Exemptions: How Do I Know If the Executive Exemption Applies?

Can you shed some light on how to determine if my employees fall within the executive exemption? I don’t want to get hit later with unpaid overtime claims. Thanks! — J.S., Sacramento

The federal Fair Labor Standards Act and the California Labor Code require employers to pay employees premium wages for overtime, unless the employees are exempt. Employers are responsible for determining whether an exemption applies; in doing so, they should evaluate their employees on an individual basis. As noted in the question, one exemption is the executive exemption. Employers must follow a two-step process to determine whether an employee falls within this exemption: To qualify for the executive exemption, the employee must satisfy both the salary level test and the duties test.

Salary Level

An employee must meet a minimum salary level to qualify for the executive exemption. The salary must be a predetermined amount which isn’t dependent on the quality or quantity of the work he or she performs. It also doesn’t depend on the hours worked—an exempt employee is paid for completing the work regardless of how long it takes.

California and federal law differ regarding the minimum salary an employee must earn to fall within this exemption. To satisfy the California salary level test, the employee must earn $2,600 a month or $31,200 a year.¹ This amount is based on the current state minimum wage, which is $7.50 per hour. Note that when the state minimum wage increases to $8.00 on Jan. 1, 2008, employees must earn a minimum salary of $2,773.33 per month or $33,280 per year to be classified as an exempt executive.

 Paying Overtime: 10 Key Exemption Concepts

Only one thing really matters in the determination as to whether or not an employee is exempt: The duties the employee performs. Learn how to avoid costly, preventable mistakes with our free White Paper, Paying Overtime: 10 Key Exemption Concepts.

Under federal law, an employee would have to earn $455 a week or $23,660 a year to fall within the executive exemption. Because the minimum California amount is higher than the federal amount, you have to pay the higher California salary for the employee to be exempt.

Duties

The executive exemption isn’t only tied to the amount an employee earns. To qualify for this exemption in California, an employee must also pass all four prongs of the duties test. The employee must:

1. Manage the entire business in which he or she is employed or a customarily recognized department or subdivision of the business.
2. Customarily and regularly direct the work of two or more full-time employees. The employee may satisfy this element by supervising the equivalent of two full-time employees, such as four part-time employees who work a total of 80 hours per week.
3. Customarily and regularly exercise discretion and independent judgment. To satisfy this element, the employee must be able to make independent choices (without receiving immediate direction) about significant matters. Note that an employee who merely chooses which company policy to follow or remembers which set procedures to use isn’t exercising discretion and independent judgment.
4. Have the authority to hire or fire other employees. The employee doesn’t have to have the final word on hiring or firing. An employee may also qualify if his or her suggestions and recommendations as to hiring, firing, advancement, promotion, or any other status change of other employees is given particular weight.

To qualify as exempt in California, an employee must be “primarily engaged” in performing exempt duties—the employee must spend more than 50 percent of his or her time on these duties.

¹ Under California law, to calculate the minimum monthly salary, multiply the minimum wage by two, multiply that amount by 2,080, and divide by 12.1 Under California law, to calculate the minimum monthly salary, multiply the minimum wage by two, multiply that amount by 2,080, and divide by 12.