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Development/Training - Procedures to Determine Independent Contractor/Consultant Status

Employment arrangements should be reviewed carefully to ensure that the University is properly classifying its workers as employees or as independent contractors/consultants (IC/C). While the law regarding employees and IC/C has not changed, the IRS has given high priority to the correct classification of employment relationships and the resulting tax implications.

Generally, an employee is an individual who performs services that are subject to the will and control of an employer–both what must be done and how it must be done. The employer can allow an employee considerable discretion and freedom of action, so long as the employer has the legal right to control both the method and the result of the services. An IC/C is an individual over whom the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. A short or limited time span to accomplish the work has no affect on the determination of whether someone is functioning as an employee or IC/C.

The Internal Revenue Service uses a number of factors to assist in determining if the worker is an employee or an IC/C. There is no minimum number of factors that, if met, would determine that the individual is an employee or IC/C. The attached factors are intended as guidelines and should be considered in the context of the service being provided and employment practices at the University. If an individual clearly does not meet the conditions of an IC/C, the IRS assumes an employee/employer relationship exists and the individual should be paid on payroll.

Before applying the IRS guidelines, however, two basic questions may clarify the process for payment of the work?

  • Does the University pay as employees others who perform essentially the same duties that are to be performed by this worker?
  • Has this worker been paid during the current calendar year as an employee?

If the answer to either of these questions is yes, University of Maine System policy requires that the individual be paid through payroll. Please call Human Resources at 581-1581 if you need assistance with these questions.

Should the IRS determine that an individual has been inappropriately classified as an IC/C, the University could be subject to substantial penalties for failure to withhold taxes and to pay social security taxes.

Certification and Review Process

The responsible administrator should carefully review each situation to determine whether or not the individual can be classified as an IC/C following the factors developed by the IRS. Complete and forward the Independent Contractor/Employee Status Determination Form to Human Resources, 140 Corbett Hall, for final review. Specific questions about applying these factors should be addressed to Dennis Corson, x1-1580.

