Do I classify my employees as salary or hourly and what does that mean for my business?

Do I classify my employees as salary or hourly and what does that mean for my business?

By: Elizabeth J. McInturff, Esq. and Claire Kretschmer, Law Clerk

Employers are experiencing an impact on their businesses as a result of the COVID-19 pandemic. Some face a diminished demand for their goods and services, and others are confronting a surge in demand. Employers dealing with abnormal demands will likely find themselves adjusting their businesses in ways that will directly impact their employees and have employment law implications. The Fair Labor Standards Act of 1938 (FLSA) governs a large part of employment law and will need to be considered in any employer decisions. This article will discuss the background of FLSA and how the current economic climate may affect employee classification.  

Background: Exempt vs. Non-Exempt 

In 1938, the U.S. Department of Labor passed FLSA with the goal of protecting employees from unfair pay practices. The Act has since been amended to continue this goal in the modern workforce. One of the most innovative pieces of FLSA is defining employees as either exempt or non-exempt. This differentiation determines whether or not the employee is exempt from minimum wage and overtime pay requirements for FLSA. Salaried employees are exempt from these requirements, while hourly employees are non-exempt. Salaried employees have a fixed rate of pay, regardless of the number of hours they work, and do not get paid extra for overtime. Hourly employees are given a fixed hourly salary that must be at least the federal minimum wage, paid based on the number of hours worked, and eligible for overtime pay. 

How to Correctly Identify Employees

Whether an employee is classified as exempt or non-exempt is based primarily on the amount of money she makes and her primary job duties. Employees who make less than $23,600 per year ($455 per week) are non-exempt, with those making more typically classified as exempt. But job duty is perhaps the most essential test of whether a job is exempt or non-exempt. In general, employees performing primarily executive, professional, or administrative duties are classified as exempt employees. Under FLSA, primary duty is defined as the principal, main, major, or most important duty that the employee performs. 

Shifting Consumer Demand May Result in Widespread Employee Reclassification 

Once an employee is classified as exempt or non-exempt, there are a few ways the employee can be reclassified. Employers can intentionally change employees’ classifications. But an employer cannot simply change an employee’s status on a whim. If the employee is not getting a new job title, the employer must show why the primary duties of the job have changed. Employers choosing to reclassify an employee must do so with the intention that the change is long term. Additionally, employers may accidentally and unknowingly change their employees’ classification when making adjustments to day-to-day business. 

Employers confronting a decrease in demand for their goods and services are likely seeing a decline in the amount of work needed to be done and, in turn, a decrease in the hours employees need to work to complete their tasks. Exempt or salaried employees are still paid the fixed-rate despite the decline in workload. In industries facing a decline in demand or reduced workload, converting salaried employees to hourly employees may be a realistic solution. This would allow employers to only pay employees for the number of hours worked. To ensure this reclassification is legal, the employer would either need to change the employee’s job title or explain why and how the employee’s primary duties have changed.

Employers experiencing an increase in demand for their goods and services are likely confronting a surge in employee overtime hours. Non-exempt or hourly employees are paid for every hour they work and paid extra for overtime hours. In fields facing an increase in demand, converting hourly employees to salaried is an attractive option because employees would receive a set pay rate and not be eligible for overtime pay. Many employees in businesses experiencing a surge in demand may be taking on more demanding roles, and that change may legally entitle them to be reclassified as exempt. 

Employers considering reclassifying employees must note that this change cannot be done retroactively. Employees are entitled to written notice of the change in their classification and the implications it has. Once the employee receives the notification, the change affects only future work and payments. COVID-19’s economic consequences have many employers confronting the possibility of reclassification. 

Employers should also check relevant State laws to ensure that they are in compliance. 

The attorneys at JDKatz, P.C. would be happy to advise you and your business in navigating this landscape.  

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