End-of-Year Employee Classification: Your December HR Project

End-of-Year Employee Classification: Your December HR Project

As we close out 2025, I know you're juggling year-end appeals, board reports, holiday events, and maybe even planning some well-earned time away. But before you wrap up for the year, there’s one HR task worth pausing for: reviewing whether your employees are properly classified.

I get it, classification isn’t thrilling. But I can tell you this: misclassification is one of the most common and costly compliance issues I see, and it usually happens to well-intentioned teams who are simply moving fast or don't know what they don't know.

December is actually the ideal time to check classifications. You’re closing your books, planning staffing for the next year, and evaluating roles that may have evolved. If you catch an issue now, you can fix it before it grows into something bigger in 2026.

The Department of Labor (DOL) has been increasingly active in pursuing misclassification cases. Nonprofits aren’t exempt and with small teams, shifting responsibilities, and limited in-house HR expertise, they're often likely to run into gray areas simply because roles evolve without formal review.

The Two Big Classification Questions

Every classification review really boils down to two decisions:

1. Are they an employee or an independent contractor?
2. If they’re an employee, are they exempt or non-exempt under FLSA?

Let’s break each down.

1. Employee vs. Independent Contractor: This distinction determines taxes, benefits eligibility, liability, and how much control you legally can have over someone’s work.

Independent contractors generally…

- Control how, when, and where they work
- Provide their own tools and equipment
- Serve multiple clients
- Work on defined projects or time-bound engagements and bring a particular skill set/level of expertise

Think of your grant writer who works with several nonprofits, manages their own deadlines, and uses their own laptop and software.

Employees generally…

- Follow your schedule and are held to workplace expectations and policies
- Use your systems and tools
- Are trained in your processes and are provided on-going development
- Have an ongoing relationship with your organization

If someone attends team meetings, uses your internal tools, reports to your staff and/or manages other staff members, they are likely an employee regardless of what you’ve been calling them.

Misclassification can result in back taxes, penalties, and required retroactive benefits.

2. Exempt vs. Non-Exempt Employees

Once you’ve confirmed someone is an employee, the next step is determining whether they are eligible for overtime.

Non-exempt employees...

- Must track hours
- Must be paid overtime for hours worked over 40 in a workweek
- Can be hourly or salaried

Exempt employees...

To qualify, they must meet all three of the following tests:

-Salary Basis Test: Paid a consistent salary not tied to hours worked
-Salary Level Test: At least $684/week or $35,568 annually (as of July 2024, although plans to increase this are in process)
-Duties Test: Primary duties must be executive, administrative, or professional

Being salaried alone doesn’t determine exemption. For nonprofits, titles often mislead. A “Program Manager” earning $35,000 who mostly handles routine tasks does not meet the salary threshold or the duties test. They’re likely non-exempt and entitled to overtime.

So, where to start?

1. Start with a comprehensive list. Include employees, contractors, interns, consultants, and seasonal workers.

2. Revisit every contractor classification and ask questions such as: 1) Do we control when/how they work? 2) Do they work exclusively for us? 3) Have they become part of the internal workflow and are essential to organizational progress?

3. Audit every exempt employee and ask questions like: 1) Are they over the salary threshold? 2) Are their actual daily duties still exempt-level? 3) Are you treating them as salaried?

4. Look at duties, not titles. Job titles don’t determine classification, responsibilities and job duties do.

5. Consider how roles have evolved. People grow. Roles shift and the scope changes. Classification should evolve too based on what the role actually is today.

If you uncover misclassifications, do not panic. Correct is moving forward. Update payroll, classification status, and any related benefits. Explain the change transparently. If someone shifts from exempt to non-exempt, walk them through what changes (e.g., time tracking, overtime eligibility). If someone shifts from contractor to employee, walk them through what changes (e.g., employer pays full share of FICA vs. contractor paying half and employer paying half).

If the misclassification has been long-standing or is financially significant, legal guidance from an employment attorney may worth the investment.

Just like updating your handbook or conducting performance reviews, add classification to your annual December checklist. A quick yearly review avoids slow creep into non-compliance. It protects your people, your mission, and your hard-earned resources.

If you're feeling unsure, overwhelmed, or want a second set of eyes, reach out. This is exactly why we exist. And always remember, people matter most!