Guidelines for Hiring Independent Contractors

To be classified as an independent contractor, the IRS 20-Factor Test result must indicate that the relationship between Mercer University and the service provider is an independent contractor arrangement; and the service provider must meet ALL of the following requirements:

The individual:

• is NOT currently an employee of the University;
• has NOT been employed by the University within the last twelve months;
• is NOT a registered student at the University;
• is at least 18 years of age;
• is eligible to work in the U.S.;
• is eligible to be employed by the University.

Examples of individuals who may be paid as an independent contractor

The following services will not need to have a 20-Factor Test determination completed or have the determination reviewed before contracting with the service provider since the University has evaluated and classified the following general classes of service providers as independent contractors:

• Sporting officials for intercollegiate athletic events;
• Professional announcers and color commentators for athletic events;
• Performers, artists, professional athletes, entertainers ( i.e., non-employees who provide entertainment services to the University for a fee such as DJs, singers, bands, comedians, magicians, game hosting, motivational speakers, etc.);
• Guest speakers/lecturers, i.e., non-employees who provide services to the University for a fee (or honorarium) in which one-time lectures, discourses or presentations (not to exceed twice a semester) are given before classes or audiences;
• Interpreters;
• Caterers;
• Tailor/Seamstress; and
• Series editor, copy editor, manuscript reader, or book designer.

Examples of individuals NOT generally classified as independent contractors

Based on the Common Law Test, the following categories of workers will be considered employees, and not be considered independent contractors while performing services for the University. Payments to these workers should be made through payroll (contact Student Employment for students, contact HR for all others). The following list is not all-inclusive. Therefore, departments should determine an individual’s classification by using the 20-Factor Test as a guide whenever doubt exists as to the proper classification of a service provider.

• Employees (including faculty, staff, and students) and recent former employees. If the service provider you wish to hire is a current or recent former employee (employed by the University in the previous 12 months), they will be paid as an employee and not as an independent contractor.
  This includes a former employee who is called back to train a new employee in their former position.
• Performing routine services similar to one presently being performed by a University employee.
• Mercer University faculty, staff, or students performing services for the University, regardless of the source of payment (i.e., departmental accounts, grants, foundation funding, etc.).
• Individuals providing instruction or teaching services. Since education is one of the University’s primary missions, the IRS will always view these types of payments as employment.
• Individuals providing administrative, secretarial, clerical, housekeeping, maintenance, temporary or season laborers, and event workers (cashiers, ticket takers, chain crew, parking attendants, ushers, runners, etc.).

Please contact Mallori Gattis in Human Resources to determine the appropriate payment method for individuals who do not fit the criteria for being paid as an independent contractor.

The 20-Factor Test is a tool that is designed to help determine whether a worker or class of workers hired by the University to perform services should be classified as an employee or as an independent contractor. It should help you understand the details of what is being evaluated. As you look at the factors, you should be aware that the IRS does not look specifically at any one factor, but one factor can be enough to cause the IRS to determine that a worker is an employee. There is no “magic number” of factors which determines status.

Important: The IRS presumes that a worker is an employee unless proven otherwise. So the burden of proof is on the employer to show that it has classified a worker correctly.

You DO NOT need to complete the 20-Factor Test if:

• The individual is incorporated (i.e. Corporation, Corp, Incorporated or Inc. is part of the individual’s name).
• The individual falls into any of the predetermined independent contractor categories noted in previous section.

You DO NOT need to complete the 20-Factor Test if:

• The individual does not fall into any of the predetermined independent contractor categories noted above in which case you’ll need to complete the 20-Factor Test to find out whether this individual should be classified as an employee or as an independent contractor.

According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

Common Law Rules

Factors that provide evidence of the degree of control and independence of the contractor fall into three categories:

• 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 the worker is paid, whether expenses are reimbursed, who provides tools, supplies, etc.
• Type of relationship: Are there written contracts or employee benefits, such as a pension plan, health insurance, or vacation days? Will the relationship continue, and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

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.

Misclassification of Employees

If you classify an employee as independent contractor and you have no reasonable basis for doing so, Mercer may be held liable for employment taxes for that worker.

Each state has its own way to evaluate the status of workers for state wages, hours, and working condition requirements. Several states – more all the time – are now using what’s called a three-factor ABC test. This test, in brief, requires that all three of these factors must be met for the worker to be considered as an independent contractor:

• The worker is not under the control of the employer for the performance of work.
• The work must NOT be within the usual course of the employer’s business, and
• The worker must be “customarily engaged” in an independent trade or business that is the same as the work performed for this employer.

• 20-Factor Test
• At-a-Glance Worker Classification Guide: Independent Contractor vs. Employee
• IRS Form W-9 and Instructions for Independent Contractors

Does the term “independent contractor” only apply to individuals?

