In today’s marketplace, college students may be offered a wide variety of employment opportunities. The following information should help career services professionals advise their students on the nature of these opportunities.
Employee vs. Independent Contractor: Factors in Assessing the Relationship
Individuals entering the work force will generally be classified as either employees or independent contractors. The appropriate classification will depend on a variety of factors, the most important of which is control over the manner and means by which the end result of the work is accomplished and limits the individual's ability to perform similar work for other entities. If the hiring organization (i.e., the person or entity for whom the services are performed) controls the manner and means by which the end result of the work is accomplished, the worker will generally be classified as an employee. Conversely, to the extent that the worker controls the manner and means by which the end result of the work is accomplished and is permitted to perform similar work for other entities, he or she will generally be classified as an independent contractor.
Both the courts and the IRS use a “totality of the circumstances” test to determine whether an individual should be properly classified as an employee or an independent contractor. As such, in addition to the “control” factor discussed above, other factors are relevant to the appropriate classification. These factors include the following:
- Instructions. Is the worker required to comply with the hiring organization’s instructions about when, where, and how the work is to be done? (Yes=Employee; No=IC)
- Training. Does the hiring organization require the worker to attend training or regular meetings? (Yes=Employee; No=IC)
- Integration. Are the workers’ services integrated into the business operations of the hiring organization? Is the success or continuation of the hiring organization’s business dependent to an appreciable degree upon the performance of the worker’s services? (Yes=Employee; No=IC)
- Services Rendered Personally. Is it necessary for the services to be rendered personally by the worker? (Yes=Employee; No=IC)
- Hiring, Supervising, and Paying Assistants. Does the hiring organization hire, supervise, and pay assistants for the worker? (Yes=Employee; No=IC)
- Continuing Relationship. Do the worker and the hiring organization have an ongoing, continuing relationship? (Yes=Employee; No=IC)
- Set Hours of Work. Is there a set amount of hours and days that the worker must work each day/week? Does the hiring organization determine the worker’s schedule? (Yes=Employee; No=IC)
- Full-Time Required. Is the worker required to devote substantially his or her full time to the business of the service recipient? (Yes=Employee; No=IC)
- Doing Work on Employer’s Premises. Is the work performed on the premises of the hiring organization? (Yes=Employee; No=IC)
- Order or Sequence of Work. Is the worker required to perform services in the order or sequence set by the hiring organization? (Yes=Employee; No=IC)
- Oral or Written Reports. Is the worker required to submit regular or written reports to the hiring organization? (Yes=Employee; No=IC)
- Method of Compensation. Is the worker paid on an hourly or salaried basis? (Yes=Employee; No= IC) Is the worker paid on a per-job basis? (Yes=IC; No=Employee)
- Payment of Expenses. Does the hiring organization reimburse the worker for expenses (i.e., business, travel, insurance, etc.)? (Yes=Employee; No=IC)
- Furnishing of Tools and Materials. Does the hiring organization furnish significant tools, materials, and other equipment to the worker? (Yes=Employee; No=IC)
- Significant Investment. Does the worker invest, through capital infusion, in the facilities that are used by the worker in performing his or her services? (Yes=IC; No=Employee)
- Realization of Profit or Loss. Is it possible for the worker to realize a profit or suffer a loss as a result of the performance of the worker’s services? (Yes=IC; No=Employee)
- Working for More than One Firm at a Time. Does the worker perform more thanminimalservices for a multiple of unrelated persons or firms at the same time? (Yes=IC; No=Employee)
- Making Services Available to the General Public. Does the worker make his or her services available to the general public on a regular basis (e.g., through a separate, private practice)? (Yes=IC; No=Employee)
- Right to Discharge. Does the hiring organization have the right to discharge the worker irrespective of the result produced? (Yes=Employee; No=IC)
- Right to Terminate. Does the worker possess the right to end his or her relationship with the hiring organization at any time without incurring liability? (Yes=Employee; No=IC)
With respect to these factors, no one factor determines the nature of the relationship. Consequently, it is always necessary to evaluate the relationship between the worker and the service recipient in light of all of the factors listed above.
In light of the foregoing, where the hiring organization controls the manner and means by which the worker’s services are performed and the individual is limited with regard to who else service can be provided, the worker is generally deemed an employee. With respect to the employer-employee relationship, employees are classified in many different ways.
At-Will Employees vs. Term/Just Cause Employees
Generally, in most states, employees are deemed “at-will” employees unless a contract of employment states otherwise. In this regard, absent a specific “term” (or duration of employment) identified in an employment agreement or a promise by the employer to terminate the employee only “for cause,” an employee is presumed to be employed “at-will.” An at-will employment relationship can be terminated by either party (the employer or the employee) at any time (with or without notice) and for any reason (with or without cause). An at-will employee is typically not entitled to severance benefits upon the termination of employment.
On the other hand, with respect to an employee employed for a specific “term” (e.g., six months, one year, two years, five years, etc.), the employer is contractually bound to continue the employment relationship until the natural expiration of the term or the contract is terminated in accordance with the language set forth therein. If the employer terminates the agreement upon the natural expiration of the term, the employee is generally not entitled to post-employment severance benefits. If the employer terminates the agreement prior to the natural expiration of the term, however, the termination will be deemed either a “termination for cause” or a “termination without cause.” Employees terminated “for cause” generally are not entitled to severance benefits. Employees terminated “without cause” generally are entitled to severance benefits as defined in the employment agreement (or payment for the remainder of unexpired portion of the contract term).
Employment agreements should provide the definition of cause so both the employer and employee understand the nature of employment and the reasons for termination.
