1,071: Independent Contractor Determinations

Revised: January 2008

To determine whether an individual is an employee or an independent contractor, the relationship of the worker and NSHE must be examined. All evidence of control and independence must be established based on the following criteria:

• Behavioral control refers to whether the NSHE has the right to direct and control how the worker does the task, such as: instructions about when, where and how to work, and training provided to the workers.
• Financial control refers to the extent the NSHE can control the business aspects of the worker's job, such as: extent to which the worker has reimbursed business expenses, extent of the worker's investment, extent to which the worker makes services available to the general public, how the NSHE pays the worker (by the hour, week, month or lump sum by the job), and the extent to which the worker can realize a profit or loss.
• Type of relationship refers to faculty substantiation of the relationship, such as: any written contracts, whether the NSHE is to provide the worker with employee-type benefits such as insurance, vacation or sick pay, whether the relationship is to be ongoing (i.e. indefinite), and the extent to which services performed are an important part of the NSHE's regular business activity.

The consequences of misclassifying an employee as an independent contractor have serious legal implications under employment and tax laws. The NSHE can be held liable for retroactive federal taxes as well as social security, state industrial insurance and unemployment taxes. In addition, interest and severe penalties can be assessed by the IRS.

Independent contractor determinations are facts and circumstance based. A person is not an independent contractor simply because there is an agreement as such or because the hiring department permits him considerable discretion and freedom of action. Substantiation of an independent contractor relationship must be provided through the Internal Revenue Service's 20 common-law factors to determine whether an individual is an independent contractor or an employee. For more information, see the Controller's web page on independent contractors.