Reclassifying Exempt Employees as Non-Exempt under the FLSA

We have discussed exempt and non-exempt classifications and related issues many times here. Normally, we talk about classifying non-exempt employees as exempt under (most commonly) one of the white collar exemptions. What about the reverse? Can an employer decide to forgo a white collar exemption under the Fair Labor Standards Act (FLSA) regulations? The answer is yes, it is possible. In some situations–such as where the FLSA provides an exemption but state law does not–it may be required. Even if not mandated by law, companies may have other business or operational reasons to pay qualifying “exempt” employees as though they were actually non-exempt employees: requiring them to clock in and out or track their hours worked, paying them on an hourly basis rather than a salary, and paying the applicable overtime premium.

The FLSA Does Not Require Employers to Apply an Exemption

Like many other areas of the law, even though you can take advantage of an exemption does not mean that you must. For a more concrete example, think about voting or taxes. Many states offer exemptions from in-person voting requirements, even outside of the current pandemic. However, just because you can vote absentee does not mean that you must do so. Similarly, you may be eligible to deduct certain expenses on your personal or corporate tax return. Nothing in federal tax law requires you to claim these deductions, though, and doing so may have consequences (such as limitations on using those deductions in the future, subjecting income to the alternative minimum tax, or increasing audit risks). The FLSA works the same way. Neither the FLSA nor its regulations require employers to treat employees as exempt, even when the employees qualify for an exemption. Employers can elect to classify exempt employees as non-exempt, or, relatedly, decide that it will treat “close cases” as non-exempt.

As I hint above, other considerations might apply, too, such as state laws that deny exemptions where the FLSA might allow one. For example, under the FLSA, “primary duty” means “the principal, main, major or most important duty that the employee performs.” The FLSA doesn’t specify how much time must be spent on such duties, but some states do. California law states that “primarily engaged” means employees must spend more than half of their work time on such duties. In other situations, collective bargaining agreements, employee offer letters, or employment agreements might impact whether an employer can treat an employee as exempt. To the extent that any of those require the payment of a fixed salary, treating an otherwise exempt employee as non-exempt could complicate any decision like this. The FLSA should be one of, not the only, considerations when classifying employees.

Employer Takeaways

Periodically examining your use of exemptions is always smart. Duties, laws, and case law change frequently, meaning that previously exempt employees may be non-exempt today in your jurisdiction. Whatever your analysis and ultimate decisions, if you do elect to reclassify an exempt employee as non-exempt, always ensure that those employees understand that they are not to perform any work activities that they do account for in your timekeeping system, and that supervisors monitor and take appropriate action with respect to employees who fail to comply with that policy.

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