Communicating a Change from Exempt to Non-Exempt Status

The Fair Labor Standards Act (FLSA) largely remained the same since its 1938 inception, however, in recent years there have been several updates, especially as it relates to the evaluation rules to determine which positions may or may not be eligible for overtime compensation. Also, subsequent changes in Washington State have surpassed the federal requirements and those employers subject to the Washington Minimum Wage Act (WMWA) rules will also be facing additional incremental changes in the salary threshold amounts in January 2022.

You may have already conducted a workforce assessment to ensure that employees are correctly classified (Exempt vs Non-Exempt) under the FLSA and/or the WMWA, but if not, we recommend you begin that process soon. If you misclassify workers as exempt who should be non-exempt (eligible for overtime pay,) it could result in having to pay backpay for any overtime, and attorney’s fees and costs. Remember, if you need help with such an assessment or have specific questions about position classification, Associated Industries can partner with you in that process.

Although this is a compliance exercise, it is just as important to build into your audit process, a communication plan for any employees in positions that have been identified as needing to be reclassified. Doing so will help you avoid potential pitfalls associated with communicating this change. While you might be fully aware of what changes are coming for your employees, they might be feeling confused, concerned, or even completely unaware. Further, although you may feel perfectly versed on why your company has made the decisions to reclassify and can give flawless descriptions of the Overtime Exempt Salary Basis Test, the FLSA and WMWA overtime exemption standards or even a solid definition of Exempt vs. Non-Exempt, this is NOT what your employees are going to want, or any many cases, need to hear. Many will need you to address what they perceive as the professional, financial, and emotional impacts of the change. Some workers may feel that reclassification is a demotion, be concerned about the loss of flexibility, or their ability to complete the job requirements without the ability to work “extra-hours,” or even be concerned this decision means you no longer value their role in your company. But if you prepare now for how you will handle these situations, it will be much easier than if you are caught off guard and not sure what to say.

Hopefully, you have already started talking about this, so it does not come as a complete surprise, but if not, start preparing for those conversations now. Being transparent will go a long way to making your employees feel valued throughout. If you have several impacted employees, you can distribute a general notice with a summary explanation, but it will be important to communicate directly with each individual and allow them time to discuss their personal concerns. An overview summary of the legal reasoning behind the decision can be given but be prepared to spend the bulk of the conversation on the individual employee’s concerns and what specific changes impact them; especially time-tracking requirements and other new processes.

You should be clear that this is just a required categorization of pay and not a reflection of importance or level of contribution as that has not changed. Something as simple as the example below is all the FLSA / WMWA legal jargon an employee may need:

We are required to follow federal and state laws relating to which positions are eligible for overtime pay and which are considered exempt. These employees must meet very specific salary and duties criteria. Due to recent changes in the laws, your position no longer qualifies as exempt and must be reclassified to be overtime-eligible.

As you prepare, anticipate how employees may react and be ready or at least comfortable with some responses they need to ease their concerns. We discussed the importance of transparency already and that should be kept at the forefront of your preparations. Anticipating employee concerns and being prepared does not mean having scripted responses for every possible emotional reaction. You will need to be prepared to talk about transactionally what will be changing for the employees, but also to practice active listening with large doses of empathy. You should be able to script those transactional pieces of the change (i.e., scheduled hours, timekeeping, paid sick leave eligibility, overtime approval processes, etc.), but again most of the interaction should be an unscripted discussion during which you demonstrate you genuinely want to understand what they are feeling and how you can be helpful to them. Although you should talk about what you believe are the positive changes, do not try to over-sell those as a means to avoid addressing the other personal and emotional reactions. Spending too much time on what we perceive as the positives could make employees feel you are being disingenuous. While some employees will welcome the chance to receive overtime pay, others may see the need to punch a time clock as a demotion. Do not assume the potential for additional earnings automatically is the antidote for concerns.

So, you may be asking what do I say to avoid the potential pitfalls? The saying “preparation is the key to success” is especially true here. Create your communication plan now. Who will be the person speaking to employees—their direct manager or some other person in the company? What will this person say and how will they represent the changes? Prepare a document that explains what/why/how/when of the changes to share with affected employees. Again, be transparent.

Your plan should have clear yet concise detail about process changes they will experience so any uncertainty is not compounded by lack of direction. It is not as simple as; before you received a fixed salary and now you punch the time clock. Some of these employees may have never been responsible for tracking time in this manner. Preparation means your company has considered all the following before communicating with reclassified employees and you are confident you can clearly articulate your plan.

• Be clear on your classification and message – Are you changing employees from Salaried to Hourly or just from Exempt to Non-exempt? Rule changes do not require an employee to be hourly. They can continue to be paid a fixed salary but must be paid overtime (based on the per-hour rate of their annual salary) for any hours greater than the 40-hour workweek.
• Will there be changes to “after-hours” work? Do a thorough review of all tasks/duties an employee may have been performing “after-hours” that could now be considered compensable (i.e., phone calls, checking email) and determine if these will continue and be compensated or curtailed.
• What are the new timekeeping responsibilities? It is important to let newly classified non-exempt employees know it is their responsibility to track all hours worked along with explaining how to use the company-approved systems and procedures. This will likely need to be monitored, in the beginning at least, as many employees may have habits of just logging in for a few minutes, just completing a couple of things on their day off or after hours, just taking this one phone call, etc. Their dedication is indeed admirable, but also compensable.
• Will you be allowing overtime? If yes, what are the processes related to approval? If you have typically limited overtime in your company, be careful not to over-sell their eligibility for overtime as a positive.
• Can all projects/work be completed within a 40-hour schedule? You may need to evaluate the type and amount of work provided as well as productivity or timeliness expectations. Remember employees who feel this change is a loss of “status” may be concerned about how they are going to be evaluated or considered for promotion if they are not able to successfully complete their work within new hours requirements. It is important to be clear on how this is being addressed. You may simply be providing overtime compensation for all eligible hours without any change to the current working schedule. You may however be changing deadlines, productivity goals, or even redistributing workloads. Make sure you are prepared to answer these concerns. Something else to consider is; if indeed some employees end up working fewer hours than before, it could result in more time to enjoy a better work-life balance.
• Will there still be flexibility in the daily schedule? Be clear about any schedule adherence expectations and specify if flexibility remains. For example, will employees be allowed to make up hours during a workweek? If they have personal appointments away from work will they be able to make up time? Conversely, if they need to stay longer on one day to complete a task/project will they be able to leave early on another in the same pay week?
• Will benefits change? Review and communicate any minimum hours’ requirements, changes to vacation accrual/awards paid sick leave eligibility, etc. Companies who have segregated some of their benefit offerings for salaried and hourly employees may be particularly challenged to overcome the perception that this reclassification means the employee is valued less.

Preparation, to include decisions and responses to the previous questions, is key to making this transition smoother. Let me be clear, change is almost always not smooth and there are very few employees who are going to be happy about this message. Although direct managers should be engaging in the conversations with each employee, it is recommended you designate a point-person (someone other than the direct manager) who employees can reach out to with specific questions or even vent. This person should be well versed in all the decisions and responses your organization agreed to so the message is not only transparent but consistent. Remember the communication about this change does not end after you complete your in-person meeting.

Consider regular check-ins to gauge how they are feeling and how the change is going. Although we can’t avoid the real human reactions to such a change, what we can endeavor to do is provide clear and consistent information, actively listen, be truly empathetic by allowing them to express themselves while always seeking to understand their feelings, and most importantly sincerely communicating they and their contributions are and will continue to be valued by you and the Company.