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

August 22, 2016

Author: Nancy Johnson, Director of Operations, HR Collaborative, LLC

An employee making over 100k must surely be exempt, right? 

Over the last four weeks we’ve been reviewing the FLSA’s duties tests to demonstrate just how positions must be classified as exempt or non-exempt under the regulation. With the FLSA changes effective on December 1, it’s imperative that employers make certain their exempt employees meet the requirements as outlined in the duties tests. Paying an employee at the designated salary threshold is not enough to classify them as exempt. The employee must perform work that is aligned with one of the six categories of exemptions. 

We’ve outlined the criteria for the executive, administrative, and the professional duties tests  (referred to as EAP by the Department of Labor DOL) in previous articles. This week’s focus will be the Highly Compensated Employee (HCE) exemption and duties requirements. Let’s dig in and see how an employee may meet the criteria to be exempt under the HCE test. 

Highly Compensated Exemption
Under the current Department of Labor guidelines an employee must be compensated at a level of $100,000 annually to qualify for this exemption. This amount will increase to $134,004 on December 1, 2016. Like the executive, administrative and professional (EAP) exemptions, the employee must be paid on a salary or fee basis at the minimum amount of $913/week as of December 1, 2016. You might be scratching your head right now. $913 a week only amounts to $47,476/annually and that is way lower than $134,004/annually. This is because positions deemed “Highly Compensated” will be permitted to factor in additional compensation such as non-discretionary bonuses and commissions. The total cash sum including this additional compensation for HCE must be equal to or greater than $134,004/annually.

Just as we’ve emphasized before, salary alone is not enough to justify exempt status. An employee who qualifies for the HCE exemption must also “customarily and regularly [perform] at least one of the exempt duties or responsibilities of a bona fide executive, administrative, or professional employee” according to the DOL. 

The HCE regulation is also set up this way to help avoid the unintended exemption of large numbers of employees in high-wage areas who are clearly not performing EAP duties.

Since a high level of compensation is already a strong indicator that an employee should be exempt, the HCE duties test is less stringent than the other five tests. Whereas the administrative, executive, or professional tests demand that each condition outlined in the test be met in order to be classified as exempt, the HCE only requires that at least one duty be present within the employee’s job. 

  • Who will likely qualify: A highly compensated employee who customarily and regularly directs the work of two or more other employees, even though the he/she does not meet all of the other requirements for the executive exemption.  For an example, a senior executive assistant to the CEO, paid over $134,004, who performs administrative work without a great deal of discretion in judgment but directs and oversees the work of two administrative assistants.
  • Who won’t qualify: A highly compensated employee who for a short period of time (not regularly) directs the work of two or more other employees, and does not perform other requirements of the executive, administrative or professional tests. Another example would be an in-demand, highly skilled machinist earning over $134,004 who performs manual work. 

This is by far one of the least utilized exemption tests under the FLSA. In most cases when an employee is earning a six-figure salary, they meet the duties standard for another of the exemption categories.  In fact, the DOL stated that they expect only 36,000 employees to be impacted by the changes to the HCE salary threshold change to $134,004. This represents only a fraction of the over 4 million employees otherwise affected by the changes to the FLSA. 

As we wrap up, it’s also worth noting; the new HCE total annual compensation level was calculated to equal the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually). This number is set to automatically update every three years. 

To read more about the HCE, visit the Department of Labor Website.

HR Collaborative is a business consulting firm specializing in strategic human resource management. We operate in partnership with our clients and as an extension of their HR department. We help organizations build their HR systems, offering assistance within the broad spectrum of Human Capital Management. Contact: 616.965.7860 or www.hrcollaborative.net.

Source: 
https://www.dol.gov/whd/flsa/
https://www.dol.gov/whd/overtime/final2016/overtime-factsheet.htm

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