[Federal Register Volume 68, Number 61 (Monday, March 31, 2003)]
[Proposed Rules]
[Pages 15560-15597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7449]



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Part II





Department of Labor





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Wage and Hour Division



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29 CFR Part 541



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

  Federal Register / Vol. 68, No. 61 / Monday, March 31, 2003 / 
Proposed Rules  

[[Page 15560]]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1215-AA14


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

AGENCY: Wage and Hour Division, Employment Standards Administration, 
Labor.

ACTION: Proposed rule and request for comments.

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SUMMARY: The Department of Labor proposes to update and revise the 
regulations issued under the Fair Labor Standards Act (FLSA) 
implementing the exemption from minimum wage and overtime pay for 
executive, administrative, professional, outside sales and computer 
employees. These exemptions are often referred to as the FLSA's ``white 
collar'' exemptions. To be considered exempt, employees must meet 
certain minimum tests related to their primary job duties and be paid 
on a salary basis at not less than specified minimum amounts. The basic 
``duties'' tests were originally established in 1938 and revised in 
1940. The duties tests were last modified in 1949 and have remained 
essentially unchanged since that time. The ``salary basis'' test has 
remained essentially unchanged since 1954. The salary levels required 
for exemption were last updated in 1975, and the amounts adopted at 
that time were intended as an interim adjustment. Suggested changes to 
the part 541 regulations have been the subject of public commentary for 
years, including a review of the regulations by the U.S. General 
Accounting Office (GAO) in 1999. GAO recommended that the Secretary of 
Labor comprehensively review and make necessary changes to the part 541 
regulations to better meet the needs of both employers and employees in 
the modern work place, and to anticipate future work place trends. 
During 2002, the Department of Labor convened a series of stakeholder 
meetings, and heard suggestions for changes from over 40 interest 
groups representing employees and employers. The Department of Labor 
has carefully examined issues of concern raised by various interested 
parties in developing this proposed rule. The Department now invites 
public comment on all aspects of the proposed rule.

DATES: Submit written comments on or before June 30, 2003.

ADDRESSES: Address written comments to Tammy D. McCutchen, 
Administrator, Wage and Hour Division, Employment Standards 
Administration, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue, NW., Washington, DC 20210. Commenters who would like to be 
notified that their comments were received should include with their 
comments a self-addressed, stamped postcard or submit them certified 
mail, return receipt requested. As a convenience, comments of 20 pages 
or less may be submitted by facsimile (``FAX'') machine to (202) 693-
1432, which is not a toll-free number, or by e-mail to: esa.gov">[email protected]esa.gov. Because we continue to experience delays in 
receiving mail in our area, commenters are encouraged to submit any 
comments by mail early, or to transmit them electronically by FAX or e-
mail.

FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Deputy Director, 
Office of Enforcement Policy, Wage and Hour Division, Employment 
Standards Administration, U.S. Department of Labor, Room S-3506, 200 
Constitution Avenue, NW., Washington, DC 20210. Telephone: (202) 693-
0745 (this is not a toll-free number). Copies of this proposed rule may 
be obtained in alternative formats (Large Print, Braille, Audio Tape or 
Disc), upon request, by calling (202) 693-0023 (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 regulations 
issued by this agency or referenced in this notice may be directed to 
the nearest Wage and Hour Division District Office. Locate the nearest 
office by calling our toll-free help line at 1-866-4USWAGE (1-866-487-
9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto 
the Wage and Hour Division's Web site for a nationwide listing of Wage 
and Hour District and Area Offices at: http://www.dol.gov/esa/contacts/whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

    This proposed rule contains no new information collection 
requirements subject to review and approval by the Office of Management 
and Budget under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, 
et seq.). The information collection requirements for employers who 
claim exemption under 29 CFR part 541 are contained in the general FLSA 
recordkeeping requirements codified at 29 CFR part 516, which were 
approved by the Office of Management and Budget under OMB Control 
number 1215-0017. See 29 CFR 516.0 and 516.3.

II. Background

    The FLSA generally requires covered employers to pay their 
employees at least the federal minimum wage (which is currently $5.15 
an hour), and overtime premium pay of time-and-one-half the regular 
rate of pay for all hours worked over 40 in a work week. However, the 
FLSA includes a number of exemptions from the 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 pay ``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.'' However, 
pursuant to Congress' grant of rulemaking authority, implementing 
regulations have been issued, at 29 CFR part 541, defining the scope of 
the section 13(a)(1) exemptions. Because the FLSA delegates to the 
Secretary of Labor the power to define and delimit the specific terms 
of the exemptions through notice-and-comment rulemaking, the 
regulations so issued have the binding effect of law.\1\
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    \1\ See Batterton v. Francis, 432 U.S. 416, 425 n. 9 (1977).
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    These exemptions have engendered considerable confusion over the 
years regarding who is, and who is not, exempt. The implementing 
regulations generally require each of three tests to be met for the 
exemption to apply: (1) The employee must be paid a predetermined and 
fixed salary, not an hourly wage that is subject to reductions because 
of variations in the quality or quantity of work performed (the 
``salary basis test''); (2) the amount of salary paid must meet minimum 
specified amounts (the ``salary level test''); and (3) the employee's 
job duties must primarily involve managerial, administrative or 
professional skills as defined by the regulations (the ``duties 
tests'').

Legislative History

    Section 13(a)(1) was included in the original FLSA of 1938, and was 
based on provisions contained in the earlier

[[Page 15561]]

National Industrial Recovery Act and state law precedents. Specific 
references in the legislative history to the employee exemptions 
contained in section 13(a)(1) are scant. However, the exemptions were 
premised on the belief that the workers exempted typically earned 
salaries well above the minimum wage, and they were presumed to enjoy 
other compensatory privileges such as above average fringe benefits, 
greater job security and better opportunities for advancement, setting 
them apart from the nonexempt workers entitled to overtime pay.\2\ 
Further, the type of work they 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.\3\
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    \2\ Report of the Minimum Wage Study Commission, Volume IV, pp. 
236 and 240 (June 1981).
    \3\ Id.
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    Initially, persons employed in a ``local retailing capacity'' were 
also exempt, but Congress eliminated that language from the section 
13(a)(1) exemptions in 1961 when the FLSA was expanded to cover retail 
and service enterprises.\4\ Teachers and academic administrative 
personnel were added to the exemption when elementary and secondary 
schools were made subject to the FLSA in 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). A 1990 enactment expanded the exemption 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 6\1/2\ times the minimum 
wage.\5\ The compensation test for computer-related occupations was 
subsequently capped at $27.63 an hour (6\1/2\ times the former $4.25 
minimum wage) when Congress increased the minimum wage to its current 
$5.15 rate and enacted the new section 13(a)(17) exemption for such 
computer employees as part of the 1996 FLSA Amendments.\6\
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    \4\ Public Law 87-30, 75 Stat. 65 (May 5, 1961). Although 
Congress eliminated the separate, broad exemption for retail 
employees in 1961, such employees could still qualify as exempt 
executive, administrative or professional employees if they met the 
requirements for these exemptions, and Congress relaxed the duties 
tests solely to make it easier for such firms to meet the exemption 
requirements.
    \5\ Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990).
    \6\ 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)).
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Regulatory History

    The FLSA became law on June 25, 1938, and the first version of part 
541 was issued later that year in October (3 FR 2518; Oct. 20, 1938). 
In 1940, after receiving many comments on the original regulations, the 
Wage and Hour Division convened a series of public hearings for 
interested parties to express views on the regulations and to propose 
amendments. Revised regulations were issued in October 1940 (5 FR 4077; 
Oct. 15, 1940).\7\ Further hearings were initiated in 1947, leading to 
revised regulations that were issued in December 1949 (14 FR 7705; Dec. 
24, 1949).\8\ An explanatory bulletin interpreting some of the terms 
used in the regulations was published as subpart B of part 541 on 
December 28, 1949 (14 FR 7730), and became effective on January 25, 
1950. On March 9, 1954, the Department issued proposed revisions to the 
regulatory interpretations of ``salary basis'' (19 FR 1321), followed 
by a final rule issued on July 17, 1954 (19 FR 4405). The regulations 
were revised in 1958 to adjust the salary levels (23 FR 8962; Nov. 18, 
1958).\9\ Further changes were made to accommodate statutory amendments 
to the FLSA and/or to increase the salary levels in 1961, 1963, 1967, 
1970, 1973, and 1975.\10\ The existing salary rates were last revised 
on an interim basis in 1975 (see 40 FR 7092; Feb. 19, 1975). Revisions 
to increase the salary rates in January 1981 (issued at the end of the 
Carter Administration) were stayed indefinitely by the incoming Reagan 
Administration (46 FR 11972; Feb. 12, 1981). Based on petitions from 
industry groups to address other parts of the rules, and developing 
case law, the Department began a more comprehensive review leading to a 
1985 Advance Notice of Proposed Rulemaking (ANPRM) that reopened the 
public comment period and broadened the review to all aspects of the 
regulations (50 FR 47696; Nov. 11, 1985).
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    \7\ See, ``Executive, Administrative, Professional * * * Outside 
Salesman'' Redefined, Wage and Hour Division, U.S. Department of 
Labor, Report and Recommendations of the Presiding Officer (Harold 
Stein) at Hearings Preliminary to Redefinition (Oct. 10, 1940) 
(``Stein Report'').
    \8\ See, Report and Recommendations on Proposed Revisions of 
Regulations, part 541, by Harry Weiss, Presiding Officer, Wage and 
Hour and Public Contracts Divisions, U.S. Department of Labor (June 
30, 1949) (``Weiss Report'').
    \9\ See, Report and Recommendations on Proposed Revisions of 
Regulations, part 541, under the Fair Labor Standards Act, by Harry 
S. Kantor, Presiding Officer, Wage and Hour and Public Contracts 
Divisions, U.S. Department of Labor (March 3, 1958) (``Kantor 
Report'').
    \10\ See, 26 FR 8635 (Sept. 15, 1961); 28 FR 9505 (Aug. 30, 
1963); 32 FR 7823 (May 30, 1967); 35 FR 883 (Jan. 22, 1970); 38 FR 
11390 (May 7, 1973); and 40 FR 7091 (Feb. 15, 1975).
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    The Department revised these regulations in the early 1990s to 
address two specific issues. A 1990 law (Pub. L. 101-583; Nov. 15, 
1990) required regulations to be issued permitting computer systems 
analysts, computer programmers, software engineers, and other 
similarly-skilled workers in the computer field to be exempt, including 
those paid on an hourly basis if the hourly rate exceeded 6\1/2\ times 
the applicable minimum wage. (57 FR 46744; Oct. 9, 1992). Also, in 
1992, the Department issued a final rule to modify the exemption's 
requirement for payment on a ``salary basis'' as applied in the public 
sector for otherwise exempt employees paid according to pay and leave 
systems based on principles of public accountability. Under 29 CFR 
541.5d (57 FR 37677; Aug. 19, 1992), an otherwise exempt public sector 
employee does not lose exempt status under a regulated public sector 
pay and leave system that requires partial-day (or hourly) deductions 
from pay for employee absences not covered by accrued leave, or for 
budget-driven furloughs.

Overview of Existing Requirements

    The implementing regulations in part 541 contain specific criteria 
that define each category of exemption provided by section 13(a)(1). 
The applicability of any particular exemption is not presumed under the 
FLSA, but must be affirmatively established. Job titles, nomenclature, 
or job descriptions do not determine the exemptions, nor does paying a 
``salary'' rather than an hourly rate. Rather, whether an exemption 
applies depends on the specific duties and responsibilities of each 
employee's job, how much salary the employee is paid, and whether the 
salary is guaranteed without regard to the quality or quantity of work 
performed, as defined by the regulations.
    The duties tests differ for each category of exemption. Two 
different salary (or fee) levels exist for each of the exemptions for 
executive, administrative, and professional employees. The salary 
requirements do not apply to certain licensed or certified doctors, 
lawyers and teachers, or to outside sales employees. Employees paid 
below the applicable lower salary rate are not exempt regardless of 
their duties. Those paid above the higher (or

[[Page 15562]]

``upset'') salary rate are exempt if they meet a ``short'' duties test. 
Those paid between the higher and lower salary rates must meet a more 
detailed ``long'' duties test.
    The salary tests were originally designed to operate as a ready 
guide to assist employers in deciding which employees were more likely 
to meet the duties tests in the exemptions. In fact, the salary levels 
specified in the regulations were once viewed as the best indicator of 
exempt status. As last revised effective April 1, 1975, the salary 
required for executive and administrative employees under the current 
``long'' test is $155 per week; professional employees are exempt at 
$170 per week. The short test salary level (requiring fewer duties to 
be satisfied) for all three exemptions is $250 per week. Because these 
salary levels have not been raised in 28 years, virtually all employees 
are tested for exemption today under the ``short'' duties tests. 
Moreover, while the existing salary tests ($155, $170, and $250 per 
week) still reflect the interim 1975 rates, a full-time minimum wage 
worker today earns $206 per week for a 40-hour work week. Consequently, 
the existing salary tests no longer provide employees or employers any 
help in distinguishing between bona fide executive, administrative, and 
professional employees and those who should not be considered for 
exemption. Moreover, the outdated salary tests and complex duties tests 
in the current regulation cause employees to be erroneously 
misclassified as exempt and thus not paid properly.
    Under the currently applicable ``short'' test exemption 
requirements, an exempt ``executive'' employee must be paid at least 
$250 per week on a salary basis, have a primary duty to manage the 
enterprise or a customarily recognized department or subdivision 
thereof, and regularly direct the work of two or more other employees. 
An exempt ``administrative'' employee must be paid at least $250 per 
week on a salary or fee basis, have a primary duty of office or non-
manual work directly related to management policies or general business 
operations of the employer or the employer's customers (or similar 
functions in the administration of a school system or educational 
institution in work directly related to academic instruction), and 
perform work requiring the exercise of discretion and independent 
judgment. An exempt ``professional'' employee must be paid at least 
$250 per week on a salary or fee basis; 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 software field; and perform work 
requiring the consistent exercise of discretion and judgment, or work 
requiring invention, imagination, or talent in a recognized field of 
artistic endeavor. Under the professional exemption, the salary or fee 
requirement does not apply to certain licensed or certified doctors, 
lawyers and teachers; or to certain computer-related occupations if 
paid on an hourly basis at $27.63 or more per hour. An ``outside 
sales'' employee who is customarily and regularly engaged away from the 
employer's places of business making sales or obtaining orders or 
contracts for services or use of facilities, and who does not exceed a 
twenty percent tolerance per work week performing duties unrelated to 
his or her own outside sales or solicitations, is exempt. There are no 
salary or fee requirements for outside sales employees.
    Employees meeting the foregoing requirements are excluded from the 
Act's minimum wage and overtime protections. Thus, they may work any 
number of hours in the work week and are not subject to the Federal 
law's overtime pay requirements. Some state laws have stricter 
exemption standards than those just described. The FLSA does not 
preempt any such stricter State standards. If a State or local law 
establishes a higher standard than the provisions of the FLSA, the 
higher standard applies. See section 18 of the FLSA, 29 U.S.C. 218.
    The executive and administrative exemptions apply generally to 
certain management and staff-level positions within an employer's 
organization. For example, department heads with management as their 
primary duty, who regularly supervise two or more full time employees 
in their department, may qualify as executives if they are paid a 
predetermined salary of $250 or more per week. An administrative 
employee must primarily perform office or nonmanual work of substantial 
importance to the management of the business, but is not required to 
supervise other employees. Persons with functional (rather than 
departmental) management authority, or who perform ``staff'' rather 
than production or sales work, may qualify as administrative employees 
if their duties include ``discretion and independent judgment'' or 
decision-making responsibilities on important matters in managing the 
employer's general business operations (e.g., if they primarily 
determine or affect management policies in a particular area, such as 
credit, personnel, or labor relations). Executive assistants delegated 
decision-making authority to carry out parts of an exempt executive or 
administrative employee's management responsibilities may also qualify 
as exempt administrative employees.
    The professional exemption (aside from the artistic, teaching, and 
computer-related categories) applies to the recognized professions 
requiring advanced knowledge in a field of science or learning 
customarily acquired by a prolonged course of specialized intellectual 
instruction and study (i.e., the ``learned'' professions, such as 
doctor, lawyer, architect, engineer, etc.), and is typically 
characterized by possession of the appropriate academic degree for the 
particular profession. Outside sales employees must regularly work away 
from their employer's place of business making sales or obtaining 
orders or contracts; they may not exceed a 20 percent tolerance for 
performing duties unrelated to their own outside sales work. ``Inside 
sales'' employees are not included within the scope of the exemption 
for ``outside sales'' employees.
    Under the regulatory ``salary basis'' test codified at 29 CFR 
541.118, partial-day deductions from pay based on the number of hours 
worked (``pay-docking'') are generally not allowed in the private 
sector (unless made in the first or last weeks of employment or due to 
unpaid leave taken pursuant to the Family and Medical Leave Act, 29 
U.S.C. 2601 et seq.). Disciplinary deductions from pay also violate the 
``salary basis'' test (except for safety rules of major significance, 
such as no-smoking rules in oil refineries and coal mines). These 
concepts clarify the intended meaning of the requirements for payment 
of a guaranteed salary--i.e., the predetermined salary amount may not 
be reduced because of variations in either the quality or quantity of 
the work performed by the employee. Pay practices not meeting the 
guaranteed ``salary basis'' requirements cause the exemption to be 
declared inapplicable, in some cases for entire classes of 
employees.\11\
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    \11\ As noted, a special rule applies to employees of public 
agencies paid according to regulated pay and leave systems that 
require deductions for partial-day absences not covered by accrued 
leave, and for budget-driven furloughs (see 29 CFR 541.5d).

