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.
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. 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, 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:
With respect to these factors, no one factor determines the nature of the relationship; in fact, in some instances, the same factor may suggest either an employee or an independent contractor 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, the worker is generally deemed an employee. With respect to the employer-employee relationship, employees are classified in many different ways.
As an initial matter, employees are deemed either “at-will” employees or “term/just cause” employees. Generally, 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. 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 (or payment for the remainder of unexpired portion of the contract term).
Full-time Employee: A full-time employee is generally hired by the employer to work a regular five-day schedule of at least 40 hours per week. 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.).
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 and/or 40 hours per week. 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.
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 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.
The Fair Labor Standards Act (FLSA) mandates that non-exempt employees be paid overtime for all hours worked in excess of 40 per workweek. The FLSA mandates that non-exempt employees be paid at a rate of one and one-half times their regular rate of pay for all hours worked in excess of 40 per workweek. 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.
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.).
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 generally 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 (www.the-dma.org/guidelines/) and the Direct Selling Association (www.dsa.org/ethics/), and the obligations that are imposed when recruiting students.
Additionally, career services professionals may want to refer students to the White Paper: “Considering an Opportunity to Work as an Independent Contractor? Top 10 Frequently Asked Questions”.
Created January 2008. Current as of June 2012.
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