University Procurement and Logistics

76.1   Purpose

76.2   Determining Employment Status and/or Classification
      76.2.1   IRS Guidelines
      76.2.2   Employee
      76.2.3   Independent Contractor
      76.2.4   Present and Former University Employees
76.3   Service Agreement for Independent Contractors
       76.3.1   Purpose
       76.3.2   Restrictions
       76.3.3   Preparation, Processing, and Routing
       76.3.4   Invoice Routing
       76.3.5   PCard
76.4   Definitions
76.5   Forms

76.1   PURPOSE

This policy provides the criteria that define independent contractors (IC) and the required procedures to correctly classify and pay U.S. citizens and resident aliens for services that cannot be provided adequately by regular or temporary employees within the university. This policy does not apply to services provided by nonresident aliens, which are processed under a different policy—see Manual of Business Procedures Section 77.

The status of a worker lies along a continuum between independent contractor and employee, and it is important to classify them correctly.

Both the university and the individual could be subject to liability including penalties and substantial tax issues for misclassifying employees as independent contractors and failing to file required tax forms. Under no circumstances should a services contract be used to circumvent university employment procedures or to perform a service that could be accomplished by available personnel within the university.

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76.2   DETERMINING EMPLOYMENT STATUS AND/OR CLASSIFICATION

Michigan State University (MSU) must comply with the law, including Internal Revenue Service (IRS) regulations and the Fair Labor Standards Act, in its role as an employer. Failure to do so can result in assessment of taxes, penalties, and interest. One university responsibility in this regard is the accurate categorization of workers as either employees or independent contractors, with the corresponding tax withholding and reporting functions inherent in each category of worker.

Categorizing a worker as an independent contractor exposes the university to the greatest amount of risk in this regard, since the law in this area generally presumes that all individuals who provide a service are employees unless there is documented evidence to support classifying the individual as an independent contractor. For example, the IRS examines the facts and circumstances of each situation and analyzes characteristics, such as behavioral control, financial control, and the relationship between the contracting entity and the individual performing services. The U.S. Department of Labor (DOL) examines whether the individual performing services is economically dependent on the contracting entity, based on a multi-factor test.

 A. United States federal and state law requires the university to properly classify its workers as either employees or independent contractors. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: Behavioral Control, Financial Control, and the Relationship of the Parties. See IRS - Payment to Independent Contractors.

1. Behavioral Control - whether the university has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.
   a. Is the worker receiving instruction and training regarding how the work is to be done rather than relying on the worker’s expertise?
   b. Does the university set the number of hours and/or days of the week the worker is required to work?   
2. Financial Control - whether the university has a right to direct or control the financial and business aspects of the work.
   a. Are the business aspects of the worker’s job controlled by the business owner? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, facilities).
   b. Does the worker make his or her services available to the general public?
   c. Can the worker realize a profit or incur a loss?
   d. Is the worker’s investment in the work greater than the business owner’s?
3. Relationship of the Parties - how the business and the worker perceive their relationship.
   a. Will the worker receive benefits which are traditionally deemed employment benefits, such as pension plan, insurance, or vacation pay?
   b. Will the relationship continue and is the work performed a key aspect of the business?
   c. Has the worker been employed by the university previously?

A. Every individual performing services for the university and compensated by the university is presumed to be an employee unless they can meet the criteria of independent contractor status. Generally, every individual who performs services that are subject to the will and control of the university as to both what must be done and how it must be done is an employee. It does not matter that the university allows the employee considerable discretion and freedom of action, as long as the university has the legal right to control both the method and the result of the services. Similarly, where the university has the financial control in the relationship, the presumption is that the individual is an employee—not an independent contractor.

B. University policy requires that the following workers be compensated as employees on university payroll:

1. Anyone teaching a for credit course offered by the university.
2. Anyone currently employed by the university who performs additional services outside of their regular job description, in most cases. Contact Procurement for guidance at (517) 355-0357.
3. Anyone previously employed by the university and performing the same/related services to the services they provided as an employee.
4. Anyone currently enrolled as a university student.

 C. The status of any worker not falling into one of the above categories must be evaluated based on the rules for distinguishing between employees and independent contractors. The Independent Contractor form has been designed to assist in this evaluation.

      76.2.3   Independent Contractor:

A. An individual is an independent contractor if the university has the legal right to control or direct only the end product of the work and not the means and methods of accomplishing the result. Generally, independent contractors identify themselves as self-employed and make their services available to the public.

