A "Highly Compensated Employee" under the Fair Labor Standards Act ("FLSA") is an individual in the US who:
- receives at least $684 per week paid on a salary or fee basis, and at least $107,432 in total annual compensation;
- is engaged primarily in office or non-manual work; and
- customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
If an employee is considered a Highly Compensated Employee under the Department of Labor rules, then he or she is exempt from the requirements for minimum wage and overtime pay under the FLSA.
The Highly Compensated Employee exemption covers employees that, in the opinion of the DOL, make enough money to be exempted from FLSA protection. The other exemptions, such as the executive, administrative, professional, outside sales and computer employee exemptions, rely more on a qualitative analysis of an employee’s duties than their overall compensation.
Executive, Administrative or Professional Duties
The exempt duties or responsibilities of executive, administrative or professional employees may be found in our article Exempt vs Non-exempt employees. Highly Compensated Employees need to perform at least one of those duties.
Salary or Fee Basis
Salary basis. A salary basis means an employee regularly receives fixed compensation each pay period on a weekly or less frequent basis. Subject to the exceptions listed below, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked, but do not need to be paid for any workweek in which they perform no work. To be considered paid on a salary basis, the employer can’t make deductions from the salary because of operating costs or because work is not available at a time when the employee is ready and able to work.
Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10 percent of the standard salary level. Additionally, if after the 52-week period, the employer has not met its financial obligation, the employer can make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year it was paid.
Fee basis. A fee basis is an agreed amount for a single job, regardless of the time required for its completion. A fee payment is generally paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made. To determine whether a fee payment meets the minimum salary level requirement, divide the payment by the number of hours worked and see if the employee would have been paid at least $684 per week if the employee had worked 40 hours per week.
The IRS definition of Highly Compensated Employee
It’s worth noting that the IRS has a different definition of a Highly Compensated Employee, which is used to determine how much an employee may contribute to 401(k) retirement savings plans. The IRS’ rules ensure that businesses don’t favor highly compensated employees with tax benefits. The DOL is trying to allow businesses relief from overtime rules for highly compensated employees.
This article speaks to the DOL’s rules. If you’d like more information on the FLSA, see our article What is the Fair Labor Standards Act?. For more information on the proposed rules for bonuses for non-exempt employees, see our article Bonuses for Non-exempt Employees. For more information on the DOL’s rules from the DOL, see here.
This article is not to be considered legal advice and is not a substitute for advice from qualified legal counsel. Material aspects of the discussions in this article may change at any time and without further notice. This article does not address state laws, and the circumstances in your state may differ materially from the discussion here.