what are the ramifications of moving an exempt employee to salaried non-exempt? We are a firm that had an independent HR company and therefore our employees were considered technically their employees and they classified some of our employees as exempt. Starting Jan. 1 we will handle HR in house. We would like to make all employees on Jan. 1 non-exempt. Can we do this?

Yes. There is nothing preventing you from classifying all employees as non-exempt. You have to justify why you are exempting employees, not why you do not wish to. As a caution, please keep in mind that a salaried, non-exempt employee is eligible for overtime. I tend to shy away from salaried, non-exempt classifications due to the trememdous confusion it creates with non-HR types. I prefer all non-exempts to be hourly.

Thanks for your reply it was very helpful but I think I still need a little help. We have been in business for 15 years with very little employee problems because we treat them very well, ie 100% health coverage for employee and family all paid by company. Now that we are eliminating the HR firm we are looking at this exempt vs non-exempt issue and trying to figure what is best for us the employer and the down side to the employee if any. We are trying to be as fair as possible. Currently we have 4 employees that are designated exempt and meet the exempt criteria for professionals. We have a standard unwritten policy that no one works overtime, mainly for quality of life issues. As part of eliminating the HR service we have hired a very qualified book keeper that is informing us of the differences between exempt and non-exempt. It appears from all the literature that the only advantage to the employer is if the employee works a lot of overtime, which we don't. However there does appear to be a big potential downside to us, the employer, because we often call employees while they are sick or on vacation to help locate information/files for some project emergency. Under the exempt rules as I read them, we would have to pay them as working for that day and they wouldn't have to use there accrued vacation time. My understanding is that if they are sick we could force them to that time because it isn't a monetary benefit.
Do you see any advantage for us to have any exempt employees?

Your bookkeeper is mistaken. The Exempt Salaried rules are federal regulations 29 CFR 541.602, related to the federal FLSA law. That law talks about paying employees for hours worked. The law does NOT talk about paid time off balances per se. Federal rules are perfectly fine with the employer reducing PTO balances on Exempt Salaried employees for time not worked as long as the payment rules are followed. Federal DOL is very, very clear that what happens to the benefit hour balances are none of their concern. Benefit hour balances are a function of state law (if any) and company policies.
http://www.dol.gov/dol/allcfr/ESA/Title_29/Part_541/29CFR541.602.htm

http://www.dol.gov/esa/whd/opinion/FLSA/2005/2005_01_07_7_FLSA_PaidTimeOff.pdf

You are in CA and CA-DLSE in their wisdom have gotten the CA rules on this subject fairly confused, especially since the Conley court decision in 2006. The rules can be found in the CA-DLSE enforcement manual and unfortunately if all rules are looked at, they tend to be somewhat contradictory.
http://www.dir.ca.gov/dlse/Manual-Instructions.htm

Thanks for all your advice it is very helpful. I just want to make sure i understand, we cannot withhold pay for not signing a timesheet but we can take disciplinary action such as future leave without pay or termination.

If we add the timesheet policy and our duty of loyalty policy to our employee handbook and our employee refuses to sign the handbook, is that grounds for termination?

we cannot withhold pay for not signing a timesheet but we can take disciplinary action such as future leave without pay or termination.

Correct.

If we add the timesheet policy and our duty of loyalty policy to our employee handbook and our employee refuses to sign the handbook, is that grounds for termination?

Technically you do not need "grounds" to terminate. If you are asking whether you may legally terminate an employee who refuses to sign the handbook, the answer is yes, you can. I think it's overkill but it's not illegal.

I am not a termination law expert but your "duty of loyalty" policy makes me nervous. Have you had this reviewed by a lawyer yet, and is the policy legal under CA law? If not, terminating an employee for failing to follow an illegal policy could be an illegal termination under California's Public Policy exemption.

A policy requiring employees to subject and sign timesheets or face termination would normally be legal, although I suspect that any policy could be miswritten in such a way as to violate a law if the employer tries hard enough.

okay, thanks again for the info.
our duty of loyalty language was written by an attorney and only states that employees may not use our equipment for their own personal business, nor can they market our clients while employed at our company for personal gain, that competes with our company.

I don't want to have to fire someone over signing a handbook, but then it makes an employer suspicious as to why an employee would refuse to sign.

Both employer and employee need to understand that refusing to sign the policy does not exempt the employee from following it. The employee is still required to follow the policy whether they sign it or not. Signing is proof that they have been notified of the policy, not an agreement to abide by it.