In this article, we will talk about how a small business classifies or should classify its employees (Employee classification). I know this might sound like a scary topic, but we are going to take it from the top. Whenever a small business is growing and consequently needs to bring on board a few team members who help with the work load and support the growth of the business, the business would obviously need to hire one or more employees. Once this decision has been made, the next decision to be made is whether that person to be hired is to be an employee or an independent contractor, the difference of which is significant for a number of reasons.
Classifying Your Small Business Employee (employee classification)
A full time employee: is any employee that averages 30+ hours per week, or any employee that works 130 hours in a calendar month.
A part time employee: Is any employee who averages less than 30 hours per week or less than 130 hours a calendar per month.
An Independent contractor: Is someone who’s in a business for himself who provides services to other people or businesses.
The Department of Labor classification states “to determine whether the worker is economically dependent on the employer (and thus he’s an employee), or really in a business for him or herself (and thus he’s an independent contractor)”.
So if someone is working for you and you have reason to believe that you are their only source of income, you need to classify that person as an employee. Another thing you need to consider is, does that person have an opportunity for profit or loss just like your business does, if they don’t, instead they make more money by simply working more hours for you, then, they are your employee. Lastly, consider if the individual is integral to your business or not. If they are not, then they are an independent contractor.
A few more things to consider when trying to classify an individual as either an employee or an independent contractor. If you are dealing with an employee, you probably know that you have to make numerous filings throughout the year, such as various state and/or federal taxes, workers’ compensation plans, unemployment and health insurance, etc. all of which can sometimes be daunting for a small business, particularly a start-up.
In the case of independent contractors, perhaps all the business owner needs to do is to determine the terms of the contract with the independent contractor, and monitor that any KPI’s that are to be met by the contractor. After which it is the duty of the contractor to take care of his tax filings, any insurance, and more.
Why should it be done correctly?
Any business owner should be sure to correctly classify any employee because for a number of reasons, but perhaps mainly because various government agencies, especially the IRS, are actively working hard to find anyone who is running afoul of the law, with strict penalties in place for any errant offenders. Besides the IRS, the department of labor is yet another interested stakeholder in such matters, as they have several rules and protections that an employee is entitled to in terms of the law, such as overtime pay payment, minimum wage, unemployment compensation and workers compensation and any other benefits that any worker should ordinarily benefit under normal circumstances.
In closing, whether you are hiring a full or part time employee, or just an independent contractor, it is very important that you are sure that it is done properly to prevent any possible future headache you and your business might suffer if it is done incorrectly. Which is exactly why it is a very good idea to perhaps consult a business attorney to help you determine which option is best of you as well as lay out all the pros and cons of each type of employee.