Properly classifying your staff is one of the most crucial aspects of managing a practice. In fact, failure to do so can result in major problems; this includes fines and penalties from local, state, and federal agencies. Further, improper classifications can result in unpaid overtime, back pay of wages, interest, and your time. In escalated situations, a lawsuit or class action lawsuit could be filed against you, resulting in hefty additional attorney’s fees. The best approach to preventing any of these nightmarish possibilities from occurring is being proactive in familiarizing yourself with the meaning and understanding of classifications in relations to independent contractors and employee exemptions.
3 Aspects of Evaluation
When determining if your worker is an employee or an independent contractor, there are generally three things you need to evaluate: the level of behavioral control by the practice or the worker, the level of financial control by the practice or the worker, and the type of relationship between the employer and the worker.
- Level of Behavioral Control – The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not how it will be done. If your practice is in control over how and when that person completes their work, he or she is more likely to be an employee than an independent contractor. This is because an independent contractor’s tasks are outside the usual course of the employer’s business, requiring a specialized trade that you are outsourcing to the independent contractor.
- Level of Financial Control – Financial control focuses on the level as to which the worker is dependent on the practice for payment, reimbursement, and/or the use of tools or equipment. For instance, if your practice reimburses the worker for various expenses or if your practice provides all tools and equipment to the worker, it is more likely that he or she is an employee as opposed to an independent contractor.
- Type of Relationship between the Employer and the Worker – The relationship between the practice and the worker can also help determine whether the worker is an employee or an independent contractor. If there is a contract without a set date of termination and/or if there is a description of benefits such as insurance, vacation, and a pension, it is likely that the worker is an employee and not an independent contractor. Also, keep in mind that an independent contractor agreement should be limited to no more than one year. After this time period it is very difficult to prove that they are not an employee of the practice.
If you are still unsure whether your worker is an employee or an independent contractor, answering a few questions at the following link can help to point you in the right direction: https://quickbooks.intuit.com/r/1099-w2-employee-calculator/.
Every State is Different, Including California
While classifications may seem confusing on a federal level, you must also keep in mind that states can impose their own regulations in addition to the FLSA. For example, the California Supreme Court recently developed more concrete standards for determining whether or not a worker is an employee or an independent contractor. In Dynamex Operations West v. The Superior Court of Los Angeles County, the Court developed an “ABC test” that states a worker is an employee unless the employer can exhibit that he or she meets all three of the following:
- The worker’s tasks are not controlled or directed by the employer, in contract and in fact;
- The worker’s tasks are outside the usual course of the employer’s business; and
- The worker is “customarily engaged in an independently established trade, occupation, or business of the same nature as the work” he performs.
The “ABC test” makes it much more difficult for workers to be classified as independent contractors, which means that businesses may be open to more liability for fines or penalties related to labor issues. This ruling has the potential to lead to lawsuits, class action suits, or claims with the Franchise Tax Board or Employment Development Department. As a practice owner, you will want to make sure that you are not on the receiving end of any of these potential suits or claims.
After determining that a worker is an employee, you will further have to determine whether that employee is exempt or non-exempt. An exempt employee is titled “exempt” because he or she is exempt from the Fair Labor Standards Act (FLSA) regulations. For the most part, that means that you, as the employer, are not required to pay the employee for overtime. Exempt employees are salaried and often white-collar workers (i.e. professionals, executives, etc.), certain government employees, and certain employees that work on commission. In addition, exempt employees are not required to receive meal or rest breaks. Determining whether an employee is exempt or not is outlined in the FLSA regulations and is more particularly determined by the work that the employee performs. Non-exempt employees are alternatively protected by FLSA regulations. Primarily, this means that they must be paid minimum wage for any hours worked and they must be paid overtime for any hours exceeding forty in a workweek, or daily overtime for all hours in excess of eight in a day that is required some states such as California.
If you are unsure as to whether your employee is exempt or non-exempt, it is a good idea to assume that they are all non-exempt; there is no risk to this classification. In contrast, failing to properly classify employees as exempt is when employers can run into trouble. One fixed federal rule that an employer can be sure of, is that all exempt workers must earn a minimum salary of $23,660 annually. However, some states have implemented their own regulations on salary thresholds. California’s salary threshold, for example, is currently set at $43,680 annually for small employers (25 or fewer employees), and at $45,760.00 annually for large employers (more than 25 employees).
Although familiarizing yourself with employment classifications can help you feel more comfortable, consulting a professional, such as an attorney with labor law experience, is the best course of action to ensure full compliance when classifying your employees. Federal and state laws are highly technical in the area of labor and employment, as these laws are constantly in flux. Detailed questions or concerns related to classification should be reviewed with your legal counsel. As always, being proactive in putting your best foot forward ensures you are exercising due diligence in avoiding common pitfalls such as misclassifying your staff.