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Independent Contractor vs Employee
Determination Procedures

  1. Purpose

    The purpose of these procedures is to provide a summary of the criteria used to determine a worker's status under Internal Revenue Service (IRS) common law standards.

  2. Definitions

    Independent Contractor – an independent contractor relationship exists when the university has the right to control only the result of the service, not the manner of performance.

    Employee – an employer/employee relationship exists, under common-law rules, when the university has the right to control the details of how the service will be performed..

  3. Procedures

    1. Background

      An individual may only be retained for personal or professional services as an independent contractor if a determination has been made by the department that an employer-employee relationship does not exist. See Section 4 for further details.

    2. Independent Contractor Services

      1. Definition of Independent Contractor Services

        Personal services performed by independent contractors are generally infrequent, technical, or unique functions performed by individuals rather than partnerships, firms, or corporations. Examples of such services include secretarial, guest lecturing, content developing/reviewing, drafting, technical editing, translation, and technical appraisals.

        Professional services are performed by independent contractors whose occupation is the rendering of such services and may include partnerships, firms, or corporations, as well as individuals. Examples of such services include architectural and engineering services, management and systems consultation, research, the performing arts, and maintenance and housekeeping services.

      2. Engaging the Services of an Independent Contractor

        The determination of an individual's status as an employee or independent contractor must be made prior to an engagement to perform personal or professional services. As a general rule, individuals should be classified as independent contractors on an exception basis only. Departments must contact Purchasing and Financial Services for further information regarding the processes of engaging an independent contractor for services

        Departments must contact either Staff Human Resources or Faculty Affairs if it is determined the individual should be hired as an employee.

    3. Independent Contractor Services Provided By Employees (Restrictions)

      Changes in the State of California Public Contract Code significantly changed the way California State University (CSU) contracts with independent contractors.  In general, active CSU employees may not be hired as independent contractors.  Also, there are restrictions to hiring former CSU employees as independent contractors. Departments are requested to contact the Human Resources Service Group Director for further information.

  4. Determination of Employee/Independent Contractor Status

    1. Background

      Under the Internal Revenue Code, employers are required to withhold income and FICA taxes on wages paid to employees. The IRS and the courts define the term employee for purposes of these withholding requirements as any individual whose employment status meets the common law requirements for an employer-employee relationship. Generally, under common law if an employer has the right to direct and control the work of an individual who performs the services, not only as to the results to be accomplished but also as to the methods and means by which the results are accomplished, an employer-employee relationship exists. In this respect, even if the employer does not exercise the right to direct or control the manner in which the worker performs the services, the fact that the employer retains the right to do so is sufficient.

      On the other hand, if the individual is subject to the direction or control of another person only as to the end result, not as to the methods and means used to accomplish that result, the individual is not an employee.

    2. IRS Twenty Classification Factors

      Since there are no explicit statutory standards for determining a worker's status under the employment tax laws, the IRS has identified twenty classification factors, based on common law standards, which can be used to determine whether the employer has the right to direct and control the detail and means of a worker's duties. However, because business relationships change over time, the IRS and the courts have determined that some of the twenty factors are no longer as relevant as they once were.

      The primary factors listed below include key facts that illustrate the right to direct and control, or its absence. Although every factor is not necessarily present in every case, generally an employer-employee relationship exists when a worker:

