In the ever-evolving world of business, one persistent question continues to surface for employers: When—and how—should you switch an employee from salary to hourly pay?
The answer often hinges on federal wage regulations, specifically the Fair Labor Standards Act (FLSA), which governs minimum wage, overtime, and exempt versus non-exempt status. Recent legal developments have complicated the landscape, but the core issue remains the same: ensuring compliance while keeping your compensation strategy cost-effective and fair.
Whether you're a seasoned business owner or just starting out, understanding how and when to reclassify employees is pivotal.
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In 2024, the U.S. Department of Labor proposed significant increases to the minimum salary required for exempt (salaried, overtime-ineligible) status. However, a federal court blocked the rule, and none of the proposed increases ever took effect.
As of June 2025, the federal salary threshold remains:
$684 per week, or
$35,568 per year
Any employee earning less than this amount—regardless of job title—must be classified as non-exempt and is entitled to overtime pay under federal law.
Note: Some states, such as California, Colorado and Washington, enforce higher salary thresholds. In those states, you must follow the stricter state rule.
Hourly workers must be paid 1.5 times their base rate for every hour worked beyond 40 in a workweek. By contrast, salaried (exempt) employees do not receive overtime pay—regardless of how many extra hours they put in.
Still, your company might come out ahead by reclassifying certain employees from salary to hourly pay. Here's why:
For employees whose salaries fall below the federal (or state) threshold, paying overtime may cost less than increasing base salaries to maintain exempt status.
Companies with large numbers of exempt employees may draw attention from the Department of Labor, especially if those employees' job duties don't clearly meet exemption criteria.
Hourly status allows employers to better match compensation with actual hours worked, particularly in roles with fluctuating demand.
Yes, it’s legal to reclassify employees from salaried to hourly—but it must be done carefully to remain compliant with FLSA and avoid employee confusion or potential legal claims.
Here’s what employers should keep in mind:
Employers must be able to demonstrate when and why the reclassification occurred. Keep detailed records to share with the DOL’s Wage and Hour Division if needed.
HR professionals recommend changing an employee’s classification no more than once, if possible. Switching back and forth between exempt and non-exempt may be viewed as an attempt to sidestep compliance obligations.
Before making the change, revisit the FLSA duties test to ensure the role fits a non-exempt classification. Typically, employees who do not manage others or make key business decisions are better suited to hourly roles.
For at-will employees, it's acceptable to adjust duties to align with the new classification.
Start by reviewing the FLSA duties test to ensure the reclassification aligns with the job description. Typically, you can consider anyone who does not directly impact the company’s management as an hourly, non-exempt employee.
Consult an employment attorney about any employee whose status is questionable. You also may need to revise the employee’s job description to fit a non-exempt status, which is acceptable for at-will employees.
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If you plan to retain an employee’s total compensation, converting their annual salary to an hourly rate is straightforward.
Step 1: Divide the annual salary by 52 weeks (the number of weeks in a year) to determine the weekly pay.
Step 2: Divide the weekly pay by the number of hours in a standard workweek (typically 40) to find the hourly rate.
Example:
$40,000 annual salary ÷ 52 weeks = $769.23/week
$769.23 ÷ 40 hours = $19.23/hour
Sharing this simple math with employees can ease concerns. When they see their hourly pay equals the same total compensation, they’re less likely to feel that the reclassification is a pay cut.
Reclassified hourly employees must now track their time accurately. This includes time spent checking email after hours or finishing work on weekends—tasks salaried employees often perform without compensation.
To ensure compliance and manage labor costs:
Review your overtime and timekeeping policies.
Train both employees and managers on accurate time tracking.
Consider flex-time options to avoid unnecessary overtime (e.g., if someone stays late on a Tuesday, they might start later on Wednesday).
Create guardrails for remote work and after-hours availability.
RELATED: How to Accurately Measure Time and Attendance >>
Reclassification isn’t just a legal shift—it’s a cultural one. Help employees understand the change and feel supported by taking these steps:
Communicate clearly: Explain the rationale behind the reclassification and emphasize that it's not a demotion.
Reinforce fairness: Clarify how the new pay structure works and highlight that they’re now compensated for all time worked.
Provide training: Ensure both employees and managers understand timekeeping tools and wage/hour rules.
Align priorities: Work with employees to rebalance workloads if necessary to stay within 40 hours per week.
Q: Can you convert a salaried employee to hourly pay?
A: Yes. As long as the employee’s compensation and duties no longer meet the FLSA’s exempt requirements, you may reclassify them to hourly. Just be sure to document the reason for the change.
Q: Do you have to give a raise when reclassifying an employee to hourly?
A: No—but you should ensure the new hourly wage aligns with minimum wage and accurately reflects the employee’s prior compensation if you want to avoid pay dissatisfaction.
Q: Can exempt employees ever be paid hourly?
A: Technically, yes—but it’s complex. To remain exempt, the employee must still meet the duties test and be paid on a salary basis. Paying hourly often nullifies that status. It’s safest to treat hourly workers as non-exempt.
Q: What’s the current federal salary threshold for exemption?
A: As of June 2025, it’s $684/week or $35,568/year. Higher thresholds may apply in certain states.
Q: Can I switch someone back to salary later?
A: Yes, employers can reclassify an employee from hourly back to salaried (exempt) status—as long as the employee meets the FLSA's salary and duties tests at the time of the change. However, doing so repeatedly or without a clear business rationale can raise red flags with the Department of Labor.
If the changes appear to be a way to avoid paying overtime or complying with wage laws, they may be scrutinized during an audit or investigation. Best practice is to make classification changes only when there’s a legitimate, documented reason—such as a substantial change in job duties or compensation.
Changing an employee’s classification from salary to hourly pay isn’t just a payroll decision—it’s a compliance risk, a cultural shift and a communication challenge.
At Axcet HR Solutions, we help small and mid-sized businesses across the U.S. navigate FLSA rules, payroll transitions and employee reclassifications with confidence. As a certified professional employer organization (CPEO) headquartered in Kansas City, our team of certified HR, payroll and compliance experts is here to ensure your transition is seamless, legal and clear.
Considering a classification change?
Talk with our team to get HR guidance that protects your business—and supports your people.
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