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Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees

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Start Preamble

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Final rule.

SUMMARY:

The Fair Labor Standards Act (FLSA or Act) guarantees a minimum wage for all hours worked during the workweek and overtime premium pay of not less than one and one-half times the employee's regular rate of pay for hours worked over 40 in a workweek. While these protections extend to most workers, the FLSA does provide a number of exemptions. In this Final Rule, the Department of Labor (Department) revises final regulations under the FLSA implementing the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. These exemptions are frequently referred to as the “EAP” or “white collar” exemptions. To be considered exempt under part 541, employees must meet certain minimum requirements related to their primary job duties and, in most instances, must be paid on a salary basis at not less than the minimum amounts specified in the regulations.

In this Final Rule the Department updates the standard salary level and total annual compensation requirements to more effectively distinguish between overtime-eligible white collar employees and those who may be exempt, thereby making the exemption easier for employers and employees to understand and ensuring that the FLSA's intended overtime protections are fully implemented. The Department sets the standard salary level for exempt EAP employees at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The Department also permits employers to satisfy up to 10 percent of the standard salary requirement with nondiscretionary bonuses, incentive payments, and commissions, provided these forms of compensation are paid at least quarterly. The Department sets the total annual compensation requirement for an exempt Highly Compensated Employee (HCE) equal to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally. The Department also adds a provision to the regulations that automatically updates the standard salary level and HCE compensation requirements every three years by maintaining the earnings percentiles set in this Final Rule to prevent these thresholds from becoming outdated. Finally, the Department has not made any changes in this Final Rule to the duties tests for the EAP exemption.

DATES:

This Final Rule is effective on December 1, 2016.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Director, Division of Regulations, Legislation and Interpretation, U.S. Department of Labor, Wage and Hour Division, Room S-3502, 200 Constitution Avenue NW., Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Copies of this Final Rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information or request materials in alternative formats.

Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest Wage and Hour Division (WHD) district office. Locate the nearest office by calling the WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD's Web site at http://www.dol.gov/​whd/​america2.htm for a nationwide listing of WHD district and area offices.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

II. Background

A. What the FLSA Provides

B. Legislative History

C. Regulatory History

D. Overview of Existing Regulatory Requirements

E. Presidential Memorandum

F. The Department's Proposal

G. Effective Date

III. Need for Rulemaking

IV. Final Regulatory Revisions

A. Standard Salary Level

B. Special Salary Tests

C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement

D. Highly Compensated Employees

E. Automatic Updates

F. Duties Requirements for Exemption

V. Paperwork Reduction Act

VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory ReviewStart Printed Page 32392

VII. Final Regulatory Flexibility Analysis

VIII. Unfunded Mandates Reform Act Analysis

VIIIX. Executive Order 13132, Federalism

IX. Executive Order 13175, Indian Tribal Governments

XI. Effects on Families

XII. Executive Order 13045, Protection of Children

XIII. Environmental Impact Assessment

XIV. Executive Order 13211, Energy Supply

XV. Executive Order 12630, Constitutionally Protected Property Rights

XVI. Executive Order 12988, Civil Justice Reform Analysis Final Amendments to Regulatory Text

I. Executive Summary

The Fair Labor Standards Act (FLSA or Act) guarantees a minimum wage for all hours worked and limits to 40 hours per week the number of hours an employee can work without additional compensation. Section 13(a)(1) of the FLSA, which was included in the original Act in 1938, exempts from these minimum wage and overtime pay protections “any employee employed in a bona fide executive, administrative, or professional capacity.” The exemption is premised on the belief that these kinds of workers typically earn salaries well above the minimum wage and enjoy other privileges, including above-average fringe benefits, greater job security, and better opportunities for advancement, setting them apart from workers entitled to overtime pay. The statute delegates to the Secretary of Labor the authority to define and delimit the terms of the exemption.

The Department has undertaken this rulemaking in order to revise the regulations so that they effectively distinguish between overtime-eligible white collar employees who Congress intended to be protected by the FLSA's minimum wage and overtime provisions and bona fide EAP employees whom it intended to exempt. When the definition becomes outdated, employees who Congress intended to protect receive neither the higher salaries and above-average benefits expected for EAP employees nor do they receive overtime pay, and employers do not have an efficient means of identifying workers who are, and are not, entitled to the FLSA's protections. With this Final Rule, the Department will ensure that white collar employees who should receive extra pay for overtime hours will do so and that the test for exemption remains up-to-date so future workers will not be denied the protections that Congress intended to afford them.

In 1938, the Department issued the first regulations at 29 CFR part 541 defining the scope of the section 13(a)(1) white collar exemption. Since 1940, the regulations implementing the exemption have generally required each of three tests to be met for the exemption to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). While payment of a salary does not make an employee ineligible for overtime compensation, the Department has nonetheless long recognized the salary level test is the best single test of exempt status for white collar employees. The salary level test is an objective measure that helps distinguish white collar employees who are entitled to overtime from those who may be bona fide executive, administrative, or professional (EAP) employees. If left at the same amount over time, however, the effectiveness of the salary level test as a means of determining exempt status diminishes as the wages of employees increase and the real value of the salary threshold falls.

The Department has updated the salary level requirements seven times since 1938, most recently in 2004 when the salary level an employee must be paid to come within the standard test for EAP exemption was set at $455 per week ($23,660 per year for a full-year worker), which nearly tripled the $155 per week minimum salary level required for exemption up to that point. The Department also modified the duties tests in 2004, eliminating the “long” and “short” tests that had been part of the regulations since 1949 and replacing them with the “standard” test. The historic long test paired a lower salary requirement with a stringent duties test including a 20 percent cap on the amount of time most exempt employees could spend on nonexempt duties, while the short test paired a higher salary requirement with a less stringent duties test. In other words, prior to the 2004 Final Rule, to exempt lower-paid employees from receiving overtime the employer would have to meet more rigorous requirements; but for higher-paid employees, the requirements to establish the applicability of the exemption were less rigorous. The standard test established by the Department in the 2004 Final Rule paired a duties test closely based on the less-stringent short duties test with a salary level derived from the lower long test salary level. This had the effect of making it easier for employers to both pay employees a lower salary and not pay them overtime for time worked beyond 40 hours. The 2004 Final Rule also created an exemption for highly compensated employees (HCE), which imposes a very minimal duties test but requires that an employee must earn at least $100,000 in total annual compensation.

On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which white collar workers are protected by the FLSA's minimum wage and overtime standards. 79 FR 18737 (Apr. 3, 2014). The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented. The Department published a proposal to update the part 541 regulations on July 6, 2015.

One of the Department's primary goals in this rulemaking is updating the standard salary requirement, both in light of the passage of time since 2004, and because the Department has concluded that the effect of the 2004 Final Rule's pairing of a standard duties test based on the less rigorous short duties test with the kind of low salary level previously associated with the more rigorous long duties test was to exempt from overtime many lower paid workers who performed little EAP work and whose work was otherwise indistinguishable from their overtime-eligible colleagues. This has resulted in the inappropriate classification of employees as EAP exempt—that is overtime exempt—who pass the standard duties test but would have failed the long duties test. As the Department noted in our proposal, the salary level's function in helping to differentiate overtime-eligible employees from employees who may be exempt takes on greater importance when the duties test does not include a specific limit on the amount of nonexempt works that an exempt employee may perform.

In the Notice of Proposed Rulemaking (NPRM), the Department proposed setting the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers nationally and setting the HCE total annual compensation requirement at the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally. The Department further proposed to automatically update these levels annually to ensure that they would continue to provide an Start Printed Page 32393effective test for exemption. In the NPRM, the Department also asked for the public's comments on whether nondiscretionary bonuses or incentive payments should count toward some portion of the required salary level. Finally, the Department also discussed concerns with the standard duties tests and sought comments on a series of questions regarding possible changes to the tests.

After considering the comments, the Department has made several changes from the proposed rule to the Final Rule. In particular, the Department has modified the standard salary level to more fully account for the lower salaries paid in certain regions. In this Final Rule, the Department sets the standard salary level equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). This results in a salary level of $913 per week, or $47,476 annually for a full-year worker, based on data from the fourth quarter of 2015.[1] The Department believes that a standard salary level set at the 40th percentile of full-time salaried employees in the lowest-wage Census Region will accomplish the goal of setting a salary threshold that adequately distinguishes between employees who may meet the duties requirements of the EAP exemption and those who likely do not, without necessitating the reintroduction of a limit on nonexempt work, as existed under the long duties test. The Department sets the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually based on the fourth quarter of 2015), as we proposed. This increase will bring the annual compensation requirement in line with the level established in 2004. The Department believes that this will avoid the unintended exemption of large numbers of employees in high-wage areas—such as secretaries in New York City or Los Angeles—who are clearly not performing EAP duties.

In order to prevent the salary and compensation levels from becoming outdated, the Department is including in the regulations a mechanism to automatically update the salary and compensation thresholds by maintaining the fixed percentiles of weekly earnings set in this Final Rule. In response to comments, however, the Final Rule provides for updates every three years rather than for annual updates as proposed. The first update will take effect on January 1, 2020. The Department believes that regularly updating the salary and compensation levels is the best method to ensure that these tests continue to provide an effective means of distinguishing between overtime-eligible white collar employees and those who may be bona fide EAP employees. Based on historical wage growth in the South, at the time of the first update on January 1, 2020, the standard salary level is likely to be approximately $984 per week ($51,168 annually for a full-year worker) and the HCE total annual compensation requirement is likely to be approximately $147,524.

The Department also revises the regulations to permit employers for the first time to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level for the standard exemption, so long as employers pay those amounts on a quarterly or more frequent basis. Finally, the Department has not made any changes to the duties tests in this Final Rule. The majority of the revisions occur in §§ 541.600, 541.601, 541.602 and new § 541.607; conforming changes were also made in §§ 541.100, 541.200, 541.204, 541.300, 541.400, 541.604, 541.605, and 541.709.

In FY2017,[2] the Department estimates there will be approximately 159.9 million wage and salary workers in the United States, of whom we estimate that 22.5 million will be exempt EAP workers potentially affected by this Final Rule.[3] In Year 1, FY2017, the Department estimates that 4.2 million currently exempt workers who earn at least the current weekly salary level of $455 but less than the 40th earnings percentile in the South ($913) would, without some intervening action by their employers, become entitled to minimum wage and overtime protection under the FLSA (Table ES1). Similarly, an estimated 65,000 currently exempt workers who earn at least $100,000 but less than the annualized earnings of the 90th percentile of full-time salaried workers nationally ($134,004), and who meet the HCE duties test but not the standard duties test, may also become eligible for minimum wage and overtime protection. In Year 10, with triennial automatic updating of the salary and compensation levels, the Department projects that 5.0 million workers will be affected by the change in the standard salary level test and 221,000 workers will be affected by the change in the HCE total annual compensation test.

Additionally, the Department estimates that another 5.7 million white collar workers who are currently overtime eligible because they do not satisfy the EAP duties tests and who currently earn at least $455 per week but less than $913 per week will have their overtime protection strengthened in Year 1 because their status as overtime-eligible will be clear based on the salary test alone without the need to examine their duties. Reducing the number of workers for whom employers must apply the duties test to determine exempt status simplifies the application of the exemption and is consistent with the President's directive.

The Department quantified three direct costs to employers in this Final Rule: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Assuming a 7 percent discount rate, the Department estimates that average annualized direct employer costs will total $295.1 million per year (Table ES1). In addition to the direct costs, this Final Rule will also transfer income from employers to employees in the form of higher earnings. We estimate average annualized transfers to be $1,189.1 million. The Department also projects average annualized deadweight loss of $9.2 million, and notes that the projected deadweight loss is small in comparison to the amount of estimated costs.

The change to a standard salary level based on the lowest-wage Census Region has decreased the salary amount from the proposal, resulting in a smaller number of affected workers and lower transfers than estimated in the NPRM. Direct costs are higher than predicted in the NPRM, primarily because the Department has increased its estimate of the number of affected workers who work some overtime. Additionally, in response to comments, the Department has increased estimated regulatory familiarization and adjustment costs in the Final Rule.

Finally, the impacts of the Final Rule extend beyond those we have estimated quantitatively. The Department Start Printed Page 32394discusses other transfers, costs, and benefits in the relevant sections.

Table ES1—Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels

[Millions 2017$]

ImpactYear 1Future years [a]Average annualized value
Year 2Year 103% real rate7% real rate
Affected Workers (1,000s)
Standard4,1633,8935,045
HCE6573217
Total4,2283,9655,261
Costs and Transfers (Millions 2017$) [b]
Direct employer costs677.9208.0284.2288.0295.1
Transfers [c]1,285.2936.51,607.21,201.61,189.1
DWL6.48.711.19.39.2
[a] Costs/transfers in years 3 through 9 are within the range bounded by the estimates for years 2 and 10.
[b] Costs and transfers for affected workers passing the standard and HCE tests are combined.
[c] This is the net transfer from employers to workers. There may also be transfers of hours and income from some workers to others.

II. Background

A. What the FLSA Provides

The FLSA generally requires covered employers to pay their employees at least the federal minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of one and one-half times the employee's regular rate of pay for all hours worked over 40 in a workweek.[4] However, there are a number of exemptions from the FLSA's minimum wage and overtime requirements. Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), exempts from both minimum wage and overtime protection “any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act] . . .).” The FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman.” Pursuant to Congress' grant of rulemaking authority, the Department in 1938 issued the first regulations at part 541 defining the scope of the section 13(a)(1) exemptions. Because Congress explicitly delegated to the Secretary of Labor the power to define and delimit the specific terms of the exemptions through notice and comment rulemaking, regulations so issued have the binding effect of law. See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).

The Department has consistently used our rulemaking authority to define and clarify the section 13(a)(1) exemptions. Since 1940, the implementing regulations have generally required each of three tests to be met for the exemptions to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).

Employees who meet the requirements of part 541 are exempted from both the Act's minimum wage and overtime pay protections. As a result, an employer may employ such employees for any number of hours in the workweek without paying the minimum hourly wage or an overtime premium. Some state laws have stricter exemption standards than those described above. The FLSA does not preempt any such stricter state standards. If a State establishes a higher standard than the provisions of the FLSA, the higher standard applies in that State. See 29 U.S.C. 218.

B. Legislative History

Section 13(a)(1) was included in the original Act in 1938 and was based on provisions contained in the earlier National Industrial Recovery Act of 1933 (NIRA) and state law precedents. Specific references in the legislative history to the exemptions contained in section 13(a)(1) are scant. Although section 13(a)(1) exempts covered employees from both the FLSA's minimum wage and overtime requirements, its most significant impact is its removal of these employees from the Act's overtime protections.

The requirement that employers pay a premium rate of pay for all hours worked over 40 in a workweek is grounded in two policy objectives. The first is to spread employment (or, in other words, reduce involuntary unemployment) by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours. See, e.g. , Davis v. J.P. Morgan Chase, 587 F.3d 529, 535 (2d Cir. 2009). The second policy objective is to reduce overwork and its detrimental effect on the health and well-being of workers. See, e.g. , Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981).

In contrast, the exemptions contained in section 13(a)(1) were premised on the belief that the type of work exempt employees performed was difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making enforcement of the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA's time-and-a-half overtime premium. See Report of the Minimum Wage Study Commission, Volume IV, pp. 236 and 240 (June 1981).[5] Further, Start Printed Page 32395the exempted workers typically earned salaries well above the minimum wage and were presumed to enjoy other privileges to compensate them for their long hours of work, setting them apart from the nonexempt workers entitled to overtime pay. See id.

The universe of employees eligible for the section 13(a)(1) exemptions has fluctuated with amendments to the FLSA. Initially, persons employed in a “local retailing capacity” were exempt, but Congress eliminated that language from section 13(a)(1) in 1961 when the FLSA was expanded to cover retail and service enterprises. See Public Law 87-30, 75 Stat. 65 (May 5, 1961). Teachers and academic administrative personnel were added to the exemption when elementary and secondary schools were made subject to the FLSA in 1966. See Sec. 214, Public Law 89-601, 80 Stat. 830 (Sept. 23, 1966). The Education Amendments of 1972 made the Equal Pay provisions, section 6(d) of the FLSA, expressly applicable to employees who were otherwise exempt from the FLSA under section 13(a)(1). See Sec. 906(b)(1), Public Law 92-318, 86 Stat. 235 (June 23, 1972).

A 1990 enactment expanded the EAP exemptions to include computer systems analysts, computer programmers, software engineers, and similarly skilled professional workers, including those paid on an hourly basis if paid at least 61/2 times the minimum wage. See Sec. 2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990). The compensation test for computer-related occupations was subsequently capped at $27.63 an hour (61/2 times the minimum wage in effect at the time) as part of the 1996 FLSA Amendments, when Congress enacted the new section 13(a)(17) exemption for such computer employees. Section 13(a)(17) also incorporated much of the regulatory language that resulted from the 1990 enactment. See 29 U.S.C. 213(a)(17), as added by the 1996 FLSA Amendments (Sec. 2105(a), Public Law 104-188, 110 Stat. 1755 (Aug. 20, 1996)).

C. Regulatory History

The FLSA became law on June 25, 1938, and the Department issued the first version of the part 541 regulations, setting forth criteria for exempt status under section 13(a)(1), that October. 3 FR 2518 (Oct. 20, 1938). Following a series of public hearings, which were discussed in a report issued by WHD,[6] the Department published revised regulations in 1940, which, among other things, added the salary basis test. 5 FR 4077 (Oct. 15, 1940). Further hearings were convened in 1947, as discussed in a WHD-issued report,[7] and the Department issued revised regulations in 1949, which updated the salary levels required to meet the salary level test for the various exemptions. 14 FR 7705 (Dec. 24, 1949). An explanatory bulletin interpreting some of the terms used in the regulations was published as subpart B of part 541 in 1949. 14 FR 7730 (Dec. 28, 1949). In 1954, the Department issued revisions to the regulatory interpretations of the salary basis test. 19 FR 4405 (July 17, 1954). In 1958, based on another WHD-issued report,[8] the regulations were revised to update the required salary levels. 23 FR 8962 (Nov. 18, 1958). Additional changes, including salary level updates, were made to the regulations in 1961 (26 FR 8635, Sept. 15, 1961), 1963 (28 FR 9505, Aug. 30, 1963), 1967 (32 FR 7823, May 30, 1967), 1970 (35 FR 883, Jan. 22, 1970), 1973 (38 FR 11390, May 7, 1973), and 1975 (40 FR 7091, Feb. 19, 1975). Revisions to increase the salary levels in 1981 were stayed indefinitely by the Department. 46 FR 11972 (Feb. 12, 1981). In 1985, the Department published an Advance Notice of Proposed Rulemaking that reopened the comment period on the 1981 proposal and broadened the review to all aspects of the regulations, including whether to increase the salary levels, but this rulemaking was never finalized. 50 FR 47696 (Nov. 19, 1985).

The Department revised the part 541 regulations twice in 1992. First, the Department created a limited exception from the salary basis test for public employees, permitting public employers to follow public sector pay and leave systems requiring partial-day deductions from pay for absences for personal reasons or due to illness or injury not covered by accrued paid leave, or due to budget-driven furloughs, without defeating the salary basis test required for exemption. 57 FR 37677 (Aug. 19, 1992). The Department also implemented the 1990 law requiring it to promulgate regulations permitting employees in certain computer-related occupations to qualify as exempt under section 13(a)(1) of the FLSA. 57 FR 46744 (Oct. 9, 1992); see Sec. 2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990).

On March 31, 2003, the Department published a Notice of Proposed Rulemaking proposing significant changes to the part 541 regulations. 68 FR 15560 (Mar. 31, 2003). On April 23, 2004, the Department issued a Final Rule (2004 Final Rule), which raised the salary level for the first time since 1975, and made other changes, some of which are discussed below. 69 FR 22122 (Apr. 23, 2004). Current regulations retain the three tests for exempt status that have been in effect since 1940: a salary basis test, a salary level test, and a job duties test.

D. Overview of Existing Regulatory Requirements

The regulations in part 541 contain specific criteria that define each category of exemption provided by section 13(a)(1) for bona fide executive, administrative, and professional employees (including teachers and academic administrative personnel), and outside sales employees. The regulations also define those computer employees who are exempt under section 13(a)(1) and section 13(a)(17). See §§ 541.400-.402. The employer bears the burden of establishing the applicability of any exemption from the FLSA's pay requirements. Job titles and job descriptions do not determine exempt status, nor does paying a salary rather than an hourly rate. To qualify for the EAP exemption, employees must meet certain tests regarding their job duties and generally must be paid on a salary basis of not less than $455 per week.[9] In order for the exemption to Start Printed Page 32396apply, an employee's specific job duties and salary must meet all the requirements of the Department's regulations. The duties tests differ for each category of exemption.

The Department last updated the part 541 regulations in the 2004 Final Rule. Prior to 2004, employers could assert the EAP exemption for employees who satisfied either a “long” test—which paired a more restrictive duties test with a lower salary level—or a “short” test—which paired less stringent duties requirements with a higher salary level.[10] In the 2004 Final Rule the Department abandoned the concept of separate long and short tests, opting instead for one “standard” test, and set the salary level under the new standard duties test at $455 per week for executive, administrative, and professional employees.

Under the current part 541 regulations, an exempt executive employee must be compensated on a salary basis at a rate of not less than $455 per week and have a primary duty of managing the enterprise or a department or subdivision of the enterprise. See § 541.100(a)(1)-(2). An exempt executive must also customarily and regularly direct the work of at least two employees and have the authority to hire or fire, or the employee's suggestions and recommendations as to the hiring, firing, or other change of status of employees must be given particular weight. See § 541.100(a)(3)-(4).

An exempt administrative employee must be compensated on a salary or fee basis at a rate of not less than $455 per week and have a primary duty of 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. See § 541.200. An exempt administrative employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. See id.

An exempt professional employee must be compensated on a salary or fee basis at a rate of not less than $455 per week and have a primary duty of (1) work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or (2) work that is original and creative in a recognized field of artistic endeavor, or (3) teaching in a school system or educational institution, or (4) work as a computer systems analyst, computer programmer, software engineer, or other similarly-skilled worker in the computer field. See §§ 541.300; 541.303; 541.400. An exempt professional employee must perform work requiring the consistent exercise of discretion and judgment, or requiring invention, imagination, or talent in a recognized field of artistic endeavor. See § 541.300(a)(2). The salary requirements do not apply to certain licensed or certified doctors, lawyers, and teachers. See §§ 541.303(d); 541.304(d).

An exempt outside salesperson must be customarily and regularly engaged away from the employer's place of business and have a primary duty of making sales, or obtaining orders or contracts for services or for the use of facilities. See § 541.500. There are no salary or fee requirements for exempt outside sales employees. See id.

The 2004 Final Rule also created a test for exemption of highly compensated executive, administrative, and professional employees. Under the HCE exemption, employees who are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption. See § 541.601. The HCE exemption applies only to employees whose primary duty includes performing office or non-manual work; non-management production line workers and employees who perform work involving repetitive operations with their hands, physical skill, and energy are not exempt under this section no matter how highly paid. See id. Finally, in the 2004 Final Rule, the Department, mindful that nearly 30 years had elapsed between salary level increases, and in response to commenter concerns that similar lapses would occur in the future, expressed an intent to “update the salary levels on a more regular basis.” 69 FR 22171.

E. Presidential Memorandum

On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which “white collar” workers are protected by the FLSA's minimum wage and overtime standards. See 79 FR 18737 (Apr. 3, 2014). The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented. As the President noted at the time, the FLSA's overtime protections are a linchpin of the middle class, and the failure to keep the salary level requirement for the white collar exemption up to date has left millions of low-paid salaried workers without this basic protection.[11] The current salary level threshold for exemption of $455 per week, or $23,660 annually, is below the 2015 poverty threshold for a family of four.[12]

Following issuance of the memorandum, the Department embarked on an extensive outreach program, meeting with over 200 organizations in Washington, DC and several other locations, as well as by conference call. A wide range of stakeholders attended the listening sessions: employees, employers, business associations, non-profit organizations, employee advocates, unions, state and local government representatives, tribal representatives, and small businesses. In these sessions the Department asked stakeholders to address, among other issues: (1) What is the appropriate salary level for exemption; (2) what, if any, changes should be made to the duties tests; and (3) how can the regulations be simplified.

The stakeholders shared their concerns with various aspects of the current regulations, suggestions for changes, and general concerns about the scope of the exemption. The Department greatly appreciated the wide range of views that were shared during the outreach sessions. The information shared during those sessions informed the Department's NPRM.

The Department's outreach also made clear, however, that there are some widespread misconceptions about overtime eligibility under the FLSA, some of which were echoed in the comments received on the NPRM. For example, many employers and employees mistakenly believe that payment of a salary automatically disqualifies an employee from entitlement to overtime compensation irrespective of the duties performed. Many employees are also unaware of the duties required to be performed in order for the exemption to apply. Additionally, many employers seem to mistakenly believe that newly overtime-Start Printed Page 32397eligible employees (i.e., those earning between the current and new salary levels) must be converted to hourly compensation.[13] Similarly, some employers erroneously believe that they are prohibited from paying nondiscretionary bonuses to EAP employees, given that they cannot be used to satisfy the salary requirement. Some employers also mistakenly believe that the EAP regulations limit their ability to permit white collar employees to work part-time or job share.[14]

F. The Department's Proposal

On July 6, 2015, in accordance with the Presidential Memorandum, the Department published a Notice of Proposed Rulemaking to propose revisions to the part 541 regulations. See 80 FR 38516 (July 6, 2015). The Department's proposal focused primarily on updating the salary and HCE compensation levels by proposing that the standard salary level be set at the 40th percentile of weekly earnings of full-time salaried workers, proposing to increase the HCE annual compensation requirement to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers, and proposing a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption. While the primary regulatory changes proposed were in §§ 541.600 and 541.601, the Department proposed additional conforming changes to update references to the salary level throughout part 541 as well as to update the special salary provisions for American Samoa and the motion picture industry. In addition to these proposed changes, the Department also discussed whether to include nondiscretionary bonuses in determining whether the standard salary level is met and whether changes to the duties tests are warranted, but did not propose specific regulatory revisions on these issues.

More than 270,000 individuals and organizations timely commented on the NPRM during the sixty-day comment period that ended on September 4, 2015. The Department received comments from a broad array of constituencies, including small business owners, Fortune 500 corporations, employer and industry associations, individual workers, worker advocacy groups, unions, non-profit organizations, law firms (representing both employers and employees), educational organizations and representatives, religious organizations, economists, Members of Congress, federal government agencies, state and local governments and representatives, tribal governments and representatives, professional associations, and other interested members of the public. All timely received comments may be viewed on the www.regulations.gov Web site, docket ID WHD-2015-0001.

Several organizations' submissions included attachments from their individual members generally using substantively identical form comments: For example, AFSCME (24,122 comments), Center for American Progress (6,697 comments from two submissions), CREDO Action (58,927 comments), Democracy for America (34,932 comments), Economic Policy Institute (72,131 comments from five submissions), Faculty Forward and SEIU (515 comments), Jobs with Justice (5,136 comments), Mom's Rising (16,114 comments from three submissions), National Partnership for Women and Families (21,192 comments from two submissions), National Restaurant Association (2,648 comments), National Women's Law Center (6,753 comments from two submissions), Partnership to Protect Workplace Opportunity (1,770 comments from five submissions), Social Security Works (15,575 comments), Society for Human Resource Management (827 comments from two submissions), and others. Other organizations attached membership signatures to their comments. These included Care2 (37,459 signatures), the International Franchise Association (17 signatures), Organizing for Action (76,625 signatures), and 15 different post-doctoral associations (560 signatures).

Many of the comments the Department received were: (1) Very general statements of support or opposition; (2) personal anecdotes that did not address a specific aspect of the proposed changes; or (3) identical or nearly identical “campaign” comments sent in response to comment initiatives sponsored by various groups. A large number of commenters favored some change to the existing regulations, and commenters expressed a wide variety of views on the merits of particular aspects of the Department's proposal. Some commenters requested that the Department withdraw the proposal. Acknowledging that there are strong views on the issues presented in this rulemaking, the Department has carefully considered the timely submitted comments addressing the proposed changes.

Significant issues raised in the timely received comments are discussed below, together with the Department's response to those comments and a topical discussion of the changes that have been made in the Final Rule and its regulatory text. The Department also received a number of submissions after the close of the comment period, including some campaign comments, from a range of commenters representing both employers and employees. Late comments were not considered in the development of this Final Rule, and are not discussed in this Final Rule. In instances where an organization submitted both timely and untimely comments, only the timely comments were considered.

The Department received a number of comments that are beyond the scope of this rulemaking. These include, for example, comments asking the Department to issue a rule requiring employers to provide employees with “clear pay stubs,” and requesting that the Department clarify the definition of “establishment” under the exemption for seasonal amusement or recreational establishments. The Department does not address such issues in this Final Rule.

A number of commenters asked the Department to provide guidance on how the FLSA applies to non-profit organizations. See, e.g. , Alliance for Strong Families and Communities (describing “a tremendous amount of confusion in the non-profit sector concerning who is currently covered by FLSA”); Independent Sector (stating that this rulemaking process has “highlighted a lack of clarity regarding when and how the Fair Labor Standards Act applies to the nonprofit sector workforce”); Alliance of Arizona Nonprofits. Some commenters, such as CASA, asserted that most charitable organizations are not covered Start Printed Page 32398enterprises under the FLSA and, as a result, this rulemaking “will not reach a very sizable number of employees of not-for-profit organizations.” Other commenters stated that non-profit employees may be individually covered because they engage in interstate commerce. A comment submitted on behalf of 57 professors specializing in employment and labor law, however, asserted that the “overwhelming majority of the millions of employees excluded from FLSA coverage because their not-for-profit employers are not subject to enterprise coverage also are not subject to individual FLSA coverage,” and Economic Policy Institute (EPI) asserted that non-profit employers can limit the number of employees covered on an individual basis by managing interstate commerce activity.

The Department notes that the FLSA does not provide special rules for non-profit organizations or their employees, nor does this Final Rule. Nevertheless, we agree that it is important for such organizations to understand their obligations under the Act. As a general matter, non-profit charitable organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities (for example, operating a gift shop). See 29 U.S.C. 203(r)-(s), 206(a), 207(a). For a non-profit organization, enterprise coverage applies only to the activities performed for a business purpose; it does not extend to the organization's charitable activities. An organization that performs only charitable services, such as providing free food to the hungry, is not a covered enterprise; however, an employee of such a non-profit employer may nevertheless be covered on an individual basis. See 29 U.S.C. 206(a), 207(a). The FLSA covers an employee on an individual basis—that is, an individual is protected by the FLSA regardless of whether the individual works for a covered enterprise—if he or she engages in interstate commerce through activities such as making out-of-state phone calls, sending mail, or handling credit card transactions. This individual coverage applies even if the employee is not engaging in such activities for a business purpose. For example, if an employee regularly calls an out-of-state store and uses a credit card to purchase food for a non-profit that provides free meals for the homeless, that employee is protected by the FLSA on an individual basis, even though the non-profit may not be covered as an enterprise. WHD, however, will not assert that an employee who on isolated occasions spends an insubstantial amount of time performing such work is individually covered by the FLSA.

The Department also refers interested stakeholders to guidance on the application of the FLSA to non-profit organizations available in WHD Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act; [15] see also Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA).[16] Additional information regarding the applicability of the FLSA to non-profits can be found in the WHD Administrator's blog post.[17] Moreover, a number of WHD Opinion Letters address the applicability of the FLSA to non-profits. See, e.g., FLSA2009-20 (Jan. 16, 2009); FLSA2008-8 (Sept. 29, 2008); FLSA2005-52 (Nov. 14, 2005); FLSA2005-8NA (Sept. 2, 2005); FLSA2005-12NA (Sept. 23, 2005); FLSA2004-29NA (Nov. 30, 2004).[18] Finally, the Department is issuing additional guidance for the non-profit sector in connection with the publication of this Final Rule.

Commenters also asked for guidance on the application of the EAP exemption to educational institutions. See, e.g. , College and Universities Human Resources Executives; Michigan Head Start; Savannah-Chatham County Public School System. Preschools, elementary and secondary schools, and institutions of higher education are covered by the FLSA, and nothing in this Final Rule changes that coverage. 29 U.S.C. 203(r)(2)(A). Employees of such institutions therefore are generally protected by the FLSA's minimum wage and overtime provisions; however, special provisions apply to many personnel at these institutions that make them overtime exempt.

Although the EAP exemption expressly applies to an “employee employed in the capacity of academic administrative personnel or teacher” 29 U.S.C. 213(a)(1); see §§ 541.204, .303, the salary level and salary basis requirements do not apply to bona fide teachers. § 541.303(d), .600(e). Accordingly, the increase in the standard salary level in this Final Rule will not affect the overtime eligibility of bona fide teachers.

Commenters such as the NEA asked the Department to clarify which workers qualify as bona fide teachers. Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. § 541.303(a). An educational establishment is “an elementary or secondary school system, an institution of higher education or other educational institution.” [19] § 541.204(b). Teachers may include professors, adjunct instructors, primary and secondary school teachers, and teachers of skilled and semi-skilled trades and occupations. Preschool and kindergarten teachers may also qualify for exemption under the same conditions as teachers in elementary and secondary schools. See Fact Sheet #46: Daycare Centers and Preschools Under the Fair Labor Standards Act. In addition, coaches may qualify for the exemption if their primary duty is teaching as opposed to recruiting students to play sports or performing manual labor. Some commenters addressed other non-teaching staff. For example, CUPA-HR commented about workers including academic affairs counselors and advisors, textbook managers, and managers in food service, security, and building and grounds, among other employees working at colleges and universities. Academic administrative personnel subject to the exemption include: Superintendents; principals and vice-principals; department heads in institutions of higher education; academic counselors and advisors; and other employees with similar responsibilities. Academic administrative employees are subject to the salary basis requirement, but the Department notes that a special provision allows this requirement to be met if such employees are paid “on a salary basis which is at least equal to the entrance salary for teachers in the educational establishment by which [they are] employed.” § 541.204(a)(1). To the extent that this entrance salary is below the salary level established in this rule, academic administrative personnel will be exempt if their salary equals or exceeds the entrance salary. Employees whose work relates to general business operations, building management and maintenance, or the health of students and staff (such as lunch room managers), do not perform academic administrative functions. § 541.204(c).

The Department also received several comments about postdoctoral scholars. Start Printed Page 32399 See, e.g. , Association of American Medical Colleges; National Postdoctoral Association; UAW Local 5810. Postdoctoral scholars who do not have a primary duty of teaching are not considered bona fide teachers; these employees would generally meet the duties test for the learned professional exemption and would be subject to the salary basis and salary level tests.

Finally, the Council on Government Relations commented that “it is our understanding that the Wage and Hour Division does not assert an employee-employer relationship for graduate students who are simultaneously performing research under faculty supervision.” The Department views graduate students in a graduate school engaged in research under the supervision of a member of the faculty and in the course of obtaining advanced degrees as being in an educational relationship and not in an employment relationship with either the school or of any grantor funding the research, even though the student may receive a stipend for performing the research. 1994 WL 1004845 (June 28, 1994). In an effort to assist the educational sector with the issues addressed above, the Department is issuing additional guidance for this sector in connection with the publication of this Final Rule.

Lastly, in an attempt to address concerns that the terms exempt and nonexempt were not sufficiently descriptive or intuitive, in the NPRM the Department used the terms “overtime-protected” and “overtime-eligible” as synonyms for nonexempt, and “not overtime-protected” and “overtime-ineligible” as synonyms for exempt.[20] The Department received very few comments on this new terminology. The Department believes that these new terms are less confusing to the public and continues to use them in this Final Rule.

G. Effective Date

The Department received a number of comments concerning the effective date of the Final Rule. Citing the need to reduce the burden of implementation, many commenters representing employers requested a delayed effective date following publication of the Final Rule. Commenters including the Fisher & Phillips law firm, the National Association of Independent Schools and the National Association of Business Officers, requested an effective date at least 120 days after publication as was done in the Department's 2004 rulemaking.

Other commenters requested a longer period. The American Car Rental Association (ACRA), Dollar Tree, and the Retail Industry Leaders Association (RILA) each requested a delayed effective date of at least six months following publication of the Final Rule. The United States Chamber of Commerce (Chamber), the Food Marketing Institute (FMI), H-E-B, Island Hospitality Management, the National Association of Landscape Professionals (NALP), the National Council of Chain Restaurants (NCCR), the National Retail Federation (NRF), and the Securities Industry and Financial Markets Association (SIFMA) each requested a one-year delayed effective date. Finally, Laff and Associates, the National Association for Home Care and Hospice, and American Network of Community Options and Resources (ANCOR), which coordinated with more than three dozen home health care organizations, submitted comments requesting an effective date at least two years following publication of the Final Rule, to afford states sufficient time to allocate and appropriate funding.

More than 55,000 individuals submitted comments coordinated by the Center for American Progress, EPI, and MomsRising, requesting that the salary level be raised without delay. Many labor organizations and social justice and women's advocacy organizations, including the Center for Law and Social Policy, the Center for Popular Democracy, the First Shift Justice Project, the Institute for Women's Policy Research (IWPR), the Leadership Conference on Civil and Human Rights, the National Education Association (NEA), the National Coalition of Classified Education Support Employees Union, the National Urban League, the Public Justice Center, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), Women Employed, and others, similarly urged the Department to implement the Final Rule as soon as possible.

The Department has set an effective date of December 1, 2016 for the Final Rule. As several commenters noted, the Department's 2004 Final Rule set an effective date 120 days following publication of the final rule. See 79 FR 22126 (April 23, 2004). Explaining that a 120-day effective date exceeds the 30-day minimum required under the Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days mandated for a “major rule” under the Congressional Review Act, 5 U.S.C. 801(a)(3)(A), we concluded at that time that “a period of 120 days after the date of publication will provide employers ample time to ensure compliance with the final regulations.” Id. The changes provided in the 2004 Final Rule were more extensive and more complicated for employers to implement—the 2004 Final Rule included several significant changes: (1) A significant percentage increase in the salary threshold; (2) a significant reorganization of the part 541 regulations; (3) the elimination of the short and long test structure that had been in place for more than 50 years and the creation of a single standard test; and (4) the creation of a new test for highly compensated employees. In light of the Department's decision not to make changes to the standard duties test at this time, the primary change in this Final Rule is the revision to the salary level test and, therefore, this rule will be much less complicated for employers to implement. Accordingly, the Department believes that the December 1, 2016 effective date for this Final Rule (more than 180 days after publication) will provide ample time for employers to ensure compliance.

Multiple commenters also requested a delayed enforcement period or some form of safe harbor following the effective date of the Final Rule ranging from six months to two years. See, e.g. , ACRA; American Insurance Association and the Property Casualty Insurers Association of America (AIA-PCI); AT&T; Chamber; Dollar Tree; International Franchise Association (IFA); the Littler Mendelson law firm; RILA; the Wessels Sherman law firm; World Travel. Several commenters also asked the Department to provide compliance assistance, whether related specifically to the changes implemented by the Final Rule or more broadly to the FLSA's white collar regulations in general. See, e.g., Chamber; Dollar Tree; IFA; Littler Mendelson; RILA.

The Department appreciates employer concerns regarding compliance and enforcement in light of this rulemaking. As explained above, the Department believes that the December 1, 2016 effective date will provide employers ample time to make any changes that are necessary to comply with the final regulations. The Department will also provide significant outreach and compliance assistance, and will issue a number of guidance documents in connection with the publication of this Final Rule.

III. Need for Rulemaking

One of the Department's primary goals in this rulemaking is updating the section 13(a)(1) exemption's standard Start Printed Page 32400salary level requirement. A salary level test has been part of the regulations since 1938 and has been long recognized as “the best single test” of exempt status. Stein Report at 19, 42; see Weiss Report at 8-9; Kantor Report at 2-3. The salary an employer pays an employee provides “a valuable and easily applied index to the `bona fide' character of the employment for which exemption is claimed” and ensures that section 13(a)(1) of the FLSA “will not invite evasion of section 6 [minimum wage] and section 7 [overtime] for large numbers of workers to whom the wage-and-hour provisions should apply.” Stein Report at 19.

The salary level's function in differentiating exempt from overtime-eligible employees takes on greater importance when there is only one duties test that has no limitation on the amount of nonexempt work that an exempt employee may perform, as has been the case since 2004. Historically, the Department set two different salary tests that were paired with different duties tests. The long test salary level set at the low end of salaries paid to exempt employees imposed a cap on the amount of nonexempt work that an exempt employee could perform. This aspect of the long duties test made it effective in distinguishing lower-paid exempt EAP employees from overtime-eligible employees. In effect, the long duties test ensured that employers could not avoid paying overtime by assigning lower-paid employees a minimal amount of exempt work. The short test salary level, which was historically set at a level between 130 and 180 percent of the long test salary level, did not impose any specific limit on the amount of nonexempt work since that distinction was not considered necessary to aid in classifying higher-paid exempt EAP employees. In eliminating the two salary tests in 2004, the Department instead set the single standard salary level equivalent to the historic levels of the former long test salary, but paired it with a standard duties test based on the short duties test, which did not include a limit on nonexempt work. The effect of this mismatch was to exempt from overtime many lower-wage workers who performed little EAP work and whose work was otherwise indistinguishable from their overtime-eligible colleagues.

The Department has now concluded that the standard salary level we set in 2004 did not account for the absence of the more rigorous long duties test and thus has been less effective in distinguishing between EAP employees who are exempt from overtime and overtime-eligible employees. Additionally, the salary level required for exemption under section 13(a)(1) is currently $455 a week and has not been updated in more than 10 years. The annual value of the salary level ($23,660) is now lower than the poverty threshold for a family of four. As the relationship between the current standard salary level and the poverty threshold shows, the effectiveness of the salary level test as a means of helping determine exempt status diminishes as the wages of employees entitled to overtime pay increase and the real value of the salary threshold falls.

By way of this rulemaking, the Department seeks to update the standard salary level to ensure that it works effectively with the standard duties test to distinguish exempt EAP employees from overtime-protected white collar workers. This will make the exemptions easier for employers and workers to understand and ensure that the FLSA's intended overtime protections are fully implemented. The Department also proposed to update the total annual compensation required for the HCE exemption, because it too has been unchanged since 2004 and must be updated to avoid the unintended exemption of employees in high-wage areas who are clearly not performing EAP duties.

In a further effort to respond to changing conditions in the workplace, the Department's proposal also requested comment on whether to allow nondiscretionary bonuses and incentive payments to satisfy some portion of the standard test salary requirement. Currently, such bonuses are only included in calculating total annual compensation under the HCE test, but some stakeholders have urged broader inclusion, pointing out that in some industries significant portions of salaried EAP employees' earnings may be in the form of such bonuses.

The Department also proposed automatically updating the salary and compensation levels to prevent the levels from becoming outdated. The Department proposed to automatically update the standard salary test, the total annual compensation requirement for highly compensated employees, and the special salary levels for American Samoa and for motion picture industry employees, in order to ensure the continued utility of these tests over time. As the Department explained in 1949, the salary test is only a strong measure of exempt status if it is up to date, and a weakness of the salary test is that increases in wage rates and salary levels over time gradually diminish its effectiveness. See Weiss Report at 8. A rule providing for automatic updates to the salary level using a consistent methodology that has been subject to notice and comment rulemaking will maintain the utility of the dividing line set by the salary level without the need for frequent rulemaking. This modernization of the regulations will provide predictability for employers and employees by replacing infrequent, and thus more drastic, salary level increases with gradual changes occurring at set intervals.

Finally, the Department has always recognized that the salary level test works in tandem with the duties tests to identify bona fide EAP employees. The Department discussed concerns with the duties test for executive employees in the NPRM. The proposal also included questions about the duties tests including requiring exempt employees to spend a specified amount of time performing their primary duty (e.g., a 50 percent primary duty requirement as required under California state law) or otherwise limiting the amount of nonexempt work an exempt employee may perform, and adding to the regulations additional examples illustrating how the exemption may apply to particular occupations. The Department's proposal sought feedback on whether such revisions to the duties tests are needed to ensure that these tests fully reflect the purpose of the exemption.

IV. Final Regulatory Revisions

A. Standard Salary Level

i. History of the Standard Salary Level

The FLSA became law on June 25, 1938, and the first version of part 541, issued later that year, set a minimum salary level of $30 per week for exempt executive and administrative employees. See 3 FR 2518. Since 1938, the Department has increased the salary levels seven times: in 1940, 1949, 1958, 1963, 1970, 1975, and 2004. See Table A. While the Department has refined the method for calculating the salary level to fulfill its mandate, the purpose of the salary level requirement has remained consistent—to define and delimit the scope of the executive, administrative, and professional exemptions. See 29 U.S.C. 213(a)(1). The Department has long recognized that the salary paid to an employee is the “best single test” of exempt status, Stein Report at 19, and that the salary level test furnishes a “completely objective and precise measure which is not subject to differences of opinion or variations in judgment.” Weiss Report at 8-9. The Department reaffirmed this position in the 2004 Final Rule, explaining that the “salary level test is intended to help Start Printed Page 32401distinguish bona fide executive, administrative, and professional employees from those who were not intended by Congress to come within these exempt categories,” and reiterating that any increase in the salary level must “have as its primary objective the drawing of a line separating exempt from nonexempt employees.” 69 FR 22165.

Table A—Weekly Salary Levels for Exemption

Date enactedLong testShort test (all)
ExecutiveAdministrativeProfessional
1938$30$30
19403050$50
1949557575$100
1958809595125
1963100100115150
1970125125140200
1975155155170250
Standard Test
2004$455

In 1940, the Department maintained the $30 per week salary level set in 1938 for executive employees, increased the salary level for administrative employees, and established a salary level for professional employees. The Department used salary surveys from federal and state government agencies, experience gained under the National Industrial Recovery Act, and federal government salaries to determine the salary level that was the “dividing line” between employees performing exempt and nonexempt work. See Stein Report at 9, 20-21, 31-32. The Department recognized that the salary level falls within a continuum of salaries that overlaps the outer boundaries of exempt and nonexempt employees. Specifically, the Department stated:

To make enforcement possible and to provide for equity in competition, a rate should be selected in each of the three definitions which will be reasonable in the light of average conditions for industry as a whole. In some instances the rate selected will inevitably deny exemption to a few employees who might not unreasonably be exempted, but, conversely, in other instances it will undoubtedly permit the exemption of some persons who should properly be entitled to the benefits of the act.

Id. at 6. Taking into account the average salary levels for employees in numerous industries, and the percentage of employees earning below these amounts, the Department set the salary level for each exemption slightly below the “dividing line” suggested by these averages.

In 1949, the Department again looked at salary data from state and federal agencies, including the Bureau of Labor Statistics (BLS). The data reviewed included wages in small towns and low-wage industries, earnings of federal employees, average weekly earnings for exempt employees, starting salaries for college graduates, and salary ranges for different occupations such as bookkeepers, accountants, chemists, and mining engineers. See Weiss Report at 10, 14-17, 19-20. The Department noted that the “salary level adopted must exclude the great bulk of nonexempt persons if it is to be effective.” Id. at 18. Recognizing that the “increase in wage rates and salary levels” since 1940 had “gradually weakened the effectiveness of the present salary tests as a dividing line between exempt and nonexempt employees,” the Department calculated the percentage increase in weekly earnings from 1940 to 1949, and then adopted new salary levels “at a figure slightly lower than might be indicated by the data” in order to protect small businesses. Id. at 8, 14. The Department also cautioned that “a dividing line cannot be drawn with great precision but can at best be only approximate.” Id. at 11.

Also in 1949, the Department established a second, less-stringent duties test for each exemption, but only for those employees paid at or above a higher “short test” salary level. Those paid above the higher salary level were exempt if they also met a “short” duties test, which lessened the duties requirements for exemption.[21] The original, more thorough duties test became known as the “long” test, and remained for more than 50 years the test employers were required to satisfy for those employees whose salary was insufficient to meet the higher short test salary level. Apart from the differing salary requirements, the most significant difference between the short test and the long test was the long test's limit on the amount of time an exempt employee could spend on nonexempt duties while allowing the employer to claim the exemption. A bright-line, 20 percent cap on nonexempt work was instituted as part of the long duties test in 1940 for executive and professional employees, and in 1949 for administrative employees.[22] The short duties tests did not include a specific limit on nonexempt work.[23] The rationale for the less rigorous short duties test was that employees who met the higher salary level were more likely to meet “all the requirements for exemption . . . including the requirement with respect Start Printed Page 32402to nonexempt work.” Id. at 22-23. Thus, a “short-cut test for exemption . . . would facilitate the administration of the regulations without defeating the purposes of section 13(a)(1).” Id.

In contrast to the Department's extensive discussion of the methodology for setting the long test salary level, the Department's rulemakings have included comparatively little discussion of the methodology for setting the short test levels. While the Department set the long test salary level based on an analysis of the defined sample, we set the short test salary level in relation to the long test salary, and the initial short test salary set in 1949 was 133 percent of the highest long test salary (administrative and professional). In 1958, the Department rejected the suggestion that the short test salary level should be increased by the same dollar amount that the highest long test salary levels were increased and instead increased the short test salary to maintain the “percentage differential in relation to the highest [long test] salary requirement.” See Kantor Report at 10. In 1970, the Department adopted a “slightly higher percentage differential” between the “basic and [short test] salary figures,” than previously existed, resulting in an approximately 143 percent ratio between the highest long test salary level (professional) and the short test. 35 FR 885. From 1949 to 1975 the Department set a single short test salary level that applied to all categories of EAP employees while maintaining multiple long test salary levels that applied to the different categories. The ratio of the short test salary level to the long test salary levels ranged from approximately 130 percent to 180 percent over this period.[24] The existence of separate short and long tests remained part of the Department's regulations until 2004. See Table A.

In setting the long test salary level in 1958, the Department considered data collected during 1955 WHD investigations on the “actual salaries paid” to employees who “qualified for exemption” (i.e., met the applicable salary and duties tests), grouped by geographic region, broad industry groups, number of employees, and city size, and supplemented with BLS and Census data to reflect income increases of white collar and manufacturing employees during the period not covered by the Department's investigations. Kantor Report at 6. The Department then set the long test salary levels for exempt employees “at about the levels at which no more than about 10 percent of those in the lowest-wage region, or in the smallest size establishment group, or in the smallest-sized city group, or in the lowest-wage industry of each of the categories would fail to meet the tests.” Id. at 6-7. In other words, the Department set the long test salary level so that only a limited number of workers performing EAP duties (about 10 percent) in the lowest-wage regions and industries would fail to meet the salary level test and therefore be overtime protected. In laying out this methodology, the Department echoed comments from the Weiss Report that the salary tests “simplify enforcement by providing a ready method of screening out the obviously nonexempt employees,” and that “[e]mployees that do not meet the salary test are generally also found not to meet the other requirements of the regulations.” Id. at 2-3. The Department also noted that in our experience misclassification of overtime-protected employees occurs more frequently when the salary levels have “become outdated by a marked upward movement of wages and salaries.” Id. at 5.

The Department followed a similar methodology when determining the appropriate long test salary level increase in 1963, using data regarding salaries paid to exempt workers collected in a 1961 WHD survey. See 28 FR 7002. The salary level for executive and administrative employees was increased to $100 per week, for example, when the 1961 survey data showed that 13 percent of establishments paid one or more exempt executives less than $100 per week, and 4 percent of establishments paid one or more exempt administrative employees less than $100 a week. See 28 FR 7004. The professional exemption salary level was increased to $115 per week, when the 1961 survey data showed that 12 percent of establishments surveyed paid one or more professional employees less than $115 per week. See id. The Department noted that these salary levels approximated the same percentages used in 1958:

Salary tests set at this level would bear approximately the same relationship to the minimum salaries reflected in the 1961 survey data as the tests adopted in 1958, on the occasion of the last previous adjustment, bore to the minimum salaries reflected in a comparable survey, adjusted by trend data to early 1958. At that time, 10 percent of the establishments employing executive employees paid one or more executive employees less than the minimum salary adopted for executive employees and 15 percent of the establishments employing administrative or professional employees paid one or more employees employed in such capacities less than the minimum salary adopted for administrative and professional employees.

Id.

The Department continued to use a similar methodology when updating the long test salary levels in 1970. After examining data from 1968 WHD investigations, 1969 BLS wage data, and information provided in a report issued by the Department in 1969 that included salary data for executive, administrative, and professional employees,[25] the Department increased the long test salary level for executive employees to $125 per week when the salary data showed that 20 percent of executive employees from all regions and 12 percent of executive employees in the West earned less than $130 a week. See 35 FR 884-85. The Department also increased the long test salary levels for administrative and professional employees to $125 and $140, respectively.

In 1975, instead of following these prior approaches, the Department set the long test salary levels based on increases in the Consumer Price Index (CPI), although the Department adjusted the salary level downward “in order to eliminate any inflationary impact.” 40 FR 7091. As a result of this recalibration of the 1970 levels, the long test salary level for the executive and administrative exemptions was set at $155, while the professional level was set at $170. The salary levels adopted were intended as interim levels “pending the completion and analysis of a study by [BLS] covering a six month period in 1975,” and were not meant to set a precedent for future salary level increases. Id. at 7091-92. Although the Department intended to revise the salary levels after completion of the BLS study of actual salaries paid to employees, the envisioned process was never completed, and the “interim” salary levels remained unchanged for the next 29 years.

As reflected in Table A, the short test salary level increased in tandem with the long test level throughout the various rulemakings since 1949. Because the short test was designed to capture only those white collar employees whose salary was sufficiently high to indicate a stronger likelihood of exempt status and thus warrant a less stringent duties requirement, the short Start Printed Page 32403test salary level was always set significantly higher than the long test salary levels. Thus, in 1975 while the long test salary levels ranged from $155 to $170, the short test level was $250.

The salary level test was most recently updated in 2004, when the Department abandoned the concept of separate long and short tests, opting instead for one “standard” test, and set the salary level associated with the new standard duties test at $455 for executive, administrative, and professional employees. Due to the lapse in time between the 1975 and 2004 rulemakings, the salary threshold for the long duties tests (i.e., the lower salary level) did not reflect salaries being paid in the economy and had become ineffective at distinguishing between overtime-eligible and overtime exempt white collar employees. For example, at the time of the 2004 Final Rule, the salary levels for the long duties tests were $155 for executive and administrative employees and $170 for professional employees, while a full-time employee working 40 hours per week at the federal minimum wage ($5.15 per hour) earned $206 per week. See 69 FR 22164. Even the short test salary level at $250 per week was not far above the minimum wage.

The Department in the 2004 Final Rule based the new “standard” duties tests on the short duties tests (which did not limit the amount of nonexempt work that could be performed), and tied them to a single salary test level that was updated from the long test salary (which historically had been paired with a cap on nonexempt work). See 69 FR 22164, 22168-69; see also 68 FR 15570 (“Under the proposal, the minimum salary level to qualify for exemption from the FLSA minimum wage and overtime requirements as an executive, administrative, or professional employee would be increased from $155 per week to $425 per week. This salary level would be referred to as the `standard test,' thus eliminating the `short test' and `long test' terminology.”). The Department concluded that it would be burdensome to require employers to comply with a more complicated long duties test given that the passage of time had rendered the long test salary level largely obsolete. See 69 FR 22164; 68 FR 15564-65. The Department stated at the time that the new standard test salary level accounted for the elimination of the long duties test. See 69 FR 22167.

In determining the new salary level in 2004, the Department reaffirmed our oft-repeated position that the salary level is the “best single test” of exempt status. See 69 FR 22165. Consistent with prior rulemakings, the Department relied on actual earnings data. However, instead of using salary data gathered from WHD investigations, as was done under the Kantor method, the Department used Current Population Survey (CPS) data that encompassed most salaried employees. The Department also set the salary level to exclude roughly the bottom 20 percent of these salaried employees in each of the subpopulations: (1) The South and (2) the retail industry. Thus in setting the standard salary level, the Department was consistent with our previous practice of setting the long test salary level near the lower end of the current range of salaries. Although prior long test salary levels were based on salaries of approximately the lowest 10 percent of exempt salaried employees in low-wage regions and industries (the Kantor long test method), the Department stated that the change in methodology was warranted in part to account for the elimination of the short and long duties tests, and because the utilized data sample included nonexempt salaried employees, as opposed to only exempt salaried employees. However, as the Department acknowledged, the salary arrived at by this method was, in fact, equivalent to the salary derived from the Kantor long test method. See 69 FR 22168. Based on the adopted methodology, the Department ultimately set the salary level for the new standard test at $455 per week.

In summary, the regulatory history reveals a common methodology used, with some variations, to determine appropriate salary levels. In almost every case, the Department examined a broad set of data on actual wages paid to salaried employees and then set the long test salary level at an amount slightly lower than might be indicated by the data. In 1940 and 1949, the Department set the long test salary levels by looking to the average salary paid to the lowest level of exempt employees. Beginning in 1958, the Department set the long test salary levels to exclude approximately the lowest-paid 10 percent of exempt salaried employees in low-wage regions, employment size groups, city sizes, and industry sectors, and we followed a similar methodology in 1963 and 1970. The levels were based on salaries in low-wage categories in order to protect the ability of employers in those areas and industries to utilize the exemptions and in order to mitigate the impact of salaries in higher-paid regions and sectors. In 1975, the Department increased the long test salary levels based on changes in the CPI, adjusting downward to eliminate any potential inflationary impact. See 40 FR 7091 (“However, in order to eliminate any inflationary impact, the interim rates hereinafter specified are set at a level slightly below the rates based on the CPI.”). In each of these rulemakings, the Department set the short test salary level in relation to, and significantly higher than, the long test salary levels (ranging from approximately 130 to 180 percent of the long test salary levels).

