Defining Salary-Exempt Employees, Part 1: Executives

Ari Rosenstein

In 2014, President Obama instructed the Department of Labor and the Secretary of Labor to rewrite the Fair Labor Standards Act (FLSA) regulations, specifically addressing and updating the definition of salary-exempt employee status.  The DOL has only updated the FLSA regulations twice in the last 40 years, most recently in 2004. In that year, it was the Bush administration which overhauled the “white-collar” overtime exemptions and set the minimum threshold to be considered salary-exempt at $ 455 per week, or $ 23,660 per year. While the new regulations have not yet been released, it is rumored that the administration is pushing for a $ 40,000 minimum salary.

Who Qualifies as Salary-Exempt?

There are several types of exemptions and each has their own test to determine whether or not they qualify for a salary-exempt position:

• Executives
  
• Administrative
  
• Professional
  
• Highly-Skilled
  
• Outside Salespersons

In this article, we will review the Executive exemption.

The Executive Exemption Test

The executive exemption usually covers managerial employees. Supervisors often do NOT meet the executive exemption test and may be classified as non-exempt. Below are the test qualifications for an Executive exemption. ALL of the test specifics must be met in order for the position to qualify.

1. Must have the “primary duty” of management of the enterprise in which he/she is employed. “Primarily engaged in” or “primary duties” means that more than one-half of the individual’s work time is spent engaged in exempt work. That means an exempt individual must spend more than 50% of their time on exempt duties, work that is directly and closely related to exempt work, and work that is properly viewed as a means for carrying out exempt functions.  Later in this article we will list several examples of these types of duties.

2. Must customarily and regularly direct the work of two or more other employees (two full-time or their equivalent). When defining two or more full-time employees, the language “or the equivalent” would refer to an individual directing the work of 1 full-time and two part-time employees which would constitute the equivalent of two full-time. Supervision of non-employees does not meet the standard.

3. Must have the authority to hire or fire other employees or have “particular weight” given to suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees. Particular Weight is defined as having great influence over or impact in the final decision regarding the tangible employment of an individual. 

4. Customarily and regularly exercises discretionary and independent judgment. Discretionary and independent judgment is making decisions on matters of importance that drive the company business. This is different than making decisions that might cost the company money or can lead to serious loss, such as poor techniques, poor decisions, failure to follow instructions, violation of the law, etc.

5. Earns a monthly income at least two times the state minimum wage for fulltime (40 hours per week) employee. 

6. Primarily engaged in duties that meet items 1-4 previously listed.

Below are more example of executive functions that would qualify for exempt status:

• Interviewing, selecting, and training employees;
  
• Setting, recommending or adjusting employees’ rates of pay and hours of work;
  
• Directing employees’ work;
  
• Maintaining employees’ production or sales records for use in supervision or control;
  
• Appraising employees’ productivity and efficiency;
  
• Deciding on tools, merchandise, materials and supplies;
  
• Handling employee complaints and grievances;
  
• Disciplining employees when necessary;
  
• Planning and controlling the budget;
  
• Controlling flow of products, services etc.;
  
• Monitoring or implementing legal compliance issues;
  
• Ensuring safety of property and employees;

When reviewing the various activities that would fall under the executive exemption, the law states that at least 50% of the position’s activities, duties and functions are engaged in behavior as defined above.   An executive may delegate some of these duties to subordinate supervisors, such as disciplinary action, or providing input on performance appraisals, but that does NOT make that supervisor exempt because it would not be a part of their primary duties and tasks (at least not 50%).

This brings up a final important point.  If the delegation of exempt duties to a non-exempt individual becomes a part of the non-exempt’s ongoing duties, HR must be notified and their job description needs to be updated.  Changing the definition of tasks and duties might change the exempt/non-exempt status of the position.

In future articles we will review exemption status of other salaried positions.

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