Exempt to Non-Exempt and Back Again: How to Reclassify Employees

June 7, 2016 // ADP®
Exempt to Nonexempt

From time to time, employers may need to reclassify employees due to changes in job duties and responsibilities. Here are guidelines to consider when reclassifying employees:

Non-Exempt to Exempt:

Most employees are classified as non-exempt. Very few meet the required criteria to be considered exempt. When changing an employee’s classification from non-exempt to exempt, make sure the employee meets all applicable exemption criteria.

  • Apply federal and state tests first. Ensure the employee qualifies as exempt under federal and applicable state laws. Exempt employees must generally be paid a predetermined salary, regardless of the quantity or quality of work, and must meet the minimum salary and duties requirements for the exemption. If there is any doubt as to whether the employee qualifies for exemption, the employee should remain classified as non-exempt.
  • Communicate the change in advance. Notify affected employees in advance and explain how the change will impact them. For example, employers should explain that as an exempt employee, he or she will receive a set salary for each week worked and will not be entitled to overtime pay. Additionally, communicate any revised procedures for timekeeping, absences, and deductions in pay.
  • Avoid improper deductions. Employers are limited in the types of deductions they may make from an exempt employee’s salary. While employers may deduct from the employee’s salary in the first or last week of work if the employee did not work the full week, or when an exempt employee is absent for one or more full days for personal reasons, other deductions are generally prohibited.

Exempt to Non-Exempt:

The following guidelines assume that the employee was properly classified as exempt initially. For an employee that has been misclassified as exempt, see the Correcting Previous Misclassifications section below.

  • Review classifications regularly. Employers should review exempt classifications regularly to determine whether the employee still qualifies for the exemption. A change in an employee’s job duties should also trigger a review. If an exemption no longer applies, the employee should be promptly reclassified as non-exempt and paid overtime in accordance with federal and state law.
  • Communicate the change properly. As with any change in employment status, employers should notify affected employees in advance and explain the impact of the change. For example, the employee will be newly eligible for overtime pay whenever he or she works more than 40 hours in a workweek.
  • Be ready for questions. Employees may have questions about timekeeping, benefits, and other issues related to the new classification. Therefore, when notifying the employee of this change, it is a best practice to provide a contact who can answer any questions the employee may have.

Correcting Previous Misclassifications:

Employers that misclassify employees as exempt may be required to pay back overtime, fines, and damages. To remedy a misclassification, some employers will determine the amount of overtime worked and then pay any back overtime due. If an employee has been misclassified as exempt, the employer should consult legal counsel to discuss how best to address the misclassification.

Frequently Asked Questions:

When an employee is reclassified, he or she may have questions about what the change means for them. The following are some common questions about reclassification:

  • Will my pay decrease now that I’m exempt? To be considered exempt, an employee must receive a set salary each week. Often, employers will take the employee’s existing hourly rate and multiply it by 40 hours to arrive at their weekly rate of pay. The weekly rate of pay can then be multiplied by 52 to arrive at the employee’s annual salary. However, exempt employees should be aware that they are no longer eligible for overtime pay.
  • Now that I’m non-exempt, will I have more timekeeping responsibilities? Non-exempt employees often use a timekeeping system in order to track their hours. It is important to let newly classified non-exempt employees know that it is their responsibility to track all hours worked using company approved systems and procedures.
  • Will my benefits change? A reclassification typically does not impact benefits. Generally, part-time or full-time status dictates benefit eligibility. Employers should communicate the number of hours that an employee must work per week to be eligible for benefits.

Following the tips provided above can help you through the process of reclassifying employees. When faced with misclassification issues, consult legal counsel for guidance.

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog.
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