In 2004, the Department eliminated the short and long duties tests in favor of a standard duties test (that was similar to the prior less rigorous short test) for each exemption and a single salary level for executive, administrative, and professional employees. This most recent revision established a standard salary level of $455 per week using earnings data of full-time salaried employees (both exempt and nonexempt) in the South and in the retail sector. As in the past, the Department used lower-salary data sets to accommodate those businesses for which salaries were generally lower due to geographic or industry-specific reasons.

ii. Standard Salary Level Proposal

To restore the effectiveness of the salary test, in the NPRM the Department proposed to set the standard salary level equal to the 40th percentile of weekly earnings of full-time salaried workers nationally. Using salary data from 2013, the proposed methodology resulted in a standard salary level of $921 per week, or $47,892 annually. The Department estimated that, by the time of publication of a Final Rule, the proposed methodology would result in a standard salary level of approximately $970 per week, or $50,440 annually.

In proposing to update the salary threshold, the Department sought to reflect increases in actual salary levels nationwide since 2004. As the Department explained in the NPRM, when left at the same amount over time, the effectiveness of the salary level test as a means of determining exempt status diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls. See 80 FR 38517.

The Department also sought to adjust the salary level to address our conclusion that the salary level we set in 2004 was too low given the Department's elimination of the more rigorous long duties test. As discussed above, for many decades the long duties test—which limited the amount of time an exempt employee could spend on nonexempt duties and was paired with a lower salary level—existed in tandem Start Printed Page 32404with a short duties test—which did not contain a specific limit on the amount of nonexempt work and was paired with a salary level that was approximately 130 to 180 percent of the long test salary level. In 2004, the Department eliminated the long and short duties tests and created the new standard duties test, based on the short duties test. The creation of a single standard test that did not limit nonexempt work caused new uncertainty as to what salary level is sufficient to ensure that employees intended to be overtime-protected are not subject to inappropriate classification as not overtime-protected, while minimizing the number of employees disqualified from the exemption even though their primary duty is EAP exempt work. As the Department had observed in 1975, if the salary level associated with such a test is too low, employers may use it to inappropriately classify as exempt employees who would not meet the more rigorous long duties test. 40 FR 7092 (“[T]here are indications that certain employers are utilizing the high salary test to employ otherwise nonexempt employees (i.e., those who perform work in excess of the 20 percent tolerance for nonexempt work or the 40 percent tolerance allowed in the case of executive and administrative employees in retail and service establishments) for excessively long workweeks.”). Rather than pair the standard duties test with a salary level based on the higher short test salary level, however, we tied the new standard duties test to a salary level based on the long duties test. This resulted in a standard salary level that, even in 2004, was too low to effectively screen out from the exemption overtime-eligible white collar employees.

The importance of ensuring that the standard duties test is not paired with too low of a salary level is illustrated by the Department's Burger King litigation in the early 1980's, when the short and long tests were still actively in use. The Department brought two actions arguing that Burger King assistant managers were entitled to overtime protection. Sec'y of Labor v. Burger King Corp., 675 F.2d 516 (2d Cir. 1982); Sec'y of Labor v. Burger King Corp., 672 F.2d 221 (1st Cir. 1982). One group of assistant managers satisfied the higher short test salary level and was therefore subject to the less rigorous short duties test; the other group was paid less and was therefore subject to the long duties test with its limit on nonexempt work. All of the assistant managers performed the same duties, which included spending significant amounts of time performing the same routine, nonexempt work as their subordinates. Both appellate courts found that the higher paid employees were not overtime protected—even though they performed substantial amounts of nonexempt work—because they satisfied the short duties test. The lower paid employees, however, were overtime-protected by application of the more rigorous long duties test. If the long test's lower salary threshold had been paired with a duties test that did not limit nonexempt work—as the Department did in 2004—the lower paid assistant managers would have also lost overtime protection.

In this rulemaking, the Department sought to correct the mismatch between the standard salary level (based on the old long test) and the standard duties test (based on the old short test). As we noted in the NPRM, we are concerned that at the current low salary level employees in lower-level management positions who would have failed the long duties test may be inappropriately classified as ineligible for overtime. At the same time, the Department proposed a lower salary level than the average salary traditionally used for the short duties test in order to minimize the potential that bona fide EAP employees, especially in low-wage regions and industries, might become overtime-protected because they fall below the proposed salary level. As the Department explained, an up-to-date and effective salary level protects against the misclassification of overtime-eligible workers as exempt and simplifies application of the exemption for employers and employees alike.

Consistent with prior rulemakings, the Department reached the proposed salary level after considering available data on actual salary levels currently being paid in the economy. Specifically, as we did in 2004, the Department used CPS data comprising full-time nonhourly employees to determine the proposed salary level. Unlike in the 2004 rulemaking, however, the Department did not further restrict the data by filtering out various employees based on statutory and regulatory exclusions from FLSA coverage or the salary requirement (such as federal employees, doctors, lawyers, and teachers).

The Department proposed to set the salary level as a percentile rooted in the distribution of earnings rather than a specific dollar amount. Because earnings are linked to the type of work salaried workers perform, a percentile serves as an appropriate proxy for distinguishing between overtime-eligible and overtime exempt white collar workers. Based on the historical relationship of the short test salary level to the long test salary level, the Department determined that a salary between approximately the 35th and 55th percentiles of weekly earnings of full-time salaried workers nationwide would work appropriately with the standard duties test. The Department proposed to set the salary level at the low end of this range—the 40th percentile of weekly earnings of full-time salaried workers nationally—to account for low-wage regions and industries and for the fact that employers no longer have a long duties test to fall back on for purposes of exempting lower-salaried workers performing bona fide EAP duties. The Department explained, however, that a standard salary threshold significantly below the 40th percentile would require a more rigorous duties test than the current standard duties test in order to effectively distinguish between white collar employees who are overtime protected and those who may be bona fide EAP employees. See 80 FR 38519, 38532, 38543.

iii. Final Revisions to the Standard Salary Level

The Final Rule adopts the proposed methodology for setting the standard salary level as a percentile of actual salaries currently being paid to full-time nonhourly employees, as reported by BLS based on data obtained from the CPS. However, we have adjusted the data set used in response to a substantial number of comments asserting that the salary level proposed would render overtime-eligible too many bona fide EAP employees in low-wage areas. Rather than set the salary level at the 40th percentile of weekly earnings of full-time salaried workers nationally, this Final Rule sets the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. Census Regions are groupings of states and the District of Columbia that subdivide the United States for the presentation of data by the United States Census Bureau. The current Census Regions are: The Northeast, the Midwest, the South, and the West.[26] The Department determined the “lowest-wage Census Region” by examining the 40th percentile of weekly earnings of full-time salaried workers based on CPS data in each region. For the purposes of this rulemaking, we define the “lowest-wage Census Region” as the Census Region having the lowest Start Printed Page 3240540th percentile of weekly earnings of full-time salaried workers, which currently is the South.[27]

In keeping with our practice, the Department relies on the most up-to-date data available to derive the final salary level from this methodology. See 69 FR 22168. In the NPRM, the Department utilized 2013 salary data for estimating the salary level resulting from the proposed methodology, which was current at the time the Department developed the proposal. In this Final Rule, we rely on salary data from the fourth quarter of 2015, as published by BLS, to set the salary level.[28] Using this data, the Department has determined that the required standard salary level will be $913 per week, or $47,476 annually, based on the 40th percentile of weekly earnings of full-time salaried workers in the South. The $913 salary level that results from the methodology is at the low end of the historical range of short test salary levels, based on the historical ratios between the short and long test salary levels ($889-$1231). See section VI.C.iii.

White collar employees subject to the salary level test earning less than $913 per week will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities. Employees earning this amount or more on a salary or fee basis will qualify for exemption only if they meet the standard duties test, which is unchanged by this Final Rule. As a result of this increase, 4.2 million employees who meet the standard duties test will no longer fall within the EAP exemption and therefore will be overtime-protected. Additionally, 8.9 million employees paid between $455 and $913 per week who do not meet the standard duties test—5.7 million salaried white collar employees and 3.2 million salaried blue collar employees—will now face a lower risk of misclassification.

iv. Discussion of Comments

1. Proposed Increase in the Standard Salary Level

The overwhelming majority of commenters agreed that the standard salary level needs to be increased, including many commenters writing on behalf of employers, such as the Business Roundtable, Catholic Charities USA, College and University Professional Association for Human Resources (CUPA-HR), CVS Health, the National Restaurant Association (NRA), and the Northeastern Retail Lumber Association. Multiple commenters echoed the Department's observation in the NPRM that the current standard salary level of $455 per week, or $23,660 annually, is below the 2014 poverty threshold for a family of four.[29] The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) pointed out that the current salary level is only slightly higher than the state minimum wage for forty hours of work in several states, and noted that it has long been widely recognized that workers whose pay is “close to the minimum wage” are “not the kind of employees Congress intended to deny overtime protection” (citing Stein Report at 5). Some salaried employees currently classified as exempt managers commented that they earn less per hour than the employees they supervise.

The Department also received multiple comments, including comments from the American Sustainable Business Council and the Heartland Alliance for Human Needs and Human Rights, expressing concern that the current salary level facilitates the misclassification of overtime-eligible employees as overtime exempt. The RAND Corporation submitted a study estimating that 11.5 percent of salaried workers are misclassified as exempt—and therefore do not receive overtime compensation—even though their primary duty is not exempt work or they earn less than the current salary level, while a human resource professional from Florida “estimate[d] that 40 percent of those employees my clients class[ify] as . . . exempt are really non-exempt.”

A few commenters, however, such as the National Grocers Association (NGA), urged the Department to maintain the current salary level of $455 per week. For example, the National Lumber and Building Material Dealers Association stated that the current salary level is appropriate for managers in many sectors and regions. Mutual of Omaha requested that the Department create a “grandfathered exemption,” by applying the current salary level to currently exempt employees.

The Department received a significant number of comments in response to our proposal to set the standard salary level equal to the 40th percentile of weekly earnings of full-time salaried employees nationally (estimated to be $970 per week, or $50,440 per year, in 2016). Many commenters endorsed the proposed salary level as an appropriate dividing line between employees performing exempt and overtime-protected work, but others objected that it was either too low or too high. The majority of employees and commenters representing employees believed the proposed salary level amount was appropriate or should be increased, while the majority of employers and commenters representing them believed the salary level amount should be lower than the threshold the Department proposed.

A large number of commenters supported the proposed salary level either by explicitly endorsing the proposed increase or supporting the Department's proposed rule generally. Commenters who supported the salary level included thousands of individual employees, writing independently or as part of comment campaigns, and organizations representing employees (such as the American Association of Retired Persons (AARP), the Coalition of Labor Union Women, National Council of La Raza, the National Domestic Workers Alliance (NDWA), the National Partnership for Women & Families (Partnership), Service Employees International Union (SEIU), the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW), and many others). Some employers and human resource professionals also supported the proposed increase. For example, the owner of a hardware store in Minneapolis explained that he had observed “large businesses abuse their employees for many years by misclassifying them as exempt from overtime,” and stated that the Department's proposal would “help bring things back in line.” H-E-B stated that it pays “competitive wages,” and is “supportive of doubling the minimum salary threshold to the proposed amount of $50,400,” although it urged the Department to consider making regional adjustments because other retailers pay lower wages based on geographic differences. Some Members of Congress expressed support for the Department's proposal, although other Members of Congress opposed it.

The Department received many comments from those who endorsed the proposal (as well as those seeking a higher salary level) asserting that a significant increase to the current salary level is necessary to effectuate Congress' intent to extend the FLSA's wage and hour protections broadly to most workers in the United States. See, e.g., Start Printed Page 32406Comment from 57 labor law professors; AFL-CIO; Equal Justice Center; National Employment Lawyers Association (NELA); Nichols Kaster law firm; SEIU. AFL-CIO stated that Congress intended the EAP exemptions to apply only to employees who have sufficient bargaining power such that they do not need the Act's protections against overwork and who perform work that cannot be easily spread to other workers. AFL-CIO and the EPI further stated that Congress knew from experience with Depression-era worker protection legislation that employers sometimes misclassified ordinary workers as managers to evade paying overtime premiums, and as a result, exempted only “bona fide” executive, administrative, and professional employees. The National Employment Law Project (NELP) commented that the Department set the salary level too low in 2004, especially when paired with a more lenient duties test than the prior long duties test. A comment submitted on behalf of 57 labor law professors noted that, even if the Department had paired the $455 per week standard salary level set in 2004 with a more rigorous duties test, it was still lower than necessary to achieve a threshold equivalent to the inflation-adjusted amount of the 1975 long test salary level.

The Department agrees with commenters that a significant increase in the salary threshold is required to ensure the FLSA's overtime protections are fully implemented. The salary level test should provide an “index to the `bona fide' character of the employment for which exemption is claimed” and ensure that the EAP exemption “will not invite evasion” of the FLSA's minimum wage and overtime requirements “for large numbers of workers to whom the wage-and-hour provisions should apply.” Stein Report at 19. The current salary level, however, is less than the 10th percentile of weekly earnings of full-time salaried workers both nationally and in the South. The salary threshold's function in differentiating exempt from nonexempt employees takes on greater importance, moreover, when there is only one standard duties test that has no limitation on the amount of nonexempt work that an exempt employee may perform, as has been the case since 2004. As the Department has long recognized, if too low a salary level accompanies a duties test that does not limit nonexempt work, employers may utilize the salary test to employ “otherwise nonexempt employees,” who perform large amounts of nonexempt work, “for excessively long workweeks.” 40 FR 7092. The Department believes that the effect of the 2004 Final Rule's pairing of a standard duties test based on the short duties test (for higher paid employees) with a salary test based on the long test (for lower paid employees) was to exempt from overtime many lower paid workers who performed little EAP work and whose work was otherwise indistinguishable from their overtime-eligible colleagues.[30] This has resulted in the inappropriate classification of employees as EAP exempt who pass the standard duties test but would have failed the long duties test. A significant increase from the 2004 threshold is therefore necessary, not only to account for the declining real value of the salary threshold, but also to correct for the fact that the Department set the standard salary level in 2004 without adjusting for the elimination of the more rigorous long duties test.

Many commenters (including some that believe that the proposed salary level is reasonable) urged the Department to choose a method that results in a higher salary level. The vast majority of these commenters, including NELA, Nichols Kaster, the Rudy, Exelrod, Zieff & Lowe law firm, the Texas Employment Lawyers Association, and the United Food and Commercial Workers International Union (UFCW), asserted that the Department should set the standard salary level equal to the 50th percentile of earnings of full-time salaried workers nationally. The Center for Effective Government stated that the Department should set the standard salary level equal to the 60th percentile of earnings of full-time salaried workers nationally. NELP recommended that the Department adjust for inflation the short test salary level adopted by the Department in 1975, or in the alternative, adopt a threshold of $1,122 per week.

Commenters, such as the UFCW, pointed out that the Department's proposed salary is lower than the average historical salary ratio associated with the short duties test, which is the basis for the standard duties test. Multiple commenters noted that the proposed salary level covers a smaller share of all salaried workers (40 percent) than the 1975 short test salary level, which covered 62 percent of full-time salaried employees. See, e.g. , AFL-CIO; NELA; Rudy, Exelrod, Zieff & Lowe. NELA stated that the 1975 short test salary level was 1.57 times the median wage of all full-time wage and salary workers, a ratio which they asserted would result in a current salary threshold of over $65,000 per year based on first quarter 2015 data. EPI commented that the proposed salary level is lower than the short test salary levels adopted by the Department in the 1960s and 1970s, when adjusted for inflation to 2013 dollars. EPI also asserted that the salary threshold should be higher than the inflation-adjusted amounts of short test salary levels from the past in part to account for the fact that management and professional salaries grew faster than the rate of inflation after 1970, noting that CEO pay among the top 350 U.S. corporations was almost 11 times higher in 2014 than it was in 1978, after adjusting for inflation. Other commenters, including USW, similarly cited the large growth in high-level executive pay in recent decades in support of the Department's proposal.

Commenters urging a higher salary level also asserted that the Department's proposed salary level excludes from overtime protection too large a percentage of employees in traditionally nonexempt occupations and is too low to adequately minimize the risk of inappropriately classifying overtime-eligible workers as overtime exempt. AFL-CIO stated that the Department has previously set the long test salary level at an amount about 25 percent higher than the average starting salary for newly hired college graduates, and they asserted that this would yield a standard salary level of $52,000 per year. AFL-CIO contended that the salary test must be set at a “high enough level that large numbers of eligible workers are not stranded above the threshold.” NELA likewise urged the Department to “aim for a threshold where the number of non-exempt employees earning salaries above the threshold equals the number of otherwise exempt employees earning less than the threshold”—an amount we estimated in the NPRM would be roughly equal to the 50th percentile of Start Printed Page 32407weekly earnings of full-time salaried workers nationally. See 80 FR 38560.

The Department understands commenters' concerns that the proposed standard salary level was lower than the 50th percentile of full-time salaried workers ($1,065 based on 2013 data) and updating the 1975 short test salary ($1,083 based on 2013 data). As the Department stated in the NPRM, however, we are concerned that a standard salary threshold at that level, in the absence of a lower salary long test to fall back on, would deny employers the ability to use the exemption for too many employees in low-wage areas and industries who perform EAP duties.

In contrast to commenters representing employees, a great number of commenters representing employers and many individual employers objected that the Department's proposed salary level was too high. While commenters supporting the proposed threshold or advocating for a higher threshold asserted that the proposal is lower than indicated by historical short test levels, commenters advocating for a lower threshold asserted that the proposed threshold is out of step with historical long test levels. For example, the Jackson Lewis law firm asserted that the proposed threshold is higher than any past long test salary level for the executive exemption, when adjusted for inflation to 2015 dollars. The Chamber stated that the ratio of the proposed salary level to the minimum wage is too high, based on an analysis they performed that weighted the historic long test salary levels three times more heavily than historic short test salary levels.

Some commenters requesting a lower salary threshold, such as the American Association of Orthopaedic Executives, Associated Builders and Contractors (ABC), and the Montana Conservation Corps, urged the Department to instead adjust the 2004 salary level for inflation. Many others stated that the Department should set the salary level at the 20th percentile of earnings of full-time salaried employees in the South and in the retail industry, as we did in 2004. See, e.g. , American Hotel and Lodging Association (AH&LA); Dollar Tree; NRF. The NRA stated that it could support Alternative 3 in the NPRM, a salary level derived from the Kantor long test method taking the 10th percentile of earnings of likely exempt employees in low-wage regions, employment size groups, city sizes, and industries. Fisher & Phillips urged the Department to set the salary level at the 20th percentile of earnings of exempt employee salaries “in the lowest geographical and industry sectors.” Some commenters suggested a lower percentile of full-time salaried workers nationwide than the Department proposed. For example, the Chamber, which preferred that the Department use a different data source set to set the salary level, stated in the alternative that a salary level at up to the 30th percentile of earnings of full-time salaried workers nationally would “better reflect the actual dividing line between exempt and non-exempt employees.” In addition, several commenters focused on the salary level amount rather than, or in addition to, the methodology used to derive the level. For example, a non-profit organization providing senior care recommended a salary level of up to $40,000; FMI stated that most of its grocer members would not see a significant disruption at a salary level of up to $38,376; and the BOK Financial Corporation advocated for a $30,000 salary level. Finally, some commenters, such as the Partnership to Protect Workplace Opportunity (PPWO) and IFA, asserted that the Department's proposed salary level should be lower, but declined to propose a specific number or method. Most of these suggestions do not represent a meaningful departure from the methodology the Department has historically used to set the lower long test salary level, and the Department does not believe that these suggested salary levels are sufficient to account fully for the elimination of the long duties test, as explained below.

The Department received many comments stating that by using a nationwide data set, the proposal fails to adequately account for salary disparities among regions and areas, industries, and firms of different sizes. Some commenters, including the Assisted Living Federation of America and the American Seniors Housing Association (ALFA), Jackson Lewis, and PPWO, asserted that adopting the proposal would effectively eliminate the exemption for certain industries or in certain parts of the country and, as a result, would exceed the Department's statutory authority.

Multiple commenters asserted that the proposed salary level is too high for low-wage regions. See, e.g. , Chamber; FMI; International Association of Amusement Parks and Attractions; King's Daughters' School; NRF; PPWO; Society for Human Resource Management (SHRM); and many individual commenters. Several commenters cited to an analysis conducted by Oxford Economics finding that in eight southern states—Arkansas, Florida, Louisiana, Mississippi, North Carolina, Oklahoma, Tennessee, and West Virginia—more than 50 percent of nonhourly workers earn less than $970 per week, the amount the Department predicted the proposed salary level would be in 2016. PPWO cited to a study showing that 100 percent of first-line supervisors of food preparation and serving workers in Mississippi—an occupational category for which the Department predicted 10 to 50 percent of workers would likely pass the duties test when we quantified the impact of our proposal [31] —would fall below the proposed salary level. The National Association of Home Builders (NAHB) analyzed state-level data and found that 50 percent or more of first line construction supervisors in Arkansas, Mississippi, New Mexico, and Tennessee would be affected by the Department's proposal. The National Network to End Domestic Violence commented that for one of its member organizations in a rural state, nine out of eleven staff members earn less than the proposed salary level, and a lender with locations across Alabama, Louisiana, Mississippi, and Tennessee stated that 81 percent (62 out of 74) of its branch managers earn less than $51,000 per year in base salary. Some commenters, for example, the HR Policy Association and National Association of Manufacturers (NAM), expressed concern that employees performing the same duties will be exempt in one location but overtime protected in another.

In addition to these comments, multiple commenters noted that salaries may vary widely within a state or region, especially between rural or smaller communities and urban areas. Several commenters, including Columbia County, Pennsylvania, Community Transportation Association of the Northwest, Elk Valley Rancheria Indian Tribe, Jackson Lewis, the Jamestown S'Klallam Tribe, the National Board for Certified Counselors, the National Newspaper Association, NRF, and the Northern Michigan Chamber Alliance, commented that the proposed salary level is too high for rural areas and small communities. HR Policy Association stated that 14 percent of chief executives and 32 percent of general and operations managers in small cities and rural areas earn less than the salary level calculated using the proposed methodology and 2014 data. Commenters also compared earnings and the cost of living in lower-wage communities to very high wage urban areas and asserted that the Start Printed Page 32408Department's proposal fails to fully analyze and take into account these differences. See, e.g. , America Outdoors (comparing rural areas to Washington, DC, New York City, and San Francisco); Ashley Manor LLC; National Pest Management Association.

Several commenters also asserted that the proposed salary level ($50,440 based on projections for 2016) would have a disproportionate impact on employers in low-wage industries, such as the retail and restaurant industries. HR Policy Association stated that in the retail, accommodation, and food services and drinking places industries, over one-third of general and operations managers would fall below the proposed salary level in 2014 dollars. FMI stated that “millions of employees in retail who clearly meet the duties requirements for retail earn below $50,000.” NRA cited a 2014 survey finding that the median base salary paid to restaurant managers is $47,000 and to crew and shift supervisors is $38,000, and multiple chain restaurant businesses submitted comments stating that if the Department increased the salary level to our proposed threshold and updated it annually, “there might be no exempt employees in many of our restaurants.”

The Department also heard from multiple commenters, such as IFA, the National Federation of Independent Businesses (NFIB), NGA, the National Independent Automobile Dealers Association, the National Newspaper Association, Senator David Vitter, and Representative James Inhofe, that our proposal would have a disproportionate impact on small businesses. The Office of Advocacy of the United States Small Business Administration (Advocacy) stated that the proposed salary threshold would “add significant compliance costs . . . . on small entities, particularly to businesses in low-wage regions and in industries that operate with low profit margins.”

Several commenters, including the Chamber, Littler Mendelson, Fisher & Phillips, and the Seyfarth Shaw law firm, noted that the Department has historically adjusted the salary level to account for low-wage regions and industries and small establishments, and asserted that the Department failed to do so in this rulemaking. These and other commenters urged the Department to account for such variations by setting the salary level at a point near the lower range of salaries in the lowest-wage regions or industries. For example, among other alternatives, the Chamber asked the Department to consider setting the salary level at the 40th percentile of earnings of full-time salaried employees in Louisiana, Mississippi, and Oklahoma ($784 per week or $40,786 annually), which it described as the three states with the lowest salaries. Many other commenters, including the International Bancshares Corporation, the National Association of Federal Credit Unions, the National Council of Young Men's Christian Associations of the United States of America (YMCA), and many individual commenters, urged the Department to adopt different salary levels for different regions of the country or for different industries or sizes of businesses.

Commenters representing employee interests, however, disagreed that the Department should make further adjustment for low-wage regions and industries. EPI commented that because the Department's proposed standard salary level falls within historic short test levels, the Department's earlier adjustments to account for regional wage disparities are “baked in.” See also AFL-CIO. This is because the Department historically set the short test level as a function of a long test level, which had been adjusted to reflect low-wage regions and industries. UFCW similarly asserted that the Department should not have proposed a salary threshold lower than the average short test salary level to account for low-wage regions and industries, because the data from which the Department drew the percentile includes the earnings of employees in low-wage industries and regions. In addition, AFL-CIO and EPI stated that the Department should be less concerned about the impact of regional wage variation than in prior rulemakings. According to an analysis conducted by EPI, over the past four decades, wages in lower-wage states have “moved much closer to national norms.”

The Department has considered these comments and appreciates the strong views in this area. While our proposal did account for lower salaries in some regions and industries by setting the salary level lower than both the average historical salary ratio associated with the short duties test ($1,019 per week according to the data set used in the Final Rule) and the median of full-time salaried workers ($1,146 according to the data set used in the Final Rule), we have determined that further adjustment to account for regional variation is warranted. The proposed salary level ($972 based on the fourth quarter 2015 data) is in the lowest quarter of the historical range of the short test salary, but it is not at the bottom of the range, and based on the comments, we are concerned that this salary would not sufficiently account for regional variation in wages. Accordingly, we have adjusted the data set used to set the salary level to further reflect salary disparities in low-wage areas. Under this Final Rule, the Department will set the standard salary level equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. Based on fourth quarter 2015 data, the lowest-wage Census Region is the South, and the 40th percentile of weekly earnings of full-time salaried workers in the South is $913.[32] See Table B. By comparison, the 40th percentile nationally is $972, and the 40th percentile in the highest-wage Census Region (the West) is $1,050.

Table B—40th percentile of Earnings for Full-Time Salaried Workers by Census Region

Census region40th percentile of earnings of full-time salaried workers (in 4th quarter 2015)
South$913
Midwest994
Northeast1,036
West1,050
All Census Regions972

This adjustment will ensure that the salary level “is practicable over the broadest possible range of industries, business sizes and geographic regions.” 69 FR 22171 (citing Kantor Report at 5). Setting the salary level equal to the weekly earnings of the 40th percentile of full-time salaried workers in the lowest-wage Census Region represents the 22nd percentile of likely exempt employees in the South, the 19th percentile of likely exempt employees in the Midwest, and the 16th percentile of likely exempt employees in both the West and the Northeast.[33] The 40th percentile of full-time salaried workers in the South also represents the 20th percentile of likely exempt employees working in small establishments and the 28th percentile of likely exempt employees who do not live in Start Printed Page 32409metropolitan areas.[34] This increase from the traditional 10 percent of exempt employees excluded by the Kantor long test method reflects the shift to a salary level appropriate to the standard duties test. Because the long duties test included a limit on the amount of nonexempt work that could be performed, it could be paired with a low salary that excluded few employees performing EAP duties. In the absence of such a limitation in the duties test, it is necessary to set the salary level higher (resulting in the exclusion of more employees performing EAP duties) because the salary level must perform more of the screening function previously performed by the long duties test. Accordingly the salary level set in this Final Rule corrects for the mismatch in the 2004 Final Rule between a low salary threshold and a less rigorous duties test.

The decrease in the salary level due to the change to the lowest-wage region data set addresses commenters' concerns that the salary test would eliminate the exemption for certain industries or certain parts of the country. For example, while PPWO asserted that the proposed salary level would have excluded from the exemption all first line supervisors of food preparation and service workers in Mississippi, the revised salary level adopted in this Final Rule excludes only 78 percent of these workers. This leaves 22 percent of such workers covered by the exemption in Mississippi—appropriately within the 10 to 50 percent of employees in this occupation nationwide predicted to pass the standard duties test under the Department's probability codes. See section VI Appendix A. Likewise, 55 percent of first line supervisors of construction trades and extraction workers in the South earn above the Final Rule's salary threshold, even though only 0 to 10 percent of such workers nationwide are likely to pass the standard duties test. Id. The revised salary is approximately equivalent to the 2014 median base salary paid to restaurant managers cited by NRA.

Setting the salary level equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region is consistent with the Department's historical practice of examining a broad set of data on actual wages paid to salaried employees and then setting the salary level at an amount slightly lower than might be indicated by the data. In addition, this method is consistent with our previous practice of examining data broken out by geographic area in setting the salary level. The Final Rule methodology also benefits from continuity with our 2004 methodology, in which we set the salary level equal to a percentile of the earnings of full-time salaried workers in the South. Finally, the approach adopted in this Final Rule fulfills the Department's goals of making the salary methodology simpler and more transparent. See 80 FR 38527.

The Department believes that the standard salary level set in this Final Rule will appropriately distinguish between those who likely are bona fide EAP employees and those who likely are not, when paired with the current duties test and will not require a return to a limit on the performance of nonexempt work. The Final Rule salary level, like the Department's proposed salary threshold, exceeds the inflation-adjusted 2004 salary level and the levels suggested by the Kantor long test and 2004 methods (all of which were based on the lower long test salary), but is at the low end of the historical range of short test salary levels, based on the historical ratios between the short and long test salary levels. A substantially higher standard salary threshold, such as the levels advocated by some commenters representing employees, would fail to account for the absence of a long test, which historically allowed employers to claim the exemption at a lower salary level for employees who satisfy a more restrictive duties test. This is particularly true given that the salary threshold will apply nationwide, including in low-wage regions and low-wage industries. In the NPRM, the Department considered setting the standard salary equal to the 50th percentile of earnings of full-time salaried workers nationwide ($1,146 per week or $59,592 annually according to the data set used in this Final Rule); we also considered adjusting the 1975 short test salary level of $250 for inflation ($1,100 per week or $57,200 annually). We declined to adopt either alternative, however, due to our belief that the salary level generated through these methods would result in overtime eligibility for too many employees in low-wage regions and industries who are bona fide EAP employees. See 80 FR 38534. As discussed above, the Department received a great number of comments in response to the NPRM that confirm our concern about the applicability of such a salary level in low-wage regions and industries. Based on these comments and for the reasons discussed above, the Department has decided to use a regional data set that results in a lower standard salary level than the national data set we proposed in the NPRM.

The Department is mindful that any salary level must adequately demarcate bona fide EAP employees in higher-wage, as well as lower-wage areas. As we have previously explained when discussing the salary level to be paired with the more rigorous long duties test, the threshold “can be of little help in identifying” bona fide EAP employees when “large numbers” of traditionally nonexempt workers in large cities earn more than this amount. Weiss Report at 10. By setting the salary equal to the 40th percentile of salaries in the lowest-wage Census Region, a higher percentile than we chose in 2004, the Department's methodology is sufficiently protective of employees in higher-wage regions and accounts for the fact that the standard salary level will be paired with a less rigorous standard duties test that does not specifically limit the amount of nonexempt work that can be performed. The $913 salary level is within the historical range of short test salary levels, based on the ratios between the short and long test salary levels, albeit at the low end of that range. To the extent that salaries in lower-wage regions have converged with salaries elsewhere in the country, as some commenters suggested, tying the salary level to salaries in the lowest-wage Census Region is even less likely to result in a threshold that is inappropriate for other areas.

The Department believes the Final Rule methodology strikes an appropriate balance between minimizing the risk of employers misclassifying overtime-eligible workers as exempt, while reducing the undue exclusions from exemption of bona fide EAP employees. As the Department explained in the NPRM, we have long recognized that there will always be white collar overtime-eligible employees who are paid above the salary threshold, as well as employees performing EAP duties who are paid below the salary threshold. Under the Final Rule, 5.7 million white collar employees who fail the standard duties test will now also fail the salary level test eliminating their risk of misclassification as exempt. The Department estimates that 732,000 of these white collar salaried workers are overtime-eligible but their employers do not recognize them as such. See section VI.C.ii. An additional 4.2 million employees who meet the standard duties test (but may not have met the long duties test prior to 2004) will no Start Printed Page 32410longer qualify for the EAP exemption—and therefore will become overtime eligible—because they are paid less than the new salary level. See section VI.C.ii. Although the Department recognizes that an estimated 6.5 million white collar employees who fail the standard duties test will still earn at least the new salary level, these overtime-eligible employees will be protected by the application of the duties test.

Other measures confirm the appropriateness of the new standard salary level. The Department has traditionally considered newly hired college graduates to be overtime eligible and the Final Rule salary level is slightly higher than the average salary for college graduates under 25 years old.[35] See Weiss Report at 19. Setting the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the South also places it far enough above the minimum wage to provide an effective means of screening out workers who should be overtime protected. Following each update from 1949 to 1975, the ratio of the short test salary level to the earnings of a full-time, nonexempt, minimum wage worker equaled between approximately 3.0 and 6.25.[36] The proposed salary level is 3.15 times full-time minimum wage earnings ($913/($7.25 × 40)), which is within the historical range.

To the extent that some commenters advocated an even further downward adjustment to the salary level to account for low-wage regions and industries, the Department believes that such an adjustment would not be appropriate given that the Department has decided not to introduce a specific limitation on the performance of nonexempt work into the standard duties test. Moreover, we note that the standard salary level must be practicable in high-wage areas as well as in low-wage ones. As we have previously stated, the salary threshold “can be of little help in identifying” bona fide EAP employees when “large numbers” of traditionally nonexempt workers in high wage areas earn in excess of the salary level. Weiss Report at 10. In California and New York, for example, 69 percent of first-line supervisors in construction, 51 percent of paralegals and legal assistants, and 31 percent of secretaries and administrative assistants earn $913 or more per week, despite the fact that the probability of these workers passing the standard duties test is between 0 to 10 percent. With respect to commenters who expressed concern that employees performing the same duties will be exempt in one location and overtime protected in another, the Department notes that this has always been the case and may occur at any salary level. Lowering the salary threshold below the amount set in this Final Rule would result in a salary level that is inappropriate for traditionally nonexempt workers in high wage areas, especially when paired with the less rigorous standard duties test.

The $913 salary level adopted in this Final Rule corresponds to the low end of the historical range of salaries for the short duties test on which the current standard duties test is based ($889 to $1,231). The Department considered the possibility of adopting a salary level equal to the 35th percentile of weekly earnings of full-time salaried employees in the South, which would yield a salary level of $842 per week based on fourth quarter 2015 data. However, given that this would result in a salary level lower than the bottom of the historical range of short test salary levels, based on the historical ratios between the short and long test salary levels, the Department determined that setting the salary level at the 35th percentile of the lowest-wage Census Region would not work effectively with the standard duties test. The Department also considered adopting a higher salary level within the historical range of short test salaries as advocated by many employee representatives, but we remain concerned about the adverse effect such a threshold might have on low-wage regions. Accordingly, the Department has concluded that the 40th percentile of weekly earnings of full-time salaried workers in the South represents the best dividing line between employees who are overtime eligible and those who may not be overtime eligible, when paired with the standard duties test.

Historically the Department has looked to low-wage industries as well as low-wage regions in setting the long test salary and, in 2004, we looked specifically to the retail industry in setting the standard salary level.[37] In developing this Final Rule, the Department examined weekly earnings of full-time salaried employees in the retail and restaurant industries to determine if adjustment based on these industries was appropriate. In the retail industry, the 40th percentile of full-time salaried employees nationally is $848 per week, a salary below the low end of the historical range of the short test salary ($889) and therefore one that would not work effectively with the standard duties test. In the restaurant industry (food services and drinking places), the 40th percentile of full-time salaried employees nationally is $724 per week. This salary is not only below the low end of the historical short test range, but also only slightly above the historical average of the long test salary level ($719).[38 39] The Department therefore concluded that setting the salary level based on wages in these industries would require significant changes to the standard duties test, which commenters representing employers overwhelmingly opposed, see, e.g. , NRF, NRA, FMI, and which would be inconsistent with the Department's goal of simplifying the exemption. The Department believes, moreover, that the lower salary level yielded by using the lowest-wage Census Region is appropriate over the range of industries, including low-wage industries, because it captures differences across regional labor markets without attempting to adjust to specific industry conditions.

With respect to the Chamber's suggestion that the Department limit the data set to the three lowest-wage states in the South (for which the 40th percentile of weekly earnings is $784), this methodology yields a salary level significantly below the historical range of short test salary levels and for all the reasons discussed above would Start Printed Page 32411therefore fail to work appropriately with the standard duties test. If the Department had instead looked to Census divisions, the West South Central division,[40] which includes Louisiana and Oklahoma has a 40th percentile of weekly earnings of full-time salaried workers of $878, and the East South Central division,[41] which includes Mississippi, has a 40th percentile of weekly earnings of full-time salaried workers of $849. Both of these would also result in a salary level that is lower than the bottom of the historical short test salary range and would thus necessitate changes to the duties test. Moreover, the Department believes that the best practice is to set the salary level based on an entire region, as we did in 2004, rather than based on a select and very small subset of states or on a Census division.[42] The three Census divisions that make up the South Census Region have lower wages at the 40th percentile of weekly earnings of full-time salaried workers than any other Census divisions. By focusing on the lowest-wage Census Region—made up of the three lowest-wage Census divisions—we have removed the effect of the three higher earnings Census Regions on the salary level, ensuring the salary level is not driven by earnings in high- or even middle-wage regions of the country. Moreover, establishing the salary level based on a Census Region provides a sufficient data set to capture differences across regional labor markets and produces a salary level that is appropriate on a national basis.

The Department also declines to adopt different salary levels for different regions of the country or for different industries or sizes of businesses. The Department has always maintained a salary level applicable to all areas and industries. As the Department explained when we rejected regional salary thresholds in the 2004 Final Rule, adopting multiple different salary levels is not administratively feasible “because of the large number of different salary levels this would require.” 69 FR 22171. Furthermore, as discussed earlier, the Department believes the methodology adopted in this Final Rule will adequately account for commenters' concerns about geographic and other disparities by setting the salary level based on salaries in the lowest-wage Census Region.

In addition to asserting that the proposed salary level is inappropriate for low-wage regions and industries, commenters requesting a lower salary level also criticized the methodology the Department used in our proposal, took issue with the justifications underpinning the proposal, and predicted that the proposed salary level would negatively impact employers and employees. Some commenters criticized the Department for using a different percentile to set the salary threshold than it has in the past. See, e.g. , FMI; National Roofing Contractors Association (asserting that the “threshold would extend to the 40th percentile of wage earners, up sharply from methodologies used when previously determining the threshold that used the 10th and 20th percentile”).

Several commenters also disagreed with the Department's explanation that it was necessary to set a percentile that would not only reflect increases in nationwide salary levels since 2004, but also correct for the fact that the salary level set in 2004 was too low—when paired with a duties test based on the historical short duties test—to effectively screen out overtime-protected white collar employees from the exemption. Many of these commenters asserted that the Department did account for the elimination of the long duties test, by increasing “the percentile used from 10th to 20th.” Littler Mendelson; see also AH&LA; NRF. The Chamber commented that the Department did not need to adjust for the elimination of the long duties test in 2004 because the long test salary level was so in need of updating that the long duties test had been effectively inoperative for many years. Finally, some commenters asserted that the Department improperly equates the standard duties test with the less rigorous short duties test. See, e.g. , World Floor Covering Association (“DOL did not eliminate the long duty test and keep the short duty test in 2004. Rather, it combined the short and long duties tests by relaxing the strict standards under the long duty test and increasing duties under the short duty test.”) The Chamber and the Iowa Association of Business and Industry pointed out that in 2004 the Department added to the standard executive duties test an additional requirement (that the employee be one who has “the authority to hire or fire other employees or whose suggestions and recommendations” as to these matters “are given particular weight”), and the Iowa Association of Business and Industry also noted that the Department added a “matters of significance” qualification to the administrative standard duties test.

The Department disagrees with these comments, and we continue to believe that the salary level set in 2004 was too low to effectively screen out from the exemption overtime-protected white collar employees when paired with the standard duties test. As an initial matter, we disagree with commenters' suggestion that the standard duties test does not closely approximate the historic short duties test because of minor differences between the two tests. In 2004, the Department described these differences as merely “de minimis,” and explained that the new standard duties test is “substantially similar” to the old short duties test. 69 FR 22192-93; 69 FR 22214. The key difference between the old short test and the old long test was that the long test imposed a bright-line 20 percent cap on the amount of time an exempt employee could spend on nonexempt duties (40 percent for employees in the retail or service industries). The short duties test, in contrast, did not impose a specific limitation on nonexempt work because the short test was intended to apply only to workers who earned salaries high enough that such a limitation was unnecessary. The standard duties test developed in 2004 takes the short test approach and does not specifically limit nonexempt work.

When moving to a standard duties test based on the short duties test in 2004, the Department relied on the methodology we had historically used to set the long test salary threshold, with two changes. First, the Department set the salary level based on the earnings of exempt and nonexempt full-time salaried employees. In previous Start Printed Page 32412rulemakings, the Department had looked only at salary data on employees who met the EAP exemption, who earn higher salaries on average than nonexempt salaried employees. See 69 FR 22166-67. Second, recognizing that “employees earning a lower salary are more likely non-exempt,” the Department offset the first change by making an additional adjustment. Id. The 2004 Final Rule set the salary level to exclude from exemption “approximately the lowest 20 percent of all salaried employees,” whereas previously the Department set the salary level to exclude “approximately the lowest-paid 10 percent of exempt salaried employees.” 69 FR 22168 (emphases added and in original); 69 FR 22166 (emphases added). By setting the salary threshold at a higher percentile of a data set that included employees likely to earn lower salaries, the Department explained that we reached a final salary level that was “very consistent with past approaches” to setting the long test salary threshold. 69 FR 22167.

Although the Department also recognized the need to make an additional adjustment to the long test salary level methodology because of the move to the standard duties test, see 69 FR 22167, the salary level included in the 2004 Final Rule ultimately did not do so. The Department indicated that the change in percentile could account for both the fact that the data now “included nonexempt salaried employees” and “the proposed change from the `short' and `long' test structure.” Id.; see 68 FR 15571. At the same time, however, the Department acknowledged that the change to the 20th percentile of exempt and nonexempt salaried employees produced a salary that was in fact roughly equivalent to the salary derived through the methodology previously used to set the long test salary levels. See 69 FR 22168. As the data tables in the 2004 Final Rule show, the $455 salary level excluded only 8.2 percent of likely exempt employees in the South and 10.2 percent of likely exempt employees in retail. See 69 FR 22169, Table 4; see also 69 FR 22168 (“The lowest 10 percent of likely exempt salaried employees in the South earn just over $475 per week.”).[43] Accordingly, the Department set the standard salary level using a methodology that yielded a result consistent with the methodology we had historically used to set the salary level paired with the long duties test, even though the new standard duties test was based on the short duties test. This was a methodological error, even if employers at the time were primarily using the less rigorous short duties test. The fact that the long duties test was unused because the Department had neglected to update the salary associated with it for 29 years does not mean that we did not need to account for the removal of the long test when the standard test was established. The Department is now correcting this error by setting the salary level equivalent to the 40th, rather than the 20th, percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South). This percentile results in a salary level that is at the low end of the historical range of short test salary levels, based on the historical ratios between the short and long test salary levels, but is appropriately higher than the historical long test salary levels. By making this change to our 2004 methodology, the Department better accounts for the fact that the standard duties test is significantly less rigorous than the long duties test and, therefore, the salary threshold must play a greater role in protecting overtime-eligible employees.

2. Purpose of the Salary Level Test

Several commenters that stated that the Department's proposed threshold is too high asserted that the proposal alters the purpose of the salary test and inappropriately minimizes the role of the duties test by excluding from the exemption too many employees who satisfy the standard duties test. In support of this point, SHRM noted the Department's estimate that 25 percent of white collar workers subject to the salary level test who currently meet the duties test would be overtime-protected under the Department's proposed salary level. HR Policy Association stated that, if the salary level was set according to the Department's proposed methodology, 25 percent of accountants and auditors, 24 percent of business and financial operation managers, and 11 percent of “chief executives” would not qualify for the EAP exemption in 2014.

Several commenters representing employers stated that the salary level has historically been set at a level such that “employees below it would clearly not meet any duties test,” or would be very unlikely to satisfy the duties requirements. NRA; see also HR Policy Association; Jackson Lewis; SHRM. SHRM and others asserted that the proposal would for the first time set the salary level such that a large number of employees who satisfy the duties test would be excluded from the exemption, which would therefore make them overtime eligible. These commenters pointed to the Department's statement, when setting the long test salary thresholds in 1949 and 1958, that the thresholds should not defeat the exemption for “any substantial number of individuals who could reasonably be classified for purposes of the Act as bona fide executive, administrative, or professional employees,” and should provide a “ready method of screening out the obviously exempt employees.” Weiss Report at 8-9; Kantor Report at 2-3. Commenters asserted that because only those who are “very likely to satisfy” the duties tests earn salaries above the Department's proposed threshold, see Jackson Lewis (emphasis in comment), the Department has turned the historical purpose of the salary level “on its head.” See PPWO. PPWO, SHRM, and others further commented that the Department's proposal improperly renders the duties test superfluous and makes the salary level test the “sole” determinant of exempt status.

The Chamber, FMI, and SHRM also stated that the Department lacks the authority to set wages for, or establish a salary level with the goal of, improving the conditions of executive, administrative, and professional employees. IFA asserted that because the Department's proposal makes nonexempt what IFA characterized as a significant number of employees who would clearly meet the duties test, the proposal “expands the number of employees eligible for overtime beyond what Congress envisioned.”

Commenters representing employees, however, disagreed that the purpose of the salary level is to identify employees who are very likely to fail the duties tests. NELA and other commenters asserted that the primary purpose of the salary level is to prevent employers from inappropriately classifying as exempt those who are not “bona fide” executive, administrative, or professional employees. NELA noted that the proposed threshold is lower than the salaries of roughly 41 percent of salaried workers who fail the duties test, according to the NPRM, and AFL-CIO commented that under the proposal, “the percentage of overtime-Start Printed Page 32413eligible white collar salaried employees above” the salary level “will still be considerably higher than the percentage of employees below the threshold who meet the duties test.” Commenters representing employees also disagreed that the Department's proposal would prevent employers from taking advantage of the exemption for a substantial number of bona fide executive, administrative, or professional employees. For instance, EPI noted that BLS scores occupations by skill, knowledge, and responsibility, and finds an hourly wage of about $24 (or $970 for a 40-hour workweek) is below the salary level associated with supervisory responsibilities.

As the Department explained in the NPRM, the purpose of the salary level test has always been to “distinguish bona fide executive, administrative, and professional employees from those who were not intended by Congress to come within these exempt categories.” 80 FR 38524. Any increase in the salary level must therefore “have as its primary objective the drawing of a line separating exempt from nonexempt employees.” Id. The salary methodology established in this Final Rule fulfills this purpose by effectively and efficiently demarcating between white collar employees who are overtime protected and those who may be bona fide EAP employees.

The Department does not believe that the methodology adopted in this Final Rule would defeat the exemption for too many employees who pass the standard duties test, or render the standard duties test superfluous. There will always be some employees performing EAP duties who are paid below the salary threshold, as well as overtime-eligible employees who are paid above the salary threshold (and thus whose status turns on the application of the duties test). See 80 FR 38527. Under the Final Rule, 6.5 million white collar workers who earn above the required salary level do not satisfy the standard duties test, representing 47 percent of the total number of white collar workers who fail the duties test. For these overtime-eligible salaried workers, the standard duties test rather than the salary test will dictate their exemption status. For example, 48 percent of secretaries and administrative assistants in banking nationwide earn at or above the $913 per week salary level adopted in this Final Rule, although at most 10 percent of such workers are likely to pass the standard duties test. Likewise, 71 percent of first-line supervisors of mechanics, installers, and repairers in the utilities industry nationwide earn at least $913 per week, even though only 10 to 50 percent of such workers are likely to pass the standard duties test.

By contrast, of salaried white collar workers who currently meet the standard duties test, 5.0 million (22.0 percent) earn less than $913 per week, and will thus be eligible for overtime under this Final Rule. Whenever the Department increases the salary level, it is inevitable that “some employees who have been classified as exempt under the present salary tests will no longer be within the exemption under any new tests adopted.” Kantor Report at 5. As we have explained, such employees include “some whose status in management or the professions is questionable in view of their low salaries,” and some “whose exempt status, on the basis of their duties and responsibilities, is questionable.” Id. Moreover, as we have long been aware, if too low a salary level is paired with a duties test that does not specifically limit nonexempt work, employers may inappropriately classify as exempt workers who perform large amounts of nonexempt work. See 40 FR 7092. The Department believes that many of the workers who will no longer be exempt as a result of this rulemaking would have failed the long duties test and are currently inappropriately classified because of the mismatch between the current standard duties test and the standard salary level. To the extent that commenters expressed concerns that the proposal would exclude from exemption too many bona fide EAP employees in certain areas and industries, the Department has recalibrated the methodology in this Final Rule to better take into account salaries in low-wage regions and industries, as discussed earlier, while remaining cognizant of the corresponding but opposite impact on high-wage regions and industries. See section VI.C.ii.

Commenters asserting that the Department's proposal turned the purpose of the salary level test “on its head” misconstrue the relationship between the salary level test and the duties test as it has existed throughout most of the history of the part 541 regulations. The fact that an employee satisfies the duties test, especially the more lenient standard duties test, does not alone indicate that he or she is a bona fide executive, administrative, or professional employee. The salary level test and duties test have always worked in tandem to distinguish those who Congress intended the FLSA to protect from those who are “bona fide” EAP employees. The Department has long recognized, moreover, that “salary is the best single indicator of the degree of importance involved in a particular employee's job,” Weiss Report at 9, and “the best single test of the employer's good faith in characterizing the employment as of a professional nature.” Stein Report at 42. Thus, the Department acknowledged shortly after we first promulgated the part 541 regulations that, in the absence of a clause “barring an employee from the exemption if he performs a substantial amount of nonexempt work,” it becomes “all the more important” to set the salary level “high enough to prevent abuse.” Stein Report at 26. This inverse correlation between the salary level and the duties requirements was the basis of the separate short and long tests, which co-existed until 2004.

As reflected in many comments favoring a lower salary level, the Department historically paired the long duties test—which limited that amount of nonexempt work an exempt employee could perform—with a salary level designed to minimize the number of employees satisfying that test who would be deemed overtime-eligible based on their salaries. Even then, the Department noted that the long test salary level should exclude the “great bulk” of nonexempt employees from the EAP exemption. Weiss Report at 18. When the Department enacted the short test in 1949, however, we recognized that this more permissive “short-cut test” for determining exempt status—which did not specifically limit the amount of time an exempt employee could spend on nonexempt duties—must be paired with a “considerably higher” salary level. Id. at 23. This salary level, the Department explained, “must be high enough” to qualify for the EAP exemption “only those persons about whose exemption there is normally no question.” Id. Accordingly, the Department set the short test threshold such that those who earned above this level would meet the requirements of the long duties test—including the limit on performing nonexempt work—“with only minor or insignificant exceptions.” Id. In other words, the short test salary threshold was sufficiently high that an employee earning above this level was not only “very likely,” but nearly certain, to satisfy the long duties test, as well as the short duties test. Between 1949 and 1975, the Department adhered to these principles by enacting short test salary levels at approximately 130 to 180 percent of the long test salary levels.

The standard duties test adopted in 2004, and unchanged by this Final Rule, is essentially the same as the old short duties test. It does not specifically limit the amount of time an exempt employee Start Printed Page 32414can spend performing nonexempt duties. Accordingly, the Department disagrees with commenters that suggest that the current duties test can be paired appropriately with a salary level derived from the same methodology we have historically used to set the salary level paired with the long duties test. The Department also disagrees, however, with commenters that suggest the current standard duties test could be paired with a salary level derived from the 50th percentile of full-time salaried workers or from the 1975 short test salary level without also reinstating a lower-salaried long test. The methodology adopted in this Final Rule results in a salary level that is higher than indicated by historical long test methodologies, but at the low end of the historical salary range of short test salary levels, based on the ratios between the short and long test salary levels. The Department believes that this approach strikes an appropriate balance between protecting overtime-eligible workers and reducing undue exclusions from exemption of bona fide EAP employees. It also does so without necessitating a return to the two-test structure or imposing a quantitative limit on nonexempt work—alternatives that many of these same commenters strenuously opposed. See section IV.F.

3. Data Used To Set the Standard Salary Level

Some commenters representing employers also raised concerns about the Department's use of the CPS data on full-time nonhourly employees. The Chamber and Fisher & Phillips advocated that rather than calculate the salary level using the CPS data, the Department should create our own data set of exempt salaried employees drawn from WHD investigations and field research. NAM stated that the CPS data provides an “apples-to-oranges” comparison because it reflects all nonhourly compensation, while the Department's proposal excludes certain forms of compensation (for example, some incentive pay) from counting toward the salary threshold, and other commenters made similar assertions. The Chamber, Fisher & Phillips, and the Iowa Association of Business and Industry (IABI) also disagreed with the Department's conclusion that CPS data on compensation paid to nonhourly workers is an appropriate proxy for compensation paid to salaried workers. Employees sampled might be paid on a piece-rate or commission basis, for example, and thus, the Chamber stated, the “non-hourly worker category is at best a rough and imprecise measure of workers paid on the basis required for exempt status.” In addition, IABI, the International Foodservice Distributors Association, and others criticized the Department for declining to further restrict the CPS sample by filtering out various categories of employees—such as teachers, lawyers, or federal employees—based on statutory and regulatory exclusions from FLSA coverage or the salary requirement.

The Department continues to believe, as we did in 2004, that CPS data is the best available data for setting the salary threshold. The CPS is a large, statistically robust survey jointly administered by the Census Bureau and BLS, and it is widely used and cited by industry analysts. It surveys 60,000 households a month, covering a nationally representative sample of workers, industries, and geographic areas and includes a breadth of detail (e.g., occupation classifications, salary, hours worked, and industry). As the Department explained in the NPRM, the CPS offers substantial advantage over data drawn from the pool of our own investigations, because the Department's investigations contain too few observations to yield statistically meaningful results. See 80 FR 38528.

The Department considers CPS data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers, as we explained in the NPRM. See 80 FR 38517 n.1. The Department believes that most nonhourly workers are likely to be paid a salary, and although the data may include earnings of workers paid on a fee basis, the EAP exemption can apply to bona fide administrative and professional employees compensated in this manner. See § 541.605. Moreover, as explained in greater detail in section IV.C., the Department has adopted a change to the salary basis test in this Final Rule which will newly allow employers to satisfy as much as 10 percent of the standard salary level requirement through the payment of nondiscretionary bonuses and incentive pay (including commissions). The Department acknowledges that the CPS data set may include some compensation excluded from the salary test; however, we are not aware of any statistically robust source that more closely reflects salary as defined in our regulations, and the commenters did not identify any such source.

Finally, the Department disagrees that we should have excluded the salaries of employees in various job categories, such as teachers, doctors, and lawyers, because they are not subject to the part 541 salary level test. These white collar professionals are part of the universe of executive, administrative, and professional employees who Congress intended to exempt from the FLSA's minimum wage and overtime requirements. Including them in the data set achieves a sample that is more representative of EAP salary levels throughout the economy. Moving to an even more standardized sample that does not require adjustments also serves the Department's goal of making the salary methodology as transparent, accessible, and as easily replicated as possible, and is consistent with the President's directive to simplify the part 541 regulations.

4. Comments Requesting a Phase-In of the Proposed Increase

Many employers and commenters representing them also expressed concern about the magnitude of the Department's proposed increase from the 2004 salary level. Under the proposal, the salary level would have increased from $455 a week to $972 per week based on fourth quarter 2015 data, a 113.6 percent overall increase and 9.5 percent average per year increase. Under the Final Rule, the salary level will increase to $913 per week, a 100.7 percent overall increase and 8.4 percent average per year increase. Several commenters, including the Chamber, Littler Mendelson, and NAHB, described the proposed percentage increase in the salary level as “unprecedented.” Many commenters urged the Department to gradually phase-in an increase to the salary level. SHRM, for example, stated that a phased-in approach will provide some flexibility to employers, allowing them to gather information about the hours that currently nonexempt employees work and to budget for any increased wages and other costs. Independent Sector noted that an appropriate phase-in period would allow non-profit organizations to adjust to a new salary level without reducing programs and services. Some commenters advocating an incremental approach, such as PPWO and the Chamber, opposed the proposed salary level, but requested a gradual phase-in if the Department moves forward with the proposal. Others did not oppose the Department's proposed threshold, so long as the Department phases in the increase. See, e.g., National League of Cities; the Northeastern Retail Lumber Association; United Community Ministries; Walmart; Washington Metro Area Transit Authority (WMATA).

Contrary to some commenters' assertions, the magnitude of the salary increase proposed by the Department is not unprecedented. The 2004 Final Rule Start Printed Page 32415increased the then-current long test salary level for executive and administrative employees by 193.5 percent (from $155 to $455), and increased the then-current short test salary level by 82 percent (from $250 to $455). See 69 FR 22123 (explaining that the final rule nearly “triples” the “minimum salary required for exemption”). Further, as EPI pointed out in its comment, in the approximately 11 years between 1938 and 1949, the administrative long test salary test increased 150 percent. The Department acknowledges that this rulemaking enacts a sizeable increase to the 2004 salary level; however, such an increase is necessary in order to reflect increases in actual salary levels nationwide since 2004 and correct the 2004 Final Rule's mismatch between the standard duties test and the standard salary level based on the long duties test level. As we explained in the NPRM, this is the first time that the Department has needed to correct for an incongruity between the existing salary level and the applicable duties test. That said, under our proposal, the salary level effective in 2016 would have been $50,544; under the Final Rule, we project that the salary level will not reach $50,000 until the first update on January 1, 2020. Additionally, as explained in section II.G., this Final Rule has a delayed effective date of December 1, 2016—more than the 120-day delayed effective date following publication of the 2004 Final Rule. The Department believes that the timing of the effective date of this Final Rule will help minimize disruption as employers adjust to the new salary level.

