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How to Switch Employees from Salary to Hourly

A common misconception regarding an employee’s exemption status, i.e. whether the employee is hourly or salaried, is that if they perform certain job duties, they must be considered exempt. This is not true. The FLSA states that in order to be considered exempt an employee has to meet all of the following tests:

Overtime Exemption Tests

  1. Make at least $455 per week
  2. Be paid on a salary basis and not based on the number of hours worked
  3. Perform exempt job duties

Just because an employee performs exempt job type duties does not mean that the employee must make a certain wage and be considered salaried. To be considered exempt an employee must meet all of the above qualifications, not just one or two of them.

So, if you have managers that make $35,000 per year, whose job duties fit into the exempt category, you might be wondering if they have to be salaried. They don’t. They can be hourly if you want them to be.

Just because an employee passes the job duties test and makes at least $955 per week doesn’t mean that the employee must be salaried. If you choose to switch the employee to hourly, like maybe they work way under or way over 40 hours a week, you can do that with the following steps.

Steps to Take to Switch Employee Status

1. Re-write the job description

The process of switching the employee to an hourly position may involve re-writing the employee’s job description. Many exempt employees are managers that are responsible for shifts well in excess of 8 hours each day. The job description may say something like, “Employee is expected to work 50 to 60 hours per week in this position.” Or “Employee is expected to see all jobs to completion regardless of the number of hours put in per week.” If the employer wants to avoid paying overtime, this would obviously no longer be valid and so the job description should change.

2. Determine a new hourly rate

When switching employees from salaried to hourly, you’ll need to figure out what to pay them. The employee’s hourly pay rate can be lowered to “match” their old weekly rate as long as they do not drop down below the federal and state minimum wage.

If lowering employees’ hourly rates to compensate for the overtime they’ll now be getting, employees may feel they are getting a demotion. Tread gingerly in this area.

Steps to figure out new hourly rates

  • Determine how many hours the employee works per week on average
  • Find their overtime hours (i.e. hours over 40)
  • Divide the overtime hours in half
  • Add that to the overtime hours and to the straight hours
  • Divide the weekly salary by that number to get the hourly rate

So for example, if an employee made $455 per week and typically worked 50 hours a week, the process would be as follows:

Example

  • Employee works 50 hours per week
  • 10 overtime hours
  • overtime hours divided by 2 is 5
  • 5+10+40=55
  • $455/55=$8.27 per hour

So in this example, we would change the employee’s hourly rate to $8.27 so that their weekly paycheck would match what it was previously. Of course, you’ll have to check your state and city’s minimum wage laws to make sure that the new rate isn’t too low.

This process probably wouldn’t work well for employees who only work overtime occasionally. If their weekly paycheck ends up being less than their old salary, they probably won’t be happy even on the occasions when their paychecks do contain some time and a half. In this case, other measures might need to be taken to cut costs.

3. Train employees on wage and hour laws

A lot of employees that have been salaried for many years, to decades will be oblivious to the different rules between hourly and salaried workers. Training is important because staying compliant with the FLSA will help your company avoid overtime lawsuits. Make sure hourly employees are aware of these rules:

  1. Hourly employees must clock in and out from work. Time tracking is required for hourly employees.
  2. Hourly employees must be on the clock at all times while working, even while working at home and at night.
  3. Hourly employees must be paid for travel time, waiting time, and on-call time.
  4. Inform hourly employees about the company’s overtime policy.

4. Start tracking time

Employers should get their employees started tracking time. Employers need to learn the new time tracking system themselves and assign management to administrate the account. Employees will need to get used to the new habit too. The whole process could take a matter of days for small companies whose employees easily adopt new processes. For larger companies with a mix of personalities, it might take longer.

5. Adjust benefits

Salaried employees are expected to work at least 40 hours a week and so their time off calculations can be based on yearly or monthly rates. However, for employees who work more or less than that, it might be better to use an hourly accrual rate or one that matches the pay period, whether that’s weekly or bi weekly. This adjustment isn’t a requirement for hourly workers but it might make more sense than a yearly rate. Our time tracking system tracks accruals automatically and uses any of the typical accrual rates so that it integrates with your time tracking.

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  • 56 comments

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56 Responses

  1. Hi im a kitchen manager my current salary is 755.00 per week i work a average 50 houers so how much should i get payed houerly.this will happen.soon

    1. Actually they will take your weekly rate and divide by 55 to get your hourly rate which will be 13.73 for 40 hours and 20.60 for the 10 hours of OT which will equal the old $755 weekly salary you had prior. If you work more than 50 you will benefit but if you work less than 50 it will affect you substantially.