No, the term “independent contractor” encompasses individuals (includes sole proprietors doing business under a business name), partnerships, and incorporated or unincorporated companies.

What is the difference between an employee and an independent contractor?

According to the IRS, workers are considered employees if the employer they work for has the right to direct and control the way they work, including details such as when, where and how the job is completed.

According to the IRS, workers are considered independent contractors (IC) if the employer they work for has the right to direct and control only the results of the work they perform (e.g., accepting or rejecting final results) but not the means and methods of accomplishing the results. The general rule of thumb is that an IC should be a separate business entity with opportunity to experience a profit or loss; they should deliver the same type of services to multiple organizations, and be responsible for the payment of their own business expenses, general liability insurance and worker’s compensation insurance.

Our department would like an employee from another MU department do some work for us. What is the process for getting this person paid?

Anyone currently employed by MU (i.e., faculty, staff, student, grad assistant or temporary) who performs additional services for another department for compensation will be classified as an employee and should be paid through the Payroll Office. Please contact the Human Resources Office to review/approve the request and process payment.

We want to pay a student to assist us at a departmental event we have coming up. Can we process an RFP to pay this student through Accounts Payable?

No. Since the individual is currently a MU student, you would need to process paperwork to hire the student through the Student Employment Office, and the student would be paid through the Payroll Office.

Can an individual waive their right to be considered an employee and opt to be a contractor?

No, a worker cannot waive their employee status through a contract, or otherwise. Specific criteria must be met to classify a worker as an independent contractor; otherwise, the worker is an employee, no matter what a contract or waiver says.

How does Mercer University determine if a worker is an employee or an independent contractor?

MU relies on departments to develop a description of the work to be performed and to complete the IRS 20-Factor Test to assess the appropriate classification. The IRS 20-Factor Test is based on the IRS Common Law Rules described below. This checklist must be completed before the provision of services begins and returned to the Human Resources department to ensure correct classification. The form identifies when a response either strengthens or weakens the case that the individual is an independent contractor. This determination is central to the question of how an individual should be paid for services provided to the University.

What is the IRS Common Law Rules?

The Common Law Rules outline and defines 20 factors that are used to help determine whether the person providing the service is an employee or an independent contractor. All information that provides evidence of the degree of control and independence must be considered. The 20 factors are broken down into three categories: behavioral control, financial control, and the type of relationship between the business and the worker.

How is behavioral control defined?

Behavior control refers to whether the employer has the right to direct or control the work being done, including the amount and type of direction given, the amount of hours worked, the recurring work schedule, and the type of training provided. A worker is an employee when the business has the right to direct and control the worker.

How is financial control defined?

Financial control refers to who controls the economic aspects of the worker’s job, such as how the business pays the worker and the extent to which the worker has unremorseful business expenses. When compared to employees, independent contractors are more likely to:

• be paid a flat fee or on a “time and materials” basis;
• have unremorseful business expenses;
• make significant investments in tools and facilities; and
• make their services available to other businesses and realize a profit or loss.

How does the type of relationship between an independent contractor and a business differ from the relationship between an employee and employer?

There are several questions to consider when determining how the worker and the business perceive their relationship:

• Is there a written contract describing the relationship”
• What is the extent to which the worker is available to perform services for other businesses?
• How permanent is the relationship?
• What is the extent to which services performed by the worker are a key aspect of the business?
• Is the worker entitled to employee-type benefits?

Are the factors weighed differently when determining whether a worker is an employee or an independent contractor?

No. Under the IRS Common Law Rules, there is no “magic” or set number of criteria that must be met, and no one factor stands alone in make the determination. Some factors may indicate that the worker is an employee, while other factors indicate the worker is an independent contractor. An employer must weigh all factors when determining whether an individual is an employee or an independent contractor. The general rule is that an individual is an independent contractor is the payor (the University) has the right to control or direct only the result of the work, not what will be done and how it will be done. The more control the business has over the individual, the more likely that individual will be classified as an employee and not an independent contractor.

How long can an independent contractor work for a department?

While there is no specific limit, a continuing relationship between the business and worker is considered an indication of an employer/employee relationship. Since the relationship can change over time if contracts are renewed or extended, be sure to review the checklist to determine whether the worker still qualifies as an independent contractor.

What are the penalties for misclassifying employees as independent contractors?

Federal and state enforcement agencies have made worker misclassification a top priority, and the consequences for misclassification can be significant. In addition to owing back pay, overtime, and benefits to a misclassified worker, the employer may be ordered to pay back taxes, interest, and fines. The employee may also be ordered to pay back taxes, fines, and interest.