Properly Classifying Hourly & Salaried Employees Nancy C. Rodgers, Esq. Paul D. Godec, Esq. Presented by

EE vs. IC Employees vs. Independent Contractors Independent contractors Individuals who are in an independent business Offer their services to the general public Have control over what and how the work is done to arrive at the end product for a company Employees Individuals who perform services for an employer Employer has control over what will be done and how it will be done Employer has the right to control the details of how the work is performed

Independent Contractors What is the attraction? No required wages No expectations of benefits or employee perks Short-term relationship Typically less cost to the company No employment taxes such as FICA, FUTA and workers compensation

EE vs IC: Dept. of Labors Test CAUTION: no single rule or test controls DOLs Test – The extent to which the services rendered are an integral part of the principal's business – The permanency of the relationship – The amount of the contractor's investment in facilities and equipment – The nature and degree of control by the principal – The contractor's opportunities for profit and loss – The amount of initiative, judgment, or foresight in open market competition with others required for the success of the independent contractor. – The degree of independent business organization and operation

EE vs IC: Dept. of Labors Test Immaterial factors – Where work is performed – Absence of a formal employment agreement – Licensing by State/local government – Time or mode of pay

EE vs IC: IRS Test CAUTION: no single rule or test controls IRS Twenty Factor Test has been retired IRS 11 Main Test – Assesses the level of control over the worker – Behavioral Control Degree of instruction Amount of training

EE vs IC: IRS Test IRS 11 Main Test continued… – Financial Control Unreimbursed business expenses; workers financial investment services available to the market pay (salary/hourly vs flat fee) workers realization of profit or loss – Type of Relationship Written contract; benefits and perks permanency of the relationship extent to which worker provides key aspect of the companys business

EMPLOYEE Congratulations, its an ….

The Fair Labor Standards Act The Colorado Wage Act Colorado Wage Order No. ____ Employees and their money… 29

The Fair Labor Standards Act Applies to employees 40 hour work week Minimum Wage (currently $7.78/hour) for all hours worked Overtime Record keeping Youth employment

The FLSA does not require… Pay or even time for vacation, holiday, or illness A five day work week Pay raises or benefits Written discharge documents Premium pay for holidays or weekends Any limit on the hours an employee can work in one day or one week – Except for young employees

FLSA: Todays Topics Numerous exemptions and exceptions from the FLSAs requirements – Exempt Employees Exempt from minimum wage and overtime pay – Non-Exempt Employees Must be paid for all hours worked; must be paid overtime Pay Issues – Hours worked – Deductions

FLSA: Exempt Employees No overtime for hours worked over 40 Do not have to work 40 hours per week to earn their salary – Do not get to work just 40 hours per week to earn their salary Three tests for exempt employees – Salary level – Salary basis – Job duties

Exempt: Salary Level and Basis To Be Exempt: – Receipt of a pre-determined amount each pay period At least $455 per week ($910 biweekly; $ monthly) – No reduction in pay because of the quality or quantity of work performed – Paid a full salary for any week in which the employee performed any work Be very cautious of deductions

FLSA: Deductions for Absences If the exempt employee is ready, willing, and able to work, deductions cannot be made for time when work was not available. Absences occasioned by the employer, such as holidays, weather closures

FLSA: Deductions for Absences Permitted Deductions under the FLSA – Absences from work for personal reasons Can use PTO/vacation time for compensation – Absences from work for sickness or illness Only if the employer has a bona fide sick time plan – Unpaid disciplinary suspension (good faith) – Partial pay for the first or last week of employment – Unpaid medical leave pursuant to the FMLA Partial-day deductions are not allowed – Can deduct partial day from PTO/vacation bank

Exemptions Executive Administrative Professional Outside Sales Computer Employees

FLSA: Executive Exemption Primary Duty – Managing dept. or subdivision – Supervises 2+ employees – Has hiring and firing authority recommendation on hiring and firing is given significant weight Working supervisors and leads – Do not meet exemption Sole charge exception – Person in sole charge of a geographically separate facility

