Employee vs Independent Contractor
The general rule is that an individual is an independent contractor if the employer has a right to control or direct only the result of the work and not the means and methods of accomplishing the result. The right to control is a critical element when determining an employee's status. In other words, who sets the rules? As an employer, FGCU must be able to demonstrate that it classified its workers properly.
FGCU distinguishes between its employees and independent contractors by examining three basic areas. They are behavioral control, financial control, and the type of relationship between the worker and the employer. Facts that show whether the employer has a right to direct and control how the worker does the task, for which he/she is hired include the type and degree of instruction and training and provide evidence of behavioral control.
- Ex: A worker has the responsibility of facilitating the construction of a building on campus. The worker is provided an office, a phone line and an e-mail account. Though the worker is given a task to complete and when to have it completed, they are not told how to accomplish the task. The supervisor is not involved in the worker's daily activity, nor is the worker subject to regular review. Is this worker an employee or an independent contractor?
This worker is an independent contractor because the worker performs his/her tasks independent of the controls of the University except for broad parameters and very limited instruction.
Another area of focus when determining the status of a worker is financial control.
- Ex: Dr. Bailey conducts a one-time course from 9-12 Tuesday morning presented by FGCU. Dr. Bailey also conducts a similar course for other area colleges. Dr. Bailey is told what to present, but must provide his own materials and absorb any cost associated with the course. Dr. Bailey is also given time constraints within which to conduct the course. Dr. Bailey asked for, and is paid, a flat fee of $600.00 for the class which is sufficient to allow him to cover his time and expenses. However, the University withholds no taxes, so the instructor has to pay his own taxes.
Dr. Bailey is an independent contractor because he is paid a flat fee for the class, is able to make a profit, and is able to make his service available to the relevant market.
The last area to be explored in determining a worker's status is the relationship that exists between the worker and the employer. Relationships are examined in the context of the permanency of the relationships, the extent to which the worker's services are a key aspect of the employer's business, whether or not the employer provides benefits (i.e. insurance, pension, vacation play, sick pay), and how, if a contract exists, it describes the relationship.
- Ex: Dr. Polawski is hired to teach 3 sections of Biology at FGCU for the next academic year. She is given a nine-month, three-year contract which is silent as to the employee-independent contractor status. Dr. Polawski accumulates sick days and vacation days and is allowed to participate in a pension plan.
This is an example of an employer-employee relationship.
The Internal Revenue Service (IRS) looks at twenty factors in order to determine whether a certain worker should be classified as an employee or an independent contractor. (U.S. Internal Revenue Ruling 87-41) The underlying issue of this twenty-factor test is "who sets the work rules." The goal of the twenty-factor test is to determine whether the entity for whom services are performed exercise sufficient control over the individual for him or her to be classified as an employee. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. The twenty IRS factors in assessing the employment status of an individual for federal employment tax purposes are as follows:
- Instructions. A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.
- Training. 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 person or persons for whom the services are performed want the services performed in a particular method or manner.
- Integration. Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control.
When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
- Services Rendered Personally. If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results.
- Hiring, Supervising, and Paying Assistants. If the person or persons for whom the services are performed hire, supervise, and pay 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.
- Continuing Relationship. A continuing relationship between the worker and the person or persons for whom the services are performed 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 person or persons for whom the services are performed is a factor indicating control.
- Full Time Required. If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict 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 person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the person or persons receiving the services, 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 an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have 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 set by the person or persons for whom the services are performed, 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 person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so.
- Oral or Written Reports. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed 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 person or persons for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities.
- Furnishing of Tools and Materials. The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
- Significant Investment. 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 person or persons for whom the services are performed 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.
Frequently Asked Questions
- Who is an employee?
An employee is anyone who performs services for the University if the University can control what will be done and how it will be done. This is so even if the University gives the employee freedom to perform services. What matters is that the University has the right to control the details of how the services are performed.
- Who is an independent contractor?A general rule is that the University, as the payer, has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. Usually an independent contractor will have a contract and will be paid from a purchase order rather than through payroll.
- How do you determine if a person is an employee or an independent contractor?The determination, though taking into account many factors, is essentially made by examining the right to control how, when, and where a person performs services, and the degree of control or independence. It is not based on how the person is paid, how often the person is paid, or whether the person works part-time or full-time.
- If a person signs a contract which includes language that they are an independent contractor, will that be sufficient?No. The mere existence of a contract does not mean the individual is not an employee. Moreover, the characterization given to a position in a contract is not determinative. However, when a person's position is examined and all factors under review are such that a clear determination is not possible, such language in a contract can be an important factor.
- I have a limited budget. It will be cost effective for me to classify certain workers as independent contractors. I don't pay benefits and I make the workers sign a statement acknowledging they will be responsible for paying their own taxes. Will this be enough to cover me?No. If a worker meets the tests as an employee, that worker is an employee even if they consent to being treated as an independent contractor regardless of how they are classified.
- Can I make one of my employees an independent contractor by entering into a contract with them to do some additional work outside the scope of their regular responsibilities?
Normally a worker for the University will be either an employee or an independent contractor, not both. However, if an employee is providing supplemental services to the University outside his or her area of normal responsibility and meets the criteria of an independent contractor, exceptions may apply. Please contact the Department of Human Resources or the General Counsel's Office for further information.
- If I have a question about whether to categorize a worker as an independent contractor or employee, who should I contact??You should begin your inquiry by contacting the FGCU Office of Human Resources.