Worker Classification/ Independent Contractor

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Brianne Hicks
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1 Worker Classification/ Independent Contractor Policy Update June 2016

2 Contents Policy Update Objective Current Policies and Proposed Updates Overview of Proposed Updates to Policies Summary of Updates for Each Policy Next Steps 2

Policy Update Objective Based on May 2014 audit, processes and controls were identified that needed improvement to ensure compliance with various federal regulations

Policy 2319, which governs how various service providers are classified and paid, is now being updated to: 1) Bring the University into compliance with DOL and IRS

3 Policy Update Objective Based on May 2014 audit, processes and controls were identified that needed improvement to ensure compliance with various federal regulations guiding the treatment of workers. Policy 2319, which governs how various service providers are classified and paid, is now being updated to: 1) Bring the University into compliance with DOL and IRS regulations 2) Bring current those policy matters that require updating The proposed changes: Help ensure compliance with federal regulations Better address different classifications of service providers and how they are paid Integrate provisions for payment to nonresident aliens into each policy 3

4 Current Policies and Proposed Updates Current 2319 Payment to Individuals for Honoraria, Consulting Fees, Lecture Fees, Human Subject Fees and Other Services Payment of Human Subject Fees Payment to Non-Resident Aliens for Honoraria, Consulting Fees, Lecture Fees, Human Subject Fees and Other Services Proposed 2319 Payment to Individuals for Human Subject Fees, Honoraria, Limited Engagements and Independent Contractor Services No changes - Policy updated August 2015 as part of Disbursements Greenphire implementation Payment for Honoraria Limited Engagement Policy Procurement, Payment and Reporting of Independent Contractors 4

5 Overview of Proposed Updates Policy Type of Service Provider/Payment Description of Proposed Updates 2319 All Types Updates name of policy and repurposes into preamble for Updates definitions of different types of service providers Eliminates provisions for how specific types of service providers are paid Human Subject No changes Policy updated August 2015 as part of Disbursements Greenphire implementation Honoraria No changes to policy Renames existing and limits to payment of honoraria Incorporates payment of honoraria to U.S. citizens and resident aliens; maintains previous provisions for honoraria paid to nonresident aliens Limited Engagement New policy to define payment (previously lecture fees ) for a narrow list of services provided by individuals on a one-time or once-per-year basis Addresses payment to U.S. citizens and nonresident aliens Independent Contractor New policy standardizes and brings into compliance the process for procuring, paying for, and reporting on services provided by independent contractors Ensures determination/classification of an individual as an independent contractor occurs prior to agreement with individual or performance of services Excludes current faculty, staff and students; former employees; tutors; and instructors as independent contractors 5

6 Policy 2319: Payment to Individuals for Human Subject Fees, Honoraria, Limited Engagements and Independent Contractor Services Updates: Updates name of policy Repurposes policy to serve as a preamble to Updates definitions Outlines responsibilities for procuring services from nonemployees and approving payment for services Eliminates provisions for payment to nonresident aliens (now addressed in policies ) References new policy numbers for types of service provider Revises language to ensure proper classification and payment of current or former employees of the University, University of Pennsylvania Health System or a subsidiary. 6

7 Policy 2319: Payment to Individuals for Human Subject Fees, Honoraria, Limited Engagements and Independent Contractor Services (continued) Current Policy 1. Section 1 It is the responsibility of the person initiating the payment request to make an initial determination as to whether an employee/employer relationship exists. The Office of the Comptroller has final authority for determining the method of payment to individuals. Revised Policy Section 1 It is the responsibility of the person initiating the payment request (hiring manager) to follow the guidance of the policies listed below for each category of payment being made to an individual. 2. Section 2 Payments to University employees for honoraria, lecture, human subject, consulting and other fees are prohibited, unless such payments adhere to Policy #2320 Extra Compensation for University Employees. Section 2 Individuals who are currently employees of the University, UPHS or a subsidiary or individuals who have been employees of the University, UPHS or a subsidiary would be compensated through the University s payroll. 7

