If someone were to ask you to define a highly compensated employee, would you know the correct definition? Highly compensated employees are a class of employees defined by the Fair Standards Labor Act (FSLA). Knowing who they are and how the FSLA applies to them touches numerous areas ranging from overtime pay to small-business 401(k) plans.
As a payroll and benefits administration specialist, we can help your company familiarize itself with highly compensated employees and their implications on payroll. What you read in this post is designed to give you a basic overview.
The FSLA Definition
Among the many provisions of the FSLA are those that guarantee nonexempt employees receive extra overtime pay for any hours worked in excess of 40 in a given week. Nonexempt employees are normally hourly workers who punch the clock.
Exempt employees are traditionally salaried workers who do not always have a static schedule. Having said that, highly compensated employees are also considered exempt. To qualify as highly compensated, an employee must meet the following conditions:
- Weekly earnings must be at least $445;
- Total annual compensation must be at least $100,000;
- Day-to-day tasks must not normally include manual labor; and
- At least one exempt duty of an executive, administrative, or professional employee must be regularly performed.
The last item on the list is a bit ambiguous inasmuch as the law does not define 'regularly'. It is generally assumed that the one exempt duty is a normal part of the employee’s day-to-day tasks. If it is not day-to-day, it is at least regular enough to follow some sort of schedule.
Implications for Payroll
Since highly compensated employees are exempt employees, they do not have to be paid overtime for working more than 40 hours in a given week. An easy-to-understand example would be a CEO. Corporate CEOs often exceed the 40-hour workweek due to their many responsibilities in and out of the office. They do not receive extra pay for those excess dollars as long as they meet the four requirements listed above.
There are special rules in place governing how highly compensated employees can participate in 401(k) plans, to prevent them from receiving special treatment. The rules vary by situation, so it is not practical for us to attempt to detail them here. The best option for employers is to check with their payroll providers to make sure that they are complying with the special rules.
Having said that, another qualification has to be met in order for a highly compensated employee to participate in certain kinds of employer-sponsored retirement plans, including 401(k)s. Employees must meet one of the following requirements:
- Total compensation from the previous year (2016 or 2017) must exceed $120,000;
- When ranked by total compensation, the employee must be within the top 20% for that company; or
- The employee must have earned at least a 5% interest in the company during the previous year.
Consider Outsourcing Payroll
Highly compensated employees and the associated rules under the FSLA can make for complicated payroll. As with anything else payroll related, it is all about knowing and understanding the rules. If your payroll department is struggling in this area, we urge you to consider outsourcing your payroll functions to BenefitMall.
Outsourcing payroll relieves your staff of the responsibilities of time and tracking, verifying hours worked, processing checks, and so on. It also puts an expert in your corner. With our expertise backing up your payroll, you can rest assured that your highly compensated employees will be treated in accordance with the law.