The Forgotten Exemption: The Highly Compensated Employee

How forgotten is the highly compensated employee exemption? So much so that I even forgot I made a video discussing it a few weeks ago to post on the blog.

What it comes down to is this- the Fair Labor Standards Act requires that companies pay employees at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.  However, some employees are exempt from these requirements, including if they serve in certain capacities, including as a bona fide executive, administrative or professional employee, or as a highly compensated employee.

It seems like few people discuss the highly compensated employee exemption when analyzing classification issues.  Perhaps the exemption is one of the forgotten ones because it requires a careful reading of the regulations, and not just the statute; or, maybe it simply is not as common for employees making six figures to contest their exempt status. Regardless of the reason, it is one of the exemptions that I brush up on whenever I am analyzing whether a highly paid employee is exempt under the FLSA.

Making Sense of the Cents…

The highly compensated employee exemption applies to employees who have a total annual compensation of at least $100,000 and who “customarily and regularly” perform one of the exempt duties of an administrative, executive or professional employee.  The total annual compensation must include at least $455 per week paid on a salary or fee basis, and may also include commission payments, nondiscretionary bonuses, and other nondiscretionary compensation.  It does not include board, lodging, or other payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other fringe benefits.

They Must Be Making that Much for a Reason…

If an employee earns at least $100,000 of annual compensation, the court then looks to whether the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.  Work performed “customarily and regularly” includes work normally and recurrently performed each workweek, as opposed to isolated or one-time tasks.  The duties requirement is relaxed because a high level of compensation is a strong indicator that an employee is exempt. Thus, the highly compensated employee does not need to satisfy each prong of the predicate exemption (e.g., a highly compensated administrative employee who customarily and regularly performed at least one administrative duty does not need to exercise discretion or independent judgment).

I discussed this exemption in the video below. The important thing to keep in mind with the highly compensated employee exemption is that it is a complex exemption that requires a detailed legal analysis before a determination as to exemption status is made.

About Ashley Kasarjian

Attorney at Snell & Wilmer L.L.P., and publisher of the independent blog, Employment and the Law.
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