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Apr03

Compensating a Salaried Employee for Contract Work

We are piloting our internal database system with other similar organizations. The initial set-up and additional customization of the software will take our IT Director several hours outside of his normal responsibilities. He is a full time salaried employee. The company has agreed to hire our IT Director as a contract laborer to complete the additional programming requests on his own time (and we have agreed). Our Finance Director wants the company to bill us for the service and then we will compensate the IT Director. Can we do this? Is that considered “bonus” income? The IT Director charges a higher rate per hour for his contract labor compared to what he is paid at our organization (we are a nonprofit). Is it better to let our IT Director contract this work out on his own or to let our Finance Dept run it through our books and pass along the income?

It’s possible for an employee to also work as an independent contractor for the same company. The classification of employee or independent contractor is based on each position individually. So, one position could clearly be an employee relationship while the other has more independent contractor characteristics. If an employer chooses to have the worker in employee and independent contractor positions it’s very important that the employer is absolutely certain the latter position is clearly classified correctly. Otherwise, the company is risking potential violations under the Fair Labor Standards Act (FLSA).

It’s often believed the safer approach is to have the employee work two jobs within the company and pay him directly through Finance as any normal employee. A common misunderstanding with this approach is that the employee will automatically retain his FLSA classification, meaning if his current position is exempt than is second job will also be exempt. This is not always true. Under the FLSA, a worker can only have one classification, exempt or non-exempt. The classification is based on the worker’s primary job duties but when a worker has two jobs within the same company the primary duties are actually a combination of both jobs. Thus, it must be determined if the combined responsibilities would still permit the exempt classification. If not, the employee must be re-classified as non-exempt for both positions and subject to overtime regulations per the FLSA.

Based solely on the information provided it’s difficult to determine if the IT Director would maintain his exempt classification. However, assuming he would continue to have autonomous decision making on matters of significance in the second position and the second position wouldn’t assume a substantial amount of his time, it seems the exempt classification would still be viable.

Keeping the employee on the payroll for the second job, eliminates the risk of “red flags” since having the same worker listed as an employee and independent contractor may illicit attention from regulatory agencies. As mentioned above, it’s still important to ensure proper classification in order to avoid costly FLSA violations.

Assuming the IT Director would remain exempt, it’s permissible to pay him either hourly or salary for the second position. Remember non-exempt and exempt are classifications under the FLSA determining the need to adhere to overtime regulations. Hourly and salary are payment methods. So, the exempt IT Director can be paid a salary for his primary job and either a salary or hourly wage for his secondary job while keeping his exempt classification. The additional payments to the employee would be considered supplemental wages.

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This entry was posted on Thursday, April 3rd, 2014 at 8:21 pm and is filed under
Compensation, Labor Laws.
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