This blog post provides general information concerning the Fair Labor Standards Act (FLSA) and California overtime exemption for Executive Employees.
California law and the FLSA require that most employees in the United States be paid at least minimum wage for all hours worked and overtime compensation at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek - or 8 hours a day or 40 hours a week in California.
However, the FLSA and California law both provide an exemption from both minimum wage and overtime pay for employees employed as bona fide exempt executive employees. To qualify for exemption, employees must meet specific job duties tests and be paid on a salary basis. Job title does not determine exempt status. For an exemption to apply, an employee’s specific job duties and salary must meet all the requirements.
To qualify as exempt, executive employees must satisfy the exemption criteria under state law and federal regulations to be treated as exempt employees.
An employee is an “executive” if they make a weekly salary of $1,240 or greater (for 2023) - twice California's minimum wage, and they perform certain managerial-level work duties as set forth below.
Specifically, California state law says that a worker must earn a salary instead of an hourly rate to be considered an executive. Note that a salary will not pass the salary test for exempt work if it is based upon the number of hours worked, or a set amount of work time and has no minimum level or particular guarantee.
A salary must be for a predetermined amount, and an employee only passes the salary test if he/she is paid a monthly salary at least twice the state minimum wage for full-time employment (“Full-time employment” is defined as 40 hours per week). According to current minimum wage rates in California, an employee must make a weekly salary equivalent of $1,240.00 or greater to be considered an executive.
The job duties test focuses on the employee’s primary duty at work and the actual work performed. This means job titles and job descriptions are largely irrelevant under the test. The test says a worker is an executive if he/she is “primarily engaged” in all of the following duties:
Below, we define some of the terms used to satisfy the exemption criteria under both state and federal law in order to be treated as exempt employees.
Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly or less frequent basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.
Subject to exceptions listed below, an exempt employee must receive the full salary for any week the employee performs any work, regardless of the number of days or hours worked.
Exempt executive employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a “salary basis.” If the employee is ready, willing, and able to work, deductions may not be made when work is unavailable.
However, employers may use nondiscretionary bonuses and incentive payments (including commissions) paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
Additionally, if after the 52 weeks period, the employer has not met its financial obligation, the employer can make a final “catch-up” payment within one pay period after the 52 weeks 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 in which it is paid.
“Primary duty” means the principal, central, major, or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with a major emphasis on the character of the employee’s job as a whole.
Generally, “management” includes, but is not limited to, managerial duties such as:
Exempt duties tests determine a worker is an executive if they are primarily engaged in all of the previous duties. This means job titles and job descriptions are largely irrelevant under the test.
The phrase “a customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.
The phrase “customarily and regularly” means greater than occasional but less than constant; it includes work typically done every workweek but does not include isolated or one-time tasks.
A customarily recognized department or subdivision must have a permanent status and a continuing function. For example, a large employer’s human resources department might have subdivisions for labor relations, pensions, other benefits, equal employment opportunity, and personnel management, each with permanent status and function.
The phrase “two or more other employees” means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees.
The supervision can be distributed among two, three, or more employees. Still, each employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent.
For example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each supervisor directs the work of two of those workers.
Factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion, or any other change of status are given “particular weight” include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations and the frequency with which such recommendations are made, requested, and relied upon.
Generally, an executive’s recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include occasional suggestions.
An employee’s recommendations may still have “particular weight” even if a higher-level manager’s recommendation has more importance and even if the employee does not have the authority to decide on the employee’s change in status.
An exempt executive employee must regularly exercise discretion and independent judgment. An employee exercises discretion by evaluating competing conduct courses and choosing which to follow.
Independent judgment means the employee regularly exercises the authority to make discretionary decisions about significant matters without immediate direction or supervision. Those decisions can be made in the form of recommendations for action rather than taking action.
The fact that an executive employee’s independent judgment may be subject to approval or may be overridden by a higher level of authority in the company does not necessarily prevent the employee from being classified as exempt.
An employee who merely uses skill or knowledge when making decisions based on strict protocols or procedures is not exercising discretion and independent judgment, even if the employee has some leeway in making those decisions.
However, an executive may exercise discretion and independent judgment even if the executive must adhere to an employer’s guidelines or procedures. The question is whether the guidelines and procedures channel the employee’s discretion instead of eliminating it or constraining it to a degree where any discretion is largely inconsequential.
Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide exempt executive employees. To qualify for exemption, employees must meet certain job duties tests and be paid on a salary basis at not less than $684 per week. Job title does not determine exempt status. For an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.
To qualify for the executive employee exemption under the FLSA, all of the following tests must be met:
According to the FLSA, executive employees are exempt from minimum wage and overtime standards.
The employer will lose the executive exemption if it has an “actual practice” of making improper deductions from salary.
Factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to: the number of improper deductions, particularly as compared to the number of employee infractions warranting deductions; the time period during which the employer made improper deductions; the number and geographic location of both the employees whose salary was improperly reduced and the managers responsible; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.
Suppose an “actual practice” is found. In that case, the exemption is lost during the time period of the deductions for employees in the same job classification working for the same managers responsible for the improper deductions.
Isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
If an employer (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes an exemplary faith commitment to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.
Under a special rule under the FLSA for business owners, an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive.
Highly compensated employees performing office or non-manual work and paid total annual compensation of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Thus, for example, an employee may qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.
California does not have a highly compensated employee exemption. Instead, highly paid employees only qualify as exempt employees if their job duties fall within one of the exempt categories.
Employers are required to pay all employees overtime wages unless their work fits within one of the statute’s exemptions. The burden of proof for establishing that an exemption applies to a particular position rests with the employer, and the exemptions are narrowly construed against employers seeking to assert them.
Sometimes California employers misclassify workers, either intentionally or accidentally. If this occurs, the employee can file a wage and hour lawsuit against their employers and try to recover any lost compensation for minimum wages or overtime pay.
If you are an employee engaged in executive job duties and believe you qualify for an executive exemption or have questions about any of the above, contact us at Freeburg & Granieri, APC, today!
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