According to one study, 30% of businesses had misclassified their employees.
Not only does this hurt the employees and your employer brand, but it can cost your businesses thousands in fines and fees.
Employee classification is very important, but if you’re not sure if you’re classifying your employees right, keep reading.
Why Does It Matter?
You might have great intentions and accidentally misclassify an employee, but some businesses actually do it on purpose to try and save more money in an unethical way.
For example, some employers will classify full-time employees as 1099 (independent contractor) employees so that they don’t have to pay things like:
- Social Security payments
- Unemployment insurance taxes
- Employer tax contributions
- Employer Medicare contributions
This can add up to a lot of money saved for the company. However, if the company gets caught in an audit, it’ll have to pay hefty fines and fees.
Employers will also need to ensure that they’re paying their employees a minimum wage, following all of the labor laws, and complying with immigration laws as well.
Some misclassification might be accidental, but the fact that so many businesses had misclassified their employees is concerning. If you aren’t sure whether or not your employees are classified correctly, check out some of the common employee classifications.
Full-time employees are generally W2 employees. They’ll work about forty hours a week, and they could be eligible for overtime. They’re normally eligible for benefits as well.
Most of them will be hired “at will” which means that they’re not on a set contract. They can leave and find a new job, or you can fire them (with cause) at any point.
If you have more than fifty full-time employees in the United States, you also have to offer these employees health insurance to them and any dependents they might have.
This is one of the most common types of employment, and most of the workers that you’ll hire will likely fall into this category.
If you don’t have an employee that works for forty hours a week, you’ll likely have either a regular part-time or temporary part-time employee.
If you have a regular part-time employee, they will work for at least twenty hours but no more than forty.
With temporary part-time, they’ll be regularly scheduled for at least twenty hours a week but no more than forty hours. They’ll have shorter contracts, typically for 90 days.
You can set the benefits for the part-time employees, and you might prorate some of the benefits based on the hours that they work.
When you have temporary employees, they’ll be working on a contract and have a set end date for when they’ll stop working. These workers will normally be with a company anywhere from six months to two years, and they’re normally hired for a certain project.
After their contract is up, you can extend it if they’re interested in working there. You could even hire them as full-time employees.
Hiring temporary workers is also a great way to test if an employee fits into the culture of your business and whether or not you’d want to hire them full-time.
Contract employees are hired for a certain period of time. Their hours are typically like that of a full-time employee, but they could end up working more than 40 hours a week as well.
Both parties should know how long the contract is going to last upfront. Some of the most common contract jobs include construction workers, salespeople, or IT employees.
A contract employee will be nonexempt on their payroll, which means they qualify for FLSA benefits. You can also set the salary and money for this contractor based on the contract and how long the contract is going to last.
Independent contractors do work for your business, but they’re not on your company payroll. They’re classified as 1099 employees, and you don’t need to pay them any benefits.
Having independent contractors gives you and the worker flexibility. They have their own unique schedule and will complete projects based on a schedule that works for you and them.
Typically, independent contractors are hired for roles like freelance writers, rideshare drivers, or marketing professionals.
Working hours will vary based on the contract, and you can set additional compensation as well. However, the independent contractor isn’t technically an employee of the company, so they don’t get PTO or health benefits.
Hire a PEO
These might sound confusing, and that’s okay. You can hire a Professional Employer Organization (PEO) solution to help you manage all of the hiring and classification of your employees.
These PEO providers are experts in their field, and they’ll ensure that your company is in compliance with labor laws, even if it’s in a different state or country.
They’ll ensure that you have time to focus on running the main parts of your business, like growing your business and increasing profits. You’ll also have peace of mind knowing that all of your employees are correctly classified so that you won’t have any setbacks in your company.
Discover More About How to Navigate the Employee Classification
These are only a few things to remember when you’re trying to figure out how to navigate employee classification.
However, if you’re still confused, then it’s best to leave this to a company that is an expert in classifying employees.
If you’re looking for a PEO who will ensure that all of your employees are classified correctly, check out our PEO solutions.