If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
This saying is better known as the Duck Test and the phase was coined by the Indiana poet James Whitcomb Riley in the 19th Century. Surely you have heard this expression and it immediately comes to mind when a client asks me how they should classify their employees under the Fair Labor Standards Act (FLSA) and then do not like what I tell them.
The most debated employee classifications are independent contractors, temporary workers, and exempt (salaried) versus non-exempt (hourly) employees. The bottom line is that most employers want to do the right thing and classify groups of employees that do similar work, correctly. How you classify your employees has a huge impact on your budget, so I want to give you some food for thought when planning for 2020.
Legally, if we don’t follow the FLSA, for whatever reason, the big bad U.S. Department of Labor (DOL) may come knocking at your door. When they come to call you may be out millions of dollars in fines. If a present or past employee files a claim with them, then that employee and his or her friends at work and their attorneys will also come after you for lost wages. If you are sure your organization is perfect, then you do not need to read any further. If you think you might want to know a little more, then read on.
I have already mentioned the DOL and the FLSA. There are others that may come to call if the door gets opened by the complaint of just one current or past employee. The Equal Employment Opportunity Commission (EEOC) might think that where there is smoke, there is fire. If the EEOC comes to call, you must explain/defend your hiring practices, anti-discrimination and harassment policies, etc. If you have more than 100 employees, your HR folks just finished the EEOC Component 1 and 2 reports and it was an eye opener for many.
So, what about independent contractors? Look up Fact Sheet 13: Employment Relationship under the Fair Labor Standards Act on the DOL’s website. There is also significant discussion around the gig economy workers like your Uber driver. If you are interested, the DOL issued a letter in April 2019. It says that at least some gig-economy workers who find jobs through smartphone apps—such as drivers for ride-hailing services—are not covered by the FLSA. The DOL concluded that the workers who use a technology platform or “virtual marketplace” to connect with consumers—as described in the request for an opinion letter—are independent contractors rather than employees of the platform provider. What might be the implications for the very near future in the Permian Basin? I’m thinking about a contract water hauler right now—what about you?
The Internal Revenue Service (IRS) looks at 11 factors in determining if someone is an independent contractor and these three areas will guide you:
• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial: Are the business aspects of the worker’s job controlled by the payer? (These include such considerations as how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
• Type of Relationship: are there written contracts or employee-type benefits (e.g., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?
Here are a few simple takeaways. If the contractor just works for you and no one else, then the contractor is probably your employee and not a contractor. If the contractor uses your equipment, vehicle, and/or computer and maybe puts their name on one of your business cards, then they probably are your employee. If you go even further and offer them health insurance then you better make that contractor an employee. Lastly, if no one becomes a disgruntled contractor while they work for you, just wait until they file for unemployment because you told them you didn’t need them anymore. You know the talk: things have slowed down so we will give you a call when things pick up again. You and your HR/Payroll staff will spend months and months and dollars and dollars to get out of that one.
Next, what is a temporary worker? Someone you hire for a specific project seems to be a fairly good description but, often times, the temporary employee stays and stays but you don’t offer them benefits, etc. One day you look up and they have been working for you for a year and you never offered them benefits. I recommend that to solve the problem of needing a temporary worker for a project, contract with an employment agency for the extra staff. Although you may pay more up front, you do not have to worry about unemployment claims, benefits, etc. If they don’t work out, you call the agency and ask for someone else or end the contract when the job is done. An added benefit of an agency is you might find a future employee that you got to try out.
Last, the most confusing and potentially the most expensive issue with classifying employees is how to classify your full-time employees. Are you going to pay them an annual salary (exempt) or hourly (non-exempt)? There are several tests to assist you in classifying your employees. First, the Salary Test, which has been debated and changed four times in recent years depending on who is the executive in the White House. Finally, this matter seems to be settled. To pass the Salary Test as an exempt/salaried employee, the employee must make a minimum of $679 a week or $35,308 annually, starting in January 2020.
The next test is where it gets tricky. I had a client once say that the only way for one of his employees to be exempt/salaried was if they could hire and fire. That is a good rule of thumb but it is more complicated, as most things are when dealing with federal laws. In addition to the Salary Test, you have to decide if your employee can be exempt because of the Primary Duties Test. You have 3 choices: Executive, Administrative, or Professional.
The Executive and Professional duties test is fairly simple. If you have true Executive power, then you can hire and fire. These are usually the executives and department heads. The Professional group are typically your engineers, accountants, lawyers, etc., that have basic or advanced college degrees and a license or certification required by the state to perform their duties. Professionals are also creative jobs, such as artists or musicians. There are also Outside Sales and Computer Professionals. Outside Sales staff work with a great deal of autonomy and work as much as necessary to get the job done. A word of caution with regards to the Computer Professionals, they are your very top information technology employees, not the guy that installs and fixes the computers.
The Administrative duties test is where you can get in trouble. The DOL defines the administrative exemption as:
1. Compensated on a salary basis, meets the minimum Salary Test previously discussed;
2. Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and
3. Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Examples of employees that might fall into the administrative category are your department managers, supervisors, and foremen. How you categorize a position is a legal decision and must be part of your organization’s budget process in developing a strategic, workable pay plan. There are many factors to consider and I recommend you form a compensation committee to decide the correct classification, pay grade, and pay family for all your positions. If you don’t have time for all that then start with a well written job description. Identify the education required, certifications, experience required, etc. Do not forget to utilize the free services of Permian Basin Workforce Solutions. They have the most up-to-date data on area jobs and the credentials and pay associated with those positions.
This is a very brief overview of salaried and hourly position classifications. I used exempt/salaried and non-exempt/hourly interchangeably. However, a word of caution: you can have salaried staff that are not exempt from overtime. I have seen this phenomenon rarely but it is possible.
If you have read this to the very end, then I propose you start off 2020 by classifying your employees appropriately. Remember, a well written job description will assist you in determining whether a job is salaried/exempt or hourly/non-exempt. I am not a lawyer and do not pretend to be one, but keep in mind, the cost of correcting an error may be well beyond your wildest imagination.
by Michele Harmon