May 11, 2022
Some business owners try to get around labor regulations and tax requirements by misclassifying employees. However, the IRS and federal regulators are quick on the tail of such misbehavior. For example, in early 2022, federal investigators caught a Florida business paying 22 employees a flat salary and denying them overtime.
For that equipment rental business owner, the mistake proved costly—the company was on the hook for $122,000 in back wages and damages. If the business owner had just put the workers in the right categories and paid them the right amount, the whole thing could have been avoided.
Proper classification is important for both the employee and the employer. Here’s more information on how to navigate the process.
Employee Classification Nuances
One of the most frequently discussed aspects of employee classification is the problem of misclassifying full-time employees as contractors. Businesses don’t have to pay benefits for independent contractors as opposed to employees on their payroll, which is why some attempt to misclassify people. Federal and local governments classify who counts as an employee and who doesn’t and often are based on working hours.
However, as the case mentioned in the introduction shows, classifying employees is far more nuanced than it seems at first. It’s not as simple as reporting an employee as an employee. The biggest difference is in salary compared to hourly employees.
Salaried employees sign on to receive a specific annual wage in exchange for performing responsibilities agreed to in a contract. If those responsibilities take more than 40 hours a week, the salaried employee will stay longer at work without expecting overtime compensation.
On the other hand, hourly employees sign a contract stating they will be paid a certain amount per hour of labor. Some people are part-time hourly employees, but most work 40 hours a week unless they are receiving vacation time. If hourly employees work more than 40 hours a week, they are entitled to overtime compensation, which is equal to time and a half of their usual rate.
Why Is the Difference Between Salaried and Hourly Employees Important?
It may seem as if there is no difference between salaried and hourly employees—after all, a salary also works out to a set amount per hour. However, the reason why many people want to be salaried employees is that the benefits are better.
For example, salaried employees have more stability. Most hourly employees are at the mercy of their manager’s scheduling, which means that they don’t know weeks in and weeks out how many hours they will work (and how much money they will earn). Salaried employees know how much money they will receive each paycheck.
Sometimes, the instability of working as an hourly employee works to the employee’s benefit. Hourly employees have the potential to increase their take-home pay by working overtime or on holidays. It is one of the few tradeoffs for a contract that is usually very insecure, which is why the federal government is so strict about business owners restricting overtime pay.
It’s important to note that classifying employees as salaried workers is not a “get out of jail free” card when it comes to paying overtime. Salaried employees who do not work in certain restricted professional fields, such as computer-related or administrative positions, are also entitled to overtime.
Misclassifying employees as independent contractors or hourly workers as salaried employees is a quick ticket to getting the IRS and the National Labor Relations Board on your tail, as one Florida business owner learned the hard way. Talk to an accountant to ensure you are classifying all your employees correctly, giving them the right compensation and giving you peace of mind from audits.
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