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Public Commentary and the GAO Report

    Suggested changes to the part 541 regulations have been the subject 
of extensive public commentary for years, including a report issued by 
the General Accounting Office (GAO) in September 1999.\12\ In this 
report, GAO chronicled the background and history of the exemptions, 
estimated the number of workers who might be included within the scope 
of the exemptions, identified the major concerns of employers and 
employees regarding the exemptions, and suggested possible solutions to 
the issues of concern raised by the affected interests. In general, the 
employers contacted by GAO were concerned that the regulatory tests are 
too complicated, confusing, and outdated for the modern work place, and 
create potential liability for violations when errors in classification 
occur.\13\
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    \12\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place (GAO/HEHS-99-164, September 30, 1999).
    \13\ Under the FLSA, employees may sue their employer 
(individually or collectively) for up to two, or in some cases 
three, years of back wages, plus an equal amount in liquidated 
damages and attorney fees and court costs, for violations of the 
FLSA's minimum wage and overtime requirements.
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    Employers were particularly concerned about potential liability for 
violations of the complex ``salary basis'' test and the exacting 
requirements of the so-called ``no-docking'' rule, which has been the 
focus of lawsuits against employers in recent years brought 
collectively by groups of highly paid managerial and professional 
employees. This test in effect limits employers' ability to ``dock'' 
exempt employees'' pay for partial-day personal absences and 
disciplinary violations, which limits employers' ability to hold exempt 
employees accountable for their time and actions. In addition, 
employers believed that limiting the administrative and professional 
exemptions to ``nonproduction'' employees did not account for the 
effects of modern technology on employment today. They also noted the 
traditional limits of the exemptions have blurred in the modern work 
place, citing highly skilled and highly paid technical workers without 
college degrees who do not qualify as exempt professionals but who 
perform essentially the same job as exempt engineers who have the 
required academic degrees. Manufacturing employers pointed to new 
technology used in factories, which requires advanced technical skills 
but far less traditional ``manual'' labor. They also told GAO that, 
while these workers may have to follow precise written guidelines to 
perform their work, prescribed procedures were important to modern 
quality control. Employers also believed adherence to precise written 
guidelines--one major distinction between exempt and nonexempt workers 
under the existing regulations--is necessary in a modern, efficient 
work place. Employers also complained that the discretion and 
independent judgment requirements for administrative and professional 
employees are confusing and applied inconsistently by Wage and Hour 
Division investigators in classifying similarly-situated employees, and 
are particularly difficult to apply. Thus, employers were unsure how to 
classify administrative personnel. GAO's discussions with employers and 
Wage and Hour Division investigators, and its review of compliance 
cases, confirmed that this part of the duties test involved 
particularly difficult and subjective determinations, for both the 
employers and the investigators, and that it was a source of contention 
in Department audits.
    Employee representatives contacted by GAO, in contrast, were most 
concerned that the use of the exemptions be limited to preserve 
existing overtime work hour limits and the 40-hour standard work week 
for as many employees as possible. They believed the tests have become 
weakened as applied today by judicial rulings and do not adequately 
restrict employers' use of the exemptions. When combined with the low 
salary test levels, the employee representatives felt that few 
protections remain, particularly for low-income supervisory employees. 
They believed that inflation has severely eroded the salary-level 
limitations originally envisioned by the regulations. Because of 
inflation, according to the employee representatives, the current 
salary test levels are now near the minimum wage level, rendering 
application of the regulations to the current work force virtually 
meaningless.
    GAO's report noted that the conflicting interests affected by these 
rules have made consensus difficult and that, since the FLSA was 
enacted, the interests of employers to expand the white collar 
exemptions have competed with those of employees to limit use of the 
exemptions. To resolve the issues presented, GAO suggested that 
employers' desires for clear and unambiguous regulatory standards must 
be balanced with employees' desires for fair and equitable treatment in 
the work place. The GAO recommended that the Secretary of Labor 
comprehensively review the regulations and restructure the exemptions 
to better accommodate today's workplace and to anticipate future work 
place trends.
    The House Subcommittee on Workforce Protections of the Committee on 
Education and the Workforce held a hearing in May 2000 to receive 
testimony from GAO and other interested parties on GAO's September 1999 
report. Testimony provided by the GAO, representatives of business and 
labor organizations, and the Department of Labor confirmed GAO's 
assessment of the issues and the difficulty in moving forward with 
constructive changes due to the differing views of the many affected 
and interested parties, and the potential impact of possible changes. 
Representatives of worker interests opposed making changes that would 
remove overtime protections for workers now covered, while business 
interests and employer groups advocated modernizing the regulations to 
exempt more classifications of workers from overtime pay.

III. Summary of Current Regulatory Proposal

Structure and Organization

    Part 541 presently contains two subparts. Subpart A provides the 
regulatory tests that define each category of the exemption (executive, 
administrative, professional, and outside sales). Subpart B provides 
interpretations of the terms used in the exemptions. Subpart B was 
first issued as an explanatory bulletin effective in January 1950 to 
provide guidance to the public on how the Wage and Hour Division 
interpreted and applied the exemption criteria when enforcing the FLSA. 
The Department proposes to eliminate the current distinction between 
the ``regulations'' in subpart A and the ``interpretations'' in subpart 
B. This will consolidate and streamline the regulatory text, reduce 
redundancies, and make the regulations more understandable and easier 
to decipher when applying them to particular factual situations, 
providing much-requested simplification. In addition, eliminating the 
distinction between the subpart A ``regulations'' and the subpart B 
``interpretations'' will eliminate confusion regarding the appropriate 
level of deference to be given to the provisions in each subpart.
    The proposed rule reorganizes the subparts according to each 
category of exemption, and consolidates common elements (such as a new 
subpart containing common definitions), in order to eliminate 
unnecessary duplication and repetition of regulatory

[[Page 15564]]

text. Thus, after several introductory provisions in subpart A, the 
proposed new subpart B would pertain to the executive exemption; 
subpart C would pertain to the administrative exemption; subpart D 
would pertain to the professional exemption; subpart E would contain 
provisions regarding computer employees; and subpart F would contain 
provisions regarding outside sales employees. The proposed subpart G 
would include provisions regarding salary requirements applicable to 
most of the exemptions, including salary levels and the salary basis 
test. Subpart G would also include a section on highly compensated 
employees. Proposed subpart H would contain definitions and other 
miscellaneous provisions applicable to all or several of the 
exemptions. Finally, numerous editorial changes are proposed throughout 
the rule to streamline and improve its clarity, delete outdated 
references and illustrations, and remove gender-specific references.
    Current section 541.6, entitled ``Petition for amendment of 
regulations,'' has been deleted in this proposed rule. The substance of 
that section, originally adopted in 1938 and providing for interested 
persons to petition the Administrator for desired changes in these 
regulations, has been superseded and supplanted by enactment of the 
Administrative Procedure Act, 5 U.S.C. 553(e).
    Finally, the proposed rule deletes a number of discussions 
regarding application of the exemption to specific occupations. These 
discussions appeared to be outdated, relating to occupations and duties 
which may not exist in the 21st century economy. However, because most 
stakeholders find such examples useful in applying the regulations to 
specific occupations, we invite comments on specific occupations and 
duties which should be discussed in the regulations. In particular, we 
invite comments on occupations the exempt status of which has been the 
subject of confusion and litigation including but not limited to 
pilots, athletic trainers, funeral directors, insurance salespersons, 
loan officers, stock brokers, hotel sales and catering managers, and 
dietary managers in retirement homes. The Department anticipates that 
the final rule will include additional provisions on the application of 
the exemptions to such borderline occupations, but requires more 
information about the particular job duties and responsibilities 
generally found in such occupations. We invite comments on which 
occupations should be included in the final rule and whether such 
occupations should be treated as exempt or nonexempt, including 
detailed information about job duties in such occupations.

Subpart A, General Regulations, Sec. Sec.  541.000--.002

    The current regulations have several general, introductory 
provisions scattered in various locations. The proposed regulations 
would gather these provisions together into proposed subpart A. Thus, 
the proposed section 541.000 combines an introductory statement 
currently located at section 541.99 and information currently located 
at section 541.5b regarding the application of the equal pay provisions 
in section 6(d) of the FLSA to employees exempt from the minimum wage 
and overtime provisions of the FLSA under section 13(a)(1). Proposed 
section 541.000 also contains new language to reflect legislative 
changes to the FLSA regarding computer employees and information 
regarding the new organizational structure of the proposed regulations. 
Proposed section 541.001 relocates definitions of ``Act'' and 
``Administrator'' from their current location in section 541.0. 
Finally, proposed section 541.002 contains a general statement that job 
titles alone are insufficient to establish the exempt status of an 
employee. This fundamental concept, equally applicable to all the 
exemption categories, currently appears in section 541.201(b) regarding 
administrative employees.

Subpart B, Executive Employees, Sec. Sec.  541.100--.107

    To qualify as an exempt executive under the current regulations, an 
employee must be compensated on a salary basis at a rate of not less 
than $155 per week and meet the ``long'' duties test, or at a rate of 
not less than $250 per week and meet an abbreviated ``short'' duties 
test. The long test requires that an exempt executive employee: Have a 
primary duty of managing the enterprise (or a recognized department or 
subdivision thereof); customarily and regularly direct the work of two 
or more other employees; have authority to hire or fire other employees 
or have particular weight given to suggestions and recommendations as 
to hiring, firing, advancement, promotion or other change of status; 
customarily and regularly exercise discretionary powers; and devote no 
more than 20 percent (or as much as 40 percent in retail or service 
establishments) of hours worked per week to activities that are not 
directly and closely related to performing exempt managerial work. The 
percentage restrictions on performing nonexempt work in the long test 
do not apply to an employee who is in sole charge of an independent or 
physically separate branch establishment, or to an owner of at least a 
20 percent interest in the enterprise in which the employee is 
employed. The executive short duties test requires that the employee 
have a primary duty of managing the enterprise (or a recognized 
department or subdivision thereof) and customarily and regularly direct 
the work of two or more other employees.
    The proposed regulations would streamline the current regulations 
by eliminating the separate long and short tests, and substituting a 
single standard duties test in proposed Sec.  541.100. The proposed 
standard duties test would provide that an exempt executive employee 
must: (1) Have a primary duty of managing the enterprise in which the 
employee is employed or of a customarily recognized department or 
subdivision thereof; (2) customarily and regularly direct the work of 
two or more other employees; and (3) have the authority to hire or fire 
other employees or have particular weight given to suggestions and 
recommendations as to the hiring, firing, advancement, promotion or any 
other change of status of other employees. This standard test, 
consisting of the current short test requirements plus a third 
objective requirement taken from the long test, represents a middle 
ground between the current long and short tests.
    This streamlining and simplification of the current executive 
exemption regulations will eliminate the long test subsections 
regarding the percentage restrictions on nonexempt work and the 
discretionary powers requirement. We propose to eliminate these 
subsections for several reasons. Because of its outdated salary level, 
the long test has, as a practical matter, not been operative for many 
years. Reintroducing its requirements now would add new complexity and 
burdens to the exemption tests. The tests are complex and require time-
testing managers for the duties they perform, hour-by-hour in a typical 
work week. Employers are not generally required to maintain any records 
of daily or weekly hours worked by exempt employees (see 29 CFR 516.3), 
let alone perform a moment-by-moment examination of an employee's 
specific duties performed or discretionary powers exercised. Yet 
reactivating the long test's limitations on nonexempt work could impose 
such significant new monitoring requirements (and, indirectly, new 
recordkeeping burdens) for employers to analyze the substance of each 
particular

[[Page 15565]]

employee's daily and weekly tasks in order to be confident of any 
claimed exemption. Further, historically, deciding which specific 
activities were not inherently an ``essential part of and necessarily 
incident to'' the exempt work proved to be a subjective and difficult 
standard to apply for employers, employees, as well as Wage and Hour 
Division investigators. The discretionary powers test has similarly 
proved to be a subjective and difficult standard to apply. Moreover, 
making such finite determinations would be made even more difficult in 
the aftermath of the decisions in Donovan v. Burger King, Corp., 675 
F.2d 516 (2nd Cir. 1982), Donovan v. Burger King Corp., 672 F.2d 221 
(1st Cir. 1982), and similar judicial rulings which hold that an exempt 
employee's managerial duties can be carried out at the same time the 
employee performs nonexempt manual tasks. Accordingly, given these 
developments in judicial construction of the law, the Department is of 
the view that the discretionary powers provision and the percentage 
limitations on particular duties formerly applied under the now dormant 
long test are not useful criteria that should be reintroduced for 
defining the executive exemption in today's work place.
    The proposed regulations at Sec.  541.101 would recognize as an 
exempt executive any employee who owns at least a 20 percent equity 
interest in the enterprise in which the employee is employed. Section 
541.102 of the proposed regulations would continue the principle that 
an employee in ``sole charge'' of an independent establishment or a 
physically separated branch establishment may qualify as an exempt 
executive. ``Sole charge'' of an establishment is defined to include 
the senior employee with authority to make decisions regarding day-to-
day operations and to direct the work of other employees. These 
provisions appear in the current regulations as exceptions to the 
percentage restrictions on non-exempt work under the former long test, 
in recognition of the due weight to be given the freedom from direct 
supervision and the high degree of executive responsibility enjoyed by 
the top person in charge of a separate business location, as well as 
the special status of a partial equity owner of an enterprise. The 
Department believes that these continue to be valid concepts for 
special status as executives under the proposed restructured 
regulations as well. The Department seeks comments on whether the 
salary level and/or salary basis requirements should be eliminated as 
unnecessary for sole charge executives and business owners. We have 
proposed to eliminate those requirements only for the 20 percent owner, 
based upon our belief that such an individual likely will share in the 
profits of the enterprise and that this is an adequate substitute 
indicator of exempt status.
    The proposed regulations also would reorganize, simplify, 
streamline and update the regulations in other ways. The proposed 
regulations utilize objective, plain language in an attempt to make the 
regulations understandable to employees and employee representatives, 
small business owners and human resource professionals. We also propose 
to eliminate outdated and uninformative examples and to update 
definitions of key terms and phrases. The proposed regulations would 
move a number of sections pertaining to salary issues (current 
Sec. Sec.  541.117, 541.118) to a new subpart G (discussed below), 
where all such provisions will be consolidated. Other sections relevant 
to several or all of the exemption categories (such as the definition 
of primary duty and a section regarding application of the exemptions 
to trainees) would move to a proposed new subpart H (Definitions and 
Miscellaneous Provisions) to eliminate unnecessary repetition. The 
following sections of the current regulations have been edited and 
moved to proposed new subpart H:

------------------------------------------------------------------------
                                                                Proposed
             Current Section . . . Moved to . . .               section
------------------------------------------------------------------------
541.101 General..............................................    541.702
541.103 Primary duty.........................................    541.700
541.108 Work directly and closely related....................    541.703
541.109 Emergencies..........................................    541.705
541.110 Occasional tasks.....................................    541.706
541.111 Nonexempt work generally.............................    541.702
541.116 Trainees.............................................    541.704
------------------------------------------------------------------------

    Section 541.102 of the current regulations, entitled 
``Management,'' has been modified and moved to proposed section 
541.103.
    Section 541.115 of the current regulations, entitled ``Working 
foremen,'' has been moved to proposed Sec.  541.106 and renamed, 
``Working supervisors,'' although no substantive changes are intended. 
A new provision on supervisors in retail establishments has been added 
as proposed Sec.  541.107. Both 541.106 and 541.107 address the 
difficult issue of classifying employees who have both exempt 
supervisory duties and non-exempt duties, and the Department invites 
comments on whether these sections have appropriately distinguished 
exempt and non-exempt employees. Section 541.106 provides, as in the 
current regulation, that an employee with a primary duty of ordinary 
production work is not exempt even if the employee also has some 
supervisory responsibilities. This situation often occurs in a factory 
setting where a collective bargaining unit employee who works on a 
production line also has some responsibility to direct the work of 
other bargaining unit employees. Another example is a police officer 
who directs the work of other police officers on the conduct of an 
investigation but is also a member of a bargaining unit. Bargaining 
unit members do not become exempt employees simply because they are 
given some supervisory responsibilities.
    The definition of the term ``department or subdivision'' remains at 
Sec.  541.104, and the definition of ``two or more employees'' remains 
at Sec.  541.105. The Department invites comments on whether the 
supervision of ``two or more employees'' required for exemption should 
be modified to include ``the customary or regular leadership, alone or 
in combination with others, of two or more other employees.''
    Section 541.106 of the current regulations, entitled ``Authority to 
hire or fire,'' is proposed to be deleted. The text in this section 
does not contribute to any further explanation of the requirement, and 
no further explanation seems necessary. Section 541.107 of the current 
regulations, entitled ``Discretionary powers,'' and Sec.  541.112 of 
the current regulations, ``Percentage limitations on nonexempt work,'' 
are also deleted from the proposed rule for the reasons discussed 
above.

Subpart C, Administrative Employees, Sec. Sec.  541.200-.207

    To qualify as an exempt administrative employee under the current 
regulations, an employee must be paid on a salary or fee basis at a 
rate of not less than $155 per week and meet the ``long'' duties test, 
or earn $250 per week and meet the ``short'' duties test. The long test 
requires that an exempt administrative employee have a primary duty of 
either performing office or non-manual work directly related to 
management policies or general business operations of the employer or 
the employer's customers; or performing functions in the administration 
of a school system, or educational establishment or institution, in 
work directly related to academic instruction or training. In addition, 
the current regulations require that an administrative employee: 
Customarily and regularly exercise discretion and

[[Page 15566]]

independent judgment; regularly and directly assist another exempt 
employee or perform work along specialized or technical lines requiring 
special training, experience or knowledge under only general 
supervision or perform special assignments and tasks under only general 
supervision; and devote no more than 20 percent (or as much as 40 
percent in retail or service establishments) of work hours in a week to 
activities that are not directly and closely related to the performance 
of exempt work. The short test requires that the employee have a 
primary duty of performing office or non-manual work directly related 
to management policies or general business operations, which must 
include work requiring the exercise of discretion and independent 
judgment. Under both tests, when considering whether an employee's work 
is ``directly related to management policies or general business 
operations'' the regulations and the courts assess whether the work is 
``related to the administrative operations of the business as 
distinguished from production''--known as the ``production versus staff 
dichotomy''--and whether the work is ``of substantial importance to the 
management or operation of the business.''
    The current duties test for administrative employees is the most 
difficult to apply of all the duties tests. The requirement that the 
employee exercise ``discretion and independent judgment,'' for 
instance, has generated significant confusion and litigation, as noted 
in the GAO report discussed above. This rule has been interpreted to 
deny the exemption to an employee who follows a procedures manual, even 
though most employees in the modern workplace are required to operate 
within standard procedures. The ``production versus staff dichotomy'' 
also is difficult to apply uniformly in the 21st century workplace.
    The proposed regulations at Sec.  541.200 would retain the 
requirement that an exempt administrative employee have a ``primary 
duty'' of ``performing office or non-manual work related to the 
management or general business operations of the employer or the 
employer's customers,'' but replace the ``discretion and independent 
judgment'' requirement with a new requirement that the employee hold 
``a position of responsibility'' with the employer.
    The primary duty requirement of ``performing office or non-manual 
work related to the management or general business operations'' is 
defined in a new Sec.  541.201. New Sec.  541.201 clarifies that this 
requirement refers to the type of work performed by the employee and 
includes an illustrative list of the types of work areas that meet this 
requirement: tax, finance, accounting, auditing, quality control, 
purchasing, procurement, advertising, marketing, research, safety and 
health, personnel management, human resources, employee benefits, labor 
relations, public relations, government relations and similar 
activities. The Department invites comments on any other areas that 
should be included in this list and on any areas that should be 
deleted. Like the proposed changes to the executive exemption, the 
proposed administrative exemption focuses on ``primary duty'' and 
eliminates the percentage restrictions on non-exempt work currently 
required by the now-inoperative long duties test, for the same reasons 
discussed above under the executive exemption.
    The proposed rule would also reduce the emphasis on the so-called 
``production versus staff'' dichotomy in distinguishing between exempt 
and non-exempt workers, while retaining the concept that an exempt 
administrative employee must be engaged in work related to the 
management or general business operations of the employer or of the 
employer's customers. These changes are needed to reflect emerging case 
law in this area. For example, the court in Piscione v. Ernst & Young, 
171 F.3d 527 (7th Cir. 1999), examined whether an employee's duties 
were directly related to Ernst & Young's management policies or general 
business operations or those of the firm's clients. The employee worked 
as a consultant in the firm's Human Resources Consulting Group on 
several multi-million dollar defined benefit plans and defined 
contribution plans in which thousands of individuals participated. The 
employee's work involved benefits calculations, actuarial valuations, 
government filings, compliance testing, and client advice. The court 
stated that this work influenced the internal business operations and 
policies of Ernst & Young's clients with regard to their benefit plans. 
The employee was the primary contact for several clients; the employee 
identified problems with their plans and suggested solutions, and the 
employee offered suggestions to clients regarding how to improve their 
efficiency. The court rejected the argument that, because the employee 
provided clients with reports and government forms to file, the work 
was production work. Rather, the employee was an advisory specialist or 
consultant whose work was exempt. In addition, the court found that the 
employee contributed to the management policies of Ernst & Young 
because the employee played a major role in developing new methods for 
improving client services and the timeliness of firm operations.
    The proposed Sec.  541.200 also contains a second requirement for 
the administrative exemption relating to the importance of the work 
performed or the high level of competence required by the work 
performed--a requirement that an exempt employee must hold a ``position 
of responsibility.'' The term ``position of responsibility'' is defined 
in the proposed regulations at new Sec.  541.202. To meet this new 
``position of responsibility'' requirement, an employee must either (1) 
perform work of substantial importance, or (2) employ a high level of 
skill or training. The concept of ``work of substantial importance'' 
has been in the interpretive regulations since 1950, as a factor for 
determining whether a worker is an exempt administrative employee. The 
proposed regulations at new Sec.  541.204 define this phrase based on 
language in the current regulations and include a revised list 
illustrating the types of activities that are generally considered of 
``substantial importance'' for purposes of the exemption including: 
Formulating or interpreting management policies; providing consultation 
and expert advice to management; making or recommending decisions that 
have a substantial impact on business operations or finances; analyzing 
and recommending changes to operating practices; planning long or 
short-term business objectives; analyzing data, drawing conclusions and 
recommending changes; and handling complaints, arbitrating disputes or 
resolving grievances. The Department invites comments on any additional 
activities that should be included in this list and on any activities 
that should be deleted. The second alternative for meeting the 
``position of responsibility'' requirement, ``work requiring a high 
level of skill or training,'' defined in the proposed regulations at 
new Sec.  541.205, would ensure that the administrative exemption is 
not denied to a highly trained and skilled employee who performs 
administrative functions merely because the employee uses a procedures 
manual, so long as the manual contains information that can only be 
interpreted properly by someone with a high level of specialized skills 
or training, as opposed to a manual in which the employee simply looks 
up the correct answer for a particular set of circumstances. As 
reflected in the GAO report noted above,