8 Policy : Payment for Honoraria Updates: Renames policy and limits scope to payment of honoraria Clarifies honorarium and usual academic activity definitions Incorporates payment of honoraria to U.S. citizens and resident aliens; addresses tax withholding and reporting for all groups No significant changes to current practices Current Policy Title Payment to Non-resident Aliens for Honoraria, Consulting Fees, Lecture Fees, Human Subject Fees and Other Services Title Payment for Honoraria Revised Policy Definitions Honorarium is a gratuitous payment of money or other thing of value to a person for the person s participation in a usual academic activity for which no fee is legally required. An honorarium is provided as a token of appreciation for participation in an activity or event, and not as a contractual obligation for the services rendered. Usual Academic Activity means activity conducted for the benefit of the honorarium-paying institution and includes lecturing, teaching, consulting, conducting research, attending meetings, symposia or seminars, or otherwise sharing knowledge. Readings and performances are included in academic activities, so long as the activity is open without charge to the public and/or students. 8

9 Policy : Payment for Honoraria (continued) Proposed Additions 1. Section 1 Payments of honoraria to University employees or students are prohibited. 2. Section 2 Honoraria payments are made to individuals. Payments cannot be made to a business, corporation or partnership. Also, the University is not permitted to transfer the payment to another organization or individual. If the recipient wishes to transfer the payment to another organization or individual, he/she must receive the payment and then donate it. 3. Section 3 Honoraria payments are not permitted to be negotiated or contracted. This would be considered to be a contract for personal services. Please reference Policy # Procurement, Payment, and Reporting of Independent Contractors regarding rules for independent contractors. 4. Section 4 Any person may accept an honorarium payment and payment for associated incidental expenses for usual academic activity (lasting no longer than 9 days at a single institution), if the payment is made for services conducted for the benefit of the University and if the individual has not accepted such payment or expenses from more than 5 institutions or organizations in the previous 6-month period. 9

10 Policy : Payment for Honoraria (continued) 5. Section 6.a. Proposed Additions U.S. Citizen and Resident Alien The University is obligated to report to the Internal Revenue Service (IRS) on Form 1099 all U.S. citizens and resident aliens receiving cumulative remuneration greater than the annual threshold amount of $600. A W-9 and PDA-NA (Non-Affiliate) forms are required if the individual is receiving payment for the first time and not listed as a supplier in the University s Accounts Payable system or if there is a name or address change. 6. Section 6.b. Non-Residents of the U.S. (Foreign Nationals) The University will report to the Internal Revenue Service (IRS) on Form 1042-S all Non-Resident Aliens receiving cumulative remuneration. The W-8BEN and PDA-F (Foreign Non-Affiliate) forms are required if receiving payment for the first time and not listed as a supplier in Penn s Accounts Payable system or if there is a name or address change. For additional documentation needed for non-us residents, please view Honoraria Payments at the Office of the Comptroller Disbursements/Accounts Payable webpage or at 7. Section 6.c. U.S. income tax will not be withheld from payments to a citizen/permanent resident. US income tax may be withheld from payments to non-resident aliens from non-tax treaties countries and also tax exempted countries unless a properly completed IRS Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual) and the applicable statement under IRS Revenue Procedure 87-9 is submitted, along with the payment request. 10

11 Policy : Limited Engagement Updates: New policy to define payment (previously lecture fees ) for a narrow list of individuals who perform one-time or onceper-year services Waives completion of classification forms needed for independent contractors Addresses Limited Engagement payments to citizens and nonresident aliens, as well as tax considerations for nonresident aliens Current Policy 1. Lecture Fee Payment which represents compensation for services for which a discourse is given before a class or an audience. From previous version of Policy 2319 Revised Policy A Limited Engagement is a service provided by an individual who performs a one-time service, or one time per calendar year for the following service types only: Academic guest speaker, artist, presenter or special lecturer Distinguished guest speakers at University functions 11

