Employee vs. Independent Contractor Status
The following provides the University community with an understanding of the University's procedures regarding payments for personal services rendered to the University by individuals and certain types of business organizations. It provides guidelines to assist departments in identifying the appropriate classification (employee or independent contractor) for such individuals. In addition, Human Resources should be consulted for guidance regarding classification of employees and independent contractors under the following circumstances:
- A current employee will be providing additional services to the University, whether or not the employee will be paid for the same activities for which s/he is currently employed;
- A former employee will be providing services to the University, whether or not the former employee will be paid for the same activities for which s/he was previously employed;
- A prospective employee will be providing services to the University and such services are substantially similar to those for which s/he will be hired.
- An individual will be contracted to provide services on a regular basis that are commonly conducted by University employees.
- An entity wholly or partially owned by a current employee will be providing services to the University;
- An entity wholly or partially owned by a former employee will be providing services to the University which are similar in substance to the activities for which s/he was previously employed;
What is an Independent Contractor?
Independent Contractors are individuals, partnerships, limited liability companies (“LLCs”) and attorneys (regardless of organization type) who render a service and meet independent contractor conditions as established by IRS criteria. They generally have a separate work place, and are not supervised when they are working for the University. An Independent Contractor generally will offer his/her services to other organizations and may advertise to the general public. They are usually paid a flat fee by the job or project and are generally not paid by an hourly, daily, weekly, or monthly rate. There are certain exceptions, such as outside attorneys, who are paid a monthly retainer but are still considered independent contractors.
What is an Employer/Employee relationship?
For federal tax purposes, the relationship of employer and employee will exist when the University has the right to control and direct the individual who performs the services, not only as to the results to be accomplished by the work, but also as to the details and means by which the result is accomplished. That is, an employee is subject to the will and control of the University not only as to what shall be done, but also as to how and where it shall be done. It is not necessary that the University actually direct or control the manner in which services are performed; it is sufficient if the University has the right to do so.
The IRS has identified 20 factors, also known as "common law factors," to determine whether an individual is an employee or independent contractor. As part of that analysis, the IRS also uses a three-part control analysis, which focuses on the degree of control that an organization has over a worker as well as the degree of independence of the worker. There is no “formula” for determining employee versus independent contractor status. The IRS considers all factors and degrees of control in making a determination in each unique circumstance.
What are the three parts used in the “control analysis”?
Behavioral control is evidenced by facts which illustrate whether the service recipient has the right to direct or control how the worker performs the specific task s/he was engaged to do. It is demonstrated by who dictates, among other things, when, where, and how to do a job.
Financial control is evidenced by facts which illustrate whether the service recipient has the right to control the financial aspects of the worker’s activities. It is demonstrated by whether the worker bares a risk of loss, not just in wages, by not completing a job. It is further demonstrated by the worker’s entrepreneurial skill and whether the worker makes the services available to others.
The relationship between the worker and the service recipient is examined to assist in determining employee versus independent contractor status. Factors in the relationship analysis include written contracts, prior history between the parties, permanency of the relationship of the parties, and whether the services provided are part of the service recipient’s regular business activities.
What are the twenty "common law factors"?
The common law factors are a set of criteria used by the IRS to determine whether sufficient control is present to establish an employer-employee relationship. The degree of importance of each factor varies depending on the occupation and the factual context in which services are performed. The 20 common law factors used by the IRS to determine whether an employer-employee relationship exists, as they apply in the University setting, are as follows:
A worker who is required to comply with the University’s instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the University has the right to require compliance with instructions.
Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the University wants the services performed in a particular manner. Such conditions suggest the worker is an employee.
Integration of the worker’s services into University operations generally shows that the worker is subject to direction and control. When the success or continuation of an enterprise depends to an appreciable degree upon the performance of certain services, the workers who perform those services must be subject to certain amount of control by the employer.
Services Rendered Personally:
If the services must be rendered personally, presumably the University is interested in the methods used to accomplish the work as well as in the results, indicative of an employee.
Hiring, Supervising, and Paying Assistants:
If the University hires, supervises, and pays assistants, that factor generally shows control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.
A continuing relationship between the worker and the University indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.
Set Hours of Work:
The establishment of set hours of work by the University is a factor indicating control.
If the worker must devote substantially full time to the business of the University, the University has control over the amount of time the worker spends working and implicitly restricts the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses.