  2. This doesn’t take into account any week in which you take paid time off, you will lose the overtime portion of your pay. Most companies do not count vacation or sick/personal time as overtime. So if you work 40 hours & take 10 paid hours off, you get paid for 50 hours straight time.

  3. Early November I was informed that I would be moving to an hourly rate. Effective November 19th I started clocking in and out. Week ending on the 25th. Worked a total of 76.60 hours. Just today HR told me that I would be moved back to salary despite me punching in and out for the week prior. Will they have to honor my hours or am I pretty much screwed?

  4. To comply with Federal law, I have to switch an employee from an annual salary to an hourly rate. I’ve seen some quickbooks help on activating time tracking, but it’s really confusing. For the purpose of these questions, I am using Quickbooks Premier Pro DESKTOP 2017. I am also using Intuit’s Desktop Payroll Service. Some questions:

    1) I had been paying the employee on the 15th of the month for work done from the 1st to the 15th, and on the last day of the month for the 16th through the last day. If I am using a timesheet, how can I process direct deposit payroll two days before those pay date if the employee hasn’t worked them yet?

    2) What do I need to change in QB so that the software recognizes that I am no longer paying the employee a salary and am now paying him hourly?

    3) The first day of the pay period can fall on any day of the week, not just on a Monday. And payday doesn’t always end on a Friday. How do I have the employee enter time and have it all work out so he gets paid the hours worked in the pay period?

    4) What method can I use to have the employee enter time that doesn’t involve me doing data entry? I can’t give him access to Quickbooks. I don’t need any more manual labor.

    Since my employee was salaried, I had no problem paying him at fixed intervals – since there were no hour issues. I paid him every two weeks. What is scaring both him (and me) is that if I now have to institute a lag, he would end up going potentially a month before he receives his first paycheck. Am I correct in my thinking? Since he would have to work the time and THEN get paid for it later (we do direct deposit). He can’t go a month (or probably even two weeks without getting paid. How could I pay him properly as an hourly employee without him going all that time without getting paid?

    1. Hi. Are you using Timesheets.com with your QuickBooks? I can have a customer service rep call you and work with your account and integrating the two programs.

      1. Hi Peggy,
        My employer switched us over to hourly on Nov 20th after they sent a letter explaining the labor law and because we were $2440 short meeting the minimum salary requirement. So then they switched us back to exempt, a week later(all prior to Dec 1, without a letter like before. All we got was our manager saying they found a clause but are not increasing our pay. They never sent a letter explaining. Can they do this ?

      2. You did not answer the question for John. I also need an answer, for I will be going 28 days without pay due to the recent changes. I’ve worked for this company 18 years all but 2 exempt. Now they want to withhold 2 weeks pay as if I just started. I now have no money allotted for groceries. Just paying bills. This is not right by any means.

    2. You can offer your employee a transition payment in order to compensate for the lag. For example, Missouri State dealt with this issue here with employees on monthly payroll:

      “Missouri State recognizes the transition to the new lag payroll could create hardships for employees. In order for these employees to receive whole month’s pay in December and January, a transition payment of ½ of their normal monthly salary will be added to their December 31, 2008 pay. Any overtime pay or leave without pay reported on the December 2008 blue bubble time record will be adjusted on the January 30, 2009 pay.” https://apps.missouristate.edu/FinancialServices/Banner%20HRPayroll/Changing%20to%20Banner%20HRPayroll.pdf

  5. I was hired salary in November of 2015 and given 3 weeks vacation. I would have to wait 6 months to get my first week and then the other two weeks were accrued during the last 6 months. My employer now tells us that starting December 1st I would be hourly. Because the hourly employees have to wait a year, they are saying I will not get my vacation time until the anniversary of my second year. Can a company take vacation away after it was negotiated on at the start of being hired? How come they were able hire me salary in 2015, weren’t the laws in effect then?

  6. Hi Peggy My job made the switch back in September my concern is how my hours were calculated when I started with the company it was not mandatory for me to work 45 hours only 40 it was after I had worked for the company several years later it became mandatory but the calculations that they came up for me at an hourly was based on a 45 hour work week can they do that

  8. I was changed to hourly before the rule changed. I have a demanding job with a lot of deadlines. If I work over 40 hrs. HR will change it to 40 hours in the system. Is this legal? If not where can I find the information about it?

