MBP 76

SECTION 76:  Independent Contractors for U.S. Citizens and Resident Aliens

Last Updated:  September 2015

Purchasing Department 
Angell Building
166 Service Road, Room 102  
East Lansing, MI 48824
Telephone: (517) 355-0357 | Fax: (517) 353-2024

 

1. Purpose
2. Definitions 
3. Determining Employment Status
4. Independent Contractor Professional Services Contract (PSC) 
5. Frequently Asked Questions  
6. Forms

1. Purpose

This policy provides the criteria that define independent contractors (IC) and the required procedures to correctly classify and pay U.S. citizens and resident aliens for services that cannot be provided adequately by regular or temporary employees within the university.


2. Definitions

  1. Conflict of Interest (COI): 
    The university defines a conflict of interest utilizing the same definition as the State of Michigan which is available on the Michigan Legislature website. A Board of Trustees approval process exists which, when completed and approval is obtained, enables employee owned companies to do business with the university. A conflict of interest can also exist if a supplier is related to an MSU employee and the situation results in potential and/or perceived financial gain for the employee or a situation in which an employee has the ability to influence the supplier relationship.

  2. Contract & Grant Administration (CGA):
    Contract & Grant Administration provides timely, accurate, and courteous assistance to faculty and support staff with the financial and contractual aspects of submitting proposals to external sponsors, and to administer awards according to sponsor and MSU regulations.

  3. Contractor/Supplier Agreements: 
    In the event that the contractor or supplier provides their own agreement, end users are cautioned not to sign these agreements. Agreements and contracts of this nature are to be forwarded to Purchasing for review, consultation and signature. Following initial review, Purchasing will advise the department on the best course of action for the procurement. Purchasing will assist with obtaining review by legal counsel, risk management and other service providers, as appropriate.

  4. Employee:
    Every individual performing services for the university and compensated by the university is presumed to be an employee unless she/he meets the criteria of Independent Contractor (IC) status. All employees are compensated through MSU’s payroll process.

  5. Employee-Employer Relationship:
    An employee-employer relationship exists when an employer has the right to direct and control the work of an individual who performs the services, including not only the results to be accomplished but also the methods and means by which the results are accomplished. 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 is sufficient to create an employee-employer relationship.

  6. Independent Contractor (IC):
    An individual who performs services, but, by meeting certain criteria, is not classified as an employee.The term “independent contractor” can encompass individuals, partnerships and incorporated or unincorporated companies. An independent contractor is the U.S. citizen or resident alien, company, corporation or individual, who is being hired to perform the work.

  7. Non-Resident Alien:
    This is a foreign individual who is not a U.S. citizen or resident alien. When hiring a non-resident alien to perform work, see Manual of Business Procedures Section 77, NONRESIDENT ALIEN (NRA) INDEPENDENT CONTRACTORS AND NRA RECIPIENTS OF HONORARIUM, RENTS, ROYALTIES AND AWARDS for further information on how to contract with and process payments to these individuals.

  8. Purchase Order:
    A completed purchase order accompanies the PSC as part of the final contract. The independent contractor is required to reference the purchase order on all invoices, or payment may be delayed.

  9. PSC Form:
    This is the Professional Services Contract. This is a form that assists in defining the relationship between a potential contractor and the university and whether the individual should be an employee or an independent contractor. The PSC form documents the approvals necessary to engage an independent contractor at MSU and helps to define the scope of work, hourly rate, payment terms and conditions for a particular project.  The completed, signed form is to be submitted as an attachment to the requisition e-doc submitted for generation of a purchase order. The Professional Services Contract is required for all independent contractors greater than or equal to $600, excluding honorarium, speaker and performer payments. High dollar engagements of contractors should be processed via requisition and purchase order, preferably on a competitive bid basis utilizing Purchasing’s Request for Proposal process.

  10. Tax Identification Number (TIN):
    This is an identification number assigned to employers, sole proprietors, corporations, partnerships, nonprofit associations, government agencies, certain individuals and other business entities by the Federal Government.

  11. U.S. Resident Alien:
    This is a foreign individual who is a permanent resident of the U.S. but does not have citizenship and holds a valid green card.

  
3. Determining Employment Status

Michigan State University must comply with Internal Revenue Service (IRS) regulations in its role as an employer. Failure to do so can result in assessments of taxes, penalties, and interest. One university responsibility in this regard is the accurate categorization of workers as either employees or as independent contractors (IC), with the corresponding tax withholding and reporting functions inherent in each category of worker. Categorizing a worker as an IC exposes the university to the greatest amount of risk in this regard, since the IRS presumes that all individuals who provide a service are employees unless there is documented evidence to support classifying the individual as an independent contractor.  The IRS examines the facts and circumstances of each situation and analyzes characteristics, such as behavioral and financial control and the relationship between the employer and the individual performing services. 