Doing Work on Employer’s Premises:
If the work is performed on the premises of the University, that factor suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the University, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which the University generally would require that employees perform such services on the University’s premises. Control over the place of work is indicated when the University has the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
Order or Sequence Set:
If a worker must perform services in the order or sequence determined by the University, that factor shows that the worker is not free to follow the worker’s own pattern of work but must follow the established routines and schedules of the University. Often, because of the nature of an occupation, the University does not set the order of the services or set the order infrequently. It is sufficient to show control, however, if the University retains the right to do so.
Oral or Written Reports:
A requirement that the worker submit regular or written reports to the University indicates a degree of control.
Payment by Hour, Week, Month:
Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
Payment of Business and/or Traveling Expenses:
If the University ordinarily pay the worker’s business and/or traveling expenses, the worker is ordinarily an employee. However, expense reimbursement can apply to independent contractors as well.
Furnishing of Tools and Materials:
The fact that the University furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees, such as the maintenance of an office rented at fair value from an unrelated party, that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the University for such facilities and, accordingly, the existence of an employer-employee relationship. Special scrutiny is required with respect to certain types of facilities, such as home offices.
Realization of Profit or Loss:
A worker who can realize a profit or suffer a loss as a result of the worker’s services (instead of salary ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor.
Working for More than One Firm at a Time:
If a worker performs services for a multiple of unrelated entities at the same time, that factor generally indicates that the worker is an independent contractor. However, a worker who performs services for more than one entity may be an employee of each.
Making Services Available to the General Public:
The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
Right to Discharge:
The right to discharge a worker is a factor indicating that the worker is an employee. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
Right to Terminate:
If the worker has the right to end his or her relationship with the University at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.
What are the consequences of determination that independent contractor status exists?
By law, independent contractors are responsible for reporting all income earned and for paying the appropriate federal, state and city taxes, as well as self-employment taxes.
Independent contractors who are paid $600 or more during a calendar year through the University’s Accounts Payable system will be issued a Form 1099-MISC (Miscellaneous Income) after the end of each calendar year.
Travel and Business Expenses
Independent contractors may be reimbursed for appropriate travel and business expenditures. Such reimbursement must be documented in a manner consistent with the University policy for reimbursement of employee travel and business expenses. See the policy at Employee Expenses (https://fishelp.wustl.edu/ap/Documents/Policy_Statement_for_Travel_Advances__Travel_Expenses).
Independent Contractors are not employees of the University and are not entitled to University employee benefits on account of services rendered as an independent contractor.
Workers Compensation and Unemployment Compensation
Because Independent Contractors are not employees; they are not covered by the University's Workers Compensation Insurance in the event of injury while working at the University. In addition, Independent Contractors are not eligible for Unemployment Compensation when their contract terminates.
What are the consequences of determination that employee status exists?
If the individual does not meet the test for an independent contractor, he/she will be considered an employee, will be paid through payroll, and all applicable employment taxes will be withheld.
When a valid Independent Contractor relationship does not exist between the University and an individual who provides advice or renders a service, and the individual is paid through the University’s Accounts Payable section, the University may become liable for the payment of employment taxes on such payments.
Travel and Business Expenses
Employees may be reimbursed for appropriate travel and business expenditures. Such reimbursement must be documented in accordance with the University’s Travel Policy. See the policy at Employee Expenses (https://fishelp.wustl.edu/ap/Documents/Policy_Statement_for_Travel_Advances__Travel_Expenses).
Employees of the University are entitled to certain University employee benefits.
Workers Compensation and Unemployment Compensation
Employees are covered by the University's Workers Compensation Insurance in the event of injury while working at the University. In addition, employees are eligible for Unemployment Compensation when their contract terminates.
When is the Questionnaire for Determining Employee or Independent Contractor Status required?
The Questionnaire for Determining Employee or Independent Contractor Status should be completed in each of the following circumstances:
- A department would like to pay a current or former employee for services to the University through Accounts Payable;
- A department would like to pay a prospective employee for services to the University through Accounts Payable;
- A department would like to contract services with an individual to be performed on a continuing and/or regular basis which are substantially similar to services performed by University employees;
- A department would like to engage a company that is wholly or partially owned by a current employee;
- A department would like to engage a company that is wholly or partially owned by a former employee for services which are substantially similar to the activities for which the individual was previously employed.
The questionnaire must be submitted to Human Resources for review and determination of status.
Can an employee be paid as an independent contractor to another department or school?
- An employee may provide services as an independent contractor to another department or school, provided that the following circumstances are met:
- The employee maintains an outside, ongoing business that provides the same services to other organizations;
- The services are unrelated to the services rendered by the employee as an employee;
- The services are not provided during the employee’s work hours (when the employee is engaged as an employee);
- The independent contractor questionnaire is completed and submitted to Human Resources.