Classifying Your Employees Correctly

Employee classifications are based on job duties and responsibilities. The classifications impact compensation, benefits and work hours; they are also used by employers to maintain compliance with labor laws.

The most common classifications are exempt and nonexempt. Exempt employees are typically salaried workers who (a) are paid the same amount each week regardless of hours worked, (b) are paid at least $844 each week and (c) hold administrative, professional or executive positions. Nonexempt employees are often hourly workers who perform more manual or technical duties. Nonexempt employees are entitled to overtime pay for any hours worked beyond 40 in a workweek, which is defined as seven consecutive 24-hour periods.

Classifying employees as exempt or nonexempt under the Fair Labor Standards Act determines their eligibility for overtime pay as well as meal and rest breaks. Most employers have both exempt and nonexempt workers.

Other employment types come with their own sets of laws and considerations:

• Full time describes someone who works a specified number of hours a week and gets access to company benefits. The specific terms are set by the employer and may be subject to state-specific labor laws. The category is subject to FLSA.
• Part time describes someone who works fewer hours than full time, though the exact number of hours that constitutes part time is left to the employer to define. Part-time workers are covered by FLSA.
• Contract employees are hired for a defined period, often for their specialized knowledge or skills. They work varying hours according to the contract and are eligible for FLSA benefits.
• Independent contractors are like contract employees but aren't on the company's payroll. Their work hours and exemptions are determined by the organization they work for. Independent contractors are not covered by FLSA.
• Temporary employees are hired on a short-term basis and are eligible for FLSA benefits.
• On-call employees are expected to be able to work during specific hours, are paid hourly and may be covered by certain provisions of FLSA.
• Seasonal workers or employees are hired for a specific period — typically of six months or less. Seasonal workers tend to be hired for the same six months from year to year (for example, summers), while seasonal employees tend to work as help during peak times (for example, winter holiday workers). FLSA does not specifically cover these categories, but certain provisions of the act may apply.
• Volunteers are not employees, so they are neither exempt nor nonexempt.

Because employee classifications impact companies' budgets, some employers may seek to treat workers as independent contractors to avoid compliance with unemployment insurance, workers' compensation, Social Security, tax withholding, temporary disability, and minimum wage and overtime laws. However, if you instead establish an employee classification policy and apply it consistently, you will be less likely to face costly fines for misclassification. Payroll software, which offers such extras as analytics to aid in decision making, can help with compliance while fostering business growth.

Employee classification is essential for workforce planning, recruitment and retention strategies, and compliance. Be sure to talk with professionals to create your classifications thoughtfully.

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