How Businesses Can Classify Employees For HR Compliance
Author:
Clarisa Wong
Published:
July 5, 2024
Last Update:
December 18, 2024
Employee classification is a system of categorising employees based on their responsibilities, job duties, legal status, compensation, and entitlements. This classification determines employees’ pay, tax circumstances, and eligibility for company benefits. Categorising employees into groups that satisfy particular business needs – such as subdividing workers by title, executive status, or paycheck frequency – aids in both compliance and administrative efficiency. Proper employee classification is crucial to avoid severe consequences like penalties, fines, or legal action from employees seeking back pay.1
Employee classification is essential for HR compliance for several key reasons.2
First of all, it ensures legal compliance with various regulation laws that dictate how employees should be classified, and what rights and benefits they are entitled to. Incorrect classification can lead to severe legal repercussions, which include penalties, fines, and lawsuits. Secondly, proper classification contributes to business efficiency by allowing companies to manage their resources effectively, such as hiring independent contractors for short-term projects instead of full-time employees.
Thirdly, it ensures that employees receive the appropriate protections and benefits, such as minimum wage, overtime pay, worker’s compensation, and unemployment benefits. Proper classification also protects the company’s reputation, as misclassifying employees can damage morale and lead to negative perceptions of the business. Finally, accurate employee classification is crucial for meeting tax obligations, as misclassification can result in unpaid taxes, penalties, and audits from tax authorities.
Employee classification encompasses several types and definitions that cater to different business needs and employee situations. Most workplaces have their own categories, with the seven most common being:3
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- Full-time
- Part-time
- Project-based
- Temporary
- Fixed-term
- Casual
- Probationary
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Full-time employees typically work around 40 hours a week, though this can vary based on specific contracts, and they usually receive a fixed salary along with benefits like health insurance, annual leave, and sick leave.
Casual employees, on the other hand, work only when needed, without any expectation of future work, though they are still covered by labour laws if their contracts include specific terms such as pay rates and working hours.
Project-based employment, often referred to as contract employment, involves completing work according to a contract tied to a specific project, with clear tasks and timelines but no guarantee of further work once the project concludes.
Temporary employment is another category where work is not permanent and often aligns with peak periods. Seasonal workers, for example, might be hired during holidays to meet increased demand. Fixed-term employment specifies a start and end date, and employees might be rehired continuously for similar work. Probationary employment allows employers to assess if an employee is a good fit, usually over a period of three to six months, with terms outlined in the employment contract.
Other employment types include part-time work, self-employment, freelance work, and internships. Part-time employees work fewer hours than full-time employees, self-employed individuals operate their own businesses, freelancers are hired for short-term contracts, and interns gain temporary, often unpaid, experience in a specific field.
To ensure HR compliance and avoid issues related to employee misclassification, it is crucial to craft a robust employee classification policy. This policy should clearly define each type of employee and outline how their status is determined, such as by the number of hours worked or their salary. Additionally, the policy should specify the eligibility for benefits based on the employee’s classification. By establishing clear criteria and guidelines, businesses can ensure that all employees are classified correctly and consistently, which helps prevent legal issues and ensures that employees receive the appropriate benefits and protections they are entitled to.4
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