Executive Exemption: Who Qualifies?
President Obama made the news recently with a proposal to change the rules on who must be paid overtime. What rule is under consideration here, and what are the implications for employers?
 |
This entire question boils down to the details of who can be classified as exempt from required overtime pay under the Fair Labor Standards Act (FLSA) and how high their salary must be in order to qualify for the exemption. This exemption can come in many forms. The Department of Labor (DOL) tell us “Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees.”[I]
Let’s take a look at the executive exemption in particular.
How to Qualify for the Executive Exemption
For each of the exemptions noted above (except the outside sales exemption), there is a salary requirement and a job duties requirement. (The salary requirement is not a component of the outside sales exemption.)
The salary requirement for each is that the individual must be paid at least $455 per week on a salary basis. This equals a minimum annual salary of $23,660.
According to the DOL, the requirements to meet the executive exemption include the following:
- “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.”[ii]
An individual must meet all of these specific requirements as well as the salary requirement in order to be classified as an exempt employee under the executive exemption. If all of these are met, then his or her organization is not obligated to provide overtime pay for working more than 40 hours in a workweek.
Remember, every facet of the exemption must apply. The individual cannot merely be given a job title with the word “executive” or “manager” in it and automatically qualify.
Executive Order Possibilities
We mentioned at the start of this article that the Obama administration is considering changing these rules, particularly those regarding salary level. A salary of $455 per week ($23,660 yearly) puts an employee who is the sole breadwinner for a family of four below the poverty line—and yet he or she doesn’t have the protection of overtime pay under the FLSA. The minimum salary levels required for exempt status have not been updated in more than a decade—imagine the effects of inflation in that time.
The Obama administration has the authority to change the required salary level through an executive order mandating the DOL to change the rules. There is a lot of conjecture as to what the executive order would say, not least of which is the question of how high to raise the bar. It is speculated that the administration is aiming for a change requiring an annual salary of at least $42,000 before an employee could be exempt from overtime, but the details are not actually known yet.
Some who support this action are urging the president to raise the minimum salary to qualify for the exemption from $23,660 to over $50,000. Their biggest fear is that it won’t be raised enough—leaving millions of employees out when it comes to receiving overtime pay. Opponents of such a measure fear that raising this threshold at all would be a detriment to businesses that rely on employees working extra hours without extra pay.
It remains to be seen what the Obama administration will decide, but any action will certainly affect millions of employees, no matter what the outcome.
This article does not constitute legal advice. Always consult legal counsel with specific questions.
[i] http://www.dol.gov/whd/overtime/fs17b_executive.pdf
[ii] http://www.dol.gov/whd/regs/compliance/fairpay/fs17a_overview.htm
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.