Employee Classification – A Comprehensive Details
13 minutes read

Employee Classification – A Comprehensive Details

Are you aware of the distinctions between employees and independent contractors? How about full-time versus part-time, or exempt versus non-exempt? Regrettably, a significant number of employers have misclassified their employees at some point, which can result in legal troubles and hinder workers from receiving their rightful pay and benefits. To ensure compliance and maintain a contented workforce, simply follow our guide on correctly classifying your employee classification.


What is Employee Classification?

Employee classification is a system of categorising employees based on their job duties, responsibilities, working hours, and compensation. It is important for you to classify your employees correctly, as it affects their legal rights, tax obligations, and benefits eligibility. There are some different types of employee classifications, such as full-time, part-time, contract, intern, seasonal, and leased. Each type has its own advantages and disadvantages for both the employer and the employee.

Some of the factors that determine employee classification are:

  • The number of hours worked per week
  • The expected duration of the job
  • The level of control and supervision by the employer
  • The degree of independence and creativity of the employee
  • The method and frequency of payment

Importance of Employee Classification

The following are the reasons to classify the employees in your organisation.

  • Legal Rights – Different categories of employees come under different types of labour laws and regulations which in turn will make them eligible for different labour protections. Improper classification will lead to legal penalties and fines.
  • Tax Obligations – Properly classifying employees is crucial for businesses to comply with laws, protect employee rights, manage resources, meet tax obligations, and maintain a good reputation. Improper classification can lead to fines and legal scrutiny.
  • Protections for Employees – Proper employee classification is crucial for ensuring they receive the legal protections and benefits they deserve, such as minimum wage, overtime pay, and worker’s compensation.
  • Ensuring Company Reputation – Incorrect employee classification can harm a business’s reputation and affect employee morale. Unfair treatment can lead to employees leaving or speaking negatively about the company to others.
  • Planning resources: Proper classification helps organisations to effectively plan their workforce. By understanding their workforce i.e. full-time, part-time, contract, or temporary, businesses can align staffing needs with business goals and effectively manage workloads.

Types of employee classification

The following are the types of employee classification –

  • Full-time vs. part-time employees

    It is determined by the number of hours worked each week. Full-time employees typically work 40 hours or more hours per week and are entitled to benefits like health insurance, paid leave, and retirement plans. Part-time employees who work less as required will receive different benefits than full-time employees.

  • Exempt vs. non-exempt employees

    Exempt employees do not come under the protection of labour laws. They can receive various benefits from the company, like promotion, performance rewards, etc., unlike the non-exempt employees who get the benefits only as defined by the government. Also, the non-exempt employee may not necessarily be promoted or rewarded by the company even on achieving equivalent contributions as compared to exempt employees.

  • Temporary vs. permanent employees

    Temporary employees are typically hired for a specific project or duration and may not receive benefits or job security. In contrast, permanent employees are hired indefinitely and have greater entitlements and safeguards.

  • Interns vs. regular employees

    Interns are typically students or recent graduates who seek to acquire practical skills and knowledge in their field of study by working for an organisation, while regular employees are recruited to perform specific tasks and responsibilities for the organisation and are compensated for their services. Whether or not an intern is paid depends on the nature of the internship and the company policies.

  • Seasonal vs. year-round employees

    Seasonal employees are hired for a limited time during a peak season, such as summer or winter. They typically do not receive benefits or job security. Year-round employees, on the other hand, work throughout the year and have more rights and protections than seasonal employees.

  • Leased vs. direct-hire employees

    Leased employees are hired by a staffing agency and then assigned to work for a client company. The staffing agency is responsible for paying their wages, taxes, and benefits. On the other hand, direct-hire employees are hired directly by the employer and are part of the employer’s payroll and human resources system.

  • Contract and Remote employees

    Contractor and remote employees are similar but have differences in legal status, working relationship, and flexibility.

Let’s see what the differences are.

  1. Legal status – Contactors work on a contract basis and are not employees. Remote workers can be full-time or part-time employees who work remotely.
  2. Maintaining Control and Autonomy – Contractors have more control and autonomy over their work. They negotiate their contracts and can choose when and how they work. Remote workers perform their job duties from a location outside the company’s physical office, such as home or co-working spaces. They are bound by the company’s rules and regulations.
  3. Benefits – Contractors handle their own taxes and aren’t eligible for employee benefits like health insurance or paid time off. Remote employees, however, may receive similar benefits and protections to on-site employees.

How does Saral Payroll software help?

Automated software solutions for payroll taxes and employee benefits can save employers time and money while also managing different types of employees and keeping up with evolving employment laws.

  • Automated payroll with administrative benefits – Saral simplifies payroll and benefits management for all categories of employees/workers in one place. It can also track eligibility and enroll online for timely and accurate payment and benefits.
  • Time Tracking – Employers can track employee hours for overtime and benefits eligibility. This is also provided with a consolidated payroll and benefits system with a time-tracking solution that integrates with the current software.
  • Employee Management – Saral software accommodates changing employee and employer relationships with ease. For instance, a company can offer a unified pay and benefits system for employees and independent contractors, making it easy to document changes in a worker’s situation and ensuring a consistent experience.
  • Statutory Compliances – Saral payroll software helps you to track employee classification regulations across multiple states and countries.


Ways to classify employee classification

An employee classification policy defines the different categories of employees based on job roles, responsibilities, and employment status to ensure consistency in treatment.

  • Employment Categories
  • Job description and responsibility
  • Employment status
  • Benefits entitlements
  • Pay structure
  • Compliances
  • Performance revolution
  • Classification reviews
  • Working hours

What are the risks of misclassifying employees?

Misclassifying employees can have serious consequences, including legal action, fines, lawsuits, reputational damage, and demotivated employees. Employers may also face tax penalties and audits for misclassifying employees and not paying appropriate taxes.

This ends our discussion on Employee classification. Let us know your other questions and opinions on this topic. Mention below the comment box.

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