Highly Compensated Employee Exemption: The Other FLSA Exemption

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If you are like most employers in Northeast Ohio, as soon as the FLSA Final Rule was published back in May, your first step was to take a look at those employees on your payroll that make less than $47,476.

Embarking on this fact finding mission is a great place to start, but while employers are scanning their payroll records, there are two other dollar figures that are also worth a quick look to ensure full compliance with the Final Rule come December 1, 2016.

Although far less common than the Standard Salary Level change for Executive, Administrative, and Professional employees (EAP), employers will also need to assess the exempt status of any employees that fall under the “Highly Compensated Employee” (HCE) exemption.

How do I know if I have a “Highly Compensated Employee” (HCE)?

Currently, the dollar amount for the HCE is set at $100,000 annually, but under the new regulations this figure is increasing to $134,004 annually. However, as with the Standard Exemption, compensation alone does not determine the appropriate classification for an employee. The primary difference between the EAP exemption and the HCE exemption, apart from the salary cap, is the duties test itself.

For the HCE’s a “minimal duties” test is applied, which states—per the DOL’s own fact sheet on HCEs—that the minimum duties test is met if, “the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee”.

While you may have many employees that meet the salary threshold, you may not have any employees that need to be categorized as HCEs. Instead, based on the job duties assigned to most of your employees making over the HCE salary threshold, these employees probably meet more than enough of the duties test to qualify as exempt under the EAP exemption. Again, given the six-figure salary number, in these cases, these individuals are probably more appropriately classified as “Executive” and therefore already fall under the EAP exemption.

What does the new Final Rule change for my HCEs?

Changes to employee classification resulting from the new compensation assessment for HCEs are likely mostly administrative in nature, but should still be reviewed in order to remain compliant. The only major change is the increased figure of $134,004. Also, keep in mind that these employees will also need to meet the new Standard Exemption level of $913 weekly in base salary (this can be in the form of either a set salary or fee per the regulations).

The requirement to meet the Standard Exemption level is no different, but the dollar amount itself has increased to fit the Final Rule. The rest, a minimum of $86,528 to be exact, would then come in the form of commissions and other nondiscretionary compensation/bonuses (also the same rule as before).

In addition, the HCE threshold will automatically update every three years to a level that meets the 90th percentile of annual earnings of full-time salaried workers nationally.

So who does this really impact?

Per initial estimates the changes to the HCE exemption will impact about 36,000 employees (in contrast an estimated 4.6 million workers will be impacted by the change to the Standard Exemption Salary increase) Again, the key numbers to look at here are any employees that fall between $100,000 and $134,004 annually.

As an example, if an exempt employee is currently making $120,000 annually and upon review of their job duties, does NOT fully meet the duties test for EAP employees, (and the employer chose not to increase their compensation to meet the new $134,004 threshold or restructure the makeup of their total compensation package to get to this number—there are lots of options!) then this individual’s status would need to change to non-exempt.

Disclaimer: ERC does not provide qualified legal opinions. Information obtained through the site and services should not be relied upon or considered a substitute for legal advice. The information ERC provides is for general employer use and not necessarily for individual application. ERC recommends that you consult legal counsel for workplace matters.

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Northeast Ohio CEO’s Total Compensation Among Top In Nation

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According to the results of the 2012 National Executive Compensation Survey, CEOs here in Northeast Ohio receive the fourth highest total compensation package as compared to 20 other geographic regions reported in the survey. Coming in at $308,500, Northeast Ohio CEOs rounds out a strong showing for the Midwest, with the Columbus/Cincinnati breakout and Detroit Metro area in the first and third spots respectively in terms of total compensation for CEOs in their regions.

Base salary accounts for approximately 75% of the total compensation package in Northeast Ohio, a rate which suggests that area CEO’s receive a larger portion of their compensation in the form of variable pay than in the vast majority of other regions reported in the national sample. By focusing on variable pay, such as bonuses and other short term incentives, employers are able to more closely tie executive pay to performance. Establishing a clear connection between the value a CEO adds to the company and the compensation they receive in return is a critical step forward and a growing trend in executive pay, both for the sake of internal equity as well as to ensure compliance with external regulations.

Of the 47 executive positions survey across the national sample, increases to base pay remain stable- right at 3% for 2012. When calculated only including those organizations who projected increases, this number is a slightly higher figure, but one that continues to hover around the 4% mark for these executive type positions.

Additional Resources

2012 EAA National Executive Compensation Survey
The 2012 EAA National Executive Compensation Survey, published in May of 2012, reports compensation, benefits, and pay practice data provided by 2,235 participating organizations throughout the country and 108 organizations in Northeast Ohio for 11,948 executives in 47 positions. Breakouts of data are included across five variables: sales volume, organizational size, industry, organization type, and geographic location – including Northeast Ohio. Download the survey here.

2012 ERC Performance Management Practices Survey
This survey collects information from Northeast Ohio organizations on performance management practices in the workplace, specifically related to performance reviews, performance criteria, role of the supervisor in managing performance and other performance management issues. Click here to view the survey.

2012 Compensation Surveys - Open for Participation

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Our 2012 Executive, Salary, & Wage Surveys are open for participation. These surveys collect compensation data on over 400 executive, director-level, administrative, professional, managerial, and hourly positions.

2012 ERC Salary Survey

This survey collects annual salary information from Northeast Ohio organizations for 279 administrative, professional, supervisory, and managerial positions in accounting, finance, administration, customer service, sales, engineering, human resources, IT, maintenance, marketing, production, purchasing/distribution, safety, science, and research and development functions. Salary data will be reported by number of employees, industry type, annual revenue, county, for-profit or non-profit status, and years of experience (including new hires) when the results are published in May.

To participate, visit http://www.yourerc.com/survey-data/participate/ and register as a first time user.

2012 ERC Wage Survey

This survey collects hourly pay information from Northeast Ohio organizations for 109 production, maintenance, warehouse, distribution, and transportation positions. Wage data will be reported by number of employees, industry type, annual revenue, county, union affiliation, and years of experience (including new hires) when the results are published in May.

To participate, visit http://www.yourerc.com/survey-data/participate/ and register as a first time user.

2012 EAA National Executive Compensation Survey

This survey collects salary, bonus/incentive, benefits, and perquisite information for 47 executive and director-level positions in general, finance, HR, engineering, sales/marketing, international, and non-profit functions as well as Board of Directors pay. Data will be reported by industry, organizational size, location (including Northeast Ohio), and sales volume when the results are published in June.

To participate, contact surveys@yourerc.com for a survey link to participate.

Members that participate in these surveys will receive the results for no cost when they are published in May/June of 2012. Non-members that participate in these surveys will receive the results at a discount.