Engaging and Paying Independent Contractors/Consultants on Sponsored Projects

Faculty members and departments frequently engage individuals as independent contractors/consultants to provide services for a variety of University programs. In doing so, they must closely follow the federal and University policies and procedures for engaging and paying or reimbursing such persons, whether from sponsored or nonsponsored accounts. The Internal Revenue Service (IRS) is increasing the audit of independent contractor payments, and both the University and the individual are subject to substantial financial penalty for failure to comply with federal regulations.

For the purposes of this policy, the terms "independent contractor" and "consultant" are synonymous.

Distinguishing between an Employee and an Independent Contractor

The first step in complying with the policies and procedures is to determine whether the individual should be classified as an employee or an independent contractor. The distinction between employee and independent contractor is important for purposes of withholding income taxes, providing employee benefits, and complying with other legal requirements. University employees receive payment for services through the payroll system; income taxes are withheld and benefits are earned on those payments. Independent contractors receive payment for services through the accounts payable system; such payment is not characterized as payroll, and no taxes are withheld nor are benefits received.

Twenty characteristics, sometimes referred to as the common law classification factors, help differentiate between an employee and an independent contractor. The complete list of classification factors can be found at www.northwestern.edu/finsys/payment/contrt.pdf. The Department of Human Resources Compensation Division provides assistance in evaluating individual situations.

An individual is classified as a Northwestern employee if he/she is dependent on the University for income on a continuing basis and is supervised and controlled by a University faculty and/or staff member. In the case where an individual provides service after he/she has left Northwestern employment, but has been paid on the University payroll within the previous twelve months, the individual must be paid through the payroll system.

Payment to a University employee for internal consulting services, which are beyond the contracted scope and salary of his/her regular appointment, is allowable only in unusual cases and only when all of the following conditions exist:

• When the consultation pertains to a sponsored project, such work is specifically provided for in the award document or approved in writing by the sponsor.
• The consultation is performed for a department different than the individual's primary department or involves a separate or remote location.
• The work performed is beyond the scope of the individual's regular departmental responsibilities and is allowable under the terms of his/her regular appointment.
• The rate of pay is consistent with the employee's current position, unless the services performed are significantly different from services performed in the employee's current position. If this is the case, the Compensation Division must be consulted, prior to agreement with the individual for the consulting work, to determine an appropriate rate of pay based on pay grades and rates applicable to University employees doing similar work.

An individual is classified as an independent contractor or consultant if he/she performs the required task or tasks according to the contractor's own manner and method. An independent contractor's activities are not controlled or directed by the University, or by a Northwestern affiliate. If the individual's activities are controlled by Northwestern Memorial Hospital or Northwestern Medical Faculty Foundation, then a subcontract must be initiated between the University and the appropriate organization.

It is important to remember that students may not serve as University independent contractors or consultants.

Speaker Fees

Speaker fees are one form of payment to independent contractors. These fees are not normally allowable on sponsored projects, with the exception that they may be allowable on conference grants, training grants or where specifically included in an approved budget. When appropriate to the nature of the project, the speaker's presentation should relate specifically to the sponsored project and only individuals involved in the project should attend.

Two documents must be produced for payment of these fees: (1) the contracted services form (CSF), and (2) a flyer or brochure listing the date and topic of the speech along with the name of the sponsor funding the project and award title.

Fees for departmental seminar speakers and honorarium payments are not allowable charges on sponsored projects under any circumstances.

Procedures for Paying Independent Contractors on Sponsored Projects

When a sponsored project is to be charged for an independent contractor's fees, the prospective user must be certain that any requirements applicable to the grant or award have been met prior to entering into a contracted services agreement.

The following procedures are essential for initiating payment for contracted services:

1. The independent contractor must complete the CSF, which is available online at
   www.northwestern.edu/finsys/payment /us-csf.pdf.
2. The principal investigator must sign and date the CSF acknowledging his/her approval of the work completed.
3. The department creates a purchase order (PD) on CUFS with these requirements:
• PD is set up as "receiver not required,"
• Object code 5010, or 5011 if applicable is used, and
• "Grant Consult" commodity code is used.
4. For out-of-pocket expenses, the independent contractor must submit a Travel Expense Report using object codes 6765 or 5015/5016 and commodity code "Grant T & E."
5. The forms must be processed within 90 days of service.
6. The department should review the electronic approvals and ensure that all the appropriate approvals are applied before sending the original CSF and detailed invoice for approval to Accounting Services for Research and Sponsored Programs (ASRSP). Sufficient description of services should be provided on the CSF and invoice.

The executive director of the Office of Sponsored Research (OSR) provides the final approval for contracted service fees charged to sponsored projects. The paperwork is then forwarded to Accounts Payable for payment.

The complete policy is available at www.northwestern.edu/finsys/payment/paypeop.htm. Questions regarding this policy for sponsored projects should be directed to Jany Raskina in ASRSP at 847/491 4697.