Changing Employee from Salary to Hourly: Rules, Notice, and Overtime

Changing an employee from salary to hourly is a formal reclassification from exempt to non-exempt under the Fair Labor Standards Act, and it brings new legal duties around overtime, timekeeping, and records. You cannot simply announce a new pay structure and keep everything else the same. Once the exemption ends, every hour over 40 in a workweek must be paid at time and a half, and the employee’s daily work has to be tracked in a way it probably wasn’t before.

When the Change Is Legally Required

The FLSA sorts employees into exempt and non-exempt. Non-exempt employees are entitled to at least the federal minimum wage and to overtime for hours past 40 in a workweek. Exempt employees are excluded from both, but only if they satisfy a salary basis test and a duties test.¹

The salary basis test requires a fixed, predetermined amount each pay period that doesn’t fluctuate with hours worked or output.² That salary has to clear a minimum threshold, which at the federal level sits at $684 per week, or $35,568 per year, as of 2026.¹ Several states set higher thresholds, so the federal number isn’t necessarily the one that applies to you.

The duties test asks whether the employee’s primary responsibilities actually involve executive, administrative, or professional work as defined by DOL regulations.³ Job titles don’t decide it. If the person spends most of the day on non-exempt tasks, the exemption fails regardless of what the offer letter says.

When either test stops being met, because duties shift, pay drops, or the classification was wrong to begin with, you have to move the employee to non-exempt status. There is no grace period. From the moment the exemption doesn’t apply, overtime is owed.

Setting the New Hourly Rate

The straightforward calculation is annual salary divided by 52 weeks, then divided by 40 hours. Someone earning $52,000 a year has a $1,000 weekly salary and a $25 hourly equivalent. That is a starting point, not a required answer.

The new rate cannot fall below the highest applicable minimum wage, whether federal, state, or local.⁴ The federal minimum is $7.25 per hour; many states and cities are higher.⁵ Nothing forces a dollar-for-dollar match to the prior salary, but you can’t drop below the minimum wage floor.

Overtime is now owed at one and one-half times the regular rate for hours over 40 in a workweek.⁶ If the person routinely put in 45 or 50 hours as a salaried worker, that overtime cost belongs in your budget before you settle on a rate.

Regular Rate Is More Than Base Pay

For overtime purposes, the “regular rate” covers all remuneration for employment, not just base wages. Commissions, non-discretionary bonuses, and shift differentials fold into the calculation.⁷ Truly discretionary bonuses, where the employer alone decides whether to pay and how much, are excluded. A bonus keyed to production, attendance, or performance is non-discretionary and has to be counted. Employers who skip this understate overtime and build up back-pay exposure.

The regular rate for any given week is total compensation for that week divided by total hours worked that week.⁸ The rate can shift week to week when variable pay is in play, and your payroll system has to handle that.

Tracking Hours Once the Employee Is Hourly

This is where the change bites hardest day to day. A salaried exempt employee could answer email at midnight or join a Saturday call with no payroll consequence. The same person on hourly status generates compensable time for every work-related minute, and off-the-clock habits turn into overtime bills.

The FLSA defines “employ” as “to suffer or permit to work.” If you know or should know that someone is working, you owe them for the time, even if you didn’t ask.⁹ A few categories trip employers up most:

Travel. A normal commute isn’t compensable. Travel between job sites during the workday is. A one-day out-of-town assignment counts as hours worked, minus the employee’s normal commute time.⁹
Training and meetings. Attendance is compensable unless all four conditions are met: outside normal hours, voluntary, not directly related to the job, and no other work is performed. Mandatory training is always paid.⁹
Breaks and meals. Rest breaks of 20 minutes or less are paid. Meal periods of 30 minutes or more can be unpaid, but only when the employee is fully relieved of duties.⁹
Waiting and on-call time. An employee waiting for the next task at their workstation is “engaged to wait” and must be paid. On-call time at home is generally not work unless the restrictions are so tight the employee can’t use the time for themselves.

A narrow “de minimis” exception covers truly negligible amounts of time that can’t practically be recorded.¹⁰ It doesn’t cover regular, identifiable tasks like logging into systems or donning required equipment. If it happens every day and takes a few minutes, it’s compensable.

Recordkeeping You Now Owe

Federal law doesn’t require detailed time records for exempt employees. It requires them for non-exempt employees.¹¹ Once you reclassify, you take on a new set of mandatory records for that person:

Full name, Social Security number, and address
The time and day the workweek begins
Hours worked each day and total hours each workweek
Basis of pay, regular hourly rate, total straight-time earnings, and total overtime earnings each workweek
All additions to or deductions from wages, total wages paid each pay period, and dates of payment

Payroll records have to be kept for at least three years. Supporting documents like time cards and schedules have to be kept for at least two.¹² The DOL can ask to inspect these at any time, and disorganized records during an audit are nearly as bad as missing ones.

State Rules That Change the Picture

Federal law is a floor. State and local rules often add obligations that affect both when reclassification is triggered and how the change has to be rolled out.

Higher Salary Thresholds

Several states set their own minimum salary for the white-collar exemptions well above $684 per week. As of 2026, some exceed $1,300 per week. If your employee works in one of those states, the state figure controls, and clearing only the federal number won’t preserve the exemption. Check the state labor department’s current threshold before you make any classification call.

