Worker Classification

Summary

When an organization hires a worker, it must classify him/her as either an employee or an independent contractor (IC). A worker is generally considered an "employee" if the organization can control what the worker will be doing and how it will be done. A worker is an "IC" if the organization has the right to control the result of the work but not the means or methods the worker uses to accomplish the result.

This distinction is important because —

  • Employees have legal rights under federal and state employment laws that ICs generally do not;
  • Employers have legal obligations toward employees under federal and state employment laws that they don't have toward ICs; and
  • Federal and state governments lose considerable tax revenue if workers who are actually employees are misclassified as ICs.

Once an organization has classified a worker as an "employee," it must determine if the employee should be classified as "exempt" or "non-exempt" under federal and state wage-and-hour laws. Most employees are covered by these laws — that is, they are non-exempt — and thus must be paid at least minimum wage and must receive overtime compensation.

Certain types of employees — typically executive, professional, administrative and outside-sales employees — are considered exempt from wage-and-hour-laws and are not entitled to overtime pay. Proper classification depends on the employee's duties and responsibilities — not simply his/her title. For example, not all "managers" are exempt employees.

Problems arise when an employer improperly classifies non-exempt employees as "exempt" or assigns non-exempt tasks to exempt employees. Misclassification can lead to substantial fines, penalties, awards of back-pay to affected employees, and even class-action lawsuits.

© WeComply/Thomson Reuters

Key Resources

For your convenience, ACC has compiled the following key resources to assist you in your compliance efforts.

For more try searching ACC's online library for "Independent Contractors"

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