The Employer's Legal Resource: What if My Employee is "Highly Compensated"-- Is She Exempt?
Beginning in 2004, the DOL created an exemption for certain "highly compensated" white collar employees. An employee may qualify as highly compensated and subject to this exemption if:
- the employee earns at least $134,004 in total annual compensation--which compensation level was updated in the most recent regulations from its previous amount of $100,000;
- the employee's primary duty includes performing office or non-manual work; and
- the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
Employees may only qualify for the highly compensated exemption if they meet all three of the above requirements.
Most notably for highly compensated employees, the DOL has implemented a relaxed version of the duties test applicable to other exemptions. By design, the "minimal duties" test for highly compensated employees is "significantly less stringent than the standard duties test." The FLSA regulations explain that "a high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed analysis of the employee's regular job duties." For example, an employee may qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard duties test for exemption as an executive. Whether an employee "customarily and regularly" performs certain duties means greater than occasional, but may be less than constant, and includes work norma lly and recurrently performed every workweek but does not include isolated or one-time tasks.
Additionally, the exemption for highly compensated employees applies only to those workers whose primary duties involve the performance of office or non-manual work. None of the following types of employees would qualify as highly compensated in order for the exemption to apply, regardless of how highly paid they might be: non-management production line workers, non-management employees in maintenance, construction, or similar occupations such as carpenters, electricians, mechanics, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers, and other employees who perform work involving repetitive operations with their hands, physical skill, and energy.
In order to qualify for this exemption, the employee must earn at least $134,004 in total annual compensation. Of that amount, the employee must be paid at least $913 per week ($47,476 annually) on a salary basis (the basic minimum salary requirement for white collar exemptions generally), as described in the second article. The remainder of the employee's at least $134,004 annual compensationÂ may be paid through incentive payments, commissions, non-discretionary bonuses, or other non-discretionary compensation. However, employer contributions such as board, lodging, and other facilities, or payments for medical insurance, life insurance, retirement plans, or other fringe benefits cannot be counted toward an employee's total annual compensation requirement under this exemption.
Additionally, unlike the standard white collar exemptions, the highly compensated exemption does not permit employers to credit non-discretionary bonuses for up to ten percent of the employee's weekly salary payment. The highly compensated exemption flatly requires a payment of at least $913 per week to the employee on a salary basis or the exemption simply will not apply. Non-discretionary bonuses can only be counted toward the remaining non-salary portion of the $134,004 total annual compensation amount and not toward any part of the minimum weekly salary amount.
To determine whether an employee earned at least $134,004 in total annual compensation to meet the threshold for the highly compensated exemption, an employer may use any consecutive 52-week period it chooses (for example: calendar year, fiscal year, anniversary of hire year). But if the employer does not identify the particular calculation year period in advance, the calendar year will apply.
There are special rules for prorating the annual compensation if an employee works only part of the year, and which allow payment of a single lump sum, make-up amount to satisfy the required annual amount at the end of the year and similar make-up payments to employees who terminate before the year ends. An employee who is not employed for a full year--either due to being hired after the beginning of the year or terminating employment prior to the end of the year--may still qualify as "highly compensated" if he or she earns a pro rata portion of the annual compensation amount required ($134,004) based on the number of weeks that the employee has been or will be employed.
Additionally, during the last pay period or within one month after the end of the 52-week period, the employer may make one payment (make-up pay) to the employee to bring the employee's total annual compensation to at least $134,004. For example, an employee may earn $100,000 in base salary (of at least $913 per week) and the employer may anticipate based upon past sales that the employee will also earn $34,004 in commissions. However, due to poor sales in the final quarter of the year, the employee actually only earns $10,000 in commissions. The employer may, during the last pay period or within one month after the end of the year, make a payment of at least $24,004 (make-up pay) to the employee. If the employer does not make the make-up payment then the employee is not exempt as a highly compensated employee and is entitled to overtime pay under the FLSA, unless the employee otherwise meets the standard tests for exemption under the regulations. Under the highly compensated employee provision of the FLSA regulations, any payment made to the employee in the month after the end of the year as make-up pay is only attributed to the employee's previous year's total annual compensation. Such make-up payment does not count toward the total annual compensation in the year in which it was paid.
Based on the automatic update provisions in the recently amended regulations (every three years), the salary threshold for the highly compensated exemption will increase to an estimated $147,524 in 2020. The DOL will post new salary levels (for highly compensated and standard white collar exemptions) 150 days in advance of their effective date, beginning August 1, 2019.