How to Convert an Employee From Hourly to Salary
Quick Answer
Before converting an employee from hourly to salary, decide whether the role will be exempt or salaried non-exempt. To be exempt from overtime under federal rules, the employee generally must meet a salary level, be paid on a salary basis and perform qualifying job duties; job titles do not decide it. Calculate a fair salary that accounts for typical overtime, change pay at the start of a pay period, put the new terms in writing and keep tracking hours for salaried non-exempt employees.
Promotions, new responsibilities and simpler payroll are common reasons to move an employee from hourly to salary. But the switch isn't just a pay change. If the role doesn't meet the rules for exemption, a salaried employee may still be owed overtime, and a poorly planned change can lower the employee's real earnings or create back pay liability.
This guide explains how to decide whether the role can be exempt, how to calculate a fair salary, how to time the change and what to do about time tracking afterward.
Note: This is general information, not legal advice. Federal and state exemption rules differ, and some states set higher salary thresholds. Talk to an employment attorney or your payroll provider before converting employees.
Exempt vs. Salaried Non-Exempt
| Exempt salaried | Salaried non-exempt | |
|---|---|---|
| Paid a set salary | Yes | Yes |
| Overtime | Not required if exemption applies | Required for hours over 40 in a workweek |
| Track hours | Not required by FLSA, though often useful | Required |
| Must meet duties test | Yes | No |
Being paid a salary doesn't by itself make an employee exempt. See do salaried employees need to track time.
The Federal Exemption Tests
The Department of Labor's Fact Sheet #17A explains that to qualify for the executive, administrative or professional exemptions, employees generally must meet tests for salary level, salary basis and job duties. The fact sheet lists a salary level of not less than $684 per week. It also states that job titles do not determine exempt status.
| Test | What it means |
|---|---|
| Salary level | Paid at least the required minimum weekly salary |
| Salary basis | Paid a predetermined amount not reduced for variations in quality or quantity of work, with limited exceptions |
| Duties | Primary duties match an exemption, such as managing, certain office work or learned professional work |
Some states set higher salary thresholds or stricter duties tests. Always check your state, and check the DOL for any updates to the federal salary level. See what is a non-exempt worker.
Step-by-Step Conversion
- Review the job duties against the exemption tests.
- Decide exempt or salaried non-exempt.
- Review 6 to 12 months of hours, including overtime.
- Calculate the salary and compare to current earnings.
- Check state rules and salary thresholds.
- Choose the effective date, ideally the start of a pay period.
- Put it in writing and get the employee's acknowledgment.
- Update payroll, PTO and time tracking settings.
Calculating an Equivalent Salary
Base equivalent: hourly rate × 40 hours × 52 weeks.
Example: $24/hour × 2,080 hours = $49,920.
With typical overtime: if the employee averaged 4 overtime hours a week at $36, add $36 × 4 × 52 = $7,488, for about $57,408 in recent annual earnings.
If the new salary is lower than what the employee actually earned with overtime, the change can feel like a pay cut, even if it's labeled a promotion. Review real earnings, not just the base rate, and explain the numbers. See how to calculate a salary increase.
Free Hourly-to-Salary Worksheet
Hourly-to-Salary Conversion Worksheet
Employee: __________ | Current role: __________ | New role: __________
| Item | Amount |
|---|---|
| Current hourly rate | |
| Average weekly hours (last 6–12 months) | |
| Average weekly overtime hours | |
| Annual earnings including overtime | |
| Proposed salary | |
| Difference | |
| Exempt or salaried non-exempt? | |
| Meets salary level (federal and state)? | ☐ Yes ☐ No |
| Meets duties test? | ☐ Yes ☐ No ☐ N/A |
| Effective date |
Timing the Change
Make the change at the start of a pay period, and ideally at the start of a workweek, so hourly pay and salary don't overlap in confusing ways. Pay all hours worked as hourly through the last day of hourly status, including overtime. Tell the employee exactly when the change takes effect.
