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July: Question of the Month

Question: In regard to the new FLSA regulations, for those employees we currently classify as exempt under the highly compensated employee (HCE) exemption, are we required to raise their salary to $134,004 effective December 1, 2016? 

Answer: Yes, if you intend to classify those employees as exempt under the HCE exemption, you will need to increase their salaries. Under the new Fair Labor Standards Act (FLSA) regulations, which go into effect on December 1, 2016, an HCE may be classified as exempt if:

  • The employee earns total annual compensation of $134,004 or more, which includes at least $913 per week paid on a salary basis;
  • The employee’s primary duty includes performing office or non-manual work; and
  • The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

The new regulations set the total annual compensation requirement for HCEs to the annual equivalent of the 90th percentile of full-time salaried workers nationally (currently $134,004). Note that this amount is set to automatically update every three years, beginning on January 1, 2020.

The required total annual compensation of $134,004 or more may consist of commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period. 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.
  • 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.

There are special rules for prorating the annual compensation if employees work only part of the year, and which allow payment of a single lump-sum, make-up amount to satisfy the required annual amount at the end of the year and similar make-up payments to employees who terminate before the year ends.