Businesses that make staffing decisions without carefully weighing the impact the changes have on individual employees and the entire workforce could be setting up the company for stiff fines, penalties and even jail time if the government finds out. If you're currently a salaried employee and your boss breaks the news that you're being demoted to an hourly job, you have a right to be concerned, and the U.S. Department of Labor also might need to become involved.
Fair Labor Standards Act
The labor department enforces the Fair Labor Standards Act, which mandates employment regulations such as minimum wage, overtime, exempt and nonexempt status and record-keeping practices. The FLSA's rules about exempt and nonexempt are quite complex and can make what are relatively simple employment decisions a headache. Also, certain employment decisions related to exempt and nonexempt status -- such as demoting salaried employees to hourly jobs -- can land employers in hot water with the federal government.
Salaried vs. Hourly
Employees often refer to hourly versus salaried workers, yet they're really distinguishing between employees who receive overtime pay versus those who don't. But human resources staff know there's more to the distinction between who gets overtime and who doesn't. Three classifications of workers are: salaried nonexempt, salaried exempt and hourly. In the discussion concerning demoting a salaried employee to hourly status, the distinction clearly is between exempt and nonexempt status. Under the FLSA, salaried exempt workers are not entitled to overtime pay; hourly workers are entitled to overtime when they work more than 40 hours in a workweek.
Salaried exempt employees are classified as such based on title, position and how closely their responsibilities affect the company's management. Proper classification of exempt status means the employee exercises independent judgment in the majority of her job duties. Exempt classification is for employees in administrative, executive and professional roles, as well as workers in computer-related jobs and outside sales personnel. Another distinguishing factor between exempt and nonexempt employees is that the former generally do not engage in manual labor and have a reporting relationship to someone who is classified as exempt.
Demoting an employee from a salaried position to an hourly one can be a costly decision, especially if the employee's job duties don't change. If the company demotes an employee to an hourly role, but doesn't make substantive changes to the employee's job duties, it begs the question whether the employee was really exempt to begin with. This red flag that might trigger a labor department investigation of the employer's classification practices. The rationale is that when a previously exempt employee who moves from a salaried role -- where she didn't receive overtime pay -- to an hourly position where she is now entitled to overtime, it suggests that the employee may have been entitled to overtime pay all along.
Losing the exemption right could result in a labor department decision that could cost the employer back overtime pay, fines and sanctions for misclassification. In fact, in 2012, the labor department recovered nearly $5 million in back wages for employees who Wal-Mart improperly classified as exempt workers. An employee demotion should include a complete revision of job duties. A demoted employee can't work as an hourly employee with the same duties, responsibilities, benefits, rights and authority she had in the salaried role. Otherwise, the employers' classification process may come under fire, and the company risks losing the right to claim any employees as exempt.
- ADP: The Top Three FLSA Violations and How to Avoid Them
- Northwestern University, Office of Human Resources: Exempt or Not Exempt? The Fair Labor Standards Act
- U.S. Department of Labor: Fact Sheet No. 17A: Exemption for Executive, Adminsitrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act
- HR.BLR.com: Risks of Misclassifying Workers
- U.S. Department of Labor: U.S. Department of Labor Recovers $4.83 Million in Back Wages, Damages for More Than 4,500 Wal-Mart Workers
Ruth Mayhew has been writing since the mid-1980s, and she has been an HR subject matter expert since 1995. Her work appears in "The Multi-Generational Workforce in the Health Care Industry," and she has been cited in numerous publications, including journals and textbooks that focus on human resources management practices. She holds a Master of Arts in sociology from the University of Missouri-Kansas City. Ruth resides in the nation's capital, Washington, D.C.