Employment Law: Classifying Employees

Common Misconceptions and Doing it Correctly

Running a business is no simple endeavor, and the challenges that are a part of navigating employment law, especially, seem to be endless. Luckily, The Cromeens Law Firm is here to help. In this series, we’ll be covering the most integral points of employment law that every business owner should be aware of. In this blog, we’ll address common misconceptions about classifying employees as well as how to do it correctly.

One of the most important questions a company must answer about its workforce is whether the workers should be classified as employees or independent contractors. Answering this will clarify for you how to properly pay your workers and if you’ll have to pay them overtime. Knowing how to classify and compensate those you employ is essential in legally protecting you and your business, so we are going to dive into that and help you protect your business from the front end.

How do the Federal Wage and Hour Laws Apply to You? 

The Fair Labor Standards Act (FLSA) is a labor law that establishes the right to minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Nearly every single company and its employees are subject to the FLSA through either what the government calls Enterprise Coverage or Individual Coverage.  

If you have at least two employees and an annual dollar volume of sales or business of at least $500,000, you fall into the Enterprise Coverage category and, therefore, must follow the wage and overtime rules of the FLSA. 

If the individual seeking to hold you liable for wage or overtime violations is involved with interstate commerce, you fall into the Individual Coverage category and, therefore, must follow the wage and overtime rules of the FLSA. For example, your employee makes, uses, or touches material or supplies which have been shipped or may be shipped across state lines. Another example is something as simple as your employee using paint that was shipped from another state to paint a home. This makes the employee involved in interstate commerce, which makes you subject to the FLSA. 

What is the Standard Wage and Overtime Rule? 

“Except as otherwise provided in this section, no employer shall employ any of his employees…for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.”  

Simply put, the rule is that the employer must pay an employee 1.5x their regular rate for every hour worked in excess of 40 hours in a workweek unless the employee is exempt.  

Most people know the rule but are unaware of the importance of the definitions of the words employee and exempt.

Only Employees are Subject to FLSA Wage and Overtime Laws 

Employment law is extremely complex. A common misconception is that you may think that as the employer, you have the right to determine if your worker is an employee or independent contractor. However, that determination is made by the courts. So, even if a worker begs you to be an independent contractor or signs a document stating they agree to be an independent contractor or even does not have the proper documentation to be put on the payroll, you may be in violation of the FLSA if the court determines that the worker is an employee. 

The court uses a five-factor test to determine if the worker is an employee or an independent contractor: 

1. Degree of Control Exercised by Employer. The court asks questions such as, “Who determines the hours or shifts worked by the worker? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?” If the answer to these questions is consistently the employer, this factor leans towards the worker as an employee.
2. Permanency of Relationship. The court looks at how long the worker has worked for the same company. The longer the worker is with the same company, the more likely the worker is an employee.
3. Skill and Initiative Required. Here, the court looks at the job duties and tasks performed by the worker. Does the worker perform tasks requiring or drawing on extensive training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site? If these answers are “yes,” this worker is more “independent” from your company, and this factor leans towards him or her being an independent contractor. However, if you provided the worker with all the training needed to perform the job, this factor would lean towards him or her being an employee.
4. Relative Investment of Worker Compared to Employer. For this factor, the court determines who pays for the “overhead” expenses. Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment? If you invest in your worker more than your worker invests in either your business or his own business, this factor leans towards the worker as an employee.
5. Potential for Profit and Loss. Lastly, the court looks at the consequences the worker would suffer if the company started to lose money or grow exponentially. For example, did the worker make any investments such as insurance or bonding that would lead to extra profit or loss for the employee on an individual level? Can the worker earn a profit by making the executive decision to perform the job more efficiently to increase profit or potentially suffer a loss of capital investment? If the answer is no, this last factor leans towards the worker as an employee.

Important Notes

• Even though the court likes to say each factor is weighed evenly in its decision, the “control” factor matters the most.
• This analysis applies in Texas on both a state and federal level. Texas does not have separate wage and overtime laws. However, some states do have laws you must obey in addition to Federal laws. For example, a worker who may be deemed an independent contractor under the Federal laws may be deemed an employee under California’s wage and overtime laws.

Now that we know if your worker is an employee, let’s see if he or she is exempt. Another misconception is that paying your employee a salary automatically makes him or her exempt from the wage and overtime requirements. However, that is not true. 

To be considered exempt, an employee must be both paid a salary and fit into one of the exemption categories. The most popular categories are:

• Executive exemption
• Administrative exemption
• Professional exemption
• Computer employee exemption
• Highly compensated employee exemption
• Creative professional exemption

If the employee is paid a salary and fits into one of these exemptions, they are not owed overtime.

Conclusion

Employment Law is one of the most challenging areas of business ownership and is often frequently overlooked. This month’s blog series will break down and spell out the basics by educating you on how to protect yourself, your workforce, and your business before something goes wrong. Our employment attorneys will be covering this and more at our Employment Dos and Don’ts webinar on June 23 at 12:00 PM CST.

For more assistance with all things Employment Law, including creating employee handbooks and developing independent contractor agreements, contact The Cromeens Law Firm today and quit getting screwed!