Independent employee or contractor? When your business hires someone, that new hire will likely fall under one of these two classifications of workers.
Before you start advertising for an open position, you’ll typically decide ahead of time whether you’ll want to onboard an employee or hire a contractor. Your job listing should clearly state what type of position the job is so potential applicants know what to expect before applying.
Correctly classifying your workers is extremely important, as misclassification can result in impactful tax penalties.
Getting hit with an unexpected tax penalty is never good news, but these are easily avoidable if your company remains in compliance with the federal and state rules and regulations, as well as the tax contributions for employees.
To help you avoid these costly penalties and better understand the process of classifying your workers, we’re breaking down common terms you’ll come across, their meanings, and where they fit into the classification conversation.
Non-exempt vs. Exempt Workers
Non-exempt employees are required to be paid overtime, while exempt employees are not. However, you may choose to provide some form of compensation to exempt employees who work extra hours, which should be indicated clearly within the employee’s benefits package.
Non-exempt workers will either earn an annual salary or receive a predetermined hourly wage. If they receive an hourly wage, they’re entitled to a minimum wage and overtime pay when they exceed 40 hours of work per week as mandated by the Fair Labor Standards Act (FLSA). The FLSA is a federal law that determines the federal minimum wage and the requirements for overtime pay and standards.
What to Know About the FLSA and Department of Labor When Classifying Your Workers
The FLSA states that all employers are required to pay their non-exempt employees time and a half for every hour the employees work over 40 hours per week. You can calculate time and a half based on the employee’s regular pay rate. For example, if they earn an hourly wage of $20 per hour, their overtime pay would be $20+ $10, equaling $30.
Non-exempt employees paid a salary are still entitled to overtime pay. Their regular rate of pay can still be determined by dividing their weekly salary by the total number of hours worked. However, when calculating the employee’s pay, don’t include official holidays, vacation days, or sick days. Also, keep in mind that certain states have different methods for calculating the regular rate of pay for non-exempt employees who are paid on a salary basis. You must review and adhere to the applicable state law.
Check out the Department of Labor’s official guidelines regarding overtime pay eligibility. There are certain cases where employees can be considered exempt.
Situations where a non-exempt employee may be considered exempt include:
- Whether you pay your employees an annual salary,
- Whether they take home $645/wk at a minimum,
- Whether they earn at least $35,558/yr, and
- Whether their job duties entail those of someone in an administrative or executive role
In addition, highly-compensated employees, meaning those earning approximately $107,432 or more per year, aren’t eligible for overtime like other employees are.
The amount of money an employee earns and whether they’re paid hourly or salary isn’t the sole determining factor when classifying your workers correctly. Yet, employee pay rates can play a role concerning workplace policies.
Your workers that may be eligible for overtime pay include those that:
- Fail to meet the requirements of the FLSA duties test
- Earn no more than $684/wk
- Make less than $35,568/yr
- Claim specific deductions regarding their take-home pay
There are also businesses in specific industries, such as agricultural businesses, movie theaters, and railroad companies that hire hourly workers who aren’t entitled to overtime pay.
All full-time and part-time employees must fill out a Form W-4 and provide it to their employer before beginning their work with the company. Independent contractors must complete a different form, the W-9.
If you’re unsure how to classify your workers, complete the Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Form SS-8 and send it to the IRS for processing.
Should You Salary or Hourly Workers?
Salaried employees receive the same amount of money per month no matter how many hours they work, so you may find that it could be easier to pay your employees on a salaried basis as the payroll process is simplified and more consistent. For an employee to be salaried, they must uphold the duties of their position while also adhering to the DOL requirements.
Hiring hourly employees may make more sense in certain situations, as hourly workers give managers greater flexibility when creating weekly schedules. Jobs that don’t require consistent schedules, such as lifeguarding, or restaurant work, often fall into this category.
Consequences of Not Classifying Your Workers Correctly
Misclassifying your workers can significantly impact your business, even if you do so by accident.
Misclassification can result in any of the following:
- Enforcement of proper classification and disciplinary action
- Costly fines and business-related penalties
- Lawsuits from employees with unpaid overtime
- Responsibility for the costs of remedying the misclassification.
Misclassification is never acceptable, especially when intentional. However, there are instances in which reclassification is necessary. For example, a non-exempt employee might need to be reclassified as an exempt employee or vice versa. Similarly, you may hire someone as a contractor but later down the road decide it makes sense to bring them on as a long-term employee.
Regardless of classification, be sure you explain classification laws to all employees. Doing so can help avoid confusion or potential issues for everyone.
Looking for guidance on classifying your workers? That’s one of the many things Inova’s HR Experts can help with. Explore our HR Assist services for more info and get started today!
Not All HR Consultants are Created Equal
It’s important to know what to look for when determining who to outsource your HR needs to. You want to hire the most qualified fit for your company’s unique needs.
At a minimum, your HR consultant should have the following abilities:
- Strong written and verbal communication skills.
- Employee management
- Time management.
- People evaluation.
Your HR consultant should also have the necessary technical skills, including a deep understanding of HR technology and its ability to make the HR function more efficient.
In conclusion, enlisting the services of an HR consultant can bring significant benefits to your organization. From ensuring legal compliance to enhancing HR operations, an HR consultant can provide tailored solutions to meet your specific needs.
Interested in learning more about how Inova’s HR consulting services can help your business? Contact us today! Let us help you take your HR operations to the next level!