Advance Notice of Pay Changes

The FLSA doesn’t require any specific advance notice before changing an employee’s pay rate or structure. Many states do. Some require written notice before the next pay period, others require a set number of days such as 7 or 30, and a few require notice only before any work is done at the new rate. Missing a required notice can turn an otherwise valid reclassification into a wage violation under state law. Look at your state’s wage payment statute before you implement.

How to Roll the Change Out

The mechanics of implementation matter as much as the legal analysis. A sloppy rollout confuses payroll, sours the employee, and leaves holes in your documentation.

Put It in Writing

Prepare a written amendment or new agreement that states the new hourly rate, the effective date, the non-exempt status, and overtime eligibility. This document is your evidence that the change was made properly and communicated clearly. Have the employee sign and date it, and keep a copy in the personnel file.

Have the Conversation in Person

Don’t hand over reclassification paperwork cold. Sit down with the employee and explain what’s changing and why. Most resentment comes from a feeling that the change is a demotion, not from the pay structure itself. Be direct: this is a compliance move, not a performance judgment. Walk through the timekeeping expectations, including that off-the-clock work is now prohibited and every hour must be recorded accurately. Someone who used to check email at 10 p.m. needs to understand that habit now creates overtime liability for you and a compliance risk for both of you.

Update Payroll and Time Tracking Before the Switch

Process the final salaried paycheck to cover work through the effective date. Set the new hourly rate to begin the next pay period. If the employee wasn’t previously on a time clock or tracking software, get that in place before the switch, not after. Guessing at hours for the first week and correcting later is exactly the kind of loose recordkeeping that hurts you in an audit.

Set an Overtime Approval Policy

Decide whether overtime needs prior approval and write the policy down. You can require authorization before an employee works past 40 hours, and you can discipline someone who works unauthorized overtime. You still have to pay for the hours. Under the FLSA, work performed is compensable whether or not you approved it.⁹ The policy shapes future behavior; it doesn’t excuse non-payment.

What Happens to Benefits

Reclassification doesn’t automatically strip benefits, but it can change them depending on how your plans are structured. Federal law lets employers keep separate benefit plans for different employee categories, such as one for salaried staff and another for hourly workers.¹³ Moving someone from one plan to the other could shift retirement contributions, PTO accrual, or other benefits.

Health coverage under the Affordable Care Act is another point to watch. Applicable large employers have to offer coverage to employees who average at least 30 hours per week, or 130 hours per month.¹⁴ The salaried exempt version of this employee was almost certainly full-time. As an hourly worker, their hours now need to be measured against that threshold, and if the schedule drops consistently below 30 hours a week, eligibility may change. Review the plan documents and tell the employee about any effect before the change takes hold.

What It Costs to Get It Wrong

Failing to reclassify someone who no longer qualifies for exempt status, or reclassifying them on paper without actually tracking and paying overtime, creates liability that grows over time. The employer owes all unpaid overtime for the misclassification period, plus an equal amount in liquidated damages.¹⁵ That effectively doubles the back-pay bill. A court can also award the employee’s attorney’s fees and costs.

The statute of limitations for unpaid wages is two years for standard violations and three years if the violation was willful.¹⁶ A “willful” violation doesn’t require malice; it’s enough that the employer knew or should have known the classification was wrong. For someone misclassified for three years at five hours of overtime a week, the total climbs quickly once liquidated damages and legal fees are added in.

The Department of Labor can seek an injunction against ongoing violations, and employees can sue individually or on behalf of similarly situated coworkers.¹⁵ One claim often puts the rest of your classifications under scrutiny. The FLSA also prohibits retaliation against any employee who files a wage complaint or takes part in an investigation.¹⁷ Reclassifying an employee as punishment for raising a pay concern would stack a retaliation claim on top of everything else.

1
U.S. Department of Labor. Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the FLSA
2
eCFR. 29 CFR 541.602 – Salary Basis
3
Office of the Law Revision Counsel. 29 USC 213 – Exemptions
4
U.S. Department of Labor. Fact Sheet #56A: Overview of the Regular Rate of Pay Under the FLSA
5
U.S. Department of Labor. State Minimum Wage Laws
6
Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours
7
eCFR. 29 CFR Part 778 Subpart B – Principles for Computing Overtime Pay Based on the Regular Rate
8
eCFR. 29 CFR 778.109 – The Regular Rate Is the Hourly Rate Actually Paid for Normal, Non-Overtime Workweek
9
U.S. Department of Labor. Fact Sheet #22: Hours Worked Under the FLSA
10
U.S. Department of Labor. FLSA Hours Worked Advisor – Recording Hours Worked
11
Office of the Law Revision Counsel. 29 USC 211 – Collection of Data
12
U.S. Department of Labor. Fact Sheet #21: Recordkeeping Requirements Under the FLSA
13
U.S. Department of Labor. FAQs About Retirement Plans and ERISA
14
IRS. Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act
15
Office of the Law Revision Counsel. 29 USC 216 – Penalties
16
U.S. Department of Labor. Back Pay
17
Office of the Law Revision Counsel. 29 USC 215 – Prohibited Acts