What do I need to know about classifying employees? What is the difference between an independent contractor and an employee?
To fulfill their missions and make the most out of limited resources, more and more nonprofits are hiring a mix of employees and independent contractors. But classifying employees and determining who is and is not an independent contractor isn’t always an easy task. If a hire is misclassified, an organization can face hefty fines and even lawsuits. So understanding the determining factors to classification is key. Here are the basics:
To avoid paying overtime, an employer may be tempted to classify an employee as “exempt” under the law. (Non-exempt employees are entitled to overtime pay under the Fair Labor and Standards Act [FLSA], typically when they work more than 40 hours in a week.) Employees who might fall into this category include executive, administrative, and professional workers.
But simply calling an employee a manager, or paying them a salary as opposed to an hourly rate, doesn’t necessarily make an employee exempt. So do your research before making a classification. If you’re unsure, it’s best to refer to a reputable employment guide, an HR management firm or an attorney.
The IRS, California courts, and state agencies use a number of factors to determine whether an individual is an independent contractor or an employee. But because no single factor is conclusive on its own, it’s sometimes difficult for hiring organizations to determine a relationship.
In general, independent contractors work on specific, time-bound projects and are able to work when, where and how they choose. For example, they wouldn’t be required, as employees often are, to work a set number of hours or on the premises, to complete a job. They’re usually paid by the project or on commission, as opposed to employees who may be paid by the hour or the month. They typically use their own equipment, work for more than one employer at a time, and their work is generally not integral to the continuation of business. Contractors are also responsible for satisfactory completion of a job or are legally obligated to make good for failure to complete it, allowing for profit or loss. To learn more, visit the IRS website and read the IRSPublication 15-A: Employer’s Supplemental Tax Guide