As the old saying goes, change is hard. That’s especially true when it comes to payroll, and changing between the country’s two most popular pay types: salary and hourly. Let’s walk through the process of reclassifying your employees.
Know Your Pay Types
Hourly: It seems intuitive enough—hourly employees typically have a rate of pay that’s multiplied by their hours worked. If the hours worked in a given week exceed 40 (or in some states, exceed 8 hours per day), the hourly employee is entitled to overtime. This right to overtime is a key part of the Fair Labor Standards Act (FLSA) and is called “non-exempt” status.
Salary: By contrast, salaried workers are generally considered “exempt” from overtime. They receive the same gross payment per pay period regardless of hours worked. While there may be weeks when a salaried employee can cut back their hours, there will also be times that they may be working significant hours over 40.
While salaried employees are usually exempt, that’s not a hard rule. Overtime eligibility is determined solely by two criteria—wages and duties. Pay frequency or method doesn’t factor into the equation at all, meaning it's possible (though rare) to have a salaried employee who is still entitled to overtime for hours over 40 worked.
Step 1: Consider Overtime Classification
Once you begin the process of reclassification, you’ll want to document the change from start to finish. Begin by reviewing the FLSA's duties test, particularly when a potential change in overtime classification is in the cards. You will want to make sure that changing from salary to hourly is in alignment with the job description of the employee or department. For the most part, anyone not directly impacting the company’s management could be hourly and considered non-exempt. Unsure of “grey area” employees? Get a second opinion from an employment attorney.
Once you have determined overtime status, review the employee’s job description. Make sure the employee’s job description is in line with the expectation of the work performed. If the job description needs to change to fit a non-exempt status, that is okay for at-will employees.
Step 2: Crunch the Numbers
Assuming the individual’s base compensation remains the same, the way an hourly amount can be calculated is by breaking it down to its expected level. If we take $35,000 as base pay and divide it to a weekly amount ($35,000 ÷ 52 = $673.08), we can then take that weekly amount and break it down further to an hourly amount. We end up with an hourly pay of $16.83 (673.08 ÷ 40 = $16.83). When communicating with the employee, showing the math in reverse could put them at ease to ensure they are not losing any pay as a result of the change.
Step 3: Consider PTO Accrual
Depending on your company’s time off policy, a change from salary to hourly may affect your time allowed. Some policies are granted for salaried employees and accrued when the employee is hourly. While sick days might be granted annually, vacation could be a result of time worked. It’s best to review your company policy and ensure if there is a change, that it is communicated clearly as well.
Step 4: Monitor “On the Clock” Work
Some salaried employees might be used to a flexible schedule where they can check emails at night and catch up on projects over the weekend. If a salaried employee is changing to hourly, habits like this would be considered “on the clock” and could result in overtime under the new classification. When making a change of this nature, it’s best to ensure the worker is aware of their standard hours and confirm that their manager is tracking time appropriately.
While taking an honest look at your classifications is best practice, making mass changes shouldn’t become habitual. Switching around classifications frequently could be viewed as an attempt to avoid compliance with the FLSA. Communication and transparency are pivotal with a reclassification of this nature. It’s always recommended to offer office hours, particularly for those who might wrongly assume a change in overtime status constitutes a demotion.
Ultimately, it's up to HR to ensure that employees are properly notified and understand the full properties of the change. Getting the planning and implementation right can ensure a payroll happily ever after.