In most industries, employees are classified as "non-exempt" or "exempt" from overtime requirements. The federal Fair Labor Standards Act (FLSA) requires covered employers to pay "non-exempt" employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA includes exemptions from these requirements for certain administrative, professional, executive, highly compensated, outside sales, and computer professional employees. These employees are known as "exempt" employees. To be considered exempt, these employees must meet very specific salary and duties criteria.
From time to time, employers may need to reclassify employees due to changes in job duties and responsibilities. The following are guidelines to consider when reclassifying employees:
Non-exempt to exempt:
Most employees are classified as non-exempt. Very few meet the criteria needed to be considered exempt. When changing an employee's classification from non-exempt to exempt, employers should first make sure the employee meets all applicable exemption criteria.
- Apply federal and state tests first. Ensure the employee qualifies as exempt under federal and applicable state laws. Exempt employees must generally be paid a predetermined salary regardless of the quantity or quality of work and must meet the minimum salary and duties requirements for the exemption. If there is any doubt as to whether the employee qualifies for exemption, the employee should remain classified as non-exempt.
- Communicate the change in advance. Employers should notify employees of a classification change in advance and in writing, and should explain how the change will impact the employee. For example, employers should explain that as an exempt employee, the employee will receive a set salary for each week worked and will not be entitled to overtime pay. Employers should also communicate any revised procedures for absences and deductions in pay.
- Avoid improper deductions. Employers are limited in the types of deductions they may make from an exempt employee's salary. While employers may deduct from the employee's salary in the first or last week of work if the employee did not work the full week, or when an exempt employee is absent for one or more full days for personal reasons, other deductions are generally prohibited. Look for next week's Tip for more information on permissible deductions for exempt employees.
Exempt to non-exempt:
The following guidelines assume that the employee was properly classified as exempt initially. For a discussion on when an employee has been misclassified as exempt, see the Correcting Previous Misclassifications section below.
- Review classifications regularly. Employers should review exempt employees' classifications regularly to determine whether the employee still qualifies for the exemption. A change in an employee's job duties should also prompt a review. If an exemption no longer applies, the employee should be promptly reclassified as non-exempt and paid overtime in accordance with federal and state law.
- Communicate the change properly. As with any change in employment status, employers should notify employees in advance and in writing, explaining the impact of the change. Employers can address the perception that a change from exempt to non-exempt is a demotion by detailing the benefits of being classified as non-exempt, such as receiving overtime pay whenever the employee works more than 40 hours in a workweek.
- Be ready for questions. Employees may have questions about timekeeping, benefits, and other issues related to the new classification. When notifying the employee of this change, let him or her know whom they can contact with questions. Some questions employees may ask can be found in the Frequently Asked Questions section below.
Correcting previous misclassifications:
Employers that misclassify employees as exempt may be required to pay overtime owed, fines, and damages. To remedy a misclassification, some employers will determine the amount of overtime worked and then pay any back overtime due for a period of time. If an employee has been misclassified as exempt, the employer should consult legal counsel to discuss their options for how best to address the misclassification.
Note: Many employers don't track the hours of exempt employees, which can make it more difficult to determine how much overtime is due if the employee is later found to be misclassified. For this reason, as well as for more efficiently administering paid time off and other benefits, employers may want to consider tracking exempt employees' hours, provided it doesn't affect their pay.
Frequently asked questions:
When an employee is reclassified, he or she may have questions about what the change means for them. The following are some common questions about reclassification:
- Will my pay decrease now that I'm exempt? To be considered exempt, an employee must receive a set salary each week. Often, employers will take the employee's existing hourly rate and multiply it by 40 hours to arrive at their weekly rate of pay. The weekly rate of pay can then be multiplied by 52 to arrive at the employee's annual salary. However, exempt employees should be aware that they are no longer eligible for overtime pay.
- Now that I'm non-exempt, will I have more timekeeping responsibilities? Non-exempt employees often use a timekeeping system in order to track their hours. It is important to let newly classified non-exempt employees know that it is their responsibility to track all hours worked using company approved systems and procedures.
- Will my benefits change? A reclassification typically does not impact benefits. Generally, part-time or full-time status dictates benefit eligibility. Employers should communicate the number of hours that an employee must work per week to be eligible for benefits.
Following the tips provided above can help you wade through the process of reclassification. When faced with misclassification issues, employers should consider consulting legal counsel for guidance in addressing these situations.