From the Hotline: Maintaining Salary when Changing Classifications

Question: Is an employer obligated to maintain an annual salary for an employee if a position is changed from exempt to non-exempt after being hired?

Answer: Provided there is no collective bargaining agreement setting the rates of pay and pay schedules or no employment contract in place expressly obligating certain levels of compensation or benefits for a set period of time within the terms of the contract, employers generally have the right to set pay rates as long as those rates adhere to are above minimum wage.

If you have determined the job has less duties/responsibility and therefore should be non-exempt, it makes sense that a rate reduction may be commensurate with that change. However, if a salary agreement was given to the employee in an offer letter or in some other written form, the employee could potentially have a claim for breach of contract. In situations like these, the manner in which you communicate any changes can be critical in managing the employee relations impact of any type of compensation.

This that in mind, consider whether the salary truly needs to be reduced – an annual salary does not necessarily provide that one must be exempt if the hourly rate is above a certain amount. A weekly wage DOES have to be a minimum amount if you are classifying someone AS overtime-exempt, not the other way around.

When planning your communications with your employee, you can make the overtime exemption test and other information available to explain the change, and let him/her know about opportunities to earn overtime. Keep in mind that when changing someone to non-exempt, there could be potential for a back-overtime claim. With that, another consideration is to put aside some sort of amount to offset what this person will be losing in salary based on what past overtime he/she may have earned.

As with any type of classification or contract issue, consult with your legal and HR advisors for appropriate guidance in managing the details of the situation.