Employee classification plays a crucial role in determining pay structure, overtime eligibility, and workplace benefits. When businesses reclassify employees from exempt to nonexempt status, it can significantly impact both the employer and the employees.
This guide explains why reclassification happens, legal considerations, how to implement changes, and what employers and employees need to know.
1. Understanding Exempt vs. Nonexempt Status
1.1. What Is an Exempt Employee?
An exempt employee is not entitled to overtime pay under the Fair Labor Standards Act (FLSA). These employees are typically:
- Paid a fixed salary rather than an hourly wage.
- Earning at least the minimum salary threshold set by law.
- Performing executive, administrative, or professional job duties.
1.2. What Is a Nonexempt Employee?
A nonexempt employee is entitled to:
- Overtime pay at 1.5 times the regular hourly rate for hours worked beyond 40 per week.
- At least minimum wage as required by federal and state laws.
- Hourly wages or sometimes a salaried amount that is still subject to overtime rules.
2. Why Are Employees Reclassified from Exempt to Nonexempt?
2.1. Changes in Salary Thresholds
The FLSA sets a minimum salary requirement for exempt employees. If an employee’s salary falls below this threshold, they must be reclassified as nonexempt.
2.2. Job Duty Revisions
Exemption status is based on both salary and job duties. If an employee’s role shifts to include more non-managerial or routine tasks, they may no longer qualify for exempt status.
2.3. Compliance with Labor Laws
Employers may conduct audits to ensure wage and hour law compliance. If an employer discovers that an employee was misclassified, they must correct the classification.
2.4. Company Policy Changes
Businesses may choose to reclassify employees for financial reasons or to offer more equitable pay structures across different roles.
3. Legal Considerations in Reclassification
3.1. The Fair Labor Standards Act (FLSA)
The FLSA governs overtime rules, and employers must ensure that any reclassification adheres to these laws.
3.2. State Labor Laws
Some states have stricter overtime and wage laws than federal regulations. Employers must follow the most protective law for workers.
3.3. Wage and Hour Compliance
Employers must ensure that reclassified employees receive:
- Accurate overtime pay
- Correct hourly wage calculations
- Proper payroll adjustments
3.4. Avoiding Retaliation and Discrimination
Reclassification should be based on legal and business needs, not as a way to punish or target specific employees.
4. How to Implement Employee Reclassification
4.1. Notify Employees Clearly
Employers should communicate the change effectively through:
- Formal notices explaining the new classification.
- Meetings or training to clarify timekeeping and overtime policies.
4.2. Update Payroll Systems
Employers must ensure:
- Employees are shifted from salary-based to hourly payroll.
- Overtime pay calculations are accurate and automated.
4.3. Train Managers and HR Teams
- Supervisors must understand new work-hour tracking requirements.
- HR teams should assist employees with the transition.
4.4. Adjust Work Schedules If Needed
Since nonexempt employees qualify for overtime, employers may need to:
- Modify shift schedules to control overtime costs.
- Hire additional staff to prevent excessive overtime hours.
5. Employee Impact and Considerations
5.1. Changes in Work Hours and Pay
Employees may see changes in:
- Hourly wage instead of salary
- Overtime pay opportunities
- New work-hour tracking requirements
5.2. Benefits Adjustments
Some benefits, like paid time off (PTO) and bonuses, may be structured differently for nonexempt employees.
5.3. Increased Pay for Overtime
Employees who regularly work over 40 hours per week may earn more overall due to overtime compensation.
5.4. Adapting to Timekeeping Policies
Nonexempt employees must track work hours using:
- Time clocks
- Digital tracking apps
- Manual logs
6. Common Challenges in Reclassification
6.1. Employee Resistance
Some workers may feel demoted or undervalued when moved from exempt to nonexempt status. Clear communication about the benefits of overtime pay can help ease concerns.
6.2. Payroll Adjustments
Businesses must ensure flawless payroll processing to prevent errors in overtime payments and tax calculations.
6.3. Compliance Risks
Failure to properly reclassify employees can lead to:
- Legal disputes
- Government fines
- Back pay for overtime violations
Reclassifying employees from exempt to nonexempt requires careful planning, legal compliance, and transparent communication. While the change may affect pay structures, timekeeping, and overtime eligibility, it also ensures fair compensation and protects businesses from labor law violations.
Both employers and employees should stay informed about classification rules to maintain a smooth transition and a legally compliant workplace.