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Franchise Operations: Employee Classification for Payroll (2026)
Employee classification in franchises is two questions: whether location managers and crew members are employees or contractors, and whether the employees are exempt from overtime. BEG runs franchise payroll for $45 per employee per month inside the payroll software you already use, all-inclusive, live in 3 to 5 business days.
Employee or contractor: how franchises get it wrong
A location manager is exempt as an executive only if paid on a salary basis at the standard salary level, has management as the primary duty, customarily and regularly directs the work of two or more full-time employees or their equivalent, and has authority to hire or fire or has recommendations given particular weight. Job titles do not determine exemption status.
Crew members and other manual workers who perform repetitive operations with their hands, physical skill and energy are non-exempt and are owed minimum wage and overtime regardless of how much they are paid. The exemptions in 29 CFR part 541 do not apply to such blue collar work.
Exempt or non-exempt
The salary floor for the executive, administrative and professional exemptions is $684 a week, restored to the 2019 level after the 2024 rule was vacated. Food service managers at the May 2025 national median of $69,390 a year clear that salary test, so the duties test decides.
What misclassification costs
Food and beverage employers can claim a general business credit on Form 8846 equal to the 7.65% employer share of Social Security and Medicare taxes paid on employee tips, excluding tips used to bring wages up to the $7.25 per hour federal minimum wage. Distributed service charges are wages, not tips, and are excluded from the credit.
Reclassifying a contractor as an employee means back FICA at 15.3 percent split between the parties, back FUTA, penalties and interest, and often back overtime under the FLSA at time and one half for two or three years.
The rules behind this page, with sources
General information, not legal advice. Every rule below was read on the agency page linked next to it.
- A location manager is exempt as an executive only if paid on a salary basis at the standard salary level, has management as the primary duty, customarily and regularly directs the work of two or more full-time employees or their equivalent, and has authority to hire or fire or has recommendations given particular weight. Job titles do not determine exemption status. [DOL Fact Sheet #17B]
- Crew members and other manual workers who perform repetitive operations with their hands, physical skill and energy are non-exempt and are owed minimum wage and overtime regardless of how much they are paid. The exemptions in 29 CFR part 541 do not apply to such blue collar work. [29 CFR 541.3(a)]
- Food and beverage employers can claim a general business credit on Form 8846 equal to the 7.65% employer share of Social Security and Medicare taxes paid on employee tips, excluding tips used to bring wages up to the $7.25 per hour federal minimum wage. Distributed service charges are wages, not tips, and are excluded from the credit. [IRS FICA Tip Credit for employers]
Read the full guide to the employee versus contractor test, and the rest of the franchise payroll library.
Managed Payroll, Handled.
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Frequently Asked Questions
Are location managers in a franchise employees or contractors?
A location manager is exempt as an executive only if paid on a salary basis at the standard salary level, has management as the primary duty, customarily and regularly directs the work of two or more full-time employees or their equivalent, and has authority to hire or fire or has recommendations given particular weight. Job titles do not determine exemption status.
What does the second test look at?
Crew members and other manual workers who perform repetitive operations with their hands, physical skill and energy are non-exempt and are owed minimum wage and overtime regardless of how much they are paid. The exemptions in 29 CFR part 541 do not apply to such blue collar work.
What does managed payroll cost for a franchise?
$45 per employee per month, all-inclusive, inside the payroll software you already use, with no monthly minimum. Joint employer liability, multi-entity payroll and franchisor reporting requirements are configured at setup, not billed as add-ons.
Related Resources
Anthony leads payroll solutions at Business Executive Group, a national managed payroll firm serving businesses across industries including Franchise Operations. BEG manages payroll at $45 PEPM, all-inclusive, with deep expertise in compliance, multi-state filing, and industry-specific payroll requirements. Get instant pricing at beghr.com.
Authoritative source: IRS: Independent Contractor or Employee
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