We’ve already discussed on this blog how important it is to correctly classify a worker as a W-2 employee or 1099 Independent Contractor, but that’s not the only classification you need to worry about. If a contractor is working as a W-2 Employee, you also have to determine whether that worker is exempt or non-exempt.
Per the Fair Labor Standards Act (FLSA), if an employee is nonexempt, he/she must be paid overtime (OT) – which is one and half times the regular rate – for any hours worked in excess of 40 in a workweek. Please note that the state in which the employee operates may have even more stringent rules. For example, in California, you must pay nonexempts OT for any hours over 8 they work in a day.
Exempt simply means the employee does not have to be paid overtime. Most exempt employees are white-collar workers employed in bona fide executive, administrative, or professional positions. But working in what most people would consider a “professional” job doesn’t automatically exempt an employee from OT. The employee must be paid on a salary (as opposed to hourly) basis AND have work duties that match the exempt requirements provided on the Department of Labor Web site.
There is one important exception to the salary rule that may apply to some of your contractors: Professionals working in “computer-related” occupations who earn at least $27.63 per hour can still be paid on an hourly basis and remain exempt from overtime. Be sure to review the regulations to determine what constitutes a “computer-related occupation.”
Clients may try to push you into paying contractors on a salary basis because they don’t want to pay extra for overtime, but doing so can put both you and your client at risk because the Department of Labor can hold you both liable for violations. When in doubt, review the Department of Labor’s regulations and seek legal advice.
