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To be or not to be exempt? A review of the Executive Exemption

August 1, 2016

Author: Lisa Cooper, SPHR and HR Business Partner, HR Collaborative, LLC

Do your “Executives” really qualify for the FLSA overtime exemption? 

The FLSA  changes are going into effect in a few short months. Many employers have been scrambling to decide how best to comply. Would it be best to just increase Joe’s salary to $47,476? Should Joe be reclassified to non-exempt so he is paid overtime? If reclassified, how should his hourly rate be determined, based on 40 hours per week or some other calculation? There are lots of numbers to analyze here.

But remember, it’s not just about the numbers. Exempt workers must also meet a duties test. The duties test has been in effect for years, but many employers have not paid particular attention to it until now.  There are six main exemption reasons explained within the regulation and we will explore all of them over the next several weeks. Today, we’ll focus on the Executive Exemption to determine who on your management and leadership team qualifies as exempt.

The good news is that an exempt employee doesn’t have to be considered an “executive” on the org chart to qualify for the exemption. On the other hand, even if the employee’s title includes words like executive, director or manager, they may not qualify. “Job titles do not determine exempt status,” says the Wage and Hour Division of the DOL. Under the Executive duties test, employees must still meet the following:

1. The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. 

  • Who will likely qualify: Leaders who spend at least 50% of their job making decisions about a recognized department. That work involves 
    • planning work of subordinates. 
    • issuing performance evaluations, discipline, and pay adjustments.
    • controlling the department budget.
    • handling grievances of subordinates. 
    • implementing training.
    • creating department policies.
    • deciding which types of supplies and materials for the department. 

Keep in mind the DOL requires employers not rely solely on amount of time spent on these tasks – we must look at the character of the employee’s job as a whole to determine if these tasks qualify as a primary duty. 

  • Who won’t qualify: A line leader who “fills in” for his/her manager while they’re on vacation will likely not satisfy the duties test. Similarly, other senior staff that only assign tasks or coach team members probably won’t meet the duty threshold. 

2. The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent. 

  • Who will likely qualify: Leaders who direct the work of two or more full-time employees (generally 37.5 to 40 hours), or four part-time employees, normally and recurrently every workweek.
  • Who won’t qualify: Leaders who manage a department but do not have any direct reports, leaders who only have one direct report or two part-time direct reports, leaders who ‘assist’ other leaders with providing isolated direction from time to time. 

3. The employee must have the authority to implement hiring, firing, advancement, promotion or any other change of status decisions. Or, if not the direct employee making the decisions, the employee’s suggestions and recommendations must be given particular weight.

  • Who will likely qualify: Leaders who have authority and make decision regarding subordinate’s employment status. Leaders who make recommendations regarding a direct report employee’s status. The recommendations are part of that leader’s job duties, the frequency is more than “occasional”, and are frequently relied upon. 
  • Who won’t qualify: A team lead who participates on an interview panel twice per year for the new interns likely won’t satisfy this portion of the duties test.

An employee must meet all three of these stipulations in addition to meeting the new salary threshold in order to classify an employee as exempt under the Executive Exemption.  It is not sufficient to meet one or two. HR Collaborative recommends reviewing the DOL’s guidelines here to ensure that your managers and executives do in fact meet both the updated salary test as well as the duties test that has been in effect for years. 

If you find that your managers don’t meet this test, fear not. They may qualify as exempt under another duties test, like the Administrative or Highly Compensated test. For instance, FLSA carves out a special exemption for owners with 20% equity in a company, provided that owner is actively engaged in management. 

Stay tuned as we dig in to the other exemptions and explore ‘to be or not to be exempt’ next week. 

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