Putting It in Writing
Sample letter: Dear [Name], effective [date], your position will change to [title], paid a salary of $[amount] per year, paid [frequency]. This position is classified as [exempt / non-exempt] under federal and state wage laws. [If non-exempt: You will continue to record your hours and will be paid overtime for hours worked over 40 in a workweek.] Your PTO will [continue to accrue at / change to] [details]. Please sign below to acknowledge this change.
Salaried Non-Exempt Employees
If the role doesn't meet an exemption, you can still pay a salary, but the employee remains non-exempt. You must track hours and pay overtime for hours over 40 in a workweek. The regular rate for overtime depends on how many hours the salary is meant to cover. Talk to your payroll provider about the right calculation for your arrangement, including whether a method like the fluctuating workweek method applies.
PTO and Benefits After the Switch
- Decide whether PTO accrual changes from hours worked to a set amount.
- Keep the existing PTO balance.
- Review benefit eligibility tied to classification.
- For exempt employees, check salary basis rules before docking pay for partial-day absences.
See PTO and partial days for exempt employees.
Tracking Time After the Switch
Salaried non-exempt employees must still clock in and out. Even for exempt employees, tracking time can help with project costing, workload planning and spotting burnout. Make expectations clear: what's required, what's optional and how the data is used.
Risks of Misclassification
If an employee is labeled exempt but doesn't meet the tests, they may be owed back overtime for hours over 40. That's why the duties review matters more than the title or pay method. When in doubt, keep the employee non-exempt or get legal advice.
Example: An Operations Coordinator
A small company promoted an hourly coordinator to "Operations Manager" with a salary equal to 40 hours at her old rate. She had been averaging five overtime hours a week, so her real earnings dropped, and her duties were mostly scheduling and data entry, not managing people. After a review, the owner kept her non-exempt on a salary, continued tracking her hours and paid overtime, avoiding both a pay cut and a misclassification risk.
Common Mistakes
- Assuming salary means exempt.
- Using job titles to decide exemption.
- Ignoring overtime history when setting salary.
- Changing pay mid-workweek without a clear plan.
- Stopping time tracking for salaried non-exempt employees.
- No written notice of the change.
Hourly-to-Salary Checklist
| Step | Done? |
|---|---|
| Review duties against exemption tests | |
| Check federal and state salary levels | |
| Review hours and overtime history | |
| Calculate salary and compare earnings | |
| Set effective date at a pay period start | |
| Provide written notice and get acknowledgment | |
| Update payroll, PTO and time tracking |
Questions to Ask Before Converting
- Has the role's work actually changed, or just the title?
- Does the employee manage people, make independent decisions or do professional work?
- How many hours does the employee really work each week?
- Will the employee earn less than they did with overtime?
- Does your state set a higher salary threshold?
- How will you handle partial-day absences?
If the answers point to non-exempt status, pay a salary with overtime or keep the role hourly.
Common Roles and Exemption Risk
| Role | Exemption risk |
|---|---|
| Store or restaurant manager supervising staff | Often exempt if tests are met |
| Shift lead or assistant supervisor | Often non-exempt |
| Office coordinator or administrative assistant | Often non-exempt |
| Bookkeeper | Depends on duties and independence |
| Inside sales | Usually non-exempt |
These are general patterns, not legal conclusions. Review each role's actual duties.
Communicating the Change
Explain the change in a meeting before sending the letter. Cover the new salary, how it compares to recent earnings, whether overtime still applies, any changes to time tracking and PTO and when it takes effect. Employees who understand the reasons and numbers are far more likely to see it as a positive move.
Converting Back to Hourly
Sometimes a salaried role doesn't work out or duties change. Converting back to hourly follows the same process: review duties, set the hourly rate, choose a pay period start and put it in writing. Make sure overtime is tracked and paid from the effective date.
Record Keeping
Keep documentation of the duties review, salary calculation, effective date and the employee's acknowledgment. If classification is ever questioned, these records show you made a careful, good-faith decision. The DOL requires employers to keep payroll records for at least three years.