  1. IRS Guidelines
    1. United States federal and state law requires the university to properly classify its workers as either employees or independent contractors. For federal employment tax purposes, the usual common law rules are applicable when examining the relationship between the university and the individual. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: Behavioral Control, Financial Control and the Relationship of the Parties. See IRS - Payment to Independent Contractors.

a.  Behavioral Control - whether the university has a right to direct and control what work is accomplished and how the work is done, through instructions, training or other means. 

      • Does the business owner control or have the right to control what the worker does and how the worker does his or her job?

b.  Financial Control - whether the university has a right to direct or control the financial and business aspects of the worker’s job.

      • Are the business aspects of the worker’s job controlled by the business owner? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, facilities.)
      • The extent to which the worker makes his or her services available to the general public
      • The extent to which the worker can realize a profit or incur a loss

c.  Relationship of the Parties - the nature of the relationship between the parties.

      •  Are there written contracts or employee type benefits such as pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

    B.  Employee:

    1. Every individual performing services for the university and compensated by the university is presumed to be an employee unless she/he can meet the criteria of IC status. Generally, every individual who performs services that are subject to the will and control of the university as to both what must be done and how it must be done, is an employee. It does not matter that the university allows the employee considerable discretion and freedom of action, as long as the university has the legal right to control both the method and the result of the services.
    2. University policy requires that the following workers be compensated as employees:

a. Primary instructor, teaching a credit or noncredit course offered by the university to the public.
b. Anyone currently employed by the university who performs additional services outside his/her regular job description (see Section 55 -part V of the Manual of Business Procedures).
c. Anyone previously employed by the university and performing the same/related services to the services they provided as an employee.
d. Anyone currently enrolled as a university student.

3.  The status of any worker not falling into one of the above categories must be evaluated based on the IRS common law rules for distinguishing between employees and IC's. The Professional Services Contract form has been designed to assist in this evaluation. Exceptions to item II.B.2, above, may be granted based on this evaluation.

   C.  Independent Contractor:

    1. In general, an individual is an independent contractor if the university has the legal right to control or direct only the results of the work and not the means and methods of accomplishing the result. Generally, independent contractors hold themselves out in their own names as self-employed and make their services available to the public.
    2. Examples of individuals who might meet the criteria for IC status include:

      a.  Individuals providing unique professional services, such as short term consulting engagements and others who routinely provide services within an area of expertise to the public for a fee. 
      b.  Educational advisory services, researchers.
      c.  Freelance writing, editing and interpreters.
      d.  Guest speakers, lecturers or performers (see MBP Section 71 for processing).

 3.  When the status of a worker cannot be determined from the above guidelines, contact Accounting (355-5000) or Purchasing (355-0357) for guidance prior to the services being performed.

   D.  Present and Former University Employees

    1. Present and former university employees will rarely meet the IRS’s criteria for independent contractors and should usually be paid as employees. According to IRS guidelines, a continuing relationship is one indication of an employee-employer relationship. In addition, any employment of present and former university employees as independent contractors should be evaluated carefully for other indications of employee status.
    2. The initial responsibility for determining the classification rests with the department obtaining the contractual services.  The department should first verify that the individual is not or has not been employed by the university.
    3. Former/retired employees who have previously been paid as an employee to perform essentially the same/similar services do not qualify as independent contractors and must be paid as an employee. 


4. Independent Contractor Professional Services Contract (PSC)

  A.  Purpose

    1. The contract formalizes and documents a relationship between an independent contractor and the university. It is intended for use with U.S. citizens or resident aliens (copy of Green card is required) and where the contract value is greater than or equal to $600.
    2. It is to be used for unique, professional, or technical services that are predominantly intellectual in nature, require specialized knowledge, and are part of a specific project—not ongoing.
    3. The contract must be completed for all IC's, except those who fall into the exempt categories (listed below). Contracts are not required for:

a.  Guest speakers or lecturers brought to the university for a very short duration because of their expertise (see Section E below).
b.  Guest performers or artists who otherwise are not affiliated with the university (see Section E. below).
c.  Payments to research subjects or simulated patients, (simulated patients with long term assignments should be paid as employees).
d.  Substitute Contracts: Payments charged against C&GA accounts where a substitute contract form has been executed acceptable to the C&GA and retained in that office. This exception is available only at the discretion of C&GA.

 4.  For all legal service contracts and medical service contracts, departments are to contact the Assistant Director of Purchasing.

 5.  Departments are required to attach to the requisition e-doc all documentation regarding the reasonableness of the cost of the service obtained, and the selection process utilized to choose the IC.

