Actions speak louder than words. How many times have you heard this tested and true axiom?
In the world of Human Resources, it also is wise counsel. I write from experience navigating legal actions brought by disgruntled employees and taxing authority audits. Attorneys and tax auditors will request written documentation and then make a case showing how the employer’s actions differ from the documentation, almost always leading to a win for the disgruntled employee and significant fees and penalties from the taxing authority. They look at the employer’s actions — not what contracts, job descriptions or handbooks say. Two particular areas of risk are exempt vs. non-exempt employees and independent contractors vs. employees.
Let’s start with one of the most confusing of these areas: exempt vs. nonexempt employees. The issue here is whether the employer has to pay overtime and observe workday and break-time limitations for employees. Most employers have the misguided perception that all they need to do to avoid paying overtime is make all of their employees exempt employees. An exempt vs. nonexempt employment status really has to do more with the scope of the work being done than whether or not an employee is paid hourly or on salary.
“To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $684 per week. Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10 percent of the standard salary level. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.” See the footnoted website (1) for a full description of job duties and requirements that must be met in order to classify an employee as exempt, thus making them a salaried employee.
Another minefield for employers is whether to hire someone as an independent contractor or W-2 employee. Many workers request to be made independent contractors rather than W-2 employees. On the flip side, many employers prefer workers to be independent contractors to streamline payroll and decrease employer taxes. Once again, what the contract with the worker says won’t determine the requirement to withhold and pay employment taxes. If the work situation looks like a W-2 employment situation, taxing authorities will demand their taxes.
Here are some things to be mindful of when determining if a worker should be an independent contractor:
Behavioral: How closely is the work directed by the company?
-Does the company determine working hours and locations?
-Who provided the tools or equipment?
-Who employs/directs any assistants?
-Who decides where to purchase supplies and services?
Financial: Who bears the risk of losing money in the relationship?
-Is there a cost to the worker to perform the work?
-Does the worker risk doing the work at a profit?
-Is pay guaranteed to be made at a set amount at a set time?
Relationship between the company and worker: How interdependent is the company and worker?
-Does the worker receive any benefits, whether part of a company plan or reimbursement of expenses usually considered employee benefits?
-How does the worker conceive the relationship? Do they consider themselves ‘working for’ the company?
-Does the worker only work for the company or do they work for other companies?
In summary, let’s use another axiom: If it looks like a duck, walks like a duck, swims like a duck and quacks like a duck, it’s probably a duck. Employers need to review how workers are classified to ensure that the documents are in line with what’s actually happening in the business.