Reclassify the Exempt Employee

“I have an exempt (salaried) employee I’d like to make hourly instead. How do I do that?”

Your HR Survival Tip

When minimum wages increase, the minimum salary you must pay increases. At some point that salary may start to feel too high for a particular position. You may reclassify an exempt (salaried) employee to a non-exempt (hourly) employee but you want to think it through to avoid problems. You don’t want to just change a position to hourly without being aware of the potential legal issues.

The first thing is to confirm the legality of the employee’s current classification. In other words, was this person correctly classified as exempt? A proper classification of exempt means the position meets all the requirements listed in one of the Federal exemptions, including both the salary and duties tests. A good reminder for everyone is that even a high salary doesn’t automatically mean a position will qualify as exempt. The minimum salary requirement is easy because you are either paying sufficiently or not (2 X state minimum salary = the absolute minimum salary you can pay, regardless of how few hours they work). The duties test is more challenging because there is some subjectivity involved so be conservative to be safe.

If the employee was not correctly classified as exempt, you have some issues and need to make this transition very carefully. The problems include unpaid overtime, missed meal breaks, etc., that they would have received as an hourly employee. If this is where you are, you will want to talk with us or an employment law attorney about your risks and options.

If the employee was correctly classified as exempt, the transition to non-exempt is fairly simple. Even then, you’ll want to have a solid explanation of why you are reclassifying their position because they will ask. An explanation might be that California’s annual increases are causing the minimum salary to go higher than you can pay for the position, or the amount of time off the employee has been taking will work better in an hourly role, or the position is actually changing and will no longer qualify as exempt.

The transition itself is very simple. Create a memo, letter, or form indicating the effective date and hourly rate of pay. If this transition changes any benefits or the title, include that. Make sure the employee knows the new rules regarding tracking time, meal and rest breaks, and other non-exempt details. Although the total pay may not change, it’s still a good idea to give the employee a week or two notice of the change.

Keep in mind some employees feel the exempt classification is an acknowledgment of their value and level of position so they may feel they were demoted. That’s not the case so make sure they know you still value them.