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SDSURF › Project Administration Guide › Purchasing & Accounts Payable Section › Evaluating Independent Contractor vs. Employee Status

Evaluating Independent Contractor vs. Employee Status

1. There Is Risk
2. What To Consider
3. Common Law Rules
4. Making the Decision
5. Processing the Payment


The following is intended to assist SDSU Research Foundation projects and staff to determine whether individuals engaged to provide services for SDSU Research Foundation should be engaged as independent contractors or hired as employees.


1. There Is Risk

At the outset, it is important to note that there is significant risk to SDSU Research Foundation in classifying a group of individuals as independent contractors and not employees. If SDSU Research Foundation is wrong in classifying individuals as independent contractors, the risks may include state and federal tax liabilities and penalties, workers' compensation penalties, unemployment insurance penalties, wage and hour liabilities and penalties, and possibly attorneys' fees and costs. If there is any doubt about whether the person should be classified as an independent contractor, it is better to take the safer and more prudent approach and classify the individual as an employee.

To make informed decisions about a worker's status, SDSU Research Foundation requires the assistance of all its members. Everyone involved in engaging independent contractors and consultants must be familiar with the following guidelines and must read them carefully before making a determination as to whether a worker is an employee or an independent contractor.

Indeed, the risk to SDSU Research Foundation is enhanced by the fact that the determination of whether an individual is an independent contractor or an employee is a question of fact and depends on the particular circumstances. For that reason, it is very difficult to predict how a reviewing body (i.e., a court or administrative board) might rule on a particular set of facts and circumstances, and how much weight it gives to any single factor. In some instances, our decision to classify someone as an independent contractor may be seen as erroneous when subsequently reviewed by a court that decides that the individual should have been designated as an employee. That is why: When in doubt, classify the individual as an employee.


2. What To Consider

The following is a list of factors that are commonly considered in determining whether an individual is an independent contractor or an employee:

  • The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.
  • Employment status is indicated if the method of payment is measured by the amount of time worked, as opposed to the job that is completed.
  • Employment status is indicated if the work is an integral part of the principal's regular business.
  • Independent contractor status is indicated if the person performing the services is engaged in a distinct occupation or business and holds himself/herself out to the public to perform such services.
  • Independent contractor status is indicated if a particular skill is required in the occupation.
  • Independent contractor status is indicated if the worker supplies the instrumentalities, tools, and the place of work.
  • Independent contractor status is indicated if the length of time for which the services are to be performed is well defined and not indefinite.
  • Independent contractor status is indicated if the worker has an opportunity for profit or loss depending on his managerial skill.

Under no circumstances may SDSU Research Foundation engage a current employee of SDSU, SDSU Research Foundation or CSU as an independent contractor.

Even though the above factors set forth many of the basic requirements in determining an individual's work status, there are many other factors as well.

Keep in mind that if an employer has the right to direct and control the work of an individual who performs the services, not only as to the results to be accomplished but also as to the methods and means by which the results are accomplished, an employer/employee relationship exists. In this respect, even if the employer does not exercise the right to direct or control the manner in which the worker performs the services, the fact that the employer retains the right to do so may be sufficient.


3. Common Law Rules

The IRS has indicated that a workers status under the common law list is determined by applying relevant facts that fall into three main categories: behavioral control, financial control, and the overall view of the relationship.

  • Behavioral Control
    These facts show whether there is a right to direct or control how the worker does the work. A worker is deemed an employee if SDSU Research Foundation has the right to direct and control the worker's daily functions. Remember, even the right to direct and control the work may be enough to find an employment relationship. Employers typically instruct employees in the following areas:
    • When and where to do the work;
    • How the work should be performed;
    • The acceptable standards of work performance;
    • What tools or equipment to use and where to purchase them;
    • Which individual performs various tasks; and
    • What order or sequence to follow in performing the work.
    The amount of training that an individual receives from the business also plays a critical role in the analysis. An individual who is trained to perform services in a particular manner is likely to be considered to be an employee. Independent contractors, on the other hand, ordinarily use their own methods and are responsible for obtaining their own specific training.

