A common misconception regarding an employee’s exemption status, i.e. whether the employee is hourly or salaried, is that if they perform certain job duties, they must be considered exempt. This is not true. The FLSA states that in order to be considered exempt an employee has to meet all of the following tests:
Overtime Exemption Tests
- Make at least $455 per week
- Be paid on a salary basis and not based on the number of hours worked
- Perform exempt job duties
Just because an employee performs exempt job type duties does not mean that the employee must make a certain wage and be considered salaried. To be considered exempt an employee must meet all of the above qualifications, not just one or two of them.
So, if you have managers that make $35,000 per year, whose job duties fit into the exempt category, you might be wondering if they have to be salaried. They don’t. They can be hourly if you want them to be.
Just because an employee passes the job duties test and makes at least $955 per week doesn’t mean that the employee must be salaried. If you choose to switch the employee to hourly, like maybe they work way under or way over 40 hours a week, you can do that with the following steps.
Steps to Take to Switch Employee Status
1. Re-write the job description
The process of switching the employee to an hourly position may involve re-writing the employee’s job description. Many exempt employees are managers that are responsible for shifts well in excess of 8 hours each day. The job description may say something like, “Employee is expected to work 50 to 60 hours per week in this position.” Or “Employee is expected to see all jobs to completion regardless of the number of hours put in per week.” If the employer wants to avoid paying overtime, this would obviously no longer be valid and so the job description should change.
2. Determine a new hourly rate
When switching employees from salaried to hourly, you’ll need to figure out what to pay them. The employee’s hourly pay rate can be lowered to “match” their old weekly rate as long as they do not drop down below the federal and state minimum wage.
If lowering employees’ hourly rates to compensate for the overtime they’ll now be getting, employees may feel they are getting a demotion. Tread gingerly in this area.
Steps to figure out new hourly rates
- Determine how many hours the employee works per week on average
- Find their overtime hours (i.e. hours over 40)
- Divide the overtime hours in half
- Add that to the overtime hours and to the straight hours
- Divide the weekly salary by that number to get the hourly rate
So for example, if an employee made $455 per week and typically worked 50 hours a week, the process would be as follows:
- Employee works 50 hours per week
- 10 overtime hours
- overtime hours divided by 2 is 5
- $455/55=$8.27 per hour
So in this example, we would change the employee’s hourly rate to $8.27 so that their weekly paycheck would match what it was previously. Of course, you’ll have to check your state and city’s minimum wage laws to make sure that the new rate isn’t too low.
This process probably wouldn’t work well for employees who only work overtime occasionally. If their weekly paycheck ends up being less than their old salary, they probably won’t be happy even on the occasions when their paychecks do contain some time and a half. In this case, other measures might need to be taken to cut costs.
3. Train employees on wage and hour laws
A lot of employees that have been salaried for many years, to decades will be oblivious to the different rules between hourly and salaried workers. Training is important because staying compliant with the FLSA will help your company avoid overtime lawsuits. Make sure hourly employees are aware of these rules:
- Hourly employees must clock in and out from work. Time tracking is required for hourly employees.
- Hourly employees must be on the clock at all times while working, even while working at home and at night.
- Hourly employees must be paid for travel time, waiting time, and on-call time.
- Inform hourly employees about the company’s overtime policy.
4. Start tracking time
Employers should get their employees started tracking time. Employers need to learn the new time tracking system themselves and assign management to administrate the account. Employees will need to get used to the new habit too. The whole process could take a matter of days for small companies whose employees easily adopt new processes. For larger companies with a mix of personalities, it might take longer.
5. Adjust benefits
Salaried employees are expected to work at least 40 hours a week and so their time off calculations can be based on yearly or monthly rates. However, for employees who work more or less than that, it might be better to use an hourly accrual rate or one that matches the pay period, whether that’s weekly or bi weekly. This adjustment isn’t a requirement for hourly workers but it might make more sense than a yearly rate. Our time tracking system tracks accruals automatically and uses any of the typical accrual rates so that it integrates with your time tracking.