5. Impacts of the Increased Salary Level

Commenters identified many impacts that they believed would flow from the proposed increase in the standard salary level. Commenters representing employers and employees differed dramatically on some of the predicted impacts of the rule. In addition, where commenters representing employers and employees agreed on likely outcomes, they viewed the advantages and disadvantages of those outcomes quite differently.

Many employers and their representatives stated that employers would not be able to afford to increase the salaries of most of their currently exempt employees to the proposed level. Therefore, they stated that they were likely to reclassify many of these employees to overtime-protected status, which they asserted would disadvantage the employees in a number of ways and would not increase their total compensation. In contrast, employee advocates predicted that workers will benefit from the increased salary level; those who receive a salary increase to remain exempt will benefit directly, and those who are reclassified as overtime eligible will benefit in other ways, as detailed below.

Employers and their representatives, including AH&LA, CUPA-HR, NAM, NRF, and the National Small Business Association (NSBA), suggested that they would reclassify many employees to overtime-protected status. For example, the NGA surveyed its members, and 98 percent stated they would reclassify some currently exempt workers, and 80 percent stated that they would reclassify 50 percent or more because they cannot afford to increase their salaries. NCCR commented that one restaurant chain stated it likely would reclassify 90 percent of its managers and another company with more than 250 table service restaurants estimated that 85 percent of its managers have base salaries below the proposed threshold. CUPA-HR stated that 87 percent of those responding to its survey of higher education human resource professionals stated “they would have to reclassify any exempt employee currently making less than $47,500” (emphasis in comment).

Many employers and their representatives stated that they would convert newly nonexempt employees to hourly pay and pay them an hourly rate that would result in employees working the same number of hours and earning the same amount of pay as before, even after accounting for overtime premium pay. Also, some employers indicated they might reduce their workers' hours, especially over time, in an attempt to avoid paying any overtime premium pay, so the formerly exempt workers' hours and pay ultimately could be lower. See, e.g. , AH&LA; CUPA-HR; Jackson Lewis; NAM; NRF; NSBA.

Some commenters gave specific estimates of the percentage of newly nonexempt employees who would have their overtime hours limited. Associated General Contractors of America (AGC) surveyed its construction contractor members and more than 60 percent expected to institute policies and practices to ensure that newly overtime-eligible employees do not work more than 40 hours per week. ANCOR surveyed service provider organizations and more than 70 percent stated that they would prohibit or significantly restrict overtime hours. SHRM similarly commented that 70 percent of its survey respondents stated they would implement restrictive overtime policies. NRF cited an Oxford Economics report and stated that 463,000 retail workers would be reclassified to nonexempt status and those employees who work overtime would be converted to hourly pay, with their earnings remaining the same after their hourly rates of pay were adjusted, while an additional 231,500 retail employees would be reclassified to nonexempt status and have their hours and earnings reduced.[44]

Not all employers indicated such high numbers of employees would be reclassified, converted to hourly pay, or limited in hours. For example, NAM stated that 41 percent of manufacturers stated they would reclassify employees and 37.2 percent stated they would then reduce employees' hours. NAHB stated that 33 percent of survey respondents indicated they would need to make some change regarding construction supervisors, and 56 percent of that subgroup indicated they would take steps to minimize their overtime. However, only 13 percent of respondents stated they would reduce salary, and only 13 percent stated they would switch employees from a salary to an hourly rate.

Numerous employers and their representatives, including AH&LA, CUPA-HR, NCCR, Nebraska Furniture Mart, NRA, NRF, OneTouchPoint, Pizza Properties, Seyfarth Shaw, SHRM, SIFMA, and the Salvation Army, also commented that the employees who were reclassified to nonexempt status would be further disadvantaged because they would lose valuable fringe benefits, such as life insurance, long-term disability insurance, increased vacation time, incentive compensation, tuition reimbursement, and increased retirement contributions. They noted that many employers offer such benefits only to exempt employees, or provide them to exempt employees at a greater rate or at a reduced cost. In addition, ANCOR and others stated that nonexempt workers' fringe benefits would be negatively affected because employers would take funds away from such benefits in order to pay for the increased costs of the rule. AGC surveyed its construction contractor members, and 40 percent expected Start Printed Page 32416affected employees to lose some fringe benefits. With regard to those employees who remain exempt and receive a higher salary, some employer representatives, including AH&LA, NCCR, and NRF, stated that the employees would not actually benefit because employers would make other changes, such as reducing or eliminating bonuses or other incentive compensation, in order to keep their total labor costs the same. These commenters viewed this as problematic because these employees are in middle management positions that are “key steps on the ladder of professional success” and incentive compensation is an important motivator. AH&LA stated that reducing incentive compensation “curtails the ability of employers to reward their star employees,” although they acknowledged that this concern would be mitigated if incentive compensation could count toward the increased salary level. NAHB's survey results showed that 55 percent of those employers who indicated that some change for construction supervisors would be necessary would reduce or eliminate bonuses, while 33 percent stated they would reduce or eliminate other benefits.

Employer groups also stated that employees reclassified to nonexempt status and converted to hourly pay would be harmed by the loss of flexibility and the loss of the guarantee of receiving the same salary every workweek. Employers and their representatives, including AH&LA, American Bankers Association (ABA), the Chamber, FMI, IFA, New Jersey Association of Mental Health and Addiction Agencies, OneTouchPoint, PPWO, SIFMA, Seyfarth Shaw, and SHRM, asserted that exempt status gives employees the flexibility to come in late, leave early, and respond to unexpected events such as taking a sick child to the doctor. Moreover, they can do so without fear of losing pay for the time spent away from work. Newly overtime-eligible employees, these commenters asserted, will have to account for their time and they will have to think more carefully about taking unpaid time off to deal with personal and family issues. Employer representatives noted that another benefit of exempt status is that many employers allow exempt employees to perform some of their work remotely and outside of normal business hours, such as from home during the evening, as best suits the employees' personal schedules. See, e.g., AH&LA; American Staffing Association; CUPA-HR; HR Policy Association; Jackson Lewis; Maryland Chamber of Commerce; SIFMA; Women Impacting Public Policy (WIPP); YMCA. Commenters stated that many employers do not allow nonexempt employees this same flexibility in work location and in the ability to work during non-traditional hours, as it is more difficult to monitor their hours and ensure proper compensation for all hours worked. For example, SHRM stated that 67 percent of its survey respondents indicated decreased workplace flexibility and autonomy were likely results of the Department's proposal.

Employer groups also stated that employees reclassified to nonexempt status will lose out on after-hours management training programs and committee meetings and thus have fewer opportunities for career advancement. See, e.g., AH&LA; ANCOR; Construction Industry Round Table; Credit Union National Association; CUPA-HR; Jackson Lewis; Kentucky Pharmacists Association; Maryland Chamber of Commerce; NCCR; NRF; New York State Restaurant Association; PPWO; SIFMA; SHRM. Many of these commenters also stated that newly overtime-protected workers will not be permitted to work extra hours to get the job done as a way to prove their talents and dedication, and they will not be asked to perform the most challenging and important managerial functions. Employers asserted that these changes will “hollow out” the ranks of middle management, limit existing career paths, and negatively affect the newly nonexempt employees' promotion potential and future earnings. See, e.g., Michigan Chamber of Commerce; NCCR; NRF.

Many employers and their representatives also emphasized that the loss of exempt status will have a negative impact on employee morale. They stated that employees sought out their management role and view their exempt status as an indication of the employer's recognition of their achievements and their position as part of the management team. They stated that the loss of exempt status will be perceived as a demotion and devaluation of their roles in the organization, even if other aspects of their compensation remain the same. See, e.g., ANCOR; Chamber; CUPA-HR; FMI; Jackson Lewis; NAM; NCCR; NGA; NRA; Pizza Properties; SIFMA; SHRM; Salvation Army. NRF cited a survey it commissioned of 200 salaried retail and restaurant managers showing that the change in status would make 45 percent of managers feel like they were “performing a job instead of pursuing a career,” and 31 percent would feel limited in their ability to advance in their careers.

Finally, employer representatives identified a number of other negative consequences that they believed would flow from the adoption of the proposed increase in the standard salary level. For example, some employer groups, including FMI, NRF, and WIPP, emphasized that they believed employers would eliminate full-time jobs and create part-time jobs. FMI, NGA, Seyfarth Shaw, and SHRM indicated that employers would use part-time workers to ensure that newly overtime-eligible employees did not have to work overtime hours. ANCOR, NGA, Seyfarth Shaw, and the YMCA also predicted that, as the hours of the newly nonexempt workers are restricted, employers will respond by increasing the workload burden and scope of responsibility of the managers and supervisors who remain exempt.

Employees and employee advocates, on the other hand, predicted that workers would benefit in a variety of ways from the proposed increase in the standard salary level. First, they saw direct benefits from the proposed salary because, for those who remain exempt but currently earn less than the proposed increase, they will receive additional pay each week in order to raise them to the new salary level. Employees who are reclassified to nonexempt status will get more time outside of work to spend with their families or to engage in leisure activities if their hours are reduced, and thus they will have a better work-life balance; alternatively, they will be paid time-and-a-half for any overtime hours they work. Finally, work opportunities will be spread as workers who had been unemployed or underemployed will gain additional hours. Employee advocates viewed these outcomes as consistent with the fundamental purpose of the FLSA's overtime provision. See, e.g., AFL-CIO; American Federation of Teachers (AFT); Legal Aid Society-Employment Law Center (ELC); National Women's Law Center (NWLC); Partnership.

Some advocates, including AFL-CIO, AFT, and NELP, emphasized the benefits of spreading employment in light of the harms that come from working long hours, citing studies showing that long hours are related to stress and injuries at the workplace and increased incidences of certain chronic diseases like heart disease, diabetes, and depression. They also cited studies showing the high cost to businesses associated with absenteeism and turnover due to workplace stress and stated that productivity would improve Start Printed Page 32417by reducing turnover. The AFT noted that if employers cut formerly exempt workers' hours and add more nonexempt jobs, that would “likely have a salutary effect on wages since the low wage growth in our economy is related to employment slack.”

EPI disputed the employers' claim that wages and hours would remain the same after employees were reclassified to nonexempt status. EPI emphasized that this view assumes that employees have no bargaining power. However, EPI stated that a “consistent finding of both labor and macroeconomics is that nominal wages are `sticky,' meaning that employers rarely will lower them.” EPI concluded this is particularly likely to be the case now, given that the unemployment rate for college graduates was just 2.6 percent in July 2015 and for those in “management, professional, and related” occupations was just 3.1 percent. Therefore, employers will not be able to reduce employees' wage rates when they are reclassified to nonexempt status to the full extent that would be necessary for the employees to receive no additional compensation for overtime hours worked. NELP similarly emphasized that, at a time when even low-wage employers are raising their starting wages in order to attract and retain a qualified workforce, it would be “a foolhardy business practice” for employers to risk losing formerly exempt workers by decreasing their wages and hours.

Worker advocates also disputed employers' claims that workers would lose privileges and flexibility after they were converted. For example, EPI pointed to research based on the General Social Survey showing that salaried workers and hourly workers experience similarly limited workplace flexibility at levels below $50,000 per year. The research showed that 43-44 percent of hourly workers paid between $22,500 and $49,999 were able to “sometimes” or “often” change their starting or quitting times. That percentage only increased to 53-55 percent for salaried workers in that same range. Only when salaries rose above $60,000 did 80 percent of salaried workers report being able to “sometimes” or “often” change their starting or quitting times. Employees paid hourly actually reported more flexibility in the ability to take time off during the work day to take care of personal matters or family members, with 41 percent of hourly workers earning $40,000-$49,999 stating it was “not at all hard” compared to only 34 percent of salaried workers. Finally, salaried workers reported slightly greater levels of work stress than hourly workers, and they worked mandatory overtime at the same frequency as hourly workers and more days of overtime in general.

Many of the comments from individual exempt employees similarly emphasized their lack of flexibility. For example, a retail store manager described working 55-60 hours a week, with store staffing kept at the bare minimum of two-person coverage. Therefore, the manager has little “flexibility when an employee calls out sick. I have to pick up the slack.” A chef similarly stated that he routinely works 20-30 hours of overtime per week, and has to modify his schedule to meet the demands of the business, including by filling in if an overtime-eligible cook gets sick. Another exempt employee who reported working 1136 hours of overtime in three years (an average of approximately 49 hours of work per week) stated, “[i]f I complete my work in 30 hours I still have to stay for the required work hours of the company & longer as required or requested.” A manager of a community home for the intellectually disabled concurred, stating that the homes “have to be staffed 24 hours a day, 365 day[s] per year. To reduce[ ] organizational overtime, managers are expected to work when employees call in sick, are on leave, and when a client is in the hospital and needs a 24 hour sitter. Managers also pitch in to help other homes when there is a need.” Other exempt workers similarly noted that they are scheduled to staff specific shifts and also are required to fill in for hourly workers who call out sick, when positions are vacant, when extra hours are needed such as around the holidays, or when the employer has to cut payroll to meet its targets.

With regard to the loss of “status,” NELP commented that, even if employers do reclassify some employees to nonexempt status, there is no reason to consider that a demotion. NELP stated the employer can continue to give nonexempt employees whatever job titles are appropriate and is not required to otherwise diminish their stature. SEIU emphasized that it is not the designation of “exempt” that provides status to workers, but rather the pay and benefits that should accompany that designation. For example, most registered nurses, who perform bona fide professional duties and whose earnings typically exceed the proposed salary, nonetheless prefer to be paid hourly and be overtime eligible. SEIU concluded that “[b]eing classified as ineligible for overtime is little comfort to a worker who routinely works more than forty hours a week and can barely afford child care for the time she is missing with her family.” The UAW, representing postdoctoral scholars, made the same point regarding status, concluding that “their low pay indicates that their employers do not view them or treat them as bona fide professionals.”

Numerous individual employees also stated that they would not perceive a change from exempt to overtime-protected status as a demotion. For example, one employee stated that he sometimes works seven days and more than 55 hours per week, and that he would “gladly move down to non-exempt and punch a time card. At least I would finally be paid fairly for all the hours I am putting in.” A retail store manager similarly stated that he works an average of 55-60 hours per week and looks forward to either receiving an increased salary or the return of his personal life. He rejected the view that exempt employees would feel demoted by a change in status, saying he does not want a meaningless title and would not “be embarrassed if my employees find out I've been bumped to hourly again.” Another store manager with 12 years of experience emphasized “I am NOT concerned with the transition from being exempt to non exempt if that were to happen.” A convenience store manager who works an average of 60-65 hours per week stated that 7 of the 8 exempt employees he knows quit in the past year due to being overworked without any additional compensation, and he stated that workers feel that an exempt position is “a demotion rather than a promotion.” Another exempt employee stated that he believes that businesses often use salaried positions as a way to cut down on overtime costs, and that the employers “who are bemoaning the loss of `status' for their employees are probably those who have used this trick to get more hours worked for less money.”

In response to some employers' assertions that they will reclassify many of their currently exempt employees to overtime-protected status, convert them to hourly pay, modify their pay so that they work the same number of hours and earn the same amount, and potentially reduce their hours in the long run, the Department estimates that 60.4 percent [45] of exempt affected Start Printed Page 32418employees do not currently work any overtime hours. As explained in detail in the economic impact analysis in section VI.D.iv., we expect there to be relatively little change in the weekly earnings or weekly hours of such employees. We agree that for the remaining employees, who do regularly or occasionally work overtime hours, the impact of the rule will depend upon how their employers choose to respond, and we recognize there likely will be a variety of responses from which employers can choose. For example, employers will raise the salaries of some employees to the new required level; employers will reclassify some other employees to nonexempt status and provide minimum wage and overtime protections and may attempt to minimize the overall cost by modifying those employees' regular rates of pay and reducing their hours. The economic impact analysis discusses the range of possible outcomes. However, as explained in section VI.D.iv., based upon our review of the economic literature, the Department concludes that the most likely outcome is that affected workers who work overtime hours and who are reclassified to overtime-protected status on average will receive increased earnings, because employers will not be able to fully adjust their regular rate of pay to the extent necessary to provide only the same level of earnings. As further explained in the economic impact analysis, workers whose exemption status changes also will see their work hours decrease on average, and the extra hours will be spread among other workers.[46] The Department views these outcomes as fully consistent with the dual purposes of the FLSA's overtime requirement: (1) Spreading employment by incentivizing employers to hire additional employees, but rewarding those employees who are required to work overtime with time-and-a-half pay for overtime hours; and (2) avoiding detrimental effects on the health and well-being of employees by minimizing excessive working hours.

The Department recognizes that these outcomes are averages and some employees ultimately may receive lower earnings if their employers reduce their hours more extensively in an effort to ensure that no overtime hours are worked. However, such employees will receive extra time off. Therefore, the Department partially concurs with the comments of the individual employees and employee advocates who stated that the overall impact of the rule would benefit employees in a variety of ways, whether through an increased salary, overtime earnings when they have to work extra hours, time off, and/or additional hours of work for those who were previously unemployed or underemployed.

Some employers also asserted that employees reclassified as nonexempt would lose fringe benefits such as life insurance, disability insurance, increased vacation time, and bonuses and other incentive compensation that they provide only to exempt employees. The Department notes that employers may choose to continue to provide such benefits to workers who employers like ABA and IFA described as “critically important”; the design and scope of such fringe benefit and incentive compensation programs are within the employers' control. We see no compelling reason why employers cannot redesign their compensation plans to provide such fringe benefits and bonus payments based upon, for example, the employees' job titles rather than based upon their exemption status.[47]

With regard to the employer claim that employees reclassified to overtime-protected status would lose flexibility in their schedule or the ability to take a few hours off when needed for personal purposes, the Department notes that the employees who are affected by this Final Rule currently earn a salary between $455 per week and $913 per week (or between $23,660 and $47,476 per year). The results of the General Social Survey [48] research discussed in the EPI comment indicate that hourly-paid workers and salaried workers earning between $22,500 and $49,999 have little difference in workplace flexibility with regard to an employee's ability to modify his or her starting time or quitting time; a substantial increase in such flexibility is not seen until workers earn above $60,000. Moreover, workers paid hourly who earn between $40,000 and $49,999 actually reported more flexibility to take time off during the day than salaried workers in that pay range. Many of the comments the Department received from individual exempt employees similarly reflected a lack of current flexibility, with employees indicating they were routinely scheduled to work well in excess of 40 hours per week and also had to fill in for other employees who were out sick or on vacation or when positions were unfilled. Therefore, the Department does not believe that workers will incur the significant change in flexibility that some employers envisioned if the employer reclassifies them as nonexempt.

Employers also asserted that employees whose exemption status changes would lose the ability to work from home and outside of normal business hours, and they would lose the ability to attend after-hours training opportunities and meetings or to stay late to “get the job done.” The Department understands employers' concerns regarding the need to control and keep accurate records of the work hours of overtime-eligible employees.[49] However, this Final Rule does not prohibit employers from continuing to allow such employees flexibility in the time and location where they work; most employees affected by this Final Rule are employees who employers now trust to exercise discretion and independent judgment with respect to matters of significance on behalf of the company or to supervise other employees and play a role in hiring, firing, and promoting other employees. Employers should be able to trust such valued employees to follow the employers' instructions regarding when, where, and for how many hours they may work and to accurately record their hours worked.[50] Moreover, as noted Start Printed Page 32419above, an estimated 60.4 percent of employees affected by this Final Rule do not work overtime hours now; the Department believes that any changes for this substantial portion of affected workers will be minimal. Further, the Department notes that most employers currently have both exempt and nonexempt workers and therefore have systems already in place for employers to track hours. Nonetheless, for those employees who do work overtime and who become overtime eligible, the employers will have to evaluate, for example, whether training and other activities that currently occur outside the normal work day, and for which employees currently receive no extra pay, should be moved to within the normal work day or whether they are important enough to warrant payment for any extra hours worked. However, because the Department has concluded that white collar employees earning a salary of less than $913 per week are not bona fide EAP workers, the Department concludes that if the employees perform extra work to “get the job done” they should be paid for all such time.

Regarding the employer assertion that the change in exemption status will harm employees because they will not be able to take time off without losing pay for the time away from work, the Department notes that employers are not required to change employees' pay basis from salaried to hourly simply because they are no longer exempt. Employers may continue to pay employees a salary, even when the employees are entitled to overtime pay if they work in excess of 40 hours per week. See §§ 778.113-.114. Moreover, even if newly overtime-eligible employees are converted to hourly status, employers are not required to dock such employees for the hours they take off. Therefore, employers have the authority to determine how to structure the pay plans of the newly overtime-eligible employees, and employers need not structure their pay plans in a manner that results in the potentially adverse effects that the employers identified.

Finally, employers asserted that the loss of exempt status would have a negative impact on employees' morale. However, the Department believes that for most employees their feelings of importance and worth come not from their FLSA exemption status but from the increased pay, flexibility and fringe benefits that traditionally have accompanied exempt status, as well as from the job responsibilities they are assigned. None of these are incompatible with overtime protection. Many exempt employee commenters expressed significant concern and low morale regarding their current situation, and they looked forward to an improved situation under the new rule. Given the employers' emphasis on the important roles that these employees play in the success of their organizations, the Department anticipates that employers will strive to adapt to this rule in a way that minimizes the financial impact on their business while providing the maximum benefits, flexibility, and opportunities to their employees. If employers make these changes in a way that communicates the value they continue to place on the contributions of newly overtime-eligible workers, we are confident that employers can prevent employees from seeing their new entitlement to overtime protection as a demotion.

6. Impacts on Litigation

The Department also received several comments predicting the impact increasing the salary level would have on litigation. Commenters representing employees, such as the International Association of Fire Fighters (IAFF), stated that increasing the threshold would more clearly demarcate between employees who are entitled to overtime and those who are not, decreasing misclassification, and therefore, litigation, involving the EAP exemption. According to the joint comment submitted by 57 labor law professors, “the excessive importance of the duties test has resulted in the relatively high volume of litigation surrounding the exemptions and the many successful claims that have been asserted against employers in recent years,” so raising the salary level “will benefit employers by providing them more certainty and relieve them of the litigation and other costs of disputes over classification and misclassification.” Weirich Consulting & Mediation (Weirich Consulting) commented in support of the salary level change because it will make it easier “to determine more efficiently—and without needless litigation—whether or not particular employees are exempt.” Other commenters representing employers disagreed, however, with Jackson Lewis, NAM, and the Wage and Hour Defense Institute predicting that finalizing the proposed salary level would increase (rather than decrease) litigation. Jackson Lewis commented that the duties test is the main driver of litigation over the EAP exemption, and “there will be no end to litigation” so long as employers must continue to apply the standard duties tests to employees earning above the salary threshold. Jackson Lewis and NAM further asserted that the rule will result in additional litigation brought by “very dissatisfied” newly overtime-protected employees. Finally, Fisher & Phillips commented that the “collateral results” of selecting a particular salary level, including avoiding or reducing litigation, are not appropriate factors for setting the salary level required for the EAP exemption.

As we stated in the NPRM, the number of wage and hour lawsuits filed in federal courts increased substantially in the period between 2001 and 2012, from approximately 2,000 to approximately 8,000 per year, with stakeholders advising the Government Accountability Office that one of the reasons for the increased litigation was employer confusion about which workers should be classified as EAP exempt. See 80 FR 38531. Thus, these statistics support the Department's conclusion that the current standard salary level was not effective in 2004 at distinguishing between exempt and nonexempt workers and is substantially less effective today. Litigation under the FLSA remains high, with approximately 8,000 FLSA cases continuing to be filed each year.[51]

Although we did not establish the standard salary level in this Final Rule for the purpose of reducing litigation, we believe that reduced litigation will be one of the beneficial impacts of that increase. The salary level will once again serve as a clear and effective line of demarcation, thereby reducing the potential for misclassification and litigation. See Weiss Report at 8 (the salary tests prevent “the misclassification by employers of obviously nonexempt employees, thus tending to reduce litigation. They have simplified enforcement by providing a ready method of screening out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.”). Given the new standard salary level, there will be 9.9 million fewer white collar employees for whom employers could be subject to Start Printed Page 32420potential litigation regarding whether they meet the duties test (4.2 million currently EAP-exempt employees who will be newly entitled to overtime because they earn less than the new standard salary and 5.7 million overtime-eligible white collar employees paid between $455 and $913 per week whose exemption status no longer depends on the application of the duties test).[52]

7. Comments About Non-Profit Employers

A substantial number of commenters also addressed the impact that the proposed standard salary would have on non-profit employers. While many of the concerns that the non-profit employers expressed were the same as those identified by other employers, some of these commenters also addressed particular concerns that they believe they would face due to their non-profit status.

Many non-profit employers, including Habitat for Humanity, the National Multiple Sclerosis Society, the New Jersey Association of Mental Health and Addiction Agencies, Operation Smile, Catholic Charities, and the U.S. Public Interest Research Group (USPIRG), emphasized that non-profits generally pay lower salaries than for-profit employers, and therefore the proposed salary level would not serve as an effective dividing line between employees performing exempt and overtime-protected work in the non-profit sector.

For example, USPIRG stated that 75 percent of employees it has classified as exempt receive a salary below the 40th percentile of full-time salaried workers nationally. Operation Smile commented that the proposed standard salary would increase its payroll costs by nearly $1 million per year and affect more than 50 percent of its workforce. Habitat for Humanity similarly stated that the majority of its affiliates pay their highest paid employee less than $50,440 and estimated that approximately 40 percent of its affiliates' staff members would be directly affected by the proposed salary increase.

A number of non-profit commenters, including the Alliance for Strong Families and Communities, ANCOR, Catholic Charities, Easter Seals, Habitat for Humanity, and USPIRG, emphasized that they do not have the same ability as other employers to increase prices or reduce the profits paid to shareholders to compensate for the increased costs of the proposed salary; some noted this is because the prices for the services they provide are set in government contracts or by Medicaid, or because their revenue is based on grants reflecting labor costs at the time the grant is made and there may be no option for seeking an increase in funding. Several nonprofits expressed concern that they are constrained in their ability to increase salaries for their staff because funders evaluate them based on their ability to keep overhead, including salary costs, low, or because the terms of their grants may strictly limit how much of the grant can be allocated for overhead. See, e.g., Boy Scouts of America; Food Bank of Northern Nevada; The Groundwater Foundation; Operation Smile. Based upon these funding issues, many commenters stated that the unintended consequence of the increased standard salary level would be a decline in the quantity or quality of the critical services they provide to vulnerable individuals. See, e.g., CUPA-HR; Father Flanagan's Boys' Home; Lutheran Services in America; National Multiple Sclerosis Society; Salvation Army. Therefore, many non-profit organizations requested that the Department provide special relief for non-profits such as: An exemption from the salary requirement; a reduced salary level for non-profits; an incremental phased-in increase of the salary level over a period of a year or more for non-profits; a delayed implementation date for non-profits; and the elimination of automatic updating for non-profits. See, e.g., Alliance for Strong Families and Communities; Boy Scouts of America (BSA); Boys and Girls Clubs of America; Habitat for Humanity; Independent Sector; United Community Ministries; YWCA.

Nevertheless, despite their concerns regarding the potential impact of the proposed salary level, many non-profit employers expressed their general support for the intent and purpose of the rule. See, e.g., Catholic Charities; Easter Seals; Independent Sector; Maryland Nonprofits; PathStone Corporation; United Community Ministries; YWCA. Moreover, some non-profits, citing their role as both employers and service providers, supported the application of the NPRM to non-profits as proposed. For example, PathStone Corporation, and a comment submitted by CASA on behalf of 21 additional non-profit organizations, stated they fully supported the proposed regulation, with the joint CASA comment emphasizing that the “justice we seek for our clients in the world must also exist within our own organizations.” Similarly, Maryland Nonprofits commented that “[t]he nonprofit community recognizes better than most the harsh economic realities that lead to this proposed rule, and we strongly endorse its purpose.”

Other commenters indicated that the impact on non-profit employers would not be as significant as most non-profits feared. For example, the comment submitted by 57 labor law professors noted that an economist found that management employees working for non-profits earned an average of $34.24 per hour in 2007, which far exceeds the proposed salary level, and that they presumably earn more than that now. Therefore, they concluded that the regulations “should not have a deleterious effect on these valuable organizations or their efforts to accomplish their important missions.” EPI also stated that, where a non-profit is engaged in revenue-producing activities and, thus, is competing with for-profit businesses, it “is only fair” that “it should be held to the same employment standards” to achieve a level playing field with regard to the employees who are involved with that commercial business or who are engaged in interstate commerce. Other commenters, such as the Wisconsin Association of Family and Children's Agencies, questioned the wisdom of a non-profit exemption, explaining that for-profit agencies may perform the same services as non-profits and rely on the same government funding streams and a non-profit exemption would not help the similarly situated for-profit service providers.

The Department recognizes and values the enormous contributions that non-profit organizations make to the country. Nonprofit organizations provide services and programs that benefit many vulnerable individuals in a variety of facets of life, including services that benefit the vulnerable workers who the Department also works to protect by ensuring that their workplaces are fair, safe, and secure. In response to the commenters' concerns, we note that (as discussed in detail above) we have modified the proposed salary level to account for the fact that salaries are lower in some regions than others. This change yields a salary at the low end of the historical range of short test salaries. This lower final salary level will also provide relief for non-profit employers, just as it does for employers in low-wage industries.

However, regarding the commenters' suggestions that we create a special exemption from the salary requirement, a lower salary level, a delayed Start Printed Page 32421implementation date, or a phase-in period for non-profits, we note that the Department's EAP exemption regulations have never had special rules for non-profit organizations; the employees of non-profits have been removed from minimum wage and overtime protection pursuant to the EAP exemptions only if they satisfied the same salary level, salary basis, and duties tests as other employees.

The Department concludes that such special treatment is not necessary or appropriate. As the comment from the 57 labor law professors noted, a study of National Compensation Survey data showed that the average hourly wage of full-time management employees in the not-for-profit sector was $34.24 per hour in 2007 ($1,369 per 40-hour workweek), which substantially exceeds the Final Rule's required salary of $913 per week.[53] The average hourly wage for such management workers at non-profits had increased to $38.67 by 2010 ($1,547 per 40-hour week), which is more than 50 percent higher than the 2016 required standard salary.[54] Moreover, the average hourly wages of non-profit employees are not uniformly lower than those of employees in other sectors. For example, in 2007 the average hourly wages of both full-time business and financial operations employees and computer and mathematical science employees working at non-profits, $26.49 and $32.00 per hour, respectively, exceeded the average hourly earnings of such workers employed in State government.[55] Wages of full-time workers in healthcare practitioner and technical occupations for non-profits averaged $28.85 per hour in 2007, higher than those for employees in the same occupations in State and local governments ($23.89 and $27.30, respectively). Similarly, the 2007 average earnings of registered nurses were $30.80 per hour at non-profits, higher than those of registered nurses at private establishments ($30.58) and at State and local governments ($29.60).[56]

Based on CPS data, the Department projects that for FY 2017, the median weekly earnings for affected workers in non-profits will be $741.68 while the median weekly earnings of affected workers in the private sector will be $745.54. The Department recognizes however, that non-profit entities may have a higher share of affected workers than for-profit entities, but does not believe that this will unduly impact this sector. If all affected workers in the non-profit sector who regularly work overtime were increased to the new salary level this would increase the total amount that non-profits pay EAP workers by 0.5 percent, compared to an increase of 0.3 percent in other sectors.[57] Therefore, the Department concludes that treating non-profit employers differently than other employers, such as by creating a special salary level or an extended phase-in period is not appropriate and is not necessary, particularly given the fact that the Final Rule modifies the proposed rule by basing the standard salary level on salaries in the lowest-wage Census Region.

Finally, the Department also received comments from a number of non-profit higher education institutions. As discussed above, some commenters from the higher education community also asked for guidance on the application of the EAP exemption to educational institutions. Additionally, however, several commenters expressed concern about the impact that the Final Rule would have on higher education, with some suggesting a lower salary level for educational institutions. See, e.g., Iowa Association of Community College Trustees; CUPA-HR; Purdue University; South Carolina Independent Colleges and Universities. We recognize that higher education is a complex and important sector in our economy, including a variety of both private and public institutions, from small community colleges to large research institutions.

Commenters representing research institutions raised concerns about the impact of the proposed rule on postdoctoral researchers. For example, CUPA-HR noted that the National Institutes of Health (NIH) stipend levels for post-doctoral researchers are “well below” the proposed salary level and that post-doctoral researchers with less than five years of experience would no longer meet the salary level for exemption. The Department notes that the Final Rule salary level based on the 40th percentile in the lowest-wage Census Region addresses some of these concerns and results in a salary level met by the NIH FY 2016 stipend level for post-doctoral researchers with at least three years of experience and is only $208 a year above the stipend level for a post-doctoral researcher with two years of experience.

8. Other Comments

Like non-profit employers, other commenters, including local governments,[58] Indian tribes, for-profit entities receiving government funding, and commenters writing on behalf of small businesses, asserted that they do not have the same ability as other employers to increase prices or reduce their profits.[59] See, e.g., BFT Holding; Charlotte County Government; Jamestown S'Klallam Tribe. Some commenters representing these groups, as well as other commenters, requested special treatment for certain industries or employers. For example, some small businesses and commenters representing them, including the American Association for Enterprise Opportunity, California Association for Micro Enterprise Opportunity, and WIPP, requested an exemption for small entities from the salary level or from the FLSA's requirements generally. Likewise, the Gila River Indian Community and the Ute Mountain Ute Tribe submitted comments urging the Department to “open consultation with Indian tribes on the use of a lower salary threshold for tribal entities” based on “the unique economic and demographic factors that tribes face.” The Department did not propose special treatment for small businesses, tribal governments, or other entities, and did not request comment on these issues. The Department believes such special treatment is not necessary given that the Final Rule modifies the proposed rule by basing the standard salary level on salaries in the lowest-wage Census Region and this lower final salary level will provide relief for these stakeholders.

Conversely, some commenters requested that the Department apply the Start Printed Page 32422salary level test to employees who have historically not been subject to that test. For example, the Department received multiple comments from teachers, university faculty, and their representatives, asking us to repeal § 541.303(d), which provides that the salary level requirement does not apply to teaching professionals. See, e.g., National Association for the Education of Young Children (NAEYC); NWLC; New Faculty Majority Foundation; SEIU. As the NAEYC acknowledged in its comment, this request is “beyond the scope” of the NPRM, which did not propose changes to or invite comment on § 541.303(d) or on § 541.600(e), which also provides that the salary requirement does not apply to teachers and certain other professionals. See also NWLC; SEIU. The Department notes that regardless of their salary, teachers qualify for the professional exemption only if they have a primary duty of teaching, tutoring, instructing or lecturing in the activity of imparting knowledge and are employed and engaged in this activity as a teacher in an educational establishment by which they are employed.[60] See § 541.303(a).

A number of comments, including a joint comment from the AIA-PCI, requested that the Department prorate the new salary level for part-time employees. The Department declines this request. That employers currently “can afford to pay part-time exempt employees the full salary required for exempt status, even if they work just 15 or 20 hours per week,” as Seyfarth Shaw noted in support of this request, merely underscores the need to significantly increase the 2004 salary level. The Department has never prorated the salary level for part-time positions, and we considered and rejected a special rule for part-time employees performing EAP duties in 2004. See 69 FR 22171. The Department continues to believe that such a rule would be difficult to administer, and notes that the FLSA does not define full-time employment or part-time employment, but leaves this matter to be determined by employers. Employees hired to work part time, by most definitions, do not work in excess of 40 hours in a workweek, and overtime pay is not at issue for these employees. An employer may pay a nonexempt employee a salary to work part time without violating the provisions of the FLSA so long as the salary equals at least the minimum wage when divided by the actual number of hours the employee worked. See FLSA2008-1NA (Feb. 14, 2008). Employers can meet this standard with a salary of as little as $145 for twenty hours of work per week, and $217.50 for 30 hours of work per week—far below even the 2004 salary level.[61]

Finally, a small number of commenters, including the National Automobile Dealers Association, suggested that the Department should eliminate the salary level test entirely, so that the exempt status of every employee would be determined on the basis of their job duties and responsibilities alone. The Department has repeatedly rejected this approach, and we do so again in this rulemaking. The Department has long recognized that “the amount of salary paid to an employee is the `best single test' of exempt status,” and is the principal delimiting requirement preventing abuse. 69 FR 22172; Stein Report at 24. Further, as the Department explained in 2004, eliminating the salary test is contrary to the goal of simplifying the application of the exemption, which the President has directed us to do in this rulemaking, and would require a “significant restructuring of the regulations,” including the “use of more rigid duties tests.” 69 FR 22172.

B. Special Salary Tests

i. American Samoa

As explained in our proposal, the Department has historically applied a special salary level test to employees in American Samoa because minimum wage rates there have remained lower than the federal minimum wage. See 80 FR 38534. The Fair Minimum Wage Act of 2007, as amended, provides that industry-specific minimum wages rates in American Samoa will increase by $0.40 on September 30, 2018, and continue to increase every three years thereafter until each equals the federal minimum wage. See Sec. 1, Public Law 114-61, 129 Stat. 545 (Oct. 7, 2015). The minimum wage in American Samoa currently ranges from $4.58 to $5.99 an hour depending on the industry,[62] and so the disparity with the federal minimum wage is expected to remain for the foreseeable future. Accordingly, the Department proposed to continue our longstanding practice of setting the special salary level test for employees in American Samoa at approximately 84 percent of the standard salary level, which would have resulted in a salary of $816 based on fourth quarter 2015 data for full-time salaried workers nationwide.

The Department received only one comment on this aspect of our proposal—Nichols Kaster supported the proposed increase. We conclude that the proposed methodology remains appropriate, and the Final Rule accordingly sets the special salary level for American Samoa at 84 percent of the standard salary level set in the rule, which equals $767 per week. The Department has revised § 541.600(a) accordingly.

ii. Motion Picture Producing Industry

The Department has permitted employers to classify as exempt employees in the motion picture producing industry who are paid at a base rate of at least $695 per week (or a proportionate amount based on the number of days worked), so long as they meet the duties tests for the EAP exemptions. See § 541.709. This exception from the “salary basis” requirement was created in 1953 to address the “peculiar employment conditions existing in the [motion picture] industry,” 18 FR 2881 (May 19, 1953), and applies, for example, when a motion picture industry employee works less than a full workweek and is paid a daily base rate that would yield at least $695 if six days were worked. See id. Consistent with our practice in the 2004 Final Rule, the Department proposed to increase the required base rate proportionally to the proposed increase in the standard salary level test, resulting in a proposed base rate of $1,404 per week (or a proportionate amount based on the number of days worked). This method would have resulted in a base rate of $1,487 based on fourth quarter 2015 data for full-time salaried workers nationwide.

The Department did not receive any substantive comments on this subject; two commenters, Nichols Kaster and the UAW, offered general support for this proposal. The Final Rule adopts the methodology set forth in our proposal, and using the new standard salary level Start Printed Page 32423($913) results in a base rate of $1,397 per week (or a proportionate amount based on the number of days worked).[63] The Department has revised § 541.709 to incorporate this change.

iii. Other Comments Requesting Special Salary Tests

The Department also received approximately a dozen comments concerning application of the proposed salary level to Puerto Rico. Nearly all of these commenters urged the Department to either exempt Puerto Rico from the updated standard salary level requirement (thus keeping the salary level at $455) or to reinstate a special salary level test for Puerto Rico (set between the current and proposed salary levels).[64] In 1949, the Department established a special salary level for Puerto Rico because its minimum wage rate was below the FLSA minimum wage. See 14 FR 7705-06 (Dec. 24, 1949); Weiss Report at 21. The Fair Labor Standards Amendments of 1989 removed Puerto Rico from the special minimum wage provisions and instead applied the section 6(a)(1) minimum wage to Puerto Rico. See Sec. 4, Public Law 101-157, 103 Stat. 938 (Nov. 17, 1989). This change eliminated the justification for maintaining a special salary test in Puerto Rico, and so in the 2004 Final Rule we established that the standard salary level test applies to Puerto Rico. Puerto Rico continues to be subject to the section 6(a)(1) minimum wage, and the Department has consistently maintained a uniform salary level for all states and also for all territories subject to the FLSA minimum wage.

C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement

As indicated in the NPRM, the Department has consistently assessed compliance with the salary level test by looking only at actual salary or fee payments made to employees and, with the exception of the total annual compensation requirement for highly compensated employees, has not included bonus payments of any kind in this calculation. During stakeholder listening sessions held prior to the publication of the NPRM, several business representatives asked the Department to include nondiscretionary bonuses and incentive payments as a component of any revised salary level requirement. These stakeholders conveyed that nondiscretionary bonuses and incentive payments are an important component of employee compensation in many industries and stated that such compensation might be curtailed if the standard salary level was increased and employers had to shift compensation from bonuses to salary to satisfy the new standard salary level.

In recognition of the increased role bonuses play in many compensation systems, and as part of the Department's efforts to modernize the overtime regulations, the Department sought comments in the NPRM regarding whether the regulations should permit nondiscretionary bonuses and incentive payments to count towards satisfying a portion of the standard salary level test for the executive, administrative, and professional exemptions.[65] Specifically, the Department asked whether employers should be allowed to use nondiscretionary bonuses and incentive payments, paid no less often than monthly, to satisfy up to 10 percent of the standard salary level test. To ensure the integrity of the salary basis requirement, the Department stressed the importance of strictly limiting the amount of the salary requirement that could be satisfied through the payment of nondiscretionary bonuses and incentive pay, as well as the maximum time period between such payments. The Department did not propose any changes to how bonuses are treated under the “total annual compensation” requirement of the HCE test, and stated that we were not considering changing the exclusion of board, lodging, or other facilities from the salary calculation or expanding the salary level test calculation to include discretionary bonuses, payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits. See, e.g., 80 FR 38535-36, 38537 n.36. However, the Department did seek comment on the appropriateness of counting commissions toward the salary level requirement.

The requirement that exempt employees be paid on a salary basis has been a part of the Department's part 541 regulations since 1940. As the Department said at that time, “a salary criterion constitutes the best and most easily applied test of the employer's good faith in claiming that the person whose exemption is desired is actually of such importance to the firm” that he or she is properly within the exemption. Stein Report at 26, see also id. at 19, 36. Since 1940, therefore, the regulations have required that an exempt EAP employee be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed. More recently, the Department has noted “that payment on a salary basis reflects an employee's discretion to manage his or her time and to receive compensatory privileges commensurate with exempt status.” 69 FR 22177. While, as the Department noted in the NPRM, employers are allowed to pay additional compensation beyond the required salary in the form of bonuses, those payments have not counted towards the payment of the required minimum salary level. The Department's discussion in the NPRM of including nondiscretionary bonus payments in the standard salary level was informed by our concern that permitting the standard salary level to be satisfied by bonus payments that frequently correlate to the quantity and quality of work performed could undermine the utility of the salary basis requirement in identifying bona fide EAP employees.

The Department received a variety of comments concerning whether the regulations should permit nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary level test. Commenters representing employers generally supported this change as an improvement over the current regulations, though many objected that the option the Department was considering was too restrictive. Most of the commenters representing employees that addressed this idea opposed it on the grounds that it would complicate the test for exemption and undermine the worker protections established by the salary basis requirement.

Commenters representing employers offered a range of reasons for generally supporting the inclusion of nondiscretionary bonuses and incentive Start Printed Page 32424payments. Many commenters, including ACRA, the National Association of Convenience Stores (NACS), and the NRA, agreed that such payments are a key part of exempt employees' compensation in their industries. For example, EBS Building Supplies stated that its managers “can earn as much in bonus payments as they earn in regular salary during the year,” and Mill Creek Companies stated that nondiscretionary performance incentives can account for “up to 40% of a person's total compensation and are a most critical part of our strategy to align the goals of first line supervisors and professionals with the goals of the company.”

WorldatWork conducted a survey of its human resources manager members and found that “62% of respondents said their employers offer nondiscretionary incentive bonuses tied to productivity and/or profitability.” Several trade associations reported similar feedback from their members. The World Floor Covering Association stated that its “members have indicated that many managers and administrators receive bonuses based on the sales of the stores that they manage or oversee,” and the National Pest Management Association stated that 93 percent of its member companies reported providing some form of nondiscretionary bonuses. The Chemical Industry Council of Illinois and the National Council of Farmer Cooperatives respectively emphasized that nondiscretionary bonuses “are an integral part” or “play an important role” within an employee's total compensation package. RILA noted that in the retail industry “many retail managers and other exempt employees earn bonuses or other incentive payments designed to encourage a sense of ownership consistent with their important leadership roles within the organization,” and that “[c]ounting non-discretionary bonuses toward the minimum threshold for exemption is consistent with the purpose of the salary level test—the payment, criteria, or amount of these bonuses often reflects the exempt status of the recipients.”

Many commenters that opposed the Department's proposed increase to the standard salary level, including CalChamber Coalition, Fisher & Phillips, FMI, Littler Mendelson, and the National Association of Professional Insurance Agents, acknowledged that allowing employers to satisfy a portion of the salary level with bonuses and incentive payments would to some extent mitigate the financial burden of the proposed increase. Other commenters, including IFA and the Sheppard Mullin law firm, stated that not allowing nondiscretionary bonuses and incentive payments to satisfy some portion of the increased salary level would likely reduce the prevalence of those forms of compensation.

Among commenters that supported the inclusion of nondiscretionary bonuses and incentive payments in the standard salary guarantee amount, many objected that the option considered in the Department's NPRM was too restrictive to be of much practical use for employers. For example, several commenters representing employers criticized the Department's proposal to cap the crediting of nondiscretionary bonuses or incentive payments at no more than 10 percent of the standard salary level, noting that bonuses, incentive payments, and commissions often comprise a far greater portion of an exempt employee's total compensation. The Chamber stated that “unless the Department reconsiders its proposed $50,440 salary level, a limit of 10 percent (or, $5,044) is too low to provide any relief or make the additional administrative burdens worth the effort.” FMI, the National Association of Truck Stop Operators, Printing Industries of America, RILA, Weirich Consulting, and a number of other commenters requested that the Department allow such compensation to count for up to 20 percent of the standard salary level. Other commenters suggested a higher percentage, including CalChamber Coalition (at least 30 percent), ACRA (at least 40 percent), and HR Policy Association (50 percent). Many commenters, including Fisher & Phillips, the National Beer Wholesalers Association, and the National Pest Management Association, opposed the imposition of any percentage cap on the proportion of the salary level test that could be satisfied with such payments. Several commenters, however, supported the Department's 10 percent limitation. See, e.g., Concord Hospitality Enterprises; Fraternity Executive Association.

Commenters also criticized the Department's decision to consider crediting nondiscretionary bonuses and incentive payments toward the salary level test only if they are paid on a monthly or more frequent basis. According to AIA-PCI and PPWO, such a limitation fails to account for the fact that bonus payments “are typically made less often than monthly because they are tied to productivity, revenue generation, profitability, and other larger and longer-term business results that can fluctuate significantly on a month-to-month basis.” See also NRA. AH&LA stated that many “supplemental compensation programs in the lodging industry are not structured to be paid with such frequency and it would place a significant administrative burden on employers to calculate and pay incentive compensation on a monthly or more frequent basis.” AH&LA and many other commenters requested that the Department credit bonuses and incentive payments paid on an annual basis against the salary level. HR Policy Association pointed out that bonuses paid annually are already included within the “total compensation requirement” under the HCE test, while the Society of Independent Gasoline Manufacturers (SIGMA) stated that “permitting employers to count bonuses annually incentivizes them to hire employees on an annual basis, ultimately promoting job security and long-term employment.” In the absence of crediting annual bonuses, SIGMA and several other commenters, including IABI, AIA-PCI, the American Institute of Certified Public Accountants, PPWO, and Weirich Consulting, urged the Department to credit bonuses and incentive payments paid on a quarterly basis or less frequently. Other commenters favored the quarterly frequency outright. See, e.g., American Resort Development Association; Fraternity Executives Association. Fisher & Phillips and the NACS opposed imposing any timeframe limitation, but conceded that “experience suggests [quarterly] is a not-uncommon frequency for the payment of such amounts.”

Several commenters requested that the Department allow employers to make catch-up (or “true-up”) payments to eliminate the risk of non-compliance in the event that an employee's bonuses or incentive payments drop such that the employee fails to satisfy the salary level requirement in a given period. For example, SIFMA wrote that they saw “no basis for distinguishing the use of true-up payments outside of the context of highly compensated employees,” and remarked that “[a]llowing true-up payments to count helps ensure that exempt employees are receiving the guaranteed income they anticipated and is consistent with the historical salary basis approach of ensuring guaranteed income.” If annual catch-up payments are not permitted, NRA urged the Department “to permit employers to make catch-up payments based on when they pay the bonuses, i.e., monthly, semi-annually, or quarterly.”

Many commenters that supported the crediting of incentive payments urged the Department to also allow employers to credit commissions. Several commenters agreed with PPWO that “all forms of compensation should be used Start Printed Page 32425to determine whether the salary level has been met,” pointing out that the CPS earnings data for nonhourly employees that the Department is using to derive the standard salary level includes discretionary bonuses and commissions. Many commenters disputed the Department's observation in the NPRM that “employees who earn commissions are usually sales employees who . . . are generally unable to satisfy the standard duties test,” 80 FR 38536. AT&T stated that it “has management positions whose responsibilities involve the supervision of sales teams and support sales channels that receive commissions as part of their salaries and that have been found to be exempt under the executive and administrative exemptions,” and the Chamber and FMI likewise commented that in the real estate and insurance industries “[m]any exempt employees who perform little direct sales work share commissions.” A few other commenters pointed to a 2006 opinion letter advising that certain “registered representatives” in the financial services industry qualify for the administrative exemption even though they receive commissions and bonuses in addition to their salary. See FLSA2006-43 (Nov. 27, 2006).

Other commenters urged the Department to count discretionary bonuses toward the salary level. For example, PPWO stated that “[s]uch payments are in many ways even more reflective of an individual employee's efforts and contributions (and by implication their exercise of independent judgment and other characteristics of the duties' test) than nondiscretionary bonuses.”

Many commenters opposed permitting nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary level test. Some commenters stated that nondiscretionary bonuses and incentive payments do not indicate an employee's exempt status. For example, NELA and Rudy, Exelrod, Zieff & Lowe wrote that the types of nondiscretionary bonuses described in the Department's regulations—including “bonuses that are announced to employees to induce them to work more steadily, rapidly, or efficiently; bonuses to remain with the employer; attendance bonuses; individual or group production bonuses; and bonuses for quality and accuracy of work”—are “intended to incentivize workers of all types to perform their duties well; but, do not afford them any benefits of ownership.” These commenters noted further that lower level employees whom they have represented also received these types of bonuses, and thus, the commenters concluded that such bonuses “have no bearing on whether an employee should be excluded from overtime requirements.” The Georgia Department of Administrative Services and the Mississippi State Personnel Board each cautioned that there is “no guarantee that the work rewarded by the bonus or incentive payment will be FLSA exempt in nature,” while KDS Consulting stated that crediting bonuses and incentive payments would undermine the premise “that management values the salaried worker's position for some reason outside of time and task.”

Several commenters asserted that allowing nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary level would dramatically complicate application of the EAP exemptions, and introduce periodic uncertainty regarding the exempt status of employees who would need such payments to meet the salary level requirement. Nichols Kaster stated that allowing nondiscretionary bonuses and incentive payments to satisfy 10 percent of the standard salary level “could alter employees' exempt status on a weekly basis,” and put employers in a position where they “would incur substantial compliance costs reviewing their payroll on a weekly or monthly basis to determine which employees satisfied the salary basis test” (emphasis in comment). AFL-CIO and IAFF each wrote that the proposal would be “in direct contradiction to the purpose of the proposed rule, which is to clarify, streamline and simplify the regulations,” while NELA and Rudy, Exelrod, Zieff & Lowe commented that “[a]dding this component to the threshold inquiry would only make the calculation more confusing and spur additional transaction costs to what should be a straightforward computation.” Nichols Kaster, NELA, and The Labor Board, Inc., each warned that allowing bonuses to satisfy a portion of the standard salary level would likely increase FLSA litigation, while AFL-CIO noted that permitting nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary level “could lead to anomalous results” where employees with similar job duties could be classified differently depending on the criteria for the bonuses.

Commenters also contended that allowing nondiscretionary bonuses and incentive payments to satisfy a portion of the standard salary level would undermine the scheduling flexibility and income security associated with exempt status, as codified in the salary basis requirement. Nichols Kaster opined that such a change “erodes the salary basis test . . . [by] replac[ing] the certainty of a salary with the uncertainty of fluctuating compensation,” and would have the practical effect of reducing the standard salary level. NELA and Rudy, Exelrod, Zieff & Lowe agreed, stating that the Department's proposal “runs contrary to the stated purpose of the salary basis test, which is to make sure exempt employees are guaranteed a minimum level of income that is dependable and predictable to meet their families' monthly expenses before they are exempted from the protections of the overtime provisions of the FLSA.” These commenters further indicated that “[c]hanging the salary threshold calculation to include nondiscretionary bonuses would also create a perverse incentive to employers to move towards implementing more deferred compensation pay structures.” Nichols Kaster wrote that “an exempt employee who chooses not to leave work early for a parent-teacher conference for fear of missing a weekly production metric loses some of the benefit of her exempt status: The receipt of her full pay for any week in which she performs any work without regard to the number of days or hours worked” (internal quotation marks and citation omitted). Moreover, Nichols Kaster asserted that “an `attendance bonus' that penalizes an employee for partial day absences would be nothing more than an end-around the existing prohibition on partial day deductions from salary.”

Finally, some commenters warned of possible negative consequences that might result from allowing bonuses and incentive payments to satisfy a portion of the standard salary level. For example, the Georgia Department of Administrative Services and the New Mexico State Personnel Board stated that crediting such payments would create “a competitive disadvantage for public sector employers,” because public employers are not able to provide non-discretionary bonuses and incentive payments. KDS Consulting speculated that allowing bonuses and incentive payments to satisfy a part of the standard salary level would undermine the incentivizing value of such payments, to the extent that employers must pay them to maintain the exempt status of their employees.

After considering the comments, the Department has decided to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard weekly salary level test, provided these forms of compensation are paid at least quarterly. The Final Rule revises Start Printed Page 32426§ 541.602(a) to incorporate this new flexibility.

The Department analyzed comments mindful of the need to ensure that the salary level test accounts for employer payment practices without compromising the critical function of the salary basis test, which is to serve as a key indicator of exempt status. Commenters representing employer interests persuasively explained that nondiscretionary bonuses are an important part of many employer compensation systems that cover EAP employees. Modifying the tests for exemption to incorporate this fact is consistent with the President's directive to modernize the part 541 regulations. The Department also recognizes the concerns expressed by employee advocates, however, that in some instances nondiscretionary bonuses may not be indicative of exempt status and that counting such compensation toward the standard salary level may undermine the flexibility and income security associated with exempt status. While we share the concern that some bonus and incentive programs cover both overtime exempt and overtime-eligible employees, and the correlation of those programs with exempt status is therefore questionable, we are persuaded overall that the provision of nondiscretionary bonus and incentive payments has become sufficiently correlated with exempt status (for example, as evidence of the overtime exempt employee's exercise of management skill or exercise of independent judgment) that its inclusion on a limited basis in the standard salary requirement is appropriate. However, because such payments also correlate directly or indirectly in many instances with either the quantity or quality of work performed, we believe that careful limits must be set on how nondiscretionary bonuses and incentive pay are applied to the salary level test.

The Department also sought comments on the appropriateness of including commissions as part of nondiscretionary bonuses and other incentive payments that could partially satisfy the standard salary level test. In the NPRM, we raised the concern that it may be inappropriate to count commissions toward the salary level because employees who earn commissions are usually sales employees who—with the exception of outside sales employees—are generally unable to satisfy the duties test for the EAP exemptions. Comments from the Chamber, FMI, AT&T, and others have convinced us that it is not uncommon for employees who are not sales personnel, such as supervisors of a sales team, to earn commissions based on the sales of the employees they supervise. Since such supervisors may satisfy the duties test, the Department has concluded that it is appropriate to treat commissions like other types of nondiscretionary bonuses and permit them to be used to satisfy a portion of the salary level test. Accordingly, we have concluded that permitting commissions to count against a limited portion of the standard salary will not undermine the effectiveness of the salary basis test in identifying exempt employees. This change will also ensure that exemption status does not depend on (and that this rulemaking does not interfere with) whether an employer chooses to label or structure a nondiscretionary incentive payment as a “bonus” or as a “commission.” This change is also consistent with the Department's position that certain “registered representatives” in the securities and financial services industry who receive commissions may qualify for the administrative exemption. See FLSA2006-43 (Nov. 27, 2006).

In the NPRM, the Department stated that we were not considering expanding the salary level test calculation to include discretionary bonuses or changing the exclusion of board, lodging, or other facilities from the salary calculation, a position that the Department has held consistently since the salary requirement was first adopted. The Department also declined to consider including in the salary requirement payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits. The Department reemphasizes here that such forms of compensation remain excluded from the salary level test calculation.

