Employee Classification Types: What They Are & How They Compare (2023)

Do you know if your employees are classified correctly? 

Understanding employee classification types is crucial for any business owner to stay compliant with labor laws and regulations. This comprehensive guide will cover everything you need to know.

So, what is employee classification?

In short, it’s the process of categorizing workers based on their job duties and the extent of control exercised by their employer over their work. In general, employee classification determines how an employer must pay, provide benefits, and withhold taxes for their employees. 

There are several employee classification types, each with its own unique set of laws and regulations that employers must follow. In this article, we’ll dive into each of these employee classification types and explain the laws and regulations that apply to each. 

As an employer, you must comply with the laws and regulations that apply to each employee classification type. Misclassifying employees can result in serious legal consequences, including fines and penalties. 

So, let’s find out how you can accurately classify your employees to save yourself time and money.

Employee Classification Overview

When it comes to classifying employees as full-time, part-time, or temporary, it’s typically up to the employer to determine the criteria. Federal and state laws don’t define these terms.

However, when it comes to exempt and nonexempt classifications, employers are governed by the Fair Labor Standards Act (FLSA). The FLSA sets regulations for employers relating to employee wages, hours, overtime, and child labor.

The distinction between these two categories is that full-time, part-time, and temporary classifications are based on the number of hours an employee works, while exempt and non-exempt classifications are based on the type of work an employee performs and whether they are eligible for overtime pay.

Preview: Exempt vs. Nonexempt Employees

As mentioned, the FLSA defines two employee classification types: exempt and nonexempt. 

Exempt employees typically hold professional, executive, or administrative positions and are paid a salary rather than hourly wages. 

Employers exempt them from overtime pay requirements because they expect them to work as long as it takes to get the job done, regardless of how many hours they work.

Nonexempt employees are typically paid hourly wages and are entitled to overtime pay for all hours worked over 40 hours in a workweek. These employees are also entitled to receive at least the federal minimum wage for all hours worked.

Note: Employers cannot necessarily exempt an employee from overtime pay requirements just because they pay them a salary. The employee must also meet the criteria set by the FLSA regarding job duties and responsibilities to be considered exempt. We’ll discuss this subject in more detail in a later section of the article. 

Understanding the FLSA

As mentioned, The FLSA is a federal law that sets certain standards for employers. The FLSA applies to most employers and employees in the United States.

Some key provisions of the FLSA include the following:

The Federal Minimum Wage

The FLSA sets a federal minimum wage that employers must pay to nonexempt employees for all hours worked. The current federal minimum wage is $7.25 per hour.

Overtime Pay

The FLSA requires employers to pay nonexempt employees overtime pay for all hours worked over 40 hours in a workweek. Employers calculate overtime pay as one and a half times the employee’s regular hourly rate of pay.

Child Labor

The FLSA sets certain restrictions on the types of work that minors can perform and the hours they can work. 

For example, labor laws generally prohibit 14 and 15-year-olds from working during school hours and limit them to working no more than 3 hours on school days and 18 hours in a school week.

Recordkeeping

The FLSA requires employers to keep certain records related to employee wages, hours, and overtime pay.

Before we dive into the differences between full-time and part-time employees, check out this video that provides a brief overview of employee classification. 

Employee Classification Types

Since we’ve covered the basics of employee classification and the differences between exempt and nonexempt employees, let’s take a look at the three most common employee classification types for employers: full-time, part-time, and temporary.

1. Full-Time Employees

Full-time employees work a set schedule of at least 40 hours per week. 

They are typically eligible for benefits such as health insurance, vacation time, and sick leave. For full-time employees, employers are required to withhold taxes and pay Social Security and Medicare taxes.

Example: A software engineer who works 40 hours per week for a tech company. 

Some labor laws that pertain to full-time employees include:

• Fair Labor Standards Act (FLSA)
• The Family and Medical Leave Act (FMLA)
• The Affordable Care Act (ACA)

2. Part-Time Employees

Part-time employees work less than 40 hours per week regularly. 

They may or may not be eligible for benefits depending on the employer’s policies. Just like full-time employees, employers must withhold taxes and pay Social Security and Medicare taxes for part-time employees.

Example: A cashier who works 20 hours per week at a retail store. 

