Determining Contract Labor and Independent UPPS No. 04.04.08
Contractor Status Issue No. 2
Effective Date: 10/09/2009
Review: August 1 E4Y
01. POLICY STATEMENT
01.01 This UPPS provides explanation and clarification of contract labor considerations and establishes guidelines for distinguishing between staff or faculty employees and independent contractors.
02. DEFINING AN INDEPENDENT CONTRACTOR
02.01 The Texas Workforce Commission (TWC) presumes that anyone who provides services for the university is an employee until the university proves that it has no right to exercise direction or control over the work performed.
02.02 The Fair Labor Standards Act defines an independent contractor as anyone who passes the "economic reality test." This test determines whether an individual is economically dependent on the university for support or is, as a matter of economic fact, in business for him or herself. The courts focus on six factors to apply this test. These are the factors that the university must consider in order to determine whether an individual is an employee or independent contractor:
a. The extent to which the worker's services are an integral part of the university’s business;
b. The permanency of the relationship;
c. The amount of the individual’s investment in facilities and equipment;
d. The nature and degree of control by the university;
e. The opportunities for profit and loss; and
level of skill required in performing the job and the amount of initiative,
judgment, or foresight in open market competition with others required for the
success of the claimed independent enterprise.
02.03 The Internal Revenue Service (IRS) uses three categories to determine whether an individual is a “common law” employee or an independent contractor:
a. Behavioral Control is considered if the university has the right to direct and control how the work is performed or provides training and supervision to the worker.
b. 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.
c. The employer is considered to have an employment relationship with the worker if the worker has a contractual obligation to perform specific tasks in order to be paid, or if the worker does not generally offer services to the public, or if the university’s operation depends on the worker to perform standard tasks that are performed by other employees.
03. LEGAL CONSIDERATIONS
03.01 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.
03.02 The Department of Labor (DOL) and the courts have the authority to determine whether individuals are employees or independent contractors in disputes over the applicability of the overtime provisions of the Fair Labor Standards Act and to grant back pay as required.
03.03 The IRS has the authority under IRC Section 6651 to assess a penalty for failure to file employment taxes.
03.04 The TWC, the DOL, or the 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.
04. CONTRACT AND PAYMENT PROCEDURES
04.01 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.
04.02 During the contract negotiation process, and before a new vendor can be set up, the account manager must ask the proposed contractor to complete the university’s Form FS-06, “Employee vs. Independent Contractor Determination,” provided on the Tax website. The account manager must sign the form and send it to the university’s tax specialist for review and approval. The tax specialist will assist the account manager to make the correct determination of worker classification. The tax specialist will keep Form FS-06 on file if the worker is classified as an independent contractor.
04.03 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”.
04.04 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 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 Policy,” to create a new position.
05. REVIEWERS OF THIS UPPS
05.01 Reviewers of this UPPS include the following:
Associate Vice President for August 1 E4Y
Tax Specialist August 1 E4Y
Chair, Faculty Senate August 1 E4Y
Chair, Staff Council August 1 E4Y
Director, Human Resources August 1 E4Y
06. CERTIFICATION STATEMENT
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