Hi,
Can an employee be reclassified from salary to hourly if they do not perform any functions that would warrant them being salary. The salary classification was done in error. Can their pay be reduced?

Sure they can... they could even make you a part time employee. Happens to a lot of people. As hourly you must get paid OT where you would be expected to work without compensation as a salaried employee.

Here's my main problem.. the employee was given a substantial raise and made salary based on what was expected of them. The employee has not fulfilled this expectation and is taking advantage of the "salary" status. I know I can change her classification to hourly but can I legally reduce her rate of pay based on the job she is performing?

Sure, salaried positions are usually higher because there is enough padding built in to allow for the expected work beyond normal hours.

Hourly you pay them for every hour they actually DO work.

I am assuming you are in the USA... and they don't have a labor contract.

Protocol would be to run this by the one who upgraded them in the first place if it was not you, before you make an arbitrary decision.