“Employee” definition for PSLF & Independent Contractors: Department of Education vs IRS?

It seems like we have been receiving lots of comments about the definition of “employee” for PSLF purposes. Some commenters have argued that the IRS definition of employee should control, so let’s parse through the comments.

From Joshua R.I. Cohen (The Student Loan Lawyer) on July 17, 2018 (http://www.holdfasttodreams.org/the-evolving-pslf-employment-certification-form-independent-contractors/#comments):

Independent contractors do not qualify. The non-profit that pays you as an independent contractor is not your employer, they are your client. You are not employed by them. You are a 1099 contractor, not a W-2 employee. Perhaps you should review the IRS code. I think many folks will be disappointed to learn they don’t qualify when they apply for PSLF.

From Joshua R.I. Cohen (The Student Loan Lawyer) on July 17, 2018 (http://www.holdfasttodreams.org/busting-myths-pslf-and-independent-contractors):

Id’ love to talk to your “student loan lawyer” because I think they have it completely wrong. If you are a private contractor, you are the employer. The non-profit you contract with isn’t your employer – they are a client. You are a vendor – not an employee. I think you’re gonna have a lot of disappointed folks with the information you are providing.
Joshua Cohen – The Student Loan Lawyer

Also, I don’t see the quote you mention on page 5. Perhaps the newly revised form removed the language (and your argument).

Our student loan attorney (who also happens to hold a Masters of Law in Taxation) responded:

It’s strange that Mr. Cohen, a lawyer, would call the paying nonprofit a “client” of the independent contractor. Perhaps it’s because in Mr. Cohen’s setting as a lawyer, there is an attorney-client relationship, where the client pays the lawyer (and the lawyer can be an independent contractor). The term “client” is not used, nor defined under PSLF. As for Mr. Cohen’s claim that a private contractor is an “employer” and “vendor,” then it must follow that he is also claiming the nonprofit is the employee (must be false). And again his term “vendor” is not used, nor defined under PSLF.

*Hold Fast to Dreams wants to quickly note that the quote from page 5 (and its evolution) can be found here: http://www.holdfasttodreams.org/the-evolving-pslf-employment-certification-form-independent-contractors

Although the Employment Certification Forms (ECF) keeps updating, student borrowers aren’t just confined to relying upon the most recent ECF. The older ECF definitions will serve as a legal basis for reliance, just as in the ABA cases against the Department of Education.

Mr. Cohen also mistakenly refers to the IRS code for the legal definition of “employee,” suggesting that the “IRS code” should be reviewed for PSLF purposes. Referring to the “IRS code” for PSLF purposes is incorrect. Instead, the PSLF legal definition of employee should be used. As he should know, the term “employee” is defined in various ways under US law. There’s a legal grab bag of “employee” definitions under federal and state law, from the Fair Labor Standards Act, each state’s Workers’ Compensation statutes, National Labor Relations act, etc., but they should NOT and do NOT apply to PSLF because they are not the PSLF law.

But for argument’s sake, Mr. Cohen’s suggestion to look at the “IRS code” (probably means Internal Revenue Code (IRC)) is incorrect as well. First of all, since a directive from Congress in 1978, the IRS has prohibited the IRS from issuing any regulations or revenue rulings to clarify the worker classification issue. See § 530, Revenue Act of 1978, (P.L. 95-600), as amended by P.L. 96-167, P.L. 96-541, P.L. 97-248 and P.L. 99-514. Currently, the IRS resolves worker classification issues by reference to:

  1. Certain statutory rules classifying workers as independent contractors or employees;
  2. The twenty common law factors;
  3. The safe harbor provisions of § 530 of the Revenue Act of 1978;
  4. Mitigation provisions under IRC § 3509;
  5. Relief from payment of income tax pursuant to IRC §3402(d);
  6. Classification Settlement Program.

Many people incorrectly focus on the IRS categorization of employee and independent contractor for PSLF, perhaps because it’s the most popular definition, the one people are most familiar with. The IRS wins the popularity contest on that one.

Now back to PSLF. PSLF law has its own definition of employee and PSLF does not rely upon “IRS code.” Instead, Congress created the PSLF definition of “employee”: “Employee or employed means an individual who is hired and paid by a public service organization” (see 34 CFR 685.219 – Public Service Loan Forgiveness Program; https://www.law.cornell.edu/cfr/text/34/685.219).