[[Page 15567]]

it has become commonplace for employees in the modern work place to use 
procedures manuals and written guidelines as standard practices for 
achieving quality control and efficiency.
    The administrative exemption is the most challenging of the Sec.  
13(a)(1) exemptions to define and delimit, and the ``discretion and 
independent judgment'' requirement has become increasingly difficult to 
apply with uniformity in the 21st century workplace. Thus, the 
Department proposes to delete this requirement and replace it with the 
requirement that an employee hold a ``position of responsibility.'' The 
Department specifically seeks comments on whether the ``discretion and 
independent judgment'' requirement should be deleted entirely, retained 
as a third alternative for meeting the ``position of responsibility'' 
requirement, or retained by itself but modified to provide better 
guidance on distinguishing exempt administrative employees. The 
Department invites commenters to submit alternative proposed regulatory 
language for either ``discretion and independent judgment'' or 
``position of responsibility.'' The Department solicits comment on how 
employers currently interpret the ``discretion and independent 
judgment'' requirement, and whether individuals currently exempt under 
that requirement would continue to be exempt under the new ``position 
of responsibility'' requirement.
    Finally, the proposed regulations also would reorganize, simplify, 
streamline and update the regulations in other ways. The proposed 
regulations utilize objective, plain language; eliminate outdated and 
uninformative examples; and update definitions of key terms and 
phrases. As with the executive exemption, the proposal for the 
administrative exemption would move a number of sections pertaining to 
salary issues (current Sec. Sec.  541.211, 541.212 and 541.213) to 
subpart G, and other sections relevant to several or all of the 
exemption categories would move to the proposed subpart H (Definitions 
and Miscellaneous Provisions) to eliminate unnecessary repetition. For 
example, current Sec.  541.203 entitled ``Nonmanual work'' is moved to 
proposed new Sec.  541.703. Current Sec.  541.206 entitled ``Primary 
duty'' is merged with current Sec.  541.103 and moved to proposed new 
Sec.  541.700. Current Sec.  541.208 entitled ``Directly and closely 
related'' is combined with current Sec. Sec.  541.108, 541.202, and 
541.307 and moved to proposed new Sec.  541.702. Current Sec.  541.210 
entitled ``Trainees, administrative'' is combined with current Sec.  
541.116 (``Trainees, executive'') and current Sec.  541.310 
(``Trainees, professional'') and moved to proposed new Sec.  541.704. 
Provisions related to the administration of educational institutions in 
current Sec. Sec.  541.2, 541.201(c), 541.202(e), and 541.215 have been 
consolidated and moved to new Sec.  541.206; no substantive changes are 
intended by this consolidation.

Subpart D, Professional Employees, Sec. Sec.  541.300-.304

    The current regulations pertaining to the professional exemption 
contain four separate categories of exempt employees: learned 
professionals, artistic professionals, teachers, and computer 
professionals. As with the executive and administrative exemptions, the 
regulations contain both ``short'' and ``long'' duties tests, depending 
upon the salary level of the employee. The long test contains a 
separate primary duty requirement for each of the four categories of 
employees. The long test for learned professionals requires that the 
primary duty consist of work requiring knowledge of an advanced type in 
a field of science or learning customarily acquired by a prolonged 
course of specialized intellectual instruction and study, as 
distinguished from a general academic education and from an 
apprenticeship, and from training in the performance of routine mental, 
manual, or physical processes. For creative professionals, the primary 
duty must consist of work that is original and creative in character in 
a recognized field of artistic endeavor (as opposed to work which can 
be produced by a person endowed with general manual or intellectual 
ability and training), and the result of which depends primarily on the 
invention, imagination, or talent of the employee. For teachers, the 
primary duty must consist of teaching, tutoring, instructing, or 
lecturing in the activity of imparting knowledge by an employee who is 
employed and engaged in this activity as a teacher in the school system 
or educational establishment or institution by which the person is 
employed. The duties tests for computer employees are discussed in 
subpart E. The long test also requires that an exempt employee: Perform 
work requiring the consistent exercise of discretion and judgment; do 
work that is predominantly intellectual and varied in character, such 
that the output produced or the result accomplished cannot be 
standardized in relation to a given period of time; and devote no more 
than 20 percent of work hours in a week to activities that are not an 
essential part of and necessarily incident to exempt work. The short 
test in the current regulations for both learned professionals and 
teachers contains the specific primary duty requirement discussed 
above, and requires that the employee perform work requiring the 
consistent exercise of discretion and judgment. For artistic 
professionals, the work must require invention, imagination or talent 
in a recognized field of artistic endeavor.
    The proposed regulations pertaining to the professional employee 
exemption would make changes similar to those we propose for the 
executive and administrative exemptions. The goal is to clarify and 
simplify the regulations defining the professional employee exemption, 
while remaining consistent with the purposes of the FLSA. For ease of 
reference, and making no substantive changes, we propose to move the 
provisions pertaining to computer professionals to new subpart E, which 
will contain all information pertinent to such employees. We also 
propose to simplify the regulations by eliminating the separate short 
and long tests for each of the remaining three categories and 
substituting a single standard duties test for each. This restructuring 
and simplification would eliminate the percentage limitation on 
nonexempt work and the consistent exercise of discretion and judgment 
requirement. As discussed above in connection with similar proposed 
changes to the executive and administrative exemptions, we are 
proposing to eliminate these subsections because they have proven 
difficult standards to apply uniformly.
    For learned professionals, the proposed new standard test in Sec.  
541.301 would provide that employees qualify for exemption as a learned 
professional if they have a primary duty of performing office or non-
manual work requiring advanced knowledge in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction, but which also may be acquired by an 
equivalent combination of intellectual instruction and work experience. 
This proposed standard test for learned professionals would focus on 
the knowledge of the employee and how that knowledge is used in 
everyday work, not on the educational path followed to obtain that 
knowledge. Although some flexibility to focus on the worker's knowledge 
exists in the current regulation, it is very limited and rarely used. 
The clarified test reflects changes in the 21st century workplace in 
how some ``knowledge workers'' acquire specialized learning and skills: 
in the modern workplace, some

[[Page 15568]]

employees acquire advanced knowledge through a combination of formal 
college-level education, training and work experience, even where other 
employees in that field customarily acquire advanced knowledge by 
obtaining a baccalaureate or advanced degree. The proposed changes 
would clarify that, so long as such an employee's level of advanced 
knowledge is equivalent to the knowledge possessed by an employee with 
the typical academic degree generally required by the profession, the 
employee may qualify as an exempt professional. Thus, for example, an 
employee who obtained advanced knowledge by completing college courses 
in a field such as engineering, and who worked in that field for a 
number of years, could qualify for exemption if the knowledge acquired 
was equivalent to that of an employee with a baccalaureate degree in 
engineering. We have not proposed any specific formula in the 
regulations for determining the equivalencies of intellectual 
instruction and qualifying work experience, although some examples from 
the current rule have been included and expanded. Public comments are 
invited on whether the regulations should specify such equivalencies.
    The view that several years of specialized training plus intensive 
on-the-job training for a number of additional years may be equated 
with a college degree in certain fields has found support in reported 
judicial decisions. For example, the professional exemption has been 
applied to employees with a combination of training and academics in 
Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 (D. Miss. 
1995). In Leslie, the court concluded that an employee who had 
completed three years of engineering study at a university and had many 
years of experience in the field of engineering was properly classified 
as a professional employee, even though the employee did not satisfy 
one of the usual minimum qualifications for an engineering position of 
having a bachelor's degree in an engineering discipline. The court 
considered the employee's combination of education and experience as 
satisfying the requirement for a prolonged course of specialized 
intellectual instruction and study.
    For creative professionals, we propose to adopt the current short 
test, slightly modified, as the new standard test in proposed Sec.  
541.302. This new standard test would apply the creative professional 
exemption to any employee with the primary duty of ``performing work 
requiring invention, imagination, originality or talent in a recognized 
field of artistic or creative endeavor.'' This language, although 
simplified, is not intended to make any material changes from the 
existing regulations. This standard was applied in the case of Freeman 
v. National Broadcasting Company, Inc., 80 F.3d 78 (2nd Cir. 1996), in 
which employees who researched facts, developed story elements, 
interviewed subjects, wrote scripts, and supervised the editing of 
videotape were deemed to have been correctly classified as artistic 
professional employees. On the other hand, employees of small news 
organizations who spent their time gathering facts about routine 
community events such as municipal, school board, and city council 
meetings, and gathering information from the police blotter and real 
estate transaction reports, and then reporting those facts in a 
standard format were deemed not to be artistic professional employees 
in Reich v. Newspapers of New England, 44 F.3d 1060 (1st Cir. 1995) and 
Reich v. Gateway Press, Inc., 13 F.3d 685 (3d Cir. 1994).
    The standard test for teachers in proposed section 541.303 would be 
unchanged from the current short test, with the exception of the 
deletion of the requirement that the employee's work require the 
consistent exercise of discretion and judgment, a requirement that, as 
discussed above, has engendered significant confusion. Provisions on 
teachers from current Sec. Sec.  541.3, 541.301(g), and 541.314 have 
been consolidated into proposed new Sec.  541.303. The minor editorial 
changes are not intended to cause any substantive changes.
    In addition, the proposed regulations utilize objective, plain 
language that can be easily understood by employees, small business 
owners and human resource professionals, and eliminate outdated and 
uninformative examples. The proposed regulations also would address a 
number of specific occupations that have been the subject of ambiguity 
and litigation. For example, we propose to update and clarify the 
circumstances under which employees working as newspaper journalists or 
as radio or television commentators are exempt, because the case law 
regarding such employees has been evolving over the years, and the 
existing regulations discussing such employees are outdated.
    Provisions of the current regulations in Sec. Sec.  541.3 and 
541.314 that provide an exception to the salary or fee requirements for 
physicians and lawyers have been consolidated and moved to proposed 
Sec.  541.304. Current Sec.  541.307 entitled ``Essential part of and 
necessarily incident to'' has been combined with current Sec.  541.108 
(``Work directly and closely related''), 541.202 (``Categories of 
work''), and Sec.  541.208 (``Directly and closely related''), and 
moved to proposed new Sec.  541.702 (``Directly and closely related''), 
for a streamlined discussion of the principles for distinguishing 
exempt and nonexempt work. Although these sections have been 
consolidated and simplified, we do not intend any substantive changes.
    Finally, we propose to move sections that pertain to salary issues 
(Sec. Sec.  541.311, 541.312 and 541.313) to subpart G, where all such 
issues will be consolidated. Other sections relevant to several or all 
of the exemption categories (such as the definition of primary duty, a 
section regarding application of the exemption to trainees, and a 
section discussing nonexempt work generally) would move to the proposed 
subpart H (Definitions and Miscellaneous Provisions) to eliminate 
unnecessary repetition. Current Sec.  541.305 entitled ``Discretion and 
judgment'' and current Sec.  541.309 entitled ``20-percent nonexempt 
work limitation'' have been deleted from the proposed regulations for 
the same reasons similar changes are being proposed in the executive 
and administrative exemptions as discussed above.

Subpart E, Computer Employees Exemption, Sec. Sec.  541.400-.403

    The exemption for employees in computer occupations has a unique 
legislative and regulatory history. Prior to 1991, the interpretative 
regulations acknowledged that employees in various computer-related 
occupations could have supervisory or managerial duties meeting the 
exemption for ``executive'' or ``administrative'' employees, provided 
that all the applicable regulatory tests were otherwise met. However, 
the regulations did not recognize computer employees as exempt 
``learned'' professionals absent a showing that specialized, prolonged 
academic education and training was an essential prerequisite for entry 
into the computer field. At the time, colleges and universities did not 
consistently recognize computer sciences as a bona fide academic 
discipline under which standard licensing, certification, or 
registration procedures were being followed. Thus, before 1990, 
employees in computer occupations were rarely recognized as exempt 
``learned'' professionals and many also did not perform duties

[[Page 15569]]

meeting all the requirements for the executive or administrative 
exemptions. Of course, much has changed since then, and today 
``computer scientists'' who possess advanced academic degrees in the 
computer field are routinely recognized as exempt professionals.
    In November 1990, Congress enacted legislation directing the 
Department to issue regulations permitting computer systems analysts, 
computer programmers, software engineers, and other similarly-skilled 
professional workers to qualify for exemption under FLSA section 
13(a)(1). This enactment also extended the exemption to employees in 
such computer occupations if paid on an hourly basis at a rate at least 
6\1/2\ times the minimum wage. Final implementing regulations were 
issued in 1992 following public notice and comment procedures (see 29 
CFR 541.3(a)(4) and 541.303; 57 FR 46744, Oct. 9, 1992; 57 FR 47163, 
Oct. 14, 1992). However, when Congress increased the minimum wage in 
1996, that law included some of the Department's regulatory language as 
a separate statutory exemption under a new FLSA section 13(a)(17). The 
1996 enactment also froze the hourly compensation test at $27.63 (which 
equaled 6\1/2\ times the former $4.25 minimum wage). The original 1990 
statute was not affected by the 1996 enactment.
    Accordingly, under the current regulations, an exempt computer 
employee must have a primary duty of performing work requiring 
theoretical and practical application of highly-specialized knowledge 
in computer systems analysis, programming, or software engineering. In 
addition, an exempt computer employee must be engaged in performing 
these activities as a computer systems analyst, computer programmer, 
software engineer, or other similarly-skilled worker in the computer 
software field. Finally, under the current regulations, an exempt 
computer employee must consistently exercise discretion and judgment, 
and be paid not less than $250 per week on a salary basis or not less 
than $27.63 an hour if paid an hourly rate.
    The proposed regulations would consolidate and condense all of the 
regulatory guidance on the computer occupations exemption into a new 
regulatory subpart E by combining provisions of the current regulations 
found at Sec. Sec.  541.3(a)(4), 541.205(c)(7), and 541.303. This new 
subpart will collect in one place the substance of the original 1990 
enactment, the 1992 final regulations, and the 1996 enactment. The key 
regulatory language that resulted from the 1990 enactment is now 
substantially codified in section 13(a)(17) of the Act, and thus no 
substantive changes have been made to that language. However, 
consistent with changes in the professional exemption, the proposal 
deletes the additional requirement that an exempt computer employee 
must consistently exercise discretion and judgment. Further, the former 
regulatory text has been edited and streamlined to provide a more 
concise presentation, and the structure has been modified to conform to 
similar changes proposed in the professional exemption. Because of the 
tremendously rapid pace of significant changes occurring in the 
information technology industry, we have avoided citing specific job 
titles as examples of exempt workers, as they tend to quickly become 
outdated once included in the regulatory text. The Department 
recognizes that the computer employee exemption has been particularly 
confusing, and invites comments on any further clarifications possible 
under the statute.

Subpart F, Outside Sales Employees, Sec. Sec.  541.500-.504

    Section 13(a)(1) of the FLSA contains a specific and separate 
exemption for any employee employed ``in the capacity of outside 
salesman.'' Under the existing regulations, outside sales employees 
must be customarily and regularly engaged away from the employer's 
places of business making sales or obtaining orders or contracts for 
services or the use of facilities. (``Inside sales'' employees are not 
within the scope of this statutory exemption for ``outside sales'' 
employees.) The regulatory interpretations examine whether any given 
employee's chief duty or primary function is to make sales or take 
orders while away from the employer's premises, by analyzing the 
character of the job as a whole, to distinguish exempt outside sales 
employees from other nonexempt occupations (e.g., route delivery 
personnel).
    Under the current regulations, outside sales employees also may not 
exceed a 20 percent tolerance, per work week, performing duties 
unrelated to their own outside sales or solicitations. Activities that 
are incidental to, and in conjunction with, their own outside sales or 
solicitations, including incidental deliveries and collections, are not 
counted against the 20 percent nonexempt work limitation. The 20 
percent limit is based not upon the employee's own hours of work 
performed, but upon the hours worked by other nonexempt employees of 
the employer who perform the kind of nonexempt work performed by the 
outside sales employee. If no one else performs such nonexempt work, 
the base applied is 40 hours, and the amount of nonexempt work allowed 
is eight hours per week. There is no salary or fee requirement for the 
outside sales employee exemption.
    In keeping with similar proposed changes to the other exemptions in 
this part, and to simplify the outside sales exemption, the Department 
proposes to adopt a primary duty concept similar to the other 
exemptions, and to eliminate the particularly confusing 20 percent 
restriction on nonexempt work by outside sales employees. By 
eliminating this percentage limitation, the Department proposes to 
avoid any necessity that the employer track hours of outside sales 
employees. This will provide a consistent approach between this 
exemption and the exemptions for executive, administrative and 
professional employees. The essential elements required for exemption 
would continue, i.e., the outside sales employee's primary duty must be 
to make sales or obtain orders or contracts for services or the use of 
facilities, and the employee must be customarily and regularly engaged 
away from the employer's place of business performing such duty. 
Outdated illustrations and redundant examples have also been deleted 
from the regulations, but no substantive changes are intended by these 
deletions. Finally, although the FLSA refers to the ``outside 
salesman,'' we propose replacing this gender-specific term and refer 
instead to the ``outside sales employee.'' The discussion of nonexempt 
work generally in current Sec.  541.506 has been incorporated into 
proposed new Sec.  541.701, and the discussion of outside sales 
trainees in current Sec.  541.508 has been incorporated into proposed 
new Sec.  541.704. As noted above and in connection with similar 
proposed changes to the executive, administrative and professional 
exemptions, the 20-percent limitation on nonexempt work in current 
Sec.  541.507 is proposed to be deleted.

