Employee vs. Independent Contractor
Proper classification of individuals is critical to appropriately process and make payments for services. Under the United States Internal Revenue Service (IRS) and other agency guidelines, Northwestern has certain responsibilities. Independent contractor payments must be tracked for taxable income reporting on Form 1099, and employee payments are subject to employment taxes and are reportable on Form W-2. In addition, employees may be eligible for benefits. Errors in employee/non-employee classification may lead to significant fines and penalties due to lack of appropriate income reporting, tax withholding, or provision of benefits.
- An employee depends on an employer for income on a continuing basis and performs services that can be controlled and supervised by Northwestern. Additionally, any individual who has been paid on Northwestern payroll in the current calendar year is treated as an employee, even if the relationship might otherwise qualify as that of an independent contractor.
- An independent contractor relationship may exist when both: Northwestern has the right to control or direct only the result of the work, and Northwestern does not direct what will be done or how the work will be performed.
To help determine which relationship is most appropriate, see the below or review pages 4-8 of the Independent Contractor Questionnaire (ICQ) .
Common Law Rules
A set of "Common Law Rules" provides characteristics and classifications that help differentiate the work of an employee from that of an independent contractor. These fall into three categories:
- Behavioral Control
- Financial Control
- Type of Relationship
In determining whether to engage an individual as an independent contractor, the hiring department must assess the work in these three areas to determine the proper status of the individual.
While typically a contractor's work has no controls by Northwestern, it is possible that one or more control may be present without coming under the full direction of the University. For example, a contractor may work during Northwestern office hours (indicating an employee relationship), but the individual maintains contractor status by being able to work at other times if he or she chooses. The individual may work solely for Northwestern at the time (a possible employee relationship), but they maintain contractor status by being able to solicit business from other clients while performing services for Northwestern.
All independent contractor requests must begin with the submitting of the Independent Contractor Questionnaire (ICQ) and may be subject to review by HR Compensation.
Characteristics of employees vs. independent contractors
In the following examples, any characteristic of an employee relationship may indicate that the individual is an employee and not a contractor.
|In this activity:||An employee…||An independent contractor…|
|Following Direction||complies with Northwestern instructions about when, where, and how to do the work.||determines their own direction on when, where, and how to do the work.|
|Training||receives training from or at the direction of Northwestern.||acquires their own training independently of Northwestern.|
|Operational Integration||if separated from operation, affects the operation's performance.||is separable from the operation without affecting its performance.|
|Personal Involvement||is required to render the services in person.||may render services personally or through others.|
|Hiring and Supervision||hires and supervises Northwestern employees.||does not hire or supervise Northwestern employees.|
|Continuity||maintains continuous employment at Northwestern.||may work sporadically for Northwestern.|
|Schedule||follows Northwestern's work schedule.||follows their own work schedule.|
|Full Time Status||works full time for Northwestern.||may work for other employers while at Northwestern part time.|
|Facilities||uses Northwestern facilities to perform work.||has their own facilities to work from.|
|Work Sequence||performs the work in the sequence specified by Northwestern.||works according to own sequencing.|
|Reports||reports progress regularly.||reports when work is complete.|
|Payment||is paid on a regular periodic basis at set monthly/hourly amounts.||is paid as work is completed, or in progress payments.|
|Travel Reimbursement||is reimbursed for travel expenses.||pays own travel expenses or may include them in the contract.|
|Tools and Materials||uses Northwestern's tools and materials.||supplies their own tools and materials.|
|Investment||has not personally invested in facilities to perform the services.||has invested in their own facilities to do the work.|
|Business risk||cannot make a profit or suffer a loss from the services.||makes a profit or suffers a loss based on services rendered.|
|Exclusivity||works only for Northwestern.||may work for other employers while working for Northwestern.|
|Publicity||does not offer services to the general public.||offers services to the general public; may advertise.|
|Dismissal||can be dismissed from employment.||cannot be dismissed as long as the work satisfies the contract.|
|Performance Liability||can quit with no liability for completion of the work.||is liable for failure to complete the work.|
The final determination of an individual's relationship will be made by the HR Compensation division after submission of the Independent Contractor Questionnaire (ICQ) . The assessment of the work characteristics will conclude with one of the following results:
Result 1: Employee
If the supervisor or the department expect to assert employer controls, the individual is to be engaged as an employee and paid according to the provisions for employees. For nonresidents, the individual's visa must qualify for employment in the determination of eligibility to work. Refer to your department's HR contact to initiate employee paperwork.
Result 2: Independent contractor
If the work will be free from employer controls, the individual may be engaged as a contractor and paid according to the provisions for engaging independent contractors. Refer to the Independent Contractor Payment Procedures to initiate payment.
Result 3: Employee as a Consultant
If the work is free from employer controls and the individuals already a Northwestern employee, the individual is to be engaged and paid according to the provisions for engaging employees as consultants. Such payments should be processed as an Additional Pay Request.
Result 4: Unclear
If the result of the assessment is unclear, the individual will be hired and paid as an employee to ensure tax compliance. Refer to your department's HR contact to initiate employee paperwork.