    Even if no instructions are given, sufficient control may exist if the employer has the right to determine how the results are achieved. Although an employer may lack the knowledge to instruct a highly specialized professional, the key consideration is whether the employer has retained the right to control the details of a worker's performance or has given up that right.
  • Financial Control
    An employer tends to demonstrate that it has a right to control the business aspects of the worker's job under the following circumstances:
    • The worker has no expectation of realizing a profit or loss. An independent contractor can be expected to make a profit or loss.
    • By reimbursing the worker's business expenses. Independent contractors are more likely to have non-reimbursed expenses. Fixed ongoing costs that are incurred by the worker regardless of whether work is performed demonstrate that the worker operates an independent business that is subject to profits and losses.
    • The worker has no financial investment. An independent contractor often has a significant financial investment in the business he or she operates (although a significant investment is not always necessary for independent contractor status).
    • The worker does not make his or her services available to the relevant market. An independent contractor is free to seek out business opportunities and perform work for multiple clients. They also advertise, maintain a visible business location, and are available to work in the relevant market.
    • The worker is paid based on the amount of time spent. Employees are generally guaranteed a regular wage amount that is paid on an hourly or weekly basis, even if wages are supplemented by a commission. Independent contractors, however, are usually paid a flat fee to perform or to complete a particular job (although there are some notable exceptions, such as plumbers and attorneys who are independent contractors but who are usually paid by the hour).
    • The worker is required to personally perform services. If services are required to be performed only by the worker that indicates that the worker is an employee under the direction and control of the business. Independent contractors can substitute another person's services without approval of the business.
  • Overall view of the relationship
    In addition to examining the factors that address different types of control, it is also necessary to consider the overall nature of the relationship, including:
    • The intent of the parties to create either an employer/employee relationship or a principal/independent contractor relationship, as set forth in a written contract.
    • The permanency of the relationship. Engaging a worker for an indefinite period of time as opposed to a specific period of time generally indicates that an employer/employee relationship exists.
    • The right to terminate the worker at will. Having the right to terminate a worker at will - i.e., at any time, for any reason, and without notice - strongly suggests the existence of an employer/employee relationship.
    • Requirements to attend meetings or prepare reports. Unless the primary purpose of the contract is to attend meetings or prepare reports, these activities normally demonstrate an employee-employer relationship.
    • The services performed by the worker are part of the regular business of the project/department. A worker who provides services that are part of the regular business activity of the project/department is more likely to be construed as an employee. Examples: Waiters at a restaurant are considered employees because they serve food, which is an integral part of the restaurant's business. Similarly, if a grant or project has the purpose of counseling high school students, then individuals who are engaged to counsel high school students are probably considered employees and not independent contractors.
    • Providing the worker with benefits, such as insurance, a pension plan, vacation pay, or sick pay. Traditionally, only workers with employee status receive benefits.

4. Making the Decision

If after studying all the above-factors you conclude that a worker should be classified as an employee, the next step is to work with your SR administrator to complete personnel appointment forms prior to the performance of services.

When there is convincing evidence that the worker should be classified as an independent contractor, please forward an original, fully completed Independent Contractor Pre-Selection Checklist Form  (Excel Format, 79KB), a Vendor Information Form  (Word Format, 107KB), and an Independent Contractor Payment Authorization Request and Agreement form to your SR administrator, MC-1934 for approval prior to the performance of the services. Sample signatures of authorized approving representatives must be on file in SDSU Research Foundation and must agree with the signatures on your request. These forms may be accessed at:

Due to the increased monitoring of these relationships by the IRS, SDSU Research Foundation carefully reviews proposed independent contractor agreements prior to approval. Accordingly, SDSU Research Foundation may disagree with the conclusion and determine that an employee/employer relationship exists, in which case, the agreement will be returned to you for processing through payroll.

Note that consulting arrangements in excess of $5,000 and/or a specified contract period of greater than 3 months may require a consultant agreement (available from the responsible SR administrator) in addition to the independent contractor form. Refer to Consultant and Independent Contractor Payments section II.F for additional information regarding consultant agreements.

If the independent contractor is a nonresident alien, a Foreign National Information form and other documentation is also required. Refer to Processing Non–Payroll Payments to Non–Resident Aliens section III.J for addition information regarding payments to nonresident aliens.


5. Processing the Payment

Upon completion of work, or as determined by the independent contractor agreement, an original invoice, certified (signed) by the contractor is submitted to accounts payable for processing.

Note: If the independent contractor is a corporation, a Purchase Order is required. Only individuals, sole proprietors and partnerships should complete an Independent Contractor form.


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