Employee vs. Independent Contractor: How to Tell the Difference

The proper classification of individuals as employees or independent contractors is important to UNL because errors can lead to severe penalties.

The primary difference between an employee and an independent contractor is the level of control asserted by the University. If the University has the right to direct and control the work, the individual is an employee.

Facts that provide evidence for this determination fall into the following three categories: Behavioral Control, Financial Control and Type of Relationship. It is very important to consider all the facts as no single fact determines independent contractor status.

An Independent Contractor Check List, which is available on SAPPHIRE, is available to help you classify these individuals. While the Check List is intended to be the primary decision-making tool, the following background information will help you understand the regulations regarding employee vs. independent contractor classification.

Behavioral Control

The key consideration is whether the University has the right to direct and control how the individual performs his or her duties including:

  • When and where to do the work
  • What tools or equipment to use
  • What workers to hire to assist with the work
  • Type of work to be performed by each worker
  • What order or sequences to follow
  • Providing extensive training or instructions for the work to be done

The key difference for behavioral control is whether the University has retained the right to control the details of the worker’s performance or instead has given up that right.

Financial Control

Facts that show if the University has a right to direct or control the business aspects of the workers performance:

  • Extent of Investment: An independent contractor often has a significant investment in the facilities and tools they use in their performance of work for others. However, a significant investment is not necessary for independent contractor status.
  • Business expenses: Independent contractors are more likely to incur expenses related to the service performed that are not reimbursed by the University than are expenses incurred by employees. Fixed ongoing costs that are incurred by the contractor regardless if any work is being performed are especially important in determining status. However, employees may also incur expenses in connection with the services being performed that are not reimbursed.
  • Availability: An independent contractor is generally free to seek business in the open market. They often advertise, maintain a business location and are available to work for the public.
  • Payment: An employee is generally guaranteed a regular wage amount for hourly, weekly or monthly periods of time, which usually is an indicator that a worker is an employee even though commissions may supplement their pay. An independent contractor is usually paid by a flat fee for a certain job, but can be paid on an hourly basis in some situations such as for attorneys and accountants.
  • Profit or loss: An independent contractor realizes a profit or a loss while an employee does not.

Type of Relationship

Facts that show the type of relationship are:

  • Contracts: Written contracts that describe the relationships intent. This is very significant if the relationship is difficult to determine.
  • Benefits: If the worker is paid benefits such as insurance, pension or paid leave by the University this is an indication this person is an employee. If they do not receive benefits this does not mean they cannot be classified as an employee.
  • Permanency of relationship: If a worker is engaged by the University with the expectations the relationship will continue indefinitely, rather than for a specific project or period, this is generally evidence of intent to create an employer-employee relationship.
  • Daily Business Activities: If the worker provides services that relate to the daily business activity, then the University will be more likely to have the right to direct and control and would indicate an employer-employee relationship.

International Considerations

Non-U.S. citizens performing work outside the U.S. must be contracted as independent contractors and cannot be hired as employees. The criteria for qualifying as an independent contractor vary from country to country, but generally relate to the contractor's right to direct and control the work. Common indicators of a contractor include:

  • Controls how, when, and where the work is done
  • Performs similar work for other clients (also as a contractor)
  • Uses own office, other facilities, and equipment
  • Pays own business expenses
  • Pay based solely on services rendered (e.g., no vacation pay)
  • There is a defined project or contract end date

For questions regarding independent contractors, please contact Accounts Payable at ap@unl.edu.

For questions regarding employees, please contact Payroll at payroll@unl.edu.