So, you need an extra set of hands or maybe your business is growing and need to expand your team. Maybe you are considering some freelance work or a little outside help without the commitment of hiring a new employee. While a quick job post and interview may seem like enough, there are important legal considerations as well as potential complications related to legal obligations and liability. Understanding employee classifications can help you protect your business interests while staying above board with state and federal employment laws.
Worker versus Employee
The employer-employee relationship is fundamental under state and federal law. Wage and hour law, discrimination law, workers’ compensation, tax law, and other benefits protections stem from this relationship, so both employers and employees should understand their rights and obligations. Once your hired help goes from being classified as a “worker” to an “employee,” you are going to be on the hook. The most important classification is the difference between an employee and an independent contractor.
Independent Contractor versus Employee
Courts and federal agencies have been scrutinizing companies that misclassify employees as independent contractors rather than employees. One reason is that employers have largely skirted liability through this improper classification, including wage and hour law violations, workers’ compensation, discrimination violations, and other benefits. The common law definition of an employee will consider all of the following to determine whether your worker is an IC or employee:
- Does the company control what the worker does and how the worker does his or her job?
- Are finances and expenses controlled by employer, including how a worker is paid and whether expenses are reimbursed?
- Does the employer provide equipment, tools or supplies?
- Is the relationship ongoing and is the work performed a key aspect of the business?
Employers should weigh all of these factors when determining whether a worker is an employee or an IC. There is no single rule or single factor that makes an employee, but these are the basics when considering how to classify your employee. Consider the entire relationship, how much control you exert over a worker, your right to direct or control the manner of work, and be sure to document each of the factors to protect your rights.
Freelancer versus Independent Contractor
Both freelancers and independent contractors operate outside of the employer-employee relationship. In general, both will work for a business on a project-by-project basis with no direct affiliations with those companies. A freelancer will generally set their own wages while an IC is contracted by either an employee or third-party staffing agency that sets a fee and pays the consultant. One major difference between freelancers and IC’s is that a freelancer generally has multiple clients where an IC could have a single contract. In short, an IC may not be a freelancer, but a freelancer is always an IC.
Exempt versus Non-Exempt
When it comes to classifying an employee as exempt or non-exempt, the primary issue relates to minimum wage requirements and Fair Labor Standards Act (FLSA) overtime rules. Under the FLSA, every employee is entitled to overtime after they work 40 hours in a given workweek, unless they are exempt. The most common exemptions are “white-collar exemptions” for administrative, executive and professional employees, as well as computer professional and outside sales representatives. Employers benefit from classifying employees as “exempt” because they don’t have to pay overtime, no matter how many hours those employees work. Courts will narrowly construe these exemptions and it is the burden of the employer to prove status. Simply calling an employee “exempt” does not make them exempt. Their duties and job description must match up with the FLSA definitions and rules.
Interns and Trainees
You may think, “Hey what about an intern?” as a lower cost option. Before going this route, remember that state courts and federal agencies have cracked down on employers who underpay interns. Wage and hour violations have left companies paying back these “interns” years down the line. Most interns are actually employees subject to minimum wage and overtime requirements.
Under the FLSA, internship programs must meet six requirements, 1) value of training must be comparable to educational environment, 2) experience must be to benefit of intern, 3) intern does not replace regular employees, 4) company must derive no immediate advantage but could actually be impeded, 5) intern is not automatically entitled to job, 6) employer and intern understand that intern is not entitled to wages.
Most “internship” programs fail to meet these standards and in the end, employers do not actually benefit from having interns as they are defined by FLSA. Remember that the FLSA does not provide any exemption for trainees, so they are also entitled to fair wages, including overtime.
What about Staffing Agencies and Temp Employees?
In recent years, companies have turned to third-party staffing agencies to fulfill temporary work assignments. The primary benefit to this arrangement is that an employer can contract workers without being liable for workers’ compensation, insurance, and other benefits. Employers also reduce their risk of employment related litigation such as discrimination, sexual harassment or wrongful termination.
Courts and federal agencies have begun to scrutinize the third-party staffing system as unfair to workers. New FLSA guidelines make staffing agencies and employers jointly liable to ensure compliance with employment laws. This new joint-employer relationship may strip away some of the original benefits of staffing agencies. Before going the temporary worker route, make sure that you are aware of your rights and obligations as a joint-employer.
Risks of Misclassification
How you classify your employees can have tax, wage and hour, as well as benefits implications. Before making the decision to hire an employee, establish exempt or non-exempt status, hire interns, offer promotions or even get freelance help, be sure you understand how worker classification works.
In addition to what kind of work will be performed, you will also want to weigh what kind of relationship is best for you and the worker in the long-run. Do you want a long-term relationship or quick help? How many hours a week? Are you willing to train the worker or are you looking for a specific skillset? Knowing what you want will help you classify your employees and prevent unforeseen liabilities and obligations.