about our products."

Wrong. You're still liable if they violate FDA rules or anti-kickback statute. Their classification doesn't change your responsibility for their compliance.

The Compliance Stuff (Beyond Just Classification)

Okay, so you've classified someone correctly as a contractor. You're good on that part.

But you've got other compliance requirements that don't go away.

FDA compliance first. Your contractors need to understand what they can and can't say about your devices. What clinical claims are allowed? What data supports those claims? Can they make certain statements without FDA approval?

Your compliance team should create a document. Brief your contractors. Make sure they understand. You're liable if they violate. So this isn't optional.

Anti-Kickback Statute is a federal thing. You can't offer anything of value to induce referrals or business. In medical device context, this comes up with hospital staff, surgeons, administrators.

Paying commission for sales they generate? That's fine. Paying someone extra money for "consulting" or for steering business your way? That might violate anti-kickback.

Your contractors need to understand the boundaries. Have your legal team brief them. And be specific about your company's policies.

HIPAA if your contractors touch protected health information. Usually in device sales they don't. But if they do, HIPAA training is required.

Texas state laws vary. Some states have specific laws about device sales, rep conduct, what reps can say. Your contractors should know the rules for the territories they work in.

What Should Actually Be In Your Contractor Agreement

If you're hiring contractors, get a written agreement. Here's what it needs:

Relationship definition. Explicitly state: "This is a contractor relationship. You are an independent business. You have autonomy over how you work."

Scope of work. What are they actually doing? Which territories? Which products? What's the expected activity level?

Compensation. Commission rate. How it's calculated. When it's paid. Any bonuses or adjustments.

Term and termination. How long is the relationship? When does it end? Can either party end it early? How much notice?

Confidentiality. What information is confidential? What can't they share with competitors?

Compliance responsibilities. "You understand FDA guidelines, anti-kickback statute, and state laws. You'll comply. You understand I'm liable if you don't and I'll terminate the relationship if you violate."

Contractor status. "You're responsible for taxes, insurance, business expenses. You're not eligible for company benefits. You can work for other non-competing companies."

Non-compete (if applicable). Only if it's reasonable in scope and duration. Overly broad non-competes don't hold up in Texas.

Get a contract lawyer to review it before you use it. Seriously. Spend $500-$1000 on legal review now. Way cheaper than $50K in back taxes later.

What Happens If You Get It Wrong (Real Scenarios)

Let me walk you through what actually happens when you misclassify.

Scenario 1: Unemployment claim. Contractor doesn't make much money. They apply for unemployment. State reviews it. Determines they were an employee. You owe unemployment insurance taxes plus penalties.

Cost: $5K-$15K depending on how long they worked for you and what they earned.

Scenario 2: IRS notices something. You've got people on commission but no corresponding 1099s or W2s. They audit. Determine misclassification. You owe payroll taxes, income tax withholding, FICA, penalties.

Cost: $20K-$50K depending on number of contractors and length of time.

Scenario 3: Both. Federal and state both determine misclassification. Interest and penalties compound.

Cost: $30K-$100K+.

Scenario 4: Compliance issue. Your contractor makes unpermitted FDA claims or violates anti-kickback. You didn't monitor. Regulators determine you're liable. Fines. Possibly criminal exposure.

Cost: Unpredictable. Could be worse than tax issues.

I've seen all four happen to Texas device companies. It's not hypothetical.