    1. I cannot give legal advice. You should speak with an employment lawyer or maybe your HR department.

  9. Several years ago our company converted salaried employees to hourly and calculated the hourly rate of 40 hours per week plus 5 hours of overtime to ensure the same compensation. This month the employees were told that the 5 hours of overtime that has made up their base salary for the past 4 yrs would not be permitted unless approved by their direct manager. Many employees feel this is unfair and intimidating. Since the employees are bringing home less per paycheck without the ensured 5 hours of overtime. Is this legal?

  10. I work for a university. I was the second in command, His position was salaried, he retired 2 months ago, but assumed all duties plus my own, I was recently notified that the position is no longer salaried, and I was given an .85 cent raise. I do get overtime, but rewrote 2 new job descriptions​, one of which is salaried, with all of my duties except for 2. Is the legit, or foul?

  11. My employer changed 10 exempt managers to non-exempt about 6 months after we were taken over by a new company. They calculated our salary based on a 50 hour work week because they said all managers were required to work 50 hour work weeks. We were never told this before. After years have passed we realize that not all managers do have to work 50. They openly admit it. It is a well know practice if they have to work extra hours one week, they take days of the next week. We feel as though we are being forced to work 50 due to a 50 hour work week that is not followed by any exempt manager.
    Is there anything we can do?

    1. If your position is truly exempt, you can definitely work more than 40 hours without any problem, even if your manager doesn’t or other coworkers don’t.

  12. I am being switched from salary to hourly. they said that I should have been hourly all along. Does that mean that they should pay me for the overtime I’ve worked in the past? I do have records showing a few hours each week.

  13. My employer switched me from salary to hourly.
    I drive 300 miles a day (round trip) .when I get to the job l am only there an hour.
    My employer will only pay for the one hour now.
    He does provide a car and gas though.
    I also have a home office with a dedicated line to work that I am expected to use.

  14. I was hired at salary with a min 40-max 50 hours. When I was changed to hourly, they calculated my base pay on 50 hours. Is there a federal calculation?

    1. If your normal shift was 50 hours, then they don’t want to give you an overtime rate until you hit that 50 hours. That’s the reason they chose that rate. There isn’t an official way to figure out someone’s new hourly rate. Switching employees from salary to hourly is not a common thing. The important thing is that the rate doesn’t fall below state or federal minimum wage and doesn’t violate your employment contract.

  15. I was hired as a new role and job title added to the company. Salary $47,500 Exempt with 35-40 hour wk.
    I have been complimented and told I was doing what no one else has been able to do for the company.
    Four months of working with the company personal papers exposing my pay was seen by others in the department.
    Eight months into my position I was told by my supervisor that my title would change and more duties would be added to my role. My supervisor told me that my pay would not change and I would not be changed to hourly. Reassured me that it would stay the same and not to worry about a title.
    I recently had my year review and was told how I exceeded in what was asked of me. Then the supervisor informed me that they would be lowering my pay by 16% and putting me as hourly in order to make the pay “more even” for every one.
    How is this allowed?

  16. Pingback: Is It Legal to Reduce an Employee’s Pay – HR for Small Business

  17. Hi Peggy,
    I was switched to hourly a year ago after being exempt for 26 years. I don’t have a problem with that to much because I was putting in way more hours than 40 and a slave to my Manager’s with unrealistic time lines and they did not cut my pay. However, just recently I was volunteered to take over some responsibilities/job duties of a Deputy Director which would make me responsible for tracking grant and bond money.

    I don’t have a degree but my tenure and extensive job knowledge kind of makes me a valuable asset. I have been finding a lot of errors with numbers and tracking. I don’t understand how they can make me take these duties and still keep up with my same job duties as well as someone else.

    I was told that at the very bottom of everyone’s job description it has a blurb about an all other job duties requested by your Managers. Should I be seeking legal advice regarding this matter?

  18. Currently working for a employer (small company) and he has been paying salary for years now and I was notified this week that we won’t be receiving salary anymore (does he have to show me paperwork or can he just tell me). How does he have to go about letting me know this and we work a 50
    Hour week and we don’t recieve overtime unless we work over 50 hours. When we make the switch will he have to start paying me overtime after 40 hours now?

    We don’t even have a time clock, or anyone to keep up with hours.

    I feel I’ve been mistreated for years now how should I go about this

    1. Hello,

      If you are switching to hourly, you will need to start tracking your hours, even if only on paper, and overtime will be calculated over 40 hours. If you are in California, then overtime is calculated daily.

