Understanding Employee Types

Trying to understand differences in employee types, like exempt vs. non-exempt? Or salaried vs. hourly? Check out this article!

Understanding the difference between exempt & non-exempt is very important as an HR Admin. Non-exempt workers are entitled to certain protections under the FLSA (Fair Labor Standards Act). The FLSA is a federal law that sets minimum wage & overtime requirements. It states that employers must classify employees accurately or they risk being fined for compliance violations. Compliance also means abiding by state and local laws, which may provide greater benefits than the FLSA, such as overtime pay for working over eight hours a day. Check out your state's laws here.

Common Employee Types

• Exempt vs non-exempt

• Salaried vs hourly

Exempt: An exempt employee is an individual who is exempt from the overtime provisions of FLSA because they are classified as an executive, professional, administrative, outside sales employee, and certain computer professionals, and meet the specific criteria for the exemption. With some exceptions, exempt employees must be paid on a salary basis. For more information, please refer to the FLSA Fact Sheet.

 

Non-exempt: A non-exempt employee is an individual who is not exempt from the overtime provisions of the FLSA and is therefore entitled to overtime pay for all hours worked beyond 40 hours in a workweek (as well as any state overtime provisions). Non-exempt employees may be paid on a salary, hourly, or other basis. 

 

Salaried: A salaried employee is an individual who receives the same salary regardless of how many hours are worked. Exempt employees must be paid on a salary basis. Non-exempt employees may be paid on a salary basis for a fixed number of hours or under the fluctuating workweek method. Nonexempt employees paid a salary still receive overtime per federal and state laws.

If you have a non-exempt Salaried employee, you may pay them through embedded payroll by converting their wage to an equivalent hourly amount.  This will allow you to pay them a fluctuating wage in Embedded Payroll.

 

Hourly: An hourly employee is an individual who receives an hourly wage for work performed. They are generally classified as non-exempt and are subject to the overtime provisions of the FLSA. Exempt computer professionals may also be paid hourly, as could those exempt under the professional exemption- such as teachers, lawyers, and doctors. 

Contractors vs. Employees

In addition to understanding salaried vs. hourly and exempt vs. non-exempt, it's important to distinguish between contractors and employees—a classification that carries significant tax, compliance, and payment implications.

Differences Between Contractors and Employees

• Employee: Employees are hired under a company’s direct control. Employers are responsible for withholding taxes (federal income tax, Social Security, Medicare), providing benefits (such as health insurance or retirement plans), and following employment laws like the FLSA for overtime and wage protections.

• Contractor: Independent contractors, on the other hand, are self-employed individuals or companies hired to perform specific tasks or services. They have more autonomy over how, when, and where they work. Employers do not withhold taxes for contractors or provide benefits. Instead, contractors are responsible for paying their taxes and typically submit invoices for payment. 

Why Does This Matter?

Misclassifying workers as contractors instead of employees can lead to legal and financial repercussions. Companies may face fines, back taxes, and penalties for not providing overtime pay, benefits, or tax withholdings for misclassified employees. HR Admins must classify workers correctly in GoCo to ensure compliance with tax laws and labor regulations.

Can You Have Both Contractors and Employees Active in GoCo?

Yes, In GoCo, you can have both contractors and employees active within your system, but they are handled differently. You also cannot have an individual be a contractor & employee at the same time.

Payment Methods: Contractors vs. Employees

• Employees: Employees are managed through the standard payroll system, with tax withholdings, benefits, and compliance with overtime laws built into the platform. Employees can be paid via direct deposit or check.
• Contractors: Contractors are paid through direct deposit payments without tax withholdings. GoCo allows you to track contractor details for HR purposes like engagement dates, performance, and contract terms. In GoCo, earnings are limited to Hourly Wage, Bonus, or Reimbursement. Payroll Deductions are not supported. Contractors will see their earnings on Pay Statements, rather than Pay Stubs & will see a 1099 Form generated on GoCo at the end of the year.

It’s important to make sure GoCo is set up properly to differentiate these roles, ensuring that your payments and tax filings are accurate and compliant with all relevant regulations.

Published 10.18.24