Sep 072012

Employers are always looking for ways to cut costs.  Be aware, however, that it can be easy to make risky decisions on how to classify your employees.  Whether it is with existing employees or additions to staff, be sure you are making informed decisions on what category your employees should be in and why.

We understand that with these challenging times, business owners try to find as many ways as possible to control costs. Many are not aware that there are risks in making the wrong decision, even if it is out of “ignorance”. We all know that when it comes to the law, ignorance is no defense.

Employers look at the rising cost of health benefits, coupled with high taxes, and find it is tempting to think that perhaps you should convert your employees to non-exempt or independent contractors and cut some expenses.  Be aware, however, there are strict rules about what an exempt employee is and what a non-exempt employee is and what constitutes an independent contractor/employee.

How to Determine Exempt or Non-Exempt Status

Either in the hiring process or in reviewing your current employees, you need to determine the exempt or non-exempt status of the position. The Fair Labor Standard Act (FLSA) provides the regulations that inform employers about wage and hours, and most specifically the FLSA regulates the status of employees and their availability to receive or not receive overtime pay. Exempt employees are exempt from the federal and state laws governing, among other things, overtime pay, minimum wages, and timekeeping. An employee is presumed to be non-exempt unless the employer can demonstrate that the employee’s job duties and pay meet certain legally defined standards. Such issues as number of hours worked, union membership, or job title do not resolve the determination of exempt/non-exempt status.

Improper classification of exempt and non-exempt employees is common and can be very significant and costly. For example, an employee who would be correctly classified as exempt, and therefore ineligible for overtime, may be erroneously classified as non-exempt and receive overtime pay unnecessarily. Conversely, improperly classifying employees as exempt, and therefore denying overtime pay, can result in significant penalties and fines.

Once you have established whether an employee is exempt or non-exempt, you can determine the method of pay – either hourly or salaried. You can then look at the design of your compensation program and determine where you are in the process and what you need to do next.

Note: Classifying your employees in the correct category – exempt or non-exempt – is an important step in the hiring and compliance process. Don’t declare an employee exempt if they are truly non-exempt. If they are entitled to overtime pay, you are responsible to pay them. A poorly or incorrectly paid employee is an unhappy employee and is much more likely to call the Wage and Hour Dept. of the Department of Labor.

Take the time to review and see if you have the right employee makeup in your company in terms of exempt and non-exempt and be sure you follow these rules when hiring.

Independent Contractor

Another thought is that if you need a worker only on a “sometimes” basis or a specific project, an independent contractor could work for you.  Again, there are rules, but this may be a solution that could work.  The determination is complex, but is essentially made by examining the right to control how, when, and where the person performs services. It is not based on how the person is paid, how often the person is paid, or whether the person works part-time or full-time. There are three basic areas which determine employment status:

  • Behavioral control – who controls when the individual works – you or the person.
  • Financial control – usually the individual has a contract for a specific project with timelines and payment schedules defined.
  • Relationship of the parties – if you (the employer) provides the work space, the tools to do the job, the resources in your place of business, and established the hours to work, the individual is most likely an employee – not an independent contractor.  Look at what your relationship is with the person.

You can find more information on the DOL website and through a subscription to EffortlessHR, our internet based HRIS system. We would like you to make good choices and keep your company safe and efficient.


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