Keeping It Classy: Employee Classification Demystified
by Paul Edwards, CEDR
When it comes down to it, employee classification mistakes are incredibly common. In fact, from our experience talking to thousands of dentists, doctors, and office managers across the nation about their HR concerns, we’ve found that the vast majority of employers who pay independent contractors or offer bonuses or commissions have at least one wage violation on the books.
But why do these mistakes happen? Sometimes a simple oversight in the hiring process can lead to an employee being classified the wrong way. Other times, a lack of detailed understanding about wage and hour laws creates confusion about how to pay overtime, or about whether or not an employee’s hours should be tracked to ensure wage compliance.
Employers often assume that hiring an accountant and/or payroll company takes the pressure of wage compliance off of their shoulders, but that isn’t actually the case. Even if another professional gave you faulty advice about how to classify or pay your employees, it’s YOU -- not another party -- that the Department of Labor (DOL) and the Internal Revenue Service will come after for payment of back wages, back taxes, fines, fees, penalties, and attorney’s fees.
There seems to be a lot of confusion in the dental industry as to what qualifies a worker as an independent contractor (we say “worker” here because independent contractors are, by definition, not your employees).
Employers are not responsible for providing things like benefits or worker’s compensation insurance for independent contractors, nor are they required to withhold taxes on their behalf. The federal government, therefore, has some pretty strict guidelines on how to determine whether a worker should be classified as an employee or an independent contractor, and some states have even MORE stringent rules regarding this type of classification.
Independent contractors, in a general sense, are “contracted” to provide a service to your business that it would not usually provide as a typical part of its offerings. Think of the cleaning service or the IT company that you hire for your practice. Similarly, if your office focuses on general dentistry, but you decide to bring an endodontic specialist in one day a month to perform root canals for your patients, that specialist might qualify as an independent contractor.
How do I know if a worker should be classified as an independent contractor?
As mentioned above, some states will have their own tests to determine if a worker can be treated as an independent contractor. But, at the federal level, independent contractor designation has a lot to do with how much control an employer exercises over a worker’s methods. Generally, that analysis falls under the three main categories listed below:
- Behavioral Control -- If you’re concerned about how someone completes a job as much as you are concerned that it simply gets done, you’re probably dealing with an employee, not a contractor. Contractors generally set their own hours, bring some or all of their own tools and/or employees, and use their own techniques, plans, methods, and skills. Contractors also have the freedom to work for other businesses.
- Financial Control -- If you are a worker’s only source of income and they work exclusively for you, that worker is likely your employee, not a contractor. Contractors typically have the ability to realize their own profits and losses -- think of contractors as third-party businesses that provide specialized services for your business, rather than in-house entities that contribute directly to your practice’s bottomline.
- Relationship with Your Business -- Contractors perform work that is different than the work traditionally performed at your practice, and they are typically engaged for a limited project and/or for a limited amount of time. If you expect the employee to show up each day and perform a service exclusively for your practice (yes, we are talking about hygienists here), you’re probably dealing with an employee, not a contractor.
Employees: Exempt or Non-exempt?
First off, let’s start this section off by busting a common classification myth: paying an employee on a salary basis DOES NOT automatically mean that they are exempt from the requirements of the Fair Labor Standards Act (FLSA), including eligibility for overtime payments.
To be considered “Exempt” from the FLSA and overtime considerations, an employee must meet the requirements of a three-part test. Being paid on a salary is one piece of that equation, but it’s not a determining factor on its own. Rather, to qualify for FLSA exemption, an employee must:
- Be paid on a fixed-salary basis (with some exceptions for doctors and lawyers),
- Meet minimum salary requirements (as of the publication of this article, that’s at least $455 per week, or $23,660 per year), and
- Meet the job duty requirements for being classified as an Administrator, Executive, or Professional (other exemptions exist, but these are the ones that most commonly apply to dental practices).
Clearly, parts one and two of that equation are pretty straightforward. That third piece gets a little bit tricky, however, so we’ll break it down for you here in more detail.
This is NOT an easy catchall for your administrative team. An administrative exemption applies to employees whose work is primarily focused on high-level business processes and big-picture strategy as it concerns a company’s general direction, its finances, marketing strategies, etc. To meet this exemption, high-level administrative duties should be the employee’s primary responsibility. An exempt “administrator” will also be able to exercise judgment in making decisions and would not be held to restrictive guidelines made by other administrators.
The executive exemption most commonly applies to high-level managers, but this does not mean that anyone with a “manager” title fits the bill. At CEDR, we only recommend using this exemption if the employee in question is engaged in managerial tasks (such as planning, budgeting, interviewing, etc.) for the majority of their time AND they have at least three employees working under them. The executive exemption is most commonly misapplied to team leaders who supervise for part of their time, but spend the rest of their work days completing productive tasks.
Professional exemptions are often referred to as the “Learned Professional” exemption because the category focuses on employees with high levels of education in fields like medicine, law, science, accounting, engineering, and architecture. Dental professionals often have questions about whether hygienists can be made exempt under this category.
Though federal law suggests that a hygienist could meet the necessary educational standard in some cases, the DOL has repeatedly found that the work performed by hygienists is of a more mechanical nature and therefore does not meet the “professional” exemption requirement. In California, state law is clear that hygienists are not “practicing medicine” and therefore cannot be exempt from FLSA requirements unless they meet the requirements for Administrative or Executive exemptions.
Though by no means a deep dive on this subject, we hope this article has helped to make the process of employee and contractor classification at least slightly less befuddling.
For a more in-depth look at the topic, check out CEDR’s new online Guide to Employee Classification and Wage Compliance.
Paul Edwards, CEDR CEO and Co-Founder
Paul Edwards is the CEO and co-founder of CEDR HR Solutions -- a leading provider of on-demand HR support for dental practices across the United States.
He is the author of the HR Base Camp blog (hrbasecamp.com), where he shares practical ideas at the intersection of managing employees, leadership, and compliance for better thinking and HR decision-making. Join Paul and CEDR Director of Member Education, Kurt Tuller, for their presentation on how to Proactively Prevent Employment Compliance Problems at AADOM19!
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