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Of all the decisions business owners face, classifying workers is often one that can be overlooked and/or undervalued. The issue of misclassification generally falls into two categories: determining whether workers are employees or independent contractors, and then for those individuals classified as employees, determining whether they are exempt or non-exempt from certain provisions of the applicable wage and hour laws.

Misclassifying workers in either case could have detrimental effects on your company, possibly resulting in some or all of the following: back pay, fines, penalties, attorneys’ fees, and/or owed taxes.  It is very important for business owners to take time and care when determining the appropriate classification(s) for its workers, including seeking legal counsel to assist when necessary.  This post will briefly outline the differences between some of the various employee classifications, tools to assist in classifying, and potential repercussions of misclassification.

When considering whether an individual working for you is an employee or an Independent Contractor (IC), it is important to recognize that the term “employee” is defined differently under different regulations.  There are three basic tests used to determine independent contractor status under a variety of laws: the IRS Control Test, the Common Law Test, and the Economic Reality Test. How the principles of the various tests are applied varies under different laws and in different states.  It is important to keep in mind that a worker may qualify as an independent contractor for tax purposes but not for other purposes (e.g., wage/hour, workers’ compensation, unemployment insurance, etc.). Conservatively, employers will want to verify that the worker’s status as an independent contractor meets the criteria of all applicable laws.

In general, an employee would be a worker who performs services for you where you have the right to control what will be done and how it will be done, even if the individual has been granted some freedom of action. Independent Contractors are generally in business for themselves providing services to other businesses and are considered self-employed. As the employer, you will usually only have control over the result of the IC’s work and not the method of how the work is completed.

A worker’s classification affects taxes (and who is responsible for paying them), eligibility for workers’ compensation and unemployment insurance, company fringe benefits, and other protections for employees established by federal, state, and local laws. When making a determination, you may want to err on the side of an employee classification to avoid potential back taxes, penalties, and fines associated with misclassification. It is always advisable to seek counsel if you are using an IC for services for your business, especially with the Department of Labor’s new initiatives to combat willful misclassification of employees as independent contractors. For additional information on this initiative please visit: http://www.dol.gov/whd/workers/misclassification/

For information on determining classification please visit: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-(Self-Employed)-or-Employee%3F 

Once you have determined which workers are employees, another common classification question is whether the employees are exempt or non-exempt from minimum wage and overtime requirements under federal and state law.  Many employers think the determination of exempt versus non-exempt is as simple as asking whether they are paid “salary or hourly.” Although the method of payment is a part of the classification analysis, the analysis also considers the employee’s job duties and salary level, in addition to basis of payment.

Covered, non-exempt employees are subject to all provisions of the Fair Labor Standards Act (FLSA), the federal wage and hour law. Some workers, referred to as exempt employees, are excluded from the minimum wage and overtime provisions of the FLSA and some are only exempt from the overtime provisions. Those employees falling under the white-collar exemptions (executive, administrative, professional, outside sales, and certain skilled computer employees) are exempt from both minimum wage and overtime provisions of the FLSA. It is important to conduct this classification analysis carefully; if an employee is misclassified as exempt, it can lead to required back pay including any overtime hours worked for up to three years, as well as any applicable penalties.

These white collar exemptions are narrowly defined and may also be governed by your particular state, so employers are encouraged to review exact terms and conditions on the DOL website and/or by contacting your local governing agency. For more information and useful tools to assist in classifying, please visit: http://www.dol.gov/whd/regs/compliance/fairpay/fs17a_overview.htm

There is a lot to think about when it comes to properly classifying and compensating workers, and the process can be time consuming. But correctly classifying from the beginning can save you time and money in the long run. A great place to start is by building out an organizational chart for everyone who provides work and/or services for your company. Once you have the organizational chart, start drafting or reviewing already existing job descriptions for each position and during that process, make and/or review the classification determination. It’s better to take the time now to properly classify all employees, instead of potentially owing overtime and fines or penalties in the future. And remember, if you’re unsure how to classify a worker, seek legal consultation.

Erin Dillon - Senior HR Generalist/Consultant, Paychex, Inc. Erin has 7+ years of experience in Human Resources and her PHR/PHR-CA certifications as well as a Masters degree in Management. Her expertise includes: employee relations, CA employment law, Federal employment law, leaves of absence, performance management and employee handbooks. www.Paychex.com | Facebook | @Paychex | More from Erin

In my last post, I provided a process-based approach one can take to set the conditions required to ensure your business environment includes processes which facilitate desired employee behaviors. So, how can you recruit and select employees who will fit your organizational needs? I’m going to go back to processes.

