Independent Contractor Policy and Procedures
Introduction
Policy Statement
This policy applies to anyone wishing to contract for supplemental services to be paid by Brown University regardless of the source of funds. This policy supersedes the previous policy issued in October 1993. A department intending to engage a service provider as an independent contractor must follow University approval and contracting procedures before the performance of services.
Reason For Policy
Designation of independent contractor status is governed by the Internal Revenue Service (IRS) tax code and "common law" test. Significant tax penalties exist for incorrect classification of an employee as an independent contractor. In addition, contracting with an independent contractor may expose the University to significant risk. Therefore, it is imperative that common standards are applied in classification and contracting, and that each case is fully documented and auditable.
Responsibilities
You (Service Recipient or Department Administrator)
- Read and understand the Independent Contractor Policy, and comply with its provisions.
- Communicate the information in this policy to prospective independent contractors as appropriate.
- Determine status (independent contractor vs. employee).
- Ensure professional service agreement is in place before service is provided.
- Follow appropriate procedures for payment.
Academic and Administrative Department Heads
- Communicate the provisions of this policy to all faculty and staff who might seek to engage an independent contractor.
- Ensure compliance with the policy within the department.
- If appointed by a Senior Officer, obtain requisite training and review professional service agreement (up to $2,000) for content and compliance with policy.
- Sign professional service agreements for up to $2,000 prior to service being provided.
- Approve professional service agreements up to $2,000 for all non 5-ledger accounts.
Senior Officers
- Approve and sign all professional service agreements for greater than $10,000 on non 5-ledger accounts.
- Designate academic and/or administrative department heads authorized to sign professional service agreements up to $2,000 on non 5-ledger accounts.
Independent Contractor
- Provide detailed and accurate information for determination of status and contract formulation.
- Sign professional service agreement prior to providing services.
- Provide appropriate documentation for payment of services.
- Provide W-9
Controller's/ Purchasing Office
- Determine whether or not independent contractor status is appropriate.
- Review professional service agreement for content and compliance with University policies.
- Ensure that insurance and risk issues are addressed to avoid liability to the University.
- Approve all professional service contracts for over $2,000 and up to $10,000 (non 5-ledger accounts).
Office of Research Administration
- Determine whether or not independent contractor status is appropriate.
- Review contract and ensure that service provided falls within provisions of the funding agency.
- Review professional service agreement for content and compliance with University policies.
- Approve and sign all contracts related to 5-ledger accounts.
Office of the General Counsel
- Determine whether or not independent contractor status is appropriate.
- Draft professional service agreement for services with a cost of greater than $10,000 for non 5-ledger accounts.
- Draft specialized professional service agreement for any service where the standard professional service agreement does not meet the needs of the department.
Definition of Terms
Contract
A legal agreement that establishes the rights and duties of the contracting parties and that constitutes a relationship giving each the right to seek remedy for the breach of those duties.
Employee
A person paid through the Brown University payroll system to perform a service for the University. In these cases, the University controls what needs to be done, as well as how, when and where it will be done. The person is normally provided the tools and facilities to perform the function, and is not at risk for profit or loss in this capacity.
Guest Speaker
A non-employee engaged by the University to speak/lecture about a particular subject. Fees paid to a speaker represent compensation for services and recipients of such are considered independent contractors. Guest speakers include guest lecturers in classes and speakers or presenters for symposiums, lecture series or conferences.
Independent Contractor
An individual engaged to perform a specific service. Commonly referred to as a consultant, freelancer, contractor, etc., he or she is the master of his or her own time. Usually, a contractual relationship exists whereby the independent contractor is responsible for all aspects of the means and methods of the job. He or she is fully liable for any job related actions and is not eligible for employee benefits. The University may require proof of adequate insurance from independent contractors.
IRS Form 1099 MISC
An Internal Revenue Service form used to report non-employee compensation (and other miscellaneous income).
IRS Form W-9 Request For Taxpayer Identification Number and Certification
An Internal Revenue Service form used to provide the requester (University) with a taxpayer identification number (social security number - SSN or employer identification number - EIN) and a certification that the number being provided is correct. Home address is required on the W-9 for an individual using a SSN. A W-9 is required to be on file for any vendor or individual being paid for services by the University.