B. Examples of individuals who might meet the criteria for IC status include:

1. Individuals providing unique professional services, such as short-term consulting engagements, and others who routinely provide services within an area of expertise to the public for a fee. 
2. Educational advisory services, researchers.
3. Freelance writing, photography, editing, and interpreting.
4. Guest speakers, lecturers, or performers (see Manual of Business Procedures Section 71, Honoraria, Speaker Fee and Performer Payments for processing instructions).

C. When the status of a worker cannot be determined from the above guidelines, contact Procurement at (517) 355-0357 for guidance prior to the services being performed.

      76.2.4   Present and Former University Employees:

A. The initial responsibility for determining the classification lies with the department obtaining the contractual services. The department should first verify that the individual is not or has not been employed by the university.

B. Present and former university employees performing the same work for the university will rarely meet legal criteria for independent contractors and should usually be paid as employees. According to IRS and DOL guidelines, a continuing relationship is one indication of an employee-employer relationship. In addition, any employment of present and former university employees as independent contractors should be evaluated carefully for other indications of employee status.

C. The law narrowly prescribes the circumstances in which retired/former employees qualify to perform services as an independent contractor. Retired/former employees performing essentially the same/similar services as when they were employed constitute what would be viewed as a continuing relationship. These individuals should be classified as employees and paid by Payroll. 

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76.3   SERVICE AGREEMENT FOR INDEPENDENT CONTRACTORS

      76.3.1  Purpose:

A. The Service Agreement for Independent Contractors (IC Service Agreement) is the legal document that MSU Procurement uses to formalize and document the relationship between an independent contractor and the university. It is intended for use with U.S. citizens or resident aliens (copy of Green card is required) and where the contract value is greater than or equal to $2,500.

B. It is used for unique, professional, or technical services that are predominantly intellectual in nature, require specialized knowledge, and are part of a specific project—not ongoing.

C. MSU Procurement requires use of the IC Service Agreement and does not permit the use of an alternative agreement (i.e., a vendor-proposed agreement) without written approval. Procurement does not validate the independent contractor status, as the department closest to the work duties is in the best position to determine if the IRS criteria are met.

D. Departments are required to attach all documentation regarding the reasonableness of the cost of the service obtained and the selection process utilized to choose the IC to the KFS requisition eDoc.

A. The IC Service Agreement is not to be used for any campus-related alterations, repair services, lab testing services, renovations, construction of facilities, or services involving labor in general.

B. The IC Service Agreement is not to be used for the procurement of printed materials, other products or supplies, but is intended for use with contracted services only.

C. The IC Service Agreement is not to be used for “routine” services such as scientific testing, marketing, graphic design, etc.; departments can complete a requisition and attach the quote/proposal and any additional information. 

D. The IC Service Agreement is not to be used for web design or IT consulting services. These services may require additional data/security reviews.

E. The IC Service Agreement is not to be used for subscription services or license fees.

F. The IC Service Agreement is not to be used for transactions greater than $25,000. Agreements that are over this amount should be processed using a competitive bid basis through Procurement's Request for Proposal process.

A. The IC Form must be completed by the initiating department. The department should retain a copy of the completed IC Form for its files. The completed IC Form is to be attached to the requisition in the Notes and Attachments tab.

B. The IC Form and IC Service Agreement are not intended for use as an “after-the-fact” means of paying suppliers. All documentation is to be completed in advance of bringing an independent contractor on board to perform specific services. Services that are started prior to having a PO in place are considered “unauthorized,” and require a letter of acknowledgement stating the reason for the late submittal. See Manual of Business Procedures Section 270.4.4.

C. All sections of the IC form must be completed.

1. Page 1 of the IC form includes general information about the independent contractor and its business reporting status, if applicable.
2. Page 2 of the IC form provides assistance with determining the reasonableness of a worker's classification as an IC (the default worker classification is as an employee). This page should be filled out (with input from the IC if necessary) and signed by the initiating department. If a number of boxes on page 3 are marked as “true”, or you are unsure about whether the factors indicate an IC relationship, contact MSU Procurement to obtain assistance in determining the contractor’s status. If most of the boxes are marked as “true,” the worker should be hired as an employee and paid through the university payroll system, based on the IRS common law rules for determining worker classification either as an employee or as a contractor. Note that a summary of the overall test for: (1) the IRS is whether the employer controls the manner and results of work and (2) the DOL is whether the employer controls the financial relationship with the worker. Consideration of both tests is necessary.
3. Page 3 of the IC form provides a Statement of Work (SOW) template that should be filled out by the initiating department. The SOW is the document that will be attached to the IC Agreement created by MSU Procurement. The SOW is intended to define the purpose of the project and align the expectations of MSU and the independent contractor. The SOW should outline the goals, purpose, guidelines, deliverables, time requirements, and costs for the project. Each highlighted area of the SOW provides guidance to the department on what is expected.

