Eddy’s HR Mavericks Encyclopedia
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Executive Exemption
It’s critical that you understand the criteria for the executive employee exemption to ensure all employees are being fairly compensated and you are complying with the Fair Labor Standards Act.
What Is Executive Exemption?
FLSA exempt is a classification that falls under the federal Fair Labor Standards Act (FLSA). This act is the federal mandate for how to pay employees, which includes how to classify them as exempt or non-exempt from being entitled to overtime pay, among other things. It is simplest and most common for employees to be classified as non-exempt (meaning they do get overtime pay). To classify someone as exempt from FLSA, employers have to ensure all of the legal qualifications are met. Both non-executives and executives may qualify for exempt status. Let's focus here on the executive exemption. To qualify for executive exemption, employees must pass both the criteria of the duties test and meet the pay threshold. It’s important to remember that it is job responsibilities, not job titles, that are considered when determining whether an employee meets the requirements for the exemptions.
Why Is Executive Exemption Important?
Managers and leaders at organizations typically qualify for the executive exemption. It's important because this determines if the employee is legally exempt from overtime pay, paid sick leave, and other requirements.
- Financial practicalities. Without the executive exemption, employers could be required to pay company leaders for each hour per week worked. Not only is this impractical, but it could easily become a question of subjectivity. When executives spend a majority of their time ideating, delegating, and brainstorming on problem-solving, the organization could easily be taken advantage of and it would be impossible to determine actual hours worked.
- Responsibility. Executives are often responsible for performing managerial duties and using independent judgment to make critical business decisions for the organization.
Criteria for Executive Exemption
Employers must use this exemption cautiously and be sure not to broadly categorize individuals into this group. In addition to the criterion below, in order to qualify for the executive exemption an employee must be compensated on a salary or fee basis at a rate not less than $684 per week. Additionally, all three of the responsibilities (or duties) below must be met to qualify for the executive exemption. To see the government regulations, click here.
Have Management Responsibilities
The first duty is stated as Managing the enterprise or managing a customarily recognized department or subdivision of the enterprise. Is the employee leading a department or group, making independent leadership decisions on planning, tactics, actions, etc.?
Direct at Least Two Employees
The second duty: Must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent. Does the employee have two full-time employees (or a combination of full time and/or part-time employees) whom they manage on a daily basis? This includes tracking time and attendance, assigning duties and responsibilities, completing performance reviews, measuring success, delivering feedback and corrective action, etc.
Hire and Fire
Duty number three: 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. Does the employee have a significant say when it comes to decisions regarding hiring, firing, growth, added responsibilities, etc.? Even if other leaders are involved in the final decisions regarding these topics, if this employee is the management representative who works most closely with the employees and whose opinion carries the most weight when it comes to measuring employee performance, then they would meet this duty.
Tests to Determine Executive Exemption
To properly determine whether an employee qualifies for the executive exemption, business leaders or HR professionals should consider the following tests. Meeting the requirements below will help HR clearly categorize these employees as exempt or non-exempt.
Management of a Department
Management may include responsibilities including interviewing, training, directing work, tracking production and/or sales, and hiring. This could also include responsibilities related to employee relations, planning work, tracking and monitoring supplies and equipment, major purchases and planning, controlling budgets, etc. This could be rather ambiguous in nature, so when using this duties test, consider whether an employee has the ability to make autonomous decisions regarding the aforementioned responsibilities as well as whether their primary duties consist of management activities.
Leading Two or More
Leadership of two or more employees may consist of any grouping of full-time or part-time employees. Generally, an employee would meet this qualification if they have primary leadership responsibilities for at least 80 work hours per week of subordinate activities.
Particular Weight
To pass this duties test, an employee should have particular decision-making over subordinates' assigned duties, performance ratings, promotions, hiring, firing, etc. While also an ambiguous generalization, to be considered to pass this test, the frequency of influence must be taken into account. Employees whose opinions and observations are only occasionally considered to make these decisions will not pass the duties test. It is not mandatory that the executive-exempt employee has final decision making over these topics, but their opinion and observation must carry a certain amount of weight with other leaders.
Federal Decisions That Affect Executive Exemption
The Fair Labor Standards Act lays out the executive exemption and duties test that must be met to qualify an employee for the executive exemption. Additional court cases have established more detailed explanations of this regulation.
Gellhaus v Wal-Mart Stores, Inc.
The court ruled in favor of Wal-Mart, stating that because the assistant manager at a Wal-Mart store had primary duties that were managerial tasks (directing subordinates, managing inventory, hiring, firing, etc.), the position did meet the FLSA exempt requirements.
Mims v Starbucks
The court ruled that store managers met the FLSA duties test in spite of the fact they spent more than 50% of their work week performing non-exempt work. This is a critical case as it shows the importance of exercising discretion and independent judgment as a key factor in determining managerial duties.
Topics
Joy Banfield
Joy is passionate about matching People and Operations strategy in a way that causes a win-win-win relationship for everyone. In addition to her experience in HR and People Operations, Joy served as Chief of Staff to the CEO at TekBrands from 2019-2022, and during that time was involved on the sell-side of the Private Equity transaction process. Having the additional insight into business operations and strategy, she returned to her specialty of People Operations where she is passionate about partnering closely with entrepreneurial leaders to grow businesses from the ground up by truly operating in a people-first environment.
