Worker's Classification Procedure
- Purpose
- To Whom This Procedure Applies
- Responsibility
- Documentation
- Worker Classification Criteria
- Quarterly Review and Certification Renewal
- Source and Important Links
PURPOSE
The purpose of this procedure is to document current rules and regulations along with the proper procedures that must be followed when contracting and classifying an Independent Contractor (IC) or employee. This document is meant to identify evaluation and review criteria in order to establish the appropriate relationship between Loyola University Chicago and the IC or employee.
Any individual that is providing a service to LUC is considered an employee unless justification can be provided to otherwise classify said individual as an Independent Contractor. As the Internal Revenue Service and other Federal agencies expand their scrutiny of IC vs. employee classification, it is important to protect the University in the event of program audits.
TO WHOM THIS PROCEDURE APPLIES
- Individuals with decision making authority on the stewardship of LUC funds.
- Individuals with budget administration and supervisory responsibility for LUC budgets.
- Individuals responsible for the identification and selection of Independent Contractors and Employees.
- Individuals who initiate, review, approve, process, or record financial transactions on behalf of the University.
RESPONSIBILITY
The President, Vice Presidents, Deans, Directors and Budget Administrators are responsible for assuring that within their administrative units or colleges/schools:
- All necessary documentation is completed and the evaluation/classification is determined before any services are rendered. This includes any changes or modifications to existing relationships, agreements or engagements.
- Budgeted funds are available to meet all commitments.
- Proper authorization is obtained before any commitments are made.
- All engagements are reviewed and approved by necessary Human Resources and Finance representatives in order to ensure that proper classification (i.e. employee or independent contractor) is made.
- Tax treatment and associated University tax reporting obligations are identified and appropriately communicated.
- The potential benefits of the engagement justify its presentation (i.e., existing employees performing the services vs. hiring an IC).
- All expenditures follow appropriate LUC policies regardless of the source of funds.
- There is recognition of the added conditions placed on expenditures paid from federal and/or state funds or from restricted gifts and those restrictions are accounted for when expenditures are planned.
Note: Contingency, Grant, Gift, Start-up and Research Stimulation Funds are all University funds and are subject to the restrictions outlined in this document.
DOCUMENTATION
It is the policy of Loyola University Chicago to properly document each request for a worker classification of an independent contractor. As a basic rule, this documentation should be considered necessary if the worker being paid is an individual or sole proprietor providing a service to the University. Some exceptions apply such as a one time Speaking Honorarium. Please contact Human Resources to determine the documentation needed.
The following documentation is required of each potential Independent Contractor:
- Form W-9: Request for Tax Payer Identification Number and Certification
- Form W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (for non-US payees)
- A Draft Contract or Letter of Agreement including a description of the services to be performed and related fees to be paid by Loyola Chicago.
- Detailed description of services being performed
- Certificate of Liability Insurance (if necessary)
- Each type of engagement is unique and may require different types of insurance. Please contact Risk Management at extension 57861 to confirm the type necessary for your circumstances.
Please note that no payment will be made unless all completed documentation has been submitted and certified by the appropriate members of the Human Resources Department.
WORKER CLASSIFICATION CRITERIA
It is of the utmost importance for the University to properly classify payees in order to maintain proper reporting and compliance with federal regulations. As a general rule of thumb all individuals that are providing a service are considered employees unless justification can be provided to otherwise classify those individuals as Independent Contractors. All Independent Contractor classification requires a department to complete and submit the above documentation to Human Resources Department for evaluation and review. Additional review is completed by the Tax department for Non-Resident Alien independent contractors (for additional information, see the respective policy located at the following link: http://www.luc.edu/finance/policies.shtml).
In determining an individual’s status, HR will consider:
- the U.S. Department of Labor (DOL) final rule issued in January 2024 that modifies how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) [89 F.R. 1638, 1-10-24]
The DOL states that “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the FLSA if the worker is, as a matter of economic reality, in business for themself.” The final rule lists six factors to guide the assessment of the economic realities of the working relationship and to help answer the question of economic dependence under the FLSA:
- The opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
- and the following (as taken from IRS Pub 1779):
Behavioral Control: These facts will show whether there is a right to direct or control how a worker does work. (i.e., instructions and training)
- Instruction: Does the individual receive extensive instructions on how to perform the work required by the engagement. Examples include: How, when or where does the work need to be completed? Who dictates what equipment or tools need to be utilized? Can the individual hire assistants to help perform the work required? How are supplies and other related services purchased?
