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Mar 24, 2020

Q&A: Know pros/cons of reclassifying exempt workers to cut costs

COVID-19Employee ClassificationsWage and Hour 

Question: Our company is facing financial difficulty, so we’re considering reclassifying some salaried exempt workers as hourly nonexempt workers to cut down on payroll hours. Is that a good idea?

Answer: Maybe, but reclassifying workers can have unintended negative consequences. Unfortunately, many companies are scrambling for ways to save money right now. Some employers are cutting their workers’ hours, either by reducing days worked per week or hours worked per day. That’s easily done for workers who are already hourly nonexempt, but less so for workers who are salaried exempt. Reclassifying exempt workers as nonexempt could save money in the short term, but it could create liability for an employer down the road.

Exempt status means workers are exempt from overtime requirements. Under the Fair Labor Standards Act (FLSA), workers classified as exempt generally must receive full-workweek salaries in any workweek in which they work, whether their hours are few or many. This is why some employers are considering reclassifying exempt salaried workers to nonexempt hourly workers – to save on having to pay that full weekly salary.

But consider the consequences: Since nonexempt workers qualify for overtime, you’ll have to pay a non-exempt hourly employee overtime on all hours worked over 40, which means you’ll also have to keep track of all the worker’s hours. That could be especially tricky if you’ve switched the worker to telework (i.e., working from home), as many employers have done, and you’ll have to consider whether you trust each employee to accurately report hours from home. In the longer term, a court or agency investigator may not consider your exempt employees as “exempt” if you regularly switch your employees from exempt to non-exempt status and then back again.

If you’re thinking about reclassifying workers, see Vigilant’s Legal Guide, When Is an Employee Exempt Under Federal Law? for a refresher on the rules for classifying a worker as exempt. This may be a good time to reevaluate whether you’ve properly classified certain workers in the first place. Keep in mind that state classification rules may be different. Just because a worker is exempt or nonexempt under federal law, that doesn’t mean the same is true under state law. Don’t make a reclassification decision lightly, and don’t do it alone. If you have questions or concerns, members please contact your Vigilant Law Group employment attorney.

This website presents general information in nontechnical language. This information is not legal advice. Before applying this information to a specific management decision, consult legal counsel.