Payroll Tax Guideline 107: Employee vs. Independent Contractor Classification

Reviewed June 1, 2016


Summary


An independent contractor is generally an individual who is in an independent trade, business, or profession in which he or she offers services to the general public.  Independent contractors are not employees, not paid through the payroll system, not covered by the University’s workers’ compensation program, and not eligible for unemployment benefits following the contract performance period.


Federal and State law regulate when an individual can and cannot be considered an independent contractor.  This Policy & Guidance Memorandum describes the factors used in determining independent contractor status and the procedures for documenting that determination.


Note: An individual who performs a service for an employer (the University) is presumed to be an employee, unless all the factors (described below) are present to establish an independent contractor relationship.


The University deems individuals performing services for the University to be employees unless all of the legal criteria for classification as an Independent Contractor are present.



Procedure to Evaluate Individual as Employee or Independent Contractor


     A. Legal Criteria


The Massachusetts Independent Contractor Law, M.G.L. c.149 §148B, is generally considered more rigid than the Federal law[1] and requires three factors to be present.  The factors are sometimes referred to as the ABC test (referring to the sub-paragraphs in the Law).  The burden of proof is on the employer to establish that all three of the factors are present.


Factor 1: The individual must be free from control and direction in connection with the performance of the service, both under his/her contract for the performance of the service and in fact.


This factor focuses on the relationship between the individual and the employer, and specifically, the degree to which the employer controls the individual in the performance of the service.  Although the individual may be subject to certain conditions (e.g. meeting overall quality standards or performing any on-location work between certain hours), generally the individual must be free—both in terms of the written contract for services—and in practice, to:


  • Set his/her own hours
  • Determine the appropriate tools and methods to be used
  • Determine the order by which the service will be performed

Additionally, independent contractors typically receive little or no general training in the services to be provided.


Finally, unless the nature of the services to be provided requires that they be performed on location, independent contractors are typically free to perform the services on or off location.


Essentially, independent contractors should be free to determine when, where, and how to perform the services.


Factor 2: The service performed must be outside the usual course of the business of the University. (Services provided at all campuses must be considered)


This factor focuses on the ordinary services that the employer provides.  Generally, an employer cannot hire independent contractors to perform services within its normal business operation.   Two examples are illustrative:


Example #1.  An accounting firm brings in a painter to repaint their offices.  Assuming the individual meets the tests in Factors 1 and 3, the individual can be classified as an independent contractor.


Example #2.  An accounting firm brings in an accountant to assist during the busy season.  Even if the individual meets the tests in Factors 1 and 3, the individual cannot be classified as an independent contractor.


In Athol Daily News v. Division of Employment and Training, 439 Mass. 171 (2003), the court held that newspaper carriers were performing the “usual course of business” of the newspaper because their services formed a “regular and continuing part” of the employer’s business.  Therefore, the newspaper carriers must be classified as employees.


Note: This question covers the entire University, not a particular department or location.  Departments may seek information and guidance on this issue from the appropriate Campus or University Human Resources Department


Factor 3: The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.


This factor focuses on the individual and his/her business.  Generally, an individual who has a relationship with an employer such that the future of the individual’s business depends on the continuation of that relationship—even in separate, discreet contracts—is likely to be an employee.  It is not enough that the individual is permitted (either by contract or in practice) to have other clients; this factor suggests that the individual must have other clients apart from the relationship with the employer.


      B. Special Circumstances


Former employees will generally be regarded as employees, regardless of retirement status. For current employees receiving either royalties, prizes, awards, cash gifts or honoraria these payments are generally considered compensation and reportable on the W-2.


The following fees paid to non-employees are not for services rendered on behalf of the University; individuals receiving such fees are not employees (a Determination of Independent Contractor Status form need not be completed). Tax reporting may be necessary depending on the nature and amount of the payment.  


  • Royalties and permission fees
  • Prizes, awards, and cash gifts[2]
  • One-time, fixed, minimal payments to human subjects or other research or survey participants
  • Honoraria[3]
  • One-time payments to guest lecturers, speakers, performers and artists[4]

Note: Recurring guest lecturers, speakers, performers and artists may not meet criteria to be classified as an independent contractor.  Hiring managers who wish to engage guest lecturers, speakers, performers and artists on a recurring basis should complete a Determination of Independent Contractor Status form.


      C. Procedure


Hiring managers who wish to engage an individual as an independent contractor must complete a Determination of Independent Contractor Status form for review and approval by the chief human resources official at the applicable location prior to any services being performed by the individual.


Approved Determination of Independent Contractor Status forms are filed with the competed Contract for Services.


More information can be found on the IRS website.



[1] It is technically possible that an individual could be considered an employee under Massachusetts law and an independent contractor under Federal law.  And, since the Massachusetts withholding law, M.G.L. c.62B, requires withholding only for individuals who meet the Federal test, there is an inconsistency between c. 149 §148B and c. 62B (an individual may be an employee, but not subject to tax withholding).  However, despite the inconsistency, the University uses the Massachusetts test and applies the determination for all purposes.


[2] However, prizes, awards, or cash gifts to current employees is considered compensation and must be paid through the payroll system (with appropriate withholdings).


 


[3] Honoraria are payments made for services for which fees are not traditionally required, payment for volunteered services unrelated to an individual's official duties, or payments granted in recognition of a special service such as a speech. Payment of honoraria is not required; it is a courtesy.


 


[4] Guest lecturers, speakers, performers and artists are generally individuals who are distinguished a field of specialization who shall visit the University to lecture, conduct performance or workshops, or otherwise interact with students, faculty or staff. Tax reporting may be required.