Let’s start with the not-so-obvious: An employee is someone who performs services if you can control what will be done and how it will be done. How you pay them and what employment laws apply to them, however, can get a little messy.
Understanding the definitions of employees is key to classifying them correctly. And correctly classifying your employees can save you from serious financial consequences, and help your business run more efficiently overall.
You may have several types of workers on your team, including:
Statutory employees and non-statutory employees
In this blog post, we'll walk you through the ins and outs of how the IRS and Department of Labor define full-time and part-time workers.
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Definition of a Full-Time Employee
Even though the distinctions between them might seem clear, part-time employees, full-time employees, and contractors are defined by the IRS in very particular terms — and if these distinctions aren’t understood, it could spell fees, penalties, and operational headaches for your business.
So how do you define these different types of workers? Correctly classifying a worker primarily comes down to two facets of the business relationship: the hours they work in a week, per month; and their ability to control how the services are performed.
However, before we get into the definition of full-time employees and part-time employees, it’s helpful to understand who the IRS defines as an employee and who is defined as an independent contractor.
For full-time employees, the IRS requires that you pay Social Security, income, Medicare, and unemployment taxes.
And for the purposes of the Affordable Care Act, the full-time employee and contractor distinction is also important. That’s because full-time employees should receive benefits. In fact, if you have more than 50 employees, the Affordable Care Act requires that you offer some form of health coverage. Other than that, though, the shape of the benefits package you offer is largely up to you.
To understand how the IRS defines categorizes employees and independent contractors, let’s dive in a little further to something called a common law employee.
What Is a Common Law Employee?
According to the IRS, “anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”
That level of control and independence fall into three categories, some of which may not be relevant for a particular situation. However, businesses need to weight these factors when determining whether their worker can be classified as an employee or independent contractor.
The IRS outlines the rules for common law employees as such:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If you have independent contractors, depending on your business’s relationship to them, these three rules could determine whether or not they might actually be employees.
How Many Hours Is Full-Time?
Generally, businesses regard individuals who work between 35 and 40 hours a week as full-time employees. You may even choose to classify someone who works only 30 hours a week as full-time.
Paying Full-Time Employees
How can you determine if you should pay your full-time employees by the hour or pay them a salary?
Paying employees wages might mean the possibility of paying them overtime, so if you anticipate a worker occasionally taking on projects that require flexibility to work longer hours some weeks, and shorter hours others, understand that overtime could be a factor.
Definition of a Part-Time Employee
Part-time employees are common law employees who work for you on an ongoing basis. However, the average number of hours they work per week falls short of what your company defines as full-time.
Paying Part-Time Employees
Just like full-time employees, you may choose to pay your part-time employees by the hour or via salary. Their rate of pay is generally equivalent to full-time salaried employees but on a prorated basis. For example, a part-time salaried employee who works three days a week will make 60 percent of what a full-time salaried employee (who works five days a week) with the same responsibilities takes in.
People who work for you on a full-time basis will likely receive a broad range of benefits. Many businesses also choose to offer benefits to part-time employees, though on a limited basis. For example, you may offer paid time off to full-time workers but not to those who work part-time. Insurance benefits for part-time employees may also be limited.You also have to pay the same types of taxes for part-time employees as you do for full-time workers. To learn how to correctly classify interns, volunteers, temporary workers and more, check out our handy guide.
Guide to Employment Laws
If you’re struggling navigating employment laws, you’re not in it alone. We’ve put together some of our most important and helpful tips when it comes to understanding employment laws and regulations, as well as steps to take to stay compliant.
Visit our Guide to Employment laws here.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.