Nonresident Alien
An individual who is not a citizen of the United States of America or is not a resident alien (does not have a Green Card).
ORA
Office of Research Administration
Professional Services Agreement
A contract under which an independent contractor is engaged to provide a service to the University. The contract is generally a standard form for payments less than $10,000 and is individually written by the Office of the General Counsel for payments greater than $10,000 against non 5-ledger accounts. Standardized contracts are in place for payments against 5-ledger accounts regardless of amount.
Purchase Order
A written agreement used to obtain goods and materials from external sources. Once accepted, it has the legal force of a binding contract.
Resident Alien
An IRS term used to define individuals who are not U.S. citizens but have a "Green Card" or meet the "substantial presence test".
Services Agreement and Payment Authorization (Guest speaker up to $2,000 or professional service up to $500 – all accounts)
An abbreviated professional service agreement (standardized form) to facilitate the payment of a guest speaker/lecturer when the payment for service does not exceed $2,000 or an independent contractor for a one-time payment for service not to exceed $500.
PROCESS
Overview
1. Determination of Status:
A determination must be made as to whether the service provider will be an employee of the University or an independent contractor. All standardized contracts for more than $2,000 provide questions that assist university personnel in making the correct relationship determination. Proper classification of a service provider ensures that the University is in compliance with the following: the Fair Labor Standards Act and Immigration and Naturalization Service regulations, as well as statutes regarding income tax withholding, unemployment insurance taxes, Social Security, and Medicare taxes. Improper classification results in penalties to the University, and the responsible department may be required to absorb these costs. Refer to the "Determination Procedures" section of this document.
2. Procurement of Services:
If it is determined that the service provider is an independent contractor, following proper procedures on behalf of the University for the procurement of services will ensure that all contracting requirements have been met. Fair pricing (ensuring industry/market standards) is an important consideration in negotiation of fees for service for all Professional Services Agreements. Refer to the "Procurement and Payment Procedures" section of this document.
Determination Procedures
Citizens of Other Countries
Individuals who are not U.S. citizens and do not have Resident Alien status (i.e., those who do not have an Alien Registration Receipt Card or a "Green Card") cannot be paid for services under this policy. Please refer to the Non-Resident Alien Policy and Procedures.
Note: The Non-Resident Alien Policy and Procedures has not yet been established. Until such time, the Independent Contractor Policy and Procedures will apply. However, payment can only be processed on a Request for Check not on a Purchase Order. Please be aware that non-resident aliens have specific visa requirements to work in this country and may be exempt from withholding of taxes based on treaties between their country and the U.S. government. Please call the Director of University Disbursements at extension 37579 for more information.
Circumstances Where "Determination Procedures" Are Not Required
Certain types of payments may be processed without further consideration of independent contractor versus employee status:
- The following types of payments are not for services performed, although they are made to individuals. They are reportable on IRS form 1099 and taxable to the recipients:
Royalty or Permission Fee - payment that represents compensation for the sale or use of copyrighted or patented work of an author, composer or inventor.
Prize or Premium - a reward or gift of money for a competition or other scholastic achievement.
- The following types of payments are for services performed by an individual but do not require "determination procedures." Such one-time payments are typically of a fixed, minimal amount and are taxable to the recipients:
Participation Fee - payment for participating in surveys, seminars or research projects.
Human Subject Fee - payment to individuals who volunteer as human subjects in research projects.
Determining Status for Present and Former University Employees
If the service provider you wish to hire is a present University employee, a former employee (paid through University payroll within the previous twelve months) or is providing a service the same as or similar to that of an employee, he or she will usually be paid as an employee and not as an independent contractor. If employee status is determined, contact Human Resources to establish the individual as an employee and arrange for payment of his or her services via the University payroll.
Determining Independent Contractor Status
The test used by the IRS to determine a worker's classification is the "common law" test which holds that if a business tells or has a right to tell a worker how, when and where to work, then the worker is an employee. A worker free from such direction can generally be classified as an independent contractor. The IRS developed the 20-Factor test to determine if a business controls and directs a worker, or has a right to do so. The factors (questions), applied to each individual circumstance under which services are to be performed, determine the individual's classification. The questions must be objectively and consistently applied in order to determine the individual's correct status. If the predominance of answers to the 20 questions is "yes", the individual is most likely an employee. If the predominance of answers is "no", the individual is most likely an independent contractor.