Subpart G, Compensation Requirements, Sec. Sec.  541.600-.606

Salary Levels
    Salary level tests have been included as part of the exemption 
criteria since the original regulations of 1938. Under the current 
rules, most executive, administrative and professional employees must 
earn a minimum salary

[[Page 15570]]

level to qualify for the exemption.\14\ Employees paid below the 
minimum salary level are not exempt, irrespective of their job duties 
and responsibilities. Employees paid a salary above the minimum level 
in the regulations may be exempt if they also meet the salary basis and 
job duties tests.
---------------------------------------------------------------------------

    \14\ There is no salary level test for outside sales employees 
and some professional employees (teachers, doctors, lawyers). Such 
employees are exempt regardless of their salary.
---------------------------------------------------------------------------

    To qualify for exemption under the existing regulations, an 
employee currently must earn a minimum salary of $155 per week for the 
executive and administrative exemptions, and $170 per week for the 
professional exemption. Employees paid above these minimum salary 
levels must meet a ``long'' duties test to qualify for the exemption. 
The current regulations also provide that employees paid above a higher 
(or ``upset'') salary rate of $250 per week are exempt if they meet a 
``short'' duties test. As explained above, the short tests contain 
fewer requirements and are less burdensome to meet.\15\ The most recent 
updates to these minimum salary levels were in 1975. In January 1981, 
revisions to increase the salary rates by the outgoing Carter 
Administration were stayed indefinitely by the incoming Reagan 
Administration. Because the salary levels have not been increased since 
1975, the existing salary levels are outdated and no longer useful in 
distinguishing between exempt and nonexempt employees.
---------------------------------------------------------------------------

    \15\ Also, in 1996, Congress amended the FLSA to exempt certain 
hourly-paid computer professionals paid at least $27.63 per hour 
($57,470 per year, assuming 40 hours per week).
---------------------------------------------------------------------------

    Proposed Standard Test. 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 separate, higher 
salary level test for professional employees also would be eliminated.
    Most stakeholders agreed that the salary levels need to be 
increased. A full-time minimum wage worker earns $206 per week ($5.15/
hour x 40 hours)--an amount above the current long test levels and 
closely approaching the current short test level. As a result, under 
the current regulations, no full-time salaried worker is automatically 
exempt by earning below the long test level, and most salaried 
employees are tested for exemption under the short tests. Salary level 
was once viewed as being the best indicator of exempt status. Today, 
the existing salary level tests are of no help in distinguishing exempt 
employees from non-exempt workers. Accordingly, the question is not 
whether the Department should raise the salary levels, but by how much.
    One suggestion for increasing the current salary levels is to 
adjust the existing rates, adopted in 1975, to account for inflation. 
The 1999 General Accounting Office report adjusted the 1975 salary 
levels for inflation based on 1998 BLS Consumer Price Index (CPI) data, 
resulting in the following salary levels: $470/week for the executive 
and administrative long test; $515/week for the professional long 
tests; and $757/week for the short test.\16\ In January 2001, the 
Department published a report that applied 1999 CPI data to inflation 
adjust the current salary levels to $480/week for the long test and 
$774/week for the short test.\17\
---------------------------------------------------------------------------

    \16\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, GAO/HEHS-99-164, September 30, 1999.
    \17\ The ``New Economy'' and Its Impact on Executive, 
Administrative and Professional Exemptions to the Fair Labor 
Standards Act (FLSA), January 2001, pp. 71-73.
---------------------------------------------------------------------------

    However, several considerations weigh against mechanically 
adjusting the 1975 salary levels for inflation. First, the Department 
is proposing a different, standard duties test. Consequently, 
equivalency to either the current long and short test salary levels is 
not appropriate. Second, although adjusting the existing rates for 
inflation might provide the simplest, mechanical approach, the 
Department is concerned about the impact such adjusted salary levels 
would have on certain segments of industry and geographic areas of the 
country, particularly in the retail industry and in rural areas in the 
South, which tend to pay lower salaries. Third, mechanically adjusting 
for inflation presumes that the salary levels set in 1975 are precisely 
the appropriate baseline; and that the nature of work and the 
relationship between job duties and compensation practices have not 
changed in the intervening years since 1975. Fourth, the regulatory 
history has looked to information on actual salaries and incomes, not 
inflation-adjusted amounts. The 1949 Weiss Report, for example, 
considered and rejected proposals to increase salary levels based upon 
the change in the cost of living from the 1940 levels.\18\
---------------------------------------------------------------------------

    \18\ ``Actual data showing the increases in the prevailing 
minimum salary levels of bona fide executive, administrative and 
professional employees since October 1940 would be the best evidence 
of the appropriate salary increases for the revised regulations. * * 
* The change in the cost of living which was urged by several 
witnesses as a basis for determining the appropriate levels is, in 
my opinion, not a measure of the rise in prevailing minimum salary 
levels.'' Weiss Report, p. 12.
---------------------------------------------------------------------------

    Because of these concerns, the Department believes it would be more 
appropriate to examine available data on actual salary levels currently 
being paid in the economy. We reviewed a preliminary report on actual 
salary levels based on the BLS year 2000 Current Population Survey 
(CPS) Outgoing Rotations data set. This data included full-time, 
salaried workers aged 16 and above, but excluded the self-employed, 
agricultural workers, volunteers and federal employees (who are all not 
subject to the salary level tests in the part 541 regulations), broken 
out by industry and geographic area.
    In considering this data and various salary levels in the 
development of this proposal, the Department was guided by the 
prescient analysis of a 1958 Department of Labor report recommending 
changes to the salary levels:

    The salary tests have thus been set for the country as a whole * 
* * with appropriate consideration given to the fact that the same 
salary cannot operate with equal effect as a test in high-wage and 
low-wage industries and regions, and in metropolitan and rural 
areas, in an economy as complex and diversified as that of the 
United States. Despite the variation in effect, however, it is clear 
that the objectives of the salary tests will be accomplished if the 
levels selected are set at points near the lower end of the current 
range of salaries for each of the categories. Such levels will 
assist in demarcating the ``bona fide'' executive, administrative 
and professional employees without disqualifying any substantial 
number of such employees.
* * * * *
    It is my conclusion, from all the evidence, that the lower 
portion of the range of prevailing salaries will be most nearly 
approximated if the tests are set at about the levels at which no 
more than about 10 percent of those in the lowest-range 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. Although this may result in loss of 
exemption for a few employees who might otherwise qualify for 
exemption, * * * in the light of the objectives discussed above, 
this is a reasonable exercise of the Administrator's authority to 
``delimit'' as well as define.\19\
---------------------------------------------------------------------------

    \19\ Report and Recommendations on Proposed Revision of 
Regulations, Part 541 under the Fair Labor Standards Act, March 3, 
1958, by Harry S. Kantor, Assistant Administrator, Presiding 
Officer.

    As in the 1958 analysis, the Department looked to ``points near the

[[Page 15571]]

lower end of the current range of salaries'' to determine an 
appropriate salary level for the standard test--although we settled 
upon on the lowest 20 percent, rather than the lowest 10 percent, 
because of the proposed change from the ``short'' and ``long'' test 
structure in the proposed rule and because the data included some 
salaried employees who would not meet the duties tests for exemption. 
Applying this analysis, and also considering adjustments to the current 
salary levels for inflation, the Department proposes a standard salary 
level test of $425/week. Under this level, approximately the bottom 20 
percent of salaried employees would fall below the minimum salary 
requirement and be automatically entitled to overtime pay.
    Proposed special rule for highly compensated employees. The 
proposed regulations also include in Sec.  541.601 a special, 
streamlined rule for employees paid $65,000 or more annually. Under 
this proposed rule for highly compensated employees, employees paid 
$65,000 or more annually and performing non-manual work would be exempt 
if they have an identifiable executive, administrative or professional 
function as described in the standard duties tests. These highly 
compensated employees would not have to meet all the elements of the 
standard duties test to qualify for the exemption as a highly 
compensated employee. For example, an employee who supervises two 
workers but does not participate in any hiring or termination decisions 
in the company would still be exempt because the employee has a 
function that is identifiable as an executive function. In addition, 
the proposed special rule for highly compensated employees would permit 
counting base salary, commissions, non-discretionary bonuses and other 
non-discretionary compensation in determining whether an employee earns 
$65,000 or more annually. To qualify as a highly compensated employee 
under the proposed regulation, any commissions or non-discretionary 
bonuses would have to be settled and paid out to the employee as due on 
at least a monthly basis. An employee who works only a portion of a 
year, whether because the employee begins work during the year or 
leaves before the end of the year, must be guaranteed a pro rata 
portion of the $65,000 annual guarantee. The pro rata portion should be 
based upon the number of weeks the employee works in such a position. 
If an employee's total annual compensation does not total at least the 
guaranteed $65,000 by the end of the year, the proposed regulation 
would allow the employer to make a payment by the next pay period 
sufficient to bring the employee to the guaranteed level. The employer 
is not required to make this payment; however, if the employer elects 
not to make the one-time payment, the employee is not exempt as a 
highly compensated employee.\20\
---------------------------------------------------------------------------

    \20\ Of course, if all of the requirements in either the 
executive, administrative or professional employee tests established 
in Sec. Sec.  541.100, 541.200 or 541.300 are satisfied, the 
employer still would be able to claim the appropriate exemption.
---------------------------------------------------------------------------

    To determine an appropriate salary level for highly compensated 
employees, the Department looked to points near the higher end of the 
current range of salaries and found that the top 20 percent of all 
salaried employees earned above $65,000 annually. This level is 
consistent with setting the proposed standard test salary level at the 
bottom 20 percent of salaried employees.
    Puerto Rico, Virgin Islands and American Samoa. Prior to the Fair 
Labor Standards Amendments of 1989 (Pub. L. 101-157), Puerto Rico, the 
Virgin Islands, and American Samoa were subject to wage order 
proceedings under the Act, in lieu of the FLSA minimum wage, and 
consequently lower salary test levels traditionally were established 
for employees in these jurisdictions. The 1989 Amendments removed 
Puerto Rico and the Virgin Islands from the Act's wage order 
proceedings, and provided that the U.S. mainland minimum hourly wage 
rates under section 6(a)(1) of the Act would apply in Puerto Rico and 
the Virgin Islands. For this reason, the proposed regulations would 
apply the mainland salary test level of $425 per week in Puerto Rico 
and the Virgin Islands. Employees in American Samoa remain subject to 
wage order proceedings under the Act. Consequently, the proposed 
regulations would apply a special, lower salary test level of $360 per 
week for executive, administrative and professional employees in 
American Samoa. This special salary level maintains approximately the 
same ratio to the mainland test in the current regulations (84% for 
executive and administrative workers). Similarly, the proposal would 
apply a special test for highly compensated employees in American Samoa 
of $55,000 annually. Comments are invited on whether the 84 percent 
ratio is appropriate.
    Comments on salary levels. The Department invites comments on these 
proposed salary levels and on any alternative salary level amounts or 
methodologies for determining the appropriate salary level. In 
addition, the Department invites comments on the alternative of 
removing the salary tests from the regulations entirely and on how the 
regulations could be structured without the need for any specific 
salary amounts (relying only on duties tests, for example). The 
Department also invites comments on the alternative of adopting a 
``salary only'' test for highly compensated employees. Under such an 
alternative, for example, employees performing non-manual or office 
work and earning a total annual compensation over a certain amount 
would automatically be considered exempt, without any reference to the 
employee's duties.
Salary Basis Test
    Under the current regulations, to qualify for the executive, 
administrative or professional exemption, an employee must be paid on a 
``salary basis'' as defined in Sec.  541.118. The employee must 
regularly receive a predetermined amount of salary, on a weekly or less 
frequent basis, that ``is not subject to reduction because of 
variations in the quality or quantity of the work performed.'' Thus, 
with a few exceptions described below, the employee must receive the 
full salary for any week in which the employee performs any work 
without regard to the number of days or hours worked.
    The salary basis test prohibits an employer from making deductions 
from the salary ``for absences occasioned by the employer or by the 
operating requirements of the business.'' In other words, ``if the 
employee is ready, willing, and able to work, deductions may not be 
made for time when work is not available.'' However, the employee does 
not have to be paid for any work week in which he or she performs no 
work.
    The current salary basis test also prohibits deductions from pay 
for disciplinary problems, performance issues or for absences caused by 
jury duty, attendance as a witness, or temporary military leave 
(although employers may take offsets for jury or military pay) in any 
week in which an employee performs any work.
    The current regulations contain several exceptions to these salary 
basis rules: An employer may make deductions from the guaranteed pay 
``when the employee absents himself from work for a day or more for 
personal reasons, other than sickness or accident.'' Deductions also 
are permitted for absences of a day or more due to sickness or 
disability, if taken in accordance with a bona fide plan, policy or law 
(workers compensation, for example) providing wage

[[Page 15572]]

replacement benefits. Employers also may make deductions from an exempt 
employee's salary for any hours not worked in the initial and final 
weeks of employment or for hours taken as unpaid FMLA leave without 
affecting the exempt status of the employee. Finally, less than full 
week deductions from pay are permitted for violations of major safety 
rules.
    Under the current rules, an employer can lose the exemption for an 
entire class of employees for making improper deductions from 
guaranteed pay, even for highly paid employees. Depending on the facts, 
improper deductions can ``indicate that there was no intention to pay 
the employee on a salary basis. In such a case, the exemption would not 
be applicable to him during the entire period when such deductions were 
being made.'' For inadvertent mistakes, however, the regulations 
provide employers with a ``window of correction.'' If the facts 
demonstrate that the prohibited deduction from guaranteed pay was 
inadvertent, the exemption is not lost if the employer reimburses the 
employee for such deductions and promises to comply in the future.
    In developing options for its proposed rule, the Department 
considered whether to eliminate the salary basis test. We carefully 
weighed the need for the salary basis test and concluded that the 
underlying concept of the test `` guaranteed pay, not subject to 
reduction because of variations in the quality or quantity of the work 
performed `` should be retained. The nearly universal practice of 
paying employees with the requisite status to be bona fide executive, 
administrative, or professional employees on a salary basis, as the 
1949 hearings on the exemption revealed, reflected the understanding 
that such employees have discretion to manage their time and are not 
answerable for the number of hours worked or the number of tasks 
performed. Such employees are not paid by the hour or task, but for the 
general value of services performed. The salary basis test also 
describes the quid pro quo enjoyed by exempt employees, which 
distinguishes them from non-exempt workers. Exempt employees are not 
paid overtime for working over 40 hours in a week. In exchange, the 
employer must provide a guaranteed salary that cannot be reduced when 
an employee works less than 40 hours.
    The Department also considered amending the salary basis test to 
permit deductions from pay for cases in which an exempt employee 
chooses to be absent for a part of a day. But allowing such ``pay 
docking'' for partial-day absences would breach the quid pro quo and 
blur the line between exempt and non-exempt employees. An exempt 
manager, for example, does not receive extra pay for working 16 hours 
on a Thursday to complete a project; thus, as a matter of fundamental 
fairness, an employer should not be allowed to dock the employee's 
salary for leaving work early on Friday. Of course, an employer can 
terminate an employee who abuses this salary arrangement.
    Although the proposed rule retains the salary basis test and its 
concept of guaranteed pay in proposed Sec.  541.602, two significant 
updates are included in the proposal: Disciplinary Deductions. The 
proposed regulations would allow an exception to the no pay-docking 
rule for deductions from pay for full-day disciplinary suspensions. For 
example, an employer would be permitted to suspend an exempt employee 
without pay for reasons such as sexual harassment or workplace 
violence. The current regulations permit such deductions only for 
penalties imposed for infractions of safety rules of major significance 
and for unpaid suspensions for one or more full work weeks (i.e., 
Monday to Friday). The proposed change would allow employers to suspend 
exempt employees without pay for discriminatory harassment for two 
days, four days or 10 days, as appropriate to respond to the 
misconduct. The Department believes this is a common-sense change that 
will permit employers to uniformly hold exempt employees to the same 
standards of conduct as that required of nonexempt, hourly workers. 
Safe Harbor Provision. Under the current regulations, an employer who 
makes improper deductions from pay can lose the exemption for an entire 
class of employees. However, as mentioned above, the current rules also 
include a ``window of correction'' provision at 541.118(a)(6) under 
which an employer who inadvertently makes impermissible deductions can, 
in some circumstances, retain the exemption by reimbursing employees 
for any improper deductions. Unfortunately, the ``window of 
correction'' has proved difficult for the Department to administer and 
has been the source of considerable litigation. The proposed rule, at 
541.603, would clarify the circumstances and the extent to which an 
improper deduction causes an employee or groups of employees to become 
nonexempt. The proposed rule maintains the underlying purpose of the 
current rule that an employer does not lose the FLSA exemption because 
of isolated incidents of improper pay deductions. Under the proposal, 
the exemption would be lost only if there is a pattern and practice of 
improper deductions, and then only for employees in the same job 
classification and working for the same manager who is responsible for 
the improper pay docking decision or policy. For example, if one 
manager at a single company facility routinely docks the pay of 
engineers for partial-day absences, then all engineers at that one 
facility whose pay could have been docked by that same manager are not 
exempt. Engineers at other facilities or working for other managers 
would remain exempt. Further, the proposed rule would create a new 
``safe harbor'' provision: if an employer has a written policy 
prohibiting improper pay deductions, notifies employees of that policy 
and reimburses employees for any improper deductions, then that 
employer would not lose the exemption for any employees unless the 
employer's policy prohibiting improper deductions is repeatedly and 
willfully violated. The Department believes this approach would be much 
easier to apply uniformly and more consistent with the purposes of the 
FLSA.
    Proposed section 541.604 continues the guidance from current 
541.118(b) on allowing payments of additional compensation besides the 
salary as not being inconsistent with the salary basis of payment, and 
on pay plans that compute an exempt employee's salary from daily or 
shift rates if accompanied by the minimum guarantee. The language has 
been clarified to add hourly compensation plans that include such 
guarantees, consistent with established enforcement practices, if a 
reasonable relationship exists between the guaranteed amount and an 
employee's usual earnings for a normal scheduled work week.
    Proposed Sec.  541.605 contains updated guidance on the ``fee 
basis'' of payment permitted for administrative and professional 
employees, taken from current sections 541.213 and 541.313. Proposed 
Sec.  541.606 provides guidance on payment of required salary amounts 
``exclusive of board, lodging or other facilities'' or ``free and 
clear,'' taken from Sec. Sec.  541.117(c), 541.211(d), and 541.311(d) 
of the current regulations and expanded to cross-reference 29 CFR 
531.32 for more guidance on qualifying ``other facilities'' similar to 
board and lodging.
    The former ``upset salary'' provisions that were part of the short 
tests for executive, administrative and professional employees have 
been deleted from this proposed rule (current Sec. Sec.  541.119, 
541.214, and 541.315).

[[Page 15573]]

Subpart H, Definitions and Miscellaneous Provisions, Sec. Sec.  
541.700-.708

    To eliminate unnecessary repetition, the proposed regulations would 
move definitions and other provisions applicable to several or all of 
the exemption categories to a new subpart H, Definitions and 
Miscellaneous Provisions. The proposed subpart H would define ``primary 
duty'' in proposed Sec.  541.700; ``directly and closely related'' in 
proposed Section 541.702; ``exempt and nonexempt work'' in proposed 
Sec.  541.701; and ``office or non-manual work'' in proposed Sec.  
541.703. Subpart H would also contain provisions regarding trainees, 
emergencies and occasional tasks, combination exemptions, the motion 
picture producing industry, and employees of public agencies. Most of 
these provisions have been moved from the existing regulations without 
substantial change, although some changes have been made to simplify 
and update the current regulations. Current Sec.  541.602, containing 
guidance on the percentage limitations on performing nonexempt work for 
executive and administrative employees in multi-store retailing 
operations, is proposed to be deleted for the same reasons noted above 
for eliminating those former long duties test requirements from the 
executive and administrative exemptions.

