5.5 Employee vs. Independent Contractor
(Last Modified on June 26, 2019)
Internal Revenue Service (IRS) and Department of Labor (DOL) regulations make it imperative that the USG provides guidelines for determining whether certain personal service arrangements create an employer/employee or an independent contractor relationship.
Under the IRS regulations this has significance in that the institution is responsible for the payment and/or withholding of federal and state unemployment taxes, FICA, and income taxes for those individuals where an employee/employer relationship exists. Independent contractors are responsible for their own liabilities.
Under the DOL regulations, the FLSA’s minimum wage and overtime provisions do not apply to contractors with Economic independence who are in business for themselves. On the other hand, applying the FLSA’s definition, workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees and are covered by the minimum wage and overtime provisions of FLSA. For more detailed information follow the link to the USG Human Resource Administrative Practice Manual (HRAP) and the Department of Labor’s Fact Sheet #13.
5.5.1 Factors in Determining Whether a Person is considered an Employee or Independent Contractor
(Last Modified on January 30, 2018)
In determining whether the person providing service to an Institution is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Historically, the IRS has used a 20-factor test, which more recently was reconfigured into three primary factors discussed below under Common Law Rules:
Common Law Rules
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Institutions must weigh all factors when determining whether a worker is an employee or independent contractor. There is no set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
- Instructions the business gives the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:
- When and where to do the work
- What tools or equipment to use
- What workers to hire or to assist with the work
- Where to purchase supplies and services
- What work must be performed by a specified individual
- What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
- Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Facts that show whether the business has a right to control the business aspects of the worker’s job include:
- The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.
- The extent of the worker’s investment. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
- The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
- How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
- The extent to which the worker can realize a profit or loss. Since an employer usually provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and generally pays the costs of doing business, employees do not have an opportunity to make a profit or loss. An independent contractor can make a profit or loss.
Type of relationship
Facts that show the parties’ type of relationship include:
- Written contracts describing the relationship the parties intended to create. This is probably the least important of the criteria, since what really matters is the nature of the underlying work relationship, not what the parties choose to call it. However, in close cases, the written contract can make a difference.
- Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The power to grant benefits carries with it the power to take them away, which is a power generally exercised by employers over employees. A true independent contractor will finance his or her own benefits out of the overall profits of the enterprise.
- The permanency of the relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
- The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
5.5.2 Continuing Education
(Last Modified on January 30, 2018)
The majority of cases where this “determination of status’ is necessary involves continuing education classes. In general, the following table will dictate whether or not a person is to be classified as an employee or an independent contractor relative to continuing education classes.
|DURATION OF COURSE
|Short Course (less than two weeks, i.e., conference/workshop)
|Independent contractor unless otherwise dictated by the twenty factors listed in Section 5.5.1
|Non-Credit Course (two weeks or more, but less than a semester)
|Credit Course (semester)
5.5.3 Additional Compensation for University System of Georgia Employees
(Last Modified on January 30, 2018)
BOR Policy Manual Section 22.214.171.124 “Research, Saturday Classes and Off-Campus Continuing Education” covers the conditions that must be met before additional compensation can be paid a University System employee. Institution employees who are paid for continuing education services must be paid via normal institutional payroll processes.
GA Law (Code Section 45-10-25) “Exceptions to prohibitions on transactions with State agencies” is specific as to the types of services that can be utilized between USG units and in each instance an agreement between the presidents of the institutions must be consummated. Reference 5.3.3 Dual Appointment/Shared Employees for additional information.
Note: Please review Section 5.3, Employee Pay for additional information.
5.5.4 Independent Contractors
(Last Modified on June 26, 2019)
Independent contractors are all other individuals who are not University System employees. A contract must be in force that covers substantially the following:
- Statement that individual is responsible for all federal and state unemployment taxes, FICA, and income taxes.
- Responsible for their liability insurance.
- Statement that they do not consider themselves to be an employee of the institution, the University System, or State of Georgia.
- Statement of understanding that FLSA minimum wage and overtime provisions do not apply to independent contractors
- Starting and completion dates of the program.
- Responsible for their own professional development.
- Will not require that office space be provided.
- Will not be performing “extra work” for the institution.
- Generally, compensation based upon completion of contract and not on an hourly basis.
- Subject to contract remedies under contract law.
Institutions should on an annual basis review IRS and DOL criteria to ensure awareness and compliance with regulations regarding Independent Contractors.
HRAP Reference: https://www.usg.edu/hr/manual
IRS Reference: https://www.irs.gov
DOL Reference: https://www.dol.gov/whd/regs/compliance/whdfs13.htm