Some labor laws that pertain to part-time employees include:

• Fair Labor Standards Act (FLSA)
• The Affordable Care Act (ACA)
• The Consolidated Omnibus Budget Reconciliation Act (COBRA)

3. Temporary Employees

Employers hire temporary employees, also known as seasonal or contract employees, for a specific time period or project. Temporary employees are not typically eligible for benefits and are responsible for paying their own taxes.

Example: A construction worker who is hired for a six-month project. 

Some labor laws that pertain to temporary employees include:

• Fair Labor Standards Act (FLSA)
• The Employee Retirement Income Security Act (ERISA)
• The Occupational Safety and Health Act (OSHA)

Understanding the different employee classification types and the laws and regulations that apply to each is essential for any business owner. 

As an employer, you must comply with the laws and regulations that apply to each employee classification type. Misclassifying employees can result in serious legal consequences.

Key Takeaways

1. Full-time employees work a set schedule of at least 40 hours per week and are eligible for benefits such as health insurance, vacation time, and sick leave. Employers must withhold taxes and pay Social Security and Medicare taxes for full-time employees.
2. Part-time employees work less than 40 hours per week regularly and may or may not be eligible for benefits. Employers must withhold taxes and pay Social Security and Medicare taxes for part-time employees.
3. Temporary employees are hired for a specific time period or project and are not typically eligible for benefits. Temporary employees are responsible for paying their own taxes.

Exempt vs. Non-Exempt Employees and Volunteers

We’ve briefly discussed exempt vs. non-exempt employees earlier, but let’s dive deeper into these employee classification types and the labor laws that pertain to each.

Exempt Employees

Exempt employees are employees who are exempt from certain labor laws, including minimum wage and overtime pay requirements. These employees are typically salaried employees who hold professional, executive, or administrative positions.

Some examples of exempt employees include:

• Doctors
• Lawyers
• Executives
• Managers

Employers typically pay exempt employees a salary instead of hourly wages, and they do not have to provide overtime pay for hours worked over 40 hours in a workweek.

Some labor laws that pertain to exempt employees include:

• Fair Labor Standards Act (FLSA)
• The Occupational Safety and Health Act (OSHA)

Non-Exempt Employees

Non-exempt employees are employees who are protected by certain labor laws like minimum wage and overtime pay. They are typically paid hourly wages and are entitled to overtime pay for hours worked over 40 hours in a workweek.

Some examples of non-exempt employees include:

• Retail workers
• Food service workers
• Construction workers
• Administrative assistants

Non-exempt employees must be paid at least the federal minimum wage for all hours worked, and they must be paid overtime pay at a rate of one and a half times their regular hourly rate for hours worked over 40 hours in a workweek.

Some labor laws that pertain to non-exempt employees include:

• Fair Labor Standards Act (FLSA)
• The Occupational Safety and Health Act (OSHA)
• The National Labor Relations Act (NLRA)
• California Overtime Law

Volunteers

Volunteers are individuals who perform services for an organization without compensation. They are not classified as employees and are not covered by labor laws like minimum wage and overtime pay.

Some examples of volunteers include:

• Nonprofit board members
• Event volunteers
• Volunteer firefighters

Note: Certain criteria must be met for an individual to be considered a volunteer. The Department of Labor’s Wage and Hour Division provides guidance on determining whether an individual is a volunteer or an employee.

Some labor laws that pertain to volunteers include:

• Fair Labor Standards Act (FLSA)
• The Occupational Safety and Health Act (OSHA)

Key Takeaways

1. Exempt employees are exempt from certain labor laws like minimum wage and overtime pay. They are typically salaried employees who hold professional, executive, or administrative positions.
2. Non-exempt employees are protected by labor laws like minimum wage and overtime pay. They are typically paid hourly wages and are entitled to overtime pay for hours worked over 40 hours in a workweek.
3. Volunteers perform services for an organization without compensation. They are not classified as employees and are not covered by labor laws like minimum wage and overtime pay.

Employee vs. Independent Contractor

While both employees and independent contractors may perform similar job functions, there are significant differences in how they are classified and treated under the law.

What’s the Difference?

An employee is an individual who is hired to perform services for an employer. 

Employers typically have control and direction over employees, and employees are entitled to certain employment benefits and protections, such as minimum wage and overtime pay, workers’ compensation, and unemployment insurance.

