The U.S. Department of Labor (DOL) recently released its anticipated decision regarding the overtime rule, and now companies face the task of figuring out how to make the necessary changes in the workforce between now and December 1, when employers must begin to comply.
The decision made by the DOL will automatically extend overtime pay protections to more than 4 million workers during the first year of implementation – meaning many workers will see their paychecks grow. Additionally, the overtime rule doubles the minimum salary threshold to exempt an employee from overtime pay.
Generally speaking, employers can choose one of three routes in order to stay compliant:
- Raise employee salaries so those people maintain their exempt status
- Reclassify hourly employees as salaried employees
- Reclassify salaried employees as hourly, adjusting their base pay in order to account for overtime
Companies will likely find the last option to be the most cost-neutral. If executed effectively, employees’ pay should remain approximately the same before and after the change. There’s more to it than the financial aspect, though, and companies should be cognizant of the other factors that surround reclassifying an employee. It’s important that employees fully understand any major decisions and have confidence that you aren’t negatively impacting their career path.
Here are a few important elements to consider as your company transitions salaried, exempt employees to hourly, non-exempt:
New Timekeeping Procedures
Many employers who have a large population of salaried, exempt employees do not have adequate timekeeping systems in place. If transitioning employees to hourly, companies should ensure that their time and labor systems are accurate and easy to use. Should employees be required to punch in and out daily, or can they simply record their hours worked on a weekly basis? That is just one question employers need to consider when consulting with their payroll provider. WorkSmart Systems’ Human Capital Management system offers multiple options for varied workforces.
Employee Education
Employees who are exposed to an hourly role for the first time should be appropriately educated in anticipation of the change. Previously salaried employees may be accustomed to reporting to work 30 minutes early – even if just to get settled in, check personal emails, etc.
While employers are only required to pay hourly wages for work performed, they will likely be on the hook for this additional time – especially if any work was performed during this before- or after-hours work. Hourly employees should be instructed to not spend extra time at the office, even for personal reasons, and should be clearly instructed on the overtime policies.
A different definition of flexibility
Salaried employees may be accustomed to flexible working arrangements, but if they are reclassified as hourly employees, they will need to adjust to a new take on flexibility in the workplace. For example, if an employee stays late to continue working, they could be allowed to start later the next day so he or she stays within the 40-hour week, yet still completes the job duties.
Be sure to thoroughly outline wage and hourly policies — like how employees should keep track of time —in advance to avoid confusion. During the transition time, work closely with employees and managers to develop flexible work arrangements that complement your business, while also remaining compliant.
The legal implications
Reclassifying employees from salary to hourly is legal, and companies need to be sure to precisely document the process in order to stay compliant with the Fair Labor Standards Act (FLSA). It’s as simple as providing necessary insights to the U.S. Department of Labor’s (DOL) Wage and Hour Division.
It is recommended that an employer change an employee’s compensation structure only once. If reclassifying an employee multiple times, the back-and-forth changes may appear to the DOL that the company is trying to avoid following the rules, and instead navigating suspiciously through the different aspects of the FLSA.
How employees might react
While companies deal with the many implications resulting from shifting compensation structures, one of the most important elements to consider is how employees will view the change.
The last thing an employer wants is for their workers to feel undervalued. Companies need to realize that some workers may take this change as a demotion or a halt in the progression of their career. In order to ease fear, remind employees that reclassifying status is a matter of compliance, and not a reflection of employee performance. One of the most common phrases I have heard after a reclassification is “I didn’t go to college to punch a clock.”
Consider highlighting that the reclassification will provide employees with a better work-life balance and potentially help them with time management. Rather than staying late at the office every night, employees will be encouraged to leave at a decent hour without slowing their career growth.
Even after reassuring your employees, remember that this is still a big adjustment for everyone involved. Exempt employees will still be expected to get work done and be responsive outside of working hours, but reclassified employees will likely need guidance as they adjust priorities and responsibilities to fit within the 40-hour work week. With the proper support and knowledge, companies will find that the change may not be as daunting as it seems.
