When to Consider Switching Employees from Salary to Hourly Pay

By Mariah Collins, SHRM-CP on Aug 28, 2023
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In the ever-evolving world of business, one of the age-old debates revolves around compensation: Should employees be salaried or hourly? For business owners, the decision isn't simply a matter of preference.

The Fair Labor Standards Act (FLSA) presents an intricate maze of regulations that directly affect this choice, especially when it comes to the matter of overtime pay. As of now, the FLSA has set the salary threshold for exemption from overtime pay at $35,568, up from $23,660. 

But what does this mean for business owners? Does it make sense to switch certain employees from salary to hourly pay?

In this blog post, we'll delve into the intricacies of the FLSA overtime rule, the implications of the salary minimum to become exempt from overtime pay and provide some guiding insights to help you make an informed decision.

Whether you're a seasoned business owner or just starting out, understanding these regulations is pivotal to ensuring compliance and optimizing your compensation strategy.

Key questions are:

  • What are an employer’s options?
  • Can an hourly employee also be exempt?
  • What classification creates the most advantageous arrangement for both employees and the company?

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Arguments for Reclassifying Employees from Salary to Hourly Pay

Hourly workers must be paid 1.5 times their base pay rate for every hour they work over 40 in a given work week. While salaried, exempt employees are not paid overtime if they work more than 40 hours per week, your company might still come out ahead by reclassifying these individuals as hourly workers.

Even though you now would be responsible for paying these workers for overtime, your total costs might be lower than the cost of raising salaried employees’ pay to the FLSA’s salary threshold.

Another argument for reclassification is the fact that companies with too many exempt employees invite scrutiny from the Department of Labor, which increasingly holds companies to a stricter interpretation of the FLSA.

If you do decide to reclassify an employee from salary to hourly pay, consider the following:

Laws on Changing from Salary to Hourly Pay

Reclassifying employees as hourly workers is legal, but employers should carefully document the process. To maintain FLSA compliance, employers must show the DOL’s Wage and Hour Division when and why they made the changes.

HR experts further advise employers to change an employee’s compensation structure only once, if at all. Switching an employee back and forth between salary, exempt and hourly could be confusing to the employee and appear suspicious to the DOL, which may characterize the moves as the employer trying to avoid complying with different aspects of the FLSA.

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.

RELATED: Six Dos and Don’ts of Paying Overtime >>

How to Calculate Employee Pay from Salary to Hourly

Use simple math to determine the rate of pay for newly classified hourly employees. If you want to retain an individual’s base compensation, break it down to an hourly amount. For example, if the employee has been earning a $40,000 annual salary, divide that by the number of weeks in a year to calculate a weekly amount ($40,000 ÷ 52 = $769.23). Then, compute the hourly amount by dividing the weekly pay amount by the number of hours in a regular work week. In this scenario, the hourly pay is $19.23 ($769.23 ÷ 40 = $19.23).

Communicating the change to employees by showing the math in reverse could ease their concerns that they are making less money after the reclassification.

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Monitor Time

Salaried, exempt employees commonly work outside of traditional office hours. They may check emails at night or catch up on projects over the weekend without additional pay.

As hourly employees, however, the time they spend working outside of normal business hours would still be considered “on the clock” and could result in overtime under the new classification

Flexible work arrangements still can apply to hourly employees, though. For example, you may consider allowing employees who stay late one evening to finish an important project to start later the next day so that they do not work more than 40 hours in the week.

RELATED: Job Titles Alone Don’t Determine Who’s Exempt from Overtime Pay >>

To make the transition easier:

  • Review policies on overtime and how to log hours
  • Create new policies that limit work outside the office
  • Train new hourly employees and managers on time-keeping procedures
  • Thoroughly explain wage and hour policies and what constitutes compensable work
  • Work with employees to readjust priorities and responsibilities

RELATED: How to Accurately Measure Time and Attendance >>

Use Axcet HR Solutions as Your Guide

When reclassifying employees, effective communication and transparency play a vital role. It is essential to involve your HR department or seek assistance from employment experts such as Axcet HR Solutions, a professional employer organization. Axcet can assist you in notifying and educating employees about the reclassification.

By carefully planning and implementing the process, you can ensure ongoing payroll compliance and promote employee satisfaction and engagement.PEO Payroll Services

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