Further, the most recent PSLF ECF (Exp. Date 05/31/2020) section from page 5 of the ECF clarifies the term “employee”:

“EMPLOYMENT ELIGIBILITY. To qualify for PSLF, you must be an employee of a qualifying employer. An employee is someone who is hired and paid by the employer. You may physically perform your work at a qualifying or non-qualifying organization, as long as you are an employee of a qualifying employer. If you are working at the location of or with an organization under contract with your employer, the organization that hired and pays you must be a qualifying employer, not the organization where you perform your work.”

So the key to the definition of “employee” for PSLF purposes is whether who hired and paid you is a qualifying public service organization (under PSLF law), not whether you’re getting a 1099/W-2 (under the Internal Revenue Code). Look under the appropriate law, and you’ll find the appropriate definition.

On the other hand, the Department of Education has drawn the line where the contractor does not qualify. In the Final Regulations of PSLF, the Department of Education mentioned: “Several commenters recommended that contract employees who serve organizations that are tax exempt under section 501(c)(3) of the Internal Revenue Code should be considered as employees of a public service organization.” The Department of Education responded: “Contract workers at these institutions who are not paid by the institution, but are paid by a for-profit company contracted to provide certain services to the institution would not be covered.” Therefore again, we see the importance of who hires and pays you. The key to the definition of “employee” for PSLF purposes is whether who hired and paid you is a qualifying public service organization (under PSLF law).

That line can also be seen from the Department of Education website section about qualifying employment (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service#full-time-employment):

“Government contractors: For-profit government contractors are not qualifying employers. You must be directly employed by a qualifying employer for your employment to count toward PSLF. If you are employed by an organization that is doing work under a contract with a government agency or other organization, then it is your employer’s status, not the status of the organization that your employer has a contract with, that determines whether your employment qualifies for PSLF.”

Ultimately, readers and student loan borrowers should consult with FedLoan Servicing and the Department of Education for their individual cases.

From Hold Fast to Dreams:

So there you have it! Readers of this blog should understand that their individual situation may vary and they should ultimately consult with FedLoan Servicing and the Department of Education to determine whether their employment qualifies for PSLF. Lawyers can be wrong, or maybe they can be right according to the court. It’s tough to call something right/wrong, especially in such a new law like PSLF, where there has not been too much litigation. But one of the best ways to fit within PSLF is to just simply fit under the PSLF legal definitions as squarely as possible. Please consult with FedLoan Servicing or the Department of Education for further information for your individual situation.

Thank you Mr. Cohen for bringing this discussion and please let us know any further thoughts.

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  • Joshua R.I. Cohen

    I still disagree. Who is your employer when you’re a contractor? Who do you list as your employer? The 501c3 that contracted you? Or your company that has a contract with the 501c3.

    • http://www.holdfasttodreams.org askhftd

      From our student loan attorney:

      “According to the PSLF law, “[e]mployee or employed means an individual who is hired and paid by a public service organization” (see 34 CFR 685.219 – Public Service Loan Forgiveness Program; https://www.law.cornell.edu/cfr/text/34/685.219). If a 501c3 or other public service organization hires and pays the individual independent contractor, then the 501c3 or other public service organization is the qualifying employer.

      Another key word in the above quoted law is “individual.” PSLF law specifically states an “individual” there and here: “The Public Service Loan Forgiveness Program is intended to encourage individuals to enter and continue in full-time public service employment by forgiving the remaining balance of their Direct loans after they satisfy the public service and loan payment requirements of this section.” Therefore, a contract between a qualifying employer and an individual independent contractor should qualify for PSLF.

      What would not work is the following (from the Final Regulations): “Contract workers at these institutions who are not paid by the institution, but are paid by a for-profit company contracted to provide certain services to the institution would not be covered.” And this clarifies the issue further: “Government contractors: For-profit government contractors are not qualifying employers. You must be directly employed by a qualifying employer for your employment to count toward PSLF. If you are employed by an organization that is doing work under a contract with a government agency or other organization, then it is your employer’s status, not the status of the organization that your employer has a contract with, that determines whether your employment qualifies for PSLF.”

  • Joshua R.I. Cohen

    Does your student loan lawyer have a name? Perhaps we could continue the dialogue in a more private session and come to a consensus, instead of confusing readers with our differing opinions.

    • http://www.holdfasttodreams.org askhftd

      Hold Fast to Dreams is a public organization that tries to keep the discussion on the website so that the public can benefit. Thank you for understanding!