What Is an Employee?

Employees Have Differences in How They Are Classified and Paid

This is a cross section of the employees who work for one organization.
Photo: Peter Cade / Getty Images
Definition

An employee is a worker hired by an employer to do a specific job. Employers control how employees are paid, when employees work, and how employees work. In exchange, employees get benefits that contractors don't.

Key Takeaways

  • An employee is a worker that performs specific tasks for a business in exchange for regular pay.
  • Employees negotiate a salary with their employer and typically receive benefits, including overtime pay and vacation.
  • Employees differ from independent contractors in that employers take on the financial risk of the venture in exchange for more control over the employee's work.

How an Employee Works

An employee is a type of worker that an employer can hire to do a specific job. Unlike contractors, which have more freedom than an employee, an employer controls what an employee does and exactly how it will be done.

The employee is hired by the employer after an application and interview process results in their selection as an employee. This selection occurs after the applicant is found by the employer to be the most qualified of their applicants to do the job for which they are hiring.

Note

This is always a risk that the employer takes because they need to employ people who can do the work required to perform a particular job. You can only learn just so much in an interview and selection process. The rest you learn after the employee starts the job.

The terms of an individual’s employment are specified by an offer letter, an employment contract, or verbally. In a non-union workplace, every employee negotiates on their own; the terms of employment are not universal between all positions.

Many prospective employees do not negotiate at all by choosing to accept the offer that the employer makes to them. Others ask for between $5,000 and $10,000 more to see if they can start the job with a higher salary. Since raises are subsequently based on the pay rate negotiated, it behooves a new employee to negotiate the best possible deal.

In workplaces that are represented by a union, the collective bargaining agreement covers most aspects of an employee’s relationship with the workplace including compensation, benefits, hours of employment, sick time off, and vacation. The contract also protects the rights of the unionized employee and gives the employee options for grieving workplace treatment. The existence of the contract takes away the employee's individual right to negotiate his salary.

Note

Most employees who work in service or product-creating roles have a narrow range of potential salary offers since their jobs are defined with a salary range and benefits in mind. Employees who are senior leaders and managers are more likely to receive their job offer in an employment contract that is individually negotiated by them.

An employee works part-time, full-time, or is temporary in a job assignment.

An employee barters their skills, knowledge, experience, and contribution in exchange for compensation from an employer. An employee is either exempt from overtime or not exempt from overtime; the rules about paying an employee are governed by the Fair Labor Standards Act (FLSA).

An exempt employee is paid for accomplishing a full job in as many hours as necessary to accomplish it. Employers must pay the non-exempt employee for every hour worked as they are paid by the hour.

When an employee is classified as a non-exempt employee, the employer must set up a time tracking system to ensure that the employee is legally paid for every hour worked and for overtime pay. Overtime pay typically kicks in after 40 hours in a single week, and it's worth one-and-a-half times standard pay. Some states have laws that mandate overtime pay when an employee works more than eight hours per day (some states have higher thresholds or no thresholds).

Note

Some salaried employees may not receive overtime pay. Employers do not need to offer overtime pay to certain salaried workers who earn at least $684 per week.

Requirements for an Employee

Each employee has a specific job to accomplish that is often defined by a job description. In responsible organizations, a performance development planning process defines the work of the employee and the organization’s expectation’s for the employee’s performance.

It should also help employees set goals and track their performance. Additionally, the performance management system should help employees develop their ongoing skills and adopt a career path.

An employee works within a functional area or department such as marketing or human resources. An employee has a boss, the person they report to and take direction from—usually a manager or supervisor. An employee should have the expectation that they will receive reasonable, professional treatment from the manager. An employee also has coworkers who work with them to accomplish the work of the department.

The employee has a workstation or an office in which they accomplish the job. The employer supplies the employee with the tools and equipment necessary to perform work such as a computer, telephone, cell phone, laptop, desk, and supplies.

In forward-thinking organizations, the employee receives frequent performance feedback from the manager, rewards and recognition, and a reasonable benefits package.

Note

Although most employment relationships are at-will, the employee who performs the job successfully is likely, although not guaranteed, to keep the job.

Employee vs. Contractor

  Employee Contractor
Behavior Employer controls what and how Determined by contractor
Finances Employer primarily responsible Contractor primarily responsible
Relationship Work is key to business Work is not key to business

The difference between an employee and an independent contractor can be nuanced. They both perform tasks for a business in exchange for payment. A business trying to determine whether a worker is an employee or a contractor can consider three factors. There isn't a set threshold at which a worker becomes one or the other. Businesses must carefully consider all relevant factors to decide how to treat a worker.

Behavior

Behavior refers to the type of instructions given to workers, the degree of instruction, any evaluation systems for workers, and the training offered to workers. The more detailed and controlled instructions, evaluation, and training become, the more likely it is that a worker is an employee.

Finances

Financial factors typically refer to who has the biggest financial stake in the operation. Who has invested the most in the tools and expenses required to complete the task? Who stands to profit or lose the most? The more these responsibilities fall on the business, the more likely it is that a worker is an employee.

Note

Financial factors also include how the worker is paid. Employees typically receive regular wage amounts based on the amount of time worked. Contractors are more likely to receive flat fees for projects, although they can receive hourly pay.

Relationship

Employees typically receive benefits and have a relatively permanent relationship performing key tasks for employers. Businesses don't offer benefits to contractors as often. The business's relationship with a contractor usually comes with a pre-determined ending date, such as the end of a project. The services a contractor provides for a business shouldn't constitute a "key aspect" of business operations.

Frequently Asked Questions (FAQs)

What is an exempt employee?

An exempt employee meets certain thresholds that disqualify them from overtime benefits covered by the Fair Labor Standards Act (FLSA). The most common type of exempt employee is a salaried (non-hourly) worker receiving at least $684 per week. Certain professions, such as computer workers, have lower thresholds. Other types of employees, such as teachers and medical professionals, are not subject to these salary thresholds.

What is a 1099 employee?

A 1099 worker isn't an employee at all; they're an independent contractor. Rather than filling out a W-4 and using a W-2 for tax returns, independent contractors fill out a W-9 and use a 1099 form for tax returns.

What is a non-exempt employee?

A non-exempt employee must receive overtime pay under certain conditions. Many employees fall into this category, and they typically receive extra pay when working more than 40 hours per week (subject to state law).

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. National Conference of State Legislatures. "State Overtime Requirements."

  2. Department of Labor. "Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA)."

  3. Internal Revenue Service. "Forms and Associated Taxes for Independent Contractors."

  4. Internal Revenue Service. "About Form W-2, Wage and Tax Statement."

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