FLSA: Administrative Exemption Primary duty is – Performance of office or non-manual work – Work is directly related to management or general business operations of the employer or the employers customers – Discretion and independent judgment on matters of significance Significant authority Substantial consequences – All three factors must exist

Mgmt or General Business Ops? Tax Finance Accounting Budgeting Auditing Insurance Quality Control Purchasing Procurement Advertising Marketing Research Safety and Health Human Resources Employee Benefits Labor Relations Public and Govt Relations Legal and Regulatory Compliance Computer Network, Internet, and Database Administration

Independent Judgment The more … – Guidelines – Assistance – Procedures – Standards – Precedents – Supervision … the less likely the job is exempt.

FLSA: Professional Exemption Learned Professional – Performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized instruction Law, accounting, teaching, engineering, theology, medicine

FLSA: Professional Exemption Creative Professional – Performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor

FLSA: Professional Exemption Doctors Registered Nurses (not LPNs) Lawyers (not paralegals) Teachers Accountants (not bookkeepers) Pharmacists Engineers (not techs) Actuaries Chefs (not cooks) Certified athletic trainers License funeral directors Musicians Composers Conductors Soloists Essayists Short-story writers Screen writers – Who choose their own subjects Actors Painters Photographers Cartoonists

FLSA: Outside Sales Exemption Primary Duty is – Making sales or obtaining orders or contracts from customers Away from the employers place of business Does not need to meet the salary basis or level test

FLSA: Computer Exemption Systems – Analysis – Design – Creation/modification Does not include – Computer operation and maintenance Pay can be either salary (at least $455/week) or hourly ($27.63/hour)

FLSA: Motor Carrier Exemption No overtime due if: Employed by a motor carrier subject to the power of the Secretary of Transportation Engaged in activities that directly affect the operational safety of commercial motor vehicles – Drivers, drivers helpers, loaders, or mechanics The vehicles the employee works on must transport property or passengers on public highways in interstate or foreign commerce BUT still due minimum wage for all hours worked

FLSA: Pay for all hours worked Suffered or Permitted to Work – If an employee works for you, the employee must be paid for that time – Volunteers Employee works when he shouldnt? Pay the employee for the time work, including any overtime Discipline the employee for the violation

FLSA: Pay for all hours worked Waiting time – Time is controlled by employer On-Call time – Employee has little of no control over time Meal periods/Rest Periods – Not relieved of all duties; less than 30 minutes Training – Mandatory training; – benefiting employer Travel – Control and direction of employer; not a commute

Colorado Wage Act ( ) Requirements on when to pay employees – final pay, pay periods and paydays, and pay statements Deductions from wages – Loans, advances, goods – pursuant to a written agreement – Money or value of property employee did not return Defines wages to include vacation, commissions, bonuses

Colorado Wage Order No CCR Sec Covers – Retail and Service – Food and Beverage – Commercial Support Service – Health and Medical Overtime due for hours over 12 in one workday (as well as for hours over 40 in one workweek) – Similar exemptions to the FLSA 30 min. meal period for shifts over 5 hours Compensated 10 minutes rest period in the middle of each four hour work period

Calculating Overtime No matter how you pay, if an employee is non-exempt, overtime must be paid – Hourly rate, piece-rate, salary, commission, day rate, mileage rate Overtime pay is computed on the basis of the regular rate. – Includes all payments made by the employer to the employee – Does not include: expenses, premium pay, discretionary bonuses, gifts, vacation/ holidays/sick pay

Misclassification: How to Fix It Change the classification immediately and adjust the pay as needed Financial consequences – Failure to classify as an employee – Failure to classify non-exempt Any overtime due? – Risk / benefits of paying monies due Communicate with the employee – Explain any policy changes (no more overtime) – Explain and change in pay (hourly vs salary)

Nancy C. Rodgers Phone: (303) Paul D. Godec Phone: (303) Questions? For upcoming HR Workshops, go to