Top 5 Strategies for Reclassifying Employees

January, 09 2025

The Fair Labor Standards Act (FLSA) offers minimum wage and overtime pay protections to most employees. The Labour Overtime Rule classifies employees as "nonexempt" and, thus, entitled to minimum wage and overtime protections. However, some employees are considered "exempt" if they meet the FLSA criteria for salary and job duties. Typically, only employees in certain positions who meet the FLSA criteria for salary and job duties may qualify for an exemption. At certain times, employers may need to recast exempt employees as nonexempt, for example, in response to a legal change in the exemption standard or when it is found that the employee is incorrectly classified as exempt. Employers may simply recast employees as nonexempt for other business reasons.

Employee misclassification is one of the most frequent FLSA violations. Employers who fail to classify their workforce correctly may open them to costly and time-consuming legal action. Thus, employers must have all employees properly classified and steps taken to classify exempt employees as nonexempt when appropriate. However, misclassification remains one of the most frequent violations of the FLSA and Labour Overtime Rule, exposing employers to costly litigation and penalties.Employee reclassification can be complex and, if not done properly, may result in some undesirable effects, including increased risks of litigation against the employers or a decrease in employee morale. Thus, employers who classify employees as nonexempt under the FLSA should know the separate standards applicable to nonexempt employees and be ready to adopt any change that may be required or advisable.

The legal standards for exemption have changed, such as changes to the salary threshold or duties test, or Exempt employees have been misclassified. For example, during an employer audit, an employer discovers that certain exempt positions do not meet the federal, state, or local salary threshold or an employee's actual job duties do not align with what is reported work duties do not meet the duties test). Employers can, however, reclassify employees as nonexempt for any other reason or no reason at all.

Importantly, the fact that an employee meets the standard for nonexempt also does not prohibit the employer from reclassifying that employee as nonexempt. Employers can always classify employees as nonexempt, even if those employees qualify for an overtime exemption. Generally, employees who are paid salaries that are only slightly above the threshold for an exemption are more likely to be misclassified (for example, lower salaries are less likely to coincide with job responsibilities that would be classified by the FLSA as falling within an exemption).

Consequently, such jobs are more closely examined by plaintiff's attorneys and administrative agencies. To reduce the likelihood of such scrutiny, some employers choose to reclassify jobs that are paid at the lower end of the threshold; or To keep the classifications of positions consistent between jurisdictions. Some states or municipalities have more stringent requirements to qualify for an exemption. Thus, an employee in one state might qualify for an exemption, while an employee in another state with the same job title, responsibilities, and compensation might not. The employers may also want to classify both as nonexempt for consistency.

Awareness: Employers should be aware that corrective actions do not necessarily protect them from future claims, as the FLSA generally prohibits private settlements. Considering the potential financial exposure, employers who have misclassified employees should seek legal advice to determine their corrective alternatives.

Train Employees and Managers:  Formerly exempt employees may be unaware of timekeeping and other practices that apply only to nonexempt employees. In addition to communicating the change, employers may want to train reclassified employees in timekeeping, hours scheduling, overtime approval, meal and rest breaks, and any other policies applicable only to nonexempt employees prior to the effective date of their reclassification. Managers of the reclassified employees may also need additional training to understand their obligations with regard to such employees, such as approving or denying overtime and ensuring hours are accurately tracked and reported.

Examine and update recordkeeping policies:  The FLSA requires employers to maintain certain recordkeeping requirements applicable to nonexempt employees. Under the FLSA, an employer is typically required to preserve records of employee identifying information and payroll data of non-exempt employees for three years. Review existing recordkeeping practices and take steps to achieve compliance with their recordkeeping obligations concerning reclassified employees.

Review State and Local Laws:  Some states and municipalities may have other criteria that employees must meet in order to be overtime exempt. So, employers always need to properly classify employees under state and local as well as federal standards. Furthermore, a number of state and local requirements apply only to nonexempt employees, including many meal and rest break provisions. Employers who reclassify employees as nonexempt must consider whether any of the state or local provisions mentioned above, State or local wage and hour laws may apply to the reclassified employees and, if so, should inform the employees of these additional rights and benefits.

Communicate Changes in Advance: Employers should communicate the change with employees in advance of the date reclassification takes effect. The communications might include an explanation of the change in employee classification, the date such change goes into effect, a description of the organization's timekeeping policies (and meal and rest break policies, if applicable), the employees' obligations under such policies, and a description of any changes under employer policies that differentiate.

Managers should also be informed of new requirements so they may understand their responsibilities in dealing wit Newly non-exempt employees, for example, who may require the review and authorization of overtime. In addition, employers may wish to notify payroll personnel of any potential changes to employee paychecks, including paying and calculating overtime and converting salaried employees to hourly employees.

By understanding and following the Labour Overtime Rule, employers can mitigate risks, ensure compliance, and maintain employee morale. Proper classification, training, and communication are critical to a smooth transition when reclassifying employees from exempt to nonexempt status.