Here's What Happens When Salaried Employees Become Hourly

Here's What Happens When Salaried Employees Become Hourly
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The Department of Labor finally released its long-awaited overtime rule, and it's likely to send a ripple of changes through workplaces between now and December -- when employers must begin to comply.

Related: Here's How the New Overtime Rules Will Affect Entrepreneurs

The rule will automatically extend overtime pay protections to over 4 million workers within the first year of implementation, resulting in a boost to many workers’ wallets. The means: The rule doubles the minimum salary threshold to exempt an employee from overtime pay.

In general, employers have three compliance options: 

  • Raise non-exempt employee salaries so those people maintain their exempt status
  • Reclassify hourly employees as salaried employees
  • Reclassify salaried employees as hourly, adjusting their base pay in order to account for overtime.

This last option is the most cost-neutral. If done right, employees will earn the same amount they did before the rule change. But when you reclassify employees, you have much more to consider than just simply the financial aspects. Your employees are your company, so any decisions you make need to help nurture their careers and lives in the right ways.

Here’s what happens when a salaried, exempt employee becomes a non-exempt hourly one -- and all the elements a company should consider:

The legal implications

Reclassifying employees as hourly workers is legal, but employers still need to be careful. For one thing, the process needs to be well-documented. To stay compliant with the Fair Labor Standards Act (FLSA), employers need to show the U.S. Department of Labor’s Wage and Hour Division when the changes were made, and why. 

It’s also best for all parties involved if an employee’s compensation structure is changed only once, if at all. Switching employees back and forth between salaried and hourly may appear suspicious in the eyes of the DOL -- the employer appears to be trying to avoid complying with different aspects of the FLSA.

Also consider the legal costs of reclassifying employees. An analysis conducted by economists at George Mason University in April found that the tech-startup industry alone may pay between $317 million and $4.5 billion in legal fees to comply with the new overtime rules.

Related: Do New Overtime Rules Make Telework Too Risky?

The change to benefits

The nondiscrimination rules and regulations of the Affordable Care Act make it difficult for employers to switch workers' eligibility for health benefits between exempt and non-exempt status. But other benefits, especially ancillary ones, may change when employees are reclassified as hourly workers.

Benefits like paid time off, vacation accrual and, sometimes, disability or life insurance may change, depending on salaried or hourly status. Depending on employer policies, the change can be detrimental or beneficial to employees. For example, salaried workers may have more paid time off and vacation accrual, while rules for bonuses and allowances for sick time may be more favorable to hourly employees.

Consider changes like these before reclassifying your own employees. Updating benefits policies may be the best option as you consider reclassifications. For example, instead of basing the amount of paid time off you award, on a salaried or hourly status, consider companywide policies or offer paid leave based on tenure and job level. Review benefits and evaluate what will make the most sense as you finalize reclassifications.

The loss of flexibility

Salaried employees may be accustomed to flexible working arrangements. In fact, data released in January from GlobalWorkplaceAnalytics.com found that regular at-home work has grown by 103 percent since 2005. Approximately 20 to 25 percent of the workforce teleworks with some frequency, and 3.7 million U.S. employees now work from home at least half of the time.

But if workers are reclassified as hourly employees, that will have to change. This doesn’t mean flexible work has to end -- it will just look different. For example, if an employee needs to stay late to finish an important project or deadline, he or she could be allowed to start later the next day. That way, hourly employees could still work 40-hour weeks and complete all necessary tasks.

To make the transition easier, train employees and managers on time-keeping procedures. Thoroughly explain wage and hour policies and what constitutes compensable work. Also create new policies that limit work outside the office and use HR software to monitor time more accurately.

Some employers may choose to eliminate flexible work altogether to avoid risks, but that’s a drastic approach that employees will resent. Instead, work with employees and managers to develop flexible-work arrangements that work for everyone and will keep the business compliant.

The reaction from employees

In addition to all the changes employers deal with when it comes to shifting compensation structures, they should regard the whole scenario from the employee’s side. It’s a major job change that can shift an employee’s whole attitude towards his or her work.

Some employees may view the change as a demotion or step back in their career. Remind employees that reclassification is a matter of compliance, not one of status or performance at work. Eligibility for overtime ensures they are properly paid for their time and hard work -- when they work more hours, they’ll get rewarded for it.

In addition, reclassification can provide employees with a better sense of work-life balance. Instead of staying late at the office every night, employees can get a much-needed break without stunting their career growth.

Even after reassuring employees that reclassification isn’t a punishment, consider that it’s still a giant adjustment. Exempt employees are used to working beyond the typical work day. They answer emails at all times, work nights and weekends and are always available.

An April 2015 study published in the Journal of Occupational Health Psychology called this need to quickly respond to emails and other messages “telepressure.” But when reclassified, employees will need to break these habits.

Related: Millions of Employees Are Now Eligible for Overtime Pay Thanks to New Federal Rule -- Start Up Your Day Roundup

Employees are used to the freedom of working off the clock to get things done, but reclassified employees will need to adjust their habits to fit into the 40-hour work week. Review policies on overtime and how to log hours. Work with employees to readjust priorities and responsibilities. It’s a big change, but with support from managers and employers, reclassified employees can manage their work and adjust to new policies.