Employee Classification

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Table of Contents

What is Employee Classification?

An employee can be classified into several different categories. Full-time, part-time, temporary, intern, and seasonal are some of the classifications available. Generally, employees are typically categorized according to the number of hours they work, the expected duration of the job, and the job responsibilities.

Employers must have a clear policy for employee classification defining both full-time and part-time positions. A full-time employee, for example, is an employee who is assigned a limited work schedule of at least thirty-two hours per workweek, as stated in the company’s employee handbook. Employers should maintain these established hours for full-time and part-time personnel across the organization.

It’s critical to understand how misclassification works and how damaging it can be to your organization.

Why Employee Classification Matters?

There are numerous job classifications for employees, ranging from full-time employees to special classes like interns. Each person must be classified into the relevant groups to assess benefit eligibility.

Employee category plays a significant role, and the company must have a solid plan of implementing worker classification within the organization. Moreover, it’s an essential matter for the government. According to the Society for Human Resource Management, an effective employee classification ensures all legal criteria are met, guaranteeing no discrimination regarding benefit plan eligibility and compensation payment.

Ways of Classifying Employees in the Workplace

There are different ways in which the workers are classified in a workplace. Employees can be classified based on

  • Their relationship with the company
  • Working hours
  • Pay cycle
  • Pay variability.

Common Employee Classification Types

Employee classification varies from company to company. However, some classifications are standard across all companies.

Below are some of these employee categories:

Full-time employees

Full-time employees work a set number of hours per week and are often paid a fixed wage. Professional, executive, administrative, sales, and other computer-related employment are typical full-time duties. They may also have access to perks, such as healthcare coverage, a 401(k), and accrued paid time off.

Because the FLSA or the Fair Labour Standards Act does not specify the number of hours an employee must work to be considered full-time, it is up to employers to determine how many hours constitute full-time status. However, employees who work more than 40 hours per week are considered overtime workers under the FLSA.

When a full-time employee’s position is permanent, and their pay is at least $35,568 per year, they are also exempt. As full-time employees are usually exempt, they are not eligible for the FLSA benefits.

Part-time employees

Part-time employees work less than 30 hours each week and are usually paid hourly. They typically work according to their convenience. Since part-time professionals can juggle multiple jobs simultaneously, they can gain experience in many sectors. This employee category allows flexibility of work.

Because of their working hours and income, which is usually less than $35,568 per annum, most part-time are considered “non-exempt” during employee classification and are eligible for FLSA benefits. Part-time non-exempt employees are entitled to get overtime pay for their time exceeding 40 hours in a week.

Retail, food service, sales associates, and warehouse workers are all examples of part-time jobs.

Contractual employee

Contract employees are hired for a specific amount of time specified in the contract. Therefore, a contractual employee’s working hours may vary depending on the contract and are not limited to 40 hours a week.

Working a contract job has the advantage of knowing the exact duration of each task before you start. Plus, employers can extend a contract to contractual employees after they have delivered their project.

A contract employee is non-exempt and is entitled to FLSA benefits. Although the average annual salary for a single contract is less than $35,568 a year, these employees can complete multiple contracts in a year.

Sales, IT technicians, and construction workers are examples of contract jobs.

Independent contractor

An independent contractor is a person who works as a contract worker but is not employed by a corporation. Being an independent contractor allows you to create your schedule and accomplish assignments at a pace that benefits both you and your clients.

Independent contractors are neither exempt nor non-exempt because working hours are defined by a contract but are not limited to 40 hours per week. Their income varies according to job requirements, contract terms, and employer.

Freelance writers, rideshare drivers, and food delivery drivers are independent contractors.

Temporary employees

A temporary employee is recruited for a specific length of time, usually to substitute for a full-time employee on sick leave. Temporary employment is perfect for persons who need extra cash for a short period or who want to work in seasonal occupations during certain times of the year.

Temporary workers are non-exempt since they are paid hourly and typically earn less than $35,568 per year. Thus, temporary workers are eligible for FLSA benefits whether they work full-time or part-time.

Seasonal retail workers, administrative assistants, housekeepers, and performers are temporary employees.

Tests to Verify Employee Classification

There are several tests conducted for employee classification. These tests generally define whether a worker is a contractor or an employee. Some of these tests are:

  • Common-Law Test
  • ABC Test

The test taken depends on the employee classification policy of the employer.

Common-Law Test

The Common Law Test, used by the IRS, New York, the District of Columbia, and 17 other states, assess worker status by looking at the parties’ behavioral control, financial control, and relationship for each job. If an employer exercises any of these powers over a worker, the worker is classified as an employee.

When an employer directs and regulates how their employees perform the assigned tasks, it is known as behavioral control. When it comes to a code of conduct, typical instances of behavioral control include where, when, and how the work is done.

The ease with which your worker can perform similar services on the open market also affects financial control. In other words, is your staff executing identical tasks for many clients simultaneously?

The parties’ relationship explores how the worker and the employer interact. For example, if a written contract exists and the employer offers benefits (sick pay, pension, etc.), the employee classification regards that person as an employee.

The ABC Test

The ABC Test is another approach for states to assess if your recruit is a contractor or an employee. It is used by the United States Department of Labor and 33 states. California just switched from Common Law to this test.