      1. Must comply with the employer's instructions about when, where, and how to do the job. (The weight of "instructions" depends on the degree to which instructions apply to how to get the job done rather than to the end result. However, instructions imposed by the employer in compliance with governmental or governing body regulations should be given little weight. Instructions may be in the form of manuals or written procedures.)
      2. Receives training from or at the direction of the employer. (Periodic or on-going training about procedures to be followed and methods to be used indicates that the employer wants the services performed in a particular manner and is strong evidence that an employer-employee relationship exists.)
      3. Lacks a significant investment in facilities used to perform services. (A significant investment is evidence that an independent contractor relationship may exist; however it is not required for independent contractor status.)
      4. Receives payments for business and/or traveling expenses. (Independent contractors are more likely to have unreimbursed expenses. In addition, the opportunity for profit or loss exists if expenses are unreimbursed.)
      5. Does not offer services to the general public. (Any requirement that the individual work exclusively for one employer detracts from the argument that the worker is an independent contractor.)
      6. Receives payments of regular amounts at set intervals. (Performance of a task for a flat fee is generally evidence of independent contractor status. Payment by the hour, week, or month usually indicates an employer-employee relationship.)
      7. Cannot make a profit or suffer a loss from services. (The ability to realize a profit or incur a loss is probably the strongest evidence that a worker controls the business aspects of services rendered and is an independent contractor.)
      8. Can be terminated by the employer. (Since employers rarely have complete flexibility in discharging an employee, the inability to freely discharge a worker, by itself, does not constitute sufficient evidence that the worker is an independent contractor.)
      9. May quit work at any time without incurring liability. (The presence or absence of limits on a worker's ability to terminate, by itself, does not constitute sufficient evidence in determining a worker's status. On the other hand, an employer's ability to refuse payment for unsatisfactory work is characteristic of independent contractor status.)
      10. Has a continuing working relationship with the employer. (The relationship is considered continuing, even if the services are rendered on a part-time basis, are seasonal in nature, or if the individual actually works for only a short time.)
      11. Provides services that are integrated into the business, i.e., the success or continuation of the employer's business depends significantly on the performance of certain services that the worker provides.
      12. Provides services that must be rendered personally.
      13. Hires, supervises, and pays assistants on behalf of the employer, or if the employer hires, supervises, or pays assistants for the worker. (An independent contractor usually determines whether to hire assistants and, if so, whom to hire and what to pay them.)
      14. Must do the work in a sequence set by the employer.
      15. Must submit regular oral or written reports to the employer. (If a contract between the employer and an independent contractor specifies that the job must be completed to the satisfaction of the customer, the employer may avoid the need for reports from the independent contractor. Reports are usually an indication of employee status, since the worker must account for his or her actions.)
      16. Relies on the employer to furnish tools and materials.
      17. Works for only one employer at a time.

        In addition, because recent court decisions have given the following factors little weight, the IRS now considers them to be less important in determining a worker’s status:

      18. Must follow set hours of work.
      19. Works full-time for the employer.
      20. Does the work on the employer's premises, or on a route or at a location designated by the employer.

      In addition, the fact that an individual's relationship with a business is temporary should be given little weight in making an employee/ independent contractor determination. Although an independent contractor will typically have a temporary relationship with a business, so too will employees engaged on a seasonal, project, or an "as needed" basis.

    3. Applying the Twenty Factors

      Using the common law classification factors is not a simple or straightforward process since the IRS's position is that the classification factors should be used only as guidelines and that every piece of information that helps determine the extent to which the employer retains the right to control the worker is important.

      Applying the 20 factors to a particular situation can be difficult and confusing because the importance assigned to each factor can vary significantly depending on the facts and circumstances of each case. The fact that more than half of the factors may point to one result does not necessarily mean that it is the correct result; rather, all of the facts must be analyzed to determine whether certain factors may be more important than others under the particular circumstances. The weight given to a particular classification factor depends on the worker's occupation and the context in which the services are performed. No one factor is determinative; the IRS will consider the answers to all relevant questions when making its decision. However, the IRS leans toward classifying individuals as employees rather than as independent contractors.

    4. Making A Final Determination

      In order to ensure that individuals performing services for the university are properly classified, the Independent Contractor Pre-Hire Worksheet Authorization, which is based on the foregoing IRS classification factors, must be completed by the hiring department prior to hiring a worker as an independent contractor. If the hiring department believes the worker should be a hired as an independent contractor, the completed Independent Contractor Pre-Hire Worksheet must be submitted to the Human Resources Service Group Director for review and consultation with Purchasing and Financial Services.

      If the department determines that the individual should be an employee, Staff Human Resources or Faculty Affairs must be contacted for further direction.

    Forms