IV. Executive Order 12866 and the Small Business Regulatory Enforcement 
Fairness Act

    This proposed rule has been drafted and reviewed in accordance with 
Executive Order 12866, section 1(b), Principles of Regulation. The 
Department has determined that the proposed rule is an economically 
significant regulatory action under section 3(f)(1) of Executive Order 
12866. Based on a preliminary analysis of the data the rule could have 
an annual effect on the economy of $100 million or more. However, the 
proposed rule is not likely to adversely affect in a material way the 
economy, a sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, or tribal 
governments or communities; create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency; or 
materially alter the budgetary impact of entitlements, grants, user 
fees, or loan programs or the rights and obligations of recipients 
thereof.
    For similar reasons, the Department has concluded that this 
proposed rule also is a major rule under the Small Business Regulatory 
Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.). Although it 
could result in an annual effect on the economy of $100 million or 
more, it is not likely to result in a major increase in costs or prices 
for consumers, individual industries, Federal, State or local 
government agencies, or geographic regions; or have significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic or export markets.
    As a result, the Department has prepared a Preliminary Regulatory 
Impact Analysis (PRIA) in connection with this proposed rule as 
required under section 6(a)(3) of the Order and the Office of 
Management and Budget has reviewed the rule. Copies of the complete 
PRIA may be obtained from the Department by contacting the Wage and 
Hour Division at the address and telephone number provided above. The 
results of the PRIA are summarized below.

Preliminary Regulatory Impact Analysis

Overview
    The proposed changes in the rules for determining whether an 
employee is exempt as an executive, administrative, or professional 
(EAP) worker under the Fair Labor Standards Act (FLSA) will affect 
virtually all employers covered by the FLSA that employ workers within 
the scope of the exemptions in 29 CFR part 541. Employers will be 
affected unless all of their employees are expressly excluded from FLSA 
coverage by the statute. Excluded from these regulations are the self-
employed, agricultural workers, railroad workers, selected occupations 
in the transportation industries and in automobile dealerships, and 
most Federal employees subject to separate rules administered by the 
U.S. Office of Personnel Management. However, 29 CFR part 541 
regulations apply to the following Federal agencies: Library of 
Congress, U.S. Postal Service, Postal Rate Commission, and Tennessee 
Valley Authority (see 29 U.S.C. 204(f)).
    Therefore, employers in all industrial sectors except agriculture, 
railroads, and private households are subject to the existing and 
proposed regulations. The regulations also apply to State and local 
governmental employees.
    The PRIA indicates that there are 6.5 million establishments with 
109.5 million employees, annual payrolls totaling $2.8 trillion, annual 
sales revenues of $17.9 trillion, and annual pre-tax profits of $769.5 
billion in the industry sectors affected by the proposed rule. 
Corresponding data based on SBA's size standards for small business 
entities indicates that over 5.2 million of these establishments are 
considered to be small businesses. These small firms employ 
approximately 38.7 million workers with an annual payroll of $940.0 
billion. Their total annual sales are estimated to be $5.7 trillion and 
their annual pre-tax profits are estimated to be $233.9 billion. 
Approximately 79.8 percent of the affected establishments are 
considered to be small businesses and they account for 38.8 percent of 
the employment, 33.7 percent of the payroll, 31.8 percent of the annual 
sales, and 30.4 percent of the annual pre-tax profits.
    Over 87,400 state and local governmental entities will be affected 
by the proposed rule (3,043 county governments, 19,372 municipal 
governments, 16,629 township governments, 34,683 special district 
governments, and 13,726 school district governments). Nationwide, these 
entities receive more than $1.4 trillion in general revenues, including 
revenues from taxes, some categories of fees and charges, and 
intergovernmental transfers. Their direct expenditures exceed $1.6 
trillion in the aggregate. State and local governments employ more than 
4 million workers and their payrolls exceed $12.6 billion per month.
    The following tables summarize the provisions of the current 29 CFR 
part 541 and the proposed rule that were analyzed in the PRIA.

    Table 1.--Weekly Salary Levels in the Current and Proposed Rules
------------------------------------------------------------------------
                                                                Dollars
------------------------------------------------------------------------
                         Current Rule
 
Long Test:
  Executives.................................................        155
  Administrative.............................................        155
  Professionals..............................................        170
Short Test...................................................        250
 
                        Proposed Rule
 
Standard Test................................................        425
Highly Compensated...........................................      1,250
------------------------------------------------------------------------


[[Page 15574]]


 Table 2.--The Current and Proposed Duties Tests for Executive Employees
------------------------------------------------------------------------
                                                      Proposed standard
  Current long test (salary    Current short test     test (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$155 per week...............  $250 per week.......  $425 per week.
Primary duty of the           Primary duty of the   Primary duty of
 management of the             management of the     management of the
 enterprise or a recognized    enterprise or a       enterprise or a
 department or subdivision.    recognized            recognized
                               department or         department or
                               subdivision.          subdivision.
Customarily and regularly     Customarily and       Customarily and
 directs the work of two or    regularly directs     regularly directs
 more other employees.         the work of two or    the work of two or
                               more other            more other
                               employees.            employees.
Has authority to hire or                            Has authority to
 fire other employees (or                            hire or fire other
 recommendations as to                               employees (or
 hiring, firing, promotion                           recommendations as
 or other change of status                           to hiring, firing,
 of employees is given                               promotion or other
 particlar weight).                                  change of status of
                                                     other employees is
                                                     given particlar
                                                     weight).
Customarily and regularly
 exercises discretionary
 powers.
Does not devote more than 20
 percent (40 percent in
 retail or service
 establishments) of time to
 activities that are not
 directly and closely
 related to exempt work.
------------------------------------------------------------------------


   Table 3.--The Current and Proposed Duties Tests for Administrative
                                Employees
------------------------------------------------------------------------
                                                      Proposed standard
  Current long test (salary    Current short test     test (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$155 per week...............  $250 per week.......  $425 per week.
Primary duty of performing    Primary duty of       Primary duty of
 office or non-manual work     performing office     performing office
 directly related to           or non-manual work    or non-manual work
 management policies or        directly related to   directly related to
 general business operations   management policies   the management or
 of the employer or the        or general business   general business
 employer's customers.         operations of the     operations of the
                               employer or the       employer or the
                               employer's            employer's
                               customers.            customers.
Customarily and regularly     Customarily and       Holds a ``position
 exercises discretion and      regularly exercises   of responsibility''
 independent judgment.         discretion and        with the employer,
                               independent           defined as either
                               judgment.             (1) performing work
                                                     of substantial
                                                     importance or (2)
                                                     performing work
                                                     requiring a high
                                                     level skill or
                                                     training.
Regularly and directly
 assists a proprietor, or
 exempt executive or
 administrative employee; or
 performs specialized or
 technical work requiring
 special knowledge under
 only general supervision;
 or executes special
 assignments under only
 general supervision.
Does not devote more than 20
 percent (40 percent in
 retail or service
 establishments) of time to
 activities that are not
 directly and closely
 related to exempt work.
------------------------------------------------------------------------


Table 4.--The Current and Proposed Duties Tests for Learned Professional
                                Employees
------------------------------------------------------------------------
                                                      Proposed standard
 Current long test  (salary    Current short test     test  (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$170 per week...............  $250 per week.......  $425 per week.
Primary duty of performing    Primary duty of       Primary duty of
 work requiring knowledge of   performing work       performing office
 an advanced type in a field   requiring knowledge   or non-manual work
 of science or learning        of an advanced type   requiring knowledge
 customarily acquired by a     in a field of         of an advanced type
 prolonged course of           science or learning   in a field of
 specialized intellectual      customarily           science or learning
 instruction and study.        acquired by a         customarily
Consistently exercises         prolonged course of   acquired by a
 discretion and judgment..     specialized           prolonged course of
Performs work that is          intellectual          specialized
 predominantly intellectual    instruction and       intellectual
 and varied in character and   study                 instruction, but
 is of such character that    Consistently           which also may be
 the output produced or        exercises             acquired by
 result accomplished cannot    discretion and        alternative means
 be standardized in relation   judgment.             such as an
 to a given period of time..                         equivalent
Does not devote more than 20                         combination of
 percent of time to                                  intellectual
 activities that are not an                          instruction and
 essential part of and                               work experience.
 necessarily incident to
 exempt work.
------------------------------------------------------------------------


      Table 5.--The Current and Proposed Duties Tests for Creative
                         Professional Employees
------------------------------------------------------------------------
                                                      Proposed standard
 Current long test  (salary    Current short test     test  (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
$170 per week...............  $250 per week.......  $425 per week.

[[Page 15575]]

 
Primary duty of performing    Performs work         Primary duty of
 work that is original and     requiring             performing work
 creative in character in a    invention,            requiring
 recognized field of           imagination, or       invention,
 artistic endeavor, and the    talent in a           imagination,
 result of which depends       recognized field of   originality or
 primarily on the invention,   artistic endeavor.    talent in a
 imagination, or talent of                           recognized field of
 the employee.                                       artistic or
Consistently exercises                               creative endeavor.
 discretion and judgment..
Performs work that is
 predominantly intellectual
 and varied in character and
 is of such character that
 the output produced or
 result accomplished cannot
 be standardized in relation
 to a given period of time.
Does not devote more than 20
 percent of time to
 activities that are not
 directly and closely
 related to exempt work.
------------------------------------------------------------------------


                     Table 6.--The Current and Proposed Duties Tests for Computer Employees
----------------------------------------------------------------------------------------------------------------
    Current long test  (salary and        Current short test     Section 13(a)(17) test   Proposed Standard Test
               duties)                   (salary and duties)      (salary and duties)      (salary and duties)
----------------------------------------------------------------------------------------------------------------
$170 per week........................  $250 per week..........  $27.63 an hour.........  $425 per week or $27.63
                                                                                          an hour.
Primary duty of performing work        Primary duty of          Primary duty of (A)      Primary duty of (A)
 requiring theoretical and practical    performing work          application of systems   application of systems
 application of highly-specialized      requiring theoretical    analysis techniques      analysis techniques
 knowledge in computer systems          and practical            and procedures,          and procedures,
 analysis, programming, and software    application of highly-   including consulting     including consulting
 engineering.                           specialized knowledge    with users, to           with users, to
                                        in computer systems      determine hardware,      determine hardware,
                                        analysis, programming,   software of system       software of system
                                        and software             functional               functional
                                        engineering.             applications; or (B)     applications; or (B)
                                                                 design, development,     design, development,
                                                                 documentation            documentation
                                                                 analysis, creation,      analysis, creation,
                                                                 testing, or              testing, or
                                                                 modification of          modification of
                                                                 computer systems or      computer systems or
                                                                 programs, including      programs, including
                                                                 prototypes, based on     prototypes, based on
                                                                 and related to user of   and related to user of
                                                                 system design            system design
                                                                 specifications; or (C)   specifications; or (C)
                                                                 design, documentation,   design, documentation,
                                                                 testing , creation or    testing , creation or
                                                                 modification of          modification of
                                                                 computer programs        computer programs
                                                                 related to machine       related to machine
                                                                 operating systems; or    operating systems; or
                                                                 (D) a combination of     (D) a combination of
                                                                 duties described in      duties described in
                                                                 (A), (B) and (C), the    (A), (B) and (C), the
                                                                 performance of which     performance of which
                                                                 requires the same        requires the same
                                                                 level of skills.         level of skills.
Employed as a computer systems         Employed as a computer   Employed as a computer   Employed as a computer
 analyst, computer programmer,          systems analyst,         systems analyst,         systems analyst,
 software engineer, or other            computer programmer,     computer programmer,     computer programmer,
 similarly skilled worker in the        software engineer, or    software engineer, or    software engineer, or
 computer software field.               other similarly          other similarly          other similarly
                                        skilled worker in the    skilled worker in the    skilled worker in the
                                        computer software        computer software        computer software
                                        field.                   field.                   field.
Consistently exercises discretion and  Consistently exercises                            .......................
 judgment.                              discretion and
                                        judgment.
Performs work that is predominantly
 intellectual and varied in character
 and is of such character that he
 output produced or result
 accomplished cannot be standardized
 in relation to a given period of
 time.
Does not devote more than 20 percent
 of time to activities that are not
 directly and closely related to
 exempt work.
----------------------------------------------------------------------------------------------------------------


    Table 7.--The Current and Proposed Duties Tests for Outside Sales
                                Employees
------------------------------------------------------------------------
                                                      Proposed standard
  Current long test (salary    Current short test     test (salary and
         and duties)           (salary and duties)         duties)
------------------------------------------------------------------------
None required...............  None required.......  None required.

[[Page 15576]]

 
Employed for the purpose of   No separate           Primary duty of
 and customarily and           ``short'' test.       making sales; or of
 regularly engaged away from                         obtaining orders or
 the employer's place of                             contracts for
 business in making sales;                           services or for the
 or in obtaining orders or                           use of facilities
 contracts for services or                           for which a
 for the use of facilities                           consideration will
 for which a consideration                           be paid by the
 will be paid by the client                          client or customer
 or customer.                                       Customarily and
                                                     regularly engaged
                                                     away from the
                                                     employer's place or
                                                     places of business.
Does not devote more than 20
 percent of the hours worked
 by nonexempt employees of
 the employer to activities
 that are not incidental to
 and in conjunction with the
 employee's own outside
 sales or solicitations.
------------------------------------------------------------------------

Methodology for Estimating Costs
    The principal database used in the PRIA is the 2001 Current 
Population Survey (CPS). A complete description of the methodology used 
for determining the employees who are potentially exempt and nonexempt 
from the overtime requirements of the current and proposed rule is 
contained in the PRIA available by contacting the Wage and Hour 
Division at the address and telephone number provided above.
    The economic impact of the proposed rule includes two components: 
One-time implementation costs; and recurring incremental payroll costs 
incurred by employers for those employees presently treated as exempt 
from overtime under the current rule, who become nonexempt.
    The implementation costs contain two parts. The first part includes 
the amount of time employers would take to: (1) Read and understand the 
proposed rule; (2) update and formulate their overtime policies; (3) 
notify employees of any changes; and (4) all other time taken to 
implement the proposed rule. The second part of the implementation 
costs is the amount of time employers would take to review their job 
categories to determine (1) whether or not a particular job category is 
exempt or nonexempt under the proposed rule, and (2) how to adjust to 
the new salary levels and duties tests. To estimate the implementation 
costs of the proposed rule, the department contacted six human resource 
specialists from around the country to obtain information on the amount 
of time small and large businesses would take for each of these 
activities. High and low estimates of the implementation costs were 
estimated by varying the amount of time taken to review job categories 
and other time taken to implement the proposed rule.
    The second component of the economic impact of the proposed rule is 
the recurring incremental payroll costs incurred by employers for those 
employees presently treated as exempt from overtime under the current 
rule, who become nonexempt as a result of raising the salary levels and 
revising the duties tests.
    Affected employers would have four choices concerning potential 
payroll costs: (1) Adhering to a 40 hour work week; (2) paying 
statutory overtime premiums for affected workers' hours worked beyond 
40 per week; (3) raising employees' salaries to levels required for 
exempt status by the proposed rule; or (4) converting salaried 
employees' basis of pay to an hourly rate (no less than the federal 
minimum wage) that results in virtually no (or only a minimal) changes 
to the total compensation paid to those workers. Employers could also 
change the duties of currently exempt and nonexempt workers to comply 
with the proposed rule.
    For the second choice above, paying overtime premium pay, employers 
typically have two options, with differing cost implications, for 
meeting their statutory overtime obligations. For example, assume an 
employer paid an employee a fixed salary of $400 per week with no 
overtime premium pay, for which the employee worked 45 hours per week, 
and the employer must now begin to pay this employee overtime pay. As 
one option, the employer could assume that the former weekly salary of 
$400 represents compensation for a standard 40-hour workweek, and pay 
this employee in the future time-and-one-half the $10 hourly rate for 
any overtime hours worked beyond 40 per week. For a 45-hour workweek, 
total compensation due, including overtime, would equal $475 ((40 hours 
x $10/hour) + (5 hours x $15/hour) = $475), compared to $400 formerly. 
As a second option, the employer could pay the fixed salary of $400 per 
week as total straight time pay for all hours worked in the week 
(provided it equals or exceeds the federal minimum wage), and pay 
additional ``half-time'' for each hour worked beyond 40 in the week. 
This method of payment is known as a ``fixed salary for fluctuating 
hours'' (see 29 CFR 778.114). For a 45-hour workweek, total 
compensation due under this method, including overtime, would equal 
$422.22 ($400 + (($400/45) x \1/2\ x 5) = $422.22).
    The third choice above is straightforward--an employer could simply 
raise the salary level for currently exempt salaried workers earning 
less than $22,100 to at least the new proposed salary level or more and 
have them remain exempt salaried workers.
    Nothing in the FLSA would prohibit an employer affected by the 
proposed rule, or under the current rule, from implementing the fourth 
choice above that results in virtually no (or only a minimal) increase 
in labor costs. For example, to pay an hourly rate and time and one-
half that rate for 5 hours of overtime in a 45-hour workweek and incur 
approximately the same total costs as the former $400 weekly salary, 
the regular hourly rate would compute to $8.421 ((40 hours x $8.421) + 
(5 hours x (1.5 x $8.421)) = $399.99).
    Most employers affected by the proposed rule would be expected to 
choose the most cost-effective compensation adjustment method that 
maintains the stability of their work force, pay structure, and output 
levels. Given the range of options available to an employer confronted 
with paying overtime to employees previously treated as exempt, the 
actual payroll cost impact for individual employers could range from 
near zero to up to the maximum cost impacts estimated in the 
Department's PRIA. However, for the PRIA it is was assumed that, for 
any nonexempt employee who satisfies the pertinent duties test, the 
employer will choose to pay the smaller of either the additional weekly 
salary required to qualify the employee for exemption or the usual 
weekly overtime payment for the employee. Thus, the Department's