First, if you didn’t recognize the need to map out a recruiting and selection process when you read the previous article, here is a good time to do it. Why is it important to have a recruiting and selection process? As you seek to start up and grow a successful business effectively, creating and delivering your products and/or services depends on your ability to develop employees who are engaged, skilled and empowered to continuously improve. So, recruiting and selecting the right employees is critical.

Each employee has specific roles and responsibilities they must fulfill. The fact is each employee’s roles and responsibilities can be defined by the business processes they participate in. Assuming you have clearly defined your business’ mission and values, mapped out your business processes and defined the “how” for each activity, you now have the “specifications” you need to engineer the perfect job description. Regardless of the recruiting channels you utilize (direct-hire, staffing agencies, local media advertising, job fairs, social media, recruiting websites, etc.), the job description is your primary recruiting tool. Writing a job description that clearly defines exactly the type of person you are looking for can be accomplished by:

1. Identify the business processes and activities the employee will participate in and interact with.
2. From process maps and procedures you have created, identify the risks (Internal Safety & Security, External Safety & Security, Quality, and Efficiency) associated with the job-specific processes and activities which the candidate must be proficient at mitigating.
3. Identify the special skills required to mitigate the risks identified in Step 2 and any minimum requirements for specialized training, education and/or experience.
4. Identify the specific behaviors the incumbent must be both willing and able to display in order to optimize the risks associated with the job-related activities and the values they must possess to drive their decisions and actions.

The last step is where you illustrate the alignment between your business’ mission and values and how they translate down to the roles and responsibilities of the position. I believe it’s important to be very specific in that last step, avoiding the boiler-plate approach at writing the job description. After all, during the recruiting phase, you want to attract the people who will have the highest probability of meeting your expectations to apply so you can select the best candidates to interview.

Be careful about the minimum requirements you list. Only list the requirements that are critical for hire. For example, if the incumbent requires a specific license prior to being hired, it should be listed. However, if you’re willing to train the candidate with the right attitude you may not want to include it. Instead, you can review the information they provide on their resume or application to try and understand who they are and what they think. During the selection process, if you have stated all of the real minimum requirements, it will be easy to glean out the under-qualified applicants based on the education, training and experience information they provide. Just be careful that your job description doesn’t eliminate the right person based on false requirements.

My experience has been that attitude is what truly differentiates the wheat from the chaff when it comes to selecting employees who are willing to constantly engage in developing the right skills and continuously improve in a specific role. So, don’t waste time asking questions during the interview which the candidate has already answered on their resume. Instead, spend time focusing on seeking to understand their core values. This will accomplish two things:

1. It will help you determine how well they will be aligned with your organization’s values.
2. It will allow you to see what drives their decision-making.

For example, I once interviewed an applicant who sought a position on a food manufacturing line. The activities they would participate in required a detail-oriented person who could consistently ensure their hair was covered with a hair net, their uniform was free of contamination, their hands were clean and the gloves they wore were sanitized. So, I described a scenario in which a number of tasks needed to be performed prior to starting work and why they were important. The number of tasks was similar to the steps I expected an employee to take just prior to approaching the production line.  When I asked them what they thought of such a scenario, they replied, “I’m here to make as many products as possible in the time I’m here. It’s all about productivity, that’s all anybody really cares about. The tasks you just described seem like a waste of time.” Their answer indicated the candidate prioritized efficiency over food safety (external safety & security), which was not in alignment with how my organization prioritized values. I decided not to hire because I did not have the confidence I needed to trust they would make decisions that drove the kind of behaviors the job required to optimize risks.

There is a tendency to take a boilerplate job description and modify key words to fit the position. Taking this approach means that you will probably attract a lot of applicants, but you may not find the person you truly want for the role. Translating the behaviors critical to being successful at the business activities associated with the position and being specific about the values you are looking for in an employee can streamline your process of selection for interviewing and hiring. The time you save in taking the boilerplate approach may reduce the time it takes to post an opening but don’t make the mistake of believing it will not cost you more later on. You will end up investing more time and effort into selection or employee development than you expected.  Use your business processes as the driving force behind your recruiting and the investment has a much higher probability of paying larger dividends in the long-term.

Tom Eakin - Co-Chair, Sioux City SCORE Tom is an expert in leadership and organizational development, business process design and continuous improvement with a strong background in operations. www.SiouxCity.SCORE.org | SCORE Mentors | LinkedIn | More from Tom