Highlights
- Classifying employees correctly keeps your business compliant, but also ensures employees receive adequate compensation, benefits, and protections.
- Misclassifying employees, whether intentional or unintentional, can result in significant penalties, back wages, and legal fees.
- Resource Management INC can be your strategic HR partner, helping you navigate complex employee classification rules and maintain compliance.
Employment classification is a vital piece of the HR puzzle. Get it right and you’ll ensure legal compliance, fair compensation, and the appropriate benefits packages for your employees. Misclassifying employees, however, can expose your business to legal issues and financial penalties.
This guide delves into the different employee classifications, their legal implications, and best practices so you can make informed decisions.
Let’s get started!
What Is Employee Classification?
Employee classification refers to the multiple ways of categorizing workers based on their relationship with a company.
Accurately classifying workers is a key aspect of HR compliance, as different employment types determine employees’ eligibility for various rights and benefits, such as minimum wage, overtime pay, and workers’ compensation.
The Fair Labor Standards Act (FLSA) is a federal law that rules many aspects of employment, including work classification.
Exempt vs. Non-Exempt Employees
The main distinction within employment classification is between exempt and non-exempt employees. This classification determines if workers are eligible for overtime pay, a fundamental right under the FLSA.
To determine whether an employee should fall under an exempt or non-exempt status, employees should meet three different tests:
- Salary level test. This test evaluates whether the employee is paid at or above a minimum salary level. The FLSA sets a minimum salary threshold, which is subject to change, but states also have their own minimum salary requirements (which can be higher than the federal level).
- Salary basis test. This test examines how the employee is compensated. Generally, exempt employees must be paid on a salary basis and receive a fixed amount of compensation on a regular basis, regardless of the quantity of work performed.
- Duties test. This focuses on the actual job duties the employee performs.
Let’s take a closer look:
Exempt Employees
Exempt employees are salaried workers, typically holding executive, administrative, or professional positions, and meeting specific salary and job duty requirements. They are not eligible for overtime pay.
The FLSA recognizes several categories of exempt employees and has specific duties tests for each of them, including:
- Executive
- Administrative
- Professionals
- Outside Sales
- Computer-related
Non-Exempt Employees
Non-exempt employees are typically paid hourly and are entitled to both minimum wage and overtime pay. Overtime pay is calculated at one and one-half times the employee’s regular rate of pay for any hours worked beyond 40 in a workweek.
To ensure compliance with wage and hour laws, it’s essential to track non-exempt employees’ work hours.
It’s important to note that even salaried employees can be non-exempt if they do not meet the duties tests for any of the exempt categories.
7 Common Employment Types
Exempt vs non-exempt is not the only way of classifying employees. Here are some common types of workers based on their employment status, hours worked, and relationship with the company:
- Full-time employees
- Part-time employees
- Contract employees
- Freelancers
- Temporary employees
- On-call employees
- Volunteers
Full-Time Employees
Full-time employees work a specific number of hours per week, typically 30-40 hours. They are considered a core part of the company’s workforce and usually receive benefits like health insurance and retirement plans.
Part-Time Employees
Part-time employees work fewer hours than full-time employees, often with irregular schedules. They might be eligible for benefits or overtime pay based on company policies and local regulations.
Contract Employees
Contract employees are hired to fill a specific role on a fixed-length contract, which can be either full-time or part-time. Occasionally, companies might require contract employees to work on-site or set specific work hours for them.
Contractors are responsible for their own taxes and benefits. They can be paid a flat fee or an hourly rate.
Freelancers
Freelancers, or independent contractors, are self-employed individuals who provide services to multiple clients. Typically, companies hire them for short-term, non-recurrent projects and tasks. They have complete control over their work hours and methods, and handle their own taxes and benefits.
Temporary Employees
Temporary workers are hired for a specific period or to fill a temporary vacancy. Often employed through staffing agencies, they may receive benefits through these agencies.
On-Call Employees
On-call employees are available to work as needed. They are not guaranteed a specific number of hours.
Volunteers
Volunteers work without compensation for a charitable or non-profit organization.
Employees vs. Independent Contractors: What to Consider
The distinction between employees and independent contractors is a critical one for businesses. Misclassifying employees as independent contractors can have serious legal and financial repercussions, impacting not only tax compliance (IRS) but also wage and hour regulations, employee benefits, and other worker protections at both the Department of Labor (DOL) and state levels.
Here’s what to consider when analyzing these working relationships:
| Employee | Independent contractor | |
| Control | The employer controls how the work is performed, dictates work schedules, provides training, and supervises the worker’s activities. | The hiring entity specifies the desired outcome or deliverables, but they have autonomy over their work schedule, location, and how they complete tasks. |
| Financial control | Typically receives regular wages or a salary, often with benefits like health insurance and retirement plans. The employer withholds taxes. | Typically paid per project or upon completion of a specific task. They are responsible for their own taxes (including self-employment tax) and benefits. |
| Relationship | Often a long-term, ongoing relationship. The work performed is usually integral to the company’s core business. | Typically hired for a specific project or a defined period. The work may be outside the company’s core business operations. |
| Written agreement | May have an employment contract outlining terms of employment. | Should have a formal written contract (independent contractor agreement) that clearly defines the scope of work, payment terms, and the independent nature of the relationship. |
Best Practices for Classifying Employees
How can you ensure you are classifying your employees properly? Consider these best practices and tips:
- Understand the FLSA and state laws. Familiarize yourself with the specific regulations in your jurisdiction. Stay updated on any changes to these laws that may impact employee classification.
- Evaluate job duties and responsibilities. When classifying employees, assess the level of control, independence, and supervision involved in their role. Make sure their contract’s employee classification aligns with the nature of their work.
- Consider the compensation structure. Analyze the method of payment, whether it’s hourly or salary. The employee’s salary level and whether they receive overtime time are also relevant factors to consider.
- Document the classification decision. Keep records of the factors considered when making the classification. This could be helpful in the event of audits or legal disputes.
- Regularly review employment classifications to ensure accuracy. Consider whether any changes in an employee’s job duties, compensation, or supervision might affect their classification.
- Benefit from expert guidance. Partnering with an HR specialist can be invaluable, especially if your business operates in multiple states or within an industry subject to complex labor laws. An expert can help you navigate the myriad of employee classification rules, keep you updated on regulatory changes, and ensure your business remains compliant.
What Are the Consequences of Misclassification?
Failing to classify employees correctly can lead to severe legal and financial repercussions, including lawsuits, penalties, and tax liabilities for both your business and your employees. Misclassification can also harm your company’s reputation, undermining employee morale.
Tax violation fines – such as misclassifying employees as independent contractors – can result in substantial back tax payments, along with interest and potential legal fees. Federal law violations, on the other hand, can result in even more serious criminal charges, including up to a year of imprisonment.
Get Expert Guidance for Employee Classification
Employment classification can be complex and confusing. But with so much at stake, there’s no room for error.
At Resource Management INC we help small and mid-sized businesses navigate the ins and outs of employee classification, acting as a strategic partner for compliance, benefits, and payroll. Our compliance specialists provide HR guidance, ensuring your business always stays compliant and keeping you safe from costly mistakes.
Need assistance with employee classification? Contact us for a consultation today.