Think Twice Before Relying on the Highly Compensated Exemption

When the Fair Labor Standards Act (“FLSA”) regulations were amended in 2004, one of the “victories” for employers was the newly created highly compensated worker exemption. Under this exemption, an employee whose duties are not sufficient to make him/her ineligible for overtime pay under one of the traditional white collar exemptions (executive, administrative or professional) can still be exempt if he/she is a “highly compensated” worker.

The requirements for the “highly compensated” exemption are:

                 “1.        The employee earns total annual compensation of $100,000 or more, which includes at least $455.00 per week on a salary basis;

2.              The employee’s primary duty includes performing office or non-manual work; and

3.              The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.”  

In short, even if an employee’s primary duties do not qualify him or her for one of the white collars exemptions from the FLSA’s overtime requirements, the employee can still be exempt (and ineligible for overtime pay), as long as he or she earns  over $100,000.00 per year and regularly performs any job function which is an exempt duty performed by an executive, professional or administrative employee.

The problem is that many states have failed to fully adopt this exemption. For example, Hawaii does not recognize the highly compensated employee exemption. Rather it has its own version, which excludes employees that receive a guaranteed weekly minimum salary of $2,000.00. The effect of this is that, while an employee who receives a significant amount of his or her compensation in the form of commissions or bonuses may be exempt under the FLSA, the same employee may be entitled to overtime under Hawaii’s law if he or she does not have a weekly salary of at least $2,000.00.

Other states, such as Pennsylvania, refuse to recognize the highly paid exemption altogether. This poses continuing problems for employers that innocently rely on this exemption and do not check to see if it is valid under state law. The overtime claim of even one employee who is making six figures a year can be staggering. Make sure to check your local laws before assuming that your highly compensated employees are not entitled to overtime.