Shifting an Employee's Status

Moving a worker to an hourly wage can have significant ramifications in terms of overtime pay and legal liability

I have a salaried administrative assistant. I would like to change her compensation status to an hourly wage. How can I best accomplish this change, and is there any legal problem with doing so? -- J.D., Indianapolis

There's no legal barrier to changing an employee's status from salaried to hourly pay, experts say. However, in doing so you run the risk of opening an unpleasant -- and potentially costly -- can of worms.

Here's the dilemma: Administrative assistants tend to be classified as "non-exempt" employees, meaning that they aren't exempt from overtime laws and must be paid an overtime rate for each hour worked. Salaried employees, whose job duties typically involve more discretion and independent judgment, are usually classified as "exempt" employees and aren't paid overtime.

Los Angeles-based labor-law attorney Eli Kantor recommends that you consult with local labor-law counsel to help you determine whether your administrative assistant has lawfully been classified as exempt under both Indiana law and the federal law, called the Fair Labor Standards Act. An attorney can also help you determine whether you've got another problem: Namely, if you shift your assistant to a non-exempt classification, she may take that move as an admission that she was inappropriately classified initially, and is now due back pay.


  "If a non-exempt employee works overtime and isn't paid an overtime rate for each overtime hour worked, the employer's liability includes the unpaid overtime wages, penalties, and interest for up to the last four years, depending on the state and federal laws that may apply," says Mark Terman, an attorney who heads the employment law practice group at Reish, Luftman, Reicher & Cohen, in Los Angeles.

Your delicate challenge, Terman says, is to "explain the change as a shift in business methods, where the employee has greater compensation incentives and could possibly make more money, without signaling to the employee that [he or she has] been unlawfully underpaid in the past."

That challenge may be made more difficult because in some settings the change from salaried to hourly is viewed negatively -- almost as a demotion, says Susan Stemper, managing director of New York City-based Pearl Meyer & Partners compensation consultancy. "Being sensitive to the cultural perceptions will help smooth the transition," she says.


  Another thing Stemper says you should think about if you make the change is reviewing benefits and policy changes with your employee. "While less common today than in the past, your company's benefits and policies may be different for hourly and salaried employees," she notes.

You also need to make clear to your employee your overtime rules, as she will now be eligible for overtime pay. "It's important to make sure the rules are clear for overtime approval -- whether or not the employee must seek approval before putting in extra hours. Remember, whether or not the overtime was approved doesn't allow the employer to refuse to pay overtime," Stemper says.

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