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Federal and state laws don’t define the definitions of employees, making employee classification very important. It is up to the employer to categorize their employees based on the type of work and hours worked. If a business does not know how to classify employees, it becomes a serious HR compliance issue.
If employers do not classify employees, they are held liable for taxes, benefits, and pay for misclassified workers.
Legally mandated benefits required by state and federal law, such as workers’ and unemployment compensation, unpaid family, medical, and military leave, are based on employee classification. Depending on the classification, employers have to ensure they’re compliant with the Fair Labor Standards Act (FLSA)—which includes minimum wage and hour rules for overtime pay.
Additionally, one of the leading causes of payroll and tax mistakes is the misclassification of employees. Many of the tax forms businesses must file (i.e. Form 1099, Form 940, Form W-2, etc.) are determined by employee status. If an employer doesn’t pay taxes to an independent contractor who should have been paid as an employee, they are held liable for those taxes.
As you can see, employee classification quickly becomes a foundation for HR compliance. If you’re not compliant, penalties, federal and state tax liabilities, claims for benefits, and class action claims could result. So make sure you’re familiar with the following types of employees and how they translate to your HR policies and procedures.
Employees can be exempt or non-exempt. The distinction between the two is significant. Non-exempt employees are governed by the Fair Labor Standards Act (FLSA) and are entitled to overtime pay for hours worked beyond the standard 40—while exempt employees are not.
In simpler terms, exempt employees are usually salaried workers, while non-exempt employees are typically hourly workers.
Benefits may be provided or required for full-time employees—but not part-time, temporary, or contract employees. As a result, drawing the line between full-time employees and part-time or temporary employees becomes critical. However, you have to pay the following for each of the types of employees above, regardless of their status:
Don’t forget that independent contractors do not count as employees. In Colorado, the definition of employment is broad and not limited to the common-law relationship as defined by the IRS—especially when it comes to independent contractors. This form of classification is reserved for non-employee workers who perform work for your business for a temporary period of time, but do not fall under your purview of control. In other words, you do not have to withhold taxes on payments to contractors.
The easiest way to avoid HR compliance issues due to employees’ misclassification, is to craft an air-tight employee classification policy. The policy should clearly state:
Regular employee and payroll audits also help to make sure you’re not only classifying employees correctly, but making the necessary deductions for taxes and benefits. If you partner with Obsidian HR, we can do this for you. We can make sure you are compliant by helping you craft your policy and conducting regular audits.
We also record, file, and share relevant tax forms with you. And pay stubs and W-2 forms are available electronically for you and your employees through our payroll platform. Our platform also tracks time off, attendance, and can create customized reports to make it easier to conduct payroll audits and update employee records. To learn more, schedule time with us today.