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UPDATED: Apr 13, 2012
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Executive exemption is an employee qualification, used in both state and federal labor laws, which deems an employee ineligible for overtime pay. To qualify for executive exemption, the employee must first meet certain wage and salary requirements. Under both state and federal law, the employee must always be paid on a salary, not hourly basis. Federal executive exemption rules under the Fair Labor Standards Act place minimum salary requirements at $455 per week. Many states require higher minimum salary levels to be met in order to qualify for executive exemption.
However, minimum salary requirements are only the first step in qualifying an employee under executive exemption. The next step requires that the duties of an employee’s job are executive, that is, the employee’s job must primarily entail managing the entire, or a significant part of the company; the employee must supervise employees a significant portion of the time; and the employee must be given a high level of discretion, which includes indirect or direct hiring/firing and demotion/promotion powers.
Further, the employee’s job title will have no significance for executive exemption if the employee is not able to perform the specific duties which qualify him for executive exemption. In other words, if an employer gives the bellhop the job title of CEO, and the bellhop is still only responsible for carrying hotel customers’ baggage, the job title alone will not qualify the bellhop for executive exemption. Therefore, the employer is still responsible for paying the bellhop overtime wages for any overtime hours worked.
Management as the Primary Job
To qualify under the executive exemption, the employee must manage either the company as a whole, or a significant department or subdivision of the company. Some states define manage as being in charge of a particular unit or branch within the company. This criterion is considered within the context of the company itself, and is usually applied to a fixed department. For instance, a project manager in a large corporation would not likely qualify under the executive exemption, as a project manager generally does not manage a fixed department within an enterprise. Further, while a project manager may participate in the management of the enterprise, he likely is not in charge of managing the enterprise.
Federal executive exemption laws require that the management aspect of the employee’s job must be the primary duties of the employee. Some state laws designate this by a percentage, i.e., to qualify under the executive exemption, the employee must be managing at least 50% of the time. However, this requirement is also considered within the context of the particular type and size of company as well. For instance, a manager in a restaurant may be running food and cleaning up tables, but remain in charge the entire time, and therefore may still qualify for executive exemption. Other states have more stringent requirements, and the employee will not qualify under executive exemption if he spends more than half of his time performing the same work as the lower-level employees.
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Supervision of Employees
In addition to management of the enterprise, an employee must also be in charge of supervising two or more full-time employees, or the equivalent thereof, to qualify under executive exemption. Federal law defines the equivalent thereof to mean two-part time employees equals one full-time employee. In other words, an employee who supervises four part-time employees will meet this criterion.
This criterion is also taken in context with the management requirement. For example, it is not enough for the exempt employee to only oversee other employees, there must also be a proactive element to the supervision. This could mean scheduling, training, setting rates of pay, designating jobs, or planning an employee’s work.
Further, it is not enough that the employee supervise other employees on occasion: supervision of employees must be a customary, regular or significant part of the employee’s job. Some states define this in percentage terms as well, generally requiring the employee to supervise two or more full time employees at least 50% of the time.
Level of Discretion
Finally, to meet the executive exemption qualification, the employee must be able to use his own informed decision-making on the job, and be able to have some influence over hiring/firing, and demotion/promotion. While this criterion does not require that the exempt employee be able to directly hire or fire another employee, this at least requires that the exempt employee have an influence on employment decisions made within the company or department. This level of discretion must usually apply to at least the employees that the exempt employee is in charge of supervising. Moreover, the level of influence must have significant weight, i.e., the exempt employee’ suggestions must be regularly relied upon, and must be more than the occasional suggestion.