Many commenters asked the Department to increase beyond 10 percent the portion of the standard weekly salary level employers could satisfy using nondiscretionary bonuses and incentive payments. After consideration, the Department declines these requests. Because the Department has long found that the payment of a fixed predetermined salary not subject to change based on the quantity or quality of work is a strong indicator of exempt EAP status, it is important to strictly limit the percentage of the salary requirement that nondiscretionary bonuses and incentive payments can satisfy. Accordingly, setting the limit above 10 percent could undermine the premise of the salary basis test by depriving workers of a predetermined salary that does not fluctuate because of variations in the quality or quantity of their work and thus is indicative of their exempt status.[66] We believe that a 10 percent limit is also appropriate given that we are including nondiscretionary bonuses, incentive payments, and commissions as part of the salary level test for the first time and the full impact of this change on determination of EAP status is not yet known. Because this is the first time we have included nondiscretionary bonuses, incentive payments, and commissions, the Department may revisit this threshold if future experience supports additional changes to § 541.602(a)(3).

The Department takes note of comments from government employers that expressed their view that inclusion of nondiscretionary bonuses and incentive payments in the salary level creates a competitive disadvantage for them. The Department believes that by limiting to 10 percent the amount of nondiscretionary bonuses and commissions that can count toward the required weekly minimum salary level, we strike an appropriate balance which allows employers to use expanded sources of income to meet the required salary level, does not unduly harm government employers, and ensures that the salary basis requirement remains “a valuable and easily applied criterion that is a hallmark of exempt status.” 69 FR 22175. The Department also acknowledges the concern articulated by AFL-CIO that this change to the part 541 regulations may result in employees with similar job duties being classified differently depending on the criteria for the bonuses. However, such discrepancies are unavoidable with a salary requirement and already exist, for example, when regional differences in pay structure result in two employees performing the same job in different locations having different exemption status.

The Department also requested comments on whether payment on a monthly basis is an appropriate interval for nondiscretionary bonuses to be credited toward the weekly salary requirement. Numerous commenters stated that a policy requiring payment no less frequently than on a monthly basis would fail to reflect current bonus Start Printed Page 32427payment practices and would make it difficult for employers to utilize the new regulation. The Department believes it is appropriate to increase the permissible bonus payment interval, and is persuaded by comments from PPWO and others suggesting that quarterly (as opposed to monthly) payments of nondiscretionary bonus and commission income give employers sufficient opportunity to measure, quantify, and calculate payments tied to productivity or profits. This lengthened interval should also limit the compliance costs that some commenters suggested employers would incur from having to review payroll on a monthly (or more frequent) basis to determine which employees satisfied the salary level test. Accordingly, § 541.602(a)(3) establishes that in order for nondiscretionary bonuses and incentive payments (including commissions) to satisfy a portion of the standard salary level test for the executive, administrative, and professional exemptions, such compensation must be paid at least quarterly.

In response to commenter concerns, the Department has also determined that it is appropriate to permit a “catch-up” payment at the end of each quarter. This will help decrease the administrative burden on employers and ensure that exempt employees receive the compensation to which they are entitled. The Department declines to permit employers to make a yearly catch-up payment like under the test for highly compensated employees, as this would significantly undermine the integrity of the salary basis requirement, which ensures that exempt workers receive the standard salary level on a consistent basis so that it serves as the hallmark of their exempt status. This concern is not implicated in the HCE context because such employees must receive the entire standard salary amount each pay period on a salary or fee basis and the annual catch-up payment applies only to that part of total annual compensation in excess of the standard salary amount.

The Final Rule permits employers to meet the standard salary level requirement for executive, administrative, and professional exempt employees by making a catch-up payment within one pay period of the end of the quarter. In plain terms, each pay period an employer must pay the exempt executive, administrative, or professional employee on a salary basis at least 90 percent of the standard salary level required in §§ 541.100(a)(1), 541.200(a)(1), or 541.300(a)(1), and, if at the end of the quarter the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 13 weeks, the employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level). Any such catch-up payment will count only toward the prior quarter's salary amount and not toward the salary amount in the quarter in which it was paid. For example, assume Employee A is an exempt professional employee who is paid on a weekly basis, and that the standard salary level test is $913 per week. In January, February, and March, Employee A must receive $821.70 per week in salary (90 percent of $913), and the remaining $91.30 in nondiscretionary bonuses and incentive payments (including commissions) must be paid at least quarterly. If at the end of the quarter the employee has not received the equivalent of $91.30 per week in such bonuses, the employer has one additional pay period to pay the employee a lump sum (no greater than 10 percent of the salary level) to raise the employee's earnings for the quarter equal to the standard salary level.[67] The Department recognizes that some businesses pay significantly larger bonuses; where larger bonuses are paid, however, the amount attributable toward the EAP standard salary level is capped at 10 percent of the required salary amount.

The Department reemphasizes that this rulemaking does not change the requirement in § 541.601(b)(1) that highly compensated employees must receive at least the standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. While few commenters addressed this precise issue, the Clearing House Association urged the Department to permit all types of bonuses and incentive payments to satisfy the entire HCE total compensation requirement, including the standard salary amount due each pay period. While nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the HCE total annual compensation requirement, the HCE test does not allow employers to credit these payment forms toward the standard salary requirement. We conclude that permitting employers to use nondiscretionary bonuses and incentive payments to satisfy the standard salary amount is not appropriate because employers are already permitted to fulfill almost two-thirds of the HCE total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation (paid at least annually). Thus, when conducting the HCE analysis employers must remain mindful that employees must receive the full standard salary amount each pay period on a salary or fee basis.

Finally, nothing adopted in this Final Rule alters the Department's longstanding position that employers may pay their exempt EAP employees additional compensation of any form beyond the minimum amount needed to satisfy the salary basis and salary level tests. See § 541.604(a). Similarly, as noted in the NPRM, overtime-eligible (i.e., nonexempt) employees may also receive bonuses and incentive payments. Where nondiscretionary bonuses or incentive payments are made to overtime-eligible employees, the payments must be included in the regular rate when calculating overtime pay. The Department's regulations at §§ 778.208-.210 explain how to include nondiscretionary bonuses in the regular rate calculation.

D. Highly Compensated Employees

As noted in the NPRM, the Department's 2004 Final Rule created a new highly compensated exemption for certain EAP employees. Section 541.601(a) provides that such employees are exempt if they earn at least $100,000 in total annual compensation and customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee. Section 541.601(b)(1) states that employees must receive at least $455 per week on a salary or fee basis, while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation. The regulation also clarifies that total annual compensation does not include board, lodging, and other facilities, and does not include payments for medical insurance, life insurance, retirement plans, or other fringe benefits. Pursuant to § 541.601(b)(2), an employer is permitted to make a final “catch-up” payment during the final pay period or within one month after the end of the 52-week period to bring an employee's compensation up to the required level. If an employee does not work for a full year, § 541.601(b)(3) permits an employer to pay a pro rata portion of the required annual compensation, based upon the number of weeks of Start Printed Page 32428employment (and one final payment may be made, as under paragraph (b)(2), within one month after the end of employment).

The Department stated in the NPRM that we continue to believe that an HCE test for exemption is an appropriate means of testing whether highly compensated employees qualify as bona fide executive, administrative, or professional employees, but we proposed to increase the total annual compensation requirement and update it automatically on an annual basis. In the 2004 Final Rule, the Department concluded that the requirement for $100,000 in total annual compensation struck the right balance by matching a much higher compensation level than was required for the standard salary level test with a duties test that was significantly less stringent than the standard duties test, thereby creating a test that allowed only appropriate workers to qualify for exemption. See 69 FR 22174. This total annual compensation requirement was set more than four times higher than the standard salary requirement of $455 per week, which totals $23,660 per year. See id. at 22175. Such a balancing of a substantially higher compensation requirement with a minimal duties test still is appropriate, so long as the required annual compensation threshold is sufficiently high to ensure that it continues to cover only employees who “have almost invariably been found to meet all the other requirements of the regulations for exemption.” Id. at 22174.

In the NPRM, the Department proposed to update § 541.601 by increasing the total annual compensation required for the highly compensated test in order to ensure that it remains a meaningful and appropriate standard when matched with the minimal duties test. The Department noted that over the past decade, the percentage of salaried employees who earn at least $100,000 annually has increased substantially to approximately 17 percent of full-time salaried workers, more than twice the share who earned that amount in 2004; therefore, we proposed to increase the total annual compensation requirement to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally ($122,148 in 2013) to bring the annual compensation requirement more in line with the level established in 2004. Consistent with the 2004 regulations, the Department also proposed that at least the standard salary requirement must be paid on a salary or fee basis. The Department did not propose any changes to the HCE duties test.

Commenters provided both support for, and opposition to, the Department's proposal to increase the total annual compensation requirement for the HCE exemption, with some commenters preferring a higher compensation level and others preferring a lower level. Additionally, some commenters suggested that the HCE exemption should be eliminated entirely, while others suggested that the HCE duties test should be modified or eliminated. Both commenters representing employers and those representing employees generally provided much less comment on, and analysis of, the HCE proposal than they did regarding the other issues raised in the NPRM, however, with many commenters mentioning the HCE proposal only in passing or not at all.

Among those who supported the proposal as written, the American Federation of Government Employees (AFGE) indicated that the “new salary threshold for the HCE exemption provides a more accurate representation of which employees might be classified as exempt from the FLSA based on their salary,” and stated that the 90th percentile of annual earnings of full-time salaried workers “provides an objective basis for determining which employees are truly `highly-compensated' and likely to meet the qualifications of exemption from the FLSA.” The Printing Industries of America also supported the proposal, stating that “we believe this is an appropriate level for this particular test.” The Partnership indicated that increasing the HCE compensation threshold to the 90th percentile accounts for the fact that its 2004 value has eroded over time and “is appropriate to ensure that only the most highly paid employees are categorically excluded from overtime requirements, as was the rule's intent when it was adopted in 2004.”

Some commenters stated that the proposed HCE total annual compensation requirement should be increased so that the percentage of employees falling within the new compensation level matched the percentage covered in 2004. For example, NELA and Rudy, Exelrod, Zieff, & Lowe indicated that “[i]n 2004, 6.3 percent of full-time salaried workers earned a salary higher than the HCE compensation level of $100,000 . . . [so in] order to maintain the . . . 93.7 percentile figure, the Department would need to increase the HCE compensation level to $150,000 per year.” [68] These commenters asserted that such a level “is the proper approach if the exemption truly is going to exclude only those at the very top of the ladder,” and indicated that a substantial increase from the current HCE compensation level is warranted to “reflect the purpose of this test.” The commenters also cited to the 2004 Final Rule in which the Department stated that “virtually every salaried `white collar' employee with a total annual compensation of $100,000 per year would satisfy any duties test.” 69 FR 22174. Nichols Kaster similarly stated that the 90th percentile of salaried earnings is “too low to offset the minimal duties test of the HCE exemption.” Nichols Kaster favored eliminating the HCE exemption entirely and stated that the “statutory text of the FLSA does not contain an exemption for highly compensated employees (HCEs).” This commenter also stated that there “is no causal connection between high compensation and exempt job duties,” and thus expressed the view that “[s]uch a test does not accurately define or delimit bona fide exempt employees.” However, Nichols Kaster stated that if the Department retains the HCE exemption, the compensation level should be increased to the 95th percentile, should not include “catch-up” pay, and should be based only on salary payments.

Other commenters opposed the Department's proposed increase to the HCE exemption's total annual compensation requirement. Tracstaffing opined that there “is no compelling reason to increase the minimum salary level for highly compensated salaried employees.” H-E-B similarly stated that “[t]here is no public policy justification for paying overtime to an individual receiving a six figure annual income.” SIFMA advocated “maintaining the $100,000 threshold for the highly compensated test, as the `bright line' $100,000 mark furthers the goal of simplifying the analysis of who qualifies for the test.” The Chamber, the National Lumber and Building Material Dealers Association, NSBA, PPWO, Seize This Day Coaching, and several other Start Printed Page 32429commenters all similarly commented that the compensation level should remain the same for the HCE exemption test. The Clearing House Association and SIFMA commented that the HCE exemption should not have an associated duties test.

The Department has considered the comments regarding the HCE test for exemption and revises § 541.601 to set the total annual compensation required for the highly compensated exemption at the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally as proposed ($134,004 based on the fourth quarter of 2015). The Department disagrees with comments asserting that the HCE exemption compensation level should not be increased. The highly compensated earnings level should be set high enough to avoid the unintended exemption of employees who clearly are outside the scope of the exemptions and are entitled to the FLSA's minimum wage and overtime pay protections.[69] See 69 FR 22174.

The Department notes that it has been 12 years since the HCE annual compensation level was set and, as with the standard salary level, the 2004 value has eroded over time. In FY2017, approximately 20 percent of full-time salaried workers are projected to earn at least $100,000 annually, about three times the share who earned that amount in 2004. See section VI.C.iv. In order to ensure that the HCE compensation level remains a meaningful and appropriate standard when matched with the minimal duties test, the Department is increasing the HCE compensation level to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally. This level, which is generally consistent with the level established in the 2004 Final Rule, is an appropriate proxy for identifying those white collar workers who may qualify as bona fide EAP workers without sweeping in overtime-eligible workers in high-wage regions. In response to the comments from employee representatives suggesting the new HCE compensation level should be even higher, the Department does not agree that a compensation level higher than the 90th percentile is necessary to ensure that virtually every salaried white collar employee would satisfy any duties test. The Department notes that the value of tying the HCE compensation level to wage data is that it will keep the HCE compensation level in tandem with increases in actual wages and therefore not grow either too slowly or too quickly. Therefore, the Final Rule increases the total annual compensation requirement to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally, which based on fourth quarter of 2015 data is $134,004.[70]

Additionally, the Department proposed to maintain the requirement that at least the standard salary amount must be paid on a salary or fee basis. Under the current rule, employees for whom the HCE exemption is claimed must receive the full standard salary amount of $455 weekly on a salary or fee basis. See § 541.601(b). The Department proposed to maintain this requirement, updating the amount that must be paid on a salary or fee basis to the 40th percentile of weekly earnings of full-time salaried employees nationally. The Final Rule maintains this requirement, but modifies the amount of the standard salary to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The Department further stated that should it adopt a provision in the Final Rule permitting employers to take a credit against the payment of the standard salary level for nondiscretionary bonuses, that credit would not be applicable to the HCE exemption. 80 FR 38537 n.36. As previously discussed in section IV.C., the Department received almost no comments addressing the exclusion of bonus payments from satisfaction of the salary requirement for HCE employees. The Final Rule maintains the requirement that employees for whom the HCE exemption is claimed must receive the standard weekly salary amount on a salary or fee basis and does not permit employers to credit nondiscretionary bonuses for up to 10 percent of that salary payment as is permitted under this Final Rule under the standard salary test. Employers can already credit such payments toward the portion of the HCE total compensation requirement in excess of the standard salary level; the Department does not believe that allowing such payments to also satisfy a portion of the standard salary level for HCE employees would be appropriate.

A few commenters requested a regional adjustment for the HCE salary level. The Chamber stated that the “Department should set the highly compensated test using actual salary levels of exempt employees working in the South and in the retail sector that would meet the highly compensated exemption requirements.” The Department notes that no regional adjustment has been made to the HCE compensation level in this Final Rule, just as this was not part of the 2004 Final Rule's determination of the compensation level required for the HCE exemption. The HCE exemption must use a national wage rate to effectively ensure that workers such as secretaries in high-wage areas, such as New York City and Los Angeles, are not inappropriately exempted based upon the HCE exemption's minimal duties test.

The Department proposed in the NPRM to annually update the HCE total annual compensation requirement. As explained in greater detail in the automatic updating section, the Department will automatically update the HCE compensation level every three years, beginning on January 1, 2020.

The Department did not propose any changes to the HCE duties test created in 2004 and makes no change to the HCE duties test in this Final Rule. With respect to the call by some commenters to eliminate the duties test for the HCE exemption, the Department notes that we have consistently declined to adopt a salary-only test, because our statutory authority is to define and delimit who is employed in a bona fide executive, administrative or professional capacity, and salary alone is not an adequate definition. In the 2004 Final Rule, the Department expressed our agreement with commenters “that the Secretary does not have authority under the FLSA to adopt a `salary only' test for exemption, and reject[ed] suggestions from employer groups to do so,” and further noted that “[t]he Department has always maintained that the phrase `bona fide executive, administrative, or professional capacity' in the statute requires the performance of specific duties.” See 69 FR 22173. The Department continues to require, as we did in the 2004 Final Rule, that an employee have a primary duty that includes performing office or non-manual work to qualify for the HCE exemption, and workers such as “carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers, and other employees who perform work involving repetitive operations with their hands, physical skill and energy are not exempt under this section no Start Printed Page 32430matter how highly paid they might be.” § 541.601(d).

With respect to Nichols Kaster's comment asserting that the HCE exemption lacks a meaningful duties test, the Department notes that pursuant to § 541.601(a), HCE employees must customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee as identified in the regulations. As noted in the 2004 Final Rule, the “Department continues to find that employees at higher salary levels are more likely to satisfy the requirements for exemption as an executive, administrative, or professional employee.” 69 FR 22174. Therefore, “the purpose of section 541.601 was to provide a short-cut test for such highly compensated employees who have almost invariably been found to meet all the other requirements of the regulations for exemption.” Id. (internal quotation marks omitted). As we noted in the 2004 Final Rule, the “Department has the authority to adopt a more streamlined duties test for employees paid at a higher salary level.” 69 FR 22173. We continue to believe that the existing HCE duties test is appropriate for those earning at the 90th percentile of full-time salaried workers, especially in light of the fact that the required compensation level will be routinely updated and, therefore, will remain a meaningful test.

E. Automatic Updates

As the Department noted in the NPRM, even a well-calibrated salary level that is fixed becomes obsolete as wages for nonexempt workers increase over time. Lapses between rulemakings have resulted in EAP salary levels that are based on outdated salary data, and thus are ill-equipped to help employers assess which employees are unlikely to meet the duties tests for the exemptions. To ensure that the salary level set in this rulemaking remains effective, the Department proposed to modernize the regulations by establishing a mechanism for automatically updating the standard salary test, as well as the total annual compensation requirement for highly compensated employees. The Department explained that the addition of automatic updating would ensure that the salary test level is based on the best available data (and thus remains a meaningful, bright-line test), produce more predictable and incremental changes in the salary required for the EAP exemptions, and therefore provide certainty to employers, and promote government efficiency.

The Department sought comments on two alternative automatic updating methodologies. One method would update the threshold based on a fixed percentile of earnings of full-time salaried workers. The other method would update the threshold based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). The Department also proposed to automatically update the total annual compensation requirement for the HCE exemption with the same method chosen to update the standard salary test. Regardless of the method selected, the Department proposed that automatic updating for both thresholds would occur annually, but invited comment regarding whether a different updating frequency would be more appropriate. Finally, the Department proposed to publish the updated rates at least 60 days before they take effect, and invited comment regarding whether the updated rates should take effect based on the effective date of the Final Rule, on January 1, or on some other specified date. The Department received many comments in response to these proposals.

The Final Rule establishes that the Department will automatically update the standard salary level test by maintaining the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The Department will update the annual compensation requirement for highly compensated employees by maintaining this level at the annualized value of the 90th percentile of the weekly earnings of full-time salaried workers nationwide. In response to commenter concerns, the Department has modified the frequency and advance-notice elements of the updating mechanisms. The Final Rule establishes that automatic updates to the standard salary level and the HCE annual compensation requirements will occur every three years on the first of the year, and that the Department will publish the updated rates in the Federal Register at least 150 days before their effective date, and post the updated salary and compensation levels on the WHD Web site. The first automatic update will take effect on January 1, 2020. The automatic updating provision is set forth in new § 541.607.

i. The Department's Legal Authority To Automatically Update the Salary Level

Most commenters that addressed automatic updating focused on the merits of the Department's proposal, but some discussed our authority to automatically update the salary level.[71] Commenters that opposed automatic updating discussed this issue more frequently and in much greater detail than those that favored the Department's proposal.

Organizations representing employee interests, including AFL-CIO and NWLC, asserted that the Department has authority to establish an automatic updating mechanism through notice and comment rulemaking. These commenters stated that just as the Department has authority under 29 U.S.C. 213(a)(1) to establish the salary level test, we likewise have authority to automatically update the salary level to ensure it remains effective. Several commenters emphasized that Congress has never limited the Department's ability to update the salary level. For example, EPI stated that “Congress in 1938 gave the authority to define and delimit the terms `bona fide executive, administrative, or professional' to the Secretary of Labor and has never taken it back, except with respect to very particular occupations,” and a comment from 57 labor law professors similarly stated that automatic updating is “within [the Department's] discretion and authority” because “Congress granted the agency wide discretion in implementation of the statutory language.” Other commenters, including AFSCME and NELP, highlighted that automatic updating is consistent with the FLSA's purpose.

In contrast, a number of organizations representing employer interests challenged the Department's authority to add an updating mechanism. Many of these commenters, including ABC, ALFA, CUPA-HR, NRA, PPWO, and Seyfarth Shaw, stated that Congress has never granted the Department authority to institute automatic updating, and asserted that section 13(a)(1)'s silence on this issue reflects that Congress did not intend the salary level test to be automatically updated. These and other commenters stressed that whereas Congress has never amended section 13(a)(1) to expressly include automatic updating, Congress has expressly authorized indexing under other Start Printed Page 32431statutes. Many commenters, including the Chamber, CUPA-HR, and FMI, highlighted that Congress has never provided for automatic increases to the FLSA minimum wage, and the Chamber added that Congress has not indexed the minimum hourly wage for exempt computer employees under section 13(a)(17) of the FLSA, the cash wage for tipped employees under section 3(m) of the FLSA, or any of the FLSA's subminimum wages.

These comments reveal disagreement about the scope of the Department's delegated authority under section 13(a)(1) to define and delimit the EAP exemptions. The Department disagrees with the position that section 13(a)(1)'s silence on automatic updating forecloses the Department from establishing an updating mechanism. While it is true that section 13(a)(1) does not reference automatic updating, it also does not reference a salary level or salary basis test, a duties test, or other longstanding regulatory requirements. Rather than set precise criteria for defining the EAP exemptions, Congress delegated that task to the Secretary by expressly giving the Department the broad authority to define and delimit who is a bona fide executive, administrative, or professional employee. As we explained in the NPRM, since 1938 the Department has used this authority to promulgate many significant regulatory changes to the EAP exemptions, including adding a separate salary level for professional employees and a separate duties test for administrative employees in 1940, adopting separate short and long test salary levels in 1949, and eliminating the long duties test and creating a single standard salary level test and a new HCE exemption in 2004. These changes were all made without specific Congressional authorization. Despite numerous amendments to the FLSA over the past 78 years, Congress has not altered the Department's authority to promulgate, update, and enforce the salary test regulations. The Department concludes that just as we have authority under section 13(a)(1) to establish the salary level test, we likewise have authority to adopt a methodology through notice and comment rulemaking for automatically updating the salary level to ensure that the test remains effective. This interpretation is consistent with the well-settled principle that agencies have authority to “ `fill any gap left, implicitly or explicitly, by Congress.' ” Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 165 (2007) (quoting Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,843 (1984)).

That other statutes expressly provide for indexing does not alter our interpretation of the FLSA. The Department's authority to set and update the salary level test is based in the language of the FLSA, and the fact that there are indexing provisions in other statutes does not limit that authority. Moreover, three of the four non-indexed FLSA wage rates that the Chamber and other commenters referenced—the section 6(a)(1) minimum wage, the minimum hourly wage for exempt computer employees under section 13(a)(17), and the cash wage for tipped employees under section 3(m)—are set by statute.[72] In contrast, the salary level is purely a creature of regulation. Whether Congress has indexed statutorily-established rates within the FLSA does not inform, let alone undermine, the Department's authority to use notice and comment rulemaking to create a mechanism for keeping the regulatory salary level up to date.

The Department also received several comments stating that automatic updating violates section 13(a)(1)'s mandate that the Secretary define and delimit the EAP exemption from “time to time.” For example, the Chamber commented that this statutory language gives “no indication that Congress wanted to put these regulations on auto-pilot,” but instead supports that “Congress wants the Department to `continually revisit' the Part 541 regulations” (emphasis in comment) (quoting 80 FR 38537). However, promulgating an automatic updating mechanism does not conflict with section 13(a)(1)'s “time to time” language. The salary level percentile adopted in this rulemaking reflects the Department's analysis of the appropriate line of demarcation between exempt and nonexempt workers; providing that this dividing line will continue to remain up to date over time fulfills the Department's obligation to ensure that only “bona fide” EAP workers qualify for exemption. Moreover, maintaining the salary level at the 40th percentile of salaries in the lowest-wage Census Region by updating it every three years in no way precludes the Department from revisiting this methodology from “time to time” should cumulative changes in job duties, compensation practices, and other relevant working conditions indicate that changes to the salary level calculation method may be warranted.

The Department also received several comments asserting that automatic updating violates the APA and section 13(a)(1)'s requirement that the EAP exemption be defined and delimited by regulations of the Secretary subject to the provisions of the APA. These commenters asserted, albeit on slightly different grounds, that notice and comment rulemaking must precede any salary level change. CUPA-HR emphasized that under section 13(a)(1) any updating must be done by regulation, and EEAC asserted that “the FLSA exemptions have the full force and effect of law” and the “APA requires notice-and-comment rulemaking each time an agency issues, repeals, or amends a legislative rule.” NRF stated that any increase should be “based on an individualized evaluation of economic conditions rather than an automatic arbitrary formula,” and several commenters stressed that the Department must consider prevailing conditions and provide for public comment before updating the salary level. See, e.g., Jackson Lewis; NAM; PPWO.

The Department believes that automatically updating the salary level fully complies with the APA and section 13(a)(1). Through this rulemaking the Department is promulgating an automatic updating mechanism by regulation and in accordance with the APA's notice and comment requirements. The updating mechanism is not an “arbitrary formula,” but the product of an exhaustive rulemaking process that took into consideration the views of thousands of commenters. These comments raised a wide range of relevant issues, including the impact of an updating mechanism, and greatly influenced the content of the Final Rule. For example, in response to these comments (and as discussed in detail below) the Department adopted a fixed percentile approach to automatic updating, changed the updating frequency from annually to every three years, increased the period between announcing the updated salary level and the effective date of the update from 60 days to at least 150 days, and set January 1 as the effective date for future salary level updates. As to commenter concerns about accounting for prevailing economic conditions, both the NPRM and this Final Rule contain detailed 10-year projections of the costs and transfers associated with automatic updating. See section VI.D.x.; 80 FR 38586-89. Moreover, maintaining the Start Printed Page 32432salary level at a fixed percentile of earnings will help ensure the test continues to reflect prevailing wage conditions, and does not preclude the Department from revising the updating mechanism in the future through notice and comment rulemaking if we determine that conditions warrant. We disagree with commenter statements that notice and comment rulemaking must precede every salary level update when the underlying salary setting methodology is unchanged and reject the notion that in directing the Department to define and delimit the EAP exemption by regulations, Congress intended to prohibit the Department from establishing an automatic updating mechanism through notice and comment rulemaking.

Relatedly, a few commenters interpreted our NPRM statement that automatic updating would remove “the need to continually revisit this issue through resource-intensive notice and comment rulemaking,” 80 FR 38537, as an attempt to impermissibly circumvent the APA. See, e.g., Chamber; NRA. This statement was not an attempt to sidestep the APA, but rather part of our explanation for seeking comment on the merit of using an updating mechanism to keep the salary level test current. The Department has dedicated considerable resources toward this rulemaking, including conducting extensive outreach prior to issuing the NPRM, drafting a comprehensive NPRM, receiving and reviewing more than 270,000 timely comments, and drafting a Final Rule addressing these comments. The Department recognizes and appreciates the commenters' views. We disagree, however, that section 13(a)(1) or the APA prohibits us from establishing a mechanism to keep the salary level up to date so that it continues to work effectively with the duties test. Instead, we conclude that introducing an updating mechanism that ensures that the EAP exemptions remain up to date is a reasonable exercise of the Department's statutorily-established authority to define and delimit the EAP exemptions.[73]

The Department also received several comments highlighting that in two prior rulemakings we rejected commenter requests to automatically update the salary level. Specifically, some commenters raised that in our 1970 rulemaking we stated, in response to a comment, that automatic updating would “require further study,” 35 FR 884, and that we declined a similar request in 2004. See, e.g., Chamber; FMI. The Department acknowledged these prior statements in the NPRM. While we agree with commenters that our decision to institute automatic updating in this Final Rule departs from our 1970 and 2004 rulemakings, these past statements in no way foreclose our current action. The 1970 rulemaking stated that the request to automatically update the salary level “appears to have some merit, particularly since past practice has indicated that approximately 7 years elapse between amendment of the salary level requirements.” 35 FR 884. The time between rulemakings has increased since 1970 (this will be the third salary level update in 46 years), underscoring the merit of automatic updating. Consistent with our earlier statement that automatic updating “would require further study,” the Department has proposed the addition of an updating mechanism in this rulemaking and considered the wide-range of comments received on the issue. While in the 2004 Final Rule we declined to institute automatic updating and instead expressed our intent “in the future to update the salary levels on a more regular basis, as [we] did prior to 1975,” 69 FR 22171, our subsequent experience has prompted us to reexamine this matter.

Several commenters, including IFA and Littler Mendelson, specifically referenced our refusal to institute inflation-based indexing in the 2004 Final Rule. In that rulemaking we stated, in response to a comment, that “the Department has repeatedly rejected requests to mechanically rely on inflationary measures when setting the salary levels in the past because of concerns regarding the impact on lower-wage geographic regions and industries.” 69 FR 22172. We then stated that such “reasoning applies equally when considering automatic increases to the salary levels” and that “the Department believes that adopting such approaches in this rulemaking is both contrary to congressional intent and inappropriate.” Id. In its comment, the Chamber interpreted this language as expressing our conclusion “that Congress did not give the Department authority to provide automatic increases to the salary level” and stated that “the Chamber is unaware of any legislative or legal development that would justify [our purported] reversal.”

These commenters' reading of the 2004 Final Rule is overly broad, as we did not conclude that the Department lacks legal authority to institute automatic updating. Our reference to automatic updating simply reflected our conclusion at that time that an inflation-based updating mechanism, such as one based on changes in the prices of consumer goods, that unduly impacts low-wage regions and industries would be inappropriate. As explained in the NPRM, closer examination reveals that concerns raised when setting a new salary level using an inflation index are far less problematic in the automatic updating context. See 80 FR 38540. For example, in the automatic updating context there is little risk of using an outdated salary level as a baseline for inflation-based adjustments, and the inability of inflation-based indicators to account for changes in working conditions is therefore less concerning. See id. Regardless, our prior concerns about inflation-based updating are not implicated here because the Department has chosen to automatically update the salary level based on a fixed percentile of earnings of full-time salaried workers. As explained in detail in section IV.A., in response to commenter concerns that setting the salary level using the 40th percentile of a nationwide data set would adversely impact low-wage regions and industries, the Department is setting the salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census Region, which yields a lower salary level that will exclude fewer employees performing EAP duties in low-wage regions and industries. Tying the salary level and updating mechanism to a fixed percentile of earnings in the lowest-wage Census Region squarely addresses the concern we raised in the 2004 Final Rule, and ensures that our updating mechanism is appropriate for all areas and industries.

Several commenters, including CUPA-HR and FMI, also deemed the Department's proposal inconsistent with our statement in the 2004 Final Rule that “the Department finds nothing in the legislative or regulatory history that would support indexing or automatic increases.” 69 FR 22171. But as explained in our proposal, the lack of on-point legislative history—either favoring or disfavoring automatic updating—is unsurprising given the origin and evolution of the salary level test. Congress did not set forth any criteria, such as a salary level test, for defining the EAP exemptions, but instead delegated that task to the Secretary. The Department established Start Printed Page 32433the first salary level tests by regulation in 1938, using our delegated authority to define and delimit the EAP exemptions. See 29 U.S.C. 213(a)(1). The fact that the salary level tests were created by regulation after the FLSA was enacted accounts for the lack of legislative history addressing the salary level tests or updating methods. As previously discussed, despite numerous amendments to the FLSA over the past 78 years, and the Department making many significant changes to the EAP exemptions, Congress has not altered the Department's authority to promulgate, update, and enforce the salary test regulations. We agree with commenters that instituting an automatic updating mechanism departs from the Department's past practice, but believe this is an appropriate modernization and within the Department's authority.

The Department also received several comments addressing the impact of automatic updating on compliance with the Regulatory Flexibility Act (“RFA”) and Executive Order 13563, Improving Regulation and Regulatory Review. Seyfarth Shaw urged the Department to not proceed with automatic updating in part because this mechanism would “effectively bypass[]” these authorities. PPWO raised similar RFA concerns and characterized the Department's rulemaking as a “ `super-proposal,' deciding once and for all what (in the Department's belief) is best without consideration of its impact now or in the future.” PPWO further stated that “it would not be possible for the Department to accurately estimate the impact of the automatic increases in future years as the workforce and the economy are always changing.”

The RFA requires a regulatory flexibility analysis to accompany any agency rule promulgated under 5 U.S.C. 553. See 5 U.S.C. 603-604. In accordance with this requirement, this rulemaking estimates the future costs of automatic updating using the fixed percentile approach. The RFA only requires that such analyses accompany rulemaking, and commenters have not cited any RFA provision that would require the Department to conduct a new regulatory flexibility analysis before each automatic salary level update. In response to PPWO's concern about this rulemaking setting the salary level updating process “once and for all,” we reiterate that this Final Rule does not preclude further rulemaking should the Department determine that future conditions indicate that revisions to the salary level updating methodology may be warranted.

Similarly, Executive Order 13563 directs agencies to take certain steps when promulgating regulations, including using the “best available techniques to quantify anticipated present and future benefits and costs as accurately as possible” and adopting regulations “through a process that involves public participation.” 76 FR 3821 (Jan. 18, 2011). The current rulemaking fully satisfies all aspects of Executive Order 13563, see section VI; 80 FR 38545, and commenters have cited no portion of this directive that would require notice and comment rulemaking to precede future automatic salary level increases made through the updating mechanism established in this rulemaking.

Finally, Fisher & Phillips and the Southeastern Alliance of Child Care Associations stated that because the Department did not propose specific regulatory text concerning automatic updating, “adoption of any such indexing mechanism would be unlawful and without effect” under the APA. These commenters did not specify the provision of the APA that is purportedly violated. The APA requires that the notice of proposed rulemaking published in the Federal Register include either the terms or substance of the proposed rule or a description of the subjects and issues involved. See 5 U.S.C. 553(b)(3). The Department's proposal fully satisfies this standard, which does not require the NPRM to “contain every precise proposal which (the agency) may ultimately adopt as a rule,” much less the specific regulatory text. Ethyl Corp. v. EPA, 541 F.2d 1, 48 (D.C. Cir. 1976) (en banc) (internal quotation marks and citations omitted). The proposed regulatory text for each exemption states that the salary level will be updated annually (on a to-be-determined date) and that the Department will publish a notice with the updated levels at least sixty days before these rates become effective. See 80 FR 38610-11. The proposal also explains why, rather than propose regulatory text for a specific updating method, the Department sought comments on two alternatives (each of which we discussed in depth). See 80 FR 38539. The Department's NPRM fully satisfies the APA.

ii. Rationale for Automatically Updating Salary Levels

The Department proposed to establish automatic updating mechanisms to ensure that the standard salary test and the HCE total annual compensation requirement remain meaningful tests for distinguishing between bona fide EAP workers who are not entitled to overtime and overtime-protected white collar workers, and continue to work effectively with the duties tests. The Department's proposal explained that this change would ensure that these thresholds are based on the best available data and reflect prevailing salary conditions, and will produce more predictable and incremental changes in the salary required for the EAP exemptions. The Department received numerous comments addressing our automatic updating proposal.

Commenters were sharply divided over whether the Department should automatically update the salary level.[74] Employees and commenters representing employee interests overwhelmingly supported this change, while most employers and commenters representing employer interests opposed automatic updating. Overall, those supporting automatic updating generally agreed with the Department's rationale presented in the NPRM and emphasized the benefits to employees and employers of maintaining an up-to-date salary level, while those in opposition challenged the Department's rationale and emphasized the burdens annual updating would impose on employers. Several employers favored automatic updating, but requested that updates occur less frequently than on an annual basis. Additionally, some commenters that opposed automatic updating nonetheless expressed a preference for a particular updating methodology should the Department go forward with this aspect of our proposal.

Commenters that supported automatic updating focused primarily on the benefits of maintaining an up-to-date salary level. Many commenters agreed with the Department's proposal, stating that automatic updating is a transparent way to maintain an effective salary level and avoid the negative effects of infrequent salary level updates. For example, NELP stated that automatic updating “is by far the most reasonable, efficient and predictable way to ensure that the standard for exemption remains true to the statute's intended purposes,” AFL-CIO stated that a “transparent updating process would provide greater certainty and predictability for employers and workers alike,” and Start Printed Page 32434Bend the Arc, Employment Justice Center, Maintenance Cooperation Trust Fund, and several other worker advocacy groups stated that indexing “the salary threshold to an objective measure provides a predictable and efficient way to ensure that those workers intended to be covered by the [FLSA] get its protections.” Many other commenters made similar statements. See, e.g., AARP; AFT; EPI; the Gillespie Sanford law firm; Labor and Employment Committee of the National Lawyers Guild-New York City Chapter; NWLC.

Commenters supporting automatic updating also frequently discussed, and viewed the Department's proposal as a solution to, the Department's past inability to regularly update the salary level. These commenters emphasized that automatic updating would increase predictability in both the frequency and size of salary level changes, benefiting employers and employees. See, e.g., Comment from 57 labor law professors; AFL-CIO; Partnership. Several commenters representing employer interests viewed automatic updating as a means of producing more predictable salary level changes. See, e.g., American Council of Engineering Companies; CVS Health. Similarly, SIGMA supported automatic updating because “[s]udden, large adjustments to the threshold without warning can cause dislocation in the industry, increase compliance costs, and provide disincentives to employing people on a salaried rather than an hourly basis.” ANCOR stated that “steadier, more predictable” salary level changes would “likely benefit providers who will be able to adjust to smaller, more frequent changes better than to larger, less frequent ones.”

Some commenters that supported automatic updating, including Athens for Everyone, NELA, Rudy, Exelrod, Zieff & Lowe, and many others, stressed that a fixed salary level harms employees because inflation causes the salary threshold's real value to decline over time. AFSCME submitted campaign comments from 24,122 of its members who agreed that “overtime protections have been eroded by inflation,” and highlighted the “need to index these protections to keep them from being eroded again in the future.” NELA and Rudy, Exelrod, Zieff & Lowe also stated that this decline particularly harms workers earning just below the fixed salary level when it is first set, because they will “soon see that figure fall below their salary” and lose overtime protection even if “the real value of their salary stays entirely constant.” Likewise, Nichols Kaster stated that infrequent salary level updates have harmed workers earning just above the salary threshold when it is first set, as these workers have “no protection against working long hours for diminishing returns.”

A number of commenters also raised the related view that automatic updating would decrease inappropriate classification of lower salaried white collar employees as exempt. AFGE, IAFF, and others noted that the salary level's effectiveness at distinguishing between exempt and nonexempt workers diminishes over time as the wages of employees increase and the real value of the salary threshold falls. SEIU and a number of worker advocacy groups, including Equal Justice Center, NDWA, and Texas RioGrande Legal Aid, asserted that infrequent salary level updates have permitted employers to sweep too many low-salaried workers into the exemption, with NELP citing the proximity of the current salary threshold to the poverty level as a “potent example” of how the “current method of setting fixed levels results in outdated thresholds and ballooning numbers of workers improperly subject to employer classification as exempt.” Some commenters, including AFL-CIO and UFCW, asserted that failing to regularly update the standard salary level also exposes growing numbers of workers who fail the standard duties test to the “risk of misclassification.”

The Department received numerous comments from employers and groups representing employers opposing the introduction of an automatic updating mechanism. These commenters raised a variety of concerns and urged the Department not to finalize this aspect of our proposal. Consistent with how many commenters organized their comments, these views are aptly separated into two broad categories: Those addressing whether automatic updating is appropriate as a general matter, and those discussing potential financial and administrative effects of automatically updating the salary levels on an annual basis. Both of these broad categories of comments are discussed below.

Some commenters cited the Department's past refusal to institute automatic updating and emphasized that the part 541 regulations have benefited from the rulemaking process. For example, the Chamber, FMI, and others stated that rulemaking has generated vigorous public debate about the salary levels, and that the Department has increased and decreased proposed salary levels in response to public comment—including in 2004 when the Department increased the proposed salary level and HCE compensation requirements in our final rule. PPWO stated that the “Department's own actions in reaching out to the regulated community before publication of the NPRM, as well as soliciting input on the salary level in the NPRM itself, demonstrate the importance of notice-and-comment on the salary level.”

Many commenters stated that the Department should only update the salary level when conditions warrant, not automatically. CUPA-HR commented that the rates of increase and the duration between updates have always varied as the Department has tailored the salary levels “to ensure that the exemptions remained true to their purpose in the face of changing workforces and changing economic circumstances.” NGA cited the statement in the 2004 Final Rule that “salary levels should be adjusted when wage survey data or other policy concerns support such a change,” 69 FR 22171, and stated that the Department should only change the salary level when changes in earnings are substantial. Similarly, AH&LA, Island Hospitality Management, NCCR, and NRF all stated that a salary increase “should be based on an individualized evaluation of economic conditions rather than an automatic arbitrary formula.” Other commenters expressed similar views. See, e.g., Agricultural Retailers Association and the Fertilizer Institute; National Council of Farmers Cooperatives. PPWO contended that the salary level needs to be “fixed” only “when it approaches the end of its usefulness.” EEAC and Fisher & Phillips stated that the Department could simply reallocate resources as necessary to maintain an appropriate salary level without automatic updating.

Several commenters raised the related concern that automatic updating could harm the economy by increasing the financial burden on employers during economic downturns. The Chamber stated that either proposed updating method would be slow to reflect actual economic conditions, and would prevent employers from “lowering salaries to quickly respond to decreased revenue experienced in bad economic times.” Fisher & Phillips stated that automatic updating during periods of high inflation could “contribute to a serious inflationary spiral.” Analogizing to the minimum wage context, CalChamber Coalition stated that automatic updates during economic downturns may lead employers to reclassify more employees as nonexempt, reduce hours, and increase layoffs.Start Printed Page 32435

Some commenters worried that automatic updating would create an untenably high salary level that would harm low-income regions and industries, and small businesses. For example, Alpha Graphics stated that automatic updating would produce “an inappropriately high level in a matter of a few years,” and NGA stated that salary level increases would harm independent grocers with low profit margins because the updating mechanism “would not provide the necessary protection for low-wage industries and geographic areas.” See also, e.g., ALFA; NFIB. SHRM expressed concern that automatic updating based on a national salary level would not account for the fact that salaries in all regions and industries do not rise at the same pace, and it questioned whether the Department could realistically use additional rulemaking to correct for regional disparities that may arise in the future.

Several commenters asserted that updating is problematic regardless of the updating method the Department chooses, with some suggesting that the salary level and automatic updating are incompatible concepts. Seyfarth Shaw stated that any updating method “would establish an ad hoc, artificially-created level determined by statistical assumptions.” See also Wendy's (describing the updating methods as “based on untested and complicated methodologies”). EEAC expressed concern that if the salary-setting methodology in this rulemaking results in an incorrect salary level (as the Department now states was the case in 2004) automatic updating would compound this error indefinitely. NACS, the Southeastern Alliance of Child Care Associations, and others stated that establishing an automatic updating mechanism is inconsistent with the Department's recognition that “the line of demarcation” provided by the salary test “cannot be reduced to a standard formula.”

As to the effect of automatic updating on salary level predictability, PPWO stated that “it will be difficult, if not impossible, for employers and employees to determine with precision each year's new salary level in advance of the Department's pronouncement in the Federal Register,” and AIA-PCI and the Clearing House Association agreed that this uncertainty is demonstrated by the Department's statement in the NPRM that “the public will not be able to exactly replicate the weekly earnings and percentiles” used to calculate the salary level, 80 FR 38528 n.24.

The Department recognizes that our automatic updating proposal has elicited strong and diverse reactions from stakeholders. After review of submitted comments, the Department remains convinced that instituting an automatic updating mechanism is the best means of ensuring that the salary level test continues to provide an effective means of distinguishing between overtime-eligible white collar employees and those who may be bona fide EAP employees, and continues to work appropriately with the duties test.

The Department shares commenters' concerns that a fixed and outdated salary level increases the number of low-salaried employees at risk of being inappropriately classified as exempt as the real value of the salary threshold falls, and that workers earning near the fixed salary level when it is set are particularly vulnerable. The Department also agrees with commenters that the updates to the salary level should reflect prevailing economic conditions. The Department's updating mechanism directly addresses both of these issues by ensuring that the salary test level is based on the best available data and reflects current salary conditions. As explained in more detail below, the Department will use the updating mechanism established under new § 541.607 to reset the salary level using the most recent BLS data on earnings for salaried workers. Linking the salary level to earnings ensures that economic changes that impact employee salaries are reflected in the salary level test. Also, because regular updates will ensure that the salary level is in step with prevailing economic conditions, the Department does not believe that the updating mechanism will lead to undue salary level increases during economic downturns or other inopportune times. Salary level changes will occur at regular intervals using a set methodology and a publicly available data source. This improvement to the current regulations will benefit employers and employees by replacing infrequent, and thus more drastic, salary level changes with gradual changes occurring at predictable intervals.

The Department is committed to ensuring that the updating mechanism yields a salary that is appropriate for low-wage industries and geographic areas. As previously discussed in section IV.A.iv., in response to commenters' concerns, the Department is setting the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). Commenters raised similar concerns about using a nationwide data set for automatic updating. The reasons that supported changing from a national to a regional data set in the standard salary level setting context apply equally in the salary updating context, and new § 541.607 accordingly incorporates this data set change.[75] The Department recognizes that salaries do not change at the same rate nationwide, and this modification will ensure that any future increase in earnings will only impact the standard salary level to the extent that those gains are also realized by employees in the lowest-wage Census Region. This change will also further guard against commenter concerns that using a nationwide data set could lead to a standard salary level increase that does not reflect the prevailing economic climate.[76]

Experience has shown that the salary level test is only a strong measure of exempt status if it is up to date, and that left unchanged the test becomes substantially less effective as wages for overtime-protected workers increase over time. As we explained in the NPRM, competing regulatory priorities, overall agency workload, and the time-intensive nature of notice and comment rulemaking have all contributed to the Department only having updated the salary level once since 1975 (in 2004). In the 2004 Final Rule the Department expressed the intent to “update the salary levels on a more regular basis,” 69 FR 22171, yet more than a decade has passed since the last update. While some commenters viewed this inaction and the Department's past decision not to institute automatic updating as reason for withdrawing our current proposal, we believe this history underscores the appropriateness of adding an automatic updating provision to the regulations.

Contrary to several commenters' concerns, prior Department statements about the salary level test in no way undermine the Department's decision now to incorporate an automatic updating mechanism into the regulations. The Department's statement that the “line of demarcation” between exempt and nonexempt employees “cannot be reduced to a standard formula,” 80 FR 38527, simply reflects Start Printed Page 32436our continued belief that no single formula can unerringly separate exempt and nonexempt employees, and that the salary test must therefore work in tandem with the duties test for the EAP exemption to function effectively. The salary level test remains the “best single test” of exempt status, Stein Report at 19, and the method for setting and updating the salary level adopted through this rulemaking represents the Department's best determination of the appropriate dividing line between exempt and nonexempt workers, when paired with the standard duties test. While the precise updating “formula” chosen—the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region—is new, the underlying methodology is broadly consistent with the Department's past salary setting methods, see section IV.A.i., and the salary setting and updating methodology have been promulgated through notice and comment rulemaking.

The Department agrees with commenters that stated that automatic updating will increase predictability in both the frequency and size of salary level changes, benefiting employers and employees alike. We find to be unfounded comments that salary level unpredictability is evident from our statement that “the public will not be able to exactly replicate the weekly earnings and percentiles [used to calculate the salary level] from the public-use files made available by BLS.” 80 FR 38528 n.24. This explanatory footnote addressed the public's ability to duplicate BLS' deciles table using the public-use data. The referenced discrepancy is very small, and in no way compromises the public's ability to estimate future salary level changes based on the trend in quarterly earnings data published by BLS.[77] As discussed in the NPRM and above in section IV.A.iv., the Department will update the salary level using the deciles table for Census Regions as published by BLS, without modifying the data in any way or otherwise engaging in complex data analysis. This process is transparent, predictable, and straightforward.

The essentially ministerial act of applying the updating mechanism to maintain the salary level underscores why the Department does not share commenter concerns about resetting the salary level without further rulemaking. The Department agrees with commenters that past salary level changes have benefited from (and required) notice and comment rulemaking. This rulemaking is no exception, as public feedback was critical to finalizing the new standard salary level and the automatic updating mechanism. In response to public comments, the Department has changed the data set used for setting and updating the salary level, and (as discussed in greater detail below) chosen to update the salary using the “fixed percentile” approach, increased the period between notice of the updated salary level and its effective date, and changed the updating frequency. But unlike salary updates made up to this point, which have all involved some change to the salary setting methodology, salary level updates under new § 541.607 will use a fixed methodology that (through this rulemaking) has already been subject to notice and comment. Public feedback was critical to finalizing the updating mechanism, but is unnecessary when simply maintaining the salary level using this mechanism. Of course, should the Department choose to make any changes to the updating methodology in the future, such changes would require notice and comment rulemaking.[78]

The Department also disagrees with commenters that stated that we should simply reallocate agency resources as necessary to maintain an updated salary level. Whereas most regulations require a one-time expenditure of resources to promulgate, and then once issued can remain both unchanged and forceful for many years if not decades, without automatic updating the Department would have to engage in nearly continuous rulemaking to ensure that the salary test accurately reflects employee salary levels. The new automatic updating mechanism will enable the Department to maintain an effective and up-to-date salary level, while preserving our ability to revisit the underlying salary setting methodology through rulemaking as future conditions warrant. For the above reasons, the Department is finalizing our proposal to institute a regulatory mechanism for automatically updating the salary level.

The Department received many comments expressing concern about the financial and administrative burden that annual updating would impose on employers. In particular, many commenters stated that annual updating would require employers to conduct a yearly “classification analysis”—to assess employee exemption status and determine whether salary increases to preserve exempt status are warranted—and then incur additional costs implementing any changes. AIA-PCI; see also, e.g., Business Roundtable; Maryland Chamber of Commerce; PPWO. Several commenters described these costs in detail. For example, the Chamber's comment identified many common concerns:

The annual salary increase proposed by the Department will require an employer to: Analyze whether business conditions allow a salary increase or whether they need to reclassify employees as non-exempt; prepare new compensation plans for reclassified employees; develop materials to explain the reclassification to employees; review timekeeping and payroll systems to ensure compliance with the FLSA recordkeeping requirements and compliant overtime calculations; review or adopt new policies for the reclassified employees, including policies prohibiting off-the-clock work, when employees will be permitted to work overtime, payment for waiting time, training time and travel time, etc.; train the reclassified employees, and the managers who supervise them on recording time and other wage-hour topics. If the salary change is implemented as proposed, a large number of workers will have to be added to timekeeping systems. This may require server and system upgrades to account for the additional users. Best practices take time.

Additionally, ABA stated that automatic updating would require employers to consider whether to restructure the duties of newly nonexempt employees, and NFIB stated that it would require employers to annually “reassess potential raises, bonuses, or promotions” for employees. Seyfarth Shaw and others stated that the Department significantly underestimated the cost and time obligations associated with these actions.

Multiple commenters also emphasized that annual updating would negatively impact employer budgets and budget planning. NALP, NGA, NRF, Wendy's, and others stated that not knowing employee exemption status from year to year would make it more difficult for employers to forecast costs or profit margins. CUPA-HR stated that in response to a survey of its members about the Department's proposal, 91 percent of respondents stated that automatic updating as proposed would Start Printed Page 32437negatively impact their budgets, while 63.6 percent said this change would negatively impact financial planning ability. The California State Association of Counties stated that annual updating would be especially hard for public entities because “public sector salaries are generally not as flexible as private sector salaries and have many additional constraints, including bargaining agreements, restricted sources of revenue, and civil service rules.” Similarly, several commenters stated that updating would be particularly difficult for non-profit employers that have limited ability to increase revenue in response to increased labor costs. See, e.g. , American Academy of Otolaryngic Allergy; BSA; USPIRG. WorldatWork stated that budget overruns resulting from annual salary increases could deplete capital available for other business areas such as research and development, business equity for future growth, or voluntary employer contributions to retirement plans, and FMI stated that budgetary uncertainty and the “specter of unexpected cost increases provides disincentives for businesses to engage in capital spending and increase hiring and thereby grow the economy.”

Several commenters expressed concern that updating could create “salary compression” issues and impede employers' ability to give merit-based salary increases. To illustrate these interrelated concerns, SHRM provided a hypothetical in which ten exempt employees earn $975 per week (above the 2016 salary level of $970 predicted in the NPRM), and an employer budgets for a three percent annual salary increase (totaling $15,210). SHRM contended that without automatic updating the employer could reward better performing employees with large raises and give lower raises or no raise to average or poor performers. If, however, the salary level were automatically increased by two percent, the employer “would be required to adjust all ten salaries up to $989 per week in order to maintain their exempt status,” significantly reducing the total amount available for merit increases. SHRM concluded that after several automatic updates “the gap in pay between more senior and less senior, more experienced and less experienced, or more productive and less productive employees will become smaller over time, creating significant morale problems and other management challenges.” AIA-PCI stated that automatic updating would in many instances place “an artificial obligation on the company to provide a salary increase to an underperforming employee . . . simply to maintain the employee's exempt status,” and NGA stated that if “managers know they will receive an automatic raise each year by meeting minimum performance standards, they have little incentive to work increased hours and take on more responsibility while also maintaining a high performance level.” Relatedly, several commenters, including IFA, Littler Mendelson, and Fisher & Phillips, stated that in addition to raising employee salaries to maintain their exempt status, employers will have to raise the salaries of those earning above the salary threshold to avoid compression in compensation scales among exempt employees.

Some commenters stated that automatic updating would also adversely impact employees. AH&LA, NRF, and others stated that annual updating would create instability in employee compensation and benefits (which are often tied to exempt status) and that employers would likely reduce exempt employee benefits to cover annual updating's administrative costs. Similarly, AT&T stated that uncertainty about employees' year-to-year exemption status will likely cause companies to “hedge against unanticipated overtime payments, thereby putting downward pressure on annual salary increases.” Other commenters stated that possible changes in exempt status and employers' inability to provide merit increases will undermine employee morale. See, e.g. , CUPA-HR; Seyfarth Shaw. IFA asserted that such complexities illustrate that an automatic updating mechanism is inconsistent with the President's directive to “modernize” the EAP regulations.

The Department acknowledges employers' strong views on the financial and administrative considerations associated with annual automatic updating, and we agree that updating the salary level annually may increase the impact on employers. In particular, we agree that this change may require employers to reassess employee exemption status more frequently and in some instances to more closely monitor hours of newly overtime-eligible employees. These costs are discussed in greater detail in the Department's economic impact analysis, see section VI.D.x. However, the link between automatic updating and other costs commenters have raised is less clear and was generally not supported by data in the comments. Moreover, many commenters did not address the fact that the alternative to automatic updating is not a permanent fixed standard salary level, but instead larger changes to the standard salary level that would occur during irregular future updates.

The Department believes that in several respects commenters overstated the impact of automatic updating on employers. In some instances commenters failed to account for existing employer practices. For example, the concern that automatic updating will require employers to develop policies and trainings to explain reclassification to newly overtime-eligible employees ignores that employers already have overtime-eligible employees and thus typically have these procedures in place. Additionally, many commenters conflated the distinction between costs associated with the current salary increase (to $913), and those due to future automatic updates. For example, the cost of adding newly overtime-eligible workers to timekeeping systems and reviewing timekeeping and payroll systems to ensure compliance with FLSA recordkeeping requirements are likely overstated. These costs are primarily incurred when employees are initially reclassified, and the Department predicts that the number of reclassified employees at future updates will be much smaller than the number reclassified at the initial salary increase since the updating mechanism will change the salary level regularly and incrementally, and the salary level is based on actual wages of salaried workers.

The Department is also not persuaded that automatic updating (at any frequency) will force employers to reward underperforming employees, impede merit-based pay increases, or create salary compression issues. These interrelated concerns arise from the faulty premise that the automatic updating mechanism will in effect require employers to increase salaries of all affected workers. This is not the case as employers have many options for managing their workforces. The updating mechanism simply adjusts the salary level to ensure that it reflects prevailing salary conditions and can effectively work in combination with the duties test to identify exempt and nonexempt employees. Because any increase in the salary level is based on actual increases in workers' salaries, employers may find that they are already paying their exempt employees wages above the updated salary level. Where this is not the case, employers can respond to salary level updates by (for example) increasing employee pay to retain overtime exempt status, Start Printed Page 32438reclassifying employees to overtime-eligible status, decreasing hours of newly overtime-eligible employees to avoid overtime, paying overtime to newly overtime-eligible workers, redistributing hours among the workforce, and/or hiring new employees. Similarly, employers are under no obligation to reward underperforming employees with a raise (a concern discussed in a number of comments). Employers can reclassify such employees to nonexempt status, redistribute employee workloads, or take any number of other managerial actions in lieu of increasing their salary to maintain the exemption.

The Department is more persuaded by commenter concerns that annual updating would inject uncertainty into the annual employer budgeting process. While the ripple effects of this uncertainty on employee compensation are open to debate, the immediate impact on employers is clear. Although commenters often raised budgeting concerns as part of their general opposition to automatic updating, closer examination reveals that these concerns are closely linked to the updating frequency. For example, comments that updating would impact employers' ability to forecast profit margins, determine store and supply chain labor costs, and plan and implement yearly salary increases, are all most directly implicated by annual updating, as are government and non-profit commenter concerns tied to the lack of short-term control over revenue streams and employee costs. Even some of the commenters that opposed automatic updating agreed that lengthening the period between updates would help alleviate some employer concerns. See, e.g., CUPA-HR (updating every five years “could avoid many of the negative consequences associated with automatic annual increases”); BSA. Accordingly, the Department is modifying our proposal, which would have updated the salary level annually.