- Training: Does Loyola provide training or direction that will guide the individual in how the work is to be performed?
Financial Control: These facts show whether there is a right to direct or control the business part of the work. (i.e., significant investment, expenses, opportunity for profit and loss).
- Significant Investment: Does the worker have a significant investment in the work being performed?
- Expenses: Is the worker is not reimbursed for some or all of the business related expenses?
- Opportunity for Profit or Loss: Does the worker have the prospect of realizing a profit or loss on the engagement?
Relationship of the Parties: These facts will illustrate how the business and worker perceive their relationship. (i.e., contracts and benefits).
- Employee Benefits: Does the worker receive any benefits such as insurance, pension or paid leave for the engagement in question?
- Written Contracts: Written contracts can substantiate the intentions of both LUC and the worker in question and will have a great impact in finalizing a worker’s status.
A summary table demonstrating common law factors in classification follows:
| Most likely considered an IC if the University: | Most Likely considered an employee if the University: |
| BEHAVIORAL CONTROL: Factors that show whether the University has the right to control how a worker performs the specific tasks he or she has been hired to do | |
|
|
| FINANCIAL CONTROL: Factors showing whether the University has the right to control a worker’s financial life | |
|
|
| RELATIONSHIP OF THE WORKER AND THE UNIVERSITY: Factors showing whether the University and the worker believes they are an IC or Employee | |
|
|
EMPLOYEE: An individual classified as an employee will be set up as such in Human Resources. The employee will track their hours in the Kronos Time and Attendance System, receive payments, including proper tax withholdings, through Payroll Services and will receive a W-2 for their earnings.
Under an employer and employee relationship, the University withholds all applicable tax and pays the employer’s portion of social security, Medicare, and other applicable taxes. LUC issues W-2, Wage and Tax Statements, detailing all taxes withheld from wages.
Under the LUC accountable plan, employees are able to request reimbursement for travel and business related expenses (see Travel and Business Expense Policy http://www.luc.edu/finance/policies.shtml).
INDEPENDENT CONTRACTOR: If the individual is deemed to be an Independent Contractor, they will be set up in the Accounts Payable vendor master. Payments will not be made without a certified FORM W-9 on file. The University will not withhold taxes from payments made. All amounts exceeding $600 for a given calendar year will be reported by the University to the IRS as Non-Employee Compensation on Form 1099-NEC.
QUARTERLY REVIEW AND CERTIFICATION RENEWAL
IMPORTANT: All certification renewals must be completed and approved in advance by Human Resources before any new engagement begins. This includes any changes in relationship, agreement or engagement deliverables.
Once an engagement period ends, all individuals that are classified as independent contractors will be required to be reviewed and evaluated for certification renewal. At the time of classification determination and set up in the system, all independent contractors are assigned a “Certification Code” in the tracking system. This “Certification Code” covers the engagement period that was provided on the Workers Classification Review Form. This engagement period will be, but not exceed, one of the following periods:
- Less than one month
- 2 - 3 Months
- 3 - 6 Months
- 6 - 9 Months
- 1 Year
On a quarterly basis, University Accounts Payable will audit the independent contractor file. Any contractors that have an expired engagement period will be inactivated in the Vendor Master. No new activity will be allowed for that individual unless a new Workers Classification form is completed for review and approval by Human Resources. Upon authorization of a new engagement period, the vendor will be reactivated for new activity.
SOURCES AND IMPORTANT LINKS
- U.S. Department of Labor (DOL) final rule under the Fair Labor Standards Act (FLSA) [89 F.R. 1638, 1-10-24]
- IRS Pub 1586: Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs
- IRS Pub 1779: Independent Contractor or Employee
- IRS Pub 501: Exemptions, Standard Deduction and Filing Information
- IRS FORM SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
- IRS FORM 1099-MISC: Miscellaneous Income
- IRS FORM W-2: Wage and Tax Statement
- IRS FORM W-9: Request for Tax Payer Identification Number and Certification
- IRS FORM W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
- Internal Revenue Service: www.irs.gov
- Accounts Payable Online Forms: http://www.luc.edu/finance/forms.shtml
- Finance Policies: http://www.luc.edu/finance/policies.shtml
- Human Resources Online Forms: http://www.luc.edu/hr/online_forms.shtml
- University Policies: http://www.luc.edu/policy/
Reviewed/Updated: June 2024
- Purpose
- To Whom This Procedure Applies
- Responsibility
- Documentation
- Worker Classification Criteria
- Quarterly Review and Certification Renewal
- Source and Important Links
PURPOSE
The purpose of this procedure is to document current rules and regulations along with the proper procedures that must be followed when contracting and classifying an Independent Contractor (IC) or employee. This document is meant to identify evaluation and review criteria in order to establish the appropriate relationship between Loyola University Chicago and the IC or employee.