[[Page 15577]]

assessment of costs of the proposed rule reflects a range of upper 
bound estimates. Actual payroll costs would be expected to be lower 
than the estimates summarized below and presented in the PRIA because 
of the payroll adjustment option employers have that could offset the 
impact of the proposed rule. Moreover, some of the cost is likely to be 
passed on to consumers in the form of higher prices, some of the cost 
is likely to be passed on to business owners and shareholders in the 
form of lower profits, and some of the cost is likely to be passed on 
to workers in the form of fewer overtime hours.
    Finally, estimated costs are presented as ranges because data 
limitations prevent the Department from identifying exactly which 
workers are exempt and nonexempt based on the current and proposed 
duties tests. The estimates were determined using previous Department 
and U.S. General Accounting Office methodology and the latest data from 
the Bureau of Labor Statistics, the Census Bureau, and Dunn and 
Bradstreet. The ranges result from estimating a minimum and maximum 
number of workers that are likely to change from exempt to nonexempt 
employees. To estimate the recurring payroll costs of the proposed 
rule, it was necessary to apply some assumptions to the PRIA data to 
identify which employees are exempt and nonexempt under the current and 
proposed rules. Specifically, the Department assumed that for employees 
in occupations with a combination of exempt and nonexempt duties those 
with lower salaries would more likely be non-exempt. The Department 
also assumed that six years or more of work experience would be 
considered equivalent to a bachelor's degree for the learned 
professional exemption. For each occupational category with a 
combination of exempt and nonexempt duties a lower bound and an upper 
bound estimate of the number of employees who are exempt has been 
calculated. Finally, it was assumed that for each executive, 
administrative, or professional employee who becomes nonexempt, the 
likely incremental payroll cost is the smaller of the additional weekly 
salary required to qualify for exemption or the usual weekly overtime 
payment required to be paid to that worker.
Methodology for Estimating Benefits
    The benefit estimates are lower bound estimates based on PRIA data 
and a Minimum Wage Study Commission report that estimated overtime 
violation rates by industry. The Department applied these rates to the 
overtime hours worked by salaried employees in the PRIA data, and then 
reduced these estimates by two-thirds to account for other types of 
overtime violations (off-the-clock-work, straight time for all hours) 
that occur in addition to violations of the ``white collar'' 
exemptions. The Department's high and low benefit estimates result from 
different assumptions on the lower costs associated with determining 
the exempt status of employees including conducting expensive time-and-
motion studies and lower litigation costs, as well as the updated 
window of correction and safe harbor provisions in the proposed rule. 
The benefit estimates summarized below are lower bound estimates 
because they exclude significant, but difficult to quantify, benefits 
such as avoidance of the following additional costs which could be 
incurred by an employer who has misclassified employees as exempt: (1) 
The second and third years of overtime back pay allowed under the FLSA; 
(2) an amount equal to the back pay as liquidated damages; and (3) 
litigation costs, including attorney's fees. The benefit estimates also 
exclude the reduced human resource and legal costs for classifying 
workers under the proposed rule, and improved management productivity 
from reduced Department of Labor investigations and private litigation.
    Three assumptions were applied to the PRIA data to estimate the 
benefits of the proposed rule; the Department requests comments on 
these and all assumptions used for the impact analysis. First, the 
overtime violation rates published by the Minimum Wage Study Commission 
in 1980 were assumed to apply today. Second, the Commission's overtime 
violation rates were reduced to account for other types of overtime 
violations (off-the-clock-work, straight time for all hours) that occur 
in addition to violations of the ``white collar'' exemptions. Finally, 
the Department's range of benefit estimates result from different 
assumptions on the impact of the updated window-of-correction and safe 
harbor provisions in the proposed rule. The Department welcomes 
comments and estimates from the public on the amount of benefits 
associated with these provisions and other significant, but difficult 
to quantify, benefits such as the reduced human resource and legal 
costs for classifying workers under the proposed rule, and improved 
management productivity from reduced investigations and litigation.
Total Costs and Benefits
    The upper bound total cost estimate for the proposed rule ranges 
from $870.3 million to $1,575.5 million. This includes one-time 
implementation costs ranging from $535.4 million to $680.0 million and 
recurring payroll costs ranging from $334.8 million to $895.5 million. 
The lower bound total benefit estimate for the proposed rule ranges 
from $1,109.8 million to $1,972.7 million.
Private Sector Costs and Benefits
    The upper bound private sector cost estimate for the proposed rule 
ranges from $849.2 million to $1,531.9 million. This includes one-time 
implementation costs ranging from $521.4 million to $660.3 million and 
recurring payroll costs ranging from $327.8 million to $871.6 million. 
The total private sector costs as a percentage of total payroll range 
from 0.03 percent to 0.05 percent for all industries, and from 0.11 
percent to 0.21 percent of total pre-tax profits for all industries.
    The lower bound private sector benefit estimate for the proposed 
rule ranges from $1,061.3 million to $1,886.5 million. These estimates 
include the impact of updating the window of correction and safe harbor 
provisions in the proposed rule but do not include significant, but 
difficult to quantify, benefits such as the reduced human resource and 
legal costs for classifying workers under the proposed rule, and 
improved management productivity from reduced investigations and 
litigation.
    The largest total costs are incurred by the Health Services 
industry ($85.3 million to $163.4 million), Construction ($71.2 million 
to $119.1 million), Business Services ($54.1 million to $86.4 million), 
Personal Services ($38.1 million to $83.8 million), and Real Estate 
($32.2 million to $71.4 million). The 10 industries with the highest 
costs account for over 50.4 percent of the total private sector costs.
    Although the benefits of the proposed rule exceed the costs at the 
total level and for many of the major industry levels, there are some 
industries where the costs exceed the benefits (see Table 8). This 
result arises for three reasons. First, the costs are upper bound 
estimates and the benefits are lower bound estimates (see Methodology 
section above). The true net benefit for most industries could very 
well be positive. Second, a large increase in the salary levels raises 
the potential costs of the proposed rule. Finally, the industries most 
likely to bear the cost of the proposed rule are not necessarily the

[[Page 15578]]

industries most likely to receive the benefits. Most of the benefits 
come from the reduction in the potential legal liability from 
unintentionally misclassifying fairly high paid salaried workers 
working more than 40 hours per week in occupations with exempt and 
nonexempt duties, while most of the costs come from increasing the 
salary level tests for relatively low paid salaried workers. The PRIA 
data suggest that the number of workers in these two groups is often 
not equal at a detailed industry level. For example, because of the 
historical pattern of compensation levels in the Personal Services and 
Automotive Repair, Services, and Parking industries one would expect to 
find far more relatively low paid salaried workers affected by the 
proposed salary level tests than relatively high paid salaried workers 
unintentionally misclassified.
    The largest total costs as a percentage of payroll are incurred by 
the Educational Services industry (0.37 percent to 0.98 percent), 
Agricultural Services (0.22 percent to 0.53 percent), Personal Services 
(0.21 percent to 0.46 percent), Automotive Repair, Services, and 
Parking (0.13 percent to 0.29 percent), and Transportation by Air (0.11 
percent to 0.22 percent).
    The largest recurring payroll costs as a percentage of pre-tax 
profits are incurred by the Educational Services industry (1.95 percent 
to 5.22 percent), Personal Services (1.38 percent to 3.03 percent), 
Automotive Repair, Services, and Parking (0.84 percent to 1.81 
percent), Agricultural Services (0.54 percent to 1.26 percent), and 
Transportation by Air (0.54 percent to 1.07 percent).

                               Table 8.--Summary of Costs and Benefits for Industry Sectors Affected by the Proposed Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Low            High          Low        High
    SIC         Industry     implementation  implementation   payroll    payroll   Low total  High total      Low        High         Low        High
              description         costs           costs        costs      costs      costs       costs     benefits    benefits   difference  difference
--------------------------------------------------------------------------------------------------------------------------------------------------------
07........  Agricultural           $2,895          $4,020      $14,833    $37,529    $17,729     $41,549      $2,032      $3,612    -$15,697    -$37,937
             Services 4.
08........  Forestry 4.....            83             113           27         58        110         171         346         614         235         444
09........  Fishing,                   63              88          121        381        184         469         195         346          11        -123
             Hunting, &
             Trapping 4.
                            -----------------
               Agriculture          3,042           4,221       14,981     37,968     18,023      42,188       2,572       4,573     -15,451     -37,616
                Subtotal.
10........  Metal mining...           121             146            0          0        121         146         185         328          64         182
12........  Coal mining....           239             293          119        346        358         639         647       1,150         289         511
13........  Oil & gas               1,431           1,820          856      1,882      2,287       3,701       4,525       8,044       2,238       4,342
             extraction.
14........  Nonmetallic               475             602            8         13        483         615         520         924          37         309
             minerals,
             except fuels.
                            -----------------
               Mining               2,266           2,860          984      2,242      3,250       5,102       5,877      10,447       2,627       5,345
                Subtotal.
15-17.....  Construction...        48,090          64,024       23,096     55,046     71,186     119,070      33,486      59,524     -37,700     -59,545
20........  Food & kindred          5,587           6,577        1,767      3,793      7,354      10,370       3,654       6,495      -3,700      -3,875
             products.
21........  Tobacco                    87             100           83        197        169         297         110         195         -60        -102
             products.
22........  Textile mill            1,855           2,176          488      1,192      2,343       3,368         538         956      -1,806      -2,412
             products.
23........  Apparel & other         4,367           5,212          960      1,896      5,327       7,108         790       1,405      -4,537      -5,703
             textile
             products.
24........  Lumber & wood           5,746           6,917          804      2,103      6,550       9,021         922       1,639      -5,628      -7,382
             products.
25........  Furniture &             2,454           2,918          371      1,068      2,824       3,986         727       1,292      -2,098      -2,694
             fixtures.
26........  Paper & allied          2,034           2,383          826      1,754      2,860       4,137       1,484       2,638      -1,376      -1,500
             products.
27........  Printing &             10,260          12,319        3,607     16,921     13,867      29,240       3,554       6,318     -10,313     -22,922
             publishing.
28........  Chemicals &             3,118           3,678        2,969     11,299      6,087      14,977       5,892      10,473        -196      -4,504
             allied
             products.
29........  Petroleum &               481             569          910      1,637      1,390       2,206         776       1,380        -614        -826
             coal products.
30........  Rubber &                4,040           4,775          819      2,313      4,860       7,088       1,586       2,820      -3,274      -4,268
             miscellaneous
             plastics
             products.
31........  Leather &                 373             443          179        459        552         902         261         465        -291        -437
             leather
             products.
32........  Stone, clay, &          2,915           3,487          642      1,616      3,558       5,104         998       1,774      -2,560      -3,329
             glass products.
33........  Primary metal           2,125           2,485        1,078      3,017      3,203       5,501       1,596       2,837      -1,607      -2,664
             industries.
34........  Fabricated              7,498           8,927        1,993      4,837      9,491      13,764       1,942       3,452      -7,549     -10,311
             metal products.
35........  Industrial             10,509          12,543        2,778      6,887     13,287      19,430       7,515      13,359      -5,772      -6,071
             machinery &
             equipment.
36........  Electronic &            5,180           6,076        3,768      8,860      8,948      14,936       6,759      12,014      -2,189      -2,922
             other electric
             equipment.
37........  Transportation          4,689           5,469        5,207     11,883      9,896      17,352       5,352       9,513      -4,545      -7,839
             equipment.
38........  Instruments &           3,032           3,573        1,911      4,940      4,943       8,512       3,057       5,435      -1,885      -3,078
             related
             products.
39........  Misc.                   2,886           3,470        1,281      3,727      4,167       7,196       1,220       2,169      -2,947      -5,027
             manufacturing
             industries.
                            -----------------
               Manufacturin        79,235          94,095       32,442     90,399    111,678     184,494      48,733      86,628     -62,944     -97,866
                g Subtotal.
40          Railroad                   nc              nc          528      1,890        528       1,890       1,510       2,684         982         793
             Transportation
             (5).
41........  Local &                 1,500           1,881        1,216      2,652      2,716       4,533         861       1,531      -1,854      -3,003
             interurban
             passenger
             transportation.
42........  Motor freight           8,873          11,271        3,415      7,879     12,288      19,150       7,722      13,727      -4,566      -5,423
             transportation
             & warehousing.
43........  U.S. Postal             2,875           3,610        1,359      5,147      4,234       8,757         643       1,143      -3,591      -7,614
             Service (6).
44........  Water                     655             827          380      1,255      1,036       2,082       1,694       3,010         658         928
             transportation.
45........  Transportation            986           1,225       11,213     22,633     12,200      23,858       4,588       8,155      -7,612     -15,703
             by air (7).
46........  Pipelines,                 59              74            6         14         65          89          31          54         -35         -34
             except natural
             gas.
47........  Transportation          3,125           4,014          822      2,407      3,947       6,421         963       1,712      -2,984      -4,710
             services.
48........  Communications.         3,815           4,740        5,424     13,690      9,239      18,430      14,516      25,804       5,277       7,374
49........  Electric, gas,          2,052           2,537        2,623      7,136      4,675       9,673       5,977      10,625       1,302         952
             & sanitary
             services.
                            -----------------
                Trans.,            23,940          30,180       26,460     62,813     50,400      92,993      36,994      65,761     -13,406     -27,233
                Comm., &
                Pub. Util.
                Subtotal.
50........  Wholesale              25,544          32,579        4,334     10,296     29,877      42,875      38,356      68,182       8,479      25,307
             trade--durable
             goods.
51........  Wholesale              14,764          18,738        4,538     10,934     19,302      29,672      31,512      56,016      12,210      26,344
             trade--nondura
             ble goods.
                            -----------------
               Wholesale           40,308          51,318        8,871     21,229     49,179      72,547      69,868     124,198      20,689      51,650
                Subtotal.
52........  Building                4,608           5,874          949      2,380      5,557       8,254      10,553      18,758       4,995      10,504
             materials,
             hardware,
             garden supply,
             & mobile home
             dealers.

[[Page 15579]]

 
53........  General                 5,222           6,352        2,961      7,041      8,183      13,393      14,966      26,604       6,783      13,210
             merchandise
             stores.
54........  Food stores....        13,060          16,499        6,487     16,941     19,547      33,441      19,519      34,698         -28       1,257
55........  Automotive             13,380          17,101        3,942     10,470     17,322      27,571      38,529      68,490      21,207      40,919
             dealers &
             gasoline
             service
             stations.
56........  Apparel &               7,926          10,182          959      1,905      8,885      12,087       5,547       9,860      -3,339      -2,227
             accessory
             stores.
57........  Home furniture,         7,015           9,032        1,627      3,795      8,641      12,827      20,518      36,472      11,876      23,646
             furnishings, &
             equipment
             stores.
58........  Eating &               33,346          42,414        9,310     26,857     42,656      69,271      38,054      67,646      -4,601      -1,626
             drinking
             places.
59........  Miscellaneous          22,326          28,755        6,152     14,028     28,478      42,783      31,195      55,452       2,717      12,669
             retail.
                            -----------------
               Retail             106,884         136,210       32,387     83,417    139,271     219,627     178,881     317,979      39,611      98,353
                Subtotal.
60........  Depository              6,943           8,924        2,677      8,836      9,620      17,760      23,042      40,960      13,422      23,200
             institutions.
61........  Nondepository           2,727           3,580        1,795      4,701      4,522       8,281      13,449      23,907       8,927      15,625
             credit
             institutions.
62-67.....  Holding & other         4,055           5,302        8,260     20,789     12,315      26,091      30,936      54,992      18,620      28,901
             investment
             offices,
             except trusts,
             & Security &
             commodity
             brokers,
             dealers,
             exchanges, &
             services.
63-64.....  Insurance               9,454          12,342        6,016     11,003     15,470      23,345      26,681      47,428      11,211      24,083
             carriers,
             Insurance
             agents,
             brokers, &
             services.
65........  Real estate....        10,801          14,565       21,401     56,982     32,202      71,546      21,773      38,703     -10,429     -32,843
                            -----------------
            Fin., Insure.,         33,980          44,713       40,150    102,311     74,130     147,024     115,881     205,990      41,751      58,966
             & Real Est.
             Subtotal.
70........  Hotels, rooming         6,394           7,899        2,707      7,492      9,101      15,391      10,461      18,595       1,359       3,204
             houses, camps,
             & other
             lodging places.
72........  Personal               12,705          16,505       25,351     67,270     38,055      83,775       8,112      14,419     -29,943     -69,355
             services.
73........  Business               37,518          46,860       16,606     39,540     54,124      86,401     109,491     194,631      55,367     108,230
             services.
75........  Automotive             11,698          15,230       19,375     51,798     31,073      67,028       9,480      16,851     -21,593     -50,177
             repair,
             services, &
             parking.
76........  Miscellaneous           4,164           5,406        1,373      4,213      5,537       9,618       1,586       2,819      -3,951      -6,800
             repair
             services.
78........  Motion pictures         3,470           4,419        4,283     19,485      7,753      23,904      10,446      18,570       2,693      -5,334
79........  Amusement &             7,987          10,088        5,622     16,716     13,609      26,804      10,573      18,795      -3,035      -8,009
             recreation
             services.
80........  Health services        48,132          60,026       37,155    103,356     85,287     163,382     114,546     203,617      29,259      40,235
81........  Legal services.        10,263          13,361        2,246      8,969     12,509      22,329      42,821      76,119      30,313      53,790
82........  Educational             1,878           2,412       14,052     40,243     15,930      42,655     155,178     275,844     139,248     233,189
             services.
83........  Social services        12,637          16,039        9,438     21,396     22,075      37,435      12,498      22,216      -9,577     -15,219
84........  Museums, art              455             574          294        858        749       1,432       1,009       1,794         260         362
             galleries, &
             botanical &
             zoological
             gardens.
86........  Membership              4,425           5,701        1,396      9,151      5,821      14,851       8,252      14,668       2,430        -183
             organizations.
87........  Engineering,           20,847          26,721        7,828     23,332     28,675      50,053      71,813     127,656      43,138      77,602
             accounting,
             research,
             management, &
             related
             services.
89........  Services, not           1,080           1,405          206        488      1,286       1,892       1,205       2,143         -81         251
             elsewhere
             classified 4.
                            -----------------
               Services           183,651         232,645      147,933    414,307    331,584     646,952     567,471   1,008,736     235,887     361,784
                Subtotal.
 
            Private               521,396         660,266      327,832    871,621    849,228   1,531,887   1,061,273   1,886,519     212,045     354,632
             Industry.
            State & Local          14,033          19,695        7,012     23,911     21,045      43,606      48,495      86,205      27,450      42,599
             Government.
                            -----------------
               Total.......       535,429         679,961      334,844    895,532    870,273   1,575,493   1,109,768   1,972,724     239,495    397,231
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Unless otherwise noted, data are from USDOC (2001a). Na: Data not available. Nc: Not calculable.
1 Number of employers are derived from the U.S. Department of Commerce, Bureau of Census, 1992 Enterprise Statistics.
2 Employment is estimated when data suppression occurs.
3 Sales data for industries 07, 08, 09, and 89 are from the D&B (2001a) database.
4 Number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database. Sales data are derived from the D&B
  (2001a) database.
5 Only includes Railroad Switching and Terminal Establishments (SIC 4013).
6 All data for the U.S. Postal Service are from USPS (1997).
7 Data do not include large certificated passenger carriers that report to the Office of Airline Statistics, U.S. Department of Transportation.
 
 Sources: CONSAD Research Corporation and the U.S. Department of Labor; U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Economic
  Census: Comparative Statistics, downloaded from http://www.census.gov/epcd/ec97sic/index.htmldownload; U.S. Department of Commerce, Bureau of
  the Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a) National Profile of Businesses Database for Fiscal Year 2000;
  Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; U.S. Department of the Treasury, Internal Revenue
  Service (IRS, 2000) Corporate Tax Returns for Active Corporations for 1997; and U.S. Postal Service (USPS, 1997), 1997 Annual Report.

