Is My Employee an Employee, and Other Questions to Keep You Out of Trouble


Any company with employees must comply with many federal and state employment laws.  Many major labor laws do apply to companies with as few as one employee. This includes minimum wage and overtime. Employers of 11 or more employees fall under the federal health and safety act (OSHA) and the Civil Rights Act. Twenty or more employees and you are obligated to abide by COBRA, which provides for medical benefit continuation. Fifty or more employees, you must provide unpaid leave under the Family and Medical Leave Act.

Failure to understand and comply with federal and state laws may result in costly lawsuits and fines. Below are a few common problem areas for employers.

Who is an Employee?

It has become increasingly common for the company’s “workforce” to be comprised of a core group of employees, circled by vendors, consultants, and other independent contractors. For our purposes it is important to understand who is an employee, who is not, and what are the implications.

Employees vs. Independent Contractors

By definition, an employee is a person who works for another in return for compensation, where the employer has the power or right to control and direct the employee in the material details of how the work is performed. An employee is paid by the company and must file a W-2 for to report wages to the government. Companies must pay social security, unemployment and workman’s compensation insurance for employees.

An independent contractor is one who, in the exercise of an independent employment, contracts to do a piece of work according to his own methods and is subject to his employer’s control only as to the end product or final result of his work. A contractor files a 1099 form for the government to report income from their clients. The “client” company does not pay social security or unemployment insurance for a 1099 contractor.

Employers use independent contractors to reduce the cost of benefits and employment taxes and increase their flexibility. Independent contractors are not covered under many labor laws such as minimum wage, overtime and unemployment coverage. In addition, independent contractors can bring a specific expertise to a project that is critical, but not needed on a full-time basis.

How can this cause a problem? If the employer has wrongly determined that an employee is really an independent contractor, then there can be severe consequences. The IRS can pursue the employer to collect back taxes and other contributions that should have been paid by the employer on the employee’s behalf. The employee can also seek compensation for job benefits that were denied to them. This can quickly add up to substantial sums of money.

Therefore, it is important to understand the distinction. As a rule of thumb, if the worker does work only for you, under your direction, he or she is an employee. For more details, read 3 Ways to Determine Who Is an Independent Contractor and Who is Not.

“Employee or Independent Contractor status is defined by law.”

Employment at Will

In the United States, most employees are “at will.” “Employment at will” generally means that an employee has the right to leave a company, and the employer has the right to terminate an employee, at any time and for any reason. You can add to that, “as long as it is not for a discriminatory reason,” meaning on the basis of age, religion, creed, color, national origin, gender, or any other reason prohibited by law. In addition, if the employee is covered under a union collective bargaining agreement, or has an employment contract, then there may be additional obligations on the part of the company.

However, “at will” does not mean that the employee cannot litigate, and win a lawsuit for wrongful termination. Much depends upon the company’s written policies on discipline and termination, and how well the company follows its own policies.

It is important to create fair policies for your employees, and be consistent in administering them. Employees have choices too, and it will be difficult to keep good employees if they feel that their employer is randomly firing people for non-job related reasons.

“At Will” statements should be put in your employment application and in your Employee Handbook.  For 90+ free handbook policies, check out the Employee Handbook Project.

Overtime and Minimum Wage Laws

The Fair Labor Standards Act (FLSA) is a federal law that covers two areas that affect all employers: overtime and minimum wage.

Exempt and Non-Exempt Employees: Overtime

The FLSA defines two types of employees, those that are non-exempt (employees that are covered by the FLSA), and exempt (those that are not).

Non-exempt employees are:

  • All employees other than those who qualify as exempt below.
  • “Blue Collar” workers who do manual labor or who perform work involving repetitive operations with their hands, physical skill and energy.
  • Police, fire fighters, paramedics and other first responders, no matter how much money they earn.

Non-exempt employees must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.   In some states, overtime must be paid sooner (for example, after 8 hours worked in a day). Check with your state Department of Labor.

To qualify as an “exempt” employee, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week.   Exempt classifications are:

  • Executive
  • Administrative (narrowly defined)
  • Professional
  • Outside sales employees
  • Certain computer employees
  • Highly compensated employees

Job titles do not determine exempt status. This is a very important point. Employers often make the mistake of thinking that they can decide whether or not an employee is exempt from the FLSA overtime provision based on job titles. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations. Misclassifying employees can result in back pay due and fines for employers, so be careful that you understand this important law.

“An employee’s pay status is a matter of law, not your budget.”

What about interns?  Here’s a link to Interns:  To Pay or Not to Pay.

Minimum Wage

There is a federal minimum wage, which sets the baseline for the states. Many states, however, have higher minimum wages, so you should check with your state Department of Labor. As a practical matter, the minimum wage may or may not be important to you, as you will be paying wages competitive for the industry and position. Also, there are exceptions to the minimum wage, for classes such as minors, agricultural workers and tipped employees.

For more great human resource strategies and tools, check out my eBook, 7 Best Practices for Effective Human Resource Management, in the Amazon Kindle store.


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