The 20 questions are as follows:
1. Is the individual directed by someone at Brown as to when, where and how the work is to be done?
2. Is the University providing detailed instructions or training to enable the individual to perform the work in a particular way or manner?
3. Can the individual perform the work without any risk of direct economic loss to himself/herself?
4. Are the services provided by the individual an integral part of Brown's operations, like those already performed by others within established job classifications (e.g. clerical work, teaching or research)?
5. Must the services be performed specifically by the individual (rather than by someone else employed by the individual?
6. Will Brown hire, supervise or pay others to help the individual on the job?
7. Is there a continuing work relationship between the individual and the department for whom services are being performed?
8. Is the work schedule set by someone at Brown?
9. Is the individual required to devote his/her full time effort to the department for which the work is being performed?
10. Is the work required to be performed at Brown, or in specific places designated by Brown?
11. Is the sequence of work set by someone at Brown?
12. Are regular oral or written reports required to be submitted to Brown by the individual?
13. Is the method of payment based on hourly, weekly or monthly fees (as opposed to commission or by the project/job)?
14. Are business and/or travel expenses reimbursed?
15. Does Brown furnish the tools, equipment and materials used by the individual?
16. Can the individual perform the work without making or having made any investment in equipment or facilities?
17. Does the individual perform services exclusively for Brown rather than working for a number of companies at the same time?
18. Does the individual not make his/her services regularly available to the general public or businesses other than Brown?
19. Is the individual subject to dismissal for reasons other than nonperformance of contract specifications?
20. Can the individual end his/her working relationship with Brown at any time without incurring liability for failure to complete the job (e.g. forfeit of payment previously made by Brown or due under contract, or breach of contract liability)?
Currently, the IRS identifies the most important factors as numbers 1, 2, and 3 in the classification of employee vs. independent contractor. In addition, the intent of the business (Brown) and the worker is important and the written agreement will lend credence to the classification. All contracts for services greater than $2,000 include a shortened version of the twenty questions to assist in making the proper classification.
If the individual is determined to be an independent contractor, proceed with the application of this policy. If it is not clear into which category an individual falls, assistance will be provided by the Office of the General Counsel, the Controller's Office, Purchasing Department, or the Office of Research Administration (in the case of grants and contracts). These same offices have the authority to override a department decision to classify an individual as an independent contractor in order to ensure consistency throughout the University. Note: The department representative submitting and/or authorizing the contract must ensure this determination procedure has been followed. In other words, if the status is questioned by the Office of General Counsel, the Controller's Office, Purchasing Department or the Office of Research Administration, the department must be able to support it's identification of the service provider as an independent contractor.
Procurement and Payment Procedures
Guest Speaker $2,000 or less (all accounts)
An abbreviated guest speaker payment authorization form (GSPA) is used to facilitate payment to a guest speaker/lecturer when the payment for service does not exceed $2,000. The agreement incorporates a Request For Check form to reduce the processing of paperwork at the department level.
The payment of the fee for service must be made using the GSPA and the speaker will receive an IRS form 1099 from the University. However, the payment of related travel expenses may be handled in one of three ways:
- The amount of agreed travel expense is included with the fee for service on the GSPA. No travel receipts are required. The full amount of the fee plus travel will be reported on IRS form 1099 as taxable income to the speaker. He/she should maintain original receipts as part of his/her business records.
- Travel expenses to be reimbursed in compliance with Brown University Travel Policy and Procedures using a Travel Expense Report. Original receipts are required for all travel expenses $50 and greater. Any travel expense ($50 or greater) that cannot be substantiated with an original receipt must be included on the GSPA and the payment (fee and travel) will be reported as taxable income. Use of the Missing Receipt Affidavit is not valid under this policy. If it is determined after the GSPA has been signed and services have been performed that travel expenses cannot be substantiated with an original receipt, reimbursement will be made using a Request For Check and the payment will be reported as taxable income.