  B.  Restrictions:

1.  The PSC is not to be used for any campus-related alterations, repair services, lab testing services, renovations or construction of facilities or services involving labor in general.
2.  The PSC is intended for use with contracted services only, not for the procurement of printed materials, other products or supplies.
3.  For “routine” services such as scientific testing, marketing, graphic design, etc., departments can complete a requisition in the system and attach the quote/proposal, and any additional information. A PSC does not need to be completed.

  C.  Preparation, Processing and Routing:

    1. The PSC must be completed by the initiating department. The department should retain a copy of the completed PSC for its files. The completed PSC is to be attached to the requisition e-doc in the Notes and Attachments tab.
    2. The PSC is not intended for use as an “after-the-fact” means of paying suppliers.  All documentation is to be completed in advance of bringing an independent contractor on board to perform specific services.
    3. All sections of the PSC must be completed.

a.  Page 1 - includes the pertinent information regarding the independent contractor, the department and requested services.

b.  Page 2 - contains the basic terms and conditions that the IC must agree to prior to engaging in the work. These terms and conditions are critical in protecting the interests of the university, the department, and the authorizing individuals. It is important that MSU insurance requirements are considered when hiring an independent contractor. See Risk Management and Insurance Section 35 in the Manual of Business Procedures for details. Any changes requested by the IC must be approved and accepted by Purchasing prior to final signature of the PSC.

c.  Page 3- provides assistance with determining the reasonableness of a worker's classification as an IC (the default worker classification is as an employee). This page should be filled out (with input from the IC if necessary) and signed by the initiating department.  If any boxes on page 3 are marked as “true” contact Purchasing to obtain assistance in determining the contractor’s status. If most of the boxes are marked as “true,” the worker should be hired as an employee and paid through the university payroll system, based on the IRS common law rules for determining worker classification either as an employee or as a contractor.

 4.  All PSCs greater than $15,000 must be competitively bid or accompanied by a written single/sole source justification, prepared by the initiating department.

  D.  Invoice Routing:

Invoices are required for all purchase orders/PSCs and are to include a full description of and dates of the services rendered, the PO number referenced and a remit to address. All invoices are to be sent to Michigan State University, Accounts Payable, 166 Service Rd, Room 103, East Lansing, MI 48824. Accounts Payable accepts invoices from both MSU departments and suppliers electronically. See instructions. Instructing contractors to submit invoices directly to the department will result in a delay in payment.   

   E.  Honoraria, Speaker Fee, and Performer Payment Process:

    1. An honorarium, speaker or performer fee is a payment to a service provider for a presentation-oriented event such as a:
      • lecture, seminar or address
      • workshop or committee meeting
      • training session
      • artistic performance
      • entertainer

2.  Payment for these specific services is made by completing a Disbursement Voucher (DV). If the service provider does not already exist as a DV or PO vendor, a new DV vendor must be created. See the Manual of Business Procedures Section 71, Honoraria, Speaker Fee and Performer Payments.

3.  The DV must have the completed Honoraria/Speaker/Performer Checklist attached. A PSC and requisition are not needed when paying honoraria, speaker or performer fees.

4.  If the service provider has an agreement/contract that requires signature, route it through Purchasing for signature to authorize the contract before services are performed.

5. Frequently Asked Questions

A.  What is a definition of professional services?

Professional services are unique, technical and/or infrequent functions performed by an independent contractor qualified by education, experience, and/or technical ability to provide services. In most cases, these services are of a specific project nature, and are not a continuing, ongoing responsibility of the institution. The services rendered are predominately intellectual in character event though the contractor many not be required to be licensed.

B.  What types of services are processed on a PSC?

Professional services, such as short term consulting engagements, educational advisory services, freelance writing, interpreters, and others who routinely provide services within an area of expertise to the public for a fee. 

C.  What services should not generally processed on a PSC?

Services that are considered “routine” or involve labor, such as: catering, marketing, temporary employment, lab testing services, and architectural or construction services.

D.  If the supplier has their own agreement, should a PSC also be processed?

No, a PSC is not necessarily needed if a supplier has their own agreement, as it could result in contradicting terms and conditions.  The supplier’s agreement (instead of a PSC) should be attached to a requisition for PO processing.

E.  What is a single or sole source justification?

Requests for exception to the competitive process, such as single source (only one qualified supplier or acceptable product/service) or sole source (only known source or a proprietary source) purchases must be requested in writing from the initiating department. All requests for single source and sole source purchases must include detailed, objective and technical justification outlining the rationale for exception to the competitive bid process.

F.  How do I pay a speaker, presenter or performer?

These payments can be processed via DV along with a completed Honoraria/Speaker/Performer Checklist.  See the Manual of Business Procedures Section 71, Honoraria, Speaker Fee and Performer Payments for the full process.

6. Forms

Professional Services Contract Form 

Conflict of Interest Disclosure Form 

Honoria/Speaker/Performer Checklist