August 30, 2022
by Kiley VanGilder
If there’s one thing we’ll repeat over and over until we’re blue in the face, it’s that hiring isn’t just about filling a role. It’s about building a team that actually works (legally, logistically, and culturally) and one of the biggest pieces of that puzzle is employee classification.
When a lot of business owners hear “employee classification” they usually think about whether their hire will be full-time or part-time. But that’s just the tip of the iceberg – there’s a whole slew of classifications that determine everything from overtime eligibility to benefits access, and if you don’t get it right, you could be facing compliance headaches (or worse, legal trouble).
Let’s break it down in a way that actually makes sense.
Employee Classification 101: What Do These Terms Actually Mean?
If you’ve ever felt personally victimized by HR jargon like exempt, nonexempt, salaried, hourly, or FLSA compliance, you’re not alone. But by the end of this post, you’ll have a solid grasp on what these classifications actually mean for your business.
Exempt vs. Nonexempt (The Overtime Debate)
Exempt:
These folks are exempt from (aka not eligible for) overtime under the Fair Labor Standards Act (FLSA) because they meet specific criteria under executive, professional, or administrative roles. With some limited exceptions, exempt employees must be paid on a salary basis, and are expected to get the job done – regardless of the hours worked.
Nonexempt:
These employees must be paid overtime (at least time-and-a-half) for any hours worked beyond 40 hours per week. If you don’t track this correctly, you’re opening yourself up to wage claims – and that’s a mess you do not want to clean up. This can be done through:
- A fixed salary for a set number of hours, with overtime paid beyond that threshold.
- The fluctuating workweek method, where employees receive a fixed salary regardless of hours worked, plus additional half-time pay for overtime (but only if certain conditions are met under the FLSA).
Salaried vs. Hourly
Salaried:
They’re paid the same amount each pay period, no matter how many hours they work. Exempt employees must be paid a salary, but it’s important to note that not all salaried employees are exempt from overtime!
Hourly:
Alternatively, these employees paid for each hour worked. Most hourly employees are nonexempt, meaning they must be paid overtime when they clock more than 40 hours in a week.
Part-Time vs. Full-Time (The Not-So-Simple Answer)
The classifications most people are familiar with are part-time and full-time employment, though the definition is not exactly cut and dry. Since the FLSA requires overtime pay for nonexempt employees after 40 hours per week, most people assume full-time = 40 hours. But the federal government doesn’t actually define “part-time” employment.
So here’s what you need to know about part-time and full-time classifications, in a nutshell:
If your company is an Applicable Large Employer (ALE) (50+ employees), then under the Affordable Care Act (ACA), anyone working 30+ hours per week or 130+ hours per month is considered full-time.
If you’re a small business (under 50 employees), you have more flexibility in defining full-time vs. part-time. But whatever you decide needs to be clear, consistent, and compliant. across your company to avoid compliance issues and employee dissatisfaction. Your classification policy directly impacts benefits eligibility, overtime rules, and legal compliance, so don’t wing it.
That said, while you can define what “full-time” means for your team, exempt and nonexempt classifications are strictly regulated by the FLSA. The law – not your internal policy – determines who qualifies for overtime and minimum wage protections, so it’s essential to get it right from the start.
The Risk of Misclassifying Employees
Misclassification is one of the most common labor law violations, and it’s one of those compliance pieces that rears its ugly head if your employees feel like they aren’t given the same treatment as someone else. This most commonly happens when a company improperly labels an employee as exempt to avoid paying overtime; a worker is misclassified as an independent contractor when they should legally be considered an employee; or when a company applies benefits inconsistently based on unclear classifications.
If your employees feel like they’re being treated unfairly, they will notice. And so will the Department of Labor. A lawsuit, back pay claims, and fines are not the kind of surprises you want in your inbox.
To protect your business, make sure your employee handbook and internal policies are airtight and align with state and federal laws. And all employers, regardless of size, must be cognizant of legally mandated benefits required by both state and federal law such as workers’ compensation, unemployment compensation, insurance, and other equally important benefits that are not controlled by the employers’ classification of employment.
Employee Classification for Small Businesses – What Works and What Doesn’t?
After working with 50+ businesses to set up personalized policy and plan organizational structures, we’ve seen it all. Here are three things we’ve learned about small businesses scaling their teams:
- Many want to break free from the rigid corporate 9-to-5 structure and create better work-life balance. We love to see it!
- Defining full-time at 30-35 hours per week is common, but not always financially feasible. And that’s okay!
- Companies that prioritize clarity and fairness in employee classification create healthier, happier workplaces (and avoid compliance nightmares). Imagine that!
The bottom line is this: you don’t have to do what the corporate giants do. Just make sure your classification system is clear, fair, and legally sound.
How to Get Employee Classification Right Without Losing Your Sanity
Creating a smart, compliant employee classification system requires a strategic approach that considers both your current business needs and your long-term growth plans. The goal should be to determine what makes the most sense for your company right now, while also ensuring that your structure can scale as your team expands.
At the same time, you need to strike a balance between legal compliance and company culture, making sure your policies protect your business and support a positive work environment. Not sure where to start? This is literally what we do. Get in touch and let’s chat about how we help small businesses build compliant, strategic teams.
TL;DR:
Employee classification isn’t just about full-time vs. part-time—it impacts overtime pay, benefits eligibility, and compliance.
Misclassifying employees = one of the biggest HR mistakes small businesses make.
A clear, strategic, and consistent policy protects your business and keeps your team happy.
If you’re feeling lost, Paradigm’s got your back. Let’s build a hiring plan that works for you.