12 Policy : Limited Engagement (continued) Proposed Additions 1. The following forms are waived for qualifying Limited Engagements: Service Provider Questionnaire, Service Provider Evaluation Worksheet, and Independent Contractor Agreement/Contract. 2. The following forms related to Limited Engagements must be completed and submitted to Accounts Payable via the proper (Procurement/Disbursement Authorization Form) PDA form For U.S. Citizens W-9 Limited Engagement Agreement for U.S. Citizens For Nonresident Aliens W-8BEN Limited Engagement for Nonresident Aliens (Foreign Nationals) Passport Stamp of Entry Certification of Foreign Source of Income (if applicable) Completed IRS Form 8233 (Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual) and the applicable statement under IRS Revenue Procedure Tax treaty benefits are not automatic. Determination of eligible treaty benefits are made by Tax and International Operations. Nonresident aliens who may be eligible to receive a tax treaty exemption will be provided with IRS Form 8233 and the applicable statement by the Tax Department. The nonresident alien must submit a signed Form 8233 to the department initiating the request for payment in order to ensure that U.S. income tax will not be withheld from the payment. (Incorporated from previous version of Policy ) 12

13 Policy : Procurement, Payment and Reporting of Independent Contractors Updates: New policy to clarify process for procuring, paying and reporting on independent contractors Standardizes and brings into compliance the process for procuring, paying for, and reporting on services provided by independent contractors Assigns responsibility for various parts of the process Ensures determination/classification of an individual as an independent contractor occurs prior to agreement with individual or performance of services Addresses procurement of independent contractors who are nonresident aliens Excludes current faculty, staff and students; former employees, tutors; and instructors from independent contractor classification 13

14 Policy : Procurement, Payment and Reporting of Independent Contractors (continued) Current Policy 1. Definition of Employee/Employer Relationship Individuals who are independent contractors, as determined by the answers to the Independent Contractor Determination and Certification form (C-12), are to be paid through Accounts Payable. From previous version of Policy Section 1: It is the responsibility of the person initiating the payment request to make an initial determination as to whether an employee/employer relationship exists. The Office of the Comptroller has final authority for determining the method of payment to individuals. Policy Revised Policy The determination that an individual is an independent contractor must be made prior to any business commitment with the individual and prior to the individual s performance of service. Policy When engaging with an individual service provider, the following policies must be adhered to: Independent service provider must complete the Service Provider Questionnaire and submit applicable documentation. The hiring manager, in concert with his or her School/Center HR director: Must understand and comply with the University guidelines in determining Independent Contractor classification Must complete the Service Provider Evaluation Form to document the determination of Independent Contractor classification 14

15 Policy : Procurement, Payment and Reporting of Independent Contractors (continued) Current Policy 3. Section 4 A university purchase order must be issued for consulting services from an external supplier. All supporting documentation, including formal agreement or contract must be forwarded to Purchasing Services for review and approval, prior to final purchase order approval by Purchasing Services. From previous version Policy Revised Policy Section 3 Upon determining the individual service provider is an independent contractor, the Business Administrator must follow University procedures for procurement of services through Purchasing Services, including ensuring that an approved purchase order has been created. Competitive bidding and achieving fair pricing is an important consideration in the negotiation of fees for service. 4. Section 4 Independent contractors who are not U.S. residents may be paid for their services and expenses depending on their Visa type. 15

16 Policy : Procurement, Payment and Reporting of Independent Contractors (continued) Exclusions Proposed Additions 1. Current University faculty, staff, and students: Any current University, UPHS or subsidiary faculty, staff or student must be treated as employees for all work regardless of the source of payment (University funds, grant) i.e., no individual may receive both W-2 and 1099 income from the University. 2. Former University employees: If a former employee is providing a service that is the same as or similar to that of the former employee or of a current employee, he or she must be paid as an employee and not as an independent contractor. 3. Tutors: Any individual working as a tutor, regardless of whether or not he or she is currently on the University payroll, must be treated as an employee. 4. Instructors: Any individual conducting workshops, classes, or seminars on University premises for any University department must be treated as an employee unless it is for a Limited Engagement as outlined in Policy Academic Coaches and Advisors: Any individual working as an academic coach or advisor must be treated as an employee. 16

17 Next Steps Review and feedback from BAB on proposed updates Deadline for comments: Wednesday, June 22 17

PROCUREMENT/DISBURSEMENT POLICIES

PROCUREMENT/DISBURSEMENT POLICIES 2301 Authority and Responsibility for Purchasing Goods and Services 2302 Commitment to Economic Inclusion Program 2303 Use of a Purchasing Card 2303.1 Use of a Purchasing