Part 1 – Executive Exemption

 The Fair Labor Standards Act (FLSA) requires employers to pay employees minimum wage for all hours worked and overtime at a rate of time and one-half the regular rate of pay when an employee works more than 40 hours in a workweek. However, there are certain exemptions from both the minimum wage and overtime requirements of the FLSA.  These five “white collar” exemptions (executive, administrative, professional, computer professional and outside sales) are defined by the Department of Labor (DOL) in the Code of Federal Regulations Part 541.  This article is the first in a series that will discuss the highlights of each exemption.

According to the DOL Fact Sheet regarding the Executive Exemption, all four of the following tests must be met:

  • The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
  • The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
  • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
  • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Providing employees a guaranteed weekly salary of $455 per week is fairly straight-forward. However, there are nuances to being paid on a “salaried basis”, including limitations on an organization’s ability to dock an exempt employee’s pay, which we’ll discuss in a future article.

The primary duty of “management” generally refers to activities which includes but aren’t limited to hiring and training employees, setting work schedules, directing work, planning work, determining the types of materials, supplies, machinery, equipment or tools to be used, controlling the flow and distribution of materials, disciplining employees, budgeting, etc.

Performing non-exempt work doesn’t automatically disqualify an individual as exempt if the other requirements of the executive exemption are met.  According to the FLSA regulations, “generally, exempt executives make the decision regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their management while performing the nonexempt work.”

Further, the Department of Labor Field Operations Handbook states: “…time alone is not the sole test. The regulations do not require that employees spend more than 50 percent of their time performing exempt work to qualify for exemption. Thus, while employees who spend more than half their time performing exempt work will generally satisfy the primary duty requirement, employees who do not spend more than half their time performing exempt duties may still meet the primary duty requirement if other factors support that conclusion. Factors to consider include, but are not limited to, the relative importance of the exempt duties compared with other duties, the amount of time spent performing exempt work, the employee’s relative freedom from direct supervision, and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. For example, managers in retail establishments who perform exempt executive duties such as supervising and directing the work of other employees, ordering merchandise, managing the budget and authorizing payment of bills may have management as their primary duty even if they spend more than 50 percent of the time performing nonexempt work such as running the cash register. However, if a particular manager is closely supervised and earns little more than the nonexempt employees such a manager generally would not satisfy the primary duty requirement.”

The requirement that an individual supervise two full-time or full-time equivalent employees refers to employees of the employer under the FLSA.  The DOL Field Operations Handbook states: “only other employees of the employer may be considered when determining if the two full-time employee equivalency is met; supervision of volunteers, employees of independent contractors, or any other ‘non-employees’ (trainees, interns) in relation to the employer are not considered for purposes of this test.”

Additionally, full-time is considered by the DOL to be 40 hours per week.  This requirement is met when the executive customarily and regularly supervises 80 or more hours of subordinates’ time each week.

The final requirement to meet the executive exemption revolves around the individual’s authority to hire or fire other employees or whose suggestions and recommendations regarding hiring, firing, advancement, promotion or other change of status of other employees are given particular weight.  The factors determining if an employee’s recommendations are given “particular weight” include the frequency with which the recommendations are made, whether it’s part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are requested and relied upon.

More information about the FLSA’s executive exemption can be found in the DOL’s Fact Sheet at http://www.dol.gov/whd/regs/compliance/fairpay/fs17b_executive.pdf.

Contributed by Christine Crews, SPHR, is Vice President of Human Resource Services for the Employers Association Forum, Inc. (EAF). EAF is a non-profit corporate membership-based association dedicated to serving the business and HR communities with world-class HR tools, hotlines & legal compliance, news & trends, surveys & economic data, benefits & insurance, risk management, training & consulting, and leadership & organizational development. HCCMO members receive discounted rates on all EAF classroom training at EAF’s training center in Longwood.  Click here for currently scheduled programs: http://www.eafinc.org/online_store/training/HCCMO/training_programs.pdf

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