Yes, a Small Business DOES Need to Worry About Employee Classification; Here’s Why!

Yes, a Small Business DOES Need to Worry About Employee Classification; Here’s Why!By Michael Cardman

Many federal employment laws – such as the Family and Medical Leave Act, the Americans with Disabilities Act, Title VII and COBRA – don’t apply to any business with fewer than 15 employees.

But some laws can apply to a business with even just one employee – and they can really spell trouble for a small business that doesn’t pay attention.

One of them is the Fair Labor Standards Act (FLSA). Basically, it requires that all employees be paid a minimum wage (currently $7.25 an hour, although President Obama is pushing to raise it to $9.00 an hour) and time-and-a-half overtime for all hours worked beyond 40 in a workweek.

Some employees, such as executives, administrators, professionals and certain salespersons, are exempt from these requirements. The process of determining whether an employee qualifies for one of these exemptions is known as employee classification.

If a small business does not classify an employee properly, it can be held liable for as many as three years’ worth of overtime. These costs can really add up. For example, consider “Jane,” who works 50 hours a week and is paid $10 an hour. If her employer mistakenly classified her as exempt, she could be awarded $46,800 ($15 an hour multiplied by 10 hours per week multiplied by 52 weeks per year multiplied by three years and then doubled as “liquidated damages”) plus attorney fees. Now that’s a bill few small businesses can afford!

Some small businesses might say, “An employer with less than $500,000 in annual sales volume isn’t covered by the FLSA.” That’s true, unless an employee is engaged in interstate commerce. Interstate commerce need not involve the transportation of goods across state lines; it can involve something as simple as regularly making telephone calls to people in other states, handling records of interstate transactions, travelling to other states on the job, and even doing janitorial work in buildings where goods are produced for shipment.

Some small businesses might think, “We’re too small for anyone to care about actually enforcing the law. There are bigger fish in the sea.” That would be a mistake.

While it’s true that most plaintiffs’ attorneys prefer to target larger employers with lucrative class action lawsuits, a small business shouldn’t underestimate the potential for a single disgruntled employee to sue. Many FLSA lawsuits have a single plaintiff.

The US Department of Labor also has made it easier for a single employee to initiate federal enforcement by hiring more FLSA investigators, informing employees about their rights and even launching a cell phone app with which employees can track how much overtime they are owed.

A small business would be wise to learn the ins and outs of proper employee classification. Not only will it protect the business while it’s small, but it also will provide a strong foundation on which the business can expand to the point where it’s no longer small.

Today’s Guest Post on Start Your Own Small Biz was provided by Michael Cardman. Michael works on behalf of XpertHR, a practical resource to help HR comply with federal, state and municipal law. He writes regularly about employment law issues, with a focus on helping employers avoid liability through proactive compliance.

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