Difference Between Employees and Contractors Date: Mon, 29 Jun 1998 16:18:55 -0400 To: "DC - All District Chiefs", "B - Branch Chiefs and Offices" From: "Alice A. Sabatini" Subject: Difference Between Employees and Contractors Cc: "AO - All Administrative Officers", "A - Division Chief and Staff" John Peterson provided the following information at my request. It contains a summary of a case that GD has pending with a contractor that claims he was really an employee for unemployment compensation and tax purposes. As mentioned below, it is likely that in settlement GD will be required to hire Betts with back pay and benefits. Also forwarded is the information that GD issued to their managers as guidance to avoid a recurrence of this problem. I am forwarding this to you with the hope that we can learn from the GD situation and ensure that future dealings with contractors are on a non-personal basis and that we hold them at "arms-length". I am recommending that WRD Memorandum No. 95.03 be updated to include some of this information to guide us as we move forward with the implementation of services contracts on a larger scale. ---------------------------------------------------------------------------- ---------------------- Betts was awarded a purchase order for non-personnel services as an independent contractor in support of a Geologic Division (GD) team in Denver. The purchase order was written so as to attempt to provide an arms-length relationship and to keep the requirement in the "non-personal" service realm. It is apparent that the manner in which his performance under the purchase order was managed that he felt he was an employee of USGS. The purchase order expired at the end of the fiscal year and Betts, who had worked on-site within GD's work spaces, had been included in GD's email directory, and who had otherwise come to think of himself as a GD employee, was unhappy that the order was not renewed. He approached the Colorado State bureau/department that deals with unemployment compensation and won a ruling at that level that he had actually been utilized as an employee causing GD to become responsible for some unemployment compensation related costs. Having succeeded with the state, he went to the IRS, who rules on whether or not a company (or a Government agency) can rightfully claim that an agreement (like our purchase order) results in a bona fide independent contractor or an employer-employee relationship. This is important to the individual because as an independent contractor, the individual is responsible for self-employed Social Security and Medicare rates vs. the lower employee rates (and the employer is responsible for the rest). There is also a tie-in to retirement plans and other benefits as well. Betts won the first level ruling with IRS also. Based upon advice of attorneys (Justice Dept. I think) USGS is apparently not going to contest the state decision, but is contesting the IRS decision. I understand that one of the courses of action that USGS may have to take in this case may be to offer Betts a job with back pay and benefits. As a result of this case and working with the attorneys CR GD issued the following to their staff regarding dealing with services contracts and contractor's employees: "GD Contract Practices (Including via purchase orders) This list is not exclusive but is meant as a minimum GENERAL … All USGS and Contract personnel will be treated with dignity and their work valued OFFICE ENVIRONMENT AND VEHICLES The office space of Contract and USGS personnel should be clearly labeled (Name, USGS or company affiliation on office or cubicle space). Contract personnel should be listed separately from USGS employees on telephone lists, rosters, etc. … Contract personnel should not receive "all-employee" email or other communications intended for USGS employees (unless it relates directly to the work the contractor is doing for the USGS). They should not have access to internal USGS web pages (unless it relates directly to the work the contract employee is doing for the USGS). … Contract personnel may use USGS email systems when it relates directly to the work the contractor is doing for the USGS -- the email addresses of contractor must include a label associated with their USGS email address that identifies their contractor status ("Linda Webb--Contractor" would be the label associated with the email address lwebb@usgs.gov). Doing so clearly identifies this individual each time they send an email message using the USGS system, and it identifies their status as a contractor in the email directory. … Unless stipulated in the contract, contract personnel should not drive USGS vehicles. SUPERVISION, SCHEDULING … Contract for a product not a personal service. Identify requirements, specifications, time and guidelines to be observed, working restrictions, and resources to be supplied by the USGS in the contract. If alterations are in order, work through the company supervisor to make changes -not the contractor employee. … Unless stipulated in the contract, USGS staff should not set hours for contract personnel, nor can they specify where the work should be done. … Contractor personnel should report leave, scheduling and other such issues to the contractor's supervisory staff, not to USGS employees (the on-site representative of the contractor should then communicate with the USGS staff). … USGS employees cannot directly supervise contract personnel on a day-to-day basis. Work should be given to the contract personnel (via company supervisor) on a "task basis" and they should work without USGS supervision to accomplish each task. USGS personnel should judge the quantity, quality, and timeliness of the product, based on criteria set out in the contract and task order. … Contract personnel cannot serve as field assistants, because it is impossible in the field to avoid direct supervision by USGS staff. REPRESENTATION AND COMMUNICATION … Contract personnel cannot in any way represent themselves to the public as USGS employees. … Contract personnel should wear visible identification at all --CR GD USGS and contract employees will all wear name tags. OTHER ISSUES … Contract personnel should not list a USGS affiliation on publications (list the contract under which the work was performed) … Contract personnel should not be invited to official USGS "social" events--however, official USGS social events are rare to absent thus this may not be an issue. Social events should not be identified as a "USGS event" even though some may take place in government buildings (brief celebrations of birthdays, etc.). … Contract personnel are not authorized to purchase property and supplies with government funds. PENALTIES: USGS employees should be aware that they might be personally liable for any costs incurred by the establishment of an improper working relationship with a contract employee. II. COMMON LAW TEST Questions the federal government (IRS) uses to determine the degree of control you have over the individual. Whether or not you actually exercise that control does not matter, it is the right to control that determines employment status. (i.e. whether or not the individual(s) are contractors or whether they are being utilized as employees.) The use of the term 'company' below includes the Government when the issue relates to contracts the Government issues. Most of the IRS decisions on this issue involve commercial companies contracting with individuals as self-employed consultants to try and avoid "employer" portions of various taxes or to avoid providing 'pension' contributions, etc. The cumulative effect of answers to these questions is used in making a determination. 1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done? 2. Does the individual receive training from your company? 3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual? 4. Must the individual personally perform the contracted service? 5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract? 6. Is there a continuing relationship between your company and the individual? 7. Must the individual work set hours? 8. Is the individual required to work full time at your company? 9. Is the work performed on company premises? 10. Is the individual required to follow a set sequence or routine in the performance of his work? 11. Must the individual give you reports regarding his work? 12. Is the individual paid by the hour, week, or month? 13. Do you reimburse the individual for business/travel expenses? 14. Do you supply the individual with needed tools or materials? 15. Have you made a significant investment in the facilities used by the individual to perform the services? 16. Is the individual free from suffering a loss or realizing a profit based on his work? 17. Does the individual only perform services for your company? 18. Does the individual limit the availability of his services to the general public? 19. Do you have the right to discharge the individual? 20. May the individual terminate his services at any time?