Employment classifications...probably not the most exciting section of your employee handbook. But how you classify the people who work for your small business or nonprofit impacts everything from tax withholdings to access to benefits and even which employment laws apply to which workers. Whether you are new to putting together employment policies, or it’s time to dust off and update some old policies, there are some common mistakes we see employers make when it comes to employment classifications. This week, we continue our series on Essential HR Policies by looking at employment classifications--what are they, why do they matter, and what are some common mistakes to avoid?
Why Do Employment Classifications Matter?
Federal laws dictate whether your workers are employees or whether they can be classified as something else, i.e. independent contractors or interns. If your workers are legally classified as employees, then, as the employer, you have certain payroll tax obligations. All too often, small businesses and nonprofits try to avoid this tax burden by simply classifying their workers as independent contractors. But as we’ve discussed before, the penalties for misclassifying an employee as an independent contractor can be a costly mistake.
In addition to employment taxes, whether your workers are full-time or part-time will determine which benefits you might provide. For example, your paid time off policy might only apply to full-time employees who have been with your organization for a certain period of time. Additionally, if you have 50 or more full-time employees (of full-time equivalents), then you are subject to the Affordable Care Act’s employer mandate to provide health insurance coverage or pay a penalty. But the ACA defines full-time employees as those who work 30 hours or more per week, instead of the more common 40 hours per week. If your employee handbook defines full-time employees as something other than those who work 30 hours per week, then you could run into conflicts between benefits you choose to offer (such as PTO) and those you must offer under the ACA.
And then there’s the tricky question of which employment laws apply to your business or nonprofit. Whether a law applies often depends on how many employees you have. And while independent contractors are not employees, some laws, such as Ohio’s Fair Employment Practice Act, have been known to count owner-workers as employees for the sake of applying the law to a particular business’s employment practices. On the opposite end of the spectrum, the Family and Medical Leave Act doesn’t apply unless you have 50 or more employees. So before you can evaluate your responsibilities as an employer and know what to include in your employment policies (or what sections to get rid of entirely), you have to know how many of your workers will be legally classified as employees.
Employment Classification Examples
Here are the most common employment classifications we see in employee handbooks and the most common mistakes we see in each classification:
Employee vs Independent Contractor: If it’s not already clear, this is the first classification decision every employer needs to make. The most common mistake we see when reviewing employee handbooks is referring to independent contractors as employees. There is no such thing as a 1099 employee. In fact, because your independent contractors aren’t employees, they shouldn’t even be receiving a copy of the employee handbook; the policies in it don’t apply to them.
Full-time vs Part-time: The distinction between full-time and part-time matters for health insurance purposes. It may also matter if you offer other employment benefits where the benefit plan itself defines which employees are considered full-time. Outside of those circumstances, most small employers have some flexibility in how they define full-time vs part-time employees and what benefits they want to offer their full-time employees. For example, in Ohio, you aren’t legally required to offer paid time off or paid holidays. But if you choose to offer these benefits to full-time employees, then you need to decide what qualifies as full-time.
Exempt vs Non-Exempt: You also have to determine whether your employees are eligible for overtime pay. Many small employers mistakenly assume that if they pay a salary, then the employee is exempt from overtime. (Non-exempt employees are actually those that would be legally eligible for overtime if they worked more than 40 hours in a week.) However, the legal question is much more complicated than just salaried versus hourly. And if you choose to have a blanket policy prohibiting overtime, then your policy also needs to show that you are taking appropriate actions to manage how many hours your non-exempt employees work so that they don’t inadvertently work overtime that you would still be liable for paying.
Temporary or Other Probationary Statuses: Some employers choose to include temporary employees or even probationary periods for new employees. This type of status isn’t something that you’ll find in most employment laws, but it can be important to define if you want to exclude these employees from certain benefits. For example, we commonly see employee handbooks that don’t offer paid time off until an employee has completed their initial probationary period and become a regular full-time employee.
Interns: Finally, if some of your workers are interns, then you need to carefully consider whether the law will treat them as employees who must be paid at least minimum wage. Unless you are working with an academic internship program for which the student is receiving credit, don’t assume that you can hire unpaid interns for free labor. And even if your interns are part of an academic program, legally, the intern must be the primary beneficiary of the experience. When it comes to classifying workers as interns, most small employers don’t offer any employment benefits to interns (other than those that are legally required, i.e. workers’ compensation coverage). When in doubt, assume that any intern is legally considered an employee and act accordingly.
Employment classifications can be a tricky area for small employers, but it’s important to get it right if you want to minimize your legal risks. If you have questions about your employment classifications or your employment policies in general: