HCE Exemption Made Simple: Salary Basis, Total Comp & One EAP Duty (2025)

What the HCE exemption is — and is not

The HCE exemption was created to recognize that employees with very high total compensation are more likely to perform exempt work. It is a shortcut only for the duties test: instead of proving the full set of detailed executive, administrative, or professional duties, the employer may demonstrate that the employee performs at least one of the exempt duties identified in the EAP regulations. However, HCE status does not erase the other elements. The employee must still be paid on a salary or fee basis each week at or above the standard EAP salary-level amount, and the employee’s total annual compensation must reach the HCE threshold for the relevant 52-week period.

Current figures and how to apply them

Important: Regulatory thresholds can change through rulemaking or litigation. The examples below use the widely referenced 2019 federal rule baselines that many employers still rely on for modeling: a standard EAP salary level of $684 per week and an HCE total annual compensation threshold of $107,432, of which at least $684 per week must be paid on a salary or fee basis. Always confirm the current DOL numbers and any state requirements before payroll decisions.

Visual: sample compensation mixes (illustrative)

Bars compare total annual compensation to a $107,432 HCE reference. These are examples only.

Salary basis: the weekly foundation still matters

Even for HCE, the employee must be paid on a salary or fee basis at or above the EAP weekly salary level. That means the employee receives a predetermined amount each pay period that is not reduced because of variations in the quality or quantity of work. Only a few permissible deductions are allowed (full-day personal absences, certain disciplinary suspensions, unpaid FMLA, pro-rata first/last week). Repeated improper partial-day deductions can destroy salary basis and retroactively convert the employee to non-exempt, triggering overtime liability.

Counting compensation toward the HCE threshold

HCE total annual compensation can include multiple components, but there are rules on what counts and when:

• Include: base salary, nondiscretionary bonuses, incentive pay, commissions, and other nondiscretionary amounts earned during the 52-week period.
• Exclude: fringe benefits (e.g., employer contributions to retirement or health plans), reimbursements, discretionary bonuses that are not promised or tied to objective metrics, and the value of stock options unless realized as compensation in the period under plan rules.
• Timing matters: Compensation must be paid within the designated 52-week period, though regulations allow a catch-up payment shortly after the period to reach the threshold.
• Partial-year hires: The threshold may be prorated for a shorter 52-week period; verify the allowed method and document the dates.

HCE vs. the standard EAP exemptions

Worked examples (step-by-step)

Example 1 — HCE qualification with commissions

A regional account executive earns a base salary of $1,200/week (well above the EAP weekly level) and $50,000 in nondiscretionary commissions over the year, totaling $112,400. Primary duties include pricing authority, contract negotiation, and supervising a sales coordinator; the executive performs at least one administrative duty (discretion on matters of significance) and some executive duty (direction of another employee).

• Salary basis: satisfied (no improper docking).
• Total compensation: exceeds $107,432 → meets HCE reference threshold.
• Duties: at least one EAP duty → HCE duties satisfied.
• Result: Exempt under HCE (assuming state law does not require more).

Example 2 — Shortfall and catch-up

A data analytics lead is paid $1,000/week and receives quarterly nondiscretionary bonuses of $20,000 total. By week 52, total compensation is $72,000. The employee clearly exercises discretion on strategy and model selection (administrative/professional duties). Because the total comp falls short of the HCE threshold, the employer must either:

• Make a catch-up payment within the regulatory window to bring the total to the threshold, or
• Treat the employee as non-exempt for that period and compute overtime.

Example 3 — Blue-collar work with high pay

A field technician earns $130,000 with heavy overtime and hazard pay. The role is primarily manual and follows set procedures. Even though compensation is high, HCE does not apply; the employee is non-exempt and entitled to overtime.

Compliance workflow (practical checklist)

1. Define the 52-week period. Pick a fixed period for your organization (e.g., calendar year) and apply it consistently.
2. Confirm salary basis weekly. Audit payroll for improper docking and ensure the weekly EAP salary level is met for each week the employee performs any work.
3. Track total compensation. Aggregate base, commissions, and nondiscretionary bonuses; flag shortfalls by Q3 to allow catch-up planning.
4. Document at least one EAP duty. Maintain job descriptions and examples of work showing discretion/management/advanced knowledge.
5. Apply state overlays. Compare federal and state thresholds and tests; use the more protective standard.
6. Communicate expectations. Provide offer letters and plan documents that explain components counted toward HCE and the catch-up process.
7. Re-audit annually. Reevaluate duties and compensation when roles or incentive plans change.

Common pitfalls (and how to fix them)

• Assuming high pay alone is enough. Fix: verify salary basis and at least one EAP duty; do not rely on title.
• Counting discretionary bonuses. Fix: distinguish nondiscretionary (promised/metric-based) vs. truly discretionary awards.
• Letting partial-day docking creep in. Fix: train managers; use PTO banks or whole-day deductions only where allowed.
• Forgetting state law. Fix: maintain a jurisdiction matrix for thresholds and duties differences; update quarterly.
• Missing the catch-up deadline. Fix: implement a dashboard that forecasts year-end totals and triggers alerts in Q4.

Quick Guide

• Who qualifies? Employees with very high total compensation who perform at least one EAP duty and are paid on a salary/fee basis at the weekly EAP level.
• What counts toward total comp? Base salary + nondiscretionary bonuses/commissions earned in the period; discretionary bonuses and benefits generally don’t.
• Blue-collar workers? No. HCE does not apply even at high pay levels.
• Short year? Prorate the threshold and document the 52-week start/end dates.
• Shortfall at year-end? Make a catch-up payment by the regulatory deadline or treat as non-exempt and pay overtime.
• State rules? Apply the more protective standard.
• Records? Keep job descriptions, compensation breakdowns, and proof of weekly salary basis.

FAQ

Does HCE status eliminate the need for a salary basis?

No. HCE requires weekly pay on a salary or fee basis at the standard EAP level. Without salary basis, the exemption fails.

How much discretion is needed for the HCE duties test?

HCE employees must perform at least one EAP duty. For administrative duties, this typically means exercising discretion and independent judgment on matters of significance. For executive duties, directing two or more employees or having meaningful input on employment decisions may suffice. For professional duties, performing work requiring advanced knowledge or creative originality may suffice.

Can we switch an employee to HCE mid-year?

Yes, but you must still ensure the employee meets the weekly salary basis for every week worked and reaches the prorated total comp by the end of the selected 52-week period.

Do equity grants count toward HCE?

Generally not unless they are paid out as compensation in the period under the plan. Review plan terms and applicable regulations before counting them.

Is a “working lead” supervising one person enough for HCE?

Supervision of two or more full-time employees (or equivalent) is the typical executive duty standard. For HCE, remember the duties test is simplified, but the duty relied upon must still be a true EAP duty. If executive supervision is weak, you may need to rely on an administrative or professional duty instead.

Can nondiscretionary bonuses be used as a year-end catch-up?

Yes, a catch-up payment is allowed within the regulatory window to bring total comp to the threshold. Keep documentation that the payment relates to HCE compliance.

What if an employee’s compensation varies widely month to month?

That is common with commission plans. Ensure the weekly salary basis is always met, monitor year-to-date totals, and plan for a catch-up if needed.

Does remote work change the analysis?

The federal HCE framework is unchanged, but the state law where the employee actually works (their remote location) may impose a higher threshold or different rules.

What happens if we miss the catch-up payment?

The employee generally must be treated as non-exempt for the period and paid overtime at the applicable rate for hours over 40.

Is HCE available in every state?

Federal law recognizes HCE, but some states have different or stricter tests and may not follow the federal HCE shortcut. Apply the rule that is more protective for the employee.

Audit templates you can reuse

Legal basis & technical notes (federal)

• FLSA minimum wage & overtime: 29 U.S.C. §§ 206, 207.
• White-collar exemptions authority: 29 U.S.C. § 213(a)(1).
• HCE rule: 29 C.F.R. § 541.601 (total annual compensation; salary/fee basis; catch-up; duty requirement; exclusions such as manual laborers).
• Salary basis & deductions: 29 C.F.R. §§ 541.602 (salary basis) and 541.603 (safe-harbor for improper deductions).
• Executive, Administrative, Professional duties: 29 C.F.R. §§ 541.100, 541.200, 541.300–.302.
• Computer & Outside Sales (context): 29 C.F.R. §§ 541.400, 541.500.

This content is for general information only and not legal advice. Verify current federal and state requirements for your situation.