Practical Law Glossary Item 9-501-8255 (Approx. 5 pages)
Glossary
Highly Compensated Employee (HCE)
For employee benefits purposes, any employee who either:
Was a 5% owner of the employer at any time during the year or the preceding year.
Had compensation in excess of $150,000 in 2023 for determinations in 2024, or in excess of $135,000 in 2022 for determinations in 2023, and, if the employer so elects, was in the top-paid group of employees for the preceding year.
Special rules apply for aggregating entities for determining the employer, the compensation to be used in the determination, treating former employees as highly compensated and for excluding certain types of employees (26 U.S.C. § 414(q) and 26 C.F.R. § 1.414(q)-1T).
To qualify for the highly compensated employee (HCE) exemption under the FLSA, each employee must satisfy the following:
The employee must earn a total annual compensation of at least $132,964 effective July 1, 2024 ($151,164 effective January 1, 2025, with subsequent updates at three-year intervals starting July 1, 2027) ($107,432 before July 1, 2024), which must include at least $844 a week effective July 1, 2024, paid on a salary or fee basis ($1,128 a week effective January 1, 2025, with subsequent updates at three-year intervals starting July 1, 2027) ($684 a week before July 1, 2024). Total annual compensation:
may also include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period; and
does not include board, lodging, or other facilities, payments for medical or life insurance, contributions to retirement plans, or the cost of other fringe benefits.
Employers may make one final catch-up payment during the last pay period of, or within one month after the end of, the 52-week period if the employee's total annual compensation for that period does not equal at least the required minimum.
The employee's primary duty includes performing office or non-manual work.
The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
On April 23, 2024, the DOL announced a final rule to increase the standard salary level for the executive, administrative, and professional (EAP) exemptions and the total annual compensation threshold for the HCE exemption (89 Fed. Reg. 32842). The first of two incremental increases took effect July 1, 2024. The second is scheduled to take effect January 1, 2025, with subsequent updates at three-year intervals starting July 1, 2027. (29 C.F.R. §§ 541.600 and 541.607.) For more on the DOL's 2024 final rule, including prior rulemaking and pending legal challenges, see Minimum Salary for the Executive, Administrative, and Professional Exemptions Under the FLSA: DOL Rulemaking Tracker.