Tips for Navigating Worker Classifications

Correctly classifying workers as employees or as contractors (or volunteers, interns or trainees) and properly classifying employees as nonexempt or exempt from overtime pay requires HR departments to chart their way through a maze of federal and state laws and regulations.

"Beware of the different rules that courts as well as federal and state agencies use" for classifying employees, said Christine V. Walters, SHRM-SCP, an independent consultant whose practice, FiveL Co., is in Westminster, Md. She spoke on March 29 at the SHRM Employment Law & Compliance Conference 2022 in Washington, D.C.

Employee or Not?

"There are all sorts of workers who are not employees," Walters noted. "Make sure that you're treating them in a way that protects the relationship you want to establish."

Can for-profit employers use volunteers and unpaid interns?

"Yes, but it's difficult," Walters said. Here, as elsewhere, the answer often is "it depends" and "yes, maybe," requiring HR professionals to check federal and state regulations, she said.

For instance, volunteers cannot perform the same type of work performed by an employee, although there are exceptions for those who donate their services to religious, public service and nonprofit organizations.

Interns or trainees "may also be employees, depending on the circumstances of their activities for the employer," Walters noted. Department of Labor (DOL) Fact Sheet #71 lists factors that distinguish unpaid interns from employees, such as "the extent to which the intern's work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern."

"I see employers tripped up with reductions in force or hiring freezes, where extra work needs to be done and managers request an intern" to do work that had been handled by employees, Walters said.

Independent Contractors

DOL Fact Sheet #13 lists factors that distinguish independent contractors from employees under the Fair Labor Standards Act (FLSA), such as the degree of initiative and judgment exercised by the contractor and whether the contractor has an independent business organization and operation.

"Watch your state laws, too," Walters advised, because they may have different and additional requirements for determining independent contractor status.

Nonexempt Versus Exempt Workers

The DOL presumes that an employee must be paid overtime unless employers demonstrate that the employee meets the requirements of exempt status, Walters explained. If nonexempt, employees must be paid 1.5 times their "regular" rate of pay for hours worked past 40 hours per week.

One hazard is determining what compensation to include in these calculations. The DOL says that nondiscretionary bonuses must be included in the regular pay rate, for instance. Nondiscretionary bonuses, such as individual or group production bonuses, are based on a predetermined formula and are announced in advance to induce employees to work more efficiently. Employees can rely on receiving these payments if the stated goals are met.

What if the bonus is distributed to all workers when the organization meets its goals? Again, Walters said, "it depends" on factors such as how large the organization is, with a workforce of 50 employees more likely to be seen as motivated by a nondiscretionary bonus to change individual behavior as opposed to an organization with 500 employees.

Other complications are the factors for determining exempt status, such as the executive, administrative and professional "white collar" exemptions for workers with a high degree of discretion over their work.

Keep in mind the DOL's safe harbor policy, Walters advised.

What if exempt employees are put on a performance improvement plan and are no longer exercising discretion over their work?

"You may need to reclassify them as nonexempt, at least temporarily," Walters said.

At least 20 states have their own white-collar regulations, Walters noted, so "double-check your states."

Hours Worked

In determining which hours fall within the standard workweek, be sure to consider how time is spent onsite immediately before and after work and whether meal breaks are taken.

Time spent in activities that are preliminary (before principal work activities) and postliminary (after the end of principal work activities) may or may not be hours worked. It depends on whether they're directly related to the employee's principal work activities.

Also consider time spent putting on and taking off uniforms or protective equipment, called "donning and doffing." Compensating employees for this time depends on the type of business and whether the donning and doffing is considered a vital part of the employee's job, which may require consulting with a wage and hour attorney or an FLSA specialist.

For issues around unpaid meal breaks, "documentation and record-keeping are important," Walters said. You may need to record who took lunch and who didn't.

She advised having nonexempt workers sign out or use biometrics to record the start of their unpaid meal periods.

"The regulations don't require it, but it's great documentation if someone claims to have worked through their unpaid meal period," Walters said. If an employee doesn't follow your record-keeping procedures, "that puts the fault on them, not you."

Related SHRM Article:

Anticipated Overtime Rule Previewed, SHRM Online, March 2022