An independent contractor is an individual who is hired to perform services for a business but is not considered an employee. 

Independent contractors are typically self-employed and work on a project-by-project basis. They are responsible for their own taxes, insurance, and other business expenses.

Check out this article if you’re unsure of how to pay your independent contractors.

How to Determine Employee Classification Status

Determining whether a worker is an employee or an independent contractor can be challenging, and there are three helpful factors that you can consider: behavioral control, financial control, and the type of relationship between the employer and the worker.

The Three-Factor Test for Employee Classification

1. Behavioral Control

Behavioral control refers to the degree of control that the employer has over the worker’s job functions. 

Factors that indicate behavioral control include:

• Whether the employer provides training to the worker
• Whether the employer has the right to control the details of how the work is performed
• Whether the worker is required to follow specific instructions or procedures

2. Financial Control

Financial control refers to the degree of control that the employer has over the financial aspects of the worker’s job. Factors that indicate financial control include:

• Whether the worker is paid a fixed salary or an hourly rate
• Whether the employer provides the tools and equipment necessary to perform the work
• Whether the worker is reimbursed for expenses related to the job

3. Type of Relationship

The type of relationship between the employer and the worker is another important factor to consider when determining whether someone is an employee or an independent contractor. 

Factors that indicate an employment relationship include:

• Whether there is a written contract between the employer and the worker
• Whether the worker is entitled to employee benefits, such as health insurance or a pension plan
• Whether the work performed is a key aspect of the employer’s business

Bonus Tip #1: You can use this checklist to determine whether a worker is an employee or an independent contractor. It includes the three factors we listed above.

Bonus Tip #2: For more information on classification and whether to use a W2 or 1099, check out this article. 

Employee Classification Policy

As we’ve discussed throughout this article, accurately determining employee classification status is essential for any business owner. 

We know that federal and state laws do not define terms like full-time, part-time, and temporary. However, employers are still responsible for complying with federal and state laws related to employee classification. 

To help ensure compliance and mitigate risk, your business should consider implementing an employee classification policy.

What is an Employee Classification Policy?

To put it simply, an employee classification policy is a document that outlines how employees are classified within an organization. 

This policy can help you ensure that your business is complying with applicable labor laws and regulations and can help your employees understand their status, rights, and benefits.

What to Include in an Employee Classification Policy

An effective employee classification policy should include four key components.

1. Definitions of Employee Classification Types

Employers should define what is meant by terms like full-time, part-time, and temporary for their business. This will help to ensure that employees are accurately classified and that you are complying with applicable labor laws and regulations.

2. Criteria for Employee Classification

An effective employee classification policy should also outline the criteria that employers use to determine how to classify employees. This can include factors such as: 

• The number of hours worked per week
• The length of employment
• The type of work being performed

3. Benefits and Entitlements

An employee classification policy should clearly outline the benefits and entitlements that are available to employees in each classification type. This should include benefits like: 

• Health insurance
• Paid time off
• Retirement benefits

4. Compliance with Labor Laws and Regulations

An effective employee classification policy should ensure that the organization is complying with all applicable labor laws and regulations related to employee classification. This should consider the laws we’ve covered like minimum wage, overtime pay, and workers’ compensation.

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Why it’s Important to Have an Employee Classification Policy

Mitigate Risk

An employee classification policy will help your business mitigate the risk of non-compliance with labor laws and regulations related to employee classification. 

By outlining clear criteria for employee classification and ensuring compliance with applicable laws, you can avoid potential legal consequences.

Ensure Consistency

An employee classification policy can help ensure consistency in how employees are classified across the organization. 

Doing this will help you avoid confusion and ensure that your employees are receiving the benefits and entitlements that they are entitled to based on their classification status.

Support Employee Engagement and Retention

An effective employee classification policy can help support employee engagement and retention by providing clarity around employee classification and benefits. 

By outlining the benefits and entitlements that are available to employees in each classification type, your business can help employees understand their value to the organization and provide a sense of security.

How to Comply With Employee Classification Laws

As we’ve discussed, failure to comply with labor laws and regulations related to employee classification can result in legal consequences, including fines and penalties. 

To ensure compliance, your business must follow the criteria established by the IRS and the FLSA.

What are the Criteria for Compliance?

