While working with clients to stay compliant with the myriad of employment laws, job classification is always at the top of the list. In fact, this area of employment law covered by the Fair Labor Standards Act (FLSA) is one of the most significant exposures companies have based on initiatives driven by the Department of Labor and the Internal Revenue Service….as well as numerous states.
Many companies don’t even know that they are non-compliant with the law and others “interpret” the regulations incorrectly. Well, as we were told during my years at The Citadel, “ignorance is no excuse”. In employment law, “ignorance of the law is no excuse” and fines and penalties can be significant. In this short article I will quote definitions from both the websites of the IRS and DOL and provide some personal insight.
Non-Exempt versus Exempt
In most instances, these two words can be interchanged with hourly versus salary, but that may not always be the case. Basically, non-exempt simply means that an employee under this classification is NOT exempt from the overtime and minimum wage provisions of the FLSA and an exempt employee is, as long as the exempt employee gets paid at least $455 per week (with a few exceptions). A company will never be wrong if an employee is treated and paid like a non-exempt even though the employee qualifies as exempt. A company creates huge exposure when an employee is paid and treated like an exempt employee when they do not qualify under the law. Another little note to keep in mind is that if a company classifies and employee as exempt, but pays them like a non-exempt, the employee by default becomes non-exempt and all FLSA provisions apply. I probably need to provide an example on that one. Let’s say Sally is a manager and starts leaving the office at 3:30 even though she is scheduled to work till 5. The director in charge deducts 1 ½ hours from Sally’s salary each day. Nope, can’t do that without changing Sally’s job classification. Might be a performance issue, but a company cannot handle it by deducting pay.
Employee versus Independent Contractor
Now this one generally opens up a huge can of worms. I have heard of companies that bring in full time employees as independent contractors for a 90 probationary period and then convert them to employees if they work out. CAN’T DO THAT!! I have heard of companies that bring in outside sales people as full time employees and classify them as independent contractors. CAN’T DO THAT!! I understand why companies are motivated to classify employees as independent contractors. The company doesn’t pay the employer’s portion of FICA and Medicare taxes and they feel they have more control in ending the relationship if it is not working out. Proper performance management is a topic for another day. The consequences for making the wrong decision on this one can be really huge, not just from federal, but also from many states. We are talking possible fines equaling tens of thousands of dollars. In my view there is a relatively easy way to determine employee versus independent contractor.
If the company controls what will be done and how it will be done, classification should be employee. In essence the company has the right to control the details of how the work is performed. If the company has the right to control or direct only the results of the work and not what will be done and how it will be done, classification can be independent contractor.
The descriptions of each of these major categories of employment classifications are summaries and there are specifics that must also be taken into consideration. However, one should be able to get a good idea of whether proper job classifications are being used. As always, if there a questions, one should consult an expert.
To Your Success