Managers Guide to Personal/Professional Service Contracting
Misclassification of employees as independent contractors is prevalent in many businesses, private and public. The Internal Revenue Service (IRS) has developed twenty common law factors (see How to Tell if a Worker is an Employee) to be applied by employers in the classification of workers, and the employer bears the full responsibility for compliance. The worker does not have the option of choosing independent contractor status, nor will a signed contract or agreement convey independent contractor status if the common law factors indicate otherwise. Misclassification can result in employer liability for state and federal tax withholding, social security and Medicare withholding, state unemployment insurance, and the employer's share of Medicare, social security and state disability. In addition to paying the taxes not withheld and the employer portion of the taxes, the employer may also be liable for penalties of as much as $100,000.
Therefore, to ensure that everyone with authority to initiate personal/professional service contracts has current, comprehensive information and to avoid the risk of incurring significant IRS penalties, this "Managers' Guide to Personal/Professional Services Contracting" was developed by Administrative Services representatives from the Procurement & Risk Services, Payroll and Human Resources offices.
- Download the Personal Services Agreement
Please note the following:
This guide applies to individuals doing business in their own name or an assumed business name. The questionnaire is not required for doing business with an established business entity with multiple employees.
Independent Contractors Policy Statement
Intent: Portland Community College (PCC or College) intends to comply with all applicable Federal and State laws relative to the use of independent contractors, and to apply their use as part of sound fiscal management.
Guideline: PCC intends to hire individuals as full-time and part-time employees for its regular work force and to meet its short-term labor needs by hiring temporary employees. However, on occasion, in order to meet College objectives, it may be necessary to consult with experts in a particular field and to engage individuals for specific periods and/or specific assignments to provide short-term expertise.
An independent contractor is not intended to be a substitute for a regular or a temporary employee. A PCC employee is not eligible to perform work as an independent contractor during the same year in which he/she works as a PCC employee.
Before an individual can provide services as an independent contractors, the questionnaire process must be completed. This guideline is intended to assist managers in meeting their business needs, and to provide information necessary to be in compliance with the law and avoid putting PCC at risk for incurring any financial penalties associated with non-compliance.
Roles and Responsibilities
- Ensure that individual has completed the questionnaire and has been certified by Human Resources prior to beginning work.
- As PCC's representatives, initiate and ensure complete authorization of Personal/Professional Services Agreement and purchase document after independent contractor has been certified.
- Have individual complete a W-9 form.
- Approve all invoices upon receipt from independent contractor by signing, dating and including purchase document number.
- Ensure Personal/Professional Service Agreements and other related documents are up-to-date and current information provided to managers.
- Partner with Human Resource representatives in maintaining the relevant guidelines.
- Refer any inconsistent paperwork to Human Resources for review and resolution.
- Ensure up-to-date requirements for independent contractors are maintained and current information made available to managers.
- Review all questionnaires submitted by applicants for independent contractor status and make a final determination.
- Notifies the department if individual does not meet the test for independent contractor status (the individual must then be hired as a temporary employee, consistent with existing labor agreements and/or employee handbooks and paid accordingly).
- On receipt of approved invoice, issues check directly to independent contractor.
- Ensures that the independent contractor is paid only with purchase documents and completed H.R. certification, so IRS form 1099s are generated for tax reporting purposes.
ORS 670.600 INDEPENDENT CONTRACTOR STANDARDS
As used in various provisions of ORS chapters 316, 656, 657 and 701, an individual who performs labor or services shall be considered to perform the labor or services as an "independent contractor" if the standards of this section are met.
PCC must certify that the contracted work meets the following standards:
- The Contractor is free from direction and control over the means and manner of providing the labor or services, subject only to the specifications of the desired results.
- The Contractor is responsible for obtaining all assumed business registrations or professional occupation licenses required by state law or local ordinances.
- The Contractor furnishes the tools or equipment necessary for the contracted labor or services.
- The Contractor has the authority to hire employees to perform the labor or services; or fire said employees if necessary.
- Payment to the Contractor is made on completion of the performance or is made on the basis of a periodic retainer.
How to tell if a worker qualifies for independent contractor status:
Just as the "20 factors" on the next page indicate employee status, the following traits are indicators of independent contractor status. A worker may be an independent contractor if he or she:
- Is permitted to employ assistants.
- Sets the order or sequence of work.
- Sets his or her own hours of work.
- Works for other employers.
- Is paid by the job or by the contract completed.
- Makes his or her services available to the public.
- Has an opportunity for profit and loss.
- Furnishes his or her own tools.
- Has a substantial investment in his or her trade.
- May be dismissed only under terms of a contract.
How to tell if a worker is an employee:
Under the "common law test" if an employer has the right to control, both what work will be done and how it will be done, there is an employer-employee relationship. To determine if the employer has the right to control, the Internal Revenue Service (IRS) uses the following 20-factor test. A worker is generally an employee if he/she:
- Must comply with the employer's instructions about when, where and how to work.
- Receives training from or at the direction of the employer. This may include having to work along with an experienced employee or having to attend meetings.
- Provide services that are integrated into the business. That is, the success or continuation of the employer's business depends significantly on the performance of certain services which the worker provides.
- Performs the work personally.
- Hires, supervises and pays assistants for the employer.
- Have a continuing relationship with the employer.
- Must follow set hours of work.
- Works full-time for the employer.
- Do his/her work on the employer's premises.
- Must do his/her work in a sequence set by the employer.
- Must submit regular oral or written reports to the employer.
