Wage and hour issues can be a major source of difficulty and liability for small- and medium-sized businesses. Many of these issues come up because employees are not properly classified. Most commonly, nonexempt employees are mistakenly classified as exempt employees, and employees are mistakenly classified as independent contractors. Ensuring your employees are classified correctly can save you tens of thousands of dollars in back wages, fines, and litigation costs.
California heavily regulates when you have to pay employees overtime, and not paying overtime when you are required to do so can devastate your business.
The Differences between Exempt and Nonexempt Employees
In basic terms, exempt employees do not need to be paid overtime. Exempt employees are typically executives, managers, professionals, or employees who work in outside sales. These employees are given a salary. If they work more than forty hours a week, you do not have to pay them overtime. However, being an exempt employee is about more than just a title.
Exempt employees typically have more freedom with their schedule. The amount of their salary also matters. If employees are classified as exempt and called managers but are still docked pay if they leave work early, most courts will find that you have misclassified that employee and will order you to pay fines and back pay.
Exempt employees are also expected to have more freedom to make decisions about how they go about their work.
Nonexempt employees are paid an hourly wage. They must be paid time and a half for any work over eight hours in a single day or forty hours in a single work week.
Do You Have an Independent Contractor Problem?
Another area where employers often make mistakes is in misclassifying employees as independent contractors. This can be tempting because employers have less responsibilities toward independent contractors and can often save money by having fewer employees.
However, in California, regulators are often suspicious of companies that classify large numbers of workers as independent contractors. The test is to look at the degree of control the business has over the worker to see if a worker is truly an independent contractor or a misclassified employee.
Independent contractors can usually set their own schedules, are not required to wear a uniform, make all of the decisions about how they will go about their work, and usually have more than one contract at a time.
If a business has a set start and end time or gives specific direction about how to accomplish a task, the worker looks more like an employee.
Using Solid Employment Contracts
One of the problems that companies experience in classifying employees is that many times there is no black-and-white answer. There is a lot of gray area, and reasonable people can come to different conclusions.
The best way to protect your business from trouble is to make sure you have clear, direct, and legally binding employment contracts. These contracts can become excellent evidence to support your employee classifications. It also puts the worker on notice from the start about the specifics of the job.
The Law Office of Mohsen Parsa regularly works with small- and medium-sized businesses in Orange County and the Greater Los Angeles metro area. Our office helps businesses comply with employment laws and drafts custom employment contracts to protect their interests.