Small Business Cost Estimates
    The upper bound small business cost estimate for the proposed rule 
ranges from $502.4 million to $835.9 million. This includes one-time 
implementation costs ranging from $349.3 million to $451.7 million and 
recurring payroll costs ranging from $153.1 million to $384.2 million. 
The recurring payroll costs as a percentage of total payroll range from 
0.02 percent to 0.04 percent, and from 0.07 percent to 0.16 percent of 
total pre-tax profits.
    The lower bound small business benefit estimate for the proposed 
rule ranges from $629.8 million to $1,119.4 million. These estimates do 
not include significant, but difficult to quantify, benefits such as 
the reduced human resource and legal costs for classifying workers 
under the proposed rule, and improved management productivity from 
reduced investigations and litigation.
    The largest recurring payroll costs are incurred by the Personal 
Services industry ($17.6 million to $46.6

[[Page 15580]]

million), Construction ($16.7 million to $39.4 million), Automotive 
Repair, Services, and Parking ($13.9 million to $37.1 million), 
Agricultural Services ($10.4 million to $26.4 million), and Real Estate 
($9.9 million to $26.3 million). The 10 industries with the highest 
costs account for 57.4 percent to 67.0 percent of the total small 
business costs.
    The largest recurring payroll costs as a percentage of payroll are 
incurred by the Educational Services industry (0.4 percent to 1.0 
percent), Agricultural Services (0.2 percent to 0.6 percent), Personal 
Services (0.2 percent to 0.4 percent), Transportation by Air (0.1 
percent to 0.3 percent), and Automotive Repair, Services, and Parking 
(0.1 percent to 0.2 percent).
    The largest recurring payroll costs as a percentage of pre-tax 
profits are incurred by the General Merchandise Stores (4.5 percent to 
10.6 percent), Educational Services (2.0 percent to 5.3 percent), 
Agricultural Services (1.1 percent to 2.8 percent), Personal Services 
(0.9 percent to 2.4 percent), and Eating and Drinking Places (0.8 
percent to 2.2 percent).
State and Local Government Cost and Benefit Estimates
    The upper bound cost estimate for State and local governments for 
the proposed rule ranges from $21.0 million to $43.6 million. This 
includes one-time implementation costs ranging from $14.0 million to 
$19.7 million and recurring payroll costs ranging from $7.0 million to 
$23.9 million. The cost estimates represents less than 0.005 percent of 
the $1.4 trillion in general revenues received by all state and local 
governmental entities nationwide, and 0.01 percent to 0.03 percent of 
the $150 billion in total payrolls for those entities.
    The lower bound benefit estimate for State and local governments 
for the proposed rule ranges from $48.5 million to $86.2 million. These 
estimates do not include significant, but difficult to quantify, 
benefits such as the reduced human resource and legal costs for 
classifying workers under the proposed rule, and improved management 
productivity from reduced investigations and litigation.
    The largest costs are incurred by California ($2.6 million to $5.3 
million), New York ($2.3 million to $4.7 million), Texas ($1.3 million 
to $2.8 million), Illinois ($1.2 million to $2.5 million), and Florida 
($1.1 million to $2.2 million).
    The largest recurring payroll costs as a percentage of payroll are 
incurred by Arizona (0.2 percent to 0.4 percent), Wyoming (0.2 percent 
to 0.4 percent), Alabama (0.1 percent to 0.3 percent), Illinois (0.1 
percent to 0.3 percent), and West Virginia (0.1 percent to 0.3 
percent). As a percentage of total state and local government revenues, 
the recurring payroll costs do not exceed 0.01 percent in any state.
Economic Impact of Updating the Duties Tests
    The economic impact of updating the duties tests includes two 
components. First, determining whether an employee satisfies the 
requirements of the updated duties tests will be less difficult than 
determining whether that employee satisfies the requirements of the 
current duties tests. As a result, employers will likely incur much 
lower costs associated with determining the exempt status of employees, 
including conducting expensive time-and-motion studies, and responding 
to litigation contesting their exemption decisions. The second 
component is the incremental payroll costs that employers would be 
required to pay to the employees who satisfy the updated duties test 
but do not satisfy the current duties test if the proposed salary level 
tests were adopted without simultaneously adopting the proposed duties 
tests.
    The possible magnitude of the cost savings of the first component 
is indicated by the estimated numbers of employees with salaries 
between $425 per week and $1,250 per week who would have failed to 
satisfy the current duties tests but would pass the updated duties 
tests. Because very little evidence is available on the costs for this 
component, the only indicator that is available is the potential number 
of employees who might require time-and-motion studies or involve 
litigation. The PRIA indicates an additional 1.5 million to 2.7 million 
employees will be more readily identified as exempt from the overtime 
requirements of the FLSA because the updated duties tests will replace 
the current duties tests in determining their exemption. Although 
certification and adjudication costs would only have been incurred on 
behalf of some portion of those employees, the large number of 
employees who could bring litigation under the current regulations and 
their relatively high levels of compensation indicate that the impact 
of revising the duties tests is probably substantial.
    The second component of the economic impact of the revised duties 
tests is the additional incremental payroll costs that employers would 
be required to pay if the revised salary level tests were adopted 
without updating duties tests. If the proposed rule had increased the 
standard salary level test and highly compensated salary levels to $425 
per week and $1,250 per week, respectively, without replacing the 
current long duties tests with the updated duties test, employers would 
have incurred incremental payroll costs for all executive, 
administrative, and professional employees in that salary range who 
would satisfy the updated duties test but would not satisfy the current 
long duties tests. The PRIA estimates that the incremental payroll 
costs for those 1.5 million to 2.7 million employees will be between 
$1.839 billion and $3.370 billion, in addition to the $870.2 million to 
$1,575.5 million for the regulation as proposed.
    Finally, revising the duties tests could result in some paid hourly 
workers becoming salaried employees. PRIA data indicate there are 
644,000 paid hourly workers working overtime in occupations with exempt 
administrative and professional duties that could be converted to 
salaried employees. All of these workers have either an associate 
degree or 4 year college degree or more and their average income ranges 
from $50,100 to $54,700 per year. This is an upper bound estimate based 
on the number of professional and administrative workers in occupations 
with mixed exempt and nonexempt duties employing a high level of skill 
or training.

V. Regulatory Flexibility Act and Executive Order 13272

    The Regulatory Flexibility Act of 1980, as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 601 et 
seq., requires agencies to prepare regulatory flexibility analyses, and 
make them available for public comment, when proposing regulations that 
will have ``a significant economic impact on a substantial number of 
small entities.'' Accordingly, the following analysis assesses the 
impact of these regulations on small entities as defined by the 
applicable SBA size standards.
    In accordance with E.O. 13272, ``Proper Consideration of Small 
Entities in Agency Rulemaking,'' this proposed rule has been reviewed 
to assess its potential impact on small businesses, small governmental 
jurisdictions, and small organizations, as provided by the Regulatory 
Flexibility Act. The Chief Counsel for Advocacy of the Small Business 
Administration was notified of a draft of this rule upon submission of 
the rule to the Office of Management and Budget under E.O. 12866, 
Regulatory Planning and Review.

[[Page 15581]]

(1) Reasons Why Action by Agency Is Being Considered

    Section 13(a)(1) of the Fair Labor Standards Act (FLSA), 29 U.S.C. 
213(a)(1), directs the Secretary of Labor to define and delimit from 
time to time, by regulations subject to the Administrative Procedure 
Act, ``any employee employed in a bona fide executive, administrative, 
or professional capacity * * * or in the capacity of outside salesman * 
* *.'' Employees meeting the criteria specified in these regulations 
are completely exempt from minimum wage and overtime pay under the 
FLSA. The existing regulations contain requirements for payment ``on a 
salary basis,'' at not less than specified minimum amounts, and certain 
additional tests related to an employee's primary job duties and 
responsibilities. The duties tests were last modified in 1949 and have 
remained essentially unchanged since contributing to higher human 
resource and legal costs in the economy. The salary levels required for 
exemption were last updated in 1975 on an interim basis. In 1999, the 
U.S. General Accounting Office reviewed these regulations and 
recommended that the Secretary of Labor comprehensively review and 
update them, and make necessary changes to better meet the needs of 
both employers and employees in the modern work place. These 
regulations were also suggested as a candidate for reform in public 
comments submitted on OMB's 2001 and 2002 Reports to Congress on the 
Costs and Benefits of Regulations. The Department is proposing 
revisions to these regulations in response to the concerns that have 
been raised over the years to update, clarify and simplify them for the 
21st century workplace.

(2) Objectives of and Legal Basis for Rule

    This proposed rule is issued pursuant to the authority provided by 
section 13(a)(1) of the FLSA. Its objective is to provide clear and 
concise regulatory guidance, in plain language, that will assist 
employers and employees in determining whether an employee is exempt 
from the FLSA as a bona fide executive, administrative, professional, 
or outside sales employee.

(3) Number of Small Entities Covered by the Rule

    The estimated number of small entities covered by this rule is 
presented in the Department's Preliminary Regulatory Impact Analysis 
(PRIA). A copy of the Department's complete PRIA may be obtained by 
contacting the Wage and Hour Division at the address and telephone 
number provided above. Data based on SBA's size standards for small 
business entities indicates that 5.2 million establishments that will 
be affected by the proposed rule are considered to be small businesses. 
These small businesses employ approximately 38.7 million workers with 
an annual payroll of $940.0 billion. Their total annual sales are 
estimated to be $5.7 trillion and their annual pre-tax profits are 
estimated to be $233.9 billion. Approximately 79.8 percent of all 
affected establishments are considered to be small businesses and they 
account for 38.8 percent of the employment, 33.7 percent of the 
payroll, 31.8 percent of the annual sales, and 30.4 percent of the 
annual pre-tax profits.

(4) Reporting, Recordkeeping and Other Compliance Requirements of the 
Rule

    Although an employer claiming an exemption from the FLSA under 29 
CFR part 541 must be prepared to establish affirmatively that all 
required conditions for the exemption are met, this proposed rule 
contains no reporting or recordkeeping requirements as a condition for 
the exemption. However, the recordkeeping requirements for employers 
claiming exemptions from the FLSA under 29 CFR part 541 for particular 
employees are contained in the general FLSA recordkeeping regulations, 
applicable to all employers covered by the FLSA (codified at 29 CFR 
part 516; see 29 CFR 516.0 and 516.3) and have been approved by the 
Office of Management and Budget Control Number 1215-0017. There are no 
other compliance requirements under the proposed rule.

(5) Relevant Federal Rules Duplicating, Overlapping or Conflicting With 
the Rule

    No other Federal rules duplicate or conflict with the requirements 
contained in these rules. Federal employees subject to the jurisdiction 
of the U.S. Office of Personnel Management (OPM) are governed by 
separate regulations administered by OPM and not these regulations. 
Some state laws have exemption standards applied under state law that 
differ from the exemption standards provided by these Federal rules. 
The FLSA does not preempt any stricter exemption standards that may 
apply under state law. See 29 U.S.C. 218.

(6) Differing Compliance and Reporting Requirements for Small Entities

    The FLSA generally requires employers to pay covered non-exempt 
employees at least the federal minimum wage of $5.15 an hour, and time-
and-one-half overtime premium pay for hours worked over 40 per week. 
Under the terms of the statute, Congress excluded some smaller 
businesses (those with annual revenues less than $500,000) from the 
definition of covered ``enterprises'' (although individual workers who 
are engaged in interstate commerce or who produce goods for such 
commerce may be individually covered by the FLSA). This proposed rule 
clarifies and updates the criteria for the statutory exemption from the 
FLSA for executive, administrative, professional, and outside sales 
employees for all employers covered by the FLSA. Moreover, given the 
purpose of the FLSA, Congressional intent, and the statutory provisions 
regarding the coverage for smaller businesses, adopting different 
compliance requirements for small entities under this rule was not 
considered feasible.

(7) Clarification, Consolidation and Simplification of Compliance and 
Reporting Requirements for Small Entities

    As previously noted, the purpose of this proposed rule is to 
clarify, consolidate, simplify, and update the existing criteria for 
compliance with the exemption from the FLSA for executive, 
administrative, professional, and outside sales employees, for all 
businesses including small businesses. The proposed rule contains no 
new reporting requirements.

(8) Use of Performance Rather Than Design Standards

    The FLSA requires that employers comply with the minimum wage and 
overtime pay requirements and permits a number of ways in which 
employers can achieve these ``performance standards.''
    The Department considered a number of alternatives to the proposed 
rule that would impact small entities. One alternative would be not to 
change the existing regulations. This alternative was rejected because 
the Department has determined that the existing salary tests, which 
have not been raised in over 27 years, no longer provide any help in 
distinguishing between bona fide executive, administrative, and 
professional employees and those who should not be considered for 
exemption, and that the duties tests, which were last modified in 1949, 
are too complicated, confusing, and outdated for the modern workplace.
    Two other alternatives would be to raise the salary levels and not 
update the duties tests or conversely to update

[[Page 15582]]

the duties tests without raising the salary levels. However, the 
Department has concluded that raising the salary levels is necessary to 
reestablish a clear relevant bright-line test between exempt and 
nonexempt workers for both employers and employees. Moreover, 
increasing the salary levels without updating the duties tests would 
increase the cost of the proposed rule by $1.839 billion to $3.370 
billion per year--much of which would be incurred by small business. 
The duties tests were last revised in 1949 and have remained 
essentially unchanged since that time. The salary levels were last 
updated in 1975. The Department has determined that updating both the 
salary level and duties tests are necessary to better meet the needs of 
both employees and employers in the modern workplace and to anticipate 
future workplace trends.
    Another alternative could be to adjust the salary levels for the 
proposed standard test for inflation. However, the Department has never 
relied solely on inflation adjustments to determine the appropriate 
salary levels, and has decided to continue its long-standing regulatory 
practice to reject such mechanical adjustments for inflation. In 
addition, the Department has determined that this alternative would be 
far too burdensome on small businesses. The PRIA indicates that 
adjusting the salary levels for inflation would more than double the 
recurring payroll costs of the proposed rule from a range of $335 
million to $896 million per year to $747 million to $1,966 million per 
year.
    Another alternative would be to adjust the salary levels for the 
proposed standard test and highly compensated test to levels consistent 
with the 1958 Department of Labor report--no more than 10 percent of 
those [workers] in the lowest-range--instead of the 20 percent range in 
the proposed rule. However, the Department has concluded that this 
would exclude overtime protections for a significant number of workers 
without having much of an impact on the cost of the proposed rule. The 
PRIA indicates that adjusting the salary levels consistent with the 
1958 report could exempt 319,000 to 360,000 employees from overtime and 
reduce the cost of the proposed rule to $265 million to $719 million 
per year. The Department invites comments on the appropriate salary 
levels for the proposed standard test and highly compensated test.

(9) Exemption from Coverage of the Rule for Small Entities

    As discussed above in section (6) of this analysis, under the terms 
of the statute, Congress excluded smaller businesses with annual 
revenues less than $500,000 from the definition of covered enterprises 
under the FLSA. Given the purpose of the FLSA, Congressional intent, 
and the statutory provisions regarding the coverage for smaller 
businesses, adopting different compliance requirements for small 
entities under this rule was not considered feasible.

VI. Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1501, requires 
agencies to prepare a written statement that identifies the: (1) 
Authorizing legislation; (2) cost-benefit analysis; (3) macro-economic 
effects; (4) summary of state, local, and tribal government input; and 
(5) identification of reasonable alternatives and selection, or 
explanation of non-selection, of the least costly, most cost-effective 
or least burdensome alternative; for proposed rules that include any 
Federal mandate that may result in increased expenditures by State, 
local, and tribal governments, in the aggregate, or by the private 
sector, of $100 million or more in any one year.

(1) Authorizing Legislation

    This rule is issued pursuant to section 13(a)(1) of the Fair Labor 
Standards Act, 29 U.S.C. 213(a)(1). The section exempts from the FLSA's 
minimum wage and overtime pay requirements ``any employee employed in a 
bona fide executive, administrative, or professional capacity 
(including any employee employed in the capacity of academic 
administrative personnel or teacher in elementary or secondary 
schools), 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 requirements of the exemption provided by this 
section of the Act are contained in this rule, 29 CFR part 541.
    Section 3(e) of the Fair Labor Standards Act, 29 U.S.C. 203(e) 
defines employee to include most individuals employed by a state, 
political subdivision of a state, or interstate governmental agency. 
Section 3(x) of the Fair Labor Standards Act, 29 U.S.C. 203(x), also 
defines public agencies to include the government of a state or 
political subdivision thereof, or any interstate governmental agency.

(2) Cost-Benefit Analysis

    Over 87,400 State and local governmental entities will be affected 
by the proposed rule (3,043 county governments, 19,372 municipal 
governments, 16,629 township governments, 34,683 special district 
governments, and 13,726 school district governments). Nationwide, these 
entities receive more than $1.4 trillion in general revenues, including 
revenues from taxes, some categories of fees and charges, and 
intergovernmental transfers. Their direct expenditures exceed $1.6 
trillion in the aggregate. State and local governments employ more than 
4 million workers and their payrolls exceed $12.6 billion per month.
    The Department's Preliminary Regulatory Impact Analysis (PRIA) 
includes estimates of the implementation costs, incremental payroll 
costs, and benefits of the proposed rule for all state and local 
government sectors in the aggregate in each state. The results indicate 
that the total first year costs of the proposed rule on state and local 
government entities range from $21.0 to $43.6 million. This includes 
$14.0 to $19.7 million in first year (nonrecurring) implementation 
costs and $7.0 to $23.9 million in recurring incremental payroll costs. 
The first year costs represent less than three one-thousandths percent 
(0.003 percent) of the $1.434 trillion in general revenues received by 
all state and local government entities nationwide, and three one-
hundredths percent (0.03 percent) of the $150.8 billion in total 
payrolls for those entities. The recurring incremental payroll costs 
are about one-half these very small amounts.
    The Department's PRIA estimates that the benefits of the proposed 
rule for all state and local government sectors range from $48.5 to 
$86.2 million. These estimates exclude difficult to quantify benefits 
such as lower human resource costs and additional lower legal and 
settlement costs stemming from unintentionally misclassifying workers. 
The PRIA results indicate that the benefits of the proposed rule will 
exceed the costs for state and local governments in every year. 
However, State and local governments, as employers covered by the 
monetary requirements of the FLSA, will need to raise any such 
additional revenues required, however minimal, to meet their future 
compliance obligations if the proposed rule is adopted. The FLSA does 
not provide for Federal financial assistance or other Federal resources 
to meet the requirements of its intergovernmental mandates. The Federal 
mandate imposed by the rule is not expected to have measurable effects 
on health, safety, or the natural environment.

[[Page 15583]]

(3) Macro-Economic Effects

    Agencies are expected to estimate the effect of a regulation on the 
national economy, such as the effect on productivity, economic growth, 
full employment, creation of productive jobs, and international 
competitiveness of United States goods and services, if accurate 
estimates are reasonably feasible and the effect is relevant and 
material. 5 U.S.C. 1532(a)(4). However, OMB guidance on this 
requirement notes that such macro-economic effects tend to be 
measurable in nationwide econometric models only if the economic impact 
of the regulation reaches 0.25 percent to 0.5 percent of Gross Domestic 
Product, or in the range of $1.5 billion to $3.0 billion. A regulation 
with smaller aggregate effect is not likely to have a measurable impact 
in macro-economic terms unless it is highly focused on a particular 
geographic region or economic sector, which is not the case with this 
proposed rule.
    The Department's PRIA estimates that the total aggregate economic 
impact of this proposed rule ranges from $870.3 million to $1,575.5 
million. However, as noted in the previous section summarizing the 
Department's PRIA, these are upper bound estimates and the actual costs 
and impacts expected to be incurred by employers, including state and 
local governments, if the proposed rule were adopted, are likely to be 
lower. Therefore, given OMB's guidance, the Department has determined 
that a full macro-economic analysis is not likely to show any 
measurable impact on the economy.

