Employee Classification: A Practical Guide
for HR
The labor market is currently going through a period of change that impacts
all its members, including employees, employers, and independent
contractors. As more people find new ways to earn a living, businesses and
organizations have to adapt to a more complex workforce with new roles and
demands. Your organization might need to rethink its employee
classification.
Let’s dive into the fundamentals of classifying employees, the most common
types of employees, non-exempt and exempt employees, and why
contingency workers are not traditional employees. By the end of this guide,
you will understand the role and usefulness of each employee type and how
to build an efficient employee classification policy that works for your
business.
Contents
Why do you need to reassess your employee classification?
What are the types of employees?
Exempt employees vs non-exempt employees
What are contingent workers?
Remote workers vs. independent contractors
How to deal with a complex workforce
Why do you need to reassess
your employee classification?
We can blame the pandemic for making navigating the workforce more
complex than ever before. However, in reality, the trends we see today are
supported by transformations that happened during the past several
decades.
Plus, the fast development of broadband internet and the spread of portable
devices opened the door to unforeseen job opportunities.
As a result, the labor market is now diverse, with plenty of options for
anyone. This leaves companies struggling to meet the expectations of
current employees and find talent. Yet, not everyone struggles.
Some companies found a way to strive despite the various challenges that
popped up during the last couple of years.
So how do they do it?
Besides using advanced technology to improve productivity and reduce time
spent with routine tasks, successful employers aren’t afraid of a diverse
team that includes remote workers, full-time employees, and part-time
employees (just an example).
The important part, in this scenario, is to make sure you have your employee
classification right. This way, you can enjoy all the perks of having a
diversified team without any business disruptions or gaps in productivity.
Plus, when you understand the employee classification, it’s easier to decide
which type(s) of employee best fits your business’s needs.
What’s more, if you check employer review sites like JobSage or Glassdoor,
you’ll notice many reviewers appreciate their employers’ consistency and
transparency, including when it comes to classifying employees. That’s
because it provides people with a sense of reliability and trust.
What are the types of
employees?
Based on the hours worked, job duties, and the expected duration of the job,
most employers will classify their employees into five types, plus one extra
type:
1. Full-time employees
2. Part-time employee
3. Temporary employees
4. Interns
5. Seasonal workers
6. Leased employees (the extra type)
Now, these terms don’t have a strict definition in the federal or state laws in
the US. Each employer has some freedom when it comes to their employee
classification policy. However, once defined, the same policy must be applied
through the organization.
This helps employees understand their eligibility for benefits. They can also
have a fair assessment of their wages in accordance with the number of
hours per day.
Let’s explore each type of employee in more detail.
1. Full-time employees
Full-time employees usually work an average of 40 hours per week, are
eligible for benefits, and may not have a set end date for their contracts.
They are the so-called permanent employees. Also, if the business or
organization has 50+ full-time employees in the US, it must offer health care
coverage (health insurance) to these employees and their dependents.
Full-time employment is often considered one of the most reliable and safe
work conditions because employers offer a fixed salary plus overtime pay
(calculated by the hour).
However, in a job that only offers minimum wage, full-time employment can
be a disadvantage, making it difficult for businesses to retain talent.
2. Part-time employees
These individuals work less than 40 hours per week and are usually paid on
an hourly basis. Yet, some part-time employees prefer a salary basis, so it
depends on the company.
Plus, part-time employees can also be permanent if the contract doesn’t
have a set end date. Yet, these individuals may not be eligible for benefits.
3. Temporary employees
Unlike permanent employees, temporary employees (or temps, if you will)
have a set end date on their contract. These individuals often work within a
company for somewhere between six months to one or two years. Also,
some people are hired for the duration of a project. Then, their contract ends
when the project is complete.
Now, depending on the number of hours per week, you can have temporary
full-time employees and temporary part-time employees. Overall, temporary
workers are ideal for short-term projects and can help boost productivity
during busy times.
Also, hiring temps is a great way to probe the workforce and test people’s
skills without having to offer a permanent position.
4. Interns
Interns are usually hired for a short period of time (a few months at best) and
can be paid, partially paid, or unpaid. They are generally high school or
college students looking to gain their first work experience. Internships might
potentially lead to employment in your company.
5. Seasonal workers
Another type of employee that is not permanent, seasonal workers are hired
to cover a business’s seasonal increase in work. This need usually arises
during a specific season of the year (winter holidays and summer months
being the most common).
6. Leased workers
This type of worker or employee is still a salaried individual (not an
independent contractor), but they don’t show up on your company’s payroll.
As the name suggests, a company can lease out employees from a staffing
agency (from which they receive their payment) to complete a project or
supplement staff during busy periods.
Below you can see what employee classification can look like in the new
economy, divided between multiple types of employment and contract work.
Image source
Exempt employees vs non-
exempt employees
While the employee classification policy is left at the mercy of employers,
whether an employee is exempt or not is regulated by the Fair Labor
Standards Act (FLSA). We won’t get into much detail about the rules, but we
will summarize the definition of exempt and non-exempt employees. For
more details, take a look at the FLSA website.
In short, an exempt employee is an individual who is exempt from the
overtime provisions of the FLSA. That means that they are not entitled to
overtime pay. Most exempt employees are salaried and can be classified as
executive, professional, administrative, or outside sales employees.
Non-exempt employees are usually paid hourly and are entitled to overtime
pay.
Of course, there are other differences to be considered, but if you are a
business owner who has to deal with this type of employee classification, it’s
best to ask for help from a specialist in labor law.
What are contingent workers?
Independent contractors, freelancers, consultants, or any other type of
worker who is not hired via an employment contract is classified
under contingent workers. These people are collaborators who can help with
various projects and tasks, but they are also separate entities from your
business.
When hiring the services of a contingent worker, you as the business owner
don’t have to worry about benefits, providing them with health insurance, or
any other actions that usually involve a traditional employee.
Remote workers vs
independent contractors
By definition, remote workers are not present in the office or workplace.
Instead, they do their tasks from a remote location (their home or
somewhere else around the world).
Adoption of remote work (or work from home) has sped up during the
pandemic. However, it’s also a product of the great technological
development we’re experiencing in recent years.
Due to portable devices and various services that allow collaborative work
between in-office and remote employees, companies nowadays have a
global-wide talent pool at their disposal.
However, as a business owner, it’s essential to understand that remote
workers are not necessarily contingent workers (or independent contractors).
You can have both employees who work remotely (full-time, part-time, or
temporary) and remote workers who are independent contractors.
The difference is that the first type is classified as a traditional employee
while the latter is a collaborator who works remotely and takes care of their
own time management, devices, and taxes.
Many remote-first organizations hire people as independent contractors, as it
is the easiest way to get people on board without needing to deal with
different labor and business laws across different countries.
In their Recruitment FAQs, Hotjar explains how they employ people and what the reasons
for filling roles with contractors are.
Other options are using the services of a professional employer organization
(PEO) or working with an employer of record (EOR).
How to deal with a complex
workforce
Having your workforce made up of different types of employees enables your
business to be flexible and agile. You can respond to your business needs
faster.
To achieve this, businesses must learn how to manage a workforce that
includes remote and in-office workers, plus a few collaborators and maybe
some leased employees.
First, it’s important to find better ways to invest in your current employees if
you want to improve retention. However, you also need to learn how to
attract gig workers and manage their time and tasks to benefit both parties.
Businesses will have to deal with this situation more and more in the future.
Organizations that don’t adapt will eventually fail while the competition will
strive. So, which side do you want to be on?
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