Commenters that favored automatic updating often also favored annual updates. See, e.g., Nichols Kaster; UFCW. Commenters that opposed automatic updating expressed more varied opinions. AT&T, CUPA-HR, SIFMA, and others favored updating no more frequently than every five years, with some noting that this was the shortest interval between the Department's past salary level updates (since 1940). Notably, several of the commenters representing employer interests that supported some form of automatic updating favored revisiting the salary level every three years, see American Council of Engineering Companies; American Resort Development Association; WMATA, as did several commenters that opposed updating generally, see BSA (no more than every two or three years); Fisher & Phillips (“not less than every three years”). Other commenters favored other updating periods. See, e.g., Association of Regional Center Agencies (“no more frequently than biennially”).

In response to commenter concerns about the burdens of annual updating, and mindful of the range of views expressed on the appropriate updating frequency, new § 541.607 provides that updating will occur every three years. This change from the Department's proposal strikes an appropriate balance between ensuring that the salary level remains an effective “line of demarcation” and not burdening employers or their workforces with possible changes to exemption status on a yearly basis. Increasing the time period between updates will also decrease the direct costs associated with updating because regulatory familiarization costs are only incurred in years in which the salary is updated and the number of affected workers will drop in years in which the salary is unchanged leading to lower managerial costs in those years. Triennial updates using a fixed and predictable method should significantly mitigate the annual budget planning concerns that commenters raised. Additionally, employers will always know when the salary level will be updated, and between updates can access BLS data to estimate the likely size of this change. Lengthening the updating frequency to three years also responds to commenter concerns that minor year-to-year fluctuations in employee earnings should not trigger reclassification analyses.

iii. Automatic Updating Method

The Department's proposal discussed and requested comments on two alternative updating methodologies—updating using a fixed percentile of full-time salaried employee earnings or using the CPI-U. As we explained in our proposal, the fixed percentile approach would allow the Department to reset the salary level test by applying the same methodology proposed to set the initial salary level, whereas the CPI-U approach would update the salary amount based on changes to the CPI-U—a commonly used economic indicator for measuring inflation. The Department's proposal did not express a preference for either updating method and instead sought comments on these two alternatives.

The Department received numerous comments addressing these two proposed updating methods, although many commenters that supported automatic updating did not express a methodology preference. See, e.g., AARP; American Association of University Women; Legare, Atwood & Wolfe law firm; Santa Clara County Probation Peace Officers' Union. Commenters that favored automatic updating and expressed a preference for a methodology generally preferred the fixed percentile approach, although some favored the CPI-U method. Both of these groups of commenters preferred either method to no automatic updating. Commenters that opposed any form of automatic updating generally expressed concerns with both updating methods. In some instances, however, these commenters preferred a particular method (typically the CPI-U) should the Department institute automatic updating. Additionally, a few commenters suggested automatic updating methods not included in the Department's proposal.

The majority of commenters that supported automatic updating and expressed a methodology preference favored the fixed percentile approach. Many of these commenters explained that the reasons for initially setting the salary level at a fixed percentile of earnings of full-time salaried workers also supported updating using the same method. For example, NWLC stated that just as the Department determined that “looking to the actual earnings of workers provides the best evidence of the rise in prevailing salary levels and, thus, constitutes the best source for setting the proposed salary requirement,” 80 FR 38533, automatic updating should be based on changes in earnings rather than changes in prices. AFGE, EPI, IWPR, NEA, and many others agreed that salary level updates should reflect changes in wages and not prices, and thus favored updating using a wage index (i.e., the fixed percentile approach) rather than a price index (i.e., the CPI-U). NELP, the Partnership, and others added that a wage index is more appropriate because wages are less volatile than prices and increase in a more consistent and predictable fashion.

Commenters that favored the fixed percentile approach also highlighted the link between wages and the EAP exemptions' purpose and function. NELP stated that using a wage index is consistent with the fact that the exemptions are intended to cover higher-paid employees in the workforce, and NELA stated that this method reflects “the fact that the EAP exemption is, in many respects, Start Printed Page 32439premised on an employee's relative position in the workplace” and “is the fairest way to maintain consistency in workers' FLSA eligibility in light of inevitable economic change.”

Of the relatively few commenters representing employer interests that supported some form of automatic updating, several favored the fixed percentile method. For example, SIGMA (which favored automatically updating a salary level based on the 2004 method every three to five years) stated that this approach “will help the threshold keep pace with actual wage changes in the market,” while an inflation-based index “will risk harming workers and businesses” because inflation and wages “can increase at very different rates.” Printing Industries of America and at least eight of its member businesses agreed that “[a]ny indexing should reflect wage changes.” Similarly, CVS Health and several non-profit commenters (which incorporated or referenced a comment submitted by ANCOR) favored the fixed percentile approach over the CPI-U, provided in part that the Department account for regional salary level disparities and update the salary level on a less frequent basis than annually.

Most commenters representing employers opposed any form of automatic updating, and many of these commenters strongly opposed automatic updating using the fixed percentile method. The predominant concern among commenters that opposed the fixed percentile approach was that this method would produce drastic increases in the salary threshold level arising from the updating method itself, rather than from market forces. Some of these commenters predicted that employers will respond to each salary level update by converting all or a certain percentage of all full-time salaried employees earning below the new EAP salary level to hourly status. See, e.g., Dollar Tree; HR Policy Association. Others predicted employers would convert all or a certain percentage of affected employees (i.e., those EAP employees earning between the old and new salary levels) to hourly status. See, e.g., Chamber; FMI; Jackson Lewis; NAM; Small Business Legislative Council. Both of these groups of commenters stated that such conversion would decrease the number of salaried workers in the CPS data set by removing those at the lower end of the salary distribution, which would produce an upward shift (or “ratcheting”) of the salary level with each successive update. CUPA-HR, Fisher & Phillips, and others further stated that if employers increase employee salaries to preserve exempt status, this would apply further upward pressure on the 40th percentile, and CUPA-HR and Seyfarth Shaw added that this effect would also occur to the extent employers paid overtime to newly nonexempt salaried workers but did not convert them to hourly pay.

Given these predictions, several commenters estimated the impact that automatic updating using the fixed percentile approach would have on the salary level. Many stated that salary level growth would far exceed the 2.6 percent average annual growth rate for the 40th percentile of full-time salaried workers' weekly earnings that the Department estimated occurred between 2003 and 2013, 80 FR 38587. See, e.g., IFA; Littler Mendelson; Seyfarth Shaw. Other commenters, including the Chamber and FMI, submitted an Oxford Economics letter (prepared for the NRF) which projected that by 2016 annual updating would produce a salary level of approximately $1,400 per week assuming all salaried employees below the standard salary level would be converted to hourly. The Chamber and PPWO referenced (but did not submit) an article from Edgeworth Economics, an employer consulting firm, which stated that if 25 percent “of the full-time nonhourly workers earning less than [the 40th percentile salary level] were re-classified as hourly workers,” after five annual updates the salary level would equal $72,436 annually ($1,393 per week). Other commenters provided their own projections of salary level test growth. For example, WorldatWork stated that after five annual updates the salary level would reach $233,217, and HR Policy Association stated that if “the bottom 20 percent of salaried employees” are converted to hourly status the salary level would increase on average by 18 percent per year over five years. Such projections led several commenters to conclude that automatic updating using the fixed percentile approach would render the duties test increasingly obsolete and in effect eliminate the availability of the EAP exemptions in many regions and industries. See, e.g., NRA; Seyfarth Shaw. ABA captured the views of several employer representatives in stating that, because of concerns that the fixed percentile method would unduly accelerate salary level test growth, automatic updating using the CPI-U is a “less harmful approach to a bad idea.” See also NRA.

Most commenters representing employee interests did not discuss whether automatic updating using the fixed percentile approach would lead employers to convert large numbers of newly nonexempt employees to hourly status. One exception was EPI, which stated that employer projections of accelerated salary growth due to mass conversion of employees to hourly pay were inaccurate because they underestimated employee bargaining power by failing to account for low unemployment rates and the fact that “nominal wages are `sticky,' meaning that employers rarely will lower them.” EPI added that employers will have a difficult time converting salaried workers to hourly status because the new salary level will “establish a clearly observable new norm in the workplace” and so it will “be obvious to employees that any reclassification will be done to disadvantage them.” For these reasons, EPI concluded that the “wholesale reclassification of current salaried workers to hourly status . . . seems an unlikely outcome.”

While employer commenters that opposed the fixed percentile approach generally focused on the concerns discussed above, some commenters also objected to this approach based on the same concerns they raised with respect to the underlying salary level. Commenters criticized the CPS data set, see, e.g., Fisher & Phillips, expressed concern that the proposed methodology results in too high a salary level for low-wage areas, see, e.g., ACRA, and asserted that updating using the same methodology would “compound the Department's error,” see PPWO, in setting the salary level. These commenters opposed any form of automatic updating, but deemed the fixed percentile method particularly troubling.

The Department also received many comments from organizations and individuals favoring automatic updating using the CPI-U. Overall, these commenters addressed this issue in less detail than those that favored the fixed percentile approach, often only stating that the salary level should be updated based on inflation. While the majority of these comments favoring updating using the CPI-U came from individuals, a few employers and commenters representing them also supported this approach. For example, HMR Acquisition Company favored indexing the salary level to inflation (provided the Department also lowers and phases in the new salary level requirement). Many individual commenters also recommended updating using the CPI-U. For example, one human resources professional suggested increasing the salary biennially “with the national rate of inflation,” another human resources professional favoring this method stated that changes in the CPI-U are “smaller and easier for employers to absorb,” and Start Printed Page 32440one individual stated that updating using the CPI-U “will make sure that the rises in the salary level and highly compensated level will mirror economic changes, rather than create a base percentile change yearly that may or may not work for all regions of the country.” Board Game Barrister stated that updating using the CPI-U “is both predictable and fair in preventing erosion of the salary test,” while the Illinois Credit Union League stated that credit unions are “familiar with the CPI-U and utilize this standard when considering salary increases.”

As previously discussed, among commenters representing employer interests that opposed any form of automatic updating, concerns that the fixed percentile approach would quickly escalate the salary level led some commenters to reluctantly prefer the CPI-U. However, these commenters often stressed that they only preferred this method if the Department refused to withdraw the automatic updating proposal, and they generally did not provide any additional grounds for supporting use of the CPI-U as an updating mechanism. The Colorado Youth Corps Association and Firehouse Subs appeared to support automatic updating using the CPI-U provided that the Department set the initial salary level lower. NRA (which opposed either updating method) provided similar qualified support, stating that “for CPI-U indexing to be considered reasonable, the salary level itself needs to be reasonable.”

Other commenters representing employer interests that opposed any form of automatic updating provided reasons not to update the salary level using the CPI-U. The Chamber, FMI, and others stressed that prices and salaries are only correlated in the long-run. Seyfarth Shaw opined that the “CPI-U is a volatile index” and that the basket of goods used to calculate the CPI-U is “not tied in any direct way to employees' wages rates” and is “not an appropriate indicator of wage growth (or decline).” Relatedly, ACRA stated that the fact that there have “been periods where the CPI-U has outpaced wages and other periods where wages have grown faster than CPI-U” illustrates that the CPI-U is “an unreliable benchmark for wages.”

Several commenters worried that updating using the CPI-U would have an adverse impact on low-wage regions and industries because inflation does not impact all regions uniformly. For example, Dollar Tree observed that the CPI-U “focuses exclusively on urban areas, and therefore fails to account for the rural economy and cost of living,” and Lutheran Services in America Disability Network stated that this updating method “will disproportionately impact different regions, potentially worsening the income disparity and inadvertently harming workers.” See also, e.g., ACRA; ANCOR; SIGMA. Other commenters referenced the Department's past decision not to automatically update the salary level using an inflationary index. Although this fact was usually raised to assert that the Department lacked authority to automatically update the salary level, Fisher & Phillips referenced the Department's recognition in the NPRM that “inflation has been used as a method for setting the precise salary level only in the breach,” (emphasis in comment), as indicating that the CPI-U would not be an appropriate updating methodology. 80 FR 38533.

Finally, a few commenters suggested that the Department automatically update the salary level using methods other than those discussed in the NPRM. For example, AFL-CIO and AFSCME urged the Department to consider updating the salary level using BLS' Employment Cost Index for total compensation of management, professional, and related workers. See also UFCW. Many commenters, including several disability services providers, favored updating using “regional salary data.” See, e.g., Lutheran Services in America. WMATA stated that automatic updates affecting government entities should be tied to “the federal government's adjustments to General Schedule pay schedules,” and the American Resort Development Association favored a fixed annual increase of, for example, two percent. Fisher & Phillips, which opposed both methods, wanted the Department to issue a new proposal to update the salary level using internal Department data on likely exempt workers.

The Department recognizes commenters' strong views on the proposed automatic updating alternatives and has considered the comments concerning this issue. The Department has determined that automatically updating the salary level using a fixed percentile of earnings will best ensure that the salary level test effectively differentiates between bona fide EAP workers who are not entitled to overtime and overtime-eligible white collar workers and continues to work effectively with the duties test. Accordingly, new § 541.607 will reset the salary level triennially using the same methodology used in this rulemaking to set the initial salary level—the 40th percentile of earnings of full-time salaried workers in the country's lowest-wage Census Region.

The Department agrees with the view of many commenters that the same reasons that justify setting the salary level at a fixed percentile of earnings of full-time salaried workers also support updating using this method. As explained at length in section IV.A., setting the initial salary level equal to the 40th percentile of earnings of full-time salaried workers in the South reflects the Department's best determination of the appropriate line of demarcation between exempt and nonexempt workers. This method provides necessary protection for workers by accounting for the elimination of the more stringent long duties test, while at the same time not excluding from exemption too many employees performing EAP duties in low-wage geographic areas, and yielding a lower salary that is appropriate across industries. Likewise, applying this same methodology for automatic updating is the most effective and transparent way to ensure that future salary levels continue to fulfill these objectives and work appropriately with the duties test.

Unlike the CPI-U method, updating the salary level based on the 40th percentile of earnings of full-time salaried workers in the country's lowest-wage Census Region also eliminates the risk that future salary levels will deviate from the underlying salary setting methodology established in this rulemaking. Ensuring that the salary level does not depart from the designated percentile ensures that the salary level does not become too low—leading to an increased risk of inappropriate classification of low-salaried employees as exempt—or too high—depriving employers of the exemption for employees performing bona fide EAP duties, and also ensures that the standard salary level continues to work effectively with the standard duties test. For the same reasons, the Department also declines to automatically update the salary level using any of the suggested alternatives (such as the Employment Cost Index, GS-Pay Scale, and others). These methods would result in different salary level setting and updating methodologies and thus increase the risk of future salary levels diverging from the appropriate line of demarcation between exempt and nonexempt workers, which would in turn necessitate additional rulemaking to reset the salary level or updating methodology.

The Department also concludes that it is preferable to update the salary level based on changes in earnings rather Start Printed Page 32441than changes in prices. As many commenters observed, a wage index provides the best evidence of changes in prevailing salary levels. While wages and prices may be correlated in the long-run, linking the salary level to earnings is the most direct way to ensure that the salary level reflects prevailing economic conditions and can thus fulfill its intended function. This approach is also consistent with the Department's longstanding practice of basing the salary requirement on actual salaries paid to workers. The salary level test works in tandem with the duties test to operate effectively, and we agree with the Chamber, FMI, and others that changes in job duties are more closely correlated with changes in wages than in prices. Similarly, using an earnings index for automatic updates is most consistent with the Department's long-held view that “the best single test of the employer's good faith in attributing importance to the employee's service is the amount [the employer] pays for them.” Stein Report at 19. New § 541.607 provides that automatic updates will be based on CPS data for the 40th percentile of earnings of full-time salaried workers in the country's lowest-wage Census Region. This data will be readily available and transparent, and at the designated percentile is representative of those employees who may be bona fide executive, administrative, or professional workers.

Commenters that opposed the fixed percentile approach focused primarily on their concern that this methodology would lead to drastic salary level increases that would render the EAP exemptions virtually obsolete in certain industries and geographic areas. The linchpin of this “ratcheting” argument—and the crux of most opposition to the fixed percentile updating method—is the belief that employers will respond to an automatically updated salary level by converting newly nonexempt workers to hourly status, thus removing them from the data set of full-time salaried workers. The Department examined this issue closely and concludes that past experience and the comments themselves do not substantiate commenter concerns.

To evaluate the likelihood that salary level increases will lead employers to convert affected employees to hourly pay status, the Department first examined historical data concerning how employers responded to the 2004 Final Rule's salary increase. This prior rulemaking raised the standard salary level to 182 percent of the short test salary level—from $250 to $455.[79] As discussed in more detail in section VI.D.ix., if the salary level increase in 2004 led employers to convert significant numbers of workers to hourly status (as commenters assert will result from this rulemaking), then we would expect to see a notable increase in the share of workers earning just below the new threshold ($455) who are paid hourly relative to the share of workers earning just above the new threshold who are paid hourly. The Department looked at the share of full-time white collar workers paid on an hourly basis before and after the 2004 Final Rule (January-March 2004; January-March 2005) both below and above the standard salary level (at least $250 but less than $455 per week; at least $455 but less than $600 per week). The Department found that following the 2004 Final Rule, the share of full-time white collar workers being paid hourly actually decreased marginally in the group below the standard salary level and increased slightly in the group above the standard salary level. See section VI.D.ix. These results do not suggest that the 2004 salary level increase caused an increase in the share of workers paid hourly below the new threshold, and thus provide no evidence that salary level increases due to automatic updating will result in employers converting significant numbers of affected EAP workers to hourly pay status.[80]

In addition to the lack of historical data supporting commenters' concerns, commenters failed to persuasively support their key assumption that automatically updated salary levels will lead to widespread conversion of employees to hourly pay status. Most of these commenters, including Dollar Tree, Jackson Lewis, and several others simply stated—without citing any supporting data—that automatic updating would produce this effect, with several commenters mistakenly contending that such a conversion to hourly status was automatic. Even those commenters that provided more detailed economic analyses often rested their views on the same faulty assumption. For example, the submitted Oxford Economics letter assumed “that the lowest 40% of the salaried full-time wage distribution in 2016 were converted to hourly status.” Some commenters predicted the impact of automatic updating on the salary level if a set percentage of employees were converted to hourly pay. For example, HR Policy Association predicted the effect if “the bottom 20 percent of salaried employees” were converted to hourly status, and the Chamber and PPWO (quoting an article from Edgeworth Economics) commented on the impact if 25 percent “of the full-time nonhourly workers earning less than [the 40th percentile salary level] were re-classified as hourly.” But while these commenters stressed the purported impact of these employee conversion rates on the salary level, none explained why these rates are accurate estimates of employer responses.[81]

The Department believes that commenters that asserted that “ratcheting” will occur have greatly overestimated the number of employees that employers may convert to hourly status, and the impact that any such conversion would have on the salary level. Some commenters assumed that all (or a certain percentage of all) full-time salaried workers earning below the salary level would be converted to hourly status and dropped from the data set. This assumption is plainly erroneous because it fails to account for whether the employees perform white collar work and are subject to the EAP exemption. Of the 18.6 million full-time salaried white collar workers earning below the $913 salary level, only 4.2 million are currently exempt and earn between the current and new salary levels. The remaining 14.4 million workers are not currently classified as exempt under the EAP exemption, and so there is no reason to believe that their employers will convert them to hourly pay status as a result of this rulemaking. Accordingly, salary level predictions Start Printed Page 32442that are grounded in the belief that a certain percentage of all salaried workers will no longer be included in the BLS data set because they will be converted to hourly pay status regardless of whether or not they are affected by the rule are unsupported.

Other commenters predicted that employers would convert all (or a significant percentage of) affected EAP employees to hourly status. The Department believes that these predications are also inaccurate because they fail to account for whether the affected employees work overtime. As discussed in the economic impact analysis of this Final Rule, the majority of workers affected by this rulemaking do not work more than 40 hours per week, and so employers will have no need to change their compensation and can continue to pay them a salary. Even as to those affected EAP workers who will become nonexempt and regularly or occasionally work overtime (which the Department estimates will be approximately 39 percent of the total number of affected EAP workers when the salary level is updated to $913), there is no reason to believe that employers will engage in wholesale conversion of these employees to hourly status. Employers commented at great length during outreach discussions prior to the publication of the NPRM and in the submitted comments that employees desire to be salaried because of status concerns. Also, the FLSA and regulations promulgated under it expressly permit paying nonexempt employees a salary so long as they receive overtime compensation when they exceed 40 hours during a workweek. See §§ 778.113-.114. The Department therefore anticipates that employers will continue to pay many affected EAP workers who work overtime on a salary basis, and these workers therefore will remain part of the distribution of full-time salaried workers. As discussed in detail later, our analysis of the impacts of the 2004 Final Rule further supports our assumption that employers will not convert large numbers of newly overtime-eligible salaried employees to hourly pay status. Accordingly, the pool of workers who are likely to be converted to hourly pay is much smaller than supposed by those commenters that assert that the fixed percentile approach will lead to drastic salary level increases.

To the extent that some affected EAP workers are converted to hourly status and not included in the BLS data set of all salaried workers, the Department believes this will have a negligible impact on the salary level because this group would not constitute more than a small fraction of the population of full-time salaried workers that comprises the data set used to calculate the salary level. The Department believes that employers will have little incentive to change the pay status of those affected employees who do not work overtime (60.4 percent of affected employees); similarly, employers will not change the salaried status of those employees who work overtime and whose salary is raised to maintain their exempt status (2.3 percent of affected employees). The Department therefore believes that an upper bound estimate of any potential “ratcheting” effect would assume the conversion to hourly pay status of all newly nonexempt employees working either occasional or regular overtime (approximately 37.3 percent of affected employees). Based on this assumption, the Department estimated that the salary level as set in this Final Rule (based on weekly earnings of full-time salaried workers in the South) could be approximately two and a-half percent higher due to this effect in 2026, after three updates. This estimate is significantly smaller than the estimates provided by commenters that argued use of a fixed percentile for updating would lead to widespread conversion of salaried employees to hourly pay status. See section VI.D.ix.

The sample used to set the standard salary level—full-time salaried workers in the South—represents 20 million workers, including, for example, blue-collar salaried workers to whom this rulemaking does not apply and overtime-eligible white collar employees. The Department estimates that 671,000 affected EAP employees in the South regularly or occasionally work overtime, which represents just 3.3 percent of the sample. For the reasons discussed above, many of these workers are likely to remain salaried. But as noted above, even if we assume that all affected employees who occasionally or regularly work overtime are converted to hourly pay status (and therefore are no longer part of the sample), the impact on the salary level will be minimal because they constitute such a small percentage of the sample. For the same reasons, the Department does not share commenter concerns that the salary level will drastically increase if employers raise affected employees' salaries to preserve their exempt status. The Department estimates that approximately 43,000 affected employees in the South will fall into this category, constituting just 0.2 percent of the 20 million workers in the sample.

For the above reasons, the Department concludes that automatically updating the salary level using a fixed percentile of earnings will not cause the salary level to diverge from prevailing economic conditions, and thus we do not share commenters' concerns about “ratcheting” or believe that they provide a basis for declining to adopt the fixed percentile updating method. Moreover, the Department's decision to reset the salary level triennially (instead of annually) would further minimize any ratcheting if such an effect were to occur.

Beyond concerns about a possible ratcheting effect, commenters raised relatively few additional objections to the fixed percentile method of automatic updating. The Department agrees with commenters that updating the salary level using an inappropriate earnings percentile would produce an improper salary level. However, for the reasons previously discussed at length, the Department has concluded that setting the salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region produces the appropriate line of demarcation between exempt and nonexempt workers. Similarly, the Department's decision to change the updating mechanism from a nationwide to a regional data set addresses commenter concerns about the impact of the fixed percentile approach on low-wage regions and industries.

The Department believes that the chosen updating method is also responsive to many of the reasons that commenters provided for supporting updating using the CPI-U. For example, some commenters lauded the CPI's familiarity and widespread acceptance. The CPS data set is publicly available, as is BLS' deciles table for Census Regions that the Department will use for automatic updates. Other commenters stressed that updating using the CPI-U would ensure that the salary level keeps pace with inflation. These commenters were generally concerned with the adverse effect of a fixed salary level, as opposed to the effect of updating using the CPI-U versus another approach. The Department believes that a regularly updated salary level reflecting changes in salaries paid will largely alleviate this inflation concern, particularly to the extent that changes in wages and prices are correlated over time. For all the above reasons, the Department has decided to automatically update the salary level using the 40th percentile of earnings of full-time salaried workers in the country's lowest-wage Census Region.Start Printed Page 32443

The Department's proposal also sought public comment on whether automatic updates to the salary level should take effect based on the effective date of the Final Rule, on January 1, or on some other specified date. The majority of commenters that addressed this issue favored January 1. For example, Tinker Federal Credit Union stated that this date corresponds with when their internal pay changes become effective, and AH&LA stated that updating the salary level mid-year could cause newly nonexempt employees to “lose eligibility for a bonus and fringe benefits that he or she was counting on when the year began.” Other commenters, including Nichols Kaster, Quicken Loans, and several small businesses, also favored January 1. In contrast, other organizations favored a July 1 effective date for automatically updated salary levels. ANCOR and numerous other non-profit organizations favored this date because their funding is linked to state budget cycles, and the “majority of states have a budget cycle that ends in June.”

As multiple commenters observed, employers operate on varying fiscal calendars, and so it is impossible for the Department to select an effective date for automatically updated salary levels that will suit everyone. After reviewing commenter submissions on this issue, the Department has determined that future automatic updates to the salary level will take effect on January 1. The Department believes this effective date aligns with the pay practices of many employers and, when combined with the 150-day advance notice period, will best promote a smooth transition to new salary levels. While we recognize that some commenters favored new rates taking effect on July 1 to account for state budgeting cycles, any disruption caused by the January 1 effective date is mitigated by the Department's decision to update the salary level every three years and increase the amount of notice before automatically updated rates take effect. These changes ensure that those who favored a different effective date have ample notice of both when the Department will issue new salary levels and when these rates will apply.[82]

The Department also proposed to publish a notice with the new salary level in the Federal Register at least 60 days before the updated rates would become effective. Commenters that explicitly addressed this issue generally favored a longer notice period. For example, the American Council of Engineering Companies supported automatic updating but stated that “120 days' notice would be more workable for employers.” Many commenters that opposed automatic updating similarly sought more advance notice should the Department go forward with the proposal. See, e.g. , ABA (at least six months); CUPA-HR (at least one year); SHRM (at least one year). Finally, some commenters deemed 60 days of notice inadequate, but did not suggest an alternative. See, e.g. , Credit Union National Association; NFIB; Seyfarth Shaw; University of Wisconsin.

In response to commenter concerns, the Department is increasing from 60 to at least 150 days the amount of notice provided before the updated salary level takes effect. The Department believes that this change will provide employers sufficient time to adjust to the new salary level, especially since (as previously discussed) between updates employers will be able to access BLS data to help anticipate the approximate size of the salary level change, while also ensuring that salary level updates are based on the most recent available data. This increase to 150 days is also more than the amount of notice the Department has provided in each of our prior rulemakings increasing the salary threshold. Accordingly, § 541.607(g) states that the Department will publish notice of the new salary level no later than 150 days before the updated rate takes effect.

As discussed in more detail in the economic impact analysis, the Department will set the new salary level using BLS' deciles table of Census Regions, without modifying the data in any way.[83] In order to ensure that the updated salary level is based on the most recent data, the Department will use data from the second quarter (April—June) of the year prior to the update. For example, the salary level that will take effect on January 1, 2020 will be published in the Federal Register on or before August 4, 2019, and will be based on BLS data for the second quarter of 2019.

The Department also proposed to update the HCE total annual compensation requirement with the same method and frequency used to update the standard salary level test. Relatively few commenters specifically addressed this aspect of the Department's proposal, and those that did generally supported updating using the same method—the fixed percentile approach or the CPI-U—used for updating the standard salary level. See, e.g. , NEA; NELA; Partnership; and several individual commenters. Similarly, those that opposed automatically updating the standard salary level also opposed automatically updating the HCE total annual compensation requirement. See, e.g. , PPWO; Seyfarth Shaw. In light of these comments, and given our decision to update the standard salary level using the fixed percentile method, the Final Rule provides that the Department will automatically update the HCE total annual compensation level triennially to keep it at the annualized value of the 90th percentile of the weekly earnings of full-time salaried workers nationwide. This updating methodology will ensure that only those who are “at the very top of [the] economic ladder” satisfy the total annual compensation requirement and are thus subject to a minimal duties test analysis. 69 FR 22174. The Department also finalizes our proposal to update the portion of the total annual compensation level that employers must pay on a salary basis ($913 as of the effective date of this rule) so that it continues to mirror the amount of the standard salary requirement as it is updated. As previously discussed in sections IV.C., highly compensated employees must receive at least the standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments.

Finally, the Department proposed to automatically update the special salary level test for employees in American Samoa by keeping it at 84 percent of the standard salary level, and to automatically update the base rate test for motion picture industry employees by changing the base rate proportionately to the change in the standard salary level. See 80 FR 38541. The Department did not receive any comments opposing these proposed updating mechanisms, and new §§ 541.607(b) and (c) finalize these proposals.Start Printed Page 32444

F. Duties Requirements for Exemption

Examination of the duties performed by the employee has always been an integral part of the determination of exempt status, and employers must establish that the employee's “primary duty” is the performance of exempt work in order for the exemption to apply. Each of the categories included in section 13(a)(1) has separate duties requirements. As previously discussed, from 1949 until 2004 the regulations contained two different duties tests for executive, administrative, and professional employees depending on the salary level paid—a long duties test for employees paid a lower salary, and a short duties test for employees paid at a higher salary level. The long duties test included a 20 percent limit on the time spent on nonexempt tasks (40 percent for employees in the retail or service industries). In the 2004 Final Rule, the Department replaced the differing short and long duties tests with a single standard test for executive, administrative, and professional employees that did not include a cap on the amount of nonexempt work that could be performed.

The Department has always recognized that the salary level test works in tandem with the duties requirements to identify bona fide EAP employees and protect the overtime rights of nonexempt white collar workers. The Department has often noted that as salary levels rise a less robust examination of the duties is needed. This inverse correlation between the salary level and the need for an extensive duties analysis was the basis of the historical short and long duties tests. While the salary provides an initial bright-line test for EAP exemption, application of a duties test is imperative to ensure that overtime-eligible employees are not swept into the exemption. While the contours of the duties tests have evolved over time, the Department has steadfastly maintained that meeting a duties test remains a core requirement for the exemption.

As explained in the NPRM, however, the Department is concerned that under the current regulations employees in lower-level management positions may be classified as exempt and thus ineligible for overtime pay even though they are spending a significant amount of their work time performing nonexempt work. In such cases, there is a question as to whether the employees truly have a primary duty of EAP work. The Department believes that our pairing in the 2004 rulemaking of a standard duties test based on the less stringent short test for higher paid employees, with a salary level based on the long test for lower paid employees, has exacerbated these concerns and led to the inappropriate classification as EAP exempt of employees who pass the standard duties test but would have failed the long duties test. As we noted in the NPRM, this issue can arise when a manager is performing exempt duties less than 50 percent of the time, but it is argued that those duties are sufficiently important to nonetheless be considered the employee's primary duty. It can also arise when a manager who is performing nonexempt duties much of the time is deemed to perform exempt duties concurrently with those nonexempt duties, and it is argued the employee is exempt on that basis.

While the Department believed that the proposed salary level increase, coupled with automatic updates to maintain the effectiveness of the salary level test, would address most of the concerns relating to the application of the EAP exemption, we invited comments on whether adjustments to the duties tests were also necessary. The Department did not propose any specific changes to the duties tests, but instead requested comment on a series of specific issues:

A. What, if any, changes should be made to the duties tests?

B. Should employees be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for exemption? If so, what should that minimum amount be?

C. Should the Department look to the State of California's law (requiring that 50 percent of an employee's time be spent exclusively on work that is the employee's primary duty) as a model? Is some other threshold that is less than 50 percent of an employee's time worked a better indicator of the realities of the workplace today?

D. Does the single standard duties test for each exemption category appropriately distinguish between exempt and nonexempt employees? Should the Department reconsider our decision to eliminate the long/short duties tests structure?

E. Is the concurrent duties regulation for executive employees (allowing the performance of both exempt and nonexempt duties concurrently) working appropriately or does it need to be modified to avoid sweeping nonexempt employees into the exemption? Alternatively, should there be a limitation on the amount of nonexempt work? To what extent are exempt lower-level executive employees performing nonexempt work?

Finally, the Department solicited feedback regarding whether to add additional examples of specific occupations to the regulations to provide guidance in administering the EAP exemptions, particularly for employees in the computer and information technology industries. See 80 FR 38543.

After considering the comments received in response to the questions posed in the NPRM, the Department has decided against making any changes to the standard duties test or adding new examples to the regulations at this time. The Department recognizes that stakeholders have strong and divergent views about the standard duties test. We also recognize that changes to the duties test can be more difficult for employers and employees to both understand and implement. As explained in greater detail below, the Department believes that the standard salary level adopted in this Final Rule coupled with automatic updating in the future will adequately address the problems and concerns that motivated the questions posed in the NPRM about the standard duties test.

As an initial matter, many commenters asserted that the Department lacks the legal authority to enact any changes to the job duty requirements in this Final Rule without first proposing specific regulatory changes in a new NPRM. As we explained earlier with respect to our automatic updating mechanism, nothing in the APA or other referenced laws requires an agency's proposal to include regulatory text for all provisions that may appear in a final rule. See section IV.E.i.

There were some areas of agreement among the commenters in response to the questions posed in the NPRM. For example, a wide cross-section of commenters opposed the idea of reintroducing the long test/short test structure that existed before the 2004 rulemaking. A joint comment submitted by 57 labor law professors stated “it is now true that reimplementation of the two-tiered standards would serve to complicate, rather than simplify, the test for the exemption currently in use.” Commenters representing employers stated that resurrecting the pre-2004 long test/short test structure would contravene the President's expressed intent to modernize and simplify the FLSA's overtime regulations, and expressed concern about the burden such an approach would impose. See, e.g. , Fisher & Phillips; FMI; Littler Mendelson; RILA; Seyfarth Shaw; Sheppard Mullin. Commenters representing employee interests, such as NELA, explained that “having two tests Start Printed Page 32445resulted in inefficient litigation as to which test applied to which employees for which periods of time,” concluding that “it is best to proceed with a standard duties test supported by a realistic and fully indexed salary level test.” See also Employee Rights Advocacy Group; Rudy, Exelrod, Zieff & Lowe.

Many commenters also seemed to appreciate the inverse relationship between the duties test and the salary level test. For example, although it disagreed with the Department's proposed standard salary level, HR Policy Association stated it “strongly agrees with the Department that the proposed salary level increase addresses the concerns relating to executive employees performing nonexempt duties.” See also Employers Association of New Jersey. EEAC noted that “a robust salary threshold and strict duties tests” (emphasis in comment) would inappropriately screen out employees who should be classified as exempt. Commenters including AFL-CIO and the Alaska Department of Labor and Workforce Development, however, asserted that the proposed salary level was not sufficiently high to work with the current duties test and therefore the duties test needed to be strengthened.

Comments on the merits of changing the current duties requirements were sharply divergent, with many employee advocates supporting additional requirements to strengthen the standard duties test and most employer organizations strongly opposing any changes. Commenters representing employees generally asserted that changes to the standard duties test are needed to narrow the scope of an FLSA exemption they believe has been applied too broadly, as well as to reduce litigation and compliance costs attributable to the ambiguity and subjectivity of the primary duty test. Commenters representing employers generally opposed changes to the current duties test on the grounds that the kind of changes contemplated by the Department in the NPRM would be excessively burdensome and disruptive for employers and undermine the President's goal of modernizing the EAP regulations.

As a general matter, commenter views on the adequacy of the regulation's existing duty requirements reflected their broader disagreement over whether employees who pass the primary duty test but perform substantial amounts of nonexempt work should qualify as “bona fide” EAP workers. AFL-CIO, AFT, and SEIU, for example, stated that the standard duties test undermines the breadth of coverage critical to the success of the FLSA by allowing employers to exempt too many workers performing substantial amounts of nonexempt work, including workers earning more than the standard salary level proposed in the Department's NPRM. In contrast, the American Staffing Association and NSBA stated that the standard duties test appropriately emphasizes the importance of an employee's primary duty, not incidental nonexempt tasks he or she may also perform. Several commenters representing employers asserted that the duties test must account for the fact that exempt employees now perform more of their own clerical duties without the support of nonexempt administrative support staff. See, e.g. , Joint Comment of the International Public Management Association for Human Resources and the International Municipal Lawyers Association.

Employee and employer organizations similarly disagreed over whether the current standard duties test adequately works to prevent the misclassification of workers who do not meet the duties test and thus should receive overtime pay. Commenters representing employees, like NELP, stated that ambiguities in the existing duty requirements “enable employers to easily and successfully manipulate employee job titles to sweep more workers into the EAP exemptions.” Some employers, however, disagreed that non-compliance by employers is prevalent, with SHRM asserting that there is no evidence that the standard duties test leads to “mass misclassification of employees.” The New Jersey Employers Association commented that purported non-compliance in specific industries like restaurant or retail does not justify imposing burdensome new requirements on all employers throughout the entire economy.

Commenter views diverged even more sharply in response to the specific issues raised for consideration. Many employee advocates supported the introduction of a minimum requirement for time spent on an employee's primary duty to the standard duties test. A large number of these commenters endorsed the adoption of a California-style rule, which would require at least 50 percent of an employee's time to be spent exclusively on work that is the employee's primary duty. See, e.g. , AFSCME; Bend the Arc; ELC; Employment Justice Center; IWPR; Moreland law firm; National Women's Law Center; NDWA; NELP; Northwest Workers Justice Project; Partnership; SEIU; Shriver Center; Women Employed; Workplace Fairness. Other employee advocates expressed the point as a preference for a 50 percent limit on nonexempt work. See, e.g. , AFL-CIO; EPI; Nichols Kaster; Outten & Golden law firm. UFCW supported a 40-percent limit on the performance of nonexempt work, while Legare, Attwood & Wolfe supported reinstatement of the 20-percent limit on nonexempt work that existed under the former long duties test.

In support of such requirements, AFL-CIO, EPI, NELA, Nichols Kaster, and several other commenters asserted that employees who spend a majority of their time performing nonexempt duties should not qualify under the law as “bona fide” EAP workers. Legare, Attwood & Wolfe stated that while the percentage of time an employee spends performing duties is not a perfect indicator of her primary duty, it is a “very good proxy.” ELC, the Moreland law firm, NELA, and several others asserted that adding a “bright-line” quantitative component to the standard duties test would simplify compliance or reduce FLSA litigation attributable to the subjectivity of the primary duty test, while AFL-CIO stated that implementing a more objective duties test would lead to fewer “anomalous outcomes” from court decisions analyzing similar sets of facts.

Several commenters representing employers addressed the issue of concurrent duties—that is, the provision in the executive duties test that permits employees to perform nonexempt duties while simultaneously performing exempt management duties. See § 541.106. A number of employer representatives noted that the Department examined this issue in 2004 when the concurrent duties regulation was promulgated as a separate provision and asserted that there was no need for the Department to alter the conclusions we reached at that time. See, e.g. , Chamber; FMI; IFA; Littler Mendelson. Other commenters discussed how the regulation applied to particular work environments. See, e.g. , ACRA (“Managers and assistant managers employed by ACRA's members often `lead by example' by illustrating to subordinate employees how to provide top-notch customer service and take pride in all aspects of one's job.”); RILA (“Leading by example by lending a hand at the cash register or on the sales floor is essential to employee training and morale, as well as good customer service.”); Southeastern Alliance of Child Care Associations (“The `concurrent duties' concept is of particular relevance to the child care industry. Consider, as an illustration, a director who, in cleaning and/or feeding Start Printed Page 32446a young student, simultaneously trains a new teacher on how students are to be cleaned and/or fed in compliance with state regulatory requirements.”). UFCW, however, questioned whether employees were, in fact, leading by example and pitching-in or, instead, were being required by their employers to perform such large quantities of nonexempt work that their primary duty could not be said to be management. See UFCW (“many employers maintain policies which require exempt managers to spend substantial periods of time performing nonexempt hourly work” because they “do not budget sufficient hours for nonexempt employees to complete the work.”). Some individual commenters echoed this concern. For example, a retail store manager described working 55-60 hours a week and because of low staffing noted that he has little “flexibility when an employee calls out sick. I have to pick up the slack.” Similarly, a manager of a community home for the intellectually disabled stated that “[t]o reduce organizational overtime, managers are expected to work when employees call in sick, are on leave, and when a client is in the hospital and needs a 24 hour sitter.”

While few commenters representing employees specifically addressed the concurrent duties provision, many endorsed California's duties test, which NWLC observed does not allow employers to credit “time during which non-exempt work is performed concurrently.” See Heyen v. Safeway Inc., 157 Cal. Rptr. 3d 280, 299-304 (Cal. Ct. App. 2013). AFL-CIO explained that it “is not enough to require that `bona fide' EAP employees spend 50 percent of their time doing exempt work: they must spend 50 percent of their time exclusively on exempt work.” (emphasis in comment); see also NELA; UFCW. Outten & Golden explicitly requested the Department to rescind the concurrent duties provision, asserting that it contributes to the confusion surrounding the application of the executive exemption and fails to account for instances “when the amount of non-exempt work overwhelms [an executive's] capacity to perform their supervisory functions.”

Commenters representing employers strongly opposed the addition of any kind of limitation on the performance of nonexempt work to the standard duties test and any revisions to the concurrent duties regulation, stating that such changes would fail to account for the realities of the modern workplace. See, e.g. , Chamber; HR Policy Association; NCCR; NRF; NSBA; SIGMA. Further, many commenters, including AH&LA, NRA, Petroleum Marketers Association of America, PPWO, and SHRM, stated that imposing any quantitative restrictions or eliminating the concurrent duties regulation would prevent exempt employees from “pitching in” during staff shortages or busy periods, increasing labor costs or negatively affecting business efficiency and customer service. A few commenters representing employers also asserted such changes would undermine the sense of teamwork in the workplace. See, e.g. , American Resort Developmental Association; NCCR; Weirich Consulting.

AIA-PCI, NFIB, PPWO, and many others objected that introducing a cap on nonexempt work to the standard duties test would also impose significant recordkeeping burdens on employers, and several commenters, including the Chamber, Littler Mendelson, and RILA, noted that the Department previously acknowledged such concerns in the 2004 Final Rule. See 69 FR 22127. Some commenters, including AH&LA and NFIB, also asserted that the recordkeeping burden would at least partially fall onto exempt employees themselves. In addition, many commenters representing employers asserted that introducing a quantitative component to the duties test would increase FLSA litigation due to the administrative difficulties associated with tracking the hours of exempt employees. See, e.g. , AIA-PCI; CalChamber Coalition; Seyfarth Shaw; Weirich Consulting. FMI, IFA, Littler Mendelson, and the Chamber all noted that departing from the holistic approach to the standard duties test would “result in the upheaval of the past decade of case law and agency opinions.”

After considering the comments, the Department has decided against adding a quantitative limitation on the performance of nonexempt work in the standard duties test, or making any other revisions to the duties test in this rulemaking. The Department continues to believe that, at some point, a disproportionate amount of time spent on nonexempt duties may call into question whether an employee is, in fact, a bona fide EAP employee. We also understand the concerns of some commenters that contend that the qualitative nature of the primary duty test may allow the classification of lower-level employees as exempt and thus ineligible for overtime pay even though they are spending a significant amount of work time performing nonexempt work. The Department expects that setting the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region and updating that salary level on a regular basis going forward will address these concerns, which we believe are most prevalent among low-salaried white collar employees. While this salary level is lower than that proposed in the NPRM, the Department believes that it is sufficient to work effectively in combination with the current duties test. The Department will consider the impact of this rule going forward to ensure that the salary level and the duties test continue to work together to appropriately distinguish between exempt EAP employees and overtime-protected white collar workers.[84]

The Department also understands the concerns of employers and their advocates that prohibiting managers from “pitching-in” could negatively affect the workplace. The Department believes, however, that there is an important difference between a manager who occasionally demonstrates how to properly stock shelves to instruct a new employee, or who occasionally opens an additional cash register to assist in clearing a line of waiting customers, and a manager who must routinely perform significant amounts of nonexempt work because her employer does not provide appropriate staffing on all shifts. See AH&LA (“In short, when an exempt manager makes the decision that he or she needs to perform non-exempt duties to help the operation run smoothly, the manager's primary duty continues to be managing his or her staff and the operations of their department.”); NRA (“Performing hands-on work at the manager's own discretion to ensure that operations are successfully run in no way compromises the fact that the manager's primary responsibility is performing exempt work.”). In those situations such as those described by employee commenters above, where managers as a practical matter must perform significant amounts of nonexempt work, the Department does Start Printed Page 32447not believe that the manager is in any meaningful sense able to “make the decision regarding when to perform nonexempt duties” and a close examination of the specific facts must be made of whether the employee's primary duty is, in fact, the performance of exempt work. § 541.106(a).

In the NPRM, the Department also sought feedback regarding whether additional occupation examples should be added to the regulations, and, if so, which specific examples would be most helpful to include. Some commenters, including the American Staffing Association, the Maryland Chamber of Commerce, and the Poarch Band of Creek Indians, agreed that adding new examples to the regulations would be helpful in applying the EAP exemption. The American Trucking Association stated that additional regulatory examples would be particularly useful for clarifying the administrative employee exemption, which many commenters asserted is more ambiguous than the executive or professional exemptions. A number of commenters offered specific suggestions of occupations they would like to see addressed in the regulations. See, e.g. , American Staffing Association (staffing firm recruiters and account managers); American Trucking Association (truck company dispatchers); Information Technology Alliance for Public Sector (employees performing various computer-related duties); Joint Comment of Postdoctoral Associations and individuals (postdoctoral fellows); Printing Industries of America (customer service representatives). The Fraternity Executives Association, the International Association of Fire Chiefs, and the Michigan Society of Association Executives, requested regulatory examples relevant to associations, membership organizations and charitable foundations.

ABA and several commenters representing employees, including AFL-CIO, however, asserted that regulatory examples distract from the longstanding principle that job titles alone are insufficient to establish the exempt status of an employee. Nichols Kaster stated that regulatory examples of exempt occupations “encourage employers to manipulate job descriptions to classify non-exempt employees as exempt.” Finally, AFL-CIO and NELA each stated that including additional examples of generally exempt or generally nonexempt occupations is neither helpful nor necessary.

Upon further consideration, the Department has decided against introducing any new examples to the existing regulations in this rulemaking. We note that the existing examples in the regulations do not provide categorical exemptions for certain occupations but instead set out typical job duties associated with specific occupations which if performed by an employee generally would, or generally would not, qualify the employee for exemption. In all instances, it is the application of the duties test to the specific facts of the employee's work that determines whether the employee satisfies the requirements for the EAP exemption. Although the Department received feedback on suggested regulatory examples from some commenters, the stakeholder input we received overall did not justify the introduction of any new examples into the EAP regulations at this time.

V. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, requires that the Department consider the impact of paperwork and other information collection burdens imposed on the public. Under the PRA, an agency may not collect or sponsor the collection of information, nor may it impose an information collection requirement unless it displays a currently valid Office of Management and Budget (OMB) control number. See 5 CFR 1320.8(b)(3)(vi).

OMB has assigned control number 1235-0018 to the Fair Labor Standards Act (FLSA) information collections. OMB has assigned control number 1235-0021 to Employment Information Form collections, which the Department uses to obtain information from complainants regarding FLSA violations. In accordance with the PRA, the Department solicited comments on the FLSA information collections and the Employment Information Form collections in the NPRM published July 6, 2015, see 80 FR 38516, as the NPRM was expected to impact these collections. 44 U.S.C. 3506(c)(2). The Department also submitted a contemporaneous request for OMB review of the proposed revisions to the FLSA information collections, in accordance with 44 U.S.C. 3507(d). On September 29, 2015, OMB issued a notice for each collection (1235-0018 and 1235-0021) that continued the previous approval of the FLSA information collections and the Employment Information Form collections under the existing terms of clearance. OMB asked the Department to resubmit the information collection request upon promulgation of the Final Rule and after considering public comments on the proposed rule dated July 6, 2015.

Circumstances Necessitating Collection: The FLSA, 29 U.S.C. 201 et seq., sets the federal minimum wage, overtime pay, recordkeeping and youth employment standards of most general application. Section 11(c) of the FLSA requires all employers covered by the FLSA to make, keep, and preserve records of employees and of wages, hours, and other conditions and practices of employment. An FLSA covered employer must maintain the records for such period of time and make such reports as prescribed by regulations issued by the Secretary of Labor. The Department has promulgated regulations at part 516 to establish the basic FLSA recordkeeping requirements, which are approved under OMB control number 1235-0018.

FLSA section 11(a) provides that the Secretary of Labor may investigate and gather data regarding the wages, hours, or other conditions and practices of employment in any industry subject to the FLSA, and may enter and inspect such places and such records (and make such transcriptions thereof), question such employees, and investigate such facts, conditions, practices, or matters deemed necessary or appropriate to determine whether any person has violated any provision of the FLSA. 29 U.S.C. 211(a). The information collection approved under OMB control number 1235-0021 provides a method for the Wage and Hour Division of the U.S. Department of Labor to obtain information from complainants regarding alleged violations of the labor standards the agency administers and enforces. This Final Rule revises the existing information collections previously approved under OMB control number 1235-0018 (Records to be Kept by Employers—Fair Labor Standards Act) and OMB control number 1235-0021 (Employment Information Form).

This Final Rule does not impose new information collection requirements; rather, burdens under existing requirements are expected to increase as more employees receive minimum wage and overtime protections due to the proposed increase in the salary level requirement. More specifically, the changes adopted in this Final Rule may cause an increase in burden on the regulated community because employers will have additional employees to whom certain long-established recordkeeping requirements apply (e.g., maintaining daily records of hours worked by employees who are not exempt from the both minimum wage and overtime provisions). Additionally, Start Printed Page 32448the changes adopted in this Final Rule may cause an initial increase in burden if more employees file a complaint with WHD to collect back wages under the overtime pay requirements.

Public Comments: The Department sought public comments regarding the burdens imposed by information collections contained in the proposed rule. Several employer commenters and those representing them stated that employers would need to maintain records of hours worked for more employees as a result of our proposal to increase the salary level. See, e.g. , American Feed Industry Association; National Roofing Contractors Association; Nebraska Furniture Mart. Many of these comments came from individual employers as part of a campaign organized by the National Automatic Merchandising Association (NAMA), stating that the Department's proposal to raise the salary threshold would “create a challenge by placing a burden on the employers to closely track nonexempt employees' hours to ensure compliance with overtime pay and other requirements,” and this “tracking of hours would also produce increased human resources paperwork.” The Office of Advocacy of the U.S. Small Business Administration asserted that increasing the salary level as the Department proposed would add “significant” paperwork burdens on small entities, “particularly businesses in low wage regions and in industries that operate with low profit margins.” In addition, some commenters expressed concern that the Department's cost estimates related to recordkeeping were too low, given that employers would need to set up revised recordkeeping and payroll systems for newly overtime-eligible employees. See, e.g. , NSBA; Reid Petroleum; SA Photonics; Seyfarth Shaw; Surescan Corporation. The National Association for Home Care and Hospice asserted that if the Department were to adopt the proposed salary level, home care and hospice companies would need to “completely modify their recordkeeping on worker time,” and “such changes will double payroll management costs.” In response to these comments, the Department notes that we believe that most employers currently have both exempt and nonexempt workers and therefore have systems already in place for employers to track hours. The Department also notes that commenters did not offer alternatives for estimates or make suggestions regarding methodology for the PRA burdens. The actual recordkeeping requirements are not changing in the Final Rule. However, the pool of workers for whom an employer will be required to make and maintain records has increased under the Final Rule, and as a result the burden hours have increased. Included in this PRA section are the regulatory familiarization costs for this Final Rule. We note however, that this is a duplication of the regulatory familiarization costs contained in the economic impact analysis, see section VI.

A number of commenters also expressed concern about potential changes to the duties tests. Some commenters specifically articulated concern about implementing a percentage duties test. See, e.g. , American Society of Association Executives (ASAE); Community Bankers Association; International Franchise Association; Lutheran Services of America; Society for Human Resources Management. For example, Walmart stated that it “would be concerned if such a proposal includes any quantitative or time based assessment of an exempt employee's duties or further, a prohibition on concurrent duties. Such changes would require employers to undertake significant recordkeeping burdens and add to the uncertainty over classifications.” Other commenters expressed their view that the Department would violate the PRA by making any changes to the duties tests, because the Department did not provide specific proposed changes to the duties tests in the NPRM. See, e.g. , ASAE; Christian Camp and Conference Association, International; Community Bankers Association; Diving Equipment and Marketing Association; Equal Employment Advisory Committee; International Bancshares Corporation, International Dairy Foods Association; Island Hospitality Management; National Council of Chain Restaurants; National Retail Federation; New Jersey Association of Mental Health and Addiction Agencies; Recreational Diving Industry; WorldatWork; YMCA-USA. Since the Department has decided against enacting any changes to the standard duties test or adding new examples to the current regulatory text at this time, these commenters' concerns have been addressed.

An agency may not conduct an information collection unless it has a currently valid OMB approval, and the Department has submitted the identified information collection contained in the proposed rule to OMB for review under the PRA under the Control Numbers 1235-0018 and 1235-0021. See 44 U.S.C. 3507(d); 5 CFR 1320.11. The Department has resubmitted the revised FLSA information collections to OMB for approval, and intends to publish a notice announcing OMB's decision regarding this information collection request. A copy of the information collection request can be obtained at http://www.Reginfo.gov or by contacting the Wage and Hour Division as shown in the FOR FURTHER INFORMATION CONTACT section of this preamble.

OMB Control Number: 1235-0018.

Affected Public: Businesses or other for-profit, farms, not-for-profit institutions, state, local and tribal governments, and individuals or households.

Total Respondents: 5,511,960 (2,506,666 affected by this Final Rule).

Total Annual Responses: 46,057,855 (2,552,656 from this Final Rule).

Estimated Burden Hours: 3,489,585 (2,506,666 from this Final Rule)

Estimated Time per Response: various.

Frequency: Various.

Total Burden Cost (capital/startup): 0.

Total Burden Costs (operation/maintenance): $126,392,768 ($90,791,443 from this Final Rule).

Title: Employment Information Form.

OMB Control Number: 1235-0021.

Affected Public: Businesses or other for-profit, farms, not-for-profit institutions, state, local and tribal governments, and individuals or households.

Total Respondents: 37,367 (2,017 added by this rulemaking).

Estimated Number of Responses: 37,367 (2,017 added by this rulemaking).

Estimated Burden Hours: 12,456 (672 hours added by this rulemaking).

Estimated Time per Response: 20 minutes (unaffected by this rulemaking).

Frequency: Once.

Other Burden Cost: 0.

VI. Analysis Conducted In Accordance with Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory Review

Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of a regulation and to adopt a regulation only upon a reasoned determination that the regulation's net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity) justify its costs. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.

Under Executive Order 12866, the Office of Management and Budget (OMB) must determine whether a regulatory action is a “significant Start Printed Page 32449regulatory action,” which includes an action that has an annual effect of $100 million or more on the economy. Significant regulatory actions are subject to review by OMB. As described below, this Final Rule is economically significant. Therefore, the Department has prepared a Regulatory Impact Analysis (RIA) [85] in connection with this Final Rule as required under section 6(a)(3) of Executive Order 12866, and OMB has reviewed the rule.

A. Introduction

i. Background

The Fair Labor Standards Act (FLSA or Act) requires covered employers to: (1) Pay employees who are covered and not exempt from the Act's requirements not less than the federal minimum wage for all hours worked and overtime premium pay at a rate of not less than one and one-half times the employee's regular rate of pay for all hours worked over 40 in a workweek, and (2) make, keep, and preserve records of the persons employed by the employer and of the wages, hours, and other conditions and practices of employment. It is widely recognized that the general requirement that employers pay a premium rate of pay for all hours worked over 40 in a workweek is a cornerstone of the Act, grounded in two policy objectives. The first is to spread employment (or, in other words, reduce involuntary unemployment) by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours. The second policy objective is to reduce overwork and its detrimental effect on the health and well-being of workers.

The FLSA provides a number of exemptions from the Act's minimum wage and overtime pay provisions, including one for bona fide executive, administrative, and professional (EAP) employees. Such employees perform work that cannot easily be spread to other workers after 40 hours in a week and that is difficult to standardize to any timeframe; they also typically receive more monetary and non-monetary benefits than most blue collar and lower-level office workers. The exemption applies to employees employed in a bona fide executive, administrative, or professional capacity and for outside sales employees, as those terms are “defined and delimited” by the Department. 29 U.S.C. 213(a)(1). The Department's regulations implementing these “white collar” exemptions are codified at part 541.

For an employer to exclude an employee from minimum wage and overtime protection pursuant to the EAP exemption, the employee generally must meet three criteria: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). The Department has periodically updated the regulations governing these tests since the FLSA's enactment in 1938, most recently in 2004 when, among other revisions, the Department created the standard duties test and paired it with a salary level test of $455 per week. The Department also established an abbreviated duties test for highly compensated employees (HCE)—i.e., white collar workers with a total annual compensation of at least $100,000. To satisfy the total annual compensation requirement, an employee must earn at least $455 per week on a salary or fee basis, and total annual compensation may also include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.