      Letting you know verbally should be fine, unless you have a contract. One thing they can’t do is tell you on payday that you’re not getting paid your usual amount. They must give you this news regarding future paychecks.

  19. I was converted to hourly from salary and office staff was reduced from 3 to 2 and 1/2. I have more responsibilities now due to shifts in the industry. I’m a manager and qualify or can fit under the exempt definition. Yet the hourly pay is to stay and however I try to restructure office duties I can’t manage to get work done in the time allowed. Employer is very unwilling to approve OT and I was written up for lack of time management and not performing up to standard just months after my job classification change. Mind you I worked for my company for 13 years and salary until last year. How can it be that I’m scared in to having to limit OT, yet I have growing job duties which are also impacted by staffing shortage as it’s a customer service based job, I just can’t keep up and other teams in our company have more coverage than my team
    I’m in so many ways treated unfairly

    Is it legal?

    1. Check with an employment lawyer on this. A lot of things aren’t fair but aren’t necessarily illegal.

  20. If I work 35-37 hours per week at $806 salary, and my boss puts me on hourly after 13 years of those hours, can he say I was supposed to be working 40hours and pay me such a way even those his schedule does not reflect 40 hours?

    1. Nick,

      Are you saying that he has figured your new hourly rate based on you working 40 hours a week, instead of 35-37 a week? So your hourly rate would be 806/40= $20.15. Yes, he can do that. An employer has the right to switch an employee from salary to hourly and re-work your hourly rate unless you are still under an employment contract.

  21. I have to change an employee from salary to hourly. she works hard and we are a small practice and gets her work regular done during our office hours which total an actual 35.5 hours a week. Moving her from salary to hourly based on a 40 hour work week would cut her paycheck. She is asking to be compensated based on what she has been working to earn her salary and understands that OT would only be for over 40 hours not her 35.5. Is this fair to do or should I have her take the cut and risk her quitting?

    1. You could calculate her hourly rate based on a 35.5 hour work week so that her pay does not change.

  22. I work for a non profit organization in Ohio I was a salary worker and after the company was penalized for not honouring overtime for exempt workers. Without my knowledge I was converted to hourly, my work description was never rewritten I was not even told how much I make an hour. Then I was told that I would only receive my overtime every 3 months. Now that I’m looking at my check studs under my hours it’s says stipend I’m not sure why and my taxes that’s deducted on my year to date are exactly the same but the taxes withheld each pay is different can I please have some advice

  23. Question…what are rules on changing a manager to salary from hourly, when employee has stated several times he does not agree to this switch? Proper notice and conversion was given to employee.

  24. As an employer can we change an employee from Salary to Hourly Pay?
    Can we lower an employees pay from $14/hour – $12/hour due to company not making money?

    1. While salary employees we were paid on the 1st and 15th. We are tranto hourly. Should we be paid biweekly or still on the same days?

      1. Your pay periods are set up by your employer. You may want to ask your employer, supervisor, or HR department when you are expected to be paid.

  25. I was hired as salary live in Mass today they told me because I have only one worker under my Mgr position Ma law said you need 2 . I have been change to hourly and change title ? No longer Mgr Is this legit?
    No pay decrease . My Pay the same as salary was. Just now can work 40 no over time unless approved .

  26. I am salaried (the type of salary that does not get overtime).
    My question is:
    I signed an electronic copy of our companies handbook.
    In it, it states that we have to work a min of 40 weeks amd MAY be ASKED to work overtime from TIME to TIME.
    So as i read it – as long as im putting in my 40 they canmot fire me for causr.
    Nowhete in the handbook does it ever say “Until tasks are completed that week…”
    So, again, 40 is techniccaly all i have to give imo.
    The company hr lady states that she does not go by the company handbook amd that she has been in hr for 20 years and 45 AVERAGE per week is standard. I asked her WHERE that was written…??? She stated it wasnt. I told her that 40 min per week is what the conpamy handbook states.
    So, WHO is right?
    I signed a legal doc that states 40 hours min…
    Thank you.