Any individual that is providing a service to LUC is considered an employee unless justification can be provided to otherwise classify said individual as an Independent Contractor. As the Internal Revenue Service and other Federal agencies expand their scrutiny of IC vs. employee classification, it is important to protect the University in the event of program audits.
TO WHOM THIS PROCEDURE APPLIES
- Individuals with decision making authority on the stewardship of LUC funds.
- Individuals with budget administration and supervisory responsibility for LUC budgets.
- Individuals responsible for the identification and selection of Independent Contractors and Employees.
- Individuals who initiate, review, approve, process, or record financial transactions on behalf of the University.
RESPONSIBILITY
The President, Vice Presidents, Deans, Directors and Budget Administrators are responsible for assuring that within their administrative units or colleges/schools:
- All necessary documentation is completed and the evaluation/classification is determined before any services are rendered. This includes any changes or modifications to existing relationships, agreements or engagements.
- Budgeted funds are available to meet all commitments.
- Proper authorization is obtained before any commitments are made.
- All engagements are reviewed and approved by necessary Human Resources and Finance representatives in order to ensure that proper classification (i.e. employee or independent contractor) is made.
- Tax treatment and associated University tax reporting obligations are identified and appropriately communicated.
- The potential benefits of the engagement justify its presentation (i.e., existing employees performing the services vs. hiring an IC).
- All expenditures follow appropriate LUC policies regardless of the source of funds.
- There is recognition of the added conditions placed on expenditures paid from federal and/or state funds or from restricted gifts and those restrictions are accounted for when expenditures are planned.
Note: Contingency, Grant, Gift, Start-up and Research Stimulation Funds are all University funds and are subject to the restrictions outlined in this document.
DOCUMENTATION
It is the policy of Loyola University Chicago to properly document each request for a worker classification of an independent contractor. As a basic rule, this documentation should be considered necessary if the worker being paid is an individual or sole proprietor providing a service to the University. Some exceptions apply such as a one time Speaking Honorarium. Please contact Human Resources to determine the documentation needed.
The following documentation is required of each potential Independent Contractor:
- Form W-9: Request for Tax Payer Identification Number and Certification
- Form W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (for non-US payees)
- A Draft Contract or Letter of Agreement including a description of the services to be performed and related fees to be paid by Loyola Chicago.
- Detailed description of services being performed
- Certificate of Liability Insurance (if necessary)
- Each type of engagement is unique and may require different types of insurance. Please contact Risk Management at extension 57861 to confirm the type necessary for your circumstances.
Please note that no payment will be made unless all completed documentation has been submitted and certified by the appropriate members of the Human Resources Department.
WORKER CLASSIFICATION CRITERIA
It is of the utmost importance for the University to properly classify payees in order to maintain proper reporting and compliance with federal regulations. As a general rule of thumb all individuals that are providing a service are considered employees unless justification can be provided to otherwise classify those individuals as Independent Contractors. All Independent Contractor classification requires a department to complete and submit the above documentation to Human Resources Department for evaluation and review. Additional review is completed by the Tax department for Non-Resident Alien independent contractors (for additional information, see the respective policy located at the following link: http://www.luc.edu/finance/policies.shtml).
In determining an individual’s status, HR will consider:
- the U.S. Department of Labor (DOL) final rule issued in January 2024 that modifies how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) [89 F.R. 1638, 1-10-24]
The DOL states that “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the FLSA if the worker is, as a matter of economic reality, in business for themself.” The final rule lists six factors to guide the assessment of the economic realities of the working relationship and to help answer the question of economic dependence under the FLSA:
- The opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
- and the following (as taken from IRS Pub 1779):
Behavioral Control: These facts will show whether there is a right to direct or control how a worker does work. (i.e., instructions and training)
- Instruction: Does the individual receive extensive instructions on how to perform the work required by the engagement. Examples include: How, when or where does the work need to be completed? Who dictates what equipment or tools need to be utilized? Can the individual hire assistants to help perform the work required? How are supplies and other related services purchased?