As a result of inflation, the real value of the standard salary and HCE compensation thresholds have fallen significantly since they were set in 2004, making them inconsistent with Congress' intent to exempt only “bona fide” EAP workers, who typically earn salaries well above those of any workers they may supervise and presumably enjoy other privileges of employment such as above average fringe benefits, greater job security, and better opportunities for advancement. Stein Report at 21-22. For example, the annualized equivalent of the standard salary level ($23,660, or $455 per week for 52 weeks) is now below the 2015 poverty threshold for a family of four ($24,036).[86] Similarly, by October 1, 2016, approximately 20 percent of full-time salaried workers are projected to earn at least $100,000 annually, almost three times the share who earned that amount when the HCE test was created.

The premise behind the standard salary level test and the HCE total annual compensation requirement is that employers are more likely to pay higher salaries to workers in bona fide EAP jobs. A high salary is considered a measure of an employer's good faith in classifying an employee as exempt, because an employer is less likely to have misclassified a worker as exempt if he or she is paid a high wage. Stein Report at 5; Weiss Report at 8.

The salary level requirement was created to identify the dividing line distinguishing workers who may be performing exempt duties from the nonexempt workers whom Congress intended to be protected by the FLSA's minimum wage and overtime provisions. Throughout the regulatory history of the FLSA, the Department has considered the salary level test the “best single test” of exempt status. Stein Report at 19. This bright-line test is easily observed, objective, and clear. Id.

ii. Need for Rulemaking

The salary level test has been updated seven times since it was implemented in 1938. Table 1 presents the weekly salary levels associated with the EAP exemptions since 1938, organized by exemption and long/short/standard duties test.[87]

Table 1—Historical Salary Levels for the EAP Exemptions

Date enactedLong testShort test (all)
ExecutiveAdministrativeProfessional
1938$30$30
19403050$50
1949557575$100
1958809595125
Start Printed Page 32450
1963100100115150
1970125125140200
1975155155170250
Standard Test
2004$455

In 2004, the Department set the standard salary level at $455 per week. Following more than ten years of inflation, the purchasing power, or real value, of the standard salary level test has eroded substantially, and as a result increasingly more workers earn above the salary threshold. Between 2004 and 2015, the real value of the standard salary level declined 20.3 percent, calculated using the Consumer Price Index for all urban consumers (CPI-U).[88] The decline is even larger when comparing the salary level in 2015 with 1975 levels. Figure 1 demonstrates how the real values of the salary levels have changed since 1938, measured in 2015 dollars. The Final Rule's standard salary level is below the real value of the short test salary level in all previous years when it was updated.

As a result of the erosion of the real value of the standard salary level, more and more workers lack the clear protection the salary level test is meant to provide. Each year that the salary level is not updated, its utility as a distinguishing mechanism between exempt and nonexempt workers declines. The Department has revised the levels just once in the 41 years since 1975. In contrast, in the 37 years between 1938 and 1975, salary test levels were increased approximately every five to nine years. In our 2004 rulemaking, the Department stated the intention to “update the salary levels on a more regular basis, as it did prior to 1975,” and added that the “salary levels should be adjusted when wage survey data and other policy concerns support such a change.” 69 FR 22171. Now, in order to restore the value of the standard salary level as a line of demarcation between those workers for whom Congress intended to provide minimum wage and overtime protections and those workers who may be performing bona fide EAP duties, and to maintain its continued validity, in this Final Rule the Department is setting the standard salary level equal to the 40th percentile of weekly earnings of all full-time salaried workers in the lowest-wage Start Printed Page 32451Census Region. The Department determined the “lowest-wage Census Region” by examining Current Population Survey (CPS) data for each Census Region to find the region having the lowest salary amount at the 40th percentile of weekly earnings of full-time salaried workers, which currently is the South.[89] Based on the fourth quarter of 2015 CPS data, the 40th percentile for the South Census Region is $913 per week. To bring the HCE annual compensation requirement in line with the level established in 2004, the Department, in this Final Rule, is setting the HCE total annual compensation level at the 90th percentile of annualized weekly earnings of full-time salaried workers nationally. Based on the fourth quarter of 2015 CPS data, the HCE compensation level is $134,004 annually.

In addition, this Final Rule has introduced a mechanism to automatically update the standard salary and HCE total annual compensation levels every three years, with the first update taking effect on January 1, 2020. This triennial automatic updating will preserve the effectiveness of the salary level as a dividing line between nonexempt workers and workers who may be exempt, eliminate the volatility associated with previous changes in the thresholds, and increase certainty for employers with respect to future changes. It will also simplify the updating process, as the Department will simply publish a notice in the Federal Register with the updated salary and compensation thresholds at least 150 days in advance of the update, and post the updated salary and compensation levels on the Wage and Hour Division (WHD) Web site. Should the Department determine in the future that changes in the updating methodology may be warranted, the Department can engage in notice and comment rulemaking.

iii. Summary of Affected Workers, Costs, Benefits, and Transfers

The Department estimated the number of affected workers and quantified costs and transfer payments associated with this Final Rule. To produce these estimates, the Department used data from the CPS, a monthly survey of 60,000 households conducted by the U.S. Census Bureau. Many of the data variables used in this analysis are from the CPS's Merged Outgoing Rotation Group (MORG) data. The impacts calculated by the Department in this analysis are based on FY2013-FY2015 data projected to reflect FY2017. The Department used the same data available to the public to analyze the impact of this Final Rule.[90] Data for FY2015 were the most recently available at the time of writing.[91] However, the Department pooled three years of data in order to increase the sample size. Additionally, because the rulemaking will take effect December 1, 2016, the Department has projected the data to represent FY2017 as Year 1 (the fiscal year most similar to the first year of implementation).

Some commenters, such as the United States Chamber of Commerce (Chamber), National Retail Federation (NRF), and the Florida Department of Economic Opportunity (FL DEO), expressed concern that the estimated impacts in the Preliminary Regulatory Impact Analysis (PRIA) are not replicable. To the extent that these commenters suggested that the entire PRIA was based on non-public data, the Department emphasizes that we used the non-publicly available data only for determining percentiles of the earnings distribution. As we noted in the NPRM, the public will not be able to precisely recreate the salary amounts in the published deciles because to ensure the confidentiality of survey respondents, the data in BLS public-use files use adjusted weights and therefore minor discrepancies between internal BLS files and public-use files exist. See 80 FR 38528 n.24. Some commenters also asserted that the methodology used in the PRIA to estimate the impact of this rulemaking could not be replicated because the Department did not sufficiently explain our analysis. The Department believes that the analytic methodology was thoroughly described throughout the NPRM, PRIA and Appendix A, 80 FR 38545-601. Nevertheless, we have provided additional details in this RIA to address concerns about replicability.

The Department estimates that in FY2017, there will be 44.8 million white collar salaried employees who do not qualify for any other FLSA exemption and therefore may be affected by a change to the Department's part 541 regulations (Table 7). Of these workers, the Department estimates that 29.9 million would be exempt from the minimum wage and overtime pay provisions under the part 541 EAP exemptions (in the baseline scenario without the rule taking effect). The other 14.9 million workers do not satisfy the duties tests for EAP exemption and/or earn less than $455 per week (Table 7).[92] However, of the 29.9 million EAP-exempt workers, 7.4 million are in “named occupations” and thus need only pass the duties tests to be subject to the standard EAP exemptions.[93] Therefore, these workers are not considered in the analysis, leaving 22.5 million EAP-exempt workers potentially affected by this Final Rule.

In Year 1, an estimated 4.2 million workers will be affected by the increase in the standard salary level test (Table 2). This figure consists of currently EAP-exempt workers subject to the salary level test who earn at least $455 per week but less than the 40th percentile of full-time salaried workers in the South ($913). Additionally, an estimated 65,000 workers will be affected by the increase in the HCE compensation test.[94] Finally, 732,000 white collar, salaried workers making between $455 and $913 who do not meet the duties test are already overtime eligible but do not receive overtime pay because they are misclassified. While these workers are not “affected” by the Final Rule because their entitlement to overtime will not change, as a result of the change in the salary level their exemption status will be clear based on the salary test alone and they will no longer be misclassified due to misapplication of the duties test. In Year 10, with automatic updating,[95] 5.0 million workers are projected to be affected by the change in the standard salary level test and 217,000 workers will be affected by the change in the HCE total annual compensation test.

Start Printed Page 32452

Three direct costs to employers are quantified in this analysis: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Regulatory familiarization costs are the costs incurred to read and become familiar with the requirements of the rule. Adjustment costs are the costs accrued to determine workers' new exemption statuses, notify employees of policy changes, and update payroll systems. Managerial costs associated with this Final Rule occur because hours of workers who are newly entitled to overtime may be more closely scheduled and monitored to minimize or avoid overtime hours worked.

The costs presented here are the combined costs for both the change in the standard salary level test and the HCE annual compensation level (these will be disaggregated in section VI.D.iii.). Total average annualized direct employer costs over the first 10 years are estimated to be $295.1 million, assuming a 7 percent discount rate; hereafter, unless otherwise specified, average annualized values will be presented using the 7 percent real discount rate (Table 2). Deadweight loss (DWL) is also a cost but not a direct employer cost. DWL is a function of the difference between the wage employers are willing to pay for the hours lost, and the wage workers are willing to take for those hours. In other words, DWL represents the decrease in total economic surplus in the market arising from the change in the regulation. The Department estimates average annualized DWL to be $9.2 million.[96]

In addition to the costs described above, this Final Rule will also transfer income from employers to employees in the form of wages. The Department estimates average annualized transfers will be $1,189.1 million. The majority of these transfers are attributable to the FLSA's overtime provision; a far smaller share is attributable to the FLSA's minimum wage requirement. Transfers also include additional pay to increase the salaries of some affected EAP workers who remain exempt.

Employers may incur additional costs, such as hiring new workers. These other potential costs are discussed in section VI.D.iii. Benefits of this Final Rule are discussed in section VI.D.vii.

Table 2—Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels

[Millions 2017$]

ImpactYear 1Future years aAverage annualized value
Year 2Year 103% real rate7% real rate
Affected Workers (1,000s)
Standard4,1633,8935,045
HCE6573217
Total4,2283,9655,261
Costs and Transfers (Millions 2017$) b
Direct employer costs$677.9$208.0$284.2$288.0$295.1
Transfers c1,285.2936.51,607.21,201.61,189.1
DWL6.48.711.19.39.2
a These costs/transfers represent a range over the nine-year span.
b Costs and transfers for affected workers passing the standard and HCE tests are combined.
c This is the net transfer that we primarily describe as being from employers to workers. There may also be transfers of hours and income from some workers to others. Moreover, some of these transfers may be intrapersonal, for instance, higher earnings may be offset by increased hours worked for employees who remain overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees.

iv. Terminology and Abbreviations

The following terminology and abbreviations will be used throughout this RIA.

Affected EAP workers: The population of potentially affected EAP workers who either pass the standard duties test and earn at least $455 but less than the new salary level of the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South) ($913 in Year 1), or pass only the HCE duties test and earn at least $100,000 but less than the annualized earnings of the 90th percentile of full-time salaried workers nationally ($134,004 in Year 1). This is estimated to be 4.2 million workers.[97]

Baseline EAP exempt workers: The projected number of workers who would be EAP exempt in FY2017 if the rulemaking did not take effect.

BLS: Bureau of Labor Statistics.

CPI-U: Consumer Price Index for all urban consumers.

CPS: Current Population Survey.

Duties test: To be exempt from the FLSA's minimum wage and overtime requirements under section 13(a)(1), the employee's primary job duty must involve bona fide executive, administrative, or professional duties as defined by the regulations. The Department distinguishes among four such tests:

Standard duties test: The duties test used in conjunction with the standard salary level test, as set in 2004 and applied to date, to determine eligibility for the EAP exemptions. It replaced the short and long tests in effect from 1949 to 2004, but its criteria closely follow those of the former short test.

HCE duties test: The duties test used in conjunction with the HCE total annual compensation requirement, as set in 2004 and applied to date, to determine eligibility for the HCE exemption. It is much less stringent than the standard and short duties tests to reflect that very highly paid employees are much more likely to be properly classified as exempt.

Long duties test: One of two duties tests used from 1949 until 2004; this more restrictive duties test had a greater number of requirements, including a limit on the amount of nonexempt work that could be performed, and was used in conjunction with Start Printed Page 32453a lower salary level to determine eligibility for the EAP exemptions (see Table 1).

Short duties test: One of two duties tests used from 1949 to 2004; this less restrictive duties test had fewer requirements, did not limit the amount of nonexempt work that could be performed, and was used in conjunction with a higher salary level to determine eligibility for the EAP exemptions (see Table 1).

DWL: Deadweight loss; the loss of economic efficiency that can occur when the perfectly competitive equilibrium in a market for a good or service is not achieved.

EAP: Executive, administrative, and professional.

FY: Fiscal year. The federal fiscal year is from October 1 through September 30.

HCE: Highly compensated employee; a category of EAP exempt employee, established in 2004 and characterized by high earnings and a minimal duties test.

Hourly wage: For the purpose of this RIA, the amount an employee is paid for an hour of work.

Base hourly wage: The hourly wage excluding any overtime payments. Also used to express the wage rate without accounting for benefits.

Implicit hourly wage: Hourly wage calculated by dividing reported weekly earnings by reported hours worked.

Straight time wage: Another term for the hourly wage excluding any overtime payments.

MORG: Merged Outgoing Rotation Group supplement to the CPS.

Named occupations: Workers in named occupations are not subject to the salary level or salary basis tests. These occupations include teachers, academic administrative personnel,[98] physicians,[99] lawyers, judges,[100] and outside sales workers.

Overtime workers: The Department distinguishes between two types of overtime workers.

Occasional overtime workers: The Department uses two steps to identify occasional overtime workers. First, all workers who report they usually work 40 hours or less per week (identified with variable PEHRUSL1 in CPS MORG) but in the survey (or reference) week worked more than 40 hours (variable PEHRACT1 in CPS MORG) are classified as occasional overtime workers. Second, some additional workers who do not report usually working overtime and did not report working overtime in the reference week are randomly selected to be classified as occasional overtime workers so that the proportion of workers who work overtime in our sample matches the proportion of workers, measured using SIPP data, who work overtime at some point in the year.

Regular overtime workers: Workers who report they usually work more than 40 hours per week (identified with variable PEHRUSL1 in CPS MORG).

Pooled data for FY2013-FY2015: CPS MORG data from FY2013-FY2015 adjusted to represent FY2015 with earnings inflated to FY2017 dollars and sample observations weighted to reflect projected employment in FY2017. Pooled data were used to increase sample size.

Potentially affected EAP workers: EAP exempt workers who are not in named occupations and are included in the analysis (i.e., white collar, salaried, not eligible for another (non-EAP) overtime pay exemption). This is estimated to be 22.5 million workers.

Price elasticity of demand (with respect to wage): The percentage change in labor hours demanded in response to a one percent change in wages.

Real dollars (2017$): Dollars adjusted using the CPI-U to reflect the purchasing power they would have in FY2017.

Salary basis test: The EAP exemptions' requirement that workers be paid on a salary basis, that is, a pre-determined amount that cannot be reduced because of variations in the quality or quantity of the employee's work.

Salary level test: The salary a worker must earn in order to be subject to the EAP exemptions. The Department distinguishes among four such tests:

Standard salary level: The weekly salary level associated with the standard duties test that determines eligibility for the EAP exemptions. The standard salary level was set at $455 per week in the 2004 Final Rule.

HCE compensation level: Workers who meet the standard salary level requirement but not the standard duties test nevertheless are exempt if they pass a minimal duties test and earn at least the HCE total annual compensation required amount. The HCE required compensation level was set at $100,000 per year in the 2004 Final Rule, of which at least $455 per week must be paid on a salary or fee basis.

Short test salary level: The weekly salary level associated with the short duties test (eliminated in 2004).

Long test salary level: The weekly salary level associated with the long duties test (eliminated in 2004).

SIPP: Survey of Income and Program Participation.

Workers covered by the FLSA and subject to the Department's part 541 regulations: Includes all workers except those excluded from the analysis because they are not covered by the FLSA or subject to the Department's requirements. Excluded workers include: Members of the military, unpaid volunteers, the self-employed, many religious workers, and federal employees (with a few exceptions).[101]

The Department also notes that the terms employee and worker are used interchangeably throughout this analysis.

B. Methodology To Determine the Number of Potentially Affected EAP Workers

i. Overview

This section explains the methodology used to estimate the number of workers who are subject to the EAP exemptions. In this Final Rule, as in the 2004 Final Rule, the Department estimated the number of EAP exempt workers because there is no data source that identifies workers as EAP exempt. Employers are not required to report EAP exempt workers to any central agency or as part of any employee or establishment survey.[102] The methodology described here is largely based on the approach the Department used in the 2004 Final Rule. 69 FR 22196-209. All tables include projected estimates for FY2017, which begins on October 1, 2016. Some tables also include estimates for FY2005 (the first full fiscal year after the most recent increase to the salary level was implemented) to demonstrate how the prevalence of the EAP exemption has changed in the 12 years since our last rulemaking. We note that the PRIA used calendar year 2005 whereas this Final Rule uses FY2005. Therefore, the numbers have changed slightly. Figure 2 illustrates how the U.S. civilian workforce was analyzed through successive stages to estimate the number of potentially affected EAP workers.

Start Printed Page 32454

ii. Data

The estimates of EAP exempt workers are based on data drawn from the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and the BLS. The CPS is a large, nationally representative sample of the labor force. Households are surveyed for four months, excluded from the survey for eight months, surveyed for an additional four months, then permanently dropped from the sample. During the last month of each rotation in the sample (month 4 and month 16), employed respondents complete a supplementary questionnaire in addition to the regular survey.[103] This supplement contains the detailed information on earnings necessary to estimate a worker's exemption status. Responses are based on the reference week, which is always the week that includes the 12th day of the month.

Although the CPS is a large scale survey, administered to 60,000 households representing the entire nation, it is still possible to have relatively few observations when looking at subsets of employees, such as exempt workers in a specific occupation employed in a specific industry, or workers in a specific geographic location. To increase the sample size, the Department pooled together three years of CPS MORG data (FY2013 through FY2015). Earnings for each FY2013 and FY2014 observation were inflated to FY2015 dollars using the CPI-U, and the weight of each observation was adjusted so that the total number of potentially affected EAP workers in the pooled sample remained the same as the number for the FY2015 CPS MORG. Thus, the pooled CPS MORG sample uses roughly three times as many observations to represent the same total number of workers in FY2015. The additional observations allow the Department to better estimate certain attributes of the potentially affected labor force.

Next, this pooled sample was adjusted to reflect the FY2017 economy by further inflating wages and sampling weights to project to FY2017. The Department applied two years of wage growth based on the average annual growth rate in median wages. The wage growth rate is calculated as the geometric growth rate in median wages using the historical CPS MORG data for occupation-industry categories from FY2006 to FY2014.[104 105] The geometric growth rate is the constant annual growth rate that when compounded (applied to the first year's wage, then to the resulting second year's wage, etc.) yields the last historical year's wage. This method only depends on the value of the wage in the first available year and the last available year.[106]

Start Printed Page 32455

The geometric wage growth rate was also calculated from the BLS' Occupational Employment Statistics (OES) survey and used as a validity check.[107] Additionally, in occupation-industry categories where the CPS MORG data had an insufficient number of observations to reliably calculate median wages, the Department used the growth rate in median wages calculated from the OES data.[108] Any remaining occupation-industry combinations without estimated median growth rates were assigned the median of the growth rates in median wages from the CPS MORG data.

The employment growth rate is the geometric annual growth rate based on the ten-year employment projection from BLS' National Employment Matrix (NEM) for 2014 to 2024 within an occupation-industry category. An alternative method is to spread the total change in the level of employment over the ten years evenly across years (constant change in the number employed). The Department believes that on average employment is more likely to grow at a constant percentage rate rather than by a constant level (a decreasing percentage rate). To account for employment growth, the Department applied the growth rates to the sample weights of the workers. This is because the Department cannot introduce new observations to the CPS MORG data to represent the newly employed.

In addition to the calculations described above, some assumptions had to be made to use these data as the basis for the analysis. For example, the Department eliminated workers who reported that their weekly hours vary and provided no additional information on hours worked. This was done because the Department cannot estimate impacts for these workers since it is unknown whether they work overtime and therefore unknown whether there would be any need to pay for overtime if their status changed from exempt to nonexempt. The Department reweighted the rest of the sample to account for this change (i.e., to keep the same total employment estimates).[109] This adjustment assumes that the distribution of hours worked by workers whose hours do not vary is representative of hours worked by workers whose hours do vary. The Department believes that without more information this is an appropriate assumption.[110]

iii. Number of Workers Covered by the Department's Part 541 Regulations

To estimate the number of workers covered by the FLSA and subject to the Department's part 541 regulations, the Department excluded workers who are not protected by the FLSA or are not subject to the Department's regulations for a variety of reasons—for instance, they may not be covered by, or considered to be employees under, the FLSA. These workers include:

  • Military personnel,
  • unpaid volunteers,
  • self-employed individuals,
  • clergy and other religious workers, and
  • federal employees (with a few exceptions described below).

Many of these workers are excluded from the CPS MORG: Members of the military on active duty, unpaid volunteers, and the self-employed. Religious workers were excluded from the analysis after being identified by their occupation codes: `clergy' (Census occupational code 2040), `directors, religious activities and education' (2050), and `religious workers, all other' (2060). Most employees of the federal government are covered by the FLSA but are not subject to the Department's part 541 regulations because their entitlement to minimum wage and overtime pay is regulated by the Office of Personnel Management (OPM).[111] See 29 U.S.C. 204(f). Exceptions exist for U.S. Postal Service employees, Tennessee Valley Authority employees, and Library of Congress employees. See 29 U.S.C. 203(e)(2)(A). These covered federal workers were identified and included in the analysis using occupation and/or industry codes.[112] Employees of firms that have annual revenue of less than $500,000 and who are not engaged in interstate commerce are also not covered by the FLSA. The Department does not exclude them from the analysis because we have no reliable way of estimating the size of this worker population, although the Department believes it is a small percentage of workers. The 2004 Final Rule analysis similarly did not adjust for these workers.

Table 3 presents the Department's estimates of the total number of workers, and the number of workers covered by the FLSA and subject to the Department's part 541 regulations, in FY2005 and FY2017. The Department projected that in FY2017 there will be 159.9 million wage and salary workers in the United States. Of these, in the baseline scenario without changes in the salary levels, 132.8 million would be covered by the FLSA and subject to the Department's regulations (83.0 percent). The remaining 27.2 million workers would be excluded from FLSA coverage for the reasons described above and delineated in Table 4.Start Printed Page 32456

Table 3—Estimated Number of Workers Covered by the FLSA and Subject to the Department's Part 541 Regulations, FY2005 and FY2017

YearCivilian employment (1,000s)Subject to the Department's regulations
Number (1,000s)Percent
FY2005 a141,519122,04386.2
FY2017159,914b 132,75483.0
a The PRIA provided figures from calendar year 2005, which differ slightly from the fiscal year 2005 figures provided in this analysis.
b Estimate uses pooled data for FY2013-FY2015 projected to reflect FY2017.

Table 4—Reason Not Subject to the Department's Part 541 Regulations, FY2017

ReasonNumber (1,000s)
Total27,160
Self-employed and unpaid workers a23,607
Religious workers550
Federal employees b3,005
Note: Estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.
a Self-employed workers (both incorporated and unincorporated) and workers “without pay” are excluded from the MORG supplement. We assume workers “without pay” are “unpaid volunteers.” These workers are identified as the difference between the population of workers in the CPS basic data and the CPS MORG data.
b Most employees of the federal government are covered by the FLSA but are not covered by part 541. Exceptions are for U.S. Postal Service employees, Tennessee Valley Authority employees, and Library of Congress employees.

iv. Number of Workers in the Analysis

After limiting the analysis to workers covered by the FLSA and subject to the Department's part 541 regulations, several other groups of workers are identified and excluded from further analysis since they are unlikely to be affected by this Final Rule. These include:

  • Blue collar workers,
  • workers paid hourly, and
  • workers who are exempt under certain other (non-EAP) exemptions.

The Department excludes a total of 87.9 million workers from the analysis for one or more of these reasons, which often overlapped (e.g., many blue collar workers are also paid hourly). In FY2017, we project there will be 48.1 million blue collar workers (Table 5). These workers were identified in the CPS MORG data following the methodology from the U.S. Government Accountability Office's (GAO) 1999 white collar exemptions report [113] and the Department's 2004 regulatory impact analysis. See 69 FR 22240-44 (Table A-1). Supervisors in traditionally blue collar industries are classified as white collar workers because their duties are generally managerial or administrative, and therefore they were not excluded as blue collar workers. The Department used the CPS MORG variable PEERNHRY to determine hourly status, and determined that 78.3 million workers will be paid on an hourly basis in FY 2017.

Also excluded from further analysis were workers who are exempt under certain other (non-EAP) exemptions. Although some of these workers may also be exempt under the EAP exemptions, even if these workers lost their EAP exempt status they would remain exempt from the minimum wage and/or overtime pay provisions based on the non-EAP exemption, and thus were excluded from the analysis. We excluded an estimated 4.5 million workers, including some agricultural and transportation workers, from further analysis because they will be subject to another (non-EAP) overtime exemption. See Appendix A: Methodology for Estimating Exemption Status, for details on how this population was identified.

Table 5—Estimated Number of Workers Covered by the FLSA and Subject to the Department's Part 541 Regulations, FY2005 and FY2017 (1,000s)

YearSubject to DOL's Part 541 Reg.Workers in the analysis aExcluded from analysisReason excluded b
Blue collar workersHourly workersAnother exemption c
AgricultureTransportationOther
FY2005122,04339,44782,59545,88973,8137781,911967
FY2017132,75444,84587,90948,11978,3109021,9121,691
Note: FY2017 estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.
a Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption.
b Numbers do not add to total due to overlap.
c Eligible for another (non-EAP) overtime pay exemption.

In the 2004 Final Rule the Department excluded some of these workers from the population of potentially affected EAP workers, but not all of them. Agricultural and transportation workers are two of the largest groups of workers excluded from this analysis, and they were similarly excluded in 2004. Agricultural workers were identified by occupational-industry combination.[114] Transportation workers were defined as those who are subject to the following Start Printed Page 32457FLSA exemptions: Section 13(b)(1), section 13(b)(2), section 13(b)(3), section 13(b)(6), or section 13(b)(10). This methodology is the same as in the 2004 Final Rule and is explained in Appendix A. The Department excluded 902,000 agricultural workers and 1.9 million transportation workers from the analysis. In addition, the Department excluded another 1.7 million workers who fall within one or more of multiple FLSA minimum wage and overtime exemptions and are detailed in Appendix A. However, of these 1.7 million workers, all but 25,600 are either blue collar or hourly and thus the impact of excluding these workers is negligible.

v. Number of Potentially Affected EAP Workers

After excluding workers not subject to the Department's FLSA regulations and workers who are unlikely to be affected by this Final Rule (i.e., blue collar workers, workers paid hourly, workers who are subject to another (non-EAP) overtime exemption), the Department estimated there would be 44.8 million salaried white collar workers for whom employers might claim either the standard EAP exemption or the HCE exemption. To be exempt under the standard EAP test the employee must:

  • Be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); [115, 116]
  • earn at least a designated salary amount; the salary level has been set at $455 per week since 2004 (the salary level test); and
  • perform work activities that primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).

The 2004 Final Rule's HCE test requires the employee to pass the same standard salary basis and salary level tests. However, the HCE duties test is much less restrictive than the standard duties test, and the employee must earn at least $100,000 in total annual compensation, including at least $455 per week paid on a salary or fee basis, while the balance may be paid as nondiscretionary bonuses and commissions.

Salary Basis

As discussed above, the Department included only nonhourly workers in the analysis using the CPS variable PEERNHRY, which identifies workers as either hourly or nonhourly. For the purpose of this rulemaking, the Department considers data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers. The Department notes that we made the same assumption regarding nonhourly workers in the 2004 Final Rule. See 69 FR 22197. Several commenters asserted that the Department's use of the CPS variable PEERNHRY to indicate whether a worker is salaried is inappropriate. For example, the NRF included an analysis it commissioned from Oxford Economics, which stated that this variable is inappropriate because all workers who earn under $455 a week (and are therefore nonexempt) will report that they are “paid at an hourly rate.” The Department believes this is an entirely unwarranted assumption: exempt status is not a prerequisite for being salaried; salaried status is a prerequisite for being exempt (the salary basis test). Millions of workers—white and blue collar alike—are salaried despite being nonexempt, including 3.2 million white-collar workers who reported earning less than $455 per week in the CPS. See 80 FR 38522 (noting the “widespread misconception[ ]” that “payment of a salary automatically disqualifies an employee from entitlement to overtime compensation.”)

Some commenters, such as the Chamber and the National Association of Convenience Stores (NACS), expressed concern that the Department is using “nonhourly” workers to approximate “salaried” workers, even though this may include workers who are paid on a piece-rate, a day-rate, or largely on bonuses or commissions. The Panel Study of Income Dynamics (PSID) provides additional information on how nonhourly workers are paid. In the PSID, respondents are asked how they are paid on their main job and are asked for more detail if their response is other than salaried or hourly. Possible responses include piecework, commission, self-employed/farmer/profits, and by the job/day/mile. The Department analyzed the PSID data and found that relatively few nonhourly workers were paid by methods other than salaried. The Department is not aware of any statistically robust source that more closely reflects salary as defined in our regulations, and the commenters did not identify any such source.

Salary Level

Weekly earnings are available in the CPS MORG data, which allowed the Department to estimate how many nonhourly workers pass the salary level tests.[117] The Fisher & Phillips law firm, Jackson Lewis law firm, NACS, and the Clearing House Association (Clearing House) commented that CPS earnings data may be inappropriate because the data includes overtime pay, commissions, or tips. The Department notes that employers may factor into an employee's salary a premium for expected overtime hours worked. To the extent they do so, that premium would be reflected in the data. Similarly, the Department believes tips will be an uncommon form of payment for these workers since tips are uncommon for white-collar workers. Lastly, the Department believes that commissions make up a relatively small share of earnings among nonhourly employees.[118] In any event, as discussed earlier in section IV.C., the Department has adopted a change to the salary basis test in this Final Rule that will newly Start Printed Page 32458allow employers to satisfy as much as 10 percent of the standard salary level requirement for employees who meet the standard duties test through the payment of nondiscretionary bonuses, incentive payments, and commissions.

NACS also asserted that the CPS MORG earnings data are unreliable because they “are self-reported and are therefore not subject to verification.” The Department acknowledges that the CPS, like all surveys, involves some measurement error. However, based on the literature measuring error in CPS earnings data, the Department believes that measurement error should not significantly bias its results.[119]

Duties

The CPS MORG data do not capture information about job duties, and at the time of writing the NPRM, there were no data available on the prevalence of EAP exempt workers. Due to this data limitation, the Department used occupational titles, combined with probability estimates of passing the duties test by occupational title, to estimate the number of workers passing the duties test. This methodology is very similar to the methodology used in the 2004 rulemaking, and was the best available data and methodology. To determine whether a worker met the duties test, the Department used an analysis performed by WHD in 1998 in response to a request from the GAO. Because WHD enforces the FLSA's overtime requirements and regularly assesses workers' exempt status, WHD's representatives were uniquely qualified to provide the analysis. The analysis was used in both the GAO's 1999 white collar exemptions report [120] and the Department's 2004 regulatory impact analysis. See 69 FR 22198.

WHD's representatives examined 499 occupational codes, excluding nine that were not relevant to the analysis for various reasons (one code was assigned to unemployed persons whose last job was in the Armed Forces, some codes were assigned to workers who are not FLSA covered, others had no observations). Of the remaining occupational codes, WHD's representatives determined that 251 occupational codes likely included EAP exempt workers and assigned one of four probability codes reflecting the estimated likelihood, expressed as ranges, that a worker in a specific occupation would perform duties required to meet the EAP duties tests. The Department supplemented this analysis in the 2004 Final Rule regulatory impact analysis when the HCE exemption was introduced. The Department modified the four probability codes for highly paid workers based upon our analysis of the provisions of the highly compensated test relative to the standard duties test (Table 6). To illustrate, WHD representatives assigned exempt probability code 4 to the occupation “first-line supervisors/managers of construction trades and extraction workers” (Census code 6200), which indicates that a worker in this occupation has a 0 and 10 percent likelihood of meeting the standard EAP duties test. However, if that worker earns at least $100,000 annually, he or she has a 15 percent probability of passing the shorter HCE duties test.

The occupations identified in GAO's 1999 report and used by the Department in the 2004 Final Rule map to an earlier occupational classification scheme (the 1990 Census occupational codes). Therefore, for this Final Rule, the Department used an occupational crosswalk to map the previous occupational codes to the 2002 Census occupational codes which are used in the CPS MORG 2002 through 2010 data, and to the 2010 Census occupational codes which are used in the CPS MORG FY2013 through FY2015 data.[121] If a new occupation comprises more than one previous occupation, then the new occupation's probability code is the weighted average of the previous occupations' probability codes, rounded to the closest probability code.

Table 6—Probability Worker in Category Passes the Duties Test

Probability codeThe Standard EAP testThe HCE test
Lower bound (%)Upper bound (%)Lower bound (%)Upper bound (%)
00000
190100100100
250909496
3105058.460
40101515

These codes provide information on the likelihood an employee in a category met the duties test but they do not identify the workers in the CPS MORG who actually passed the test. Therefore, the Department designated workers as exempt or nonexempt based on the probabilities. For example, for every ten public relations managers, between five and nine were estimated to pass the standard duties test (based on probability category 2). However, it is unknown which of these ten workers are exempt; therefore, the Department must determine the status for these workers. Exemption status could be randomly assigned with equal probability, but this would ignore the earnings of the worker as a factor in determining the probability of exemption. The probability of qualifying for the exemption increases with earnings because higher paid workers are more likely to perform the required duties, an assumption adhered to by both the Department in the 2004 Final Rule and the GAO in its 1999 Report.[122] The Department estimated the probability of exemption for each worker as a function of both earnings Start Printed Page 32459and the occupation's exempt probability category using a gamma distribution.[123] Based on these revised probabilities, each worker was assigned exempt or nonexempt status based on a random draw from a binomial distribution using the worker's revised probability as the probability of success. Thus, if this method is applied to ten workers who each have a 60 percent probability of being exempt, six workers would be expected to be designated as exempt.[124] However, which particular workers are designated as exempt may vary with each set of ten random draws. For details see Appendix A.

The Chamber attached to its comment an Oxford Economic analysis commissioned by the NRF, which also submitted the analysis, asserting that that CPS data may not be appropriate to determine how many workers are EAP exempt, and specifically how many pass the duties test. The Oxford Economics analysis contends that occupational titles in the CPS are less accurate than the OES survey, a BLS-published data set based on employer surveys, because the occupational titles in the CPS are self-reported, while occupational titles in the OES survey are reported by firms, and are therefore better suited to obtain information on actual occupations. Oxford Economics asserts in their Appendix A that there is title-inflation in the CPS data, which would imply that the Department's number of affected workers was overestimated. Similarly, the Chamber described the CPS job title information as based on “brief, limited individual verbal responses.”

The Department acknowledges that an establishment survey (like the OES) may more accurately reflect the occupational titles applied to workers by individual employers; however, we note that businesses, like workers, may also have an incentive to inflate or deflate occupational titles. In addition, Oxford Economics and the Chamber overstate the presumed weaknesses of the CPS occupation classification. When the CPS reports occupation codes, occupation is generally determined from the initial, in-person, in-depth interview with the respondent, and the interviewer is directed to determine the respondent's duties and responsibilities, not merely accept the occupational title at face value; Census coders then assign the occupation code based on the interview.

Moreover, there are important shortcomings of the OES, which made it an inappropriate data source for the Department's purposes. First, the OES data do not include individual level data. For example, earnings are not disaggregated by respondent; only select decile estimates are presented. This does not allow estimation of the number of workers earning at least $455.[125] Second, the OES does not provide information on hours worked. In order to estimate costs and transfers using OES data, Oxford Economics had to apply estimates of hours worked from the CPS data to the OES data. This requires mapping CPS occupational titles to OES occupational titles, and therefore does not avoid use of the titles Oxford Economics finds inadequate. The Department believes the direct information on earnings and hours worked from CPS is more germane to the analysis than some potential inaccuracy in occupational titles, and will result in a more accurate analysis than trying to map worker characteristics such as data on hours worked by earnings from CPS to the OES. Finally, even if there are slight discrepancies in occupational titles, a review of the occupational titles in Appendix A of this RIA will show that closely related occupational titles are generally assigned the same probability of exemption (for example, different types of engineers are all classified as probability code 1; and cashiers and counter and rental clerks are both classified as probability code 4).

The Chamber expressed concern that the probability codes used to determine the share of workers in an occupation who are EAP exempt are 17 years old and therefore out of date. Similarly, the Economic Policy Institute (EPI) commented that we underestimated the number of exempt workers for this reason. The Department acknowledges these codes were developed in 1998 for use by the GAO in its study of the part 541 exemptions, but we believe the probability codes continue to accurately estimate exemption status given the fact that the standard duties test is not substantively different from the former short duties tests reflected in the codes.[126] The Department looked at O*NET [127] to determine the extent to which the 1998 probability codes reflected occupational duties today. The Department's review of O*NET verified the continued appropriateness of the 1998 probability codes.

The Partnership to Protect Workplace Opportunity (PPWO) cited an Edgeworth Economics article asserting that the probability codes are inappropriate because there is evidence that the relationship between salaries and job duties assumed by the Department is not valid. The article provides the following example: “the median pay of `Occupational Therapists' is more than twice as high as the median pay of `First Line Supervisors/Managers of Retail Sales Workers,' yet the DOL places `Occupational Therapists' in the 10 to 50 percent category for managerial and professional duties, while 50 to 90 percent of the positions in `First Line Supervisors/Managers of Retail Sales Workers' were determined to include managerial and professional duties.” However, this criticism is not valid since the positive relationship between salary levels and passing the duties test was assumed within probability code categories, not between probability code categories. The probability codes only reflect the likelihood within an occupation of passing the duties test, not the probability of being exempt.

Potentially Affected Exempt EAP Workers

The Department estimated that of the 44.8 million salaried white collar workers considered in the analysis, 29.9 million qualified for the EAP exemptions under the current regulations (Table 7). However, some of these workers were excluded from further analysis because they would not be affected by the Final Rule. This excluded group contains workers in named occupations who are not required to pass the salary requirements Start Printed Page 32460(although they must still pass a duties test) and therefore whose exemption status is not dependent on their earnings. These occupations include physicians (identified with Census occupation codes 3010, 3040, 3060, 3120), lawyers (2100), teachers (occupations 2200-2550 and industries 7860 or 7870), academic administrative personnel (school counselors (occupation 2000 and industries 7860 or 7870) and educational administrators (occupation 0230 and industries 7860 or 7870)), and outside sales workers (a subset of occupation 4950).[128] Out of the 29.9 million workers who are EAP exempt, 7.4 million, or 24.8 percent, are expected to be in named occupations in FY2017. Thus these workers will be unaffected by changes in the standard salary level and HCE compensation tests. The 22.5 million EAP exempt workers remaining in the analysis are referred to in this Final Rule as “potentially affected.” In addition to the 22.5 million potentially affected EAP exempt workers, the Department estimates that an additional 5.7 million salaried white collar workers who do not satisfy the duties test and who currently earn at least $455 per week but less than the updated salary level, will have their overtime protection strengthened because their exemption status will be clear based on the salary test alone without the need to examine their duties.

Table 7—Estimated Percentages of EAP Exempt Workers in Named Occupations, Prior to Rulemaking, FY2005 and FY2017

YearWorkers in the analysis (millions) aEAP Exempt (millions)EAP Exempt in named occupations (millions) b% of EAP exempt in named occupations
FY200539.424.96.425.9
FY201744.829.97.424.8
Note: FY2017 estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.
a Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption.
b Workers not subject to a salary level test include teachers, academic administrative personnel, physicians, lawyers, judges, and outside sales workers.

In response to the NPRM, the FL DEO conducted their own analysis of the number of Florida workers potentially affected by the proposed rule and asserted that the Department's analysis in the NPRM overestimates “by 195,000 the number of Florida workers who will qualify for overtime.” The Department's NPRM estimated that 370,000 workers would be affected in Florida whereas the FL DEO estimated 175,100.[129] However, FL DEO did not provide details explaining how they arrived at their lower number so the Department has no way to judge the validity of their analysis or to update our own analysis to incorporate any methodological improvements that may exist in the FL DEO study.

There are three groups of workers who qualify for the EAP exemptions: (1) Those passing only the standard EAP test (i.e., passing the standard duties test, the salary basis test, and the standard salary level test but not passing the HCE total annual compensation requirement); (2) those passing only the HCE test (i.e., passing the HCE duties test, the salary basis test, and the HCE total annual compensation requirement but not passing the standard duties test); and (3) those passing all requirements of both the standard and HCE tests. Based on analysis of the occupational codes and CPS earnings data, the Department has concluded that in FY2017, in the baseline scenario where the rule does not change, of the 22.5 million potentially affected EAP workers, approximately 15.4 million will pass only the standard EAP test, 7.0 million will pass both the standard and the HCE tests, and approximately 100,000 will pass only the HCE test (Table 8). When impacts are discussed in section VI.D., workers who pass both tests will be considered with those who pass only the standard EAP test because the standard salary level test is lower (i.e., the worker may continue to pass the standard salary level test even if he or she no longer passes the HCE total annual compensation requirement).

Table 8—Estimated Number of Workers Exempt Under the EAP Exemptions by Test Type, Prior to Rulemaking, FY2005 and FY2017

YearPotentially affected EAP workers (millions)
TotalPass standard test onlyPass both testsPass HCE test only
FY200518.415.82.60.04
FY201722.515.47.00.10
Note: FY2017 estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.
Start Printed Page 32461

C. Determining the Revised Salary and Compensation Levels

The Final Rule sets the EAP standard salary level at the 40th percentile of the weekly earnings distribution of full-time salaried workers in the lowest-wage Census Region (currently the South) and sets the HCE total annual compensation requirement equal to the annual earnings equivalent of the 90th percentile of the weekly earnings distribution of full-time salaried workers nationally.[130] These methods were chosen in part because they generate salary levels that (1) appropriately distinguish between workers who are eligible for overtime and those who may be EAP exempt; (2) are easy to calculate and thus easy to replicate, creating transparency through simplicity; and (3) are predictable. The Department believes that the standard salary level set using the methodology established in this rulemaking allows for reliance on the current standard duties test without necessitating a return to the more detailed long duties test. Additionally, the Department believes this salary level will not result in an unacceptably high risk that employees performing bona fide EAP duties will become entitled to overtime protection by virtue of the salary test.

In the NPRM, the Department proposed setting the EAP standard salary level at the 40th percentile of the weekly earnings distribution of full-time salaried workers nationally. In response to commenters' concerns that the proposed salary level would disqualify too many bona fide EAP employees in low-wage areas and industries, the Department limited the distribution to workers in the lowest-wage Census Region.

i. Methodology for the Standard Salary Level and Comparison to Past Methodologies

The Department in this rulemaking is setting the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). This methodology differs somewhat from previous revisions to the salary levels but the general concept holds: Define a relevant population of workers, estimate an earnings distribution for that population, then set a salary level that corresponds to a designated percentile of that distribution in order for the salary to serve as a meaningful line of demarcation between those Congress intended to protect and those who may qualify for exemption. The salary setting methodology adopted in this Final Rule continues the evolution of the Department's approach. Where the methodology differs from past methodologies, the Department believes the changes are an improvement. A comparison of this new method with methods from past rulemakings, and the reasons for selecting the new method are detailed in the rest of this section.

As discussed in section IV.A., the historical methodologies used to revise the EAP salary levels have varied somewhat across the seven updates to the salary level test since it was implemented in 1938. To guide the determination of the salary level, the Department considered methodologies used previously to revise the EAP salary levels. In particular, the Department focused on the 1958 revisions and the most recent revisions in 2004. The 1958 methodology is particularly instructive in that it synthesized previous approaches to setting the long-test salary level, and the basic structures it adopted have been a touchstone to setting the long test salary level in subsequent rulemakings (with the exception of 1975).

In 1958, the Department updated the salary levels based on a 1958 Report and Recommendations on Proposed Revision of Regulations, Part 541, by Harry S. Kantor (Kantor Report). To determine the revised salary levels the Department looked at data collected during WHD investigations on actual salaries paid to exempt EAP employees, grouped by geographic region, industry groups, number of employees, and size of city. The Department then set the long test salary levels so that no more than about 10 percent of exempt EAP employees in the lowest-wage region, lowest-wage industry, smallest establishment group, or smallest city group would fail to meet the test. Kantor Report at 6-7.[131 132] The Department then set the short test salary level in relation to, and significantly higher than, the long test salary levels. This methodology is referred to as the Kantor method, and the Department followed a similar methodology in setting the salary levels in 1963 and 1970.

A significant change in 2004 from the long test Kantor method was that the Department used the salaries of both exempt and nonexempt full-time salaried workers in the South and the retail industry to determine the required salary level (hereafter referred to as the 2004 method), rather than the salaries of exempt workers only. However, because the salaries of exempt workers on average are higher than the salaries of all full-time salaried workers, the Department selected a higher earnings percentile when setting the required salary. Based on the Department's 2004 analysis, the 20th percentile of earnings for exempt and nonexempt full-time salaried workers in the South and retail achieved a result very similar to the 10th percentile for workers in the lowest-wage regions and industries who were estimated to be exempt. See 69 FR 22169.

In the current rulemaking, the Department replicated the Kantor long test method and the 2004 method to evaluate and compare them to the chosen salary level.[133] Although the Department was able to replicate the 1958 and 2004 methods reasonably well, we could not completely replicate those methods due to changes in data availability, occupation classification systems, and incomplete documentation. In general, there are four steps in the process:

1. Identify workers likely to be members of the population of interest.

2. Further narrow the population of interest by distinguishing the sub-population employed in low-wage categories.

3. Estimate the distribution of earnings for these workers.

4. Identify the salary level that is equal to a pre-determined percentile of the distribution.

The population of workers considered for purposes of setting the salary level depends on whether the 2004 method or the Kantor long test method is used. In replicating both methods, the Department limited the population to workers subject to the FLSA and covered by the Department's part 541 provisions, and excluded exempt EAP workers in named occupations, and those exempt under another (non-EAP) exemption. For the 2004 method, the Start Printed Page 32462Department further limited the population to full-time salaried workers, and for the Kantor long test method further limited the population of interest by only including those workers determined as likely to be EAP exempt (see more detailed methodology in section VI.C. and Appendix A).

In the 2004 Final Rule, the Department identified two low-wage categories: The South (low-wage geographic region), and the retail industry (low-wage industry). In the current rulemaking, the Department identified low-wage categories by comparing average weekly earnings across categories for the populations of workers used in the Kantor long test method and the 2004 method. The South was determined to be the lowest-wage Census Region and was used for the 2004 method; however, the Department chose to use a more detailed geographical break-down for the Kantor long test method to reflect the geographic categories Kantor used. Therefore, for the Kantor long test method the East South Central Census Division is considered the lowest-wage geographical area.[134] The Department used three low-wage industries: Leisure and hospitality, other services, and public administration.[135] The Department also considered non-MSAs as a low-wage sector in the Kantor long test method. The 2004 revision did not consider population density but the Kantor long test method examined earnings across population size groups. In conclusion, for this analysis the 2004 method looks at workers in the South and the three low-wage industries, whereas the Kantor long test method looks at workers in the East South Central Division, non-MSAs, and the three low-wage industries.

Next, the Department estimated the distributions of weekly earnings of two populations: (1) Workers who are in at least one of the low-wage categories and in the Kantor population (likely exempt workers), and (2) workers who are in at least one of the low-wage categories and in the 2004 population (full-time salaried workers). From these distributions, alternate salary levels were identified based on pre-determined percentiles. For the Kantor long test method, the salary level for the long duties test is identified based on the 10th percentile of weekly earnings for likely EAP exempt workers, while the 2004 method salary level is identified based on the 20th percentile of weekly earnings for both exempt and nonexempt salaried workers. Using 2015 quarter 3 CPS MORG data, the Kantor long test method resulted in a salary level of $684 per week, and the 2004 method resulted in a salary level of $596 per week.[136] Table 9 presents the distributions of weekly earnings used to estimate the salary levels under the method used in this Final Rule, the NPRM method, the 2004 method, and the Kantor long test method.

Table 9—Weekly Earnings Distributions

PercentileWeekly earningsAnnual earnings a
Full-time salaried 2015Q4 b2004 Method 2015Q3 cKantor Long Test Method 2015Q3 dFull-time salaried 2015Q4 b2004 Method 2015Q3 cKantor Long Test Method 2015Q3 d
SouthNationallySouthNationally
10$479$509$429$684$24,908$26,468$22,319$35,560
2063369259681732,91635,98431,01542,491
3076883872694939,93643,57637,74949,332
409139728441,11047,47650,54443,87857,739
501,0541,1469881,25954,80859,59251,38165,451
a Weekly earnings multiplied by 52.
b BLS. Available at: http://www.bls.gov/​cps/​research_​series_​earnings_​nonhourly_​workers.htm.
c Full-time salaried workers in the South or employed in a low-wage industry (excludes workers not subject to the FLSA, not subject to the salary level test, and in agriculture or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently available data.
d Salaried, white collar workers who earn at least $455 per week, pass the EAP duties test, and either live in the East South Central Division or a non-MSA or are employed in a low-wage industry (excludes workers not subject to FLSA, not subject to the salary level test, and in agriculture or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently available data.

In response to the NPRM, the Iowa Association of Business and Industry (IABI) commented that the Department incorrectly replicated the Kantor long test methodology. Kantor determined the salary levels by looking separately at low-wage regions, less populated geographic regions, and low-wage industries and then identifying a single salary level that fits within these salary numbers. IABI asserted that we misapplied the methodology by aggregating these low-wage sectors into a single group. The Department disagrees with IABI that we misapplied the Kantor long-test methodology. As discussed at length in the NPRM, the Department replicated the Kantor methodology as closely as possible given changes in data availability. See 80 FR 38557.

ii. Rationale for the Methodology Chosen

The chosen methodology—the 40th percentile of full-time salaried workers in the lowest-wage Census Region—was selected because it (1) corrects for the elimination of the long duties test and allows for reliance on the current standard duties test; (2) appropriately distinguishes between workers who are eligible for overtime and those who may be EAP exempt in all regions and industries; (3) is easy to calculate and thus easy to replicate, creating transparency through simplicity; and (4) produces predictable salary levels.

The salary level test has historically been intended to serve as an initial bright-line test for overtime eligibility for white collar employees. As Start Printed Page 32463discussed previously, however, there will always be white collar overtime-eligible employees who are paid above the salary threshold. A low salary level increases the number of these employees. The necessity of applying the duties test to these overtime-protected employees consumes employer resources, may result in misclassification (which imposes additional costs to employers and society in the form of litigation), and is an indicator of the effectiveness of the salary level. Similarly, there will always be employees performing bona fide EAP duties who are paid below the salary threshold; the inability of employers to claim the EAP exemption for these employees is also an indicator of the effectiveness of the salary level. Selecting the standard salary level will inevitably affect the number of workers falling into each of these two categories.

1. Correcting for the Elimination of the Long Duties Test

The Kantor long test method sought to minimize the number of white collar employees who pass the long duties test but were excluded from the exemption by the salary threshold and therefore set the salary level at the bottom 10 percent of earnings of exempt EAP employees in low-wage regions and industries so as to prevent “disqualifying any substantial number of such employees.” Kantor Report at 5. This method was based on the long/short test structure, in which employees paid at lower salary levels were protected by significantly more rigorous duties requirements than are part of the current standard duties test. This approach, however, does not sufficiently take into account the inefficiencies of applying the duties test to large numbers of overtime-eligible white collar employees and the possibility of misclassification of those employees as exempt.

As discussed in section IV.A., for many decades the long duties test—which limited the amount of time an exempt employee could spend on nonexempt duties and was paired with a lower salary level—existed in tandem with a short duties test—which did not contain a specific limit on the amount of nonexempt work and was paired with a significantly higher salary level. In 2004, the Department eliminated the long and short duties tests and created the new standard duties test, based on the short duties test. The creation of a single standard test that did not limit nonexempt work caused new uncertainty as to what salary level is sufficient to ensure that employees intended to be overtime-protected are not subject to inappropriate classification as exempt, while minimizing the number of employees disqualified from the exemption even though their primary duty is EAP exempt work.

In the Final Rule, the Department corrects for the elimination of the long duties test and sets a salary level that works in tandem with the standard duties test to appropriately classify white collar workers as entitled to minimum wage and overtime protection or potentially exempt. Thus, while the standard salary level set by the Department is higher than the level the Kantor long test or 2004 methods would generate, it is set at the low end of the range of the historical short test levels, based on the ratios between the short test and long test levels, and much lower than the historical average for the short test. Between 1949 and 2003, the ratio of the short to long salary tests ranged from approximately 130 percent to 180 percent. The low end of this range would result in a salary level of $889; the high end would result in a salary of $1,231 (measured in FY2015 dollars). The short salary level updates between 1949 and 2003 averaged $1,100 per week (measured in FY2015 dollars).[137] At the 40th percentile of weekly earnings of full-time workers in the South, 9.9 million white collar employees would no longer be subject to the standard duties test (4.2 million currently EAP exempt employees who would be newly entitled to overtime protection due to the increase in the salary threshold and 5.7 million overtime eligible white collar employees who are paid between $455 and $913 per week whose exemption status would no longer depend on the application of the duties test). As discussed in section IV.A.iv., the Department believes that many of the workers who will no longer be exempt are currently inappropriately classified because of the mismatch between the standard duties test and the standard salary level. The final salary threshold will therefore more efficiently distinguish between employees who may meet the duties requirement of the EAP exemption and those who do not, without necessitating a return to the more detailed long duties test.

2. Appropriately Distinguishing Overtime-Eligible White Collar Workers and Those Who May Be EAP Exempt

The revised salary level also reduces the likelihood of workers being misclassified as exempt from overtime pay, providing an additional measure of the effectiveness of the salary level as a bright-line test delineating exempt and nonexempt workers. In the NPRM, the Department estimated that 13.5 percent of overtime-eligible white collar workers earning between the current salary level and the proposed salary level were misclassified. 80 FR 38559.

The Department updated our estimate of potential misclassification based on the salary level set in this Final Rule. The Department's analysis of misclassification draws on CPS data and looked at workers who are white collar, salaried, subject to the FLSA and covered by part 541 regulations, earn at least $455 but less than $913 per week, and fail the duties test. Because only workers who work overtime may receive overtime pay, when determining the share of workers who are misclassified the sample was limited to those who usually work overtime.[138] Workers were considered misclassified if they did not receive overtime pay.[139] The Department estimates that 12.8 percent of workers in this analysis who usually work overtime do not receive overtime compensation and are therefore misclassified as exempt. Applying this estimate to the sample of white collar salaried workers who fail the duties test and earn at least $455 but less than $913, the Department estimates that there are approximately 732,000 white collar salaried workers earning at least $455 but less than $913 who are overtime-eligible but whose employers do not recognize them as such.[140] These employees' entitlement to overtime pay will now be abundantly evident.

Table 10 provides estimates of the extent of misclassification of workers as exempt among first-line supervisors/managers in a variety of industries using the same method of looking at white collar salaried employees who fail the duties test and who report working more than 40 hours a week but do not report receiving overtime compensation.[141] The Department's analysis found that 41 percent of first-line supervisors/managers of food Start Printed Page 32464preparation and serving workers, and 35 percent of first-line supervisors/managers of retail sales workers are misclassified.

The Department also found that the industries with the largest number of workers who fail the duties test and report working more than 40 hours a week but do not receive overtime compensation are retail trade (125,000 workers) and food services and drinking places (97,000 workers). In these industries, the Department estimates the rate of misclassification to be 41percent of food services and drinking workers and 18 percent of retail workers.

Table 10—Estimates of Misclassification among First-Line Supervisors and Managers Covered by the Final Rule Who Earn at Least $455 and Less than $913

First-line supervisors/manager occupationsOvertime eligible salaried workers who earn between $455 and $913 per week (1,000s)Percent who usually work >40 hours aPercent misclassified b
Total5,69715.012.8
First-line supervisors/managers of . . .
Retail sales workers208.539.934.6
Non-retail sales workers66.032.627.5
Production and operating workers62.426.324.0
Construction trades and extraction workers58.519.919.0
Food preparation and serving workers55.544.941.0
Housekeeping and janitorial workers35.022.017.2
Mechanics, installers, and repairers28.929.227.6
Office and administrative support workers26.914.013.1
Personal service workers21.031.524.3
Landscaping, lawn service, and grounds keeping workers17.429.326.0
Source: CPS extract. Workers who are white collar, salaried, subject to the FLSA and covered by the part 541 regulations, earn at least $455 but less than $913 per week, and fail the duties test.
a Percent of overtime eligible salaried workers who usually work more than 40 hours per week. This differs from the 40 percent of all workers who work more than 40 hours in a week at least once per year because it only includes overtime eligible workers and excludes occasional overtime workers.
b Share of respondents who report usually working more than 40 hours per week and do not report that they “usually receive overtime pay, tips, or commissions.”

