Employee or Independent Contractor

Properly classifying employees is a critical aspect of any business. It ensures that employers comply with state and federal laws and regulations, and it also protects employees' rights and benefits. Misclassifying employees can result in significant legal and financial consequences, including penalties and fines, back wages and benefits owed, and potential legal action by employees. Therefore, it is essential for employers to understand how to classify employees correctly.

Classification of Employees

Employee or Independent Contractor: It’s a very important distinction.

There are two primary classifications of employees: exempt and non-exempt. Exempt employees are exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) and are typically referred to as salaried employees. Non-exempt employees, on the other hand, are eligible for overtime pay and are typically your hourly employees.

Within these two classifications, there are several subcategories of employees, including full-time and part-time employees, temporary and permanent employees, and independent contractors. Each classification has different implications for employers, and it is essential to understand the criteria for determining an employee's classification.

Criteria for Determining an Employee's Classification

The primary criteria for determining an employee's classification are job duties and salary. Exempt employees are typically salaried and perform executive, administrative, or professional duties, while non-exempt employees are typically hourly and perform non-exempt work.

Job Duties

Job duties are the most significant factor in determining an employee's classification. The Department of Labor (DOL) uses the "duties test" to determine whether an employee's job duties qualify them for exemption from overtime pay. The duties test evaluates an employee's primary job duties and responsibilities to determine whether they meet the requirements for one of the the FLSA exemptions.

Executive Exemption: To qualify for the executive exemption, an employee must have a primary duty of managing the enterprise or a department or subdivision of the enterprise. The employee must also regularly direct the work of two or more other employees and have the authority to hire or fire employees or make recommendations that carry weight in employment decisions.

Administrative Exemption: To qualify for the administrative exemption, an employee must have a primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer's customers. The employee must also exercise discretion and independent judgment with respect to matters of significance.

Professional Exemption: To qualify for the professional exemption, an employee must have a primary duty of performing work that requires advanced knowledge in a field of science or learning, which is customarily acquired by a prolonged course of specialized intellectual instruction.

Salary

In addition to job duties, an employee's salary is also a significant factor in determining their classification. To be exempt from overtime pay, employees must meet certain minimum salary requirements set by the FLSA. The minimum salary threshold for exempt employees is $35,568 per year, or $684 per week, as of 2022. However, this amount may vary based on state or local laws.

Non-exempt employees are not subject to a minimum salary requirement and are eligible for overtime pay for all hours worked over 40 per week. Overtime pay must be calculated at a rate of one and a half times the employee's regular rate of pay for every hour worked over 40 in any given week.

Consequences of Misclassification

Misclassifying employees can result in significant legal and financial consequences for employers. The consequences can include:

Wage and Hour Violations: Misclassified employees may be entitled to back pay for overtime and other benefits, which can result in significant financial liability for employers.

Tax Liabilities: Employers are responsible for paying payroll taxes for their employees. Misclassifying employees as independent contractors can result in tax liabilities for employers.

Legal Action: Misclassified employees may file legal action against employers for back wages and other damages.

Government Audits and Penalties: Employers may be subject to government

Do you need assistance conducting an employee classification audit for your company? If so, it may be time for us to talk. Let's chat!