In light of the new Fair Labor Standards Act (FLSA) overtime rule, which took effect as of January 1, 2020, the salary minimum went from $23,660 to $35,568 to be considered exempt from overtime pay, you may be considering reclassifying previously exempt, salaried employees 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 new 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.
Employers should keep the following considerations in mind, however, if they reclassify an employee from salaried, exempt to hourly:
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 salaried, 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.
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 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.
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, 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.
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.
Communication and transparency are critical when you reclassify employees. Your HR department or employment experts at a professional employer organization like Axcet HR Solutions can help you notify and educate employees about the change. Proper planning and implementation will ensure ongoing payroll compliance and happily engaged employees.