Since the NPRM was published, RAND has conducted a survey to identify the number of workers who may be misclassified as EAP exempt. The survey, a special module to the American Life Panel, asks respondents (1) hours worked, (2) whether they are paid on an hourly or salary basis, (3) their typical earnings, (4) whether they perform certain job responsibilities that are treated as proxies for whether they would justify exempt status, and (5) whether they receive any overtime pay. Using these data, Susann Rohwedder and Jeffrey B. Wenger [142] found “11.5 percent of salaried workers were classified as exempt by their employer although they did not meet the criteria for being so.” Using RAND's estimate of the rate of misclassification (11.5 percent), at the new salary level, the Department estimates that approximately 1.8 million salaried workers earning between $455 and $913 per week who fail the standard duties test are currently misclassified as exempt.[143]

The Department also assessed the impact of the standard salary level as a bright-line test for EAP exemption by examining: (1) The number of salaried white collar workers who pass the standard salary level test but not the duties test and (2) the number of salaried white collar workers who pass the standard duties test but not the salary level test.[144] This first group is equivalent to the number of salaried white collar workers who are eligible for overtime pay because they do not pass the standard EAP duties test, but earn above a specific salary level. The second group is the number of salaried white collar workers who satisfy the standard duties test but earn less than a specific standard salary level. The Department makes this assessment at the current salary level ($455) and the final salary level ($913), while holding all other factors determining exempt status constant (e.g., not considering whether the duties test is correctly applied or potential employer response to the change in the salary level test). Examining the impact of the salary threshold in isolation from the application of the duties test or employer adjustments to pay or hours does not provide a complete picture of the impact of a new salary threshold. It does, however, allow the Department to evaluate the effectiveness of the salary level in protecting overtime-eligible white collar employees without unduly excluding from the exemption employees performing EAP duties.

As a benchmark, the Department estimates that at the current standard salary threshold, there are 12.2 million salaried white collar workers who fail the standard duties test and are therefore overtime eligible, but earn at least the $455 threshold, while there are only 838,000 salaried white collar Start Printed Page 32465workers who pass the standard duties test but earn less than the $455 level. Thus the number of salaried white collar workers who pass the current salary threshold test but not the duties test is nearly 15 times the number of salaried white collar workers who pass the duties test but are paid below the salary threshold. This underscores the large number of overtime-eligible workers for whom employers must perform a duties analysis, and who may be at risk of misclassification as EAP exempt. At a salary threshold equal to the 40th percentile of full-time salaried workers in the South ($913), the number of overtime-eligible salaried white collar workers who would earn at least the threshold but do not pass the duties test would be reduced almost in half to 6.5 million (approximately 47 percent of all white collar salaried employees who fail the duties test). At a salary level of $913, the number of salaried white collar workers who would pass the standard duties test but earn less than the salary level would increase to 5.0 million (approximately 22 percent of all white collar salaried employees who pass the standard duties test). While this number is higher than the number of such employees under the Kantor long test method (approximately 10 percent), it includes employees who would have been overtime-eligible because they would not have passed the more rigorous long duties test, which had a cap on the percentage of time an employee could spend on nonexempt duties, and therefore were not included under that approach. Further, the number of salaried white collar workers who pass the new salary threshold test but not the duties test (6.5 million) is 31 percent higher than the number of salaried white collar workers who pass the duties test but are paid below the salary threshold (5.0 million).

Figure 3: Percentage of White Collar Salaried Workers by Earnings and Duties Test Status for National, Highest-Wage, and Lowest-Wage Regions

As illustrated in Figure 3, as the salary threshold increases there is a decrease in the share of overtime-eligible white collar workers for whom employers would be required to make an assessment under the duties test and who would be subject to possible misclassification (descending lines). At the same time, as the salary level increases there is an increase in the share of salaried white collar workers who pass the standard duties test but are screened from exemption by the salary threshold (ascending lines).[145] As previously discussed, the increase in the share from the traditional 10 percent of exempt employees excluded by the Kantor long test method reflects the shift to a salary level appropriate to the standard duties test. Because the long duties test included a limit on the amount of nonexempt work that could be performed, it could be paired with a low salary that excluded few employees performing EAP duties. In the absences of such a limitation in the duties test, it is necessary to set the salary level higher (resulting in the exclusion of more employees performing EAP duties) because the salary level must perform more of the screening function Start Printed Page 32466previously performed by the long duties test.

At the current salary level (far left of Figure 3), there is a very large gap between salaried white collar workers who are overtime eligible but earn at least the threshold (about 87 percent of all salaried white collar workers who fail the duties test are paid at least $455 per week) and salaried white collar workers who pass the standard duties test but do not meet the current salary level (about 4 percent of all salaried white collar workers who pass the duties test are paid less than $455 per week). At the salary level of the 40th percentile of weekly earnings of full-time salaried workers in the South ($913 per week), the percentage of overtime-eligible salaried white collar workers who earn above the threshold (and thus would be at risk of misclassification) still remains higher than the percentage of salaried white collar workers who pass the duties test but earn less than the salary threshold (and would become overtime protected).[146] The salary threshold would have to be considerably higher (at a weekly salary level of approximately $1,100) before the percentage of salaried white collar workers who earn less than the threshold but pass the duties test would equal the percentage who are overtime eligible but earn at least the salary threshold. While some commenters favored setting the salary level at this intersection point, the Department concludes that the resulting salary level would unduly impact low-wage regions and industries.

The Department has also looked at the impact of the new salary level on these two groups of workers in low-wage (East South Central) and high-wage (Pacific) Census divisions in addition to nationally.[147] For the East South Central Census division, the salary level at which the percentages of the two groups are about equal is approximately $995 per week, while in the Pacific Census division, the salary at which the percentages of the two groups are equal is approximately $1,217 per week. The Department's new salary level of the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($913 per week) falls below the estimate for the East South Central division. This further supports that the Department's change in the Final Rule to the lowest-wage Census Region establishes a salary level that is appropriate for classifying workers as entitled to minimum wage and overtime pay or potentially exempt in even the lowest wage areas.

3. Simplicity and Transparency

The method of basing the standard salary threshold on a particular percentile of weekly earnings of full-time salaried employees in the lowest-wage Census Region involves less estimation than previous updates, making it easier to implement, less prone to error, and more transparent than before. The method reduces computation by simplifying the classification of workers to just two criteria: wage or salaried, and full-time or part-time. Application of the Kantor long test method, in particular, would involve significant work to replicate since one would need to identify likely EAP exempt workers, a process which requires applying the standard duties test to determine the population of workers used in the earnings distribution. In addition, both the Kantor long test and 2004 methods exclude workers not subject to the FLSA, not subject to the salary level test, or in agriculture or transportation. The method adopted in this Final Rule is easier for stakeholders to replicate and understand because the standard duties test does not need to be applied to determine the population of workers used in the earnings distribution.

International Foodservice Distributors Association, IABI, and others criticized the Department for not restricting the CPS sample to workers subject to the part 541 regulations or subject to the salary level test. As explained in section IV.A.iv., the Department believes these white collar professionals are part of the universe of executive, administrative, and professional employees who Congress intended to exempt from the FLSA's minimum wage and overtime requirements and including them in the data set achieves a sample that is more representative of EAP salary levels throughout the economy.

4. Consistency and Predictability

A method that produces very different salary levels in consecutive years may reduce confidence that the salary levels in any given year are optimal. The growth rate using the Kantor long test method varies across years. The primary reason for this is because the Kantor long test method—or any other method that limits the data set to currently exempt workers—uses the value of the current salary level test to identify the population of workers from which the earnings distribution is determined. Therefore, the Kantor long test method limits the pool of workers in the sample used to set the salary level to those who meet the currently required salary level, while the 2004 method and the new method implemented in this Final Rule do not exclude workers with salaries below the current salary level. Since FY2004, the salary levels that would have been generated by the Kantor method increased by 3.6 percent on average annually.[148] Conversely, since FY2004, the 40th percentile of earnings of full-time salaried workers in the South has increased by an average of 2.4 percent annually. Similarly, the salary levels that would have been generated by the 2004 method (keeping low-wage sectors constant) increased 2.5 percent annually on average. This explains why the salary levels generated by the Kantor long test method and the 2004 method have diverged significantly since 2004 (in the third quarter of 2015, Kantor = $684; 2004 = $596).

For example, in 2003 the Kantor long test method's population of interest was limited to workers earning at least $155 per week (the 1975 long test salary level); in this Final Rule the Kantor long test method's population was restricted to workers earning at least $455 per week. Therefore the population considered in the Kantor long test method changes each time the salary level is changed. The Department's Final Rule, like the 2004 method, considers all full-time salaried workers and does not limit the pool to only those workers who meet the current salary level test, thus avoiding this potential shortcoming of the Kantor long test method.

iii. Standard Salary Levels With Alternative Methodologies

When assessing the standard salary level, the Department evaluated several alternatives in addition to the level chosen. This section presents the alternative salary levels considered and the bases for identifying those alternative levels. While commenters proposed other methods for calculating the salary level, the Department determined that these alternatives remained the best comparators for evaluating the chosen salary level methodology. As shown in Table 11, the alternative salary levels evaluated are:Start Printed Page 32467

  • Alternative 1: Inflate the 2004 weekly salary level to FY2015 dollars, which results in a salary level of $570 per week.
  • Alternative 2: Use the 2004 method to set the salary level at $596 per week.
  • Alternative 3: Use the Kantor long test level of $684 per week.
  • Alternative 4: Use the 40th earnings percentile of full-time salaried workers nationally. This was the methodology proposed in the NPRM. This results in a salary level of $972 per week.
  • Alternative 5: Adjust the salary level from the Kantor long test method to reflect the average historical ratio between the long and short test salary levels. This results in a salary level of $1,019 per week.
  • Alternative 6: Inflate the 1975 short duties test salary level, which is $1,100 in FY2015 dollars.

Table 11—Standard Salary Level and Alternatives, FY2017

AlternativeSalary level (weekly/annually)Total increase a
$%
Alt. #1: Inflate 2004 level b$570/$29,64011525.3
Alt. #2: 2004 method c596/31,01514131.1
Alt. #3: Kantor long test c684/35,56822950.3
Final Rule method (40th percentile of full-time salaried workers in lowest-wage Census Region)913/47,476458100.7
Alt. #4: 40th percentile of full-time salaried workers nationally972/50,544517113.6
Alt. #5: Kantor short test c1,019/52,984564123.9
Alt. #6: Inflate 1975 short test level b1,100/57,205645141.8
a Change between salary level or alternative and the salary level set in 2004 ($455 per week).
b Value in FY2015$. Inflated using CPI-U to FY2015$ (most recent data available).
c Data for 2015, quarter 3.

Alternative 1 inflates the 2004 standard salary level ($455) to FY2015 dollars using the CPI-U. This produces a salary level of $570 per week. As noted above, the 2004 method sets the standard salary level at approximately the 20th percentile of full-time salaried workers in the South and retail industry. Alternative 2 applies this methodology to more recent data (quarter 3 of 2015), resulting in a salary level of $596 per week. Alternative 3 produces the salary level using the Kantor method for the long duties test, resulting in a level of $684 per week. As we explain earlier in the preamble, the Department rejected the use of these alternatives because they pair a salary level appropriate for use with the long duties test with a duties test appropriate for use with the short test salary.

Alternative 4 sets the standard salary equal to the 40th percentile of weekly earnings of all full-time salaried workers nationally. This is the approach that the Department proposed in the NPRM. This alternative uses the same methodology as this Final Rule—setting the salary level at the 40th percentile of earnings—but uses a data set including full-time salaried workers nationwide instead of limiting the population to the lowest-wage Census Region. The 40th percentile of earnings of all full-time salaried workers nationally, in the fourth quarter of 2015, is $972. As discussed in more detail in section IV.A.iv., the Department declined to adopt this method in response to commenters' concerns that the proposed salary level could disproportionately impact workers in low-wage regions and industries by inappropriately excluding from exemption too many workers who meet the duties test.

Alternative 5 (Kantor short test) is also based on the Kantor method but, whereas alternative 3 generates the salary level associated with the long duties test, alternative 5 generates a level more closely resembling the salary associated with the short duties test, which the Department set as a function of the Kantor long test. In the 2004 Final Rule, the Department replaced the structure of separate short and long duties tests with a single standard duties test based on the less restrictive short duties test, which had historically been paired with a higher salary level test. However, the Department set the standard salary level in 2004 at a level that was equivalent to the Kantor long test salary level, which was associated with the long duties test and limited the amount of nonexempt work that the employee could perform. In alternative 5, the Department therefore considered revising the standard salary level to approximate the short test salary that better matches the standard duties test. On average, the salary levels set in 1949 through 1975 were 149 percent higher for the short test than the long test. Therefore, the Department inflated the Kantor estimate of $684 by 149 percent, which generated a short salary level equivalent of $1,019 per week.[149] While the Department used the average difference between the Kantor short and long tests for this alternative, the ratio of the short to long salary tests ranged from approximately 130 percent to 180 percent between 1949 and 2004. The low end of this range would result in a weekly salary of $889; the high end would result in a salary of $1,231. The Department rejected the use of the Kantor short test, as explained in this preamble, because we concluded that a standard salary level of $1,019 per week might exclude from exemption too many bona fide EAP workers in certain regions or industries.

Alternative 6 inflates the 1975 short duties test salary level to $1,100 per week in FY2015 dollars. Similar to alternative 5, the Department rejected the use of a short test salary level due to the concern that it might exclude from exemption too many bona fide EAP workers in certain regions or industries.

Section VI.D. details the transfers, costs, and benefits of the new salary level and the above alternatives. A comparison of the costs and benefits supports the Department's decision to set the standard salary level of the 40th percentile of weekly earnings of all full-time salaried workers in the South ($913 per week).

iv. Methodology for the HCE Total Annual Compensation Level and Alternative Methods

The Department sets the HCE compensation level equal to the annual equivalent of the 90th percentile of the Start Printed Page 32468distribution of earnings of all full-time salaried workers nationally. BLS calculated the salary level from the CPS MORG data by limiting the population to nonhourly workers who work full-time (i.e., at least 35 hours per week) and determining the 90th percentile of the resulting weighted weekly earnings distribution. The 90th percentile of weekly earnings in the fourth quarter of 2015 was $2,577. This was then multiplied by 52 to determine the annual earnings equivalent ($134,004). This method uses a percentile towards the top of the nationwide earnings distribution to reflect the minimal duties criteria associated with the highly compensated employee exemption.

The Department also evaluated the following alternative HCE compensation levels:

  • HCE alternative 1: Leave the HCE compensation level unchanged at $100,000 per year.
  • HCE alternative 2: Inflate the 2004 level using CPI-U to $125,320 per year in FY2015 dollars.
  • HCE alternative 3: Set the HCE compensation level at $149,894 per year, which is approximately the annualized level of weekly earnings exceeded by 6.3 percent of full-time salaried workers. This is the same percent of such workers that exceeded the HCE compensation level in 2004. See 69 FR 22169.

The Department continues to believe that HCE alternative 1 is inappropriate because leaving the HCE compensation level unchanged at $100,000 per year would ignore more than 10 years of wage growth. In FY2017, approximately 20 percent of full-time salaried workers are projected to earn at least $100,000 annually, more than three times the share who earned that amount in the 2004 Final Rule analysis. HCE alternative 2 uses the CPI-U to inflate the value set in 2004 instead of using the higher wage growth over that time period, and therefore the Department does not believe this alternative accurately reflects wage growth since 2004. Finally, HCE alternative 3 would set the annual compensation level at $149,894. The Department believes this compensation level would be too high to provide a meaningful alternative test for exemption. Thus, the Department concludes that adjusting the HCE total annual compensation to reflect the 90th percentile of earnings of full-time salaried workers nationwide ($134,004) strikes the appropriate balance.

D. Impacts of Revised Salary and Compensation Level Test Values

i. Overview and Summary of Quantified Impacts

The impacts of increasing the EAP salary and compensation levels will depend on how employers respond. Employer response is expected to vary by the characteristics of the affected EAP workers. For workers who usually work 40 hours a week or less, the Department assumes that employers will reclassify these affected EAP workers as overtime-eligible and will pay them the same weekly earnings for the same number of hours worked. While these employees will become overtime eligible, employers can continue to pay their current salaries and will not need to make any adjustments as long as the employees' hours do not exceed 40 hours in a workweek. For affected EAP employees who work overtime, employers may: (1) Pay the required overtime premium for the current number of overtime hours based upon the current implicit regular rate of pay; (2) reduce or eliminate overtime hours; (3) reduce the regular rate of pay so total weekly earnings and hours do not change after overtime is paid; (4) increase employees' salaries to the new salary level; or (5) use some combination of these responses. Transfers from employers to employees and between employees, direct employer costs, and DWL depend on how employers respond to the Final Rule.

In order to increase the sample size and the reliability and granularity of results in this analysis, the Department used three years (FY2013-FY2015) of CPS MORG data to represent the FY2015 labor market. Monetary values in FY2013 and FY2014 were inflated to FY2015 dollars and the sample was reweighted to reflect the population of potentially affected workers in FY2015. Afterwards, this pooled sample was adjusted to reflect the FY2017 economy by further inflating wages and sampling weights to match projections for FY2017. See section VI.B.ii.

Table 12 presents the projected impact on affected workers, costs, transfers, and DWL associated with increasing the standard EAP salary level from $455 per week to the 40th earnings percentile of full-time salaried workers in the South, $913 per week; increasing the HCE compensation level from $100,000 to the 90th earnings percentile of full-time salaried workers nationally, $134,004 annually; and updating both of these levels triennially. The Department estimated that the direct employer costs of this Final Rule will total $677.9 million in the first year, with average annualized direct costs of $295.1 million per year over 10 years. In addition to these direct costs, this Final Rule will also transfer income from employers to employees. Year 1 transfers will equal $1,285.2 million, with average annualized transfers estimated at $1,189.1 million per year over 10 years. Finally, the 10-year average annualized DWL was estimated to be $9.2 million. Potential employer costs due to reduced profits and additional hiring were not quantified but are discussed in section VI.D.iii. Benefits were also not quantified but are discussed in section VI.D.vii.

Table 12—Summary of Affected Workers and Regulatory Costs and Transfers, Standard and HCE Salary Levels

Impact aYear 1Future years bAverage annualized value
Year 2Year 103% real rate7% real rate
Affected Workers (1000s)
Standard4,1633,8935,045
HCE6573217
Total4,2283,9655,261
Direct Employer Costs (Millions FY2017$)
Regulatory familiarization c$272.5$0.0$23.1$37.6$42.4
Adjustment d191.41.55.925.429.0
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Managerial214.0206.6255.1225.0223.6
Total direct costs e677.9208.0284.2288.0295.1
Transfers from Employers to Workers (Millions FY2017)f
Due to minimum wage$34.3$28.5$17.8$23.2$23.8
Due to overtime pay1,250.8907.91,589.41,178.51,165.3
Total transfers e1,285.2936.51,607.21,201.61,189.1
DWL (Millions FY2017)g
DWL6.48.711.19.39.2
a Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the text.
b These costs/transfers represent a range over the nine-year span.
c Regulatory familiarization costs occur only in years when the salary levels are updated (Years 1, 4, 7, and 10).
d Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs may occur in years without updated salary levels because some workers' projected earnings are estimated using negative earnings growth.
e Components may not add to total due to rounding.
f This is the net transfer that we primarily describe as being from employers to workers. There may also be transfers between workers. Moreover, some of these transfers may be intrapersonal (for instance, higher earnings may be offset by increased hours worked for employees who remain overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees).
g DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.

ii. Affected EAP Workers

1. Overview

Costs, transfer payments, DWL, and benefits of this Final Rule depend on the number of affected EAP workers and labor market adjustments made by employers. The Department estimated there were 22.5 million potentially affected EAP workers: that is, EAP workers who either (1) passed the salary basis test, the standard salary level test, and the standard duties test, or (2) passed the salary basis test, passed the standard salary level test, the HCE total compensation level test, and the HCE duties test. This number excludes workers in named occupations who are not subject to the salary tests or who qualify for another (non-EAP) exemption.

The Department estimated that increasing the standard salary level from $455 per week to the 40th earnings percentile of all full-time salaried workers in the lowest-wage Census Region (South, $913 per week) would affect 4.2 million workers (i.e., the number of potentially affected workers who earn at least $455 per week but less than $913 per week). These affected workers compose 18.5 percent of potentially affected EAP workers. The Department also estimated that 65,000 workers would be affected by an increase in the HCE compensation level from $100,000 to the annual earnings equivalent of the 90th percentile of full-time workers nationally (the number of potentially affected workers who earn at least $100,000 but less than $134,004 annually and pass the minimal duties test but not the standard duties test, about 0.3 percent of the pool of potentially affected EAP workers). By Year 10 the total number of affected workers is predicted to increase to 5.3 million.

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Table 13 presents the number of affected EAP workers, the mean number of overtime hours they work per week, and their average weekly earnings. The 4.2 million workers affected by the increase in the standard salary level average 1.4 hours of overtime per week and earn an average of $734 per week. The average number of overtime hours is low because most of these workers (3.3 million) do not usually work overtime.[150] However, the estimated 825,000 affected workers who regularly work overtime average 11.1 hours of overtime per week. The 65,000 EAP workers affected by the change in the HCE annual compensation level average 5.5 hours of overtime per week and earn an average of $2,181 per week ($113,389 per year).

Although most affected EAP workers who typically do not work overtime might experience little or no change in their daily work routine, those who regularly work overtime may experience significant changes. The Department expects that workers who routinely work some overtime or who earn less than the minimum wage are most likely to be tangibly impacted by the revised standard salary level.[151] Employers might respond by: Reclassifying such employees to nonexempt status (either paying at least the hourly minimum wage and a premium for any overtime hours, or its salary equivalent with half-time paid for any overtime hours); reducing workers' regular wage rates (provided that the reduced rates still exceed the minimum wage); increasing the employees' salary to the salary level; reducing or eliminating overtime hours; or using some combination of these responses.

Table 13—Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, FY2017

Type of affected EAP workerAffected EAP workers aMean overtime hoursMean usual weekly earnings
Number (1,000s)% of total
Standard Salary Level
All affected EAP workers4,1631001.4$734
Earn less than the minimum wage b110.329.3551
Regularly work overtime82519.811.1744
CPS occasionally work overtime c1503.68.5727
HCE Compensation Level
All affected EAP workers651005.5$2,181
Earn less than the minimum wage b
Regularly work overtime3045.812.32,153
CPS occasionally work overtime c34.28.52,309
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
b The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE workers will not be impacted by the minimum wage provision. These workers all regularly work overtime and are also included in that row.
c Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These workers are identified later when we define Type 2 workers.
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The Department considered two types of overtime workers in this analysis: regular overtime workers and occasional overtime workers.[152] Regular overtime workers typically worked more than 40 hours per week. Occasional overtime workers typically worked 40 hours or less per week, but they worked more than 40 hours in the week they were surveyed. The Department considers these two populations separately in the analysis because labor market responses to overtime pay requirements may differ for these two types of workers.

In a representative week, an estimated 152,000 occasional overtime workers will be affected by either the standard salary level or the HCE total annual compensation level increase (3.6 percent of all affected EAP workers; this number does not match Table 13 due to rounding). They averaged 8.5 hours of overtime in weeks when they work at least some overtime. This group represents the number of workers with occasional overtime hours in the week the CPS MORG survey was conducted. In other weeks, these specific individuals may not work overtime but other workers, who did not work overtime in the survey week, may work overtime. Because the survey week is a representative week, the Department believes the prevalence of occasional overtime in the survey week, and the characteristics of these workers, is representative of other weeks (even though a different group of workers would be identified as occasional overtime workers in a different week).[153]

2. Characteristics of Affected EAP Workers

In this section the Department examines the characteristics of affected EAP workers. Table 14 presents the distribution of affected workers across industries and occupations. The industry with the most affected EAP workers was education and health services (956,000 affected workers). Other industries where a large number of workers are expected to be affected are professional and business services (704,000), financial activities (571,000), and wholesale and retail trade (562,000). The industries with the largest share of potentially affected workers who are affected are “other services” (30 percent) and leisure and hospitality (30 percent). Impacts by industry are considered in section VI.D.v.

The management, business, and financial occupation category accounted for the most affected EAP workers by occupation (1.8 million). A large number of workers are expected to be affected in the professional and related occupations category (1.4 million). The occupations with the largest share of potentially affected workers who are expected to be affected are farming, fishing, and forestry (63 percent),[154] office and administrative support (39 percent), and services (37 percent).

Some commenters expressed concern about the impacts of the rule on non-profits organizations. The Department found that workers in non-profits are somewhat more likely to be affected by the rulemaking; 25 percent of potentially affected workers in private non-profits are affected compared to 18 percent in private for-profit firms.

Table 14—Estimated Number of Exempt Workers With the Current and Updated Salary Levels, by Industry and Occupation, FY2017

Industry/occupation/non-profitWorkers subject to FLSA (millions)Potentially affected EAP workers (millions) aNot-affected (millions) bAffected (millions) cAffected as share of potentially affected (percent)
Total132.7522.5118.294.2319
By Industry
Agriculture, forestry, fishing, & hunting1.120.030.030.0116
Mining1.040.230.210.0210
Construction7.410.800.670.1316
Manufacturing14.823.262.890.3611
Wholesale & retail trade19.032.461.900.5623
Transportation & utilities6.950.790.650.1317
Information2.860.950.780.1718
Financial activities9.213.432.860.5717
Professional & business services14.224.643.940.7015
Education & health services32.953.732.770.9626
Leisure & hospitality12.580.780.540.2330
Other services5.360.580.400.1830
Public administration5.190.850.650.2024
By Occupation
Management, business, & financial19.1811.369.521.8416
Professional & related30.307.666.311.3518
Services23.610.200.130.0837
Sales and related13.722.161.600.5626
Office & administrative support17.820.940.570.3739
Farming, fishing, & forestry0.840.000.000.0063
Construction & extraction6.160.030.020.0121
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Installation, maintenance, & repair4.630.040.030.0115
Production8.310.080.070.0117
Transportation & material moving8.200.030.020.0124
By Non-Profit and Government Status
Non-profit, private d9.121.811.350.4625
For profit, private105.0818.8015.493.3118
Government (state, local, and federal)18.551.911.450.4624
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers' weekly earnings do not increase to the new salary level).
c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
d As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Although not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

Table 15 presents the distribution of affected workers based on Census Regions and divisions, and MSA status. The region with the most affected workers is the South (1.7 million). However, as a share of potentially affected workers in the region, the South is not unduly affected relative to other regions (22 percent are affected compared with 16 to 19 percent in other regions). Impacts by region are considered in section VI.D.v. Although the vast majority of affected EAP workers resided in MSAs (3.8 of 4.2 million, or 89 percent), this largely reflects the fact that 86.7 percent of all workers reside in metropolitan areas.[155]

Employers in low-wage industries, regions, and non-metropolitan areas may perceive a greater impact due to the lower wages and salaries typically paid in those areas and industries. The Department believes the salary level adopted in this Final Rule (which we have adjusted downward from the amount proposed in the NPRM to account for these low-wage areas) is appropriate. In addition, the vast majority of potentially affected workers reside in metropolitan areas and do not work in low-wage industries, and workers in low-wage regions are not unduly affected relative to other regions.

Table 15—Estimated Number of Potentially Affected EAP Workers With the Current and Updated Salary Levels, by Region, Division, and MSA Status, FY2017

Region/division/metropolitan statusWorkers subject to FLSA (millions)Potentially affected EAP workers (millions) aNot-affected (millions) bAffected (millions) cAffected as share of potentially affected (percent)
Total132.7522.5118.294.2319
By Region/Division
Northeast24.774.804.020.7916
New England6.691.361.170.1914
Middle Atlantic18.083.442.840.5917
Midwest29.534.733.840.8819
East North Central19.973.172.580.5818
West North Central9.561.561.260.3019
South48.217.846.101.7422
South Atlantic25.024.473.510.9521
East South Central7.230.940.690.2527
West South Central15.962.441.900.5322
West30.255.154.320.8216
Mountain9.481.511.220.2919
Pacific20.763.643.100.5315
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By Metropolitan Status
Metropolitan114.5620.8217.073.7518
Non-metropolitan17.241.591.140.4528
Not identified0.960.100.080.0325
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers' weekly earnings do not increase to the new salary level).
c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).

iii. Costs

1. Summary

Three direct costs to employers were quantified in this analysis: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Regulatory familiarization costs are costs to learn about the change in the regulation, occurring primarily in Year 1 and to a lesser extent in future years when the salary and compensation levels are automatically updated (e.g., Years 4, 7, 10). Adjustment costs are costs incurred by firms to determine workers' exemption statuses, notify employees of policy changes, and update payroll systems. Managerial costs occur because employers may spend more time scheduling newly nonexempt employees and more closely monitor their hours to minimize or avoid paying the overtime premium.

The Department estimated costs for Year 1 assuming that the first year of the analysis will be FY2017. The Department estimated that Year 1 regulatory familiarization costs will equal $272.5 million, Year 1 adjustment costs will sum to $191.4 million, and Year 1 managerial costs will total $214.0 million (Table 16). Total direct employer costs in Year 1 are estimated to equal $677.9 million. Regulatory familiarization costs, adjustment costs and management costs are recurring and thus are projected for years 2 through 10 (section VI.D.x.).

Many commenters, including PPWO, NRF, and the National Grocers Association, stated that the NPRM underestimated the costs of complying with the rulemaking. The Assisted Living Federation of America, Associated Builders and Contractors, and the College and University Professional Association for Human Resources (CUPA-HR) stated that 80 to 90 percent of respondents to their member surveys indicated that the Department's costs estimates were understated. Throughout this analysis, the Department addresses comments relating to regulatory familiarization costs, adjustment costs, and managerial costs in turn. We also discuss costs that are not quantified and comments asserting that the regulation will result in additional unquantified costs in section VI.D.iii. Regulatory familiarization costs, adjustment costs and managerial costs associated with automatically updating the standard salary level are discussed in section VI.D.x.

Table 16—Summary of Year 1 Direct Employer Costs

[Millions]

Direct employer costsStandard salary levelHCE Compensation levelTotal
Regulatory familiarization a$272.5
Adjustment$188.5$2.9191.4
Managerial208.65.5214.0
Total direct costs397.08.4677.9
a Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the HCE compensation level.

2. Regulatory Familiarization Costs

Changing the standard salary and HCE total compensation thresholds will impose direct costs on businesses by requiring them to review the regulation. It is not clear whether regulatory familiarization costs are a function of the number of establishments or the number of firms. The Department believes that generally the headquarters of a firm will conduct the regulatory review for the entire company; however, some firms provide more autonomy to their establishments, and in such cases regulatory familiarization may occur at the establishment level. To be conservative, the Department uses the number of establishments in its cost estimate assuming that regulatory familiarization occurs at a decentralized level.

The Department believes that all establishments will incur some regulatory familiarization costs, even if they do not employ exempt workers, because all establishments will need to confirm whether this Final Rule includes any provisions that may impact their workers. Firms with more affected EAP workers will likely spend more time reviewing the regulation than firms with fewer or no affected EAP workers (since a careful reading of the regulations will probably follow the initial decision that the firm is affected). However, the Department does not Start Printed Page 32474know the distribution of affected EAP workers across firms and so an average cost per establishment is used.

In the NPRM, the Department requested that commenters provide data if possible on the costs of regulatory familiarization, and a few commenters provided estimates based on personal judgments or responses by members. While the information provided may reflect the experiences of individual commenters, the information does not provide a basis for the Department to revise its estimate of time required for regulatory familiarization. The Department continues to believe that our estimate of one hour per establishment in the NPRM is a reasonable average that accounts for some businesses requiring more time while other businesses require less time.

To estimate the total regulatory familiarization costs, three pieces of information must be estimated: (1) A wage level for the employees reviewing the rule; (2) the number of hours employees spend reviewing the rule; and (3) the number of establishments employing workers. The Department's analysis assumes that mid-level human resource workers with a median wage of $24.86 per hour will review the Final Rule.[156] Assuming benefits are paid at a rate of 46 percent of the base wage and one hour of time is required for regulatory familiarization, the average cost per establishment is $36.22.[157] The number of establishments with paid employees was 7.52 million.[158] Regulatory familiarization costs in Year 1 were estimated to be $272.5 million ($36.22 per hour × 1 hour × 7.52 million establishments).[159] Regulatory familiarization costs in future years are discussed in section VI.D.x.

Wage Rate

The Department estimated in the NPRM that one hour of regulatory familiarization time costs $34.19 based on the wage for a mid-level human resources worker adjusted to include benefits. We follow the same approach in this RIA; however, due to growth in wages, the wage rate used in the Final Rule is $36.22. The Chamber asserted that time spent on regulatory familiarization will generally be conducted by a manager with a base wage better approximated at $60 per hour, multiplied by a mark-up of 3.3 to cover indirect overhead and support.[160] The National Association of Landscape Professionals (NALP) commented that 92 percent of the members it surveyed believe the wage rate should be “be more like $51.00 to $68.00 per hour.” [161] The Department believes that we have utilized an appropriate wage rate; we similarly used wage rates for human resources specialists in the 2004 Final Rule (using a low to high range of such rates, depending upon employer size, rather than a single mid-level wage rate as we do currently). 69 FR 22222-24. Although higher paid managers may be briefed on the rule, we expect in general that mid-level human resource specialists will be the individuals primarily responsible for becoming familiar with the new rule. Moreover, this wage estimate is an average across all firms, some of which will pay higher rates and others lower rates.

Time Requirement

In the NPRM, the Department estimated each establishment will, on average, spend one hour on regulatory familiarization. Firms with more affected EAP workers will likely spend more time reviewing the regulation than firms with fewer or no affected EAP workers. No data were identified from which to estimate in the NPRM the amount of time required to review the regulation, and the Department requested that commenters provide data if possible. The Department did not receive any reliable data from commenters, although some commenters suggested different amounts of time based on their personal judgment or surveys they conducted. The American Hotel and Lodging Association (AH&LA), the National Roofing Contractors Association, NRF and others commented that regulatory familiarization will take longer than one hour, with some stating that several individuals in each of their establishments will need to read and familiarize themselves with the new rule. AH&LA estimated it will take at least four hours per establishment to become familiar with the Final Rule. The Chamber commented that an average of 6 hours of time is appropriate because: “For the very smallest establishments a familiarization time of one to two hours may be possible, but for larger establishments the number of labor hours may amount to hundreds or more.”

The Department believes these commenters significantly overestimate the time necessary for regulatory familiarization. The EAP exemptions have been in existence in one form or another since 1938, and were updated as recently as 2004. While the 2004 rulemaking promulgated a host of changes, including revisions to the duties test, the most significant change promulgated in this rulemaking is setting a new standard salary level for exempt workers, and updating that salary level every three years. The Department believes that, on average, one hour is sufficient to time to read about and understand, for example, the change in the standard salary level from $455 to $913 per week, and we note that the regulatory text changes comprise only a few pages.Start Printed Page 32475

Recurrence

The Chamber criticized the Department for failing to estimate regulatory familiarization costs occurring after the first year, commenting that regulatory familiarization costs would repeat with each automatic update to the salary level. Upon further consideration, the Department agrees there will be some regulatory familiarization costs in future years when the salary level is updated (e.g., 2020, 2023, 2026). However, because subsequent updates will use the same method adopted in this Final Rule, and this rule informs stakeholders that the salary and compensation levels will be updated every three years, there is little additional regulatory change with which employers will have to familiarize themselves. Accordingly, the Department has added 5 minutes per establishment of regulatory familiarization time to access and read the published salary levels in future years when the salary and compensation levels are automatically updated (see projected costs in section VI.D.x.).

3. Adjustment Costs

Changes in the standard salary and HCE compensation levels will impose direct costs on firms by requiring them to re-determine the exemption status of employees, update and adapt overtime policies, notify employees of policy changes, and adjust their payroll systems. The Department believes the size of these costs will depend on the number of affected EAP workers and will occur in any year when exemption status is changed for any workers. To estimate adjustment costs three pieces of information must be estimated: (1) A wage level for the employees making the adjustments; (2) the amount of time spent making the adjustments; and (3) the estimated number of newly affected EAP workers. The Department again estimated that the average wage with benefits for human resources, training, and labor relations specialists is $36.22 per hour (as explained above). No applicable data were identified from which to estimate the amount of time required to make these adjustments.[162] However, in response to comments claiming that the Department underestimated the adjustment time, for this Final Rule, the Department increased the time from one hour to 75 minutes per affected worker. The estimated number of affected EAP workers in Year 1 is 4.2 million (as discussed in section VI.D.ii.). Therefore, total Year 1 adjustment costs were estimated to equal $191.4 million ($36.22 × 1.25 hours × 4.2 million workers).

Adjustment costs may be partially offset by a reduction in the cost to employers of determining employees' exempt status. Currently, to determine whether an employee is exempt firms must apply the duties test to salaried workers who earn at least $455 per week. Following this rulemaking, firms will no longer be required to apply the potentially time-consuming duties test to employees earning less than the updated salary level. This will be a clear cost savings to employers for employees who do not pass the duties test and earn at least $455 per week but less than the updated salary level. The Department did not estimate the potential size of this cost savings.

Wage Rate

The Chamber commented that a more appropriate wage rate would be $200 per hour, based on a manager's wage of around $60 per hour, multiplied by a mark-up (or loaded) rate of 3.3 to cover indirect overhead and support. The Department believes its use of the occupation of “human resources, training, and labor relations specialists” and corresponding wage rate appropriately reflects the occupational classification and wage rate on average for the individuals who will re-determine the exemption status of employees, update and adapt overtime policies, notify employees of policy changes, and adjust their payroll systems. The Department recognizes that in some businesses, more senior staff will conduct at least portions of this work, while in other businesses, more junior staff may perform at least a portion of this work. Therefore, the Department continues to rely on its use of the “human resources, training, and labor relations specialists” and corresponding wage rate to reflect the average costs to businesses impacted by this Final Rule. The Department also disagrees with the mark-up rate suggested by the Chamber, because an additional 75 minutes of time will have little-to-no effect on the cost of overhead and support services. No other commenters provided alternative wage rates.

Time Requirement

To estimate adjustment costs, the Department assumed in the NPRM that each establishment will, on average, spend one hour of time per affected worker to make adjustments required because of this rulemaking. 80 FR 38566. The Department requested that commenters provide any applicable data concerning this issue, but no applicable data were identified from which to estimate the amount of time required to make these adjustments. The Department believes that commenters that did address adjustment costs significantly overestimated the time necessary for making appropriate workplace adjustments. However, the Department agrees that some increase is warranted, and thus increased the estimated average adjustment time to 75 minutes per affected worker.

Based on feedback from their members, AH&LA and Island Hospitality Management estimated that employers will need approximately four to seven hours per affected employee. The National Council of Chain Restaurants (NCCR) stated that “[e]mployers have told NCCR that the approximate time needed to make such adjustments will be 3-4 hours per employee,” and NRF reported that its members “estimate it would take at least three to four hours per affected employee to make applicable adjustments.” The American Insurance Association and the Property Casualty Insurers Association of America (AIA-PCI) asserted that adjustments will require more time than the Department estimated because employers will not make adjustments in response to the rule “in a vacuum; legal, HR, and operations all will need to be involved to assess risk, determine value, and ultimately decide whether a position, or classification, or part of a classification should be reclassified to non-exempt as a result of the Department's salary level increase.” New Castle Hotels & Resorts similarly stated that a “hotel's GM and HR as well as the Department Head and the effected manager would all need to be involved together with payroll.” AIA-PCI also asserted that in many cases, information technology systems “cannot be configured to accommodate exempt and non-exempt employees in the same job classification,” and thus additional time will be required to reconfigure these systems.

A report by Oxford Economics, submitted by NRF and referenced by other commenters, estimated the “transitional costs” associated with this rule.[163] The tasks covered by Oxford Start Printed Page 32476Economics' transition cost measure include: “identifying which employees ought to have salaries adjusted and then making and communicating that adjustment”; “converting a salaried employee to an hourly rate and then adding that employee to the time tracking system (already in use for existing hourly employees)”; disruptions to normal business operations; time for “HR personnel [to] communicate and implement the change”; time for additional IT support for time-tracking system; costs associated with the added complexity of managing and scheduling people's time; and costs associated with “establishing an hourly rate (lower than existing base salary) that is calculated so that overall compensation (including new overtime payments) will leave current total compensation unchanged.” These costs appear to be roughly comparable to the Department's adjustment cost category, although with some inclusion of costs the Department categorized as managerial costs. However, Oxford Economics also included costs associated with converting newly nonexempt workers from salaried to hourly status, which the Department recognizes is a choice some employers may make in responding to this rule, but is not a requirement of the regulation. Oxford Economics estimated Year 1 transactional costs of $648 million in the retail and restaurant industry if the salary level were set at $808 per week, and $874 million if the salary level were set at $984 per week. These costs for the retail and restaurant industry alone are roughly 4 to 5.5 times larger than our NPRM estimate for all industries ($160.1 million based on a $921 salary level in Year 1). The Department has evaluated Oxford Economics' analysis and determined that this discrepancy is due in part to Oxford Economics' estimation of the time requirement for adjustment.[164]

Oxford Economics assumed that adjustment costs for Type 1 workers (those who do not work overtime) are zero, and that each worker who receives a pay increase to the new salary level in order to remain exempt (Oxford Economics' equivalent to Type 4 workers) requires 1/1000th of a human resource employee full time equivalent; this equates to approximately 2.1 hours of time per affected worker (i.e., 2,080 FTE hours/1,000).[165] These per worker cost estimates are comparable to the Department's cost estimates. However, for employees reclassified as nonexempt as a result of the rulemaking, Oxford Economics appears to estimate that transitioning these workers will require 34.7 hours per worker for “group 2” workers and 10.4 hours per worker for “group 3” workers.[166] These workers appear to be very roughly comparable to the Department's Type 2 and 3 workers, but with much more extreme assumptions concerning how employers will respond (e.g., all overtime hours will be eliminated instead of reduced as the Department expects). Oxford Economics defines “group 2” workers as those who “will have their hourly wage rate set in such a way that their total compensation remains unchanged,” and “group 3” workers as those who will “see their hours cut to 38 per week, with their salary cut proportionally.”

The Department believes Oxford Economics' estimates of the time requirement for adjusting Type 2 and 3 (Oxford Economics' “group 2” and “group 3”) workers are too high. It is unreasonable to expect, for example, that it will take a human resource worker 34.7 hours (almost an entire workweek) to reclassify each Type 2 worker as nonexempt, and possibly adjust his or her implicit hourly wage rate so the total compensation remains unchanged. As we stated above, in this Final Rule, the Department estimates an average of 75 minutes of adjustment time per affected worker. However, employers will need to exert minimal effort to determine the change in status of perhaps 60 percent of affected workers (e.g., the majority of affected workers who work no overtime). Thus, we assume that the average of 75 minutes per worker is concentrated on the subset of employees requiring more analysis to make a decision. If, for example, we allocate 0.5 hours per Type 1 worker and 50 percent of Type 2 workers (i.e., workers whose hours and base wage rates do not change), then that still leaves 3.0 hours per worker for the remaining 50 percent of Type 2 workers, and all Type 3 and Type 4 workers. Finally, larger firms are likely to experience economies of scale in evaluating affected workers; a decision on how to treat a worker with specific characteristics (e.g., earnings, hours, duties) is likely to be applicable to multiple workers.

With respect to the concern raised by AIA-PCI about reconfiguring information technology systems to include both exempt and overtime-protected workers, the Department notes that most organizations affected by the rule already employ overtime-eligible workers and have in place payroll systems and personnel practices (e.g., requiring advance authorization for overtime hours) so that additional costs associated with the rule should be relatively small in the short run.[167]

Recurrence

The Chamber also expressed concern the Department underestimated projected adjustment costs associated with automatic updating, stating that employers would incur significant adjustment costs in years the salary is automatically updated, even if subsequent salary level changes affect fewer workers than the initial increase (to $913). Similarly, PPWO stated that the Department's cost projections did not account for the fact that “compliance review activities that take place in Year 1 will be repeated on an annual basis, for different groups of employees that fall below the new salary minimum.” See also North Dakota Bankers Association (the Department should recognize that future salary updates require time to determine whether an employee should be classified as exempt or nonexempt, not just time to reprogram the payroll). Contrary to these comments, the Department's estimated adjustment costs include costs in all years for newly affected workers. The Department limits adjustment costs in projected years to newly affected workers because there is Start Printed Page 32477no need to “adjust” for workers who are already overtime eligible (due to a prior adjustment of the EAP salary level) when the salary level is updated again.

4. Managerial Costs

If employers reclassify employees as overtime eligible due to the changes in the salary levels, then firms may incur ongoing managerial costs associated with this Final Rule because the employer may schedule and more closely monitor an employee's hours to minimize or avoid working overtime-eligible employees more than 40 hours in a week. For example, the manager of a reclassified worker may have to assess whether the marginal benefit of scheduling the worker for more than 40 hours exceeds the marginal cost of paying the overtime premium. Additionally, the manager may have to spend more time monitoring the employee's work and productivity since the marginal cost of employing the worker per hour has increased. Unlike regulatory familiarization and adjustment costs, which occur primarily in Year 1 and to a much lesser extent in years when the salary is automatically updated, managerial costs are incurred more uniformly every year.

Because there was little precedent or data to aid in evaluating these costs, the Department examined several sources to estimate costs. First, prior part 541 rulemakings were reviewed to determine whether managerial costs were estimated. No estimates were found. This cost was not quantified for the 2004 rulemaking. Second, a literature review was conducted in an effort to identify information to help guide the cost estimates; again, no estimates were found. The Department also requested data from the public applicable to this cost estimate; however, as discussed below, the Department received no time estimates that seemed more appropriate than the estimates used in the NPRM.

Based on commenters' concerns, discussed below, that managerial costs are applicable to more workers than were included in the NPRM, the Department expanded the number of workers for whom employers experience additional managerial costs (section VI.D.iv.) As in the NPRM, managerial costs are applied to workers who are reclassified as overtime-protected and who either regularly work overtime or occasionally work overtime but on a regular basis. For the Final Rule, however, the Department expanded its count of the number of workers who occasionally work regular overtime (defined later as half of Type 2 workers) by assuming that some Type 1 workers (who report that they do not work overtime) will actually work overtime during some week of the year. Therefore, the number of workers for whom we apply managerial costs increased from 808,000 using the NPRM methodology to 1.2 million using the Final Rule methodology.

To provide a sense of the potential magnitude of these costs, the Department estimated these costs assuming that management spends an additional five minutes per week scheduling and monitoring each affected worker expected to be reclassified as overtime eligible as a result of this rule, and whose hours are adjusted (1.2 million affected EAP workers as calculated in section VI.D.iv.). As will be discussed in detail below, most affected workers do not currently work overtime, and there is no reason to expect their hours worked to change when their status changes from exempt to nonexempt. Similarly, employers are likely to find that it is less costly to give some workers a raise in order to maintain their exempt status. For both these groups of workers, management will have little or no need to increase their monitoring of hours worked. Under these assumptions, the additional managerial hours worked per week were estimated to be 97,300 hours ((5 minutes/60 minutes) × 1.2 million workers).

The median hourly wage in FY2017 for a manager is estimated to be $29.04 and benefits are estimated to be paid at a rate of 46 percent of the base wage, which totals $42.31 per hour.[168 169] Multiplying the additional 97,300 weekly managerial hours by the hourly wage of $42.31 and 52 weeks per year, the Year 1 managerial costs were estimated to total $208.6 million due to this rule. Although the exact magnitude would vary with the number of affected EAP workers each year, managerial costs would be incurred annually.

Additional Investment

Some commenters, such as the National Grocers Association and the National Association of Area Agencies on Aging asserted that managerial costs will be higher than the Department estimated because some employers may need to purchase new systems or hire additional personnel to monitor hours. However, the Department believes that most companies already manage a mix of exempt and nonexempt employees, and already have policies and recordkeeping systems in place for nonexempt employees. Thus, they are unlikely to need to purchase systems or hire additional monitoring personnel as a result of this rulemaking. Moreover, no particular form or order of records is required and employers may choose whatever form of recordkeeping works best for their business and their employees. For example, where an employee works a fixed schedule that rarely varies, the employer may simply keep a record of the schedule and indicate the number of hours the worker actually worked only when the worker varies from the schedule (“exceptions reporting”). 29 CFR 516.2(c). Because simple recordkeeping systems, such as exceptions reporting systems for workers on a fixed schedule, are permissible, costs may be minimal.

Time Requirement

Several commenters asserted that scheduling and monitoring newly overtime eligible workers will require more time than the Department assumes. One human resource manager commented that the time required will “be closer to 15 minutes than 5,” and AH&LA stated that its members believe these costs “will be closer to 25 minutes to an hour a week.” NCCR stated that it received feedback from employers in the restaurant industry who estimated that managerial costs will range from one to three hours per week. NRF similarly states that its members estimated that managerial costs would range from one to three hours per week.

The Department believes these commenters' estimates are excessive. For example, 75 percent of currently exempt employees who work overtime average less than 10 hours of overtime per week. Assuming a newly nonexempt employee averages 10 hours of overtime per week, then based on NCCR's estimate, a manager would spend from 6 minutes to 18 minutes monitoring for each hour of overtime worked by that employee. The Department believes this estimate is unrealistically high. We also note that commenters did not submit any data supporting their 15 minute and 25 minute estimates. Furthermore, we recognize that employers routinely apply efficiencies in their operations, and see no reason why they will not do so with regard to scheduling as well.

Wage Rate

The Chamber recommended that the Department use the mean wage rather than the median to calculate hourly managerial costs, and also asserted that Start Printed Page 32478the wage should include all loaded overhead cost. However, the mean and median wages for managers are very similar in the CPS data ($32.71 versus $29.04, respectively), so using the mean wage will not result in substantially different estimated costs. Furthermore, if the distribution of wages is skewed (as demonstrated here by a mean wage larger than the median wage), the median value is more representative of the wage most firms will pay. The Department does not believe it is appropriate to use all overhead costs in estimating a marginal cost increase because the relevant cost is the marginal value of the cost of labor, which is much smaller than the loaded overhead cost. Most overhead costs are largely fixed and unaffected if an employee works an incremental hour. For example, accounting and administrative staff are unlikely to work more time; building rent, heat and electricity are unlikely to change if a supervisor or human resource staff person works an incremental hour. However, acknowledging that there might be some overhead costs, we include a sensitivity analysis providing an upper bound cost estimate.[170]

Number of Affected Workers

The Chamber also asserted that managerial costs should apply to all affected workers whose status changes, not just those who regularly work overtime, because “even those who usually work only 40 hours will require additional management schedule monitoring to ensure that their hours do not go higher.” The Department believes that although some companies may closely monitor hours for workers who usually do not work overtime, many companies do not. Many companies simply prohibit overtime without express approval and/or assign workers to a set weekly schedule of hours; in such firms monitoring costs for these newly nonexempt workers who usually do not work overtime should be negligible. Furthermore, without additional information, it is impossible to determine the prevalence of the more strenuous form of managerial oversight described by the Chamber. However, we did increase the number of workers for whom managerial costs are estimated to include more occasional overtime workers, as discussed above.

5. Other Potential Costs

In addition to the costs discussed above, there may be additional costs that have not been quantified. In the NPRM we identified these potential costs to include reduced profits and hiring costs. See 80 FR 38578-80. Commenters addressed a variety of other potential costs.

Reduced Scheduling Flexibility

Some commenters, such as the ASAE, Thombert, Inc., Applied Measurement Professionals; and Alaska USA Federal Credit Union, asserted that exempt workers enjoy more scheduling flexibility claiming that their hours generally are not monitored, and thus this rulemaking will impose costs on newly overtime-eligible workers by (for example) limiting their ability to adjust their schedule to meet personal and family obligations. Other commenters suggested that the rulemaking would impose costs on employers because they will lose flexibility to schedule employees. For example, TRANSITIONS for the Developmentally Disabled commented that “[h]aving managers that can work those urgencies and emergencies, then giving them time off later to make up for those extra hours, helps our managers manage the business without us paying expensive overtime or having someone without managerial skills deal with those situations” (emphasis in comment).

The Final Rule does not necessitate that employers reduce scheduling flexibility. Employers can continue to offer flexible schedules and require workers to monitor their own hours and to follow the employers' timekeeping rules. Additionally, some exempt workers already monitor their hours for billing purposes. For these reasons, and because there is little data or literature on these costs, the Department does not quantify potential costs regarding scheduling flexibility to either employees or employers. Moreover, the limited literature available suggests that if there is a reduction in flexibility for employees, it would not be as large as commenters suggested. A study by Lonnie Golden,[171] referenced by the National Employment Law Project (NELP), found using data from the General Social Survey (GSS) that “[i]n general, salaried workers at the lower (less than $50,000) income levels don't have noticeably greater levels of work flexibility that they would `lose' if they became more like their hourly counterparts.”

Reclassification to Overtime Eligible Status

Some commenters asserted that the rulemaking will negatively affect the morale of employees reclassified as overtime eligible.[172] For example, WorldatWork stated that 79 percent of survey respondents said the proposed rule would have a negative effect on the reclassified employees' morale, as exemption classification is a perceived measure of status desired by employees, and Kimball Midwest similarly commented that “many of the young professionals that we employ would view being reclassified to nonexempt as a demotion and an insult to their professional and social status in the workplace.” The Department believes that for most employees their feelings of importance and worth come not from their FLSA exemption status, but from the increased pay, flexibility, fringe benefits, and job responsibilities that traditionally have accompanied exempt status, and that these factors are not incompatible with overtime eligibility.

However, if the worker does prefer to be salaried rather than hourly, then this change may impact the worker. The likelihood of this impact occurring depends on the costs to employers and benefits to employees of being salaried. Research has shown that salaried workers (who are not synonymous with exempt workers, but whose status is correlated with exempt status) are more likely than hourly workers to receive benefits such as paid vacation time and health insurance,[173] are more satisfied with their benefits,[174] and that when employer demand for labor decreases, Start Printed Page 32479hourly workers tend to see their hours cut before salaried workers, making earnings for hourly workers less predictable.[175] However, this literature generally does not control for differences between salaried and hourly workers such as education, job title, or earnings; therefore, this correlation is not necessarily attributable to hourly status.

Some evidence suggests that it is more costly for the employer to employ a salaried worker than an hourly worker. If true, employers may choose to accompany the change in exemption status with a change to the employee's method of pay, from salary to an hourly basis, since there is no longer as great an incentive to classify the worker as salaried.[176]

Jackson Lewis asserted that the Department did not adequately consider other costs associated with reclassifying employees from exempt to nonexempt: “This is not just a mere matter of accounting for potential changes in direct wage costs. Exempt and non-exempt employees function very differently in the workplace. Reclassifying employees imposes costs with respect to re-engineering roles, determining new performance metrics, and devising compensation programs that drive the desired behaviors consistent with an obligation to pay a wage premium after forty hours in a workweek.” We believe these considerations are adequately accounted for in the Department's adjustment cost estimate, which we increased by 15 minutes from 60 to 75 minutes for each affected worker.

Earnings Predictability

Some commenters asserted that employers will convert newly nonexempt employees to hourly pay and that these employees will lose the earnings predictability of a guaranteed salary. See, e.g. , AH&LA; Island Hospitality Management; NCCR; NRF. These commenters asserted that receipt of a guaranteed minimum salary provides peace of mind to employees. These comments appear to reflect a common misperception among employers that overtime-eligible employees must be paid on an hourly basis. Overtime-eligible employees may continue to be paid a salary, as long as that salary is equivalent to a base wage at least equal to the minimum wage rate for every hour worked, and the employee receives a 50 percent premium on that base wage for any overtime hours each week. §§ 778.113-.114.

Reduced Opportunities for Training and Advancement

Some commenters stated that the rulemaking will reduce training and promotional opportunities. For example, ASAE commented that employers would not permit newly overtime eligible employees to attend conferences and annual meetings. In response to these comments, the Department notes that if an employer believes that training opportunities are sufficiently important, it can ensure employees attend the trainings during their 40-hour workweek, or pay the overtime premium where training attendance causes the employee to work over 40 hours in a workweek. Given this, and because there is no data and literature to quantify any potential costs to workers, we decline to do so in this analysis.

Reduced Productivity

Some commenters expressed concern that the automatic updating provisions of the rule may reduce productivity. For example, the Michael Best & Friedrich law firm commented that many employees will “assume they could perform at the same level, or do the bare minimum, and still receive an automatic pay increase,” and this “unmotivated workforce will lead to lesser productivity.” This rulemaking does not require any employer to provide an automatic pay raise when the standard salary level increases. As always, employers have the ability to determine which employees deserve raises, and the size of that raise, and to decide how to handle employees whose work is unsatisfactory. Additionally, the Final Rule has been modified so that updating will occur every three years, not annually, which should lessen commenters' concerns on this issue. Furthermore, as discussed in section VI.D.vii., the Department believes that in some instances employers may in fact experience increased worker productivity due to factors including efficiency wages, improved worker health, and a reduction in turnover.

Quality of Services

Some commenters expressed concern that the rulemaking, by restricting work hours, will negatively impact the quality of public services provided by local governments, see, e.g. , City of Galax; disability services providers, see, e.g. , American Network of Community Options and Resources (ANCOR); health care providers, see, e.g. , Lutheran Services in America; education providers, see, e.g. , La Salle Catholic College Preparatory, and others. The Indian River Schools commented that the “only way a school system can adjust for this change is to reduce services to students, given that our industry operates with low-overhead.”

The Department believes the impact of the rule on public services will be small. The Department acknowledges that some employees who work overtime providing public services may see a reduction in hours as an effect of the rulemaking. However, if the services are in demand the Department believes additional workers may be hired, as funding availability allows, to make up some of these hours, and productivity increases, as discussed in section VI.D.vii., may offset some reduction in services. Furthermore, the Department notes that school systems would largely be unaffected by the rulemaking: Teachers and academic administrative personnel are “named occupations” and thus do not have to pass the salary level test to remain exempt. In addition, the Department expects many employers will adjust base wages downward to some degree so that even after paying the overtime premium, overall pay and hours of work for many employees will be relatively minimally impacted, as indicated in the comments of many employers.