Frequently asked questions
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Eddy’s HR Mavericks Encyclopedia
Executive Exemption
It’s critical that you understand the criteria for the executive employee exemption to ensure all employees are being fairly compensated and you are complying with the Fair Labor Standards Act.
What Is Executive Exemption?
FLSA exempt is a classification that falls under the federal Fair Labor Standards Act (FLSA). This act is the federal mandate for how to pay employees, which includes how to classify them as exempt or non-exempt from being entitled to overtime pay, among other things. It is simplest and most common for employees to be classified as non-exempt (meaning they do get overtime pay). To classify someone as exempt from FLSA, employers have to ensure all of the legal qualifications are met. Both non-executives and executives may qualify for exempt status. Let's focus here on the executive exemption. To qualify for executive exemption, employees must pass both the criteria of the duties test and meet the pay threshold. It’s important to remember that it is job responsibilities, not job titles, that are considered when determining whether an employee meets the requirements for the exemptions.
Why Is Executive Exemption Important?
Managers and leaders at organizations typically qualify for the executive exemption. It's important because this determines if the employee is legally exempt from overtime pay, paid sick leave, and other requirements.
- Financial practicalities. Without the executive exemption, employers could be required to pay company leaders for each hour per week worked. Not only is this impractical, but it could easily become a question of subjectivity. When executives spend a majority of their time ideating, delegating, and brainstorming on problem-solving, the organization could easily be taken advantage of and it would be impossible to determine actual hours worked.
- Responsibility. Executives are often responsible for performing managerial duties and using independent judgment to make critical business decisions for the organization.
Criteria for Executive Exemption
Employers must use this exemption cautiously and be sure not to broadly categorize individuals into this group. In addition to the criterion below, in order to qualify for the executive exemption an employee must be compensated on a salary or fee basis at a rate not less than $684 per week. Additionally, all three of the responsibilities (or duties) below must be met to qualify for the executive exemption. To see the government regulations, click here.
Have Management Responsibilities
The first duty is stated as Managing the enterprise or managing a customarily recognized department or subdivision of the enterprise. Is the employee leading a department or group, making independent leadership decisions on planning, tactics, actions, etc.?
Direct at Least Two Employees
The second duty: Must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent. Does the employee have two full-time employees (or a combination of full time and/or part-time employees) whom they manage on a daily basis? This includes tracking time and attendance, assigning duties and responsibilities, completing performance reviews, measuring success, delivering feedback and corrective action, etc.
Hire and Fire
Duty number three: 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. Does the employee have a significant say when it comes to decisions regarding hiring, firing, growth, added responsibilities, etc.? Even if other leaders are involved in the final decisions regarding these topics, if this employee is the management representative who works most closely with the employees and whose opinion carries the most weight when it comes to measuring employee performance, then they would meet this duty.
Tests to Determine Executive Exemption
To properly determine whether an employee qualifies for the executive exemption, business leaders or HR professionals should consider the following tests. Meeting the requirements below will help HR clearly categorize these employees as exempt or non-exempt.
Management of a Department
Management may include responsibilities including interviewing, training, directing work, tracking production and/or sales, and hiring. This could also include responsibilities related to employee relations, planning work, tracking and monitoring supplies and equipment, major purchases and planning, controlling budgets, etc. This could be rather ambiguous in nature, so when using this duties test, consider whether an employee has the ability to make autonomous decisions regarding the aforementioned responsibilities as well as whether their primary duties consist of management activities.
Leading Two or More
Leadership of two or more employees may consist of any grouping of full-time or part-time employees. Generally, an employee would meet this qualification if they have primary leadership responsibilities for at least 80 work hours per week of subordinate activities.
Particular Weight
To pass this duties test, an employee should have particular decision-making over subordinates' assigned duties, performance ratings, promotions, hiring, firing, etc. While also an ambiguous generalization, to be considered to pass this test, the frequency of influence must be taken into account. Employees whose opinions and observations are only occasionally considered to make these decisions will not pass the duties test. It is not mandatory that the executive-exempt employee has final decision making over these topics, but their opinion and observation must carry a certain amount of weight with other leaders.
Federal Decisions That Affect Executive Exemption
The Fair Labor Standards Act lays out the executive exemption and duties test that must be met to qualify an employee for the executive exemption. Additional court cases have established more detailed explanations of this regulation.
Gellhaus v Wal-Mart Stores, Inc.
The court ruled in favor of Wal-Mart, stating that because the assistant manager at a Wal-Mart store had primary duties that were managerial tasks (directing subordinates, managing inventory, hiring, firing, etc.), the position did meet the FLSA exempt requirements.
Mims v Starbucks
The court ruled that store managers met the FLSA duties test in spite of the fact they spent more than 50% of their work week performing non-exempt work. This is a critical case as it shows the importance of exercising discretion and independent judgment as a key factor in determining managerial duties.
Topics
Joy Banfield
Joy is passionate about matching People and Operations strategy in a way that causes a win-win-win relationship for everyone. In addition to her experience in HR and People Operations, Joy served as Chief of Staff to the CEO at TekBrands from 2019-2022, and during that time was involved on the sell-side of the Private Equity transaction process. Having the additional insight into business operations and strategy, she returned to her specialty of People Operations where she is passionate about partnering closely with entrepreneurial leaders to grow businesses from the ground up by truly operating in a people-first environment.
Frequently asked questions
Other Related Terms
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