The criteria for compliance vary depending on the specific labor laws and regulations that apply to the business. However, some of the key criteria for any business include: 

Labor Laws

Employers must comply with federal and state labor laws related to minimum wage, overtime pay, and child labor. 

As mentioned, the FLSA outlines these labor standards and is the federal law that establishes minimum wage, overtime pay, and other labor standards for most private and public sector employers.

Overtime 

The FLSA’s overtime requirements mandate that employers must pay employees who work more than 40 hours in a workweek at least one and one-half times their regular rate of pay for all hours worked over 40.

FLSA Record-Keeping Requirements

Employers must comply with the FLSA’s recordkeeping requirements, which require employers to maintain certain records related to employee classification, including hours worked, wages paid, and classification status.

Why Must Businesses Abide by the Criteria?

Your businesses must abide by the criteria established by the IRS and the FLSA to avoid legal consequences.

Failure to comply with labor laws and regulations related to employee classification can result in significant financial and reputational harm to your business. Additionally, non-compliance can lead to employee dissatisfaction and turnover.

Why Employers Need to Understand These Laws

For compliance

You need to understand labor laws and regulations related to employee classification to ensure compliance and avoid legal consequences. 

By understanding the criteria established by the IRS and the FLSA, you can ensure that they are accurately classifying employees and providing them with the benefits and entitlements that they are entitled to.

For employee satisfaction

By complying with applicable laws and regulations, you can provide employees with the benefits and protections that they are entitled to based on their classification status. This can help foster a positive work environment and support employee engagement and retention.

For reputation

Compliance with labor laws and regulations can help build trust with customers, employees, and other stakeholders, and can help demonstrate your business’s commitment to ethical and responsible business practices.

How Workyard Can Help

Complying with labor laws and regulations related to employee classification can be challenging, but it’s essential for any business owner who wants to avoid legal consequences and maintain a positive reputation. 

Fortunately, Workyard can help employers stay compliant with applicable laws and regulations by providing a comprehensive suite of features designed to simplify employee time tracking and compliance.

Electronic Record-Keeping

One of the key features of Workyard is electronic record-keeping, which helps employers meet FLSA record-keeping requirements. With Workyard, employers can easily track and maintain electronic records of hours worked by each employee, ensuring compliance with federal labor laws.

Overtime Calculations

Workyard also automatically calculates overtime based on local state laws, making it easy for employers to stay compliant with overtime laws. 

Employers no longer need to worry about manually calculating overtime for each employee, as Workyard takes care of it automatically.

Break Tracking & Reminders

Workyard sends break reminders in the form of push notifications, preventing employees from working too long without taking a break. 

By ensuring that employees take regular breaks, employers can protect their workforce from burnout and avoid costly penalties associated with non-compliance.

Easy Time Card Management

Workyard makes it easy for employers to view, edit, and maintain time cards. 

The system logs and archives every hour worked and break taken for future reference, making it easier for employers to resolve disputes and comply with federal labor laws. If a supervisor changes a time card, Workyard automatically notifies the employee and provides them with an explanation for full transparency.

Indisputable Record-Keeping

With Workyard, employers have an indisputable record of who did what and when. 

This record-keeping feature helps employers resolve disputes and avoid potential legal consequences associated with non-compliance. Workyard designed its comprehensive suite of features to simplify employee time tracking and compliance, making it easier for employers to stay compliant with federal labor laws.

So, what are you waiting for? Sign up for a free trial of Workyard today!

The Bottom Line on Employee Classification

Employee classification is an important aspect of any business, as it determines an employee’s status, rights, and benefits. 

In this article, we’ve discussed the various employee classification types, such as full-time, part-time, temporary, exempt, non-exempt, and independent contractors. Additionally, we’ve provided guidance on how to comply with employee classification laws. 

To recap:

1. Employers should establish an employee classification policy to protect themselves from risk and help employees understand their status, rights, and benefits.
2. Employers must also follow the FLSA and IRS criteria to minimize risk and stay compliant, as non-compliance can result in costly penalties and legal consequences.

Workyard is a valuable tool that can help you stay compliant and simplify employee time tracking and compliance. By using Workyard, you can ensure accurate record-keeping, automatic overtime calculations, and break reminders, making it easier to comply with federal labor laws with more peace of mind. Sign up for a free trial of Workyard today.