Full-Time, Part-Time, or Freelance? Classify Your Employees Correctly

March 8, 2016 // ADP®

It may not seem like a big deal, but how an employee is “classified” can end up being a source of confusion for business owners. Mistakes, such as misclassifying a worker as an independent contractor when he or she should be considered a full-time employee, can result in fines, back taxes and interest payments. The Affordable Care Act has brought employers additional Internal Revenue Service scrutiny. Here’s a rundown of the basic employee classifications and which rules apply to each.

Independent Contractor or Employee?

Independent contractors may be more cost-effective than full-time employees and give a business owner more flexibility with staffing during seasonal changes or times of uncertainty. However, to be classified as an independent contractor, some very specific conditions have to be met. Misclassification has become a frequent cause of many employee lawsuits, with contractors, for example, claiming they were essentially performing the work of employees but not getting employee benefits.

The most common way to determine whether your workers are contractors or employees are the three common law measures that the IRS uses. This mainly has to do with how much independence workers have.

Behavioral

Does the company direct or control the work of the worker?

Financial

Is the worker required to make an investment in tools and facilities?

Type of relationship:

Is there a written contract between the parties that lays out how permanent the relationship is?

To provide additional guidance, the IRS has laid out 20 specific factors that can be used to help make the determination. Additionally, there are a number of tests used to assess the status of an employee. The Department of Labor and EEOC both have guidance on factors to consider when making employee classification determinations.

Exempt or Nonexempt?

Another important classification is the difference between exempt and nonexempt employees, i.e., those who must be paid for overtime and those who do not.

Non-exempt employees are covered by the Fair Labor Standards Act (FLSA) and are paid for any overtime they work more than 40 hours a week at a rate of at least one-and-a-half times their hourly rate.

Exempt employees, on the other hand, do not earn overtime pay, even though they may be required to work beyond 40 hours a week. In order to be classified as exempt, workers must meet all three tests laid out by the FLSA:

They must be paid at least $455 a week
They must be salaried
They must perform exempt duties

Misclassifying workers as exempt may result in having to pay overtime, fines and damages. Many business owners don’t track the hours of exempt employees, which could make it difficult to determine how much overtime is owed if the employee is later found to have been misclassified. To avoid this potential problem, consider tracking the hours of all employees.

Full-Time, Part-Time or Temporary?

Companies typically define full-time, part-time and temporary status based on the eligibility requirements of their insurance benefit plans. For example, most employers limit health insurance coverage to full-time employees.

Temporary

These workers can work either full- or part-time, but their employment is for a finite period of time. Temporary workers do not typically receive benefits.

While it can be confusing, taking time to learn how to properly classify employees can help you sidestep potential problems of having to pay back taxes and fines.

Full-time

The FLSA sets 40 hours as the number of hours nonexempt employees can work without being paid overtime, so this has become a common shorthand for full time with many employers. Others use 35 hours or 37½ hours as their definition of full-time. However, note that the ACA considers employees full-time—and therefore eligible for health insurance—at 30 hours.

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog.

ADP®

ADP® is one of the world’s largest HR organizations. We are leaders in HR outsourcing, systems and solutions – in everything from basic payroll, benefits and record keeping to complex tools for recruiting, compensation, succession planning and data analytics. We focus on what we do best – be it systems, process or compliance – so you can concentrate on what your business does the best – because thriving businesses succeed with motivated and empowered people. We know your purpose isn’t simply better process – it’s building a business on a better workforce.