D. All transactions equal to or greater than $25,000 must be competitively bid or accompanied by a written single/sole source justification, prepared by the initiating department and attached to the requisition.

      76.3.4   Invoice Routing:

A. Invoices are required for all purchase orders and are to include a full description and dates of the services rendered, the PO number referenced, and a remit to address. All invoices are to be sent to Michigan State University, Accounts Payable, 166 Service Rd, Room 103, East Lansing, MI 48824. Accounts Payable accepts invoices from both MSU departments and suppliers electronically (see Accounts Payable email instructions). Instructing contractors to submit invoices directly to the department will result in a delay in payment.

      76.3.5   PCard:

A. A PCard may also be used to for a limited number of services, up to $9,950. Please see the PCard Manual for details. 

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76.4   DEFINITIONS

A. Conflict of Interest (COI): The university defines a conflict of interest utilizing the same definition as the State of Michigan which is available on the Michigan Legislature website. A Board of Trustees approval process exists which, when completed and approval is obtained, enables employee-owned companies to do business with the university. A conflict of interest can also exist if a supplier is related to an MSU employee and the situation results in potential and/or perceived financial gain for the employee or a situation in which an employee can influence the supplier relationship.

B. Contractor/Supplier Agreements: If the contractor or supplier provides their own agreement, end users are not to sign these agreements. External agreements and contracts of this nature are to be forwarded to Procurement for review, consultation and signature. Following initial review, Procurement will advise the department on the best course of action for the purchase. Procurement will assist with obtaining review by legal counsel, risk management, and other service providers, as appropriate.

C. Employee: Every individual performing services for and compensated by the university is presumed to be an employee unless she/he meets the criteria of independent contractor status. All employees are compensated through MSU’s payroll process.

D. Employee-Employer Relationship: An employee-employer relationship exists when an employer has the right to direct and control the work of an individual who performs the services, including not only the results to be accomplished but also the methods and means by which the results are accomplished. An employee-employer relationship exists even if the employer does not exercise the right to direct or control the way the worker performs the services.

E. Independent Contractor (IC): An individual who performs services, but by meeting certain criteria, is not classified as an employee. The criteria are set forth in this manual. For this manual, the term “independent contractor" refers to individuals who are US citizens or resident aliens. An independent contractor contracts with the university to provide services for which the university controls or directs the result, not the means and methods of accomplishing the result. As a rule, independent contractors should have the opportunity to experience a profit or loss, deliver the same type of service to multiple organizations, and be responsible for payment of their own business expenses (including general liability insurance).

F.  Independent Contractor form (IC form): This is a form that assists in defining the relationship between a potential contractor and the university and whether the individual should be an employee or an independent contractor. The IC form documents the approvals necessary to engage an independent contractor at MSU. The IC form also contains a template State of Work that will outline the goals, purpose, guidelines, deliverables, time requirements, and costs for the project. The completed, signed form is to be submitted as an attachment to the requisition eDoc. A buyer will then begin the process the purchase order. The IC form is required for independent contractor services greater than $2,500 and less than $25,000, excluding honorarium, speaker and performer payments. See Manual of Business Procedures Section 71, Honoraria, Speaker Fee, and Performer Payments. 

G. Non-Resident Alien: This is a foreign individual who is not a U.S. citizen or resident alien. When engaging a non-resident alien to provide services, see Manual of Business Procedures Section 77, Nonresident Alien (NRA) Independent Contractors and NRA Recipients of Honorarium, Rents, Royalties, and Awards for further information on how to contract with and process payments to these individuals.

H. Purchase Order (PO): A completed purchase order accompanies the IC Service Agreement as part of the final contract. The independent contractor is required to reference the purchase order on all invoices, or payment may be delayed. The independent contractor may not begin work until a purchase order has been issued.

I. Resident Alien: This is a foreign individual who is a permanent resident of the U.S. but does not have U.S. citizenship and holds a valid Green Card.

J. Service Agreement for Independent Contractors (IC Service Agreement): The IC Service Agreement is the formal, legal agreement between the university and the independent contractor, and contains language required by federal and state laws and regulations and by university policy.

76.5   FORMS

A. Independent Contractor form

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