• Though they are normally paid by the hour, nonexempt employees can receive pay by the mile, by number of units produced, or by a weekly salary.
• Acquiring the services of an independent contractor can bring superior skills or expertise for a limited time, cutting an employer’s costs and lowering its liabilities.

A nonexempt employee is one who is entitled to overtime. They are commonly called “hourly” employees and are usually paid by the hour. However, a nonexempt employee can be paid using other methods (for example, by the mile, the number of units produced, or a weekly salary). The important thing is that “salaried” does not necessarily mean “exempt from overtime.” It is possible to pay a nonexempt employee a salary, but the employee is still legally entitled to overtime.

The exempt classifications are exactly what they sound like — an exemption from the employer’s duty to pay overtime. Employers are not required to classify an employee as exempt, and where this is done, the company bears the burden of proving that the exemption was properly applied.

There have been court cases of misclassified employees suing their employers for past overtime wages. Think of nonexempt employees as the “default” position — if an employee does not qualify as exempt, that employee must be nonexempt and is entitled to overtime.

Although some employees can be exempt, the criteria for meeting a particular exemption are fairly specific, and the employer bears the burden of proving that an exemption applies. If an employee was improperly classified as exempt and should have received overtime, the individual can file a wage claim to recover back overtime pay.

If employers are in doubt regarding proper status, the nonexempt status should be applied. Employees cannot claim they were wrongly paid overtime.

Independent contractors

Independent contractors are individuals hired on a contract basis to perform specialized work at another employer’s workplace. They can include engineers, writers, systems analysts, and many other specialized or highly skilled workers.

Obtaining the services of an independent contractor is a good way of securing highly skilled or specialized expertise for a short period of time, rather than permanently employing someone with those skills. Choosing an independent contract can save a lot of costs (e.g., in employee benefits) and reduce some legal liabilities.

On the downside, if an independent contractor is incorrectly classified and is really an employee, then problems can arise. This is why it is critical for employers to make sure a person really qualifies as an independent contractor, spell out all terms of the contract, and abide by those terms.

When hiring an independent contractor, an employer needs to be sure its relationship with the contractor meets requirements of several agencies. These include:

• The Internal Revenue Service (IRS),
• The U.S. Department of Labor (DOL),
• State unemployment compensation agencies,
• State workers’ compensation agencies, and
• State tax agencies.

Each agency has different tests for distinguishing between employees and independent contractors.

What one agency may define as an employer/employee relationship, another might define as an independent contractor relationship. Although the criteria provided by the IRS and the DOL are the most well-known and commonly used, it is possible for an individual to meet those criteria for independence, but still be considered an employee by a state agency (e.g., for workers’ compensation or unemployment compensation).