I. DETERMINING A WORKER'S EMPLOYMENT STATUS
As stated earlier, it is extremely important that the University Payroll
Department determine the employment status of a worker at the University.
"Is the worker an employee or independent contractor?" As an employer and
hirer of various independent services, the university including your department
is legally obligated to correctly identify workers as employees or independent
So who is an employee of the University of Chicago? The university uses the
same method of determining employment status as the Internal Revenue Service.
The Internal Revenue Code, Section 3121d, defines an employee for Social
Security employment purposes as follows:
any officer of a corporation; or
any individual who, under the usual common law rules applicable in determining
the employer-employee relationship, has the status of an employee;..."
Definition 1 considers any officer of the University as an employee. However,
definition two is rather vague; it refers to what is known as the common
law rules. "What exactly are these 'common law rules' that determine
employer-employee relationship?" Basically, the 'common law rules' can best
be described as a list of factors that gauge the control of an employer (someone
who employs the services of others) over an employee (someone who renders
The following section discusses the employer-employee relationship and summarizes
the various factors of the Common Law Test.
I.A. Determination of Employment Status and Common Law
The primary method used to determine whether an employee-employer relationship
exists is the "common law" test. In order to implement the "common law" test,
the Payroll Department must obtain important information regarding prospective
workers. This vital information is provided by the workers on the Independent
Contractor Questionnaire. The questions on the Independent Contractor
Questionnaire summarize the common law test, and therefore aid the Payroll
Department in classifying workers as either 'employees' or 'independent
Common Law Test
Central Focus: Employer's Right to Control
The central focus of the common law test is determining who has the right
to control two basic elements: (1) what must be done -- i.e., the results
of the work, and (2) how it must be done -- i.e., the method by which the
work or services are performed. Under this test, a worker is considered an
employee subject to payroll tax withholding if the employee has the right
to control both the result to be accomplished and the method or means by
which the result is achieved. If the employer has the right to control or
direct only the result of the work -- and not the method or means used to
accomplish the result -- the individual may qualify as an independent
The common law test can be difficult to apply to specific cases or situations.
Proper application of the test requires an employer to consider a number
of factors or characteristics of the work in question to determine whether
an employer-employee relationship exists. For example, two characteristics
typically indicating that an individual has "employee" status are: (1) the
employer has the right to discharge the worker, and (2) the employer supplies
the worker with tools and a place to work. On the other hand, individuals
such as lawyers, physicians, and contractors who offer their services to
the general public in the pursuit of an independent trade, business, or
profession normally are not considered employees. Keep in mind, however,
that no one factor or set of factors is automatically controlling. All the
facts and circumstances of a particular situation must be taken into account
in determining whether an individual worker should be treated as an employee
or as an independent contractor.
Factors Used by IRS in Determining Employee Status
The Internal Revenue Service has listed a number of work factors or
characteristics that it takes into account in deciding whether an employer's
control over an individual is sufficient to establish an employer-employee
relationship. None of these factors, standing alone, is necessarily controlling
or decisive. The Internal Revenue Service focuses on the following in determining
an individual's employment status:
Risk of profit or loss -- Independent contractors typically can invest
significant amounts of time or capital in their work without any guarantee
of success -- i.e., they realize a profit or sustain a loss based on their
success in performing the work or service. When workers are insulated from
loss or are restricted in the amount of profit they can gain, they usually
are classified as employees.
A continuing relationship -- Employees usually are hired for a continuing,
indefinite period. This generally applies even to work or services performed
on an irregular but recurring basis, as well as to part-time, temporary,
and seasonal work. The relationship between an independent contractor and
employer, on the other hand, usually ends when the job is finished.
Compliance with instructions -- An individual who must comply with another
person's instructions about when, where, or how to work generally is considered
an employee. This applies even if the other person simply has the right to
require compliance, but does not exercise that right.
Training -- Requiring that an individual be trained through such methods
as working with an experienced employee, attending instructional sessions
or training courses, or corresponding with the employer is indicative of
employee status because it shows that the employer wants to control the way
the work is done or the method that is used. Independent contractors, on
the other hand, normally are not trained by the purchaser of their
Personal services required -- Employee status is suggested if an individual
is required to personally render the services in question, IRS says, because
such an arrangement indicates that the employer is interested in controlling
the methods used to accomplish the results. By contrast, an individual's
right to substitute another's services without the employer's knowledge suggests
the existence of a contractor relationship.
Integration into the business -- The fact that an individual's services are
so integrated into an employer's operations that the success or continuation
of the business depends on the performance of the services generally indicates
that the individual is subject to a certain amount of control by the owner
of the business.
