Classifying Workers Correctly

This year, many states increased their minimum wage requirements, including Colorado. These updates bring new concerns over compliance with federal and state wage laws. The main federal law that applies is the Fair Labor Standards Act (FLSA). The FLSA is construed very broadly by the courts in order to maintain what the Supreme Court called “minimum standards of decency.”¹ State wage laws may also provide additional standards. But what should employers consider?

Independent Contractors Versus Employees

The Act places minimum expectations on employers such as the number of hours an employee works in a day, how much they should be paid for each hour of work, and certain overtime requirements. Of course, these laws only apply to nonexempt employees. The Act (in a circular way) defines employees as “any individual employed by an employer.”² This definition excludes independent contractors who, as a matter of economic reality, do not depend on the employer to which they render services. For example, if you hire a lawn service to drop by your business’s property once a month, the workers who come to your property aren’t your employees and they don’t depend on this one job they are doing for you. Compare that to a nursery worker who, on a monthly basis, also mows the lawn or does small gardening projects in addition to his regular duties helping customers. In those examples, it wouldn’t matter whether the employer labeled the nursery worker as an independent contractor or whether it called the gardening service workers employees—the economic reality is that one is employed by the employer and the other has been hired for a one-time (albeit monthly) job. The nursery worker would be entitled to rely on the protections of the FLSA.

Exempt Versus Non-Exempt

Also challenging are the distinctions between exempt and nonexempt employees. This issue is the most commonly litigated under the FLSA and state wage laws.  Most often, disagreement arises when employers hire both classifications of employees. The default is for the employee to be nonexempt, thus classification at the outset is crucial.

What does it mean to have an “exempt” employee? The employee is exempt under the FLSA’s overtime and wage requirements. Many employers get in trouble with this because they assume that making an employee salaried automatically makes the employee exempt. This is not the case, as salaried employees can still fall into either the exempt or nonexempt category—and the default is nonexempt. It’s only when the salaried worker is employed as an executive employee, a professional, or an administrator that the worker may be considered exempt. Under the FLSA, categories may be broken down like this:

• Nonexempt hourly employees are paid hourly. Any time worked is accounted for and must be paid according to FLSA standards.
• Nonexempt salaried employees are paid on a salary basis, but if they miss a full day of work, it may usually be deducted from their pay.
• Exempt employees must be paid their full salary in any week they work at all, regardless of the number of hours worked.

Things that Don’t Work

Employers should be wary about the categorization of employees. Enhancing an employee’s job title and fixing them with a salary will not automatically make an exempt employee. Thus, calling a housekeeper an engineer and giving a salary will not make the person exempt. Moreover, an employer cannot create a hybrid structure where the employee is nonexempt for the first 40 hours of work and exempt for anything above it. In a workspace where employees perform similar functions, an employer should keep detailed accountings of who is doing what and periodically review job duties to ensure proper categorization of staff and consistency across job descriptions. Employers should also carefully monitor overtime and pay out where it is due. Failure to properly account for these job specifications could lead to a costly wage claim lawsuit.

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¹Tony & Susan Alamo Found. v. Secretary of Labor, 471 US 290, 296 (1985).

² 29 USC § 206(a)

Featured Image by Rebecca Sidebotham.