Factors Used by IRS to Determine Independent Contractor/Consultant Status

Factors
Employee
Independent Contractor
Instructions
  • A employee is required to comply with instructions about when, where, and how to work.
  • The instructions are generally detailed and specify how the desired result is to be accomplished.
  • Some employees may work with high levels of autonomy and discretion about when, where and how to work because they are highly proficient and conscientious workers.
  • If the University has the right to give instructions, the individual is an employee.
  • An IC/C decides how to do the job, establishes his or her own procedures, and is not supervised.
  • The University is only interested in the end result.
Training
  • Training of a worker by an experienced employee, by correspondence, by required attendance at meetings, and by other methods, is a factor of control indicating that the employer wants the services performed in a particular manner.
  • Especially true if the training is given periodically or at frequent intervals.
  • An IC/C ordinarily uses his or her own methods and receives no training beyond basic information/ orientation sessions from the University.
  • An IC/C is not required to attend meetings or training programs.
Integration
  • If the individual’s services are an integral part of the University’s operations, it generally indicates an employer/employee relationship.
  • If the performance of service establishes or affects the firm’s/individual’s own business reputation and not the business reputation of the University, it indicates IC/C relationship.
Services Rendered Personally
  • If the services must be rendered personally, it indicates the University is interested in the methods, as well as the results.
  • An individual’s right to substitute another’s services without the University’s knowledge suggests the existence of an IC/C relationship.
Hiring Employees
  • If the University hires other employees to assist the worker, an IC/C classification is not appropriate.
  • An IC/C may hire, supervise, and pay his/her own employees to enable him/her to meet the terms of the contract.
Continuing Relationship
  • A continuing or recurring relationship between an individual and the University likely indicates an employer/employee relationship.
  • The relationship between an IC/C and the University ends when the job is finished.
Work Hours/Work Schedule
  • Controlling, or the authority to control, the work hours/work schedule indicates an employer/employee.
  • An employee’s pay is tied to the number of hours required to perform the work.
  • An IC/C controls his or her own time.
  • The rate of pay, determined in the contract, is not generally increased or decreased by the amount of time the IC/C must work to complete the project.
Place of Work
  • A requirement that the work be performed on the University’s premises, or at a location designated by the University, implies an employer/employee relationship, especially where the work is of such a nature that it could be done elsewhere.
  • For example, the use of University office space, telephone and clerical services generally places the worker within the University’s direction and supervision.
  • The importance of this factor depends on the nature of the service involved and the authority the University has to control the work.
  • Doing work away from the University’s premises when it could be done on site may indicate a lack of control.
  • An IC/C will generally have an established business site.
Sequence of Work
  • If a person must perform services in the order or sequence set by the University, it shows that the worker is not free to follow an independent pattern of work, but must follow the established routines and schedules.
  • Control is sufficiently shown, if the University retains the right to do so.
  • If the University is not interested in the order or sequence by which the individual completes the work, there is an indication that there is a lack of control over the manner and means by which the work is performed.
Reports
  • The submission of regular oral or written reports indicates control since the worker must account for his or her actions.
  • An IC/C is not required to file reports which constitute a review of his or her work. However, reports related only to an end result is not an indication of employment or independence.
Payments
  • Payment by the hour, week, or month represents an employer/employee relationship.
  • Payment by the job which includes a lump sum computed by the number of hours required to do the job at a fixed rate per hour may indicate to the IRS an employee/employer relationship.
  • Payment of a flat fee is customary where the worker is an IC/C.
Expenses
  • Payment or reimbursement of the worker’s business and travel expenses by the University may indicate an employer/employee relationship.
  • A person who is paid on a job basis and who has to take care of all or some incidental expenses is generally an IC/C.
Investment
  • Providing any necessary facilities/equipment by the University tends to indicate an employment relationship.
  • Facilities include, generally, equipment or premises necessary for the work but not the tools, instruments, clothing, etc., that are commonly provided by employees in their particular trade.
  • A significant investment by the worker in order to perform the service tends to show an independent status.
  • In order to be significant, the investment must be real, essential, and adequate.
Profit or Loss
  • Employees receive compensation based on the duration of time required to do the work. Thus, they do not suffer a financial loss and are restricted from earning a profit by performing the work.
  • The possibility of a profit or loss for the worker as a result of these services generally shows IC/C status.
  • Whether a profit is realized or loss suffered generally depends on management decisions: that is, the one responsible for a profit or loss can use his or her own ingenuity, initiative, and judgment in conducting the business or enterprise.
  • An IC/C typically can invest significant amounts of time/capital in his/her work without any guarantee of profit.
Services Available to the Public
  • A person may work for a number of people or firms but is considered a University employee if the University has the right to control and direct his/her work.
  • An IC/C is generally free to seek other clients.
  • Demonstrated by advertisements, a visible business location and availability.
Right to Fire
  • If the University has the right to discipline or discharge an individual, that worker is considered an employee.
  • An IC/C cannot be discharged as long as he/she produces a result that measures up to the contract specifications. However, the relationship can be terminated with liability as provided in the specific agreement.
Right to Quit
  • The right to quit at any time without incurring liability indicates an employer/employee relationship.
  • An IC/C usually agrees to complete a specific job and he or she is responsible for its satisfactory completion or is legally obligated to make good for failure to complete the job.
  • Terminating a contract may impose a liability on the University.
Part Time or Temporary Work
  • The fact that the work is part time or of a short duration does not necessarily support an IC/C classification.
  • Other factors, such as the extent to which the services are available to the public and the authority to control the work should be considered here.
Summary of Hiring Process for Independent Contractor/Consultant
1. Certification by University employee with responsibility for and authority over work to be performed using Independent Contractor/Employee Status Determination Form.
2. Review of form by Human Resources.
3. Submit to Purchasing the completed Review Form (PDF) (available from Human Resources) and Personal Service Contract (available from Purchasing), signed by the contractor/consultant (attach a description of the proposed activity if not self explanatory), along with a completed W-9 Form (available from Purchasing), and a completed and authorized Requisition for Purchase Form or electronic requisition.



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