3 Tests for Classifying Employees
Employers have wide-ranging employee tax and wage-reporting responsibilities. Whether deliberate or not, inability to correctly report and pay out taxes on your personnel can end in substantial fines and interest payments. Misclassification of a worker as an independent contractor is one way where employers incur violations.
All companies are at risk and small companies can no longer assume that the IRS will ignore them to focus on larger businesses. The Affordable Care Act (ACA) has introduced amplified inspection from the IRS on the issue of proper employee classification. Any business is at risk, and, for small companies particularly, the possible fines related with misclassifying employees—as well as the damages, penalties and fines they could theoretically have to pay if they are litigated for Labor Code violations –could be devastating. Because of this, it is completely essential for employers to properly classify all employees.
Nearly 20% of wage and hour lawsuits center on the allegation that employers misclassified nonexempt employees as exempt, largely to avoid paying overtime.
Nonexempt employees are eligible for overtime pay; exempt employees are not.
Broadly speaking, in order to be classified as exempt, employees must meet three tests:
✔ The Salary Level Test –Employees must be paid at least $23,600 per year.
✔ The Salary Basis Test –Employees must be paid on a salary basis; i.e., receive a guaranteed minimum amount of pay for any work week.
✔ The Duties Test – Employees must perform exempt job duties, defined as executive, professional, or administrative duties.
As you know, it’s a great deal more complicated than this (especially with regards to the Duties Test), and that’s what lands employers in trouble. Your responses to the three preceding tests should deliver preliminary guidance in making a determination on your employees’ status. However, you will need to look at the relationship and a whole and consider the degree of control held by the employee over his or her job. The IRS uses a 20-factor test, known as the “right to control” test, to evaluate an employee’s status as independent or employee. This test is comprised of questions concerning the level of training received, extent of personal services, suppleness of schedule, demands for full-time work and more. It is also why President Obama recently directed the DOL to revise white collar exemptions. While the result of that directive remains to be seen, it is clear that employers need to tighten up on their classification policies now.
Best Practices for Classifying Employees Correctly:
- Audit exempt status classifications for all employees, giving priority to the highest-risk positions. Gather documentation, conduct interviews, assess against federal and state labor laws, and develop a communication plan for employees. Then, make the required changes. If you can’t reasonably determine an employee’s correct classification, bring in a labor law expert.
- Develop a training program for managers to ensure employees are classified correctly going forward.
- If you don’t track hours for exempt employees, consider doing so now. If you fail to keep records of exempt employees, you’ll have no documentation regarding hours worked in the event of a related allegation.
- Consider a system with advanced reporting capabilities so you can continuously monitor and ensure employees are compensated properly when it comes to role and responsibility.
To defend your business from the hazard of expensive consequences, you must guarantee that your company’s policies and actions are compliant with current regulatory requirements. EPAY’s time and attendance system helps employers track time for all employees to avoid missclassification. Learn how Blueforce can help you more accurately track hours worked and run reports to guarantee proper compensation for all employees, regardless of classification.
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