Work classification seems simple, until it isn't. Misclassifying employees is more common than most employers realize: 10-30% of employers misclassify at least one employee as an independent contractor, meaning millions of workers miss out on benefits they're entitled to, and employers face costly penalties to correct the mistake.
Misclassification doesn't make the IRS happy either. It's estimated to cost the government roughly $8 billion annually in lost employment taxes.
This guide covers how to classify workers correctly under the Fair Labor Standards Act (FLSA), from independent contractor vs. employee status to exempt vs. nonexempt classification, so you can avoid the legal and financial fallout of getting it wrong.
Accurate job classification under the FLSA ensures workers receive proper minimum wage and overtime protections. Specifically, classification:
The critical distinction between these roles isn't just about titles, it's about the working relationship and the economic realities behind it. Full-time employees receive protections and tax treatment that independent contractors don't, such as employer-paid Social Security and Medicare contributions.
Independent contractors: Work on their own terms, choose their projects, and manage their own schedules. They decide how to complete their work, handle their own income and self-employment taxes, and provide their own tools, without the protections employees receive under the FLSA.
Employees: Follow the employer's guidelines, work within the company's structure, and keep to set hours. Employers withhold and remit the appropriate taxes on their behalf and provide applicable benefits and protections.
Under the current six-factor test, the DOL and courts weigh factors including the permanence of the relationship, the degree of control each party has, and whether the work is integral to the business, to determine whether a worker is economically dependent on the business (an employee) or in business for themselves (an independent contractor). Because this framework may soon change, employers should revisit contractor relationships periodically rather than treating any single classification as permanent.
In February 2026, the U.S. Department of Labor announced a Notice of Proposed Rulemaking that would replace the current test. The February 2026 NPRM would replace the current six-factor test with a five-factor test, essentially reviving the DOL's 2021 rule. Two factors are elevated as “core” and carry more weight than the rest:
Per the proposal, when both core factors point toward the same classification, DOL states there is a “substantial likelihood” that reflects the worker's accurate status, a more predictable, employer-friendly standard than the current test's totality-of-the-circumstances approach, where no factor is weighted more heavily than another.
Not yet in effect. The public comment period closed April 28, 2026, and no final rule had been issued as of this writing. Source: Federal Register, 91 FR 9932.
Employees can also be classified as exempt or nonexempt. The two differ primarily in eligibility for overtime pay, exempt employees generally hold managerial or professional roles, while nonexempt employees perform manual or technical tasks. Getting this distinction wrong can lead to significant legal and financial consequences.
Exempt employees are not entitled to overtime pay. To qualify as exempt, an employee generally must meet three criteria:
1. Salary Basis: The employee must be paid a fixed salary, regardless of the number of hours worked.
2. Salary Level: The employee must earn at least the federal minimum salary threshold, currently $684 per week ($35,568 annually) for the standard exemption, or $107,432 annually for the highly compensated employee exemption. This threshold is set by the Department of Labor and has changed hands more than once in recent years — see the note below.
3. Duties Test: The employee's actual job duties must fall into a recognized exempt category, most commonly:
A brief history, since this number has moved around: the $684/week threshold was set in 2019. A 2024 rule would have raised it significantly in two steps, but a federal court vacated that rule in November 2024, and in May 2026 the Department of Labor formally rescinded it and restored the 2019 level. As of this guide, $684/week is once again the governing federal standard, though it's worth confirming this hasn't changed again by the time this is published.
Nonexempt employees are entitled to overtime pay, at least one and a half times their regular rate for any hours worked over 40 in a workweek. They can be paid hourly or on salary, but their job duties don't qualify them for an exemption under the FLSA.
Some situations call for extra care. Under the FLSA, certain seasonal workers may be exempt from federal minimum wage and overtime rules if the employer meets specific operational criteria, but states can impose stricter requirements. Massachusetts, for example, applies shorter operational-period limits and mandatory certifications for seasonal exemptions that go beyond the federal standard.
Some jurisdictions also maintain their own hybrid classifications with unique pay rules. For example, certain public-sector part-time roles carry overtime and pro-rated pay requirements distinct from standard private-sector FLSA rules. If your organization operates across multiple states or in the public sector, confirm any jurisdiction-specific nuances with local counsel rather than assuming federal rules alone apply.
Employers are responsible for classifying workers accurately. To do that well, they should:
Misclassification, intentional or not, carries real consequences:
The IRS's Voluntary Classification Settlement Program (VCSP) offers employers a way to reclassify workers going forward and resolve past misclassification with less severe consequences than a full audit.
Correct classification protects workers and employers alike. Following the FLSA and applicable state laws, and keeping a vigilant eye on the classification process, helps employers avoid legal exposure while building a fair, equitable workplace.
Staying proactive through regularly reviewing job roles and compensation against current legal standards, pays off in the form of a more compliant, more harmonious organization over time.
Classification questions rarely have a single simple answer, and the rules underneath them keep shifting. CoAd helps employers navigate worker classification and exemption status with confidence.
For further reading, these federal resources are directly on point:
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