Salary Basis and Deductions
Exempt employees generally must receive their full salary for any week they perform work, with limited exceptions. Docking pay for partial-day absences, disciplinary reasons or business slowdowns can put the exemption at risk. Use PTO for absences where your policy allows, and check the salary basis rules before making any deduction from an exempt employee's salary.
State Salary Thresholds
Several states require higher salaries than the federal level for employees to be exempt, and some apply different duties tests. Some cities have their own rules as well. If your business operates in more than one state, check each state's threshold before converting employees there.
Getting Started
- List the employees being considered for salary.
- Review each role's actual duties.
- Pull 6 to 12 months of hours and earnings.
- Check federal and state salary levels.
- Decide exempt or salaried non-exempt for each.
- Prepare letters and meet with each employee.
- Update payroll and time tracking settings before the effective date.
Taking time to review duties and earnings up front prevents the two biggest problems: unintended pay cuts and misclassification.
Hourly-to-Salary Quick Reference
| Check | Why |
|---|---|
| Duties, not title | Titles don't decide exemption |
| Salary level (federal and state) | Threshold must be met for exemption |
| Recent earnings with overtime | Avoid an unintended pay cut |
| Effective date at pay period start | Clean payroll transition |
| Written notice | Clear terms for both sides |
| Time tracking settings | Non-exempt still clock in |
When Hourly Is the Better Choice
For many roles, staying hourly is simpler and safer. If the employee's duties don't clearly meet an exemption, if their hours vary a lot or if they rely on overtime pay, hourly pay may serve both sides better. Raising the hourly rate can reward a promotion without changing classification. See salary vs. hourly pros and cons.
Example Salary Comparison
| Option | Annual pay | Overtime | Time tracking |
|---|---|---|---|
| Stay hourly at $24 | About $49,920 plus overtime | Paid | Required |
| Exempt salary $58,000 | $58,000 | Not paid if exemption applies | Optional |
| Salaried non-exempt $50,000 | $50,000 plus overtime | Paid | Required |
This sample uses made-up figures to show how options compare. The right choice depends on the role's duties and the employee's typical hours.
PTO Accrual After Conversion
Hourly employees often accrue PTO per hour worked. Salaried employees usually accrue a set amount per pay period. Decide which method applies after conversion, keep the existing balance and explain any change in the conversion letter. See PTO accrual methods.
Converting Several Employees at Once
If you're restructuring roles and converting multiple employees, review each role separately. The same title can have different duties at different locations, and each employee's overtime history differs. Document each decision on its own worksheet, set a common effective date if practical and meet with each employee individually.
Getting Help
Classification mistakes can be expensive. If you're unsure whether a role meets an exemption, talk to an employment attorney or use the Department of Labor's resources before making the switch. Your payroll provider can help set up salaried non-exempt pay correctly.
Reviewing the Change After 90 Days
Check in about three months after the conversion. Compare the employee's hours with what you expected, confirm overtime is being paid correctly if they're non-exempt and ask how the change is working for them. If an exempt employee is regularly working much longer hours, revisit the workload or the salary before it turns into turnover.
Converting Part-Time Employees to Salary
The federal salary level in Fact Sheet #17A is a weekly amount. A part-time employee paid less than that amount per week wouldn't meet the salary level test for the white-collar exemptions, even if their duties qualify. You can still pay a part-time employee a set salary as a non-exempt employee, as long as you track hours and pay overtime when required. Check state rules, which may set higher thresholds.
Final Thoughts
Converting an employee to salary can reward growth and simplify payroll, but only when the role truly fits. Review duties, check salary thresholds, compare real earnings and put everything in writing. When the role doesn't meet an exemption, a salary with overtime or a higher hourly rate can achieve the same goal safely.
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Sources
- U.S. DOL: Fact Sheet #17A, Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees
- U.S. DOL: Overtime Pay