Highly Compensated Employee Exemption
Effective August 24, 2004, certain highly compensated employees may not be entitled to overtime compensation. A highly compensated employee is one who:
- Receives at least $455 per week paid on a salary or fee basis, and
- Receives at least $100,000 in total annual compensation.
“Highly compensated” employees must receive the same minimum base compensation of at least $455 per week paid on a salary or fee basis.
An employee who is highly compensated, whose primary duty includes office or non-manual work and who customarily and regularly performs any one or more of the exempt duties of an executive, administrative or professional employee identified in the regulations will qualify for exemption.
What is included in “total annual compensation” of at least $100,000?
Total annual compensation includes the payment of at least $455 per week on a salary or a fee basis and any commissions, non-discretionary bonuses and other non-discretionary compensation earned during the 52-week period. Thus, a highly compensated employee must receive at least the same base salary throughout the year as required for an exempt employee under the standard tests, and may receive additional income in the form of commissions and nondiscretionary bonuses to meet the $100,000 annual earnings threshold.
What is not included in “total annual compensation” of at least $100,000?
Total annual compensation does not include board, lodging or other facilities; payments made by the employer for medical insurance or life insurance; contributions to retirement plans; and the employer’s cost of other fringe benefits. Costs associated with providing such items or benefits may not be considered when determining if the employee has received the full required minimum compensation.
What year is used to determine whether the employee received at least $100,000 in total annual compensation?
An employer may use any consecutive 52-week period it chooses (e.g., calendar year, fiscal year, anniversary of hire year). If the employer does not identify the year in advance, the calendar year will apply.
What happens if the employee is not employed for the full year; for example he or she is hired two months into the year?
An employee who is not employed for a full year – either due to being hired after the beginning of the year or terminating employment prior to the end of the year – may still qualify as “highly compensated” if he or she earns a pro rata portion of the annual compensation amount required ($100,000) based on the number of weeks that the employee has been or will be employed.
What if the employee failed to earn $100,000 in the year, for example an anticipated commission payment was not made by the end of the year?
During the last pay period or within one month after the end of the 52-week period, the employer may make one payment (make-up pay) to the employee to bring the employee’s total annual compensation to at least $100,000. For example, an employee may earn $80,000 in base salary and the employer may anticipate based upon past sales that the employee also will earn $20,000 in commissions. However, due to poor sales in the final quarter of the year, the employee actually only earns $10,000 in commissions. The employer may, during the last pay period or within one month after the end of the year, make a payment of at least $10,000 (make-up pay) to the employee.
If the employer does not make the make-up payment, the employee is not exempt as a highly compensated employee and is entitled to overtime pay under the FLSA, unless he or she otherwise qualifies as an exempt employee under the FLSA.
Does make-up pay count towards the employee’s annual compensation in the year that it was paid?
Under the highly compensated employee provision of the Regulations, Part 541, any payment made to the employee in the month after the end of the year as make-up pay is only attributed to the employee’s previous year’s total annual compensation. Such a make-up payment does not count toward the total annual compensation in the year in which it was paid.