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Independent Contractor Guidelines


Independent Contractor Analysis Form Word Document
Defining the Independent Contractor A User's Guide Word Document

Planning for Additional Services

When planning for an upcoming project, event, or grant where additional services may be needed, it is important to determine whether the individuals providing services are employees or independent contractors. The Internal Revenue Service, as well as other federal agencies, holds employers responsible for determining appropriate classification. Additionally, misclassification could have drastic repercussions such as fines, penalties, and litigation.

Employee vs. Independent Contractor

What is the difference between an employee and an independent contractor?

An employee is typically a worker that the University has the right to control or direct the work. In most cases, an employee is entitled to benefits and insurance coverage. Also, employees are covered under several federal employment laws such as the Fair Labor Standards Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and Title VII of the Civil Rights Act. Employees are also provided unemployment and worker's compensation coverage.

Independent Contractors (often synonymous with terms such as consultant, freelancer, self-employed worker, etc.) are not subject to such provisions and protections. In order to qualify as an independent contractor, the University must not control or direct the full scope of work of the individual in any way. The degree of control or direction over the work is measured in a variety of methods.

Independent Contractor Guidelines


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Methods for Determining Independent Contractor Classification

Different agencies such as the IRS, Department of Labor, and the Office of Unemployment each have their own definition of an independent contractor. Additionally, each uses their own test to determine independent contractor status. While different definitions and tests exist, each are similar and take into account a variety of factors. In order to prevent misclassification with respect to each agency, the University must ensure it is compliant with the variety of definitions. Therefore, the following tests are used when determining independent contractor status.

IRS 20 Factor Test
This test, used by the IRS, is also known as the "right-to-control" test. Made up of twenty factors, each factor is designed to evaluate which party (the University or the individual) controls how work is performed. Under IRS rules, independent contractors control the manner and means by which contracted services, products, or results are achieved. If the University maintains control, the individual is most likely an employee. The following are the factors that are examined. It is important to note that no single factor is decisive in determining an individual's status.

1. Level of instruction given to the individual 11. Requirements for reports
2. Amount of training provided before the individual can perform the task 12. Method of payment
3. Degree of business integration 13. Payment of business or travel expenses
4. Extent of personal services 14. Provision of tools and materials
5. Control of assistants - is the individual supervising employees? 15. Investment in facilities - is the facility being modified so that the individual can work?
6. Continuity of relationship - what is the length of the job? Is it regularly renewed? 16. Realization of profit or loss
7. Flexibility of schedule 17. Work for multiple companies
8. Demands for full-time work - is the individual provided with equipment, assistance, and/or materials - is the individual provided with equipment, assistance and/or materials? 18. Availability to public
9. Need for on-site services 19. Control over discharge
10. Sequence of work 20. Right of termination
Behavioral Control, Financial Control, Relationship Status

The IRS has condensed the 20 Factor Test into three main factors to aid in determining whether a worker is an employee or independent contractor.

Behavioral control refers to facts that show whether there is a right to direct or control how the individual does the work. Factors that measure behavioral control include "Type of instructions given," "Degree of instruction," "Evaluation Systems," and "Training."

Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the individual's job. These factors include whether the individual has a "significant investment" in the work, "unreimbursed expenses," an "opportunity for profit or loss," if they make their "services available to the market," and their "method of payment."

Relationship Status refers to facts that show how the worker and the University perceive their relationship to each other. Such factors that help define this relationship include "written contracts," whether the individual receives "employee benefits," "permanency of the relationship," and whether the "services provided are a key activity of the University."(See A User's Guide)

Reasonable Basis Test

The Reasonable Basis Test is a method for determining independent contractor status that is provided to employers by the IRS as a "safe harbor." Part of Section 530 of the Revenue Act of 1978, this test prevents the misclassification of employees as independent contractors if the University can show a reasonable basis for treating the individual as an independent contractor. One or more of the following must exist for a reasonable basis to apply:

1. A court ruling or IRS Revenue Ruling showing similar individuals are not employees

2. An IRS Technical Advise Memorandum or Private Letter Ruling issued to the University stating the individual is not an employee

3. A past IRS audit that did not find similar positions at the University to be employees

4. A longstanding, widely recognized practice in the industry for treating similar individuals as non-employees

Substantive Consistency Test

The Substantive Consistency Test is a test in which the University must meet in order to qualify for relief provided by Section 530. This "safe harbor" protects the University from any potential penalties and fines associated with misclassification. Substantive consistency states that in order for an individual to be considered an independent contractor, the University must treat individuals holding substantially similar positions as independent contractors too. Treatment of the class of workers must be consistent with the University's belief that they were independent contractors. Similar positions are determined based on an analysis of daily services and the methods used by workers.

