Practical tips for reclassifying employees from exempt to non-exempt status
The federal government and many states are cracking down on employers that misclassify employees as exempt (salaried) who should be non-exempt (hourly). Meanwhile, a steady stream of class and collective action lawsuits alleging employee misclassification continues unabated. Plus, the Department of Labor has issued regulations that — if not derailed by pending challenges — will increase the minimum annual salary threshold for exempt employees to $47,476 as of Dec. 1.
As a result of these developments, employers are scrambling to reclassify employees. However, employers should exercise caution in order to minimize the risk that, in attempting to avoid legal liability for misclassification, they inadvertently create other problems. This article highlights key tips for employers reclassifying employees.
If an employer has not conducted periodic audits, a good chance exists that some employees are misclassified. Even if employees were properly classified in the past, they may now be misclassified because the work employees actually perform often changes over time. Exemption requirements change over time as well.
Set a date
Make sure the reclassification target date leaves enough time to prepare. Sticking to the date minimizes disruptions.
Determine pay rates
Figuring out how to convert an exempt employee’s salary to an hourly rate is not always straightforward — especially if the employee sometimes works more than 40 hours a week and is entitled to overtime pay. Employers must ensure that the new pay rate will not inadvertently reduce or increase the newly non-exempt employee’s compensation.
Notify employees, in writing, that they are being reclassified. Understand that some employees perceive reclassification to a non-exempt position as a demotion. In the interest of employee morale, notices should emphasize that the reclassification is not a demotion.
An employer who reclassifies employees should let its payroll department or service know the identities of the reclassified employees as far in advance as possible.
Consider changing the position
An employer that reclassifies a position in response to a new legal requirement, such as the Department of Labor’s increased salary threshold, can rely on the new requirement to justify the change. However, if an employer concludes that employees are otherwise misclassified, the best approach is, if feasible, to restructure the responsibilities and title of the position. Otherwise, employees may sue to recover pay for the time period before the reclassification, arguing that the reclassification was an admission that employees were misclassified. In restructuring a position, consider removing some responsibilities that qualify an employee for exempt classification and assigning them to higher-level personnel, thereby reinforcing the exempt status of those personnel.
Issue job descriptions
When reclassifying employees, an employer that restructures positions should issue new job descriptions reflecting the changes.
Employers should train newly non-exempt employees regarding timekeeping and overtime. Although reclassification should reduce the risk of misclassification liability, the employer may face increased risk of off-the-clock claims. It may be especially difficult to educate previously exempt employees that, when they are not clocked in, they cannot perform work. Employers should consider cutting off non-exempt employee remote access to the computer system after working hours or implementing a system for capturing time spent on it. Ideally, employers should also train supervisors of newly non-exempt employees regarding timekeeping and overtime. If applicable under state law, training for non-exempt employees and their supervisors should include training about meal and rest breaks.
See also: 9 FAQs about the DOL’s overtime rule
Employers should require reclassified employees to acknowledge in writing their receipt of timekeeping and overtime policies (and, if applicable under state law, meal and rest break policies). Also consider having all non-exempt employees verify their hours in writing each week, which should undermine off-the-clock claims.
After reclassification, an employer should periodically review the pay of newly non-exempt employees to ensure it is consistent with expectations.
Misclassification liability is an area of substantial potential exposure. Employers can reduce their risk by periodically reviewing their workforce and reclassifying employees as necessary. An employer that reclassifies employees should consult with counsel and proceed cautiously.