Understanding Employee Classification Issues
How do you determine whether an employee is classified as full-time, part-time, or temporary? It is really up to you.
Since federal and state laws generally do not define these terms, employers usually have a lot of flexibility when categorizing employees. Employee classifications are often based on the number of hours worked and job duties performed and typically determine eligibility for benefits.
The following outlines issues you need to consider in classifying employees.
Definitions of Employee Classifications
Employees usually are classified according to the hours worked and the expected duration of the job. Accordingly, they generally fall into three major categories: full-time, part-time, and temporary employees. When designing definitions of employee classification, many employers use the eligibility requirements under their insurance benefit plans. For example, many health care plans exclude part-time employees who work less than a specific number of hours a week.
Even so, the employee definition you choose will not affect employee eligibility for legally mandated benefits. Federal and state laws require certain employment benefits, such as workers’ compensation, unemployment compensation, unpaid family and medical leave, and military leave. In addition, they set their own criteria for eligibility. Note, too, the Fair Labor Standards Act (FLSA) further classifies employees as eligible or ineligible for overtime pay and refers to them as either being exempt or nonexempt from the Act’s provisions.
Definition of a Full-Time Employee
A full-time employee generally is defined as one who works a normal workweek for an indefinite period of time. Since the FLSA sets 40 hours as the maximum number of hours worked before employers must pay overtime to nonexempt employees, many organizations use that number as their normal workweek. Others use 37 1/2 hours or even 35 hours, depending on their workday and meal schedules. Some employers define full-time employment according to their part-time employment hours. For example, if part-time employment is defined as 30 hours or less a week, employees who work more than 30 hours are then considered full-time. Full-time employees generally are eligible for all the benefits the employer offers.
Definition of a Part-Time Employee
Part-time employees also are employed on an ongoing basis and typically receive some benefits, but work fewer hours than the normal full-time schedule. Part-time employment may mean working irregular hours, regularly scheduled hours every workday, or full workdays but fewer than five per week. A common definition of part-time employment is work of 30 hours or less per week.
Many employers provide part-time employees with a pro rata share of benefits, such as vacation, sick leave, and other paid absences, based on the number of hours worked.
Definition of a Temporary Employee
Temporary employees may work part-time or full-time hours and may be hired through an agency or directly by the employer. What makes their status “temporary” is that the worker is hired for a particular project or for a finite period of time. As a result of the short-term nature of their employment, temporary employees generally do not receive any benefits, other than those required by temporary employee laws.
Since some employers use temporary workers as an entry pool to screen full-time candidates, these employees may have increased expectations of advancing to regular employment and eligibility for benefits. Therefore, you should make clear to temporary workers that they are being hired for a limited period of time only and are not eligible for benefits. Many employers explain the temporary nature of the job in a letter or other written memorandum. The letter should state an approximate limit for the period that the worker is expected to be employed, such as “approximately 90 days,” and give management the option to extend it if needed.
In addition, you should monitor the status of temporary employees so that if the limited duration of their employment changes, you can reclassify them correctly and offer benefits if they are eligible. Otherwise, you may end up with misunderstandings and legal claims.
What About Independent Contractors and Volunteers?
The independent contractor, or freelancer, classification is used for nonemployee workers who typically perform specialized work that your employees do not do and are retained for a specific period of time. Since they are not considered employees of the organization, these workers are not covered by the laws for minimum wage and overtime, payroll taxes, workers’ compensation, unemployment compensation, or employment discrimination and are not eligible for any benefits. But meeting criteria for independent contractor status is tricky because the Internal Revenue Service, the Department of Labor, states, and the courts all impose separate standards for employers to satisfy. As a general rule, though, as long as you do not exercise substantial control and direction over their work, these workers are not considered employees.
Using volunteers is even trickier. Many employers mistakenly believe that they can supplement their workforce by using unpaid volunteers, including current employees who volunteer their services to help fill in during a worker shortage. However, the Department of Labor restricts the definition of nonemployee volunteers. According to the DOL, individuals may volunteer their services without receiving pay only in limited circumstances, typically involving the performance of charitable activities for non-profit groups such as public service, religious, or humanitarian organizations.
Be Consistent with Your Employee Criteria
The main importance of employee classifications is their effect on eligibility for benefits, such as health insurance and paid time off. While not many laws regulate the definitions (with the exception of the nonemployee independent contractor), you still must apply your definitions consistently.
Microsoft found this out the hard way. It was forced to pay over $96 million to settle lawsuits alleging misclassification of its workers as temporary employees or independent contractors and, thus, improperly excluding them from participation in its benefits plans. Accordingly, you should pay close attention to how you classify your workers and review your classifications regularly to ensure that they properly match your benefits eligibility requirements.
Robin Thomas, J.D.
Personnel Policy Service, Inc.
- How to Write a Job Description that Attracts the Best Candidates
- Writing an Employee Compensation Policy
- Guidelines for Managing Exempt-Status Employees
Do you have a topic you would like Compensation Today to cover? Write us at firstname.lastname@example.org.
Are you paying your best employees enough to retain them after the economy picks back up? Get up-to-date and make sure your external salary market data is specific enough to the education, skills set and experience of employees you want to keep. Give a PayScale Demo a try.
- Get accurate compensation data with a free PayScale Compensation Report.