Is your Assistant Manager really an Exempt Employee?

Many employers mistakenly assume they have a choice about whether a worker is a contractor (“1099 employee”) or an employee (“W2”). Others don’t realize there is a very narrow category of workers that can be salaried rather than hourly with overtime.

Here are 6 things every employer needs to know about employee misclassification:

1. By default, every worker is classified as an employee by the government. The burden is on the employer to show why it is valid to treat the worker as a contractor. “What’s the big deal?” you might ask? Employees are subject to a number of laws that protect them, such as the requirement of being paid overtime for more than 40 hours of work, anti-discrimination laws, protection for disabilities and workers comp protection if they get hurt. In addition, the employer pays part of the employment taxes for an employee, which makes it easier for the government to collect taxes.

2. Both the IRS and the Department of Labor have guidelines for how to tell if someone is an employee rather than a contractor. In short, the more control the employer exercises over the workplace, job, schedule, sequence of work events, the more likely a worker is an employee. True contractors are able to work for more than one company, provide their own tools and materials, and are generally paid a lump sum for a delivered work product, rather than by the hour.

If you guess wrong, you can be subject to paying the withholding taxes during the period of misclassified employment and steep penalties.

3. Also by default, every worker is classified as non-exempt, which means they are paid hourly and are entitled to time and a half after 40 hours per week. Exempt workers are paid a salary no matter how many hours they work, but they must fall into one of the following categories:

4. To be exempt, an employee must be paid at least $455/week (this amount may be going up –stay tuned) and pass a duties test to make sure their duties truly match their title. For example, you can’t just call someone an assistant manager and assume they are properly classified. A true exempt executive position requires the employee supervise at least two full-time employees, have management as the primary duty, and have genuine input into the status of other employees (such as hiring, firing, promotions, or assignments).

5. The administrative category may be the most troubling to classify. The administrative exemption is designed for relatively high-level employees whose main job is to "keep the business running." Typical administrative exempt positions include human resources employees, payroll and finance, records maintenance, accounting and tax, marketing and advertising, quality control, public relations, shareholder or investment relations, government relations, legal and regulatory compliance, and some computer-related jobs (such as network, internet and database administration).

6. The penalties include back pay and overtime, penalties and liquidated damages. In North Carolina, a misclassification is considered an unfair trade practice and will result in a penalty of three times the wages that were not properly paid.

Before you guess wrong and incur steep penalties, consult a business or employment attorney for up-front guidance.