- A guest speaker/service provider may not wish to receive a fee and asks only for reimbursement of travel expenses. In this case, travel expenses will be reimbursed using a Travel Expense Report in compliance with Brown University Travel Policy and Procedures. Original receipts are required for all travel expenses $50 and greater. Any travel expense ($50 or greater) that cannot be substantiated with an original receipt must be paid using a Request For Check and a W-9 and the payment will be reported as taxable income.
Complete the top portion of the GSPA identifying: pay to, address, date of service, description and location of service, fees and expenses, the account number to be charged. For tax reporting purposes the speaker'sSocial Security (or Federal Tax ID) number and home address are required. Complete the Payment Authorization section including account number, sub-code, account description, amount and authorized department signature.
The completed GSPA and one copy should be forwarded to Accounts Payable for processing. Note: Additional review and signature approval by the Office of Research Administration is required for any payment against a 5-ledger account prior to the performance of services. Once approved by ORA, the documents will be forwarded to Accounts Payable for processing.
Independent Contractor – up to $2,000 (all accounts)
An abbreviated Professional Service Agreement (PSA) is used to contract for a variety of professional services when the payment for services rendered is up to $2,000. This agreement incorporates a Departmental Certification and the contract Terms and Conditions. Part I, the Departmental Certification, includes the scope of work, the criteria used in the selection of the independent contractor, questions to facilitate determination of employment status, the duration and cost of services performed and the account number to be charged. Part II, Terms and Conditions, identifies the contractual provisions between Brown and the independent contractor.
Part I is to be completed by the appropriate department designee. The PSA and request for W-9 is then forwarded to the independent contractor. He/she must sign and date Part II (prior to performance of services), thereby signifying acceptance of both Parts I and II of the contractual agreement. The appropriate Academic or Administrative Department Head or Manager or the Office of Research Administration (for payments against 5 ledger accounts) is charged with review and signature approval of Part II of the Professional Service Agreement (prior to performance of services) thereby finalizing the contract.
Upon completion of services, a Request For Check (including the statement "All services have been satisfactorily performed") along with the original PSA, a W-9 (if one is not on file with the Accounts Payable Department) and any related documentation (invoice and/or correspondence from the contractor) should be forwarded to the Accounts Payable Department for processing. If the payment is against a 5-ledger, ORA must sign Part II prior to the documents being forwarded to the Accounts Payable Department for processing. Note: If multiple invoices are expected (rather than a single payment), the payment must be processed using a Purchase Order, not a Request For Check.
The payment for the fee for service must be made using the PSA and the independent contractor will receive an IRS form 1099 from the University. However, the payment of related travel expenses may be handled in one of three ways:
- The amount of agreed travel expense is included with the fee for service on the PSA. No travel receipts are required. The full amount of the fee plus travel will be reported on IRS form 1099 as taxable income to the independent contractor. The independent contractor should maintain original receipts as part of his/her business records.
- Travel expense to be reimbursed in compliance with Brown University Travel Policy and Procedures using a Travel Expense Report. Original receipts are required for all travel expenses $50 and greater. Any travel expense ($50 or greater) that cannot be substantiated with an original receipt must be included on the PSA and the payment (fee and travel) will be reported as taxable income. Use of the Missing Receipt Affidavit is not valid under this policy. If it is determined after the PSA has been signed and services have been performed that travel expenses cannot be substantiated with an original receipt, reimbursement will be made using a Request For Check and the payment will be reported as taxable income.
- The independent contractor may not wish to receive a fee and asks only for reimbursement of travel expenses. In this case, travel expenses will be reimbursed using a Travel Expense Report in compliance with Brown University Travel Policy and Procedures. Original receipts are required for all travel expenses $50 and greater. Any travel expense ($50 or greater) that cannot be substantiated with an original receipt must be paid using a Request For Check and a W-9 and the payment will be reported as taxable income.
Independent Contractor - greater than $2,000 and up to $10,000 (non 5-ledger)
A standardized Professional Services Agreement (PSA) is used to contract for a variety of professional services when the payment for service rendered (including fee, travel and other expenses) is greater than $2,000 and up to $10,000 and is going to be charged to any account other than a 5-ledger. This agreement incorporates a Departmental Certification and the contract Terms and Conditions. Part I, the Services Profile, includes scope of work and the criteria used in the selection of the independent contractor. Part II, the Establishment of Employer/Independent Contractor Relationship, provides questions to facilitate determination of the correct employment status. Part III, the Professional Services Agreement, identifies the contractual provisions between Brown and the independent contractor. The terms and conditions are slightly different for an individual versus a company so there is a separate form for each type of vendor. A standardized agreement containing language to address special needs of a department or type of service (i.e.: author rights, licensing, royalties, etc.) may be generated by the Office of the General Counsel for future use. Standardized (generic) agreements have been developed by the Office of the General Counsel for many departments and they should continue to be used.