Economic Realities Test

According to the Department of Labor, "the economic realities test is used to determine employee status under the Family and Medical Leave Act, the Fair Labor Standards Act, and the Worker Adjustment and Retraining Act. Additionally, it is often applied by courts in determining independent contractor status in civil rights cases under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act" (www. dol.gov). This test varies from the IRS's test because "the economic realities test takes into account the degree to which the workers are economically dependent on the business" (www. dol.gov). For example, a worker who relies solely on payment from the University to meet personal financial obligations fails to meet independent contractor standards according to the Economic Realities Test. However, if the same worker is supported financially through other services he or she offers to the general market, they are more likely to meet this test.

The Right to Control or Direct Work

It is also important to note that even if control or direction over the work is not exercised, the University may still retain the right to control or direct the work. Simply maintaining the right to control or direct the work of the individual may be sufficient in deeming independent contractor status inappropriate. Oftentimes, this situation occurs when work is being completed for a grant or a project ( see Additional Services Provided for Grants or Projects).

Current Employee and Independent Contractor

Individuals may, on rare occasions, simultaneously provide services to the University as both an employee and an independent contractor. Albeit rare, this is only capable if the duties for each service fall within the guidelines for proper classification. Additionally, the duties must not be substantially similar. For example, faculty members should not be compensated as independent contractors for service within workshops because instruction/teaching is being provided in each of his or her positions. An example of a situation where an individual may be classified simultaneously as an employee and an independent contractor is if an individual worked full time as a Cashier (employee), then in his own time, provided a musical performance as an independent contractor. Again, the relationship for each service must be examined to determine appropriate classification.

Key Aspect of the University

The IRS and courts have often based decisions of misclassification of independent contractors on whether or not the service provided was a key aspect of the business. Rationale for such decisions can be best described in an example the IRS has provided. For example, "work of an attorney or paralegal is part of the regular business of a law firm. If a law firm hires an attorney or paralegal, it is likely that it will present their work as its own. As a result, there is an increased probability that the law firm will direct or control their activities. However, one needs to examine all of the facts to determine whether these workers are employees. It is possible that the work performed is part of the principal business of the law firm, yet it has hired workers who are outside specialists and may be independent contractors." (IRS Training Materials, 1996). This same example may be applied to the University in reference to faculty members, as providing higher education and research is consistent with the University's key aspect. Therefore, anytime someone provides instruction or teaching, additional precaution should be applied when using independent contractors.

Additional Services Provided for Grants or Projects

When planning a proposal for a grant or project, it is important to determine the type of additional services that are needed. Due to the nature of grants and projects, oftentimes highly specialized assistance is required for a specific or defined term and funding for benefits may be limited. Independent contractors are an attractive option to providing such services under given constraints. However, two main considerations must be given prior to using the independent contractor classification.

First, an analysis of the relationship between the University and the individual should be conducted to determine status. Normal tests of independent contractor status should be applied to examine the relationship between the University and the individual.

Second, the relationship to the grant work itself must be considered. Grants are awarded to the University and not an employee of the University. However, the funding agency dictates the activities funded by the grant. It is the University's responsibility to ensure that the grant activities are carried out based on the terms and conditions imposed by the funding agency and the proposal that was approved for funding by the agency. SIUE provides assurances to funding agencies prior to awards that it will be compliant with all requirements set forth in grant agreements and will carry out proposed activities dictated by the funding agency in its program guidelines as well as adhere to any federal and/or state regulatory compliances regarding the management and administration of grant activities and financial/fiduciary responsibilities. The Principal Investigator is, in most cases, responsible for ensuring the achievement of the grant's objectives. If assistance is needed to carry out objectives, the individual providing such services might be not be an employee of the University under certain circumstances. For example, for grants that involve numerous institutions, employees of said institutions may provide an integral function to carrying out the grant's objectives. In such instances, a third-party agreement may be utilized, where the University partners with one or more of said institutions. If the individual does not serve a primary function to the overall grant's success by personally carrying out the objectives, but merely provides a highly specialized service subsidiary to the grant, independent contractor may be a suitable classification.

