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Human Resources

How to Classify Employees/Contractors or Exempt/Non-Exempt Employees?

by FrankCrum on April 5, 2016

 Classify Employees vs Contractors or Exempt vs Non-Exempt Employees?The following is an excerpt from our latest guide, "A Business Owner's Guide to HR: Is There a Better Way?"

Employee or Contractor?

Misclassifying individuals may open your organization to a number of risk factors and penalties. The U. S. Department of Labor issues guidance on classifying workers under the federal Fair Labor Standards Act (FLSA).

According to the IRS, obligations toward employees include requirements such as withholding income taxes and withholding and paying Social Security and Medicare taxes. These obligations do not exist for payments to independent contractors.The IRS provides criteria and definitions to determine whether a worker is an employee or contractor. The primary elements in this determination relate to the degree of control and independence. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control and type of relationship.

Because there is no one factor that determines the classification, it’s important to consider the entire relationship in light of these three elements.

Exempt or Non-Exempt?

All employees are either exempt or non-exempt and the U.S. Department of Labor has established certain criteria for employees to be considered exempt. Violating these criteria can lead to expensive litigation.

Non-exempt employees are those who, while paid in a variety of methods (hourly, daily, piece rate, commissions, etc.), are entitled to certain provisions under the law. Generally, they must make at least minimum wage for all hours worked, and they are entitled to overtime if they work more than 40 hours in a workweek.

Exempt employees are paid on a salary basis and their pay does not fluctuate based on the number of hours they work (or any other factors). While exempt employees generally cannot have their pay reduced for working fewer hours (with limited exceptions), they also are not entitled to overtime pay for working more.

A Business Owner's Guide to HR


FrankCrum is a professional employer organization (PEO), founded in 1981 dedicated to helping business owners boost HR capabilities and broaden convenient services and benefits to employees. The origin of FrankCrum dates back to 1981, when Frank W. Crum, Jr. and his father, Frank Crum, Sr., founded the Great American Temporary Service. With a passion for helping small business owners succeed, the company has evolved and grown over several decades.