Correctly Classifying Employees
Many small business owners share common false assumptions regarding employee classifications. One is that the classifications of independent contractor and employee are interchangeable. Another common misconception is that all employees can legitimately be classified as salaried or exempt. Also, many employers fail to realize that there are specific requirements that must be met in order to correctly classify their workers. It is important to understand the rules of employee classification to avoid costly mistakes later.

Correctly classifying Independent contractors is still an issue. The regulations in California that govern the classification of independent contractors didn’t magically go away when AB5 was passed two years ago. There are still requirements businesses must comply with to avoid the penalties and fines for incorrectly having workers classified as independent contractors. The regulations for classifying workers as independent contractors are they must:

  • have their own business,
  • the business and independent contractor must have a contract with an end date,
  • are completely independent in their work deliverables, set their own hours, and provide their own materials.

Independent contractors provide products and services to their clients, not to their client’s customers. They are not to be given the business’ policies to follow with the exception of Sexual Harassment Prevention.

Exempt vs. Non-exempt Classifications–salaried vs. hourly
To clarify, the terms exempt and non-exempt are commonly known as salaried and hourly. When getting started with classifying employees, it is important to understand the terms exempt and non-exempt, as defined by the Fair Labor Standards Act, or FLSA. FLSA is the federal law that determines minimum wage standards and controls which employees are entitled to overtime pay, meal and rest periods, and other wage and hour benefits.

If a claim is brought asserting that an employer has misclassified an employee, the Labor Commission starts with the assumption that all workers are in fact employees, meaning that no workers qualify as independent contractors and that all employees are considered to be non-exempt. The burden of proof is on the employer that an employee is correctly classified. So, who would be considered a non-exempt employee?

Generally, non-exempt workers are paid hourly, routinely supervised, and are required to follow the employer’s policies and procedures, and their job can be easily performed by others. All wage and hour laws apply to non-exempt workers, including eligibility for overtime pay, rest and meal breaks and the entitlement to be paid at least minimum wage.

Salary and duties tests are to be used to determine if a worker can be classified as exempt. For most exempt positions, the employee must spend more than 50% of their time performing exempt job duties. Most exempt job duties fall within 3 categories – executive, administrative and professional exemptions. There are many variables used to define employees as exempt.
Employees may be considered exempt if they:

  • Do not need supervision to do their job
  • Manage people or a department
  • Are paid an annual salary
  • Perform work requiring an advanced degree, certification, or training
  • Have decision-making authority on significant matters that affect the business.
  • They are to work whatever number of hours required to complete their job duties, whether it is 20 hours or 60 hours in a workweek.

Exempt workers are not entitled to the same benefits of overtime pay or meal breaks as afforded to non-exempt workers. However, exempt employees by definition must be paid a minimum monthly salary of no less than two times the state minimum wage as full-time employment. In 2022, to meet the definition of exempt in California, the minimum salary is $58,240 for employers with 25 or fewer employees. Employers of businesses with 26 or more employees must have a minimum salary of $62,400 a year.
Note that there is no such thing as a part-time exempt employee. All exempt employees are to be paid their full salary regardless of the number of hours worked in a week. That is unless they take time off for personal reasons.

There are other positions that may be qualified as exempt, each with unique salary and duties tests. These include highly paid professionals, such as tech workers, inside and outside sales positions, and some artists.

How to ensure your employees are correctly classified
The duties performed in the position, rather than the job title, determine classification. Start by reviewing your job descriptions. Make sure you have a written job description for every position in your company, that includes the essential duties of the job. Then compare the written job description against the work assigned. This is your opportunity to check that employees are appropriately classified based on the actual work being performed and not an outdated list of duties.

Next, identify which jobs need to be reclassified, if any. These are the positions that, based on an updated job description, you may need to change the classification from exempt to non-exempt or vice versa. Salaries for newly exempt positions should be raised to ensure that they are competitive and consistent with the amount and kind of work being done. This should meet the minimum salary definition requirements discussed earlier. It will be important to create a plan to communicate these changes to affected employees in a way that causes the least amount of disruption or negative impact on the employees.

Sometimes employees want to be classified as exempt since they perceive it as an increase in their status. Employers must never allow themselves to be swayed by such a request. The employee is not the one who will suffer from the repercussions of misclassification, it is only the employer.

To complete the process, implement all adjustments with appropriate employee notices, update payroll records and ensure that all changes are reflected for on the promised effective payroll date.

Repercussions of Misclassifying Employees 
Misclassifying employees can have serious financial implications. Employers found to have misclassified employees, either intentionally or because they failed to change employee classifications based on current or updated duties, will be responsible for unpaid back wages, overtime pay, and corresponding payroll taxes. Significant fines and penalties can also be assessed by federal, state, and in some cases, local agencies. Because of this, it is particularly important to be aware of how expectations for a job position may change and how this affects the classification of the position.

If you need help with correctly classifying workers as independent contractors, exempt or non-exempt employees, we are here for you. Be in touch by scheduling your free consultation with me on our website.