Employee Classification Basics: A Simple Framework for Small Teams

Classification errors are quietly expensive. When roles are misclassified (employee vs. contractor, exempt vs. non-exempt), payroll practices, overtime, and benefits often follow the wrong rules—creating disputes and enforcement risk.

Start with two decisions:

1) Employee vs. Independent Contractor

Ask: Who controls the work? If the business controls schedule, tools, training, and how the work is performed, the person may be an employee under many standards. If the person runs an independent business, controls their methods, and serves multiple clients, contractor status may be appropriate.

2) Exempt vs. Non-exempt (for employees)Exempt roles typically require meeting specific duty tests and salary requirements. If the role is primarily hands-on production, hourly operations, or tightly supervised, it often belongs in non-exempt. When in doubt, treat as non-exempt and build timekeeping discipline.

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Documentation checklist (what to keep):

• Role description and primary duties

• Pay basis and pay rate rationale

• Scheduling/timekeeping expectations

• Any contractor agreements + proof of business independence

Practical guardrail:

Re-check classification whenever duties change. A “manager” title does not automatically make a role exempt.

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Download the “Role Classification Notes Template” for consistent documentation.

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Disclaimer: Educational information only; classification rules vary by jurisdiction and facts.