- Receives payments of regular amounts at set intervals.
- Receives payments for business and/or traveling expenses.
- Relies on the employer to furnish tools and materials.
- Lacks a significant investment in facilities used to perform the service.
- Cannot make a profit or suffers a loss from his/her services.
- Work for one employer at a time.
- Does not offer his/her services to the general public.
- May be fired by the employer.
- May quit work at any time without liability other than losing pay.
Common Questions and Answers:
Click on one of the questions below to receive the answer:
Q. I understand there's a general test used by the IRS to determine if someone meets the criteria for "independent contractor", but is there a way to summarize the key points?
A. Courts generally look at four factors in applying the test:
- evidence of the right to control or of actual exercise of control,
- method of payment,
- which party furnished the tools/equipment/supplies,
- the right to fire.
Q. Does this mean I can't fire a consultant or independent contractor if his or her performance is sub-standard?
A. First, it's best not to refer to "performance" of an independent contractor as we do with employees. Instead, (once a determination has been made that the individual meets the definition of independent contractor), we need to be sure the work statement for the project includes:
- clear definition of expected results or deliverables,
- targeted dates of completion,
- language specifying who may terminate the contract for what purpose(s) and with what amount of notice. PCC does not have the right to "fire" the consultant, but if the consultant is not meeting the terms of the agreement, we do have a right to terminate the contract within the terms set forth in the agreement.
Q. What are the risks of non-compliance?
A. Guessing at the employment status of a worker, or "intentional disregard of the statutes", puts PCC at great risk. Penalties include, but are not limited to, exposure to additional taxes, penalties and interest, additional wages and overtime obligations under the Fair Labor Standards Act, workers' compensation and unemployment liabilities, and potential wrongful termination suits. In addition, if audited, other similar situations are generally investigated, and any penalties assessed for the original case may be multiplied by the number of additional violations.
Q. Do I have the right to expect that services be provided by the one individual who signs the independent contractor agreement?
A. No. If the employer insists that services be provided "personally", then "employee" status is inferred. An independent contractor retains the right to assign or delegate the work to another. Example: An Independent contractor, "John", signs an agreement to provide _______services for PCC; John is free to do the work himself, or to assign it to his employees, or to other qualified independent contractors within the framework of the contract. It is also acceptable to stipulate a particular employee of the consultant with required expertise to work on the project as part of the agreement.
Q. My project may involve gathering or verifying data from outside sources; can I have the independent contractor identify with PCC?
A. Not directly. Work performed under PCC's name infers "employee" status. Work performed under worker's name infers independent contractor status. In the scenario described, independent contractor could say something like "My name is John Smith. I've been engaged by Portland Community College to gather ____________data".
Q. I still want to have some control over how the independent contractor performs this work.
A. In this case, it may indicate the relationship is one of employer/employee. The right of control infers "employee" status. An independent contractor is free to use his/her own methodologies and discretion to accomplish agreed upon deliverables. The employer may provide suggestions, but not give orders or have the independent contractor comply with specific set of instructions.
Q. Frank Wilson worked in my department as a part-time instructor for four years, and left in 1994. He's available again and I'd like to give him a teaching assignment, teaching the same subject he taught when he last worked here. However, he has informed me he has established a consulting business, and prefers to return as an independent contractor, rather than as an employee. Can we do this?
A. Based on the information available, Frank should be classified as an employee. When he worked here previously, the employer/employee relationship was established. In similar cases, the courts have ruled that a school district that classified a teacher as an employee in one year is not allowed to treat the same worker, performing the same job, as an independent contractor in subsequent years. In this case, initially the school district exercised the degree of direction and control necessary to establish an employer/employee relationship; withheld taxes, maintained the right to evaluate performance and provided the premises, tools and materials to perform the job. The later designation of the worker as anything other than an employee was immaterial.
Q. Ann Jones worked here as an instructor, but left three years ago. Now she has her own consulting business, a smoking cessation program which she has developed and offers through a variety of schools, associations. Does she qualify as an independent contractor?
A. Since she is no longer an employee of PCC, has an established business and provides services she has developed to a number of clients, the chances are good that Ann would qualify However, we would still require her to complete the questionnaire before making a final determination.
Q. Do we have to complete the Independent Contractor questionnaire for an honorarium also?
A. Generally no. As long as this is a one-time only activity and will normally be for less than $500.00.
Q. Can I reimburse an Independent Contractor or an individual being paid an honorarium for travel expenses?
A. Yes, if there is a provision in the contract establishing rates for travel reimbursement. Approved travel reimbursements must meet requirements of the college's Staff Travel Policy or be more stringent. The IC/honoraria may request travel reimbursement by:
- Submitting one invoice for the contracting fee and travel reimbursement, or
- Invoicing the college separately for travel costs. Substantiation (receipts) is required. Substantiated travel reimbursements invoiced separately are not 1099 reportable.
Note: The college cannot make travel arrangements, prepay travel expenses or authorize direct billing for independent contractors or honoraria. Doing so poses a potential employer liability to pay payroll taxes, pension benefits, leave accruals, etc.
Q. What triggers an audit?
A. Some examples of past circumstances that initiated audits by the IRS:
- Unemployment compensation claims;
- Disgruntled ex-worker or disgruntled competitor;
- Disgruntled ex-spouse;
- IRS matching of several 1099 forms from one independent contractor and one employer, raising questions regarding "a single source" of income;
- Reports to IRS from outside accounting sources;
- Leads discovered by auditors during the course of an unrelated audit; and, or
- Random IRS audits.