Determining Contract Labor and Independent Contractor Status
UPPS No. 04.04.08
Issue No. 3
Effective Date: 10/13/2014
Next Review Date: 8/01/2018 (E4Y)
Sr. Reviewer: Associate Vice President for Finances Services
- This policy provides explanation and clarification of contract labor considerations and establishes guidelines for distinguishing between staff or faculty employees and independent contractors.
DEFINING AN INDEPENDENT CONTRACTOR
The Texas Workforce Commission (TWC) presumes that anyone who provides services for Texas State University is an employee until the university proves that it has no right to exercise direction or control over the work performed.
The Internal Revenue Service (IRS) applies an eleven factor test when determining whether a person is an employee of the university or an independent contractor. While none of these factors is independently controlling, a prevailing number of factors would possibly leave the IRS to believe that person is an employee. These are the factors that the university must consider in order to determine whether an individual is an employee or independent contractor:
the instructions the university gives the worker;
the training the university gives the worker;
the extent to which the worker has reimbursed business expenses;
the extent of the worker’s investment;
the extent to which the worker makes services available to the relevant market;
how the university pays the worker;
the extent to which the worker can realize a profit or loss;
written contracts describing the relationship the parties intended to create;
whether the university provides the worker with employee-type benefits such as insurance, pension plan, vacation pay or sick pay;
the permanency of the relationship; and
the extent to which services performed by the worker are a key aspect of the regular business of the university.
The above eleven factors correspond to the following three categories established by the IRS:
Behavioral control is the first consideration. A worker is an employee if the university has the right to direct and control how the work is performed or provides training and supervision to the worker;
Financial control occurs when the university has the right to control the business aspects of the worker’s job, such as reimbursement of expenses or providing tools and workspace or other support; and
Relationship of the parties is the third consideration. Factors such as employee benefits would indicate an employee/employer relationship. If the worker does not offer services to the public, or if the university’s operation depends on the worker to perform standard tasks, this would also indicate an employee/employer relationship. A written contract that establishes an independent contractor status is beneficial if it is difficult to determine the status based on other factors.
The TWC conducts audits of employer accounts to ensure compliance with the Texas Unemployment Commission Act. The TWC has the statutory authority and legal obligation to determine whether individuals are employees or independent contractors and to assess back taxes, penalties, and interest as required.
The university, through the application of the eleven factors listed in Section 02.02, has the responsibility for determining whether or not a person is an employee or independent contractor.
While the IRS has the authority to audit the university’s determination of whether or not a person is an employee, the Department of Labor (DOL) has the authority to determine whether individuals who are determined by the university to be employees are subject to the overtime provisions of the Fair Labor Standards Act and to grant back pay as required.
The IRS has the authority under IRS Section 6651 to assess a penalty for failure to file employment taxes. The IRS also has the authority to audit the university’s determination whether individuals are employees or independent contractors.
The TWC, DOL, or IRS can perform unannounced audits to determine compliance with employee or contract labor requirements. Noncompliance findings can result in back tax assessments, penalties, interest, and back pay. The initiating department may have to pay any penalties or back taxes.
CONTRACT AND PAYMENT PROCEDURES
Account managers should realize that simply classifying a worker as an independent contractor does not make it so. All aspects of the actual working relationship will determine if the university has the right to exercise direction and control.
During the contract negotiation process, and before a new vendor can be set up, the account manager must ask the proposed contractor to complete Form FS-06, Employee vs. Independent Contractor Determination, provided on the Procurement and Strategic Sourcing website. The account manager must sign the form and send it to the director of Procurement and Strategic Sourcing for review and approval. The director of Procurement and Strategic Sourcing will assist the account manager to make the correct determination of worker classification. The director of Procurement and Strategic Sourcing will keep Form FS-06 on file if the worker is classified as an independent contractor.
If the account manager determines that the payee is an independent contractor, the payee will receive payment according to procedures in UPPS No. 03.04.01, Contracted Services, Including Consultants, Speakers and Other Services.
If the payee is classified as a university employee, the employee will receive payment by Personnel Change Request (PCR). The appropriate department will process the PCR for a Non-Student Non-Regular (NSNR) position through the Quick Hire PCR process, and total payment charged will include fringe benefits, if applicable. The department will provide Human Resources with the information necessary to determine the position’s appropriate classification based on job duties and responsibilities. If needed, Human Resources will use the audit procedures in UPPS No. 04.04.11, University Classification and Compensation, to create a new position.
REVIEWERS OF THIS UPPS
Reviewers of this UPPS include the following:
Position Date Associate Vice President for Financial Services August 1 E4Y Director, Procurement and Strategic Sourcing August 1 E4Y Assistant Vice President for Human Resources August 1 E4Y Director, Payroll and Tax Compliance August 1 E4Y
This UPPS has been approved by the following individuals in their official capacities and represents Texas State policy and procedure from the date of this document until superseded.
Associate Vice President for Financial Services; senior reviewer of this UPPS
Vice President for Finance and Support Services