In addition to employment agreements, employees can also overcome the general “at-will” nature of employment if they are members of a union and subject to the terms of a collective bargaining agreement. A collective bargaining agreement will generally provide protections to employees with regard to the reasons for termination and allow for employees to “grieve” (or dispute) the reasons for their termination.
Note: There is no legal definition of “full-time” or “part-time” employee for most aspects of the law (one exception being the Affordable Care Act,which defines “full-time” as at least 30 hours per week or 130 hours per month).
Full-time Employee: A full-time employee is generally hired by the employer to work a regular five-day schedule for the number of hours defined by an employer. Full-time employees are generally provided with full employment benefits (e.g., paid vacation, paid sick leave, paid holidays, health insurance benefits, 401(k) or pension benefits, etc.). Generally, the determination of such benefits is at the sole discretion of the employer.
Part-time Employee: A part-time employee is generally hired by the employer to work a regular or semi-regular schedule of less than five days per week or a number of hours set by the employer. Part-time employees are generally not provided with full employment benefits. While part-time employees may be entitled to some or all employment benefits on a pro-rated basis, they typically are not provided with full benefits. The determination of benefits is generally at the sole discretion of the employer.
Temporary Employee: A temporary employee is generally hired to perform a specific job of limited duration. Such employees are often recruited, screened, hired, and trained by a temporary staffing firm or employment agency. In such cases, the staffing firm/employment agency is generally deemed the “employer” of the temporary employee. As such, the staffing firm/employment agency will assign the temporary employee to clients, determine the amount of compensation to be paid to the temporary employee, pay the temporary employee, withhold the appropriate payroll taxes, and, depending on state law, provide workers’ compensation coverage. The staffing firm/employment agency then bills the client for the services performed. Because the temporary employee usually performs his or her services at the client’s place of business and is supervised by the client, often a “joint employer” relationship exists (i.e., the temporary employee is deemed to be employed by both the staffing firm/employment agency and the client). The temporary employee is generally not eligible for employment benefits from the client.
Contract Employee: A contract employee is generally hired to provide a specific service on a long-term basis on behalf of an outside contracting firm. Computer management, engineering, and accounting are examples of services a contract firm may provide. Like a temporary staffing firm/employment agency, a contract firm hires, recruits, screens, pays, and sometimes trains its workers. The primary difference between a temporary staffing firm/employment agency and a contract firm is that the contract firm assumes full responsibility for providing ongoing service to the client and supervises its workers at the client’s work site. As such, the contract firm is clearly the “employer” of the worker. To the extent that the contract firm provides employment benefits to its employees, the employee will be eligible for such benefits in accordance with the plans and policies of the contract firm. The employee will not be entitled to employment benefits from the client.
Exempt vs. Non-Exempt Employees
The Fair Labor Standards Act (FLSA) mandates that non-exempt employees be paid overtime for all hours worked in excess of 40 per workweek at a rate of one and one-half times their regular rate of pay. This entitlement is due largely to the fact that non-exempt employees are paid on an hourly basis (i.e., their compensation varies depending upon the total number of hours worked per week).
Exempt employees, on the other hand, are not entitled to overtime compensation under the FLSA. This exclusion is based largely on the fact that exempt employees are paid on a salaried basis (i.e., they are guaranteed a fixed compensation regardless of the amount of hours worked). Compensation on a salaried basis, however, is not the only requirement of exempt status. The employee must also meet all of the “duties” requirements for an exemption to enjoy exempt status, which include, but are not limited to, being classified as an administrative, executive, or professional employer under the applicable FLSA test.
Employees who qualify for exempt status under the FLSA are not entitled to overtime compensation for hours worked in excess of 40 per workweek. The exempt status of any employee will depend upon whether the position qualifies for one of the FLSA’s exemptions (e.g., administrative exemption, executive exemption, professional exemption, outside sales employee exemption, etc.).
The Independent Contractor
In a case where the worker controls not only the end result of the services performed but also the manner and means by which the services are performed and the end result obtained, the worker will generally be deemed an independent contractor.
Independent contractors are often self-employed. Independent contractors frequently enter into a written agreement to provide services to a client in exchange for an agreed upon fee (e.g., lump sum, hourly, weekly, monthly, etc.). Independent contractors are not considered “employees” of the client and therefore are not placed on an client’s payroll. Rather, the independent contractor typically invoices the client for the services performed, and the client pays the independent contractor through its accounts payable. The client does not withhold federal, state, or local taxes from the payment; rather, the independent contractor is responsible for satisfying all tax obligations with respect to the compensation received. All income earned during the course of a calendar/tax year is reported to the independent contractor and to the federal government by the client on a 1099 basis.
As discussed above, independent contractors do not receive any type of employment benefits from the client, nor does the client provide the tools, equipment, supplies, training, or facilities necessary for performing the services or accomplishing the end result of the services. The independent contractor frequently works for multiple clients at one time, employs his/her own employees, and is susceptible to experiencing a profit or loss based upon the services provided.
Examples of independent contractor positions offered to college students include freelance assignments and direct sales positions. Direct sales positions may require an initial investment to attend an orientation or training session and/or purchase a starter kit. Direct salespersons are typically compensated on a commission basis. Multilevel marketing (MLM) is a form of direct sales where contractors also recruit others to sell a product and thereby earn commissions on their own sales as well as those of their recruits.
Career services offices may wish to become acquainted with the codes of ethics of professional associations to which such recruiting organizations belong, e.g., the Direct Marketing Association and the Direct Selling Association, and the obligations that are imposed when recruiting students.
Updated October 2018