I have walked into many a company where every employee is classified as “exempt” meaning they are paid a set salary every week. The owner is so proud he/she thought to do it that way. Payroll is simple and it does not matter if folks work overtime. Whoa, not so fast.
The Department of Labor has instructions under the FLSA (Fair Labor Standards Act) regarding how jobs are classified. How a job should be classified is not based on job titles or job descriptions. The DOL looks at “whether the employee's compensation and specific job duties meet all the requirements of the regulations for the particular exemption claimed” (http://www.dol.gov).
For example, if a person’s job title is “Assistant Manager” he/she might be considered exempt as an executive employee. However, if the person’s job duties are basically of a non-exempt nature the job will be deemed hourly and the employer may owe overtime pay and possibly penalties. Ouch!
Another item I seem to run into quite a bit is employee vs. independent contractor. Just as the DOL has rules governing exempt vs. non-exempt; our friends at the IRS have rules for determining if an individual is an employee or independent contractor. If the company is determining the person’s schedule (when and where to work), providing them with the tools needed for the job (computer, phone, jack-hammer etc.), what workers to hire to assist with work the person might need to be classified as an employee.
If you are not sure visit the IRS website for further clarification: http://www.irs.gov/businesses. Misclassifying individuals as independent contractors can lead to some hefty fines if there is an audit.
Expense reimbursement is another fun area to touch on. Sometimes employees may claim expenses as “work related” when in fact they are not. If, for example, you use the company credit card, by mistake of course, to take your family out to dinner you should advise your employer accordingly. You should then reimburse the company for the meal. If you “forget” the company should treat this expense as additional income for your tax purposes.
If you are the business owner, you must be especially careful. Without a clear separation of your personal and business expenses you leave yourself open to personal liability. If, for instance, someone were to sue your company they may take the position that because of the way you handle your expenses you and your company are one in the same. This could leave you open to losing your personal assets. Consult an attorney for guidance.
These are just a few examples. As mentioned at the outset of this article, you are fine as long as you do not get caught. Do you want to take that chance?