Control over the hiring, supervising, and paying of assistants -- An employer
that hires, supervises, and pays an individual's assistants usually is viewed
as controlling the work (and the individual performing the services) in question.
On the other hand, individuals who hire, supervise, and pay other workers
in accordance with an arrangement in which they have agreed to provide the
labor needed to attain a certain result generally are treated as independent
Set hours of work -- A requirement that individuals adhere to certain work
hours established by the employer generally is viewed as a factor indicating
A full-time work requirement -- Employee status is suggested if an individual
must work on a substantially full-time basis for the employer since this
indicates that the employer controls the amount of time the individual spends
working and thus essentially restricts the worker's ability to perform for
someone else. By contrast, independent contractors typically are free to
work when and for whom they choose.
Working on the employer's premises -- Performance of the work on the employer's
premises may be viewed as evidence of employer control, especially if the
work could be done elsewhere. While performance at an off-premises site
demonstrates some freedom from employer control, it does not by itself mean
that the worker is an independent contractor. According to IRS, the importance
of the work-on-premises factor "depends on the nature of the service involved
and the extent to which an employer generally would require that employees
perform such services on the employer's premises." Employer control is suggested,
IRS adds, when the employer has the right to "compel the worker to travel
a designated route, to canvass a territory within a certain time, or to work
at specific places."
A required work order or sequence -- A requirement that an individual perform
work in a certain order or sequence may be viewed as a factor showing that
the employer controls or retains the right to control the worker.
Required reports -- A degree of control is suggested, IRS says, where an
individual is required to submit regular oral or written reports to the
Payment by the hour, week, or month -- Employees generally are paid by the
hour, day, or month, while independent contractors typically are paid by
the job or on a lump-sum or straight commission basis.
Payment of business or travel expenses -- Employer payment of an individual's
business or work-related travel expenses generally indicates employee
Furnishing of tools and materials -- An employer-employee relationship is
indicated where an employer supplies a worker with significant amount of
tools, materials, or other equipment. Moreover, in some occupations and
industries where it is customary for individuals to provide their own tools,
these workers also may be treated as employees.
Investment in facilities -- Individuals are likely to be treated as independent
contractors if they have a significant investment in facilities they use
in the course of performing services (e.g., an office rented at fair market
value from a third party). IRS stresses that "special scrutiny is required
with respect to certain types of facilities, such as home offices."
Working for more than one firm -- Individuals who perform services for a
number of businesses or people at the same time usually are considered
independent contractors. IRS cautions, however, that "a worker who performs
services for more than one person may be an employee of each of the persons,
especially where such persons are part of the same service arrangement."
Worker's availability to the general public -- Individuals who make their
services available to the public on a "regular and consistent" basis generally
are treated as independent contractors.
Employer's discharge rights -- If an employer has the right to discharge
an individual, that worker is viewed as an employee. Independent contractors,
on the other hand, cannot be fired as long as they perform in accordance
with their contract specifications.
Worker's termination rights -- Employees typically can end their employment
relationship at any time without incurring liability, whereas independent
contractors might be liable for a breach of contract if they leave without
completing their work.
I.B. University Employees Who Cannot Be Paid As Independent
In most circumstances, University employees are not allowed to receive
independent contractor type payments on a Direct Payment Voucher.
University of Chicago employees (professors, students, clerical workers,
etc.) performing services for the University cannot be considered independent
contractors, regardless of the source of payment (departmental accounts,
government grants, foundation funds). With the exception of employee/authors
who receive royalty payments, the University cannot treat a worker as
both an employee and an independent contractor.
Based on the Common Law Test, the following categories of workers will not
be considered independent contractors while performing services for the
University of Chicago professors and/or students and/or clerical workers
performing services for the University, regardless of the source of payment.
(i.e. Departmental accounts, government grants, foundation funds).
Any individual working as tutors, regardless of whether or not they are currently
on the university payroll.
Instructors, employed by any department of the University, conducting workshops,
classes, or seminars on University premises for any University department.
Any individual who provides any TEACHING services will not be paid as an
Independent Contractor. Income classified under teaching (tutoring or
instructing) represents compensation to people who are regular employees
of the University.
University of Chicago professors working for a consulting firm, selling their
services back to the University.
Receptionists, clerical and/or secretarial workers, either permanent or
Waiters and waitresses, either permanent or temporary.
Whenever in doubt, check with the Payroll Department about proper classification
before any services are contracted.
The final decision concerning whether an individual should be classified
as an employee or an independent contractor will be made by the Payroll
Department, in conjunction with the Office of Legal Counsel.
