“As a business owner, can’t I pay my workers however I want?” This is one of the most common questions I get from business owners.

Unfortunately, the Federal and State Departments of Labor under the Fair Standards Labor Act as well as the IRS have guidelines business owners must follow. So, the answer to the question above is no.

There are several questions that businesses need to ask in order to determine how to classify the worker and what guidelines exist for that classification. For instance, will the worker be an employee or an independent contractor?

In one situation a client told me that they were giving the workers the choice of how they wanted to be paid. Ironically, they all chose to be paid as independent contractors. This became an issue when one of the workers tried to apply for unemployment when they were let go from their job.

Shortly thereafter, the business owner received a call from the Employment Security Commission (ESC) stating that they had a worker from the company applying for unemployment benefits, but the company has not been paying any unemployment dollars/tax to date. The ESC let the owner know that they would be auditing the company and looking into the unemployment claim starting with a call and a request for information.

Worker classification is not left up to the worker or the owner to determine. There are guidelines to follow to determine whether the classification is employee or independent contractor. The guidelines are determined by the following:

Employee — If the classification is to be an employee, then the next question is whether they are exempt or non-exempt.

Regarding this, a statement I hear often from business owners is, “I don’t want to pay overtime, so I am going to classify all my employees as exempt.”

Again, it is not a choice. The classification is determined by the job description, specifically the responsibilities, tasks, and duties assigned to the position along with the education required to perform these responsibilities, tasks, and duties. If the position does not meet the allowable exemptions for either executive, professional, administrative, or outside sales, then the employee must be classified as non-exempt and eligible for overtime pay. You can learn more about the Fair Labor Standards Act guidelines online.

Independent Contractor — If the classification is to be an independent contractor, it is important to understand IRS guidelines when determining if a worker can be appropriately classified as an independent contractor. You can learn more about the guidelines of an independent contractor on the IRS website.

Misclassification of workers can cause great expense to a company when an audit is conducted by the DOL or ESC due to an employee complaint to one of the agencies or to an attorney defending you in an employment lawsuit.

To best protect your business, you, as the business owner need to classify your workers appropriately as a responsible business. You can greatly minimize your employment risk of fines and penalties or a lawsuit settlement by doing so. You also demonstrate to your workers that you are a responsible business who follows the guidelines of the DOL and IRS for worker classification and that you strive to be compliant.

Business owners, no, you can’t pay your workers however you choose, but you can choose to be compliant and classify workers accordingly to the guidelines provided by the DOL and IRS. Your workers will appreciate your business striving to be compliant and you will minimize your risk for financial repercussions associated with misclassifications. Keep those dollars within the company verses paying fines, penalties, and settlements to the former employee and/or a government agency.

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If you have any questions and/or would like additional assistance with worker classification, please contact Close HR Connections.