    1. Hi Marc, I’m sorry to hear about the confusion. First, I find it quite odd that the HR representative doesn’t follow the handbook. The handbook is a basic guide that both the employee and employer should follow, and if they aren’t following the handbook/rules, how are you supposed to figure out what the regulations are? That’s confusing and doesn’t provide clear rules for you and other employees. In regards to the quality of work issue, the FLSA states:

      “An employee is paid on a salary basis if s/he has a “guaranteed minimum” amount of money s/he can count on receiving for any work week in which s/he performs “any” work”

      and

      “[the] base pay of a salary basis employee may not be reduced based on the “quality or quantity” of work performed (provided that the employee does “some” work in the work period). This usually means that the base pay of a salary basis employee may not be reduced if s/he performs less work than normal, if the reason for that is determined by the employer.”

      In regards to your concern about the 40-hour week obligation, there’s not a clear answer. The FLSA only has regulations in regards to the amount of hours it takes to get overtime, but it doesn’t necessarily say how many hours a person must work. Their only guideline is that a workweek consists of 7 consecutive 24-hour periods, which equals to 168 hours. Now, if your handbook does say 40 hours, it may be deemed as a contract by a court. If it’s deemed as a contract, your employer can be liable for breaching the contract. Each state has its own laws in regards to handbook contracts, so you’ll want to check with your local labor board.

  27. My employer put me on hourly in mid 2016. I was told my overall yearly wage wasn’t going to change but I have yet to make what was projected. I am still $3-$5K less than what I should have made back then. Is that legal? I know it’s not ethical to make someone lose wages but it’s been bugging me ever since.

    1. If your employer is not compensating you with the agreed rate, that might be a legal issue depending on the circumstances. I would suggest speaking with your HR department about your missing wages or even speaking with the Department of Labor’s Wage and Hour Division https://www.dol.gov/agencies/whd. You may even need to speak with someone who can give you legal advice.

  28. Hello, so my boss switched me from salary to hourly. I was getting 445 per pay check and before taxes its 600. While I was salary he also fully covered my health insurance as a benefit. Since I am now hourly, he is claiming now I am a production worker and I can not have my health insurance fully paid from the company….is this legal, is what he is saying is true?

  29. Hello! I work in DC. I was recently switched to salary from hourly for a less than $1 raise an hour. We are paid twice a month on the same day every month. When I checked my last paycheck to budget for the week, I was shocked to see my paycheck was 10 hours short. I reached out to payroll (we don’t have an HR department) and was not given a satisfactory answer as to what happened to those hours I worked but was not paid for. The only answer given is that I am now salaried– I was not notified of the change, my job description does not fall under FLSA guidelines for exempt employees and did not change. The only change was the .78 cent increase to my base hourly rate and to be perfectly honest, I’d rather be paid for the hours I work. Now I’m being told from other employees that those 10 hours are “donated”. Any advice or insights? Thank you!

    1. Hi there. Salaried employees get paid the same amount every pay period no matter how many hours they work. The FLSA doesn’t have guidelines in regards to how many hours a salaried employee is supposed to work each week, which means that you will get paid the same amount if you do some type of
      “work” throughout the week. Since you are a salaried employee, you are not paid based on the amount of hours you work– you’re still going to see the same paycheck every two week whether you work 20 hours or 60 hours. That’s probably why your workplace said that those hours were “donated”. According to the FLSA, to be an exempt employee you must: 1) be paid at least $455 per week 2) be paid on a salary basis 3) perform exempt job duties. If those rules apply to you, you are exempt and don’t qualify for overtime. Now, if your employer did not notify you that you were going to change from Hourly to Salary, that can potentially be an issue because they are supposed to notify you before changing your status. If possible, I would suggest speaking with your HR department about the issue. If they can’t help you, your next step would be filing a complaint with the Department of Labor.

  30. We have a single Mom who needs to work, but also needs to help her young son with his homework now that the schools are closed due to COVID-19. She’s an Engineer, Exempt Professional, doesn’t qualify for FFCRA because she wants to work 3-days and stay home 2-days/week working 24/hrs per week. Can we change her to Non-Exempt Hourly? What do I need to do besides rewrite her job description? Can we set a time limit to change her back when the school year/home study is over? Thank you!

    1. Hi Patricia. Changing her job description is a good first step; however, some people also do a payroll action notice or other approval to have for any future audits. Since her hours are being reduced, it may effect her PTO and health benefits, so you’ll want to make sure that she’s covered in the company handbook. You may convert her back to her normal status later, so you’ll just want to make sure that the company policy covers her PTO and benefits while she’s hourly. Also, it’s important to ensure that you follow salary and hourly basis requirements: https://www.dol.gov/agencies/whd/fact-sheets/17g-overtime-salary. If you have more questions, I suggest that you speak with an HR professional such as myHRcounsel, or another service along those lines.

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