Parts I, II and III (two originals for part III) are to be completed by the appropriate Academic or Administrative Department Head or Manager. Both originals of Part III, the PSA, are then forwarded to the independent contractor. He/she must sign and date both copies of the PSA (prior to performance of services), thereby signifying acceptance of the contractual agreement. The authorized Department Head or Manager must sign Part III indicating the agreement is acceptable and ready for final approval and processing. The Director of Purchasing is charged with review and signature approval of the Professional Service Agreement (prior to performance of services) thereby finalizing the contract.
Payment for services in this category will only be processed using a Brown University Purchase Order. The PSA's (signed by the contractor) along with three competitive bids or a sole source justification (justification for how the vendor was selected and indication that pricing is within industry standards) should be marked in the upper right hand corner with the Purchase Requisition Number and forwarded to the Purchasing Department for final approval and issuance of the Purchase Order. The Purchase Requisition must clearly state vendor terms (net # of days from invoice date before payment is due) and payment terms (lump sum vs. multiple payments and associated due dates). Payment will be processed by the Accounts Payable Department upon receipt of an invoice from the contractor and a signed receiving report from the department. The contractor will receive an IRS form 1099 from the University including the fee, travel and other related expenses. Travel or other related expenses may not be separated from the PSA.
Independent Contractor - greater than $10,000 (non 5-ledger)
Three competitive bids or a sole source justification (justification for how the vendor was selected and indication that pricing is within industry standards) must be provided to the Purchasing Department with a Purchase Requisition in order to obtain the services of an independent contractor for amounts exceeding $10,000.
The Purchasing Department in conjunction with the Office of General Counsel will provide the contractor with an expanded Professional Services Agreement as part of the award process. Upon receipt of the contractor's signed agreement, the appropriate Brown University officer is charged with review and signature approval of the PSA thereby finalizing the contract. The signed PSA will then be forwarded to the Purchasing Department where a Purchase Order will be issued. Payment will be processed by the Accounts Payable Department upon receipt of both an invoice from the contractor and a signed receiving report from the department. The contractor will receive an IRS form 1099 from the University in an amount that includes the fee, travel and other related expenses. Travel or other related expenses may not be separated from the PSA.
Independent Contractor - repetitive contracts greater than $10,000 (non 5-ledger)
The Office of General Counsel may generate a standardized form for professional services greater than $10,000 if the service is repetitive in nature. This would include standing contracts that are renewed each year with the same vendor (i.e.: audit firms, benefits companies).
Independent Contractor - greater than $2,000 (5-ledger)
A specialized Professional Services Agreement (PSA) is used to contract for any service to be charged to a 5-ledger account for an amount greater than $2,000 including the fee, travel and related expenses. This agreement incorporates a certification of need for professional services and the agreement/contract. Part I, the Services Profile, and Part II, the Establishment of Employer/Independent Contractor Relationship and the PSA (with the exception of the signature for execution of the contract) should be completed by the principal investigator and forwarded to the contractor for review and signature. The signed PSA and the Certification for Need for Professional Services should be marked in the upper right hand corner with the Purchase Requisition Number and be forwarded to the Purchasing Department. The Purchasing Department will match the incoming documentation with the Purchase Requisition and forward it to ORA. Provided all documents are in order, funds are available, and the expense is allowable on the sponsored project to be charged, the agreement and the Purchase Requisition will be signed by the Director of the Office of Research Administration and forwarded to the Purchasing Department for generation of a Brown University Purchase Order.
Payments will be made to the contractor upon submission and approval of signed invoices from the contractor detailing the services rendered, the dates worked, the number of days worked times the daily rate, and actual reimbursable expenses. The department must specify the purchase order number against which the payment is to be made, sign and date each invoice indicating "O.K. to pay", and forward to the Accounts Payable Department for processing. The contractor will receive an IRS form 1099 from the University in an amount that includes the fee, travel and other related expenses. Travel or other related expenses may not be separated from the PSA.
