Step by Step Guidance
Authors: XpertHR Editorial Team, and Allen S. Kinzer, Vorys, Sater, Seymour and Pease LLP
When most people think of an “executive,” they probably think of somebody like a CEO, a president, or a regional manager of a large company. But within the context of the Fair Labor Standards Act (FLSA), several kinds of employees can be considered an executive as long as they meet certain criteria. For example, employees like convenience store managers, chefs and construction superintendents who might not otherwise be exempt can qualify as executives if they manage a business or a department and direct the work of at least two employees, among other things. Follow these steps to determine whether an employee qualifies for the executive exemption.
Step 1: Confirm That the Employee Performs Management Tasks
What counts as management under the FLSA? It includes duties such as interviewing, selecting or training employees; setting and adjusting employees’ rates of pay and hours; and directing the work of other employees. An employee must perform management tasks in order to qualify for the executive exemption.
Step 2: Ensure That Management Is the Employee’s Primary Duty
Management must be more than just a part of an employee’s duties; it must be the employee’s primary duty – that is, the “principal, main, major or most important duty that the employee performs.” As a general rule, an employee who spends at least half of his or her time performing management duties will fulfill this requirement. However, an employee can spend less time performing management duties as long as:
The employee is relatively free from direct supervision;
The employee is paid a higher wage than other employees who perform the same type of non-management work; and
The employee’s non-management work is not as important as his or her management duties.
Step 3: Check That the Employee Manages the Business, a Department or a Subdivision
To qualify as an executive, an employee cannot simply manage a temporary team or a task force within a company. Instead, an exempt executive must manage the employer’s business or a customarily recognized department or subdivision of the business. Divisions or subdivisions must be permanent and have a continuing function within the company. However, a department or subdivision need not be contained physically within the business location and may move locations.
Step 4: Be Sure That the Employee Regularly Directs the Work of at Least Two Full-Time Employees
An exempt executive must direct at least 80 hours of subordinates’ work per week. This can be the work of two full-time, 40-hours-per-week employees or their equivalent – for example, one full-time employee and two half-time employees or four half-time employees. He or she must do this “customarily and regularly,” meaning more than occasional but less than constant.
Step 5: Confirm That the Employee Has the Authority to Hire and Fire (or at Least Strongly Influence Hiring and Firing Decisions)
An executive employee must possess hiring and firing authority or have the power to affect the hiring or firing because his or her suggestions are given particular weight. Factors indicating that the employee’s suggestions or recommendations have particular weight include whether making such suggestions is part of the employee’s job, the frequency with which such suggestions are made, and the frequency with which the employee’s suggestions are relied upon.
Step 6: Check That the Employee Is Paid on a Salary Basis
To qualify for the executive exemption, an employee must be paid on a “salary basis.” That means that the employee must regularly be paid a set amount of compensation, of at least $455 per week, which does not vary based on the quality or quantity of the employee’s work. There are a handful of deductions from pay that are allowed, but most deductions (such as docking a salaried employee’s pay for substandard work or a partial day’s absence) will violate the salary basis requirement and thus jeopardize the employee’s exempt status.
NOTE: Effective January 1, 2020, a final overtime rule from the US Department of Labor (DOL) will increase the minimum salary for executive employees from $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). The rule also will allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level test, as long as they are paid annually or more frequently.
Step 7: Consult an Attorney or DOL If the Employee Does Not Clearly Satisfy All the Requirements
If the employee under consideration does not clearly meet all the aforementioned requirements, it is prudent to consult an attorney or the US Department of Labor before classifying him or her as an exempt executive. If in doubt, employers should err on the side of caution by classifying the employee as nonexempt. Employers may also wish to determine if the employee qualifies for one of the other FLSA exemptions.
Step 8: Fulfill Recordkeeping Requirements and Memorialize the Classification
In addition to most of the recordkeeping requirements applicable to nonexempt employees, employers of employees classified as executives must also maintain and preserve records about the basis on which wages are paid. These records must be detailed enough to allow the employer to calculate the employee’s total remuneration each pay period, including fringe benefits and prerequisites. Employers also should document all of the factors that support their classification decisions, preferably in a file dedicated to the employee in question. For instance, an organizational chart can show that the employee regularly directs the work of two or more employees. Having the employee sign off on these documents to confirm the job duties can help support the classification decision as well. Nothing is foolproof, but these records can help an employer’s case in the event of a lawsuit or a DOL investigation.