Increased Prices

Some commenters expressed concern that increased labor costs will be passed along to consumers in the form of higher prices. See, e.g., National Association of Home Builders (NAHB) (stating that of the 33 percent of members surveyed who predicted some change, 44 percent indicated that the proposal “would result in higher home prices for consumers”); SnowSports Industries of America. NRF stated that many of its members noted that raising prices would result in a loss of sales.

The Department does anticipate that, in some cases, part of the additional labor costs may be offset by higher prices of goods and services. However, because costs and transfers are on average small relative to payroll and revenues, the Department does not Start Printed Page 32480expect this rulemaking to have a significant effect on prices. The Department projects that, on average, costs and transfers make up less than 0.03 percent of payroll and less than 0.01 percent of revenues, although for specific industries and firms this percentage may be larger. Therefore, the Department expects that any potential change in prices will be modest. Further, any significant price increases, would generally not represent a separate category of impacts relative to those estimated in the RIA; rather, price increases (where they occur) are the channel through which consumers, rather than employers or employees, bear rule-induced costs (including transfers).[177]

Foreign Competition

Some commenters expressed concern that the rulemaking will hurt the United States' ability to compete in the international market. See, e.g, Jackson Lewis; NACCO Industries; National Association of Manufacturers; National Association of Wholesale Distributors; Precision Machined Products Association. The Department does not believe this is a serious concern due to the small ratio of employer costs and transfers to revenues.

Substitution of Capital

Some commenters, such as the National Parking Association and the National Beer Wholesalers Association, asserted that, by increasing the marginal cost of labor, the rule will lead companies to automate their business operations and substitute capital for labor. The Department believes that it is unlikely that employees performing jobs that can be easily automated will satisfy the duties test, and that any such effect would be negligible due to the small ratio of employer costs and transfer payments to operating revenue.

Wage Compression and Spillover Effects

Several commenters stated that employers may increase the wages of workers currently paid just above the new threshold to maintain a distribution of wages, and some asserted that the Department failed to account for this effort to avoid salary compression in our economic analysis. See, e.g. , Cornerstone Credit Union League; First Premier Bank; HMR Acquisition Company; International Franchise Association; PPWO; Seyfarth Shaw law firm; Tulsa Regional Chamber. The Department did not consider salary compression in the NPRM because data are not available to estimate this effect. For the same reason, we decline to consider this cost in the analysis accompanying this Final Rule.

Substitution of Part-Time Jobs in Place of Full-Time Jobs

Some commenters stated that firms will reduce the number of full-time positions and replace them with part-time positions to limit overtime payments. See, e.g., Associated General Contractors of America (AGC); National Newspaper Association; SnowSports Industries of America. These commenters assume that rather than cutting the hours of a worker who works 60 hours per week to 40 hours and hiring a part-time employee to work the remaining 20 hours (which would potentially reduce unemployment), employers will create part-time positions at the expense of full-time employment.

As an initial matter, an employer will have an incentive to make these adjustments only if the cost of paying overtime is greater than the costs associated with hiring another worker. Further, although the Department acknowledges the possibility that firms may reduce the number of full-time positions and replace them with part-time positions, on net the Department believes the benefits of additional jobs (i.e., external margins) will outweigh any detriment of reduction in hours for current employees (i.e., internal margins), although the Department cannot quantify this effect. Due to data limitations the Department has not estimated transfers between workers. We note, however, that most of the estimates submitted by commenters of large costs, transfers, and employment impacts rely implicitly on the assumption that employers make no adjustment to the rulemaking except to pay the overtime premium. This lack of employer response is contradicted by quantitative analysis of employer behavior (see Barkume,[178] for example), and by the employer comments on this rulemaking. Employers will adjust to the rule by adjusting base pay for newly nonexempt employees, as well as in other ways. After accounting for employer adjustments, the costs and transfers resulting from the rule are small relative to payroll and revenues, as are the projected reductions in employee hours, and the likelihood of large scale impacts on employment appears to be small.

Conversely, other commenters, such as the International Food Service Distributors Association, expressed concern that employers would eliminate part-time positions “where the employees value the flexibility.” See also CUPA-HR. The Department believes it is unlikely that an employer will eliminate part-time positions simply because the workers become eligible for overtime, as an employer will not have to pay workers employed for less than 40 hours per week the overtime premium even if they are newly entitled to overtime pay.

Finally, the Home Loan and Investment Company and other commenters also asserted that some workers who currently hold only one job will need to take a second job to supplement their now reduced hours. This would reduce workers' utility since juggling two jobs is more difficult than holding one job, even if the total hours are the same. To address this concern, the Department looked at the effect of the 2004 rulemaking on the probability of multiple job holding. The 2004 rulemaking increased the salary level required to be eligible for exemption from $250 per week (short test salary level) to $455 (standard test salary level).[179] To estimate the effect of this update on the share of full-time, white collar workers holding multiple jobs, the Department conducted a difference-in-differences (DD) analysis. This analysis allows the identification of any potential regulatory impact, while controlling for time trends and a broad range of other relevant factors (education, occupation, industry, geographic location, etc.). The Department compared January-March 2004 to January-March 2005 [180] and compared workers earning between $250 and $455 and those earning at least $455 but less than $600. The Department found no statistically significant change in workers' probability of holding multiple jobs before and after the 2004 Final Rule took effect.181 However, a caveat should be noted about interpreting this result as an indication that the Final Rule will not lead to an increase in the holding of multiple jobs. This rule is estimated to Start Printed Page 32481affect approximately three times as many workers as the 2004 rule (for which the Department estimated 1.3 million affected workers), and factors that could not be controlled for in the analysis of the 2004 rule may lead to a different outcome based on this rule.

181 The difference-in-differences model used to examine whether the share of workers holding multiple jobs increased as a result of the 2004 rule can be written as

where Mi is equal to 1 if worker i is has more than one job and 0 otherwise, Ti is equal to 1 if worker i earns at least $250 but less than $455 and 0 if he earns between $455 and $600, Pi is equal to 1 for the post-change period (Jan.-Mar. 2005) and 0 for the pre-change period (Jan.-Mar. 2004), and Ci is a set of worker-specific controls (age, education, gender, race, ethnicity, occupation, industry, state of residence, working overtime, whether paid hourly or salaried). The model was estimated using a probit regression. The relevant marginal effect is −0.009 (i.e., the amount the likelihood of multiple job holding changes post rulemaking for workers earning between $250 and $455 per week relative to the change for workers earning between $455 and $600), with a standard deviation of 0.006. Thus, while the point estimate shows a decrease in the probability of multiple job holding for affected workers after the 2004 Final Rule took effect, the finding is not statistically significant at conventional thresholds for significance. The Department also used a difference-in-difference-in-differences model to examine whether the share of workers holding multiple jobs increased as a result of the California's increase in the salary threshold from $540 to $640 between 2006 and 2008 and from $640 to $720 between 2014 and 2015. That model can be written as

where Mi is equal to 1 if worker i has multiple jobs and 0 otherwise, Ti is equal to 1 if worker i earns between the old threshold and the new threshold and 0 if he earns just above the new threshold, Pi is equal to 1 for the post-change period and 0 for the pre-change period, Si is equal to 1 if worker i is in California and 0 if she is in other states where the salary level was not increased, and Ci is the same set of worker-specific controls used in the DD analysis. The model was estimated using a probit regression. For the change between 2006 and 2008, the relevant marginal effect is −0.025 with a standard deviation of 0.004, and for the change between 2014 and 2015, the relevant marginal effect is 0.042 with a standard deviation of 0.018. Thus we observe a statistically significant (at conventional thresholds) increase in the share of workers holding multiple jobs in one period but a statistically significant (at conventional thresholds) decrease in the other.

Reduced Profits

Some commenters, including an HR consultant, a small business owner, and a commenter from the restaurant industry, expressed concern that establishments with small profit margins may lose money or go out of business. The increase in workers' earnings resulting from the revised salary level is a transfer of income from firms to workers, not a cost, and is thus neutral concerning its primary effect on welfare. However, there are potential secondary effects (both costs and benefits) of the transfer due to the potential difference in the marginal utility of income and the marginal propensity to consume or save between workers and business owners. Thus, the Department acknowledges that profits may be reduced due to increased employer costs and transfer payments as a result of this rule, although some of these costs and transfers may be offset by making payroll adjustments or the profit consequences of costs and transfers partially mitigated through increased prices.[182] The Department notes that firms have a broad array of approaches for adjusting to the rulemaking: Firms that face robust demand may be able to increase product prices and may make smaller adjustments to base wages or overtime hours; firms that have little ability to raise prices may have to make more substantial changes to wages or other variables. Further, because costs and transfers are on average small relative to payroll and revenues, the Department does not expect this rulemaking to have a significant effect on profits. Additionally, increased payroll may lead to increased consumer spending which may translate into higher profits, offsetting part of the initial reduction in profits. Two business owners who commented separately in support of the Department's proposal cited an increase in sales as a likely consequence of this rulemaking.

Hiring Costs

One of Congress' goals in enacting the FLSA in 1938 was to spread employment to a greater number of workers by effectively raising the wages of employees working more than 40 hours per week. To the extent that firms respond to an update to the salary level test by reducing overtime, they may do so by spreading hours to other workers, including: Current workers employed for less than 40 hours per week by that employer, current workers who retain their exempt status, and newly hired workers. If new workers are hired to absorb these transferred hours, then the associated hiring costs are a cost of this Final Rule.

iv. Transfers

1. Overview

Transfer payments occur when income is redistributed from one party to another. The Department has quantified two possible transfers from employers to employees likely to result from this update to the salary level tests: (1) Transfers to ensure compliance with the FLSA minimum wage provision; and (2) transfers to ensure compliance with the FLSA overtime pay provision. Transfers in Year 1 to workers from employers due to the minimum wage provision were estimated to be $34.3 million. The increase in the HCE compensation level does not affect minimum wage transfers because workers eligible for the HCE exemption earn well above the minimum wage. Transfers to employees from employers due to the overtime pay provision were estimated to be $1,250.8 million, $1,152.3 million of which is from the increased standard salary level, while the remainder is attributable to the increased HCE compensation level. Start Printed Page 32482Total Year 1 transfers were estimated to be $1,285.2 million (Table 17).

Table 17—Summary of Year 1 Regulatory Transfers

[Millions]

Transfer from employers to workersStandard salary levelHCE Compensation levelTotal
Due to minimum wage$34.3$0.0$34.3
Due to overtime pay1,152.398.51,250.8
Total transfers1,186.698.51,285.2

Because the overtime premium depends on the base wage, the estimates of minimum wage transfers and overtime transfers are linked. This can be considered a two-step approach. The Department first identified affected EAP workers with an implicit regular hourly wage lower than the minimum wage, and then calculated the wage increase necessary to reach the minimum wage. The implicit regular rate of pay is calculated as usual weekly earnings divided by usual weekly hours worked. For those employees whose implicit regular rate of pay is below the minimum wage, the overtime premium was based on the minimum wage as the regular rate of pay.

2. Transfers Due to the Minimum Wage Provision

Transfers from employers to workers to ensure compliance with the higher of the federal or applicable state minimum wage are small compared to the transfers attributed to overtime pay and are only associated with the change in the standard salary level. For purposes of this analysis, the hourly rate of pay is calculated as usual weekly earnings divided by usual weekly hours worked. In addition to earning below the federal or state minimum wage, this set of workers also works many hours per week. To demonstrate, in order to earn less than the federal minimum wage of $7.25 per hour, but at least $455 per week, these workers must regularly work significant amounts of overtime (since $455/$7.25 = 62.8 hours). The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage as of January 2016. Most affected EAP workers already receive at least the minimum wage; an estimated 11,200 affected EAP workers (less than 0.3 percent of all affected EAP workers) currently earn an implicit hourly rate of pay less than the minimum wage. The Department estimated transfers due to payment of the minimum wage by calculating the change in earnings if wages rose to the minimum wage for workers who become nonexempt and thus would have to be paid at least the minimum wage.[183]

In response to an increase in the regular rate of pay to the minimum wage, employers may reduce the workers' hours, which must be considered when estimating transfers attributed to payment of the minimum wage to newly overtime-eligible workers. In theory, because the quantity of labor hours demanded is inversely related to wages, a higher mandated wage could result in fewer hours of labor demanded. However, the weight of the empirical evidence finds that increases in the minimum wage have caused little or no significant job loss.[184] Thus, in the case of this regulation, the Department believes that any disemployment effect due to the minimum wage provision would be negligible. This is partially due to the small number of workers affected by this provision. The Department estimates the potential disemployment effects (i.e., the estimated reduction in hours) of the transfer attributed to the minimum wage by multiplying the percent change in the regular rate of pay by a labor demand elasticity of −0.075.[185]

At the new standard salary level ($913 per week), the Department estimates that 11,200 affected EAP workers will on average see an hourly wage increase of $0.91, work 0.7 fewer hours per week, and receive an increase in weekly earnings of $59.10 as a result of coverage by the minimum wage provisions (Table 18). The total change in weekly earnings due to the payment of the minimum wage was estimated to be $660,300 per week ($59.10 × 11,200) or $34.3 million in Year 1.

Table 18—Minimum Wage Only: Mean Hourly Wages, Usual Overtime Hours, and Weekly Earnings for Affected EAP Workers, FY2017

Hourly wage aUsual weekly hoursUsual weekly earningsTotal weekly transfer (1,000s)
Before Final Rule$8.1369.3$551.2
After Final Rule9.0468.6610.3
Start Printed Page 32483
Change0.91−0.759.1$660.3
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.

Modeling employer adjustments for these workers is a two-step process. First, employers adjust wages and hours to meet the minimum wage requirement, as described here. Then, these workers' hours will be further adjusted in response to the requirement to pay the overtime premium, which is discussed in the following section. The transfers presented here only apply to the minimum wage provision. However, minimum wage transfers impact overtime transfers because the overtime premium is calculated based on the minimum wage, not the worker's original wage. Thus, the two are not entirely separable.

3. Transfers Due to the Overtime Pay Provision

Introduction

The Final Rule will also transfer income to affected workers who work in excess of 40 hours per week. Requiring an overtime premium increases the marginal cost of labor, which employers will likely try to offset by adjusting wages or hours. Thus, the size of the transfers due to the overtime pay provision will depend largely on how employers respond to the updated salary levels. How employers respond and the ensuing changes in employment conditions will depend on the demand for labor, current wages, employer and employee bargaining power, and other factors. Employers may respond by: (1) Paying the required overtime premium to affected workers for the same number of overtime hours at the same implicit regular rate of pay; (2) reducing overtime hours and potentially transferring some of these hours to other workers; (3) increasing workers' salaries to the updated salary or compensation level; (4) reducing the regular rate of pay for workers working overtime; or (5) using some combination of these responses. How employers will respond depends on many factors, including the relative costs of each of these alternatives; in turn, the relative costs of each of these alternatives are a function of workers' earnings and hours worked.

The simplest approach to estimating these transfer payments would be to multiply an employee's regular rate of pay (after compliance with the minimum wage) by 1.5 for all overtime hours; this is referred to as the “full overtime premium” model.[186] However, due to expected wage and hour adjustments by employers, this would likely overestimate the size of the transfer. Therefore, the Department used a methodology that allows for employer adjustments, such as changes in the regular rate of pay or hours worked. The size of these adjustments is likely to vary depending on the affected worker's salary and work patterns. To model employer responses, the Department used a method that reflects the average response among all employers for all affected workers. However, individual employer responses will vary.

Literature on Employer Adjustments

Two conceptual models are useful for thinking about how employers may respond to reclassifying certain employees as overtime eligible: The “full overtime premium” model and the “employment contract” model.[187] These models make different assumptions about the demand for overtime hours and the structure of the employment agreement which result in different implications for predicting employer responses.

The full overtime premium model is based on what we will refer to as the “labor demand” model of determining wage and hour conditions. In the labor demand model, employers and employees negotiate fixed hourly wages and then subsequently negotiate hours worked, rather than determining both hours and pay simultaneously. This model assumes employees are aware of the hourly wage rate they negotiated and may be more reluctant to accept downward adjustments. The labor demand model would apply if employees had a contract to be paid at an hourly rate, meaning that employers could not reduce the regular rate of pay in response to the requirement to pay a 50 percent premium on hours worked beyond 40 in a week. However, the increase in the marginal cost of labor would lead to a reduction in the hours of labor demanded as long as labor demand is not completely inelastic. The full overtime premium model is a special case of the labor demand model in which the demand for labor is completely inelastic, that is employers will demand the same number of hours worked regardless of the cost.

In the employment contract model, employers and employees negotiate total pay and hours simultaneously, rather than negotiating a fixed hourly wage and then determining hours. Under this model, when employers are required to pay employees an overtime premium, they adjust the employees' implicit hourly rate of pay downward so that when the overtime premium is paid total employee earnings (and thus total employer cost) remain constant, along with the employees' hours. The employer does not experience a change in cost and the employee does not experience a change in earnings or hours. The employment contract model would hold if the workers who are reclassified as overtime protected had an employment agreement specifying set total earnings and hours of work.

The employment contract model tends to be more applicable when overtime hours are predictable, while the labor demand model is generally more applicable to situations where the need for overtime is unanticipated (for example, where there are unforeseen, short-term increases in demand). However, the employment contract model may not fully hold even for workers who work predictable overtime due to market imperfections, employer incentives, or workers' bargaining power. Four examples are provided.Start Printed Page 32484

  • Employers are constrained because they cannot reduce an employee's implicit hourly rate of pay below the minimum wage. If the employee's implicit hourly rate of pay before the change is at or below the minimum wage, then employers will not be able to reduce the rate of pay to offset the cost of paying the overtime premium.
  • Employees generally have some, albeit limited, bargaining power which may prevent employers from reducing the employee's implicit hourly rate of pay to fully offset increased costs.
  • Employers may be hesitant to reduce the employee's implicit hourly rate of pay by the entire amount predicted by the employment contract model because it may hurt employee morale and consequently productivity.[188]
  • Employers are often limited in their ability to pay different regular rates of pay to different employees who perform the same work and have the same qualifications because of fairness concerns. In order to keep wages constant across employees and reduce wages for overtime workers, employers would need to reduce the implicit hourly rate of pay for employees who do not work overtime as well as those who do work overtime. This would reduce total earnings for these non-overtime employees (potentially causing retention problems, productivity losses, and morale concerns).[189]

Therefore, the likely outcome will fall somewhere between the conditions predicted by the full overtime premium and employment contract models. For example, the implicit hourly rate of pay may fall, but not all the way to the wage predicted by the employment contract model, and overtime hours may fall but not be eliminated since the implicit hourly rate of pay has fallen. The Department conducted a literature review to evaluate how the market would adjust to a change in the requirement to pay overtime.

Barkume (2010) and Trejo (1991) empirically tested for evidence of these two competing models by measuring labor market responses to the application of FLSA overtime pay regulations.[190] Both concluded that wages partially adjust toward the level consistent with the employment contract model in response to the overtime pay provision.[191] Barkume found that employee wage rates were adjusted downward by 40 to 80 percent of the amount the employment contract model predicted, depending on modeling assumptions. Earlier research had demonstrated that in the absence of regulation some employers may voluntarily pay workers some overtime premium to entice them to work longer hours, to compensate workers for unexpected changes in their schedules, or as a result of collective bargaining.[192] Thus Barkume assumed that workers would receive an average voluntary overtime pay premium of 28 percent in the absence of an overtime pay regulation. Including this voluntary overtime pay from employers, he estimated that in response to overtime pay regulation, the wage adjusted downward by 80 percent of the amount that would occur with the employment contract model. Conversely, when Barkume assumed workers would receive no voluntary overtime pay premium in the absence of an overtime pay regulation, wages adjusted downward 40 percent of the amount the employment contract model predicted.[193 194] However, while it seemed reasonable that some premium was paid for overtime in the absence of regulation, Barkume's assumption of a 28 percent initial overtime premium is likely too high for the salaried workers potentially affected by a change in the salary and compensation level requirements for the EAP exemptions.[195]

Comments Regarding Transfers

The few commenters who tried to model employer responses generally used or cited the same literature the Department used (in particular, Barkume (2010) and Trejo (1991)). Susann Rohwedder and Jeffrey B. Wenger conducted an analysis for RAND on the impacts of the rulemaking and, like our analysis, found small effects on individual workers' earnings and hours.[196]

Some organizations conducted surveys to evaluate how employers may respond. Although these surveys may be helpful as background information, they generally cannot be used in a quantitative analysis due to issues such as insufficient sample sizes, missing sampling methodology, and missing magnitudes. As an example of the last concern, the American Association of Orthopaedic Executives (AAOE) conducted a survey of their members and found “19% of respondents indicated that they would change the number of staff hours worked in order to avoid paying overtime.” The Department agrees firms will generally change staffing hours and has included this in the quantitative analysis. The modeling question is to what degree employers will adjust hours.

Despite the inability to incorporate these survey results into the analysis, Start Printed Page 32485they may be informative and select results are presented here.

  • The AAOE found “18% [of members] indicated that they would not change their current practice operations. 16% stated that they would increase salaries to the new threshold. 11% would change the affected employees to hourly employees, and 4% stated that they would eliminate positions within their practice.” This indicates employers will use a variety of mechanisms to reduce transfer payments, as discussed and modeled by the Department.
  • The 2015 WorldatWork survey found “73% of respondents stated they would have more nonexempt employees.”
  • Kansas Bankers Association compiled member banks' analyses of the rule that found “[o]verwhelmingly . . . the response was not to increase the newly non-exempt salaries to continue to keep the position as an exempt position. In fact, only 2 bank CEOs responded that they would choose to do so. Rather, the overwhelming majority of bank CEOs stated those employees would move to non-exempt status, and overtime would be restricted or prohibited.”
  • The NAHB presented results from a member survey that found 33 percent of companies indicated a change in company policies, with respect to construction supervisors, would occur. Among those firms, “56% of respondents indicated that they would take steps to minimize overtime, such as cut workers hours.”
  • ANCOR found “[l]ess than a third of providers would be able to increase the salary of full-time exempt workers to meet the projected threshold.”
  • Society for Human Resource Management (SHRM) reported that, according to its survey “the most significant result identified was the implementation of restrictive overtime policies leading to potential reduction in employees working overtime, with 70 percent of respondents indicating that would be a likely outcome.”
  • AGC reported its survey found “74% of AGC-surveyed construction contractors responded that they would likely reclassify some or all of the impacted exempt workers to a non-exempt hourly status at their current salaries. The survey results also show that: Over 60% of respondents expect the proposed rule to result in the institution of policies and practices to ensure that affected employees do not work over 40 hours a week.”
  • International Public Management Association for Human Resources (IMPA-HR) and the International Municipal Lawyers Association reported from an IPMA-HR survey that “[a]bout 60% said they would convert currently exempt employees to non-exempt and pay them overtime while the same amount would prohibit them from working more than 40 hours per week without approval. Only 1/3 would raise salaries to at least $970 per week.”
  • National Association of Professional Insurance Agents asked survey respondents with workers who would be converted to nonexempt status and who work overtime whether they would decrease overtime hours; 65 percent responded they would.

Some commenters stated that many employers will respond by reducing hours and base wages more than the Department estimated. The National Association of Manufacturers wrote:

While in the initial months following a reclassification, most employees tend to come out about the same in terms of total work and total compensation, the steady pressure of the overtime premium tends to result in a gradual reduction of the employee's schedule. The challenge for that employee is that the hourly rate does not normally increase to offset this loss in hours. Instead, the employer looks to give the work to other employees. The scaling back of the employee's weekly working hours can take a significant toll on the employee's earnings, especially given that the wages lost for each hour of overtime eliminated are at premium rates. The net economic effect of the Proposed Rule will be to take working hours and pay away from employees currently classified as exempt and redistribute those hours and pay to other employees.

Some commenters, including Jackson Lewis, the National RV Dealers Association, and the Sheppard Mullin law firm, asserted that many employers may follow the full employment contract model rather than the partial employment contract model used by the Department in the analysis. The Iowa Association of Community Providers wrote that “[i]n order to maintain current payroll budgets, the organizations will need to lower the hourly wages of non-exempt employees, such that their total annual compensation, including overtime payments, remains at the prior year's level.” The Construction Industry Round Table asserted that “empirical research generally supports the `fixed-job' model rather than the `fixed-wage' model.”

Other commenters stated that overtime will be reduced significantly more than the Department estimated in the NPRM. However, little data was provided to support these claims, making them difficult to incorporate into the analysis. For example, Audubon Area Community Services believes that “[b]ecause additional revenue is not an option, our agency would have to reclassify all but 10 of our positions to non-exempt with no overtime allowed by any staff.”

The Department's reading and analysis of the literature cited in the rulemaking is that a result between the fixed-job model and the fixed-wage model would occur and thus we modeled our results accordingly. Specifically, based upon Barkume's findings regarding employer responses and transfer payments, we believe the partial employment contract model is most appropriate and consistent with the literature. Therefore, we have not changed the analysis. Several commenters commented on the literature we used to support using the partial employment contract model. The Center for American Progress expressed support for our use of Barkume's analysis and stated that this would result in some transfer payments since employers cannot fully adjust base wages. The Washington Center for Equitable Growth noted the Department “should make clear that under certain conditions the fixed-wage model underlying [the Department's] analysis implies that some workers will see an increase in hours. If these workers are under-employed, the shift in the composition of those hours from over-worked to under-worked employees will be a welfare-improving consequence of the proposed rule.”

Identifying Types of Affected Workers

The Department identified four types of workers whose work characteristics impact how employers were modeled to respond to the changes in both the standard and HCE salary levels:

  • Type 1: Workers who do not work overtime.
  • Type 2: Workers who do not regularly work overtime but occasionally work overtime.
  • Type 3: Workers who regularly work overtime.
  • Type 4: Workers who regularly work overtime. These workers differ from the Type 3 workers because it is less expensive for the employer to pay the updated salary level than pay overtime and incur managerial costs for these workers.[197]

The Department began by identifying the number of workers in each type. After modeling employer adjustments, transfer payments were then estimated. Type 3 and 4 workers are identified as Start Printed Page 32486those who regularly work overtime (CPS variable PEHRUSL1 greater than 40). These workers are divided between Type 3 and Type 4 depending on whether their weekly earnings are raised to the updated EAP salary level or they become nonexempt. Distinguishing Type 3 workers from Type 4 workers is a four step process. First we identify all workers who regularly work overtime. Then we estimate each worker's weekly earnings if they became nonexempt, to which we add weekly managerial costs for each affected worker of $3.53 ($42.31 per hour × (5 minutes/60 minutes)). Lastly, we identify as Type 4 those workers whose expected nonexempt earnings plus weekly managerial costs exceeds the updated standard salary level; those whose expected nonexempt earnings plus weekly managerial costs are less than the new standard salary level are classified as Type 3 workers. The Department assumes that firms will include incremental managerial costs in their determination of whether to treat an affected employee as a Type 3 or Type 4 worker because those costs are only incurred if the employee is a Type 3 worker. Thus, it is appropriate to determine if the additional earnings plus the additional managerial costs for an affected worker exceed the revised salary level. In the NPRM managerial costs were not included in the determination of whether a worker is a Type 3 or Type 4 worker. Therefore, in this Final Rule there are somewhat more Type 4 workers than the NPRM methodology would yield.

Identifying Type 2 workers involves two steps. First, using CPS MORG data, the Department identified those who do not usually work overtime but did work overtime in the survey week (the week referred to in the CPS questionnaire, variable PEHRACT1 greater than 40). These workers represent those who occasionally work overtime and happened to work overtime in that specific week. The survey (or reference) week is always the pay period that includes the 12th day of the month and contains responses for all twelve months. In a different week the identity of workers who work overtime might differ, but the number working overtime and the hours of overtime worked are similar because the survey week is representative of occasional overtime patterns.

The second step for identifying Type 2 workers in the Final Rule differs from the methodology used in the NPRM. In the NPRM, we used only the first step described above to identify Type 2 workers. Those who did not regularly work overtime and did not work overtime in the survey week were classified as Type 1 workers. As previously discussed, commenters expressed concerns that the Department underestimated the number of workers who will experience changes in their wages or hours, and therefore that we underestimated costs, because managerial costs are a function of the number of workers who work overtime.

Therefore, for this Final Rule, the Department supplemented the CPS data with data from the Survey of Income and Program Participation (SIPP) in order to look at likelihood of working some overtime during the year. Based on 2012 data, the most recent available, the Department found that 39.4 percent of nonhourly workers worked overtime at some point in a year. Workers already identified as Types 2, 3, and 4, using the methodology in the NPRM, compose 24 percent of affected workers. Therefore, as a second step, the Department classified a share of workers who reported they do not usually work overtime, and did not work overtime in the reference week (previously identified as Type 1 workers), as Type 2 workers such that a total of 39.4 percent of affected workers were Type 2, 3, or 4. Therefore, the Department estimates fewer Type 1 workers and more Type 2 workers than in the NPRM.

Modeling Changes in Wages and Hours

In practice, employers do not seem to adjust wages of regular overtime workers to the full extent indicated by the employment contract model, and thus employees appear to get a small but significant increase in weekly earnings due to overtime pay coverage. Barkume and Trejo found evidence partially supporting both the employment contract model and the full overtime premium model in response to a 50 percent overtime premium requirement: A decrease in the regular rate of pay for workers with overtime (but not the full decrease to the employment contract model level) and a decrease in the amount of overtime worked. Therefore, when modeling employer responses with respect to the adjustment to the regular rate of pay, the Department used a method that falls somewhere between the employment contract model and the full overtime premium model (i.e., the partial employment contract model).

Barkume reported two methods to estimate this partial employment contract wage, depending on the amount of overtime pay assumed to be paid in the absence of regulation. As noted above, the Department believes both the model assuming a voluntary 28 percent overtime premium and the model assuming no voluntary overtime premium are unrealistic for the affected population. Therefore, lacking more information, the Department determined that an appropriate estimate of the impact on the implicit hourly rate of pay for regular overtime workers after the Final Rule should be determined using the average of Barkume's two estimates of partial employment contract model adjustments: A wage change that is 40 percent of the adjustment toward the amount predicted by the employment contract model, assuming an initial zero overtime pay premium, and a wage change that is 80 percent of the adjustment assuming an initial 28 percent overtime pay premium.[198] This is approximately equivalent to assuming that salaried overtime workers implicitly receive the equivalent of a 14 percent overtime premium in the absence of regulation (the mid-point between 0 and 28 percent).

Modeling changes in wages, hours, and earnings for Type 1 and Type 4 workers is relatively straightforward. Type 1 affected EAP workers will become overtime eligible, but since they do not work overtime, they will see no change in their weekly earnings. Type 4 workers will remain exempt because their earnings will be raised to the updated EAP salary level (either the standard salary level or HCE compensation level depending on which test the worker passed). These workers' earnings will increase by the difference between their current earnings and the amount necessary to satisfy the new standard salary requirement or comply with the new total annual compensation level. It is possible employers will increase these workers' hours in response to paying them a higher salary, but the Department has not modeled this potential change.[199]

Start Printed Page 32487

Modeling changes in wages, hours, and earnings for Type 2 and Type 3 workers is more complex and uses findings from Barkume discussed above. The Department distinguishes those who regularly work overtime (Type 3 workers) from those who occasionally, or irregularly, work overtime (Type 2 workers) because employer adjustment to the Final Rule may differ accordingly. The Department believes that employers are more likely to adjust hours worked and wages for regular overtime workers because their hours are predictable. Conversely, it may be more difficult to adjust hours and wages for occasional overtime workers because employers may be responding to a transient, perhaps unpredicted, shift in market demand for the good or service they provide. In this case, it is likely advantageous for the employer to pay for this occasional overtime rather than to adjust permanent staffing. Additionally, the transient and possibly unpredicted nature of the change may make it difficult to adjust wages for these workers.

The Department treats Type 2 affected workers in two ways due to the uncertainty of the nature of these occasional overtime hours worked. If these workers work extra hours on an unforeseen, short-term, as-needed basis (e.g., to adjust to unanticipated increases in demand), then there may be less opportunity for employers to adjust straight-time wages downward.[200] However, if these workers work extra hours on a foreseen, periodic basis (e.g., work a few extra hours one week each month, but workers do not consider it “regular overtime” because they do not work overtime during three weeks each month), then there may be some opportunity for employers to adjust straight-time wages downward (e.g., so pre- and post-revision monthly income is more similar). That this overtime is periodic and predictable is what makes it much more similar to that worked by Type 3 workers, and provides employers with more opportunity to adjust hours and wages. Since in reality there is likely a mix of these two occasional overtime scenarios, the Department combines models representing these two scenarios when estimating impacts.

Our estimate for how Type 2 workers are affected is based on the assumption that 50 percent of these workers who worked occasional overtime worked expected overtime hours and the other 50 percent worked unexpected overtime.[201] Workers were randomly assigned to these two groups. Workers with expected occasional overtime hours were treated like Type 3 affected workers (partial employment contract model adjustments). Workers with unexpected occasional overtime hours were assumed to receive a 50 percent pay premium for the overtime hours worked and receive no change in base wage or hours (full overtime premium model). When modeling Type 2 workers' hour and wage adjustments, we treated those identified as Type 2 using the CPS data as representative of all Type 2 workers. We estimated employer adjustments and transfers assuming that the patterns observed in the CPS reference week are representative of an average week in the year. Thus, we assume total transfers for the year are equal to 52 times the transfers estimated for the single representative week for which we have CPS data. However, these transfers are spread over a larger group including those who occasionally work overtime but did not do so in the CPS reference week.[202, 203]

Since Type 2 and Type 3 EAP workers work more than 40 hours per week, whether routinely or occasionally, they will receive an overtime premium based on their implicit hourly wage adjusted as described above. Because employers must now pay more for the same number of labor hours, they will seek to reduce those hours; in economics, this is described as a decrease in the quantity of labor hours demanded (a movement to the left along the labor demand curve). It is the net effect of these two changes that will determine the final weekly earnings for affected EAP workers. The reduction in hours is calculated using the elasticity of labor demand with respect to wages. The Department used a short-run demand elasticity of −0.20 to estimate the percentage decrease in hours worked resulting from the increase in average hourly wages in Year 1, calculated using the adjusted base wage and the overtime wage premium.[204] The interpretation of the short run demand elasticity in this context is that a 10 percent increase in wages will result in a 2 percent decrease in hours demanded. Transfers projected for years 2 through 10 used a long-run elasticity; this is discussed in section VI.D.x.[205]

For Type 3 affected workers, and the 50 percent of Type 2 affected workers who worked expected overtime, we estimated adjusted total hours worked after making wage adjustments using the partial employment contract model. To estimate adjusted hours worked, we set Start Printed Page 32488the percent change in total hours worked equal to the percent change in average wages multiplied by the wage elasticity of labor demand.[206] The percent change in average wages is equal to the adjusted implicit average hourly wage minus the original implicit average hourly wage divided by the original implicit average hourly wage. The original implicit average hourly wage is equal to original weekly earnings divided by original hours worked. The adjusted implicit average hourly wage is equal to adjusted weekly earnings divided by adjusted total hours worked. Adjusted weekly earnings equals the adjusted hourly wage (i.e., after the partial employment contract model adjustment) multiplied by 40 hours plus adjusted hours worked in excess of 40 multiplied by 1.5 times the adjusted hourly wage.

Figure 4 is a flow chart summarizing the four types of affected EAP workers. Also shown are the impacts on exempt status, weekly earnings, and hours worked for each type of affected worker.

Start Printed Page 32489

Start Printed Page 32490

Estimated Number of and Impacts on Affected EAP Workers

The Department projects 4.2 million workers will be affected by either (1) an increase in the standard salary level to the 40th percentile of weekly earnings of full-time salaried workers in the South because they earn salaries of at least $455 per week and less than $913 per week, or (2) an increase in the HCE compensation level to the 90th percentile of earnings of full-time salaried workers nationwide because they only pass the HCE duties test and earn at least $100,000 and less than $134,004 annually. These workers are categorized into the four “types” identified previously. There are 2.6 million Type 1 workers (60.4 percent of all affected EAP workers), those who work 40 hours per week or less and thus will not be paid an overtime premium despite their expected change in status to overtime protected (Table 19). The number of Type 1 workers decreased from the NPRM because some of these workers are now classified as Type 2 workers (as explained above). Type 2 workers, those who are expected to become overtime eligible and do not usually work overtime but do occasionally work overtime and will be paid the overtime premium, total 817,000 (19.3 percent of all affected EAP workers). Type 3 workers, those who regularly work overtime and are expected to become overtime eligible and be paid the overtime premium, are composed of an estimated 759,000 workers (17.9 percent of all affected EAP workers). The number of affected Type 4 workers was estimated to be 96,000 workers (2.3 percent of all affected workers); these are workers who the Department believes will remain exempt because firms will have a financial incentive to increase their weekly salaries to the updated salary and compensation levels, rather than pay a premium for overtime hours.[207]

Table 19—Affected EAP Workers by Type (1,000s), FY2017

TotalNo overtime (T1)Occasional overtime (T2)Regular overtime
Newly nonexempt (T3)Remain exempt (T4)
Standard salary level4,1632,52381573095
HCE compensation level64.932.52.728.51.2
Total4,2282,55581775996
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly hours increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

The Final Rule will likely impact some affected workers' hourly wages, hours, and weekly earnings. Predicted changes in implicit wage rates are outlined in Table 20; changes in hours in Table 21; and changes in weekly earnings in Table 22. How these will change depends on the type of worker, but on average weekly earnings are unchanged or increase while hours worked are unchanged or decrease.

Type 1 workers will have no change in wages, hours, or earnings.[208] Estimating changes in the regular rate of pay for Type 3 workers and the 50 percent of Type 2 workers who regularly work occasional overtime requires Start Printed Page 32491application of the partial employment contract model, which predicts a decrease in their average regular rates of pay. The Department estimates that employers would decrease these workers' regular hourly rates of pay to the amount predicted by the partial employment contract model adjustment. Employers are assumed to be unable to adjust the hours or regular rate of pay for the occasional overtime workers whose overtime is irregularly scheduled and unpredictable (the remaining 50 percent of Type 2 workers); therefore, their earnings will increase because they will receive the overtime premium for their unpredictable overtime hours. As a group, Type 2 workers currently exempt under the standard test would see a decrease in their average regular hourly wage (i.e., excluding the overtime premium) from $19.00 to $18.92, a decrease of 0.4 percent (Table 20). Type 2 workers paid between $100,000 and the updated HCE compensation level would see an average decrease in their regular hourly wage from $57.73 to $55.02, a decrease of 4.7 percent. However, because workers will now receive a 50 percent premium on their regular hourly wage for each hour worked in excess of 40 hours per week, average weekly earnings for Type 2 workers would increase.[209]

Type 3 workers will also receive decreases in their regular hourly wage as predicted by the partial employment contract model. Type 3 affected workers paid below the new standard salary level would have their regular hourly rate of pay decrease on average from $14.51 to $13.74 per hour, a decrease of 5.3 percent. Type 3 workers paid between $100,000 and the new HCE compensation level would have their regular rate of pay decrease on average from $41.43 to $38.80 per hour, a decrease of 6.3 percent. Again, although regular hourly rates decline, weekly earnings will increase on average because these workers are now eligible for the overtime premium.

Type 4 workers' implicit hourly rates of pay would increase in order for their earnings to meet the updated standard salary level ($913 per week) or the updated HCE annual compensation level ($134,004 annually). The implicit hourly rate for Type 4 affected EAP workers who had earned at least $455 and below $913 per week would increase on average from $17.32 to $17.54 (a 1.3 percent increase). The implicit hourly rate of pay for Type 4 workers who had earned between $100,000 and $134,004 annually would increase on average from $49.97 to $50.76 (a 1.6 percent increase).

Table 20—Average Regular Rate of Pay by Type of Affected EAP Worker, FY2017

TotalNo overtime (T1)Occasional overtime (T2)Regular overtime
Newly nonexempt (T3)Remain exempt (T4)
Standard Salary Level
Before Final Rule$18.39$19.36$19.00$14.51$17.32
After Final Rule$18.25$19.36$18.92$13.74$17.54
Change ($)−$0.15$0.00−$0.08−$0.77$0.23
Change (%)−0.8%0.0%−0.4%−5.3%1.3%
HCE Compensation Level
Before Final Rule$49.62$56.13$57.73$41.43$49.97
After Final Rule$48.37$56.13$55.02$38.80$50.76
Change ($)−$1.25$0.00−$2.72−$2.63$0.79
Change (%)−2.5%0.0%−4.7%−6.3%1.6%
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

Type 1 and Type 4 workers would have no change in hours. Type 1 workers' hours would not change because they do not work overtime and thus the requirement to pay an overtime premium does not affect them. Type 4 workers' hours may increase, but due to lack of data, the Department assumed hours would not change. Half of Type 2 and all Type 3 workers would see a small decrease in their hours of overtime worked. This reduction in hours is relatively small and is due to the effect on labor demand from the increase in the average hourly base wage as predicted by the employment contract model.

Type 2 workers who work occasional overtime hours would be newly overtime eligible and would see a negligible decrease in average weekly hours in weeks where occasional overtime is worked (0.1 percent decrease) (Table 21).[210] This is the average change across all weeks, including weeks without overtime, in which the decrease in hours is zero. Type 2 workers who would no longer earn the updated HCE compensation level would see a decrease in average weekly hours in applicable weeks from 48.5 to 48.2 (0.5 percent). Type 3 workers affected by the increase in the standard salary level would see a decrease in hours worked from 50.8 to 50.3 hours per week (0.8 percent). Type Start Printed Page 324923 workers affected by the increase in the HCE compensation level would see an average decrease from 52.4 to 52.0 hours per week (0.7 percent).

Table 21—Average Weekly Hours for Affected EAP Workers by Type, FY2017

TotalNo overtime worked (T1)Occasional OT (T2)Regular OT
Newly nonexempt (T3)Remain exempt (T4)
Standard Salary Levela
Before Final Rule41.438.640.350.853.5
After Final Rule41.338.640.350.353.5
Change ($)−0.10.00.0−0.40.0
Change (%)−0.2%0.0%−0.1%−0.8%0.0%
HCE Compensation Levela
Before Final Rule45.539.048.552.451.1
After Final Rule45.339.048.252.051.1
Change ($)−0.20.0−0.3−0.40.0
Change (%)−0.4%0.0%−0.5%−0.7%0.0%
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

Because Type 1 workers do not experience a change in their regular rate of pay or hours, they would have no change in earnings due to the Final Rule (Table 22). While their hours are not expected to change, Type 4 workers' salaries would increase to the new standard salary level or HCE compensation level (depending on which test they pass). Thus, Type 4 workers' average weekly earnings would increase by $12.70 (1.4 percent) for those affected by the change in the standard salary level and by $41.58 per week (1.6 percent) for those affected by the HCE compensation level.

Although both Type 2 and Type 3 workers on average experience a decrease in both their regular rate of pay and hours worked, their weekly earnings are expected to increase as a result of the overtime premium. Based on a standard salary level of $913 per week, Type 2 workers' average weekly earnings increase from $751.47 to $760.11, a 1.1 percent increase. The average weekly earnings of Type 2 workers affected by the change in the HCE compensation level were estimated to increase from $2,778.65 to $2,836.63, a 2.1 percent increase. For Type 3 workers affected by the standard salary level, average weekly earnings would increase from $723.86 to $743.83, an increase of 2.8 percent. Type 3 workers affected by the change in the HCE compensation level have an increase in average weekly earnings from $2,136.91 to $2,196.10, an increase of 2.8 percent. Weekly earnings after the standard salary level increased were estimated using the new wage (i.e., the partial employment contract model wage) and the reduced number of overtime hours worked.

Table 22—Average Weekly Earnings for Affected EAP Workers by Type, FY2017

TotalNo overtime (T1)Occasional overtime (T2)Regular overtime
Newly nonexempt (T3)Remain exempt (T4)
Standard Salary Levela
Before Final Rule$733.65$724.45$751.47$723.86$900.30
After Final Rule$739.13$724.45$760.11$743.83$913.00
Change ($)$5.48$0.00$8.63$19.97$12.70
Change (%)0.7%0.0%1.1%2.8%1.4%
HCE Compensation Levela
Before Final Rule$2,180.55$2,155.94$2,778.65$2,136.91$2,535.42
After Final Rule$2,209.75$2,155.94$2,836.63$2,196.10$2,577.00
Change ($)$29.19$0.00$57.98$59.19$41.58
Change (%)1.3%0.0%2.1%2.8%1.6%
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.Start Printed Page 32493
a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the weekly earnings because the product of two averages is not necessarily equal to the average of the product.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

At the new standard salary level, the average weekly earnings of all affected workers is expected to increase from $733.65 to $739.13, a change of $5.48 (0.7 percent). However, these figures mask the impact on workers whose hours and earnings will change because Type 1 workers, who do not work overtime, make up more than 60 percent of the pool of affected workers. If Type 1 workers are excluded, the average increase in weekly earnings is $13.91 (1.9 percent). Multiplying the average change of $5.48 by the 4.2 million affected standard EAP workers equals an increase in earnings of $22.8 million per week or $1,187 million in the first year (Table 23). Of the weekly total, $660,000 is due to the minimum wage provision and $22.2 million stems from the overtime pay provision.

For workers affected by the change in the HCE compensation level, average weekly earnings increase by $29.19 ($57.57 if Type 1 workers, who do not work overtime, are excluded). When multiplied by 65,000 affected workers, the national increase in weekly earnings is $1.9 million per week, or $98.5 million in the first year. Thus, total Year 1 transfer payments attributable to this Final Rule total $1,285.2 million.

Table 23—Total Change in Weekly and Annual Earnings for Affected EAP Workers by Provision, FY2017

ProvisionTotal change in earnings (1,000s)
WeeklyAnnual
Total a$24,715$1,285,162
Standard salary level:
Total22,8201,186,646
Minimum wage only66034,338
Overtime pay only b22,1601,152,308
HCE compensation level:
Total1,89598,515
Minimum wage only
Overtime pay only b1,89598,515
a Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.
b Estimated by subtracting the minimum wage transfer from the total transfer.

4. Potential Transfers Not Quantified

There may be additional transfers attributable to this Final Rule; however, the magnitude of these other transfers could not be quantified.

Reduced Earnings for Some Workers

Holding regular rate of pay and work hours constant, payment of an overtime premium will increase weekly earnings for workers who work overtime. However, as discussed previously, employers may try to mitigate cost increases by reducing the number of overtime hours worked, either by transferring these hours to other workers or monitoring hours more closely. Depending on how hours are adjusted, a specific worker may earn less pay after this Final Rule. For example, assume an exempt worker is paid for overtime hours at his regular rate of pay (not paid the overtime premium but still acquires a benefit from each additional hour worked over 40 in a week). If the employer does not raise the worker's salary to the new level, requiring the overtime premium may cause the employer to reduce the worker's hours to 40 per week. If the worker's regular rate of pay does not increase, the worker will earn less due to the lost hours of work.

Additional Work for Some Workers

Affected workers who remain exempt will see an increase in pay but may also see an increase in workload as Emerge Center and other commenters noted. The Department estimated the net changes in hours, but as noted in section VI.D.iv.3, subpart Modeling Changes in Wages and Hours, did not estimate changes in hours for affected workers whose earnings increase (perhaps most notably those whose salary is increased to the new threshold so they remain overtime exempt).

Reduction in Bonuses and Benefits

Some commenters stated that employers may offset increased labor costs by reducing bonuses or benefits.[211] See, e.g., Greater Philadelphia Chamber of Commerce; Kentucky Society of CPAs; Michigan Association of Certified Public Accountants; Rockingham County, North Carolina. AGC stated that 40 percent of the members it surveyed expected affected employees to lose some fringe benefits. Other commenters, such as AIA-PCI, stated that employers would reduce bonus and incentive pay to newly overtime-eligible workers, offsetting some of the earnings gains achieved through overtime pay. NAHB presented results from a survey conducted of members concerning overtime of construction supervisors, and stated that of the 33 percent of companies indicating that a change in company policies, with respect to construction supervisors, would occur, 55 percent reported they would “reduce or eliminate bonuses” and 33 percent indicated they would “reduce or eliminate other benefits.” This results in approximately 18 percent of respondents predicting reduced bonuses Start Printed Page 32494and 11 percent predicting reduced benefits.

Commenters did not provide any data from which to estimate the potential magnitude of changes to benefits or bonuses. Therefore, the Department has not incorporated these impacts into the cost and transfer estimates. Furthermore, the Department believes if employers reduce benefits or bonuses, those reductions will occur instead of the full employer adjustments included in the model; that is, an employer who reduces benefits or bonuses is likely to reduce base wages by a smaller amount. The labor market will constrain to some extent employers' ability to reduce labor costs, regardless of the types of compensation they use to achieve those reductions.

v. Sensitivity Analysis

This section includes estimated costs and transfers using either different assumptions or segments of the population. First, the Department presents bounds on transfer payments estimated using alternative assumptions. Second, in response to commenter concerns that the rulemaking would have a disproportionate impact on low-wage regions and industries, the Department considers costs and transfers by region and by industry.

1. Bounds on Transfer Payments

Because the Department cannot predict employers' precise reaction to the Final Rule, the Department calculated bounds on the size of the estimated transfers from employers to workers using a variety of assumptions. Since transfer payments are the largest component of this Final Rule, the scenarios considered here are bounds around the transfer estimate. Based on the assumptions made, these bounds do not generate bounded estimates for costs or DWL.

The potential upper limit for transfers occurs with the assumption that the demand for labor is completely inelastic, and therefore neither the implicit regular hourly rate of pay nor hours worked adjust in response to the changes in the EAP standard salary level and HCE annual compensation level. Under this assumption, employers pay workers one and a half times their current implicit hourly rate of pay for all overtime hours currently worked (i.e., the full overtime premium). The potential lower bound occurs when wages adjust completely and weekly earnings are unchanged as predicted by the employment contract model. The Department believes that both the upper bound scenario and the lower bound scenario are unrealistic; therefore, we constructed more credible bounds.

For a more realistic upper bound on transfer payments, the Department assumed that all occasional overtime workers and half of regular overtime workers would receive the full overtime premium (i.e., such workers would work the same number of hours but be paid 1.5 times their implicit initial hourly wage for all overtime hours). Conversely, in the preferred model the Department assumed that only 50 percent of occasional overtime workers and no regular overtime workers would receive the full overtime premium. For the other half of regular overtime workers, the Department assumed in the upper bound method that they would have their implicit hourly wage adjusted as predicted by the partial employment contract model (wage rates fall and hours are reduced but total earnings continue to increase, as in the preferred method). Table 24 summarizes the assumptions described above.

The plausible lower transfer bound also depends on whether employees work regular overtime or occasional overtime. For those who regularly work overtime hours and half of those who work occasional overtime, the Department assumes the employees' wages will fully adjust as predicted by the employment contract model (in the preferred method their wages adjust based on the partial employment contract model).[212] For the other half of employees with occasional overtime hours, the lower bound assumes they will be paid one and one-half times their implicit hourly wage for overtime hours worked (full overtime premium).

Table 24—Summary of the Assumptions Used To Calculate the Lower Estimate, Preferred Estimate, and Upper Estimate of Transfers

Lower transfer estimatePreferred estimateUpper transfer estimate
Occasional Overtime Workers (Type 2)
50% full EC model adj50% partial EC model adj100% full overtime premium.
50% full overtime premium50% full overtime premium
Regular Overtime Workers (Type 3)
100% full EC model adj100% partial EC model adj50% partial EC model adj. 50% full overtime premium.
* Full overtime premium: Regular rate of pay equals the implicit hourly wage prior to the regulation (with no adjustments); workers are paid 1.5 times this base wage for the same number of overtime hours worked prior to the regulation.
* Full employment contract (EC) model: Base wages are set at the higher of: (1) A rate such that total earnings and hours remain the same before and after the regulation; thus the base wage falls, and workers are paid 1.5 times the new base wage for overtime hours (the employment contract model) or (2) the minimum wage.
* Partial employment contract model: Regular rates of pay are partially adjusted to the wage implied by the employment contract model. The resulting regular rate of pay is the midpoint of: (1) A base wage that adjusts 40 percent of the way to the employment contract model wage level, assuming no overtime premium was initially paid and (2) a base wage that adjusts 80 percent of the way to the employment contract model wage level, assuming the workers initially received a 28 percent premium for overtime hours worked.

The cost and transfer payment estimates associated with the bounds are presented in Table 25. Regulatory familiarization costs and adjustment costs do not vary across the scenarios. These employer costs are a function of the number of affected firms or affected workers, human resource personnel hourly wages, and time estimates. None of these vary based on the assumptions made above. Conversely, managerial costs are lower under these alternative Start Printed Page 32495employer response assumptions because fewer workers' hours are adjusted by employers and thus managerial costs, which depend in part on the number of workers whose hours change, will be smaller.[213] Depending on how employers adjust the implicit regular hourly wage, estimated transfers may range from $487.5 million to $2,525.3 million, with the preferred estimate equal to $1,285.2 million.

Table 25—Bounds on Year 1 Cost and Transfer Payment Estimates, FY 2017

[Millions]

Cost/transferLower transfer estimatePreferred estimateUpper transfer estimate
Direct employer costs:
Reg. familiarization$272.5$272.5$272.5
Adjustment costs191.4191.4191.4
Managerial costs0.0214.062.4
Total direct employer costs463.9677.9526.2
Transfers487.51,285.22,525.3
Note 1: Pooled data for FY2013-FY2015 projected to reflect FY2017.
Note 2: Estimates due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.

2. Impacts by Regions and Industries

In response to commenter concerns that the proposed standard salary level would disproportionately impact low-wage regions and low-wage industries, and requests for additional information on impacts by region and/or industry, this section presents estimates of the impacts of this Final Rule by region and by industry (see section IV.A.iv.).

PPWO asserted that the Department's probability codes demonstrate that the proposed salary level will disproportionately impact low-wage regions and industries. Specifically, PPWO cited a study that found 100 percent of first-line supervisors of food preparation and serving workers in Mississippi would fall below the new threshold, even though the Department's probability codes state that 10 to 50 percent of employees in this occupation should pass the duties test. The Department estimated based on CPS data for FY2013-FY2015 that about 20 percent of first-line supervisors of food preparation and serving workers in Mississippi in this industry will exceed the Final Rule salary threshold, while only 10 to 50 percent will pass the duties test, which shows the change in the Final Rule mitigates the impact on low-wage regions and industries. Similarly, the National Association of Home Builders (NAHB) analyzed state-level data and found that 50 percent or more of first line construction supervisors in Arkansas, Mississippi, New Mexico, and Tennessee would be affected by the Department's proposal. However, 55 percent of first line supervisors of construction trades and extraction workers in the South earn above the Final Rule's salary threshold, even though only 0 to 10 percent of such workers nationwide are likely to pass the standard duties test. Finally, the National Restaurant Association (NRA) noted, based on a 2014 study, that the median base salary paid to restaurant managers is $47,000 and to crew and shift supervisors is $38,000. As revised, the standard salary level in this Final Rule is approximately equivalent to the 2014 median base salary paid to restaurant managers cited by NRA.

The Department analyzed impacts to low wage regions by comparing the number of affected workers, costs, and transfers across the four Census Regions. The region with the most affected workers is the South (1.7 million). However, as a share of potentially affected workers in the region, the South is not unduly affected relative to other regions (22 percent are affected compared with 16 to 19 percent in other regions); as a share of all workers in the region, the South is also not unduly affected relative to other regions (3.6 percent are affected compared with 2.7 to 3.2 percent in other regions).

Table 26—Potentially Affected and Affected Workers, by Region, FY2017

RegionWorkers subject to FLSA (millions)Potentially affected workers (millions) aAffected workers
Number (millions) bPercent of total affectedPercent of potentially affected workers in regionPercent of all workers in region
All132.822.54.210018.83.2
Northeast24.84.80.818.616.43.2
Midwest29.54.70.920.818.63.0
South48.27.81.741.122.23.6
West30.25.10.819.516.02.7
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a  Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
b Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
Start Printed Page 32496

Total transfers in the first year were estimated to be $1.3 billion (Table 27). As expected, the transfers in the South are the largest portion because the largest number of affected workers is employed in the South. Transfers in the South were estimated to be about 36.5 percent of all transfers, while the South composes 41.1 percent of all affected workers (see section VI.D.ii.), thus, transfers per affected workers are somewhat below average in the South. Annual transfers per worker are $270 in the South and range from $242 to $378 in other regions. Excluding Type 1 workers, whose hours do not change, annual transfers per worker are $699 in the South and range from $664 to $1,004 in other regions.

Table 27—Transfers by Region, FY2017

RegionTotal change in earnings (millions) aPercent of totalPer affected worker
Total$1,285.2100$304.00
Northeast189.914.8241.86
Midwest314.724.5357.13
South469.336.5269.96
West311.324.2378.28
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
a Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.

Direct employer costs are composed of regulatory familiarization costs, adjustment costs, and management costs. Total first year direct employer costs were estimated to be $677.9 million (Table 28). Total direct employer costs were estimated to be the highest in the South ($259.6 million) and lowest in the Northeast ($123.0 million). While the three components of direct employer costs vary as a percent of these total costs by region, the percentage of total direct costs in each region is fairly consistent with the share of all workers in a region. Direct employer costs in each region as a percentage of the total direct costs were estimated to be 18.1 percent in the Northeast, 22.7 percent in the Midwest, 38.3 percent in the South, and 20.9 percent in the West. Once again, these proportions are almost the same as the proportions of the total workforce in each region: 18.5 percent in the Northeast, 22.0 percent in the Midwest, 36.7 percent in the South, and 22.8 percent in the West.

Table 28—Direct Employer Costs by Region, FY2017

Direct employer costs aAll regionsNortheastMidwestSouthWest
Costs (Millions)
Regulatory familiarization$272.5$52.6$59.9$95.7