Independent Contractor

The University employs people through many different programs and authorities. One area of confusion is the distinction between an "employee" and an "independent contractor" or consultant.

Any person already hired as an employee of the University or any other State agency must not be considered an independent contractor.

It is important to determine a person's status correctly prior to the beginning of his/her employment in order to handle properly all subsequent personnel actions including pay, statutory deductions (State and Federal taxes, retirement contributions, and Social Security), benefits eligibility, and compliance with workers' compensation, wage-hour, and other relevant laws.

The hiring department must request permission of Material & Disbursement Services to designate and propose payment to an independent contractor in advance of making any employment commitment or preparing any pay request form(s). The department must avoid any arrangement (such as designating a true employee as an independent contractor) which has the effect of circumventing or violating State personnel policy or law. Material & Disbursement Services, Pre-Audit Unit, advises departments as to making correct status determinations.

In general, IRS guidelines provide that an employer/employee relationship exists if the University needs the services of someone and has the right to control and direct both the result of the services and the means by which the result is achieved. It is the extent of the direction and control exercised over the worker that determines whether or not he/she is an employee and that employment taxes should be withheld. Three main categories and patterns of behavior and financial control are typical. These are:

Behavioral Control: Facts which illustrate whether there is a right to direct or control how the worker performs the specific task for which he/she is hired (i.e., providing instructions or training);

Financial Control: Facts which illustrate whether there is a right to direct or control how the business aspects of the worker's activities are conducted (i.e., significant investment, unreimbursed expenses such as rent and utilities, advertising, wages of assistants, licensing, insurance, supplies, etc.);

Relationship of Parties: Facts which illustrate how the parties perceive their relationship (i.e., employee benefits, intent of the parties, written contracts, permanency, discharge/termination, integration into regular business activities).

In addition, the following criteria are used to make employee status determinations. They also are taken from Internal Revenue Service regulations. Persons meeting these criteria are, by definition, "employees." They must not be considered or paid as "independent contractors."

1. Instructions. An employee is required to comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to give instructions.

2. Training. An employee is trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.

3. Integration. The employee's services are integrated into the business operations because the services are important to the success or continuation of the business.

4. Services rendered personally. An employee renders services personally. This indicates that the employer controls the methods as well as the results.

5. Hiring Assistants. An employee works for an employer that hires, supervises, and pays assistants. An independent contractor hires, supervises, and pays assistants under a contract that requires him/her to provide materials and labor and to be responsible for the result.

6. Continuing relationship. An employee has a continuing relationship with an employer. A continuing relationship may exist where work is performed at frequently recurring, although irregular, intervals.

7. Set hours of work. An employee has set hours to work. The independent contractor is the master of his/her own time.

8. Full-time work. An employee normally works full-time for the employer. An independent contractor can work for whom he/she chooses.

9. Work done on premises. An employee works on the premises of an employer, or works on a route, or at a location designated by an employer.

10. Order or sequence set. An employee must perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.

11. Reports. An employee must submit reports to an employer. This shows that the employee must account to the employer for his/her actions.

12. Payments. An employee is paid by the hour, week, or month. An independent contractor is paid by the job or on straight commission.

13. Expenses. An employee's business and travel expenses are paid by the employer. This shows that the employee is subject to regulation and control.

14. Tools and materials. An employee is furnished significant tools, materials, and other equipment by an employer.

15. Investment. An independent contractor has a significant investment in the facilities he/she uses in performing services for someone else.

16. Profit or loss. An independent contractor can make a profit or suffer a loss.

17. Works for more than one person or firm. An independent contractor gives his/her services to a multiple of unrelated persons or firms at the same time.

18. Offers services to the general public. An independent contractor makes his/her services available to the general public.

19. Right to fire. An employee can be fired by an employer. An independent contractor cannot be fired so long as he/she produces a result that meets the specifications of its contract.

20. Right to quit. An employee can quit his/her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete the job.

For additional information or for assistance in making an employee status determination, call the Pre-Audit Unit in Material & Disbursement Services.

For federal tax compliance reasons, UNC-Chapel Hill departments may not engage someone as an independent contractor if they have worked as an employee, temporary or permanent, part- or full-time for the State of North Carolina (including UNC-Chapel Hill or any other UNC System campus) within the past 12 months (365 calendar days). An exception is made if the services they will perform for UNC-Chapel Hill as an independent contractor are substantially different from those services that they performed for the University or any other State agency as an employee within the past 12 months. For this purpose, substantially different shall mean that the expertise used and duties performed as an independent contractor may not be related or similar to that which the individual performed as an employee.

For example, a former accountant may not be engaged as an independent contractor to perform accounting services or a former research associate may not be engaged to perform research on an independent contractor without first having a 12-month break in service as a State employee. After this break in service, this restriction does not apply unless the individual once again becomes an employee of the University or any other State agency.

If you have questions about this policy, contact the Compensation & Staffing Resources Department in the Office of Human Resources.