- Training: Does Loyola provide training or direction that will guide the individual in how the work is to be performed?
Financial Control: These facts show whether there is a right to direct or control the business part of the work. (i.e., significant investment, expenses, opportunity for profit and loss).
- Significant Investment: Does the worker have a significant investment in the work being performed?
- Expenses: Is the worker is not reimbursed for some or all of the business related expenses?
- Opportunity for Profit or Loss: Does the worker have the prospect of realizing a profit or loss on the engagement?
Relationship of the Parties: These facts will illustrate how the business and worker perceive their relationship. (i.e., contracts and benefits).
- Employee Benefits: Does the worker receive any benefits such as insurance, pension or paid leave for the engagement in question?
- Written Contracts: Written contracts can substantiate the intentions of both LUC and the worker in question and will have a great impact in finalizing a worker’s status.
A summary table demonstrating common law factors in classification follows:
| Most likely considered an IC if the University: | Most Likely considered an employee if the University: |
| BEHAVIORAL CONTROL: Factors that show whether the University has the right to control how a worker performs the specific tasks he or she has been hired to do | |
|
|
| FINANCIAL CONTROL: Factors showing whether the University has the right to control a worker’s financial life | |
|
|
| RELATIONSHIP OF THE WORKER AND THE UNIVERSITY: Factors showing whether the University and the worker believes they are an IC or Employee | |
|
|
EMPLOYEE: An individual classified as an employee will be set up as such in Human Resources. The employee will track their hours in the Kronos Time and Attendance System, receive payments, including proper tax withholdings, through Payroll Services and will receive a W-2 for their earnings.
Under an employer and employee relationship, the University withholds all applicable tax and pays the employer’s portion of social security, Medicare, and other applicable taxes. LUC issues W-2, Wage and Tax Statements, detailing all taxes withheld from wages.
Under the LUC accountable plan, employees are able to request reimbursement for travel and business related expenses (see Travel and Business Expense Policy http://www.luc.edu/finance/policies.shtml).
INDEPENDENT CONTRACTOR: If the individual is deemed to be an Independent Contractor, they will be set up in the Accounts Payable vendor master. Payments will not be made without a certified FORM W-9 on file. The University will not withhold taxes from payments made. All amounts exceeding $600 for a given calendar year will be reported by the University to the IRS as Non-Employee Compensation on Form 1099-NEC.
QUARTERLY REVIEW AND CERTIFICATION RENEWAL
IMPORTANT: All certification renewals must be completed and approved in advance by Human Resources before any new engagement begins. This includes any changes in relationship, agreement or engagement deliverables.
Once an engagement period ends, all individuals that are classified as independent contractors will be required to be reviewed and evaluated for certification renewal. At the time of classification determination and set up in the system, all independent contractors are assigned a “Certification Code” in the tracking system. This “Certification Code” covers the engagement period that was provided on the Workers Classification Review Form. This engagement period will be, but not exceed, one of the following periods:
- Less than one month
- 2 - 3 Months
- 3 - 6 Months
- 6 - 9 Months
- 1 Year
On a quarterly basis, University Accounts Payable will audit the independent contractor file. Any contractors that have an expired engagement period will be inactivated in the Vendor Master. No new activity will be allowed for that individual unless a new Workers Classification form is completed for review and approval by Human Resources. Upon authorization of a new engagement period, the vendor will be reactivated for new activity.
SOURCES AND IMPORTANT LINKS
- U.S. Department of Labor (DOL) final rule under the Fair Labor Standards Act (FLSA) [89 F.R. 1638, 1-10-24]
- IRS Pub 1586: Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs
- IRS Pub 1779: Independent Contractor or Employee
- IRS Pub 501: Exemptions, Standard Deduction and Filing Information
- IRS FORM SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
- IRS FORM 1099-MISC: Miscellaneous Income
- IRS FORM W-2: Wage and Tax Statement
- IRS FORM W-9: Request for Tax Payer Identification Number and Certification
- IRS FORM W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
- Internal Revenue Service: www.irs.gov
- Accounts Payable Online Forms: http://www.luc.edu/finance/forms.shtml
- Finance Policies: http://www.luc.edu/finance/policies.shtml
- Human Resources Online Forms: http://www.luc.edu/hr/online_forms.shtml
- University Policies: http://www.luc.edu/policy/
Reviewed/Updated: June 2024