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There is quite a bit of information out there explaining how a business should go about classifying its employees. While not a simple matter, there are some basic 'rules of thumb' that can help keep your business out of trouble. Here are some of the most common questions we get from employers...
FLSA is the Fair Labor Standards Act, which was created in 1938 to ensure the basic welfare of U.S. workers. FLSA established a national minimum wage, guaranteed time plus one half for over time in certain jobs and prevents oppressive child labor. FSLA is administered and enforced by the Department of Labor (DOL) and they take employee misclassification very seriously. So much so that the U.S. Department of Labor has set aside an additional $25 million for an initiative to garget misclassifications!
Most jobs are governed by the FLSA, therefore most employers are required to follow FLSA guidelines, with a few exceptions. For example, the Railway Labor Act (RLA) governs railroad workers and the Motor Carriers Act (MCA) governs truck drivers. Therefore, neither is required to comply with FLSA guidelines.
Employers will generally fall into two categories..."salary exempt" or "salary non-exempt". Salary non-exempt employees are entitled to overtime pay. Salary exempt employees are not. The term "salary" simply means that, as an employer, you offer sick, vacation and personal days (or PTO - paid time off) to your employees; so in the event the employee requests/takes time off, his/her pay will not be reduced by the number of hours (or days) they are away from work.
Another common classification is "employee" and "independent contractor". An employee is a person hired by a company to occupy a specific role and carry out job functions as outlined by the role's job description. An independent contractor operates independently, meaning he/she will abide by corporate policies while in your workspace, however they do not work regularly for an employer but provides work services as needed. Contractors will generally have their own tax ID (or work directly for a firm who is responsible for contracting out their services). Most contractors are paid as "vendors" via invoicing and are generally required to file a 1099 form with each of the companies they support.
It is imperative that employers have sufficient documented proof and a written agreement in place to safeguard against misclassification. DO NOT assume that someone is an independent contractor just because you are told they have their own business. One of the biggest mistakes we see is when employers assume their contractors are independent because they have a business card or website. That is NOT sufficient proof.
If an employee meets the following criteria, he/she may likely be exempt. If he/she does not, it is likely the employee is non-exempt. Consider the following -
- Is the employee paid at least $23,600 per year?
- Is the employee paid on a salary basis?
- Does a primary component of the employee's job involve the exercise of independent judgment and discretion about matters of significance?
- Does the employee perform exempt job duties (e.g. , we'll get into this in the next section)?
- How does the employee's work fit into the company's overall operations? Keep in mind, the employee's job title is not sufficient enough to make this determination. His/her position description should also be considered.
- Does the employee supervise two or more employees?
- Does the employee have genuine input into the job status of other employees (does he/she have the ability to hire, fire, promote or assign duties to others)?
- As part of the employee's primary duty, is he/she a part of management? *
* Management duties include -
- Interviewing, selecting and training employees
- Setting rates of pay and hours of work
- Appraising productivity, handling employee grievances or complaints, disciplining employees
- Determining work techniques
- Planning and assigning work to employees
- Determining the types of equipment to be used in performing work, or materials needed to carry out job functions
- Planning budgets for work
- Monitoring work for legal/regulatory compliance
- Providing for safety and security in the workplace
A high-level employee's job functions are vital to the business' operations. This could include some Executive Assistant functions (i.e., Executive Assistant to the CEO who may indeed be high-level as he/she is responsible for running the CEO's day to day life) payroll staff, finance staff, employees who are responsible for benefits management, records maintenance, accounting, tax, marketing, etc. A simple way to make this determination is to ask yourself...would the business suffer if this role no longer existed? How critical is this employee's duties in relation to the overall business operations (i.e., buying reams of paper versus buying a fleet of trucks)? Does this role have the authority to formulate or interpret company policies? If you answered 'yes' to these questions, it is likely that the employee in question is a high-level employee and may qualify for exempt status.
Under FLSA, exempt employees are generally entitled to nothing more than their full base salary in any period for which they performed work. The FLSA places no limit on the amount of work an employer may require from an exempt employee.
Under FLSA, non-exempt employees are entitled to time plus one half of their regular rate of pay for each hour they work over the standard threshold (which is generally 40 hours per week). If an employee works more than the standard threshold in a given week, they he/she must be paid (in addition to their regular pay) 1.5 times their base pay for the additional hours worked.
As an employer, you do not want to make the mistake of misclassifying an employee as exempt when he/she should be non-exempt. Nor do you want to misclassify an employee as an independent contractor when in fact they are not . Doing so could open you up to a lawsuit to include back pay to all misclassified personnel covering the entire length of their employment (until such a time that the misclassification is remedied). As an employer, you'd also be required to pay payroll taxes on the employee's back pay income.
If you find that you've made this mistake, you should contact an HR consulting firm or an attorney to quickly remedy the matter. In such a case, you would be advised on the steps necessary to rectify the matter and be given instruction on how to mitigate any potential damage.
Be advised, this discussion is limited to rights under FLSA. Exempt employees and independent contractors may have additional rights under other laws, their employment/service contracts or your company's specific policies. We welcome any questions you might have regarding employment status.