The ABC test determines if the worker’s business is unusual and beyond the hiring organization’s premises and if the worker is engaged as an independent contractor in this occupation.

The absence of control exists if the worker is free from the hiring organization’s direction or control, both by contract and in fact. However, there are a few exceptions. For example, the recruiting organization may impose specific hours due to access restrictions, but it may not direct the worker on how to do the job.

To be categorized as an independent contractor, a worker must undertake “unique” labor in the hiring organization’s business and outside of the hiring entity’s premises.

Exempt vs. Non-exempt

Under employee classification, some employees are exempt and non-exempt. The non-exempt and exempt employee classifications play a significant role in companies.

Let’s understand what is entailed under both of these in workers classification:

Exempt employee

An exempt employee is not entitled to FLSA benefits such as minimum wage and overtime compensation but is entitled to benefits from their employer, such as healthcare, paid time off, and a 401(k) (k). Exempt employees have the following characteristics:

  • Earns at least $684 per week on a salary structure that remains stable regardless of hours worked or tasks performed.
  • Has executive, professional, administrative, or outside sales work responsibilities.

Non-exempt employee

A non-exempt employee is qualified for FLSA benefits and company-specific policies, such as working from home and under flexible hours. The FLSA does not limit the number of hours non-exempt employees can work per day or week, nor limit their overtime hours.

These employees also have the following characteristics:

  • Are paid hourly unless classified as salaried non-exempt.
  • Has a weekly income of less than $684.
  • Enjoys working hours not governed by the Fair Labor Standards Act.

Tips for Managing Both Exempt and Non-exempt Employees

Employee classification can be effectively managed if you put these tips into practice.

The following pointers will help you understand the employee classification of exempt vs. non-exempt workers.

Use payroll software

Paying exempt and non-exempt employees can become a smooth process by hiring a third-party service provider like Multiplier. You can leverage Multiplier’s team of in-house experts to manage employee onboarding, payroll, compliance, and so much more. In addition, everything is automated to make the payroll process seamless and smooth.

Paying a fixed salary to non-exempt employees

Because the FLSA covers non-exempt employees, you must pay them at least the minimum wage mandated by federal law. However, if your state’s minimum wage is higher than the federal minimum wage, you must pay that wage. In most circumstances, employers need to pay workers 1.5 times their regular salary for overtime work that exceeds 40 hours per week.

If you don’t want to pay your employees hourly, you can pay them a regular weekly rate, as long as it meets the minimum wage standards. For employees performing the same hours every week, offering a consistent wage is advantageous. Employers use this strategy to pay employees a weekly fixed compensation with overtime pay.

Provide long-term needs for exempt salaries

Exempt employees’ salaries should not change every week. Even if your company has a slow week and the exempt employees only work for a few hours a week, they must receive the entire week’s pay. While employers can delay payment during layoffs, employees cannot work in any capacity then.

Focusing on your long-term goals is an excellent way to structure exempt employee wages. The pay should always remain consistent. If your company is experiencing long-term difficulties, you may reduce the wages. However, this may negatively impact employee loyalty.

Best Practices for Classifying Employees

Employee classification can be a cumbersome practice. Therefore, you must follow the best practices while getting into the worker classification, such as:

  • Consider every aspect of the employer-employee relationship. Before you can classify employees, you must first assess how much control you have over their job and how much you pay them. To avoid misclassification, it is essential to analyze the duration of their employment, contracts, benefits, and the work they perform.
  • Make contracts that are aligned with the employment responsibilities of employees. When categorizing employees, ensure that their classification in the employment contract corresponds to their job responsibilities. By double-checking employment contracts, you can avoid job misclassification and related penalties.
  • Understand the legal stances of the federal and state governments on what constitutes permanent or temporary employment, regular or part-time work, and minimum age limits concerning working hours and overtime.
  • To manage employee expectations, include employee classification in their job descriptions. This will ensure that employees know their eligibility for benefits and other company programs.
  • Notify employees early on if they are eligible for part-time work.

Can an Employee Change Classification Under Prevailing Wage?

Work done on the Prevailing Wage Jobs are subject to several classifications according to the nature of work performed. Under prevailing wage laws, workers must be paid per the rates determined for their job classification. Misclassification of workers is one of the most common prevailing wage rule breaches. It directly impacts the employee classification procedures of wages and overtime compensation.

Let’s look at a situation where this might occur in the real world. An employer may categorize an employee under a lower tier to minimize their payment rate. This is illegal and could eventually jeopardize the employer’s reputation.

Hence, if an employee on a prevailing wage job performs specific tasks under a particular category, they must be paid at that rate.

How Can Multiplier Help?

At Multiplier, we can help you with all aspects of employee classification. We can manage payroll and other employment-related activities like full-time employees, independent contractors, freelancers, etc.

You can contact us and smoothen your entire workflow and management of exempt and non-exempt employees.

Frequently Asked Questions

Q. Are volunteers full-time employees?

No, they work part-time with the organization without committing to working hours.

Q. What purpose does employee classification serve?

It helps better understand the categories of employees and their association with an organization.

Q. What is FTE?

FTE refers to full-time equivalent. Organizations use this unit to understand the parity of hours between two work zones.

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.