Amending a Professional Service Agreement
Changing the terms and conditions of an existing contract requires the completion of an Amendment to Professional Services Agreement form. The form allows for change to scope of the service, period of performance or financial consideration for the service performed. All other terms and conditions of the original agreement will remain in full force and effect. The amendment must be signed by the independent contractor and the appropriate University representative. Note: A contract cannot be amended after it has expired. If the original contract period has passed, a new contract is required for the performance of additional services by the same vendor.
Processing of an Amendment to Professional Services Agreement will follow the same procedure as the original contract. However, if the amended financial consideration for the service performed is greater than the original contract category amount ($500, $2,000 or $10,000), the approval and payment process for the new category will govern.
Amendments to a contract originally processed using a Request for Check (less than $2,000) requires the completion of the Payment Authorization section of the Amendment to Professional Services Agreement. Payments against 5-ledgers should be forwarded to the Office of Research Administration and all others to Accounts Payable for processing.
Amendments to a contract originally processed using a purchase order (greater than $2,000) will require the completion of the Purchase Order Change Authorization section of the Amendment to Professional Service Agreement. The documentation for amendments to contracts paid against a 5-ledger should be forwarded to the Office of Research Administration and all others to Purchasing for processing.
OTHER CONSIDERATIONS
Independent Contractor Refusal to Sign Agreement:
If the independent contractor refuses to sign our contract as written or wants a representative from Brown University to sign their contract (any amount up to $10,000), the contract review and approval will be the responsibility of the Director of Purchasing or the Office of Research Administration (5-ledger account). The Director of Purchasing or the Office of Research Administration may involve the Office of the General Counsel depending on the circumstance. In other words, departments do not have the authority to change a Brown contract template or to sign a vendor contract.
Travel Expenses:
Independent contractors whose fee for service is $2,000 or less may, but will no longer be required, to include travel expenses with the fee for service. If travel expenses are to be separated, they must be in compliance with the Brown University Travel Policy and may be reimbursed using a Travel Expense Report. Original receipts will be required for any expense $50 and greater and use of the Missing Receipt Affidavit is not valid. Any travel expense, $50 and greater, not substantiated with an original receipt will be reported as taxable income. Please refer to Procurement and Payment Procedures for more details.
Employees of Brown University should not personally incur travel expenses of a guest speaker or independent contractor and expect to be reimbursed.
Direct billing to the University for travel expenses of a guest speaker or independent contractor is not allowed.
Departments may use University guest rooms or short-term visitor housing (Rental Facilities) for the lodging of a guest speaker, independent contractor or visiting scholar if the total payment for service does not exceed $2,000. However, the individual must maintain permanent residence elsewhere and the stay must not exceed the lesser of one year or the contract period. Payment will be processed using an Internal Purchase Requisition (IPR).
Travel arrangements for a service provider without the financial means to expend personal funds in advance must be handled directly with the Controller's Office. Contact the Assistant Controller (extension 37579) or the Director of Accounting (extension 32716) for assistance in handling this special circumstance.
Signatures and Signature Authority:
Signatures of the independent contractor and the appointed University representative approving the contract must be original. Faxed or stamped signatures are not valid.
The "acknowledgment" signature on the agreement is reserved for the authorized department head or manager to indicate that the agreement is acceptable prior to final execution.
Individuals authorized to sign contracts for professional services agreements are not authorized to sign any other type of agreement/contract (i.e.: leases, etc.) unless expressly authorized by the Corporation.
Individuals authorized to sign contracts are as follows:
Up to $2,000: * Academic and Administrative Department Heads and Managers - As designated by Senior Officers in writing to the Controller's Office
* Director of Purchasing
* Director of Research Administration (for 5-ledger accounts)
* Designated Senior Officers
$2,000 to $10,000: * Director of Purchasing
* Director of Research Administration (for 5-ledger accounts)
* Designated Senior Officers
Over $10,000: * Director of Purchasing
* Director of Research Administration (for 5-ledger accounts)
* Designated Senior Officers
Over $50,000: * Executive Vice President for Finance and Administration