Performing Artists

The use of performing artists is a very common practice throughout the University, and as a result, relationships between the University and such individuals vary. Each relationship must be carefully examined to determine the most appropriate classification. Some individuals performing on behalf of the University may qualify as an independent contractor, while others may display characteristics more consistent with employee classification.

For a performing artist to be considered an independent contractor, he/she must meet the following characteristics:

  • Performer should provide his or her own equipment. This includes instruments, sound equipment, stage equipment, and lighting. Additionally, the performer should hold a significant investment in such equipment.
  • Performer should retain the right to exercise artistic control over the elements of the performance, including music selection.
  • Performer(s) should be in business for themselves, offering similar services to the available market.
  • Performer provides services under a single engagement arrangement.
  • Performer sets rate of pay to be received (fee for performance) and when breaks will occur.
  • Performer is not a current University employee whose duties are consistent with proposed services

In addition, some performing artists may be considered an independent contractor if he or she is serving as a "featured performer." In order to be considered a "featured performer," the following characteristics should apply:

  • must serve as the main attraction for the event or performance, where success of the event is dependent on his or her attendance
  • the individual is a well-recognized professional within the industry
  • the individual provides his or her own instrument
  • the rate of pay is negotiated or set by the performer
  • the service are provided under a single engagement, not to exceed nine (9) days within a calendar year
  • the individual offers similar services to the general public

The aforementioned guidelines are to serve only as an aid for workshop planning purposes. Exceptions to the guidelines may exist and each case must be individually examined to determine appropriate classification.

Workshops

When a department or hiring unit is planning to host a workshop, additional support may be needed in areas that require highly specialized expertise. For such instances, independent contractors are an attractive option. However, because the University's key aspect is to offer education to students, the use of independent contractors within workshops should be done cautiously. The relationship between the University and an individual must be examined to determine the appropriate classification. Some guidelines that support independent contractor classification are as follows:

  • the individual is not the primary presenter, organizer, or coordinator of the workshop
  • the individual is assisting by providing highly specialized expertise
  • the individual offers similar services to the general public
  • the length of service is nine (9) days or less within a calendar year
  • the individual is engaged in faculty development through workshops

If the individual has past or current employment consistent with the proposed duties, if the workshop is evaluated by the workshop organizer, or if the workshop is provided exclusively to enrolled student for academic credit, then the individual should be classified as an employee.

The aforementioned guidelines are to serve only as an aid for workshop planning purposes. Exceptions to the guidelines may exist and each case must be individually examined to determine appropriate classification.

Guest Speakers and Guest Lecturers

If the services of a Guest Speaker or Guest Lecturer are going to be utilized, the degree of control the University has over the individual determines independent contractor status. Some guidelines that support independent contractor classification are as follows:

  • the individual shares highly specialized expertise and experiences which will be communicated at the course
  • the individual is not the primary organizer or coordinator of the arrangement in which speaking services are needed
  • the individual does not participate in designing the course curriculum created by the University
  • the individual does not control a curriculum created by the University
  • the individual does not provide assignments, quizzes, or tests toward a student's grade

If the individual has past or current employment consistent with the proposed duties or if the lecture is evaluated by the person who arranged for a guest lecturer/speaker then, the individual should be classified as an employee.

The aforementioned guidelines are to serve only as an aid for workshop planning purposes. Exceptions to the guidelines may exist and each case must be individually examined to determine appropriate classification.

Outsourcing and Third-Party Agreements

For occasions where independent contractors are performing similar services as University employees, precaution should be given to ensure misclassification does not exist. In such occasions, the University could maintain a high degree of control over the work. Additionally, this could disqualify the University from protections provided by the IRS. ( See Section 530 and Substantive Consistency under Method for Determining Independent Contractor Classification)

In some instances, the University may be justified in classifying individuals who perform similar services as both independent contractors and employees. In order to avoid misclassification, the relationship of an independent contractor should be made through a third-party agreement. Large construction projects, highly specialized services, and other short-term or supplemental projects/services could be outsourced through a third-party agreement. Independent contractors should not be used to replace employees who are unavailable to work.

In third-party relationships, the contract between the third party and the University should clearly state who bears the employment responsibilities. For example, an individual may be referred to the University as an independent contractor; however, the referring party should consider the individual as their employee. If the third party does not consider the individual to be their employee, the University should assume the role of employer. Even if the employment responsibilities are clearly defined in a third-party agreement, the University could still be liable for misclassification. On some rare occasions, a third party and the University may assume a joint employer relationship over the individual.

In any third-party relationship, control factors must be carefully examined to determine who bears the employment responsibilities.

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