What are the white-collar exemption tests?

On April 23, 2004, the Department of Labor (DOL) issued final regulations that revise the Fair Labor Standards Act's white-collar exemption rules. For more information about the changes brought about by the regulations, which became effective August 23, 2004, see ¶34,075 .

Here is a summary of the new tests for the executive, administrative and professional exemptions:

Executive exemption tests. To qualify for the executive employee exemption, all of the following tests must be met:

1. The employee must be compensated on a salary basis at a rate not less than $455 per week;

2. The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

3. The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

4. The employee must 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.

Business owners. Under a special rule 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.

Administrative exemption tests. To qualify for the administrative employee exemption, all of the following tests must be met:

1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;

2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

3. The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional exemption tests. There are two general types of exempt professional employees: learned professionals and creative professionals.

Learned professionals. To qualify for the learned professional employee exemption, all of the following tests must be met:

1. The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;

2. The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

3. The advanced knowledge must be in a field of science or learning; and

4. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Creative professionals. To qualify for the creative professional employee exemption, all of the following tests must be met:

1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;

2. The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Highly compensated employees. Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 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.

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.

Total annual compensation. The required total annual compensation of $100,000 or more may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.

Make-up payments and prorating. 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. Employers also can make similar make-up payments to employees who terminate before the year ends.

Customarily and regularly.Customarily and regularly means greater than occasional but may be less than constant, and includes work normally and recurrently performed every workweek but does not include isolated or one-time tasks.