(4) Summary of State, Local, and Tribal Government Input

    Congress amended the FLSA in 1985 to readjust how the Act would 
apply to the public sector. The 1985 amendments allowed compensatory 
time off in lieu of cash overtime pay, partial overtime exemptions for 
police and fire departments, the use of unpaid volunteers in certain 
circumstances, and a temporary phase-in period for meeting FLSA 
compliance obligations. However, Congress enacted no special provisions 
for public agencies related to the section 13(a)(1) exemptions or the 
541 regulations. Consequently, the same rules for distinguishing 541-
exempt employees from nonexempt employees that apply in the private 
sector were initially applied to the public sector following the 1985 
amendments.
    Since 1985, State and local governments have confronted FLSA 
compliance issues and the 541 regulations have been among the foremost 
of their concerns, particularly in the administrative exemption 
category. Many State and local governments classified nearly all of 
their non-supervisory ``white collar'' workers as exempt administrative 
employees without regard to whether their primary duty relates directly 
to agency management policies or general business operations or meets 
the discretion and independent judgment test. In the late 1980s, 
several Governors and State and local government agencies urged the 
Department to exempt classifications such as social workers, 
detectives, probation officers, and others, to avoid disrupting the 
level of public services that would result from increasing costs or 
limiting the hours of service due to overtime requirements. In 1989, 
former Labor Secretary Elizabeth Dole, in a widely disseminated 
response to 13 Governors, confirmed the nature of the administrative 
exemption's duties test as applied to public sector employees but 
solicited specific input with accompanying rationale for what should be 
changed. Responses were limited but argued generally that government 
services are unique because of the impact on health, safety, welfare or 
liberty of citizens. This, they argued, should allow exemption of 
positions in law enforcement and criminal justice, human services, 
health care and rehabilitation services, and the unemployment 
compensation systems, regardless of whether any particular employee's 
job duties include important decision-making on how the agency is 
operated or managed internally. They also urged the Department to 
redefine the professional exemption to recognize a broader contemporary 
use of that term in government employment.
    In the midst of a growing wave of private lawsuits filed by public 
employees against their employers challenging their exempt status, a 
series of court decisions were rendered that sharply limited public 
employers' ability to successfully assert exemption under the ``salary 
basis'' rule. This led the Department to alter the ``salary basis'' 
rules to provide specific relief to public employers in a final rule 
issued in August 1992 (57 FR 37666; Aug. 19, 1992). Under this special 
rule, the fact that a public sector pay and leave system includes 
partial-day deductions from pay for absences not covered by accrued 
paid leave becomes irrelevant to determining any public sector 
employee's eligibility for exemption.
    Public sector employers have been less vocal over FLSA issues since 
the Department's 1992 rulemaking allowing partial-day (or hourly) 
deductions from pay for employee absences not covered by accrued leave 
and other special ``salary basis'' rules for budget-driven furloughs 
(29 CFR 541.5d). The U.S. Supreme Court's 1997 decision in Auer v. 
Robbins, 519 U.S. 452 (1997), a public sector case involving the City 
of St. Louis Police Department and disciplinary deductions from pay, 
may also have relieved many concerns of public agencies over pay 
docking for discipline.
    Although public agency organizations were invited to the 
Department's stakeholder meetings to address concerns over the 541 
regulations, they mostly did not respond to the invitations. The 
International Personnel Management Association, accompanied by the 
National Public Employers Labor Relations Association and the U.S. 
Conference of Mayors, suggested that progressive discipline systems are 
common in the public sector (some collectively bargained) and the 
``salary basis'' rule for exempt workers, which prohibits disciplinary 
deductions except for major safety rules, threatens such systems. 
Representatives of the Interstate Labor Standards Association (ILSA) 
submitted written views suggesting that the salary threshold be indexed 
to the current minimum wage or some multiple thereof (e.g., 3 times the 
minimum wage for a 40-hour workweek or $618 per week). One additional 
idea was to relate the salary levels to those of the supervised 
employees.
    The proposed rule would revise and simplify the exemptions' duties 
tests, but would continue to apply the same basic duties tests in both 
the public and private sectors. The public sector is governed by a 
different set of pay-docking rules and additional proposed revisions in 
this rule would broaden permissible disciplinary deductions to include 
sanctions for infractions such as sexual harassment and work place 
violence. However, a broader or separate duties test rule applicable 
solely to the public sector does not seem warranted at this time, as 
the case has not been made for such separate treatment. The Department 
is interested in receiving specific public comments on any issues of 
concern to public employees and public employers, and will carefully 
examine any such public comments submitted on this proposal during the 
rulemaking process.

(5) Least Burdensome Option or Explanation Required

    The Department's consideration of various options is described in 
the preceding section in the preamble on the Regulatory Flexibility Act 
and Executive Order 13272. The Department

[[Page 15584]]

believes that it has chosen the least burdensome option that updates, 
clarifies, and simplifies the rule. One alternative option would have 
set the exemptions' salary level at a rate lower than the proposed $425 
per week, which might impose lower direct payroll costs on employers 
but may not necessarily be the most cost-effective or least burdensome 
alternative for employers. A lower salary level could result in a less 
effective ``bright-line'' test that separates exempt workers from those 
nonexempt workers whom Congress intended to cover by the Act. Greater 
ambiguity regarding who is exempt and nonexempt increases the potential 
legal liability from unintentionally misclassifying workers, and thus 
the ultimate cost of the regulation.

VII. Effects on Families

    This rule has been assessed under section 654 of the Treasury and 
General Government Appropriations Act, 1999, for its effect on family 
well-being and the undersigned hereby certifies that the rule will not 
adversely affect the well-being of families.

VIII. Executive Order 13045, Protection of Children

    In accordance with Executive Order 13045, the Department has 
evaluated this rule and determined that it has no environmental health 
risk or safety risk that may disproportionately affect children.

IX. Executive Order 13132, Federalism

    This rule will not have ``substantial direct effects on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government.'' Under the terms of section 6 of E.O. 13132, it 
has been determined that this rule does not have sufficient federalism 
implications to warrant the preparation of a federalism summary impact 
statement.
    This rule is issued pursuant to section 13(a)(1) of the Fair Labor 
Standards Act, 29 U.S.C. 213(a)(1). The section exempts from the FLSA's 
minimum wage and overtime pay requirements ``any employee employed in a 
bona fide executive, administrative, or professional capacity 
(including any employee employed in the capacity of academic 
administrative personnel or teacher in elementary or secondary 
schools), 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 requirements of the exemption provided by this 
section of the Act are contained in this rule, 29 CFR part 541.
    Section 3(e) of the Fair Labor Standards Act, 29 U.S.C. 203(e), 
defines employee to include most individuals employed by a state, 
political subdivision of a state, or interstate governmental agency. 
Section 3(x) of the Fair Labor Standards Act, 29 U.S.C. 203(x), also 
defines public agencies to include the government of a state or 
political subdivision thereof, or any interstate governmental agency.
    The Department's Preliminary Regulatory Impact Analysis (PRIA) 
estimates the implementation costs, incremental payroll costs, and 
benefits of the proposed rule for all state and local government 
sectors in the aggregate in each state. The results indicate that the 
total first year costs of the proposed rule on state and local 
government entities range from $24.1 to $43.6 million. This includes 
$14.0 to $19.7 million in first year (nonrecurring) implementation 
costs and $10.1 to $23.9 million in recurring incremental payroll 
costs. The first year costs represent less than three one-thousandths 
percent (0.003 percent) of the $1.434 trillion in general revenues 
received by all state and local government entities nationwide, and 
three one-hundredths percent (0.03 percent) of the $150.8 billion in 
total payrolls for those entities. The recurring incremental payroll 
costs are about one-half these very small amounts.
    The Department's PRIA also estimates that the benefits of the 
proposed rule for all state and local government sectors range from 
$48.5 to $86.2 million. These estimates exclude difficult to quantify 
benefits such as lower human resource costs and additional lower legal 
and settlement costs stemming from unintentionally misclassifying 
workers. The PRIA results indicate that the benefits of the proposed 
rule will exceed the costs for state and local governments in every 
year. The Federal mandate imposed by the rule is not expected to have 
substantial direct effects on the States and will not affect the 
current relationship between the national government and the states or 
the distribution of power and responsibilities among the various levels 
of government.

X. Executive Order 13175, Indian Tribal Governments

    This rule was reviewed under the terms of E.O. 13175 and determined 
not to have ``tribal implications.'' The rule does not have 
``substantial direct effects on one or more Indian tribes, on the 
relationship between the Federal government and Indian tribes, or on 
the distribution of power and responsibilities between the Federal 
government and Indian tribes.'' As a result, no tribal summary impact 
statement has been prepared.

XI. Executive Order 12630, Constitutionally Protected Property Rights

    This rule is not subject to E.O. 12630 because it does not involve 
implementation of a policy ``that has takings implications'' or that 
could impose limitations on private property use.

XII. Executive Order 12988, Civil Justice Reform Analysis

    This rule was drafted and reviewed in accordance with E.O. 12988 
and will not unduly burden the federal court system. The rule was: (1) 
Reviewed to eliminate drafting errors and ambiguities; (2) written to 
minimize litigation; and (3) written to provide a clear legal standard 
for affected conduct, and to promote burden reduction.

XIII. Executive Order 13211, Energy Supply

    This rule is not subject to E.O. 13211. It will not have a 
significant adverse effect on the supply, distribution, or use of 
energy.

XIV. Environmental Impact Assessment

    The Department has reviewed this rule in accordance with the 
requirements of the National Environmental Policy Act (NEPA) of 1969 
(42 U.S.C. 4321 et seq.), the regulations of the Council on 
Environmental Quality (40 U.S.C. 1500), and the Department's NEPA 
procedures (29 CFR part 11). The rule will not have a significant 
impact on the quality of the human environment, and, thus, the 
Department has not conducted an environmental assessment or an 
environmental impact statement.

List of Subjects in 29 CFR Part 541

    Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.

    Signed in Washington, DC, this 25th day of March, 2003.
Tammy D. McCutchen,
Administrator, Wage and Hour Division.
    For the reasons set forth above, 29 CFR part 541 is proposed to be 
amended as set forth below.

[[Page 15585]]

PART 541--DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, 
ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES

Subpart A--General Regulations
Sec.
541.0 Introductory statement.
541.1 Terms defined.
541.2 Job titles insufficient.
Subpart B--Executive Employees
541.100 General rule for executive employees.
541.101 Business owner.
541.102 Sole charge executive.
541.103 Management of the enterprise.
541.104 Department or subdivision.
541.105 Two or more other employees.
541.106 Working supervisors.
541.107 Supervisors in retail establishments.
Subpart C--Administrative Employees
541.200 General rule for administrative employees.
541.201 Related to management or general business operations.
541.202 Position of responsibility.
541.203 Work of substantial importance.
541.204 High level of skill or training.
541.205 Educational establishments.
Subpart D--Professional Employees
541.300 General rule for professional employees.
541.301 Learned professionals.
541.302 Creative professionals.
541.303 Teachers.
541.304 Practice of law or medicine.
Subpart E--Computer Employees
541.400 General rule for computer employees.
541.401 High level of skill and expertise.
541.402 Computer operation, manufacture and repair.
541.403 Executive and administrative computer employees.
Subpart F--Outside Sales Employees
541.500 General rule for outside sales employees.
541.501 Making sales or obtaining orders.
541.502 Away from employer's place of business.
541.503 Promotion work.
541.504 Drivers who sell.
Subpart G--Salary Requirements
541.600 Amount of salary required.
541.601 Highly compensated employees.
541.602 Salary basis.
541.603 Effect of improper deductions from salary.
541.604 Minimum guarantee plus extras.
541.605 Fee basis.
541.606 Board, lodging or other facilities.
Subpart H--Definitions and Miscellaneous Provisions
541.700 Primary duty.
541.701 Customarily and regularly.
541.702 Exempt and nonexempt work.
541.703 Directly and closely related.
541.704 Trainees.
541.705 Emergencies.
541.706 Occasional tasks.
541.707 Combination exemptions.
541.708 Motion picture producing industry.
541.709 Employees of public agencies.

    Authority: 29 U.S.C. 213; Pub. L. 101-583, 104 Stat. 2871; 
Reorganization Plan No. 6 of 1950 (3 CFR 1945-53 Comp. p. 1004); 
Secretary's Order No. 4-2001 (66 FR 29656).

Subpart A--General Regulations


Sec.  541.0  Introductory statement.

    (a) Section 13(a)(1) of the Fair Labor Standards Act, as amended, 
provides an exemption from the Act's minimum wage and overtime 
requirements for any employee employed in a bona fide executive, 
administrative, or professional capacity (including any employee 
employed in the capacity of academic administrative personnel or 
teacher in elementary or secondary schools), or in the capacity of an 
outside sales employee, 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. Section 13(a)(17) of the Act 
provides an exemption from the minimum wage and overtime requirements 
for computer systems analysts, computer programmers, software 
engineers, and other similarly skilled computer employees.
    (b) The requirements for these exemptions are contained in this 
part as follows: executive employees, subpart B; administrative 
employees, subpart C; professional employees, subpart D; computer 
employees, subpart E; outside sales employees, subpart F. Subpart G 
contains regulations regarding salary requirements applicable to most 
of the exemptions, including salary levels and the salary basis test. 
Subpart G also contains a provision for exempting certain highly 
compensated employees. Subpart H contains definitions and other 
miscellaneous provisions applicable to all or several of the 
exemptions.
    (c) Effective July 1, 1972, the Fair Labor Standards Act was 
amended to include within the protection of the equal pay provisions 
those employees exempt from the minimum wage and overtime pay 
provisions as bona fide executive, administrative, and professional 
employees (including any employee employed in the capacity of academic 
administrative personnel or teacher in elementary or secondary 
schools), or in the capacity of an outside sales employee under section 
13(a)(1) of the Act. The equal pay provisions in section 6(d) of the 
Fair Labor Standards Act are administered and enforced by the United 
States Equal Employment Opportunity Commission.


Sec.  541.1  Terms defined.

    Act means the Fair Labor Standards Act of 1938, as amended.
    Administrator means the Administrator of the Wage and Hour 
Division, United States Department of Labor. The Secretary of Labor has 
delegated to the Administrator the functions vested in the Secretary 
under sections 13(a)(1) and 13(a)(17) of the Fair Labor Standards Act.


Sec.  541.2  Job titles insufficient.

    A job title alone is insufficient to establish the exempt status of 
an employee. The exempt or nonexempt status of any particular employee 
must be determined on the basis of whether the employee's salary and 
duties meet the requirements of the regulations in this part.

Subpart B--Executive Employees


Sec.  541.100  General rule for executive employees.

    (a) The term ``employee employed in a bona fide executive 
capacity'' in section 13(a)(1) of the Act shall mean any employee:
    (1) Compensated on a salary basis at a rate of not less than $425 
per week (or $360 per week, if employed in American Samoa by employers 
other than the Federal Government), exclusive of board, lodging or 
other facilities;
    (2) With a primary duty of the management of the enterprise in 
which the employee is employed or of a customarily recognized 
department or subdivision thereof;
    (3) Who customarily and regularly directs the work of two or more 
other employees; and
    (4) Who has the authority to hire or fire other employees or whose 
suggestions and recommendations as to the hiring, firing, advancement, 
promotion or any other change of status of other employees will be 
given particular weight.
    (b) The phrase ``salary basis'' is defined at Sec.  541.602; 
``board, lodging or other facilities'' is defined at Sec.  541.606; 
``primary duty'' is defined at Sec.  541.700; and ``customarily and 
regularly'' is defined at Sec.  541.701.


Sec.  541.101  Business owner.

    The term ``employee employed in a bona fide executive capacity'' in 
section 13(a)(1) of the Act also includes any employee who owns at 
least a 20-percent equity interest in the enterprise in which the 
employee is employed, regardless of whether the business is a corporate 
or other type of organization.

[[Page 15586]]

The requirements of subpart G (salary requirements) of this part do not 
apply to the business owners described in this section.


Sec.  541.102  Sole charge executive.

    (a) The term ``employee employed in a bona fide executive 
capacity'' in section 13(a)(1) of the Act also includes any employee 
compensated on a salary basis at a rate of not less than $425 per week 
(or $360 per week, if employed in American Samoa by employers other 
than the Federal Government), exclusive of board, lodging or other 
facilities, who is in sole charge of an independent establishment or a 
physically separated branch establishment.
    (b) The term ``sole charge'' means that the employee ordinarily 
must be in charge of the company activities at the location where the 
employee is employed. Thus, to qualify as a ``sole charge'' executive, 
the employee must have authority to make decisions regarding the day-
to-day operations of the establishment and to direct the work of any 
other employees at the establishment or branch. Only one person in any 
establishment can qualify as a sole charge executive, and then only if 
that person is the top person in charge at that location. The ``sole-
charge'' status of an employee will not be considered lost because of 
an occasional visit to the establishment or branch office of a 
superior.
    (c) The phrase ``independent establishment or a physically 
separated branch establishment'' means an establishment that has a 
fixed location and is geographically separated from other company 
property. The management of operations within one of several buildings 
located on single or adjoining tracts of company property does not 
qualify for the exemption under this section. In the case of a branch, 
there must be a true and complete physical separation from the main 
office.
    (d) A leased department may qualify as an independent establishment 
when the lessee operates under a separate trade name, with its own 
separate employees and records, and in other respects conducts the 
lessee's business independently of the lessor's. In such a case the 
leased department would enjoy the same status as a physically separated 
branch establishment. A leased department cannot be considered an 
independent establishment when the lessor has authority over such 
matters as hiring and firing of employees, other personnel policies, 
advertising, purchasing, pricing, credit operations, insurance and 
taxes.


Sec.  541.103  Management of the enterprise.

    Generally, ``management of the enterprise'' includes activities 
such as interviewing, selecting, and training of employees; setting and 
adjusting their rates of pay and hours of work; directing the work of 
employees; maintaining production or sales records for use in 
supervision or control; appraising employees' productivity and 
efficiency; handling employee complaints and grievances; disciplining 
employees; planning the work; determining the techniques to be used; 
apportioning the work among the employees; determining the type of 
materials, supplies, machinery or tools to be used or merchandise to be 
bought, stocked and sold; controlling the flow and distribution of 
materials or merchandise and supplies; and providing for the safety of 
the employees or the property.


Sec.  541.104  Department or subdivision.

    (a) The phrase ``a customarily recognized department or 
subdivision'' is intended to distinguish between a mere collection of 
employees assigned from time to time to a specific job or series of 
jobs and a unit with permanent status and function. A customarily 
recognized department or subdivision must have a permanent status and a 
continuing function. For example, a large employer's human resources 
department might have subdivisions for labor relations, pensions and 
other benefits, equal employment opportunity, and personnel management, 
each of which has a permanent status and function.
    (b) When an enterprise has more than one establishment, the 
employee in charge of each establishment may be considered in charge of 
a recognized subdivision of the enterprise. The employee also may 
qualify for the sole charge exemption, if all of the requirements of 
Sec.  541.102 are satisfied.
    (c) A recognized department or subdivision need not be physically 
within the employer's establishment and may move from place to place. 
The mere fact that the employee works in more than one location does 
not invalidate the exemption if other factors show that the employee is 
actually in charge of a recognized unit with a continuing function in 
the organization.
    (d) Continuity of the same subordinate personnel is not essential 
to the existence of a recognized unit with a continuing function. An 
otherwise exempt employee will not lose the exemption merely because 
the employee draws and supervises workers from a pool or supervises a 
team of workers drawn from other recognized units, if other factors are 
present that indicate that the employee is in charge of a recognized 
unit with a continuing function.


Sec.  541.105  Two or more other employees.

    (a) To qualify as an exempt executive under Sec.  541.100, the 
employee must customarily and regularly direct the work of two or more 
other employees. The phrase ``two or more other employees'' means two 
full-time employees or their equivalent. One full-time and two half-
time employees, for example, are equivalent to two full-time employees. 
Four half-time employees are also equivalent.
    (b) The supervision can be distributed among two, three or more 
employees, but each such employee must customarily and regularly direct 
the work of two or more other full-time employees or the equivalent. 
Thus, for example, a department with five full-time non-exempt workers 
may have up to two exempt supervisors if