I.C. How University Employees are Paid for Providing
Generally, a department requests payment for an independent contractor by
completing the Direct Payment Voucher (Form 88R). If a department
submits an independent contractor payment request on a DPV for a person
currently on university payroll - i.e. a university employee - then the payment
request will be rejected and the DPV will be sent back to the department.
To pay biweekly employees who have rendered extra service to the university,
the department who employed the worker's services must complete the Biweekly
Additional Pay Form (Form UPP 173). The department should then submit
this form to the Payroll Department, Mott 319.
To pay monthly employees who have performed any extra services to the university,
the department who employed the worker's services must complete the Monthly
Extra Service Payment Request (Form UPP 172). The department should also
forward this completed form to the Payroll Department, Mott 319.
I.D. Special Payments that University Employees Can
Receive through the Independent Contractor System
In certain cases, University employees can receive payments handled through
the Independent Contractor Payment System. These cases are listed below:
(1) Special interest payments: so-called payments for "hobby services"
- an activity which could be considered a hobby/recreational avocation which
is not related to regular duties performed by the employee at the
For example, a department might submit a DPV to pay a university employee
for musical services (conducting, playing, performing, etc.) provided that
the 'musician' performs as a side-line interest and is employed in any of
university departments except the Music Department. The request will be honored
and the musician may receive payment through this method. However, DPVs to
pay any employee in the Music department for musical services will be refused;
the employee must be paid through the 'extra-service payment' system. To
count as a 'hobby' payment, the services rendered must be unrelated to the
person's regular employment at the university.
The final decision on an activity's 'hobby' status and on whether or not
a person should be paid as an independent contractor for 'hobby' services
rendered will be made by the Payroll Department, in conjunction with Legal
(2) Human subject fees: usually a fee paid to a student or university
employee for participation in a Hospital or Biological Sciences Division
research project or study.
(3) Royalties or Permission Fees: a payment which represents compensation
for the sale or use of a copyrighted or patented work of an author, composer,
or inventor. (See next section)
II. Other IRS Reportable Payments Processed
Through the Independent Contractor Payment
The following categories of payments, although not considered independent
contractor payments, are processed through the Payroll Department's Independent
(1) Honorarium: a payment which is primarily intended to confer
distinction on or to symbolize respect, esteem or admiration for the recipient.
It is paid to the recipient at the discretion of the payer, and is not a
fee charged by the person being paid. Some departments err by requesting
"honorarium" payments for an individual who has rendered services to the
university (e.g. "speaker's honorarium"). Such an "honorarium" - no matter
how small - is still considered a compensation for services. If such an
honorarium is requested for a university employee, it must be processed through
Payroll as extra service pay.
Note: An honorarium which represents a payment to confer distinction or respect
for the recipient, is an unallowable charge against a federal research grant
or contract. However, speaker fees and one-time lecture fees are allowed.
(2) One-time lecture fee: a payment which represents compensation
for services for which a discourse, or lecture, is given before a class or
an audience. Lectures and seminar speakers treated as independent contractors
are paid for "independent personal services", not "teaching". Income classified
under teaching represents compensation paid to people who are regular employees
of the university.
Anyone receiving more than a single "one-time" lecture fee in any given calendar
year may be subject to treatment as an employee.
(3) Human subject fee: a payment which represents compensation to
individuals participating as subjects in a scientific research project.
(4) Royalties: a payment made to an author or composer for each copy
of his work sold, or to an inventor for each article sold under a patent.
(5) Permission fees: a percentage paid to an author or inventor for
the use of all, or a portion of, their copyrighted or patented material-for
example, fees paid for Xeroxing copyrighted material for use in a class.
(6) Rents: a payment made to a rentor for overnight stays at a bed
and breakfast, apartment rental, rental of a room in a private residence,
office space rental, and equipment rental---for example, tents, linens, tables,
(7) Prizes and awards: a reward or gift of money for a competition
or other scholastic achievements. Awards handled through the Independent
Contractor Payment System must not be work-related; award payments to employees
for outstanding job performance, for example, should be processed through
Payroll's Extra Service System.
Note: Post-doctoral Fellows receive their award payments monthly through
the Payroll system like regular university employees, but they are not considered
employees. Fellowships are granted for the purpose of advancing the fellow's
research, not as compensation for services. Fellowships are not wages. As
a result, tax-reporting for these fellows is not handled by Payroll, but
by the Independent Contractor desk. Fellows receive Forms 1099 or 1042S
tax-reporting documents and not W-2 forms like regular university