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The highly compensated have a ‘relaxed’ duties exemption
Updated Dec. 22, 2016
Update: Revised Overtime Rule Blocked
On Nov. 22, 2016, a federal district court judge in Texas placed an injunction, effective nationwide, on the Obama administration Department of Labor’s overtime rule revision, preventing it from taking effect on Dec 1, 2016 (see the
SHRM Online article
Federal Judge Halts Overtime Rule). Many now believe it is unlikely that the revised rule, which would have more than doubled the $23,660 exempt-status salary threshold in place since 2004, will go forward, given that the Trump administration is not expected to pursue the Obama administration's appeal. For now, the current rule’s salary threshold remains in place, and so this article has been revised to reflect the current rule.
SHRM Online will continue to monitor and report developments.
Misunderstandings abound regarding the interaction of the salary test and the duties test, as well as the exemption for highly paid employees, under the Department of Labor's Fair Labor Standards Act overtime regulations..
Under the overtime regulations in place since 2004, the annual salary threshold for exempt positions is $23,660 (or $455 per week). In addition, a duties test is used to determine whether employees earning more than the salary threshold must be classified as nonexempt from overtime, including the tests for meeting the executive, administrative and professional exemptions.
In addition, highly compensated employees (HCEs) who receive total annual compensation of at least $100,000, are exempt from the FLSA's overtime requirements if they meet a separate HCE duties test that has a lower bar than the test required for employees paid the standard salary level.
employees covered by the Fair Labor Standards Act must receive at least time and one-half their regular pay rate for all hours work over 40 in a workweek.
The following Q&As address some frequent misperceptions.
If an employee earns more than $23,660, is he or she automatically exempt?
No, although this is a common misconception about the overtime regulations. Meeting the salary threshold doesn't automatically make an employee exempt from overtime pay; employees must earn at least the standard salary threshold of $23,660 and fulfill one of the exemptions in the standard duties test.
"Earning a certain salary is only one of three requirements that must be met for an employee to be exempt from overtime under the so-called white collar exemptions," explained Sushma Tripathi, vice president for workforce planning and benefits consulting at benefit services firm ADP. These three requirements are the two prongs of the salary test plus the duties test:
"It is entirely possible that an employee could meet requirements of the salary basis and salary level tests and still fail to qualify as an exempt employee under the FLSA because the employee might not meet the requirements of the duties test," Tripathi said.
[SHRM members-only toolkit:
Determining Overtime Eligibility in the United States]
So, if they just meet the duties test, can they be classified as exempt?
No; once again, exempt employees must earn above the threshold of $23,660 and meet one of the exemptions in the standard duties test.
Generally, what duties satisfy each of the white-collar exemptions?
As an example, "An employee who holds the position of assistant manager of a large chain store may be one of several assistant managers assigned to various portions of the store," Tripathi explained. "She might direct the day-to-day activities of several employees but may have no discretion as to whether to hire or fire any employees. The same employee may spend more than half of her time stocking shelves, filing orders and [doing] other routine tasks that require little or no discretion and independent judgment. Even if she were to meet the requirements of the salary basis and salary threshold tests, she would not qualify for the executive, administrative or professional exemptions because she would not meet the duties test required for any of the white-collar exemptions."
But I heard if you earn enough, you don't have to satisfy the duties test?
Not quite. Employees who receive total annual compensation of at least $100,000—referred to as highly compensated employees (HCEs)—are exempt from the FLSA's overtime requirements if they meet a more "relaxed" HCE duties test than is required for employees paid the standard salary level. Under the HCE duties test:
"Nonmanagement production line workers and employees who perform work involving repetitive operations with their hands, physical skill and energy are not exempt under this section, no matter how highly paid," Tripathi said.
However, an example of an employee who could qualify for the relaxed HCE duties test might be a well-paid executive assistant to a high-ranking company official, she added.
"Even though such employees' primary duties might not always qualify for any of the white-collar exemptions standing alone, because they earn at least the amount required by the HCE exemption and they customarily engage in activities that include the exercise of discretion and independent judgment with respect to matters of significance, they could be exempt under the HCE exemption," Tripathi explained.
[SHRM members-only toolkit:
Calculating Overtime Pay in the United States]
What if an employee earns between the standard salary threshold and the HCE salary threshold?
If employees earns more than the standard salary threshold ($23,660) but less than the HCE salary threshold ($100,000), and if they do not meet the criteria of the standard duties test, then even if they pass the relaxed duties test for HCEs,
you would need to raise their compensation to the HCE threshold to retain their exempt status, Labor Department guidance clarified. Alternatively, you could reclassify the employee as nonexempt, which means that they would be entitled to receive overtime pay for all work hours beyond 40 in a workweek.
SHRM Online Article:
Ensure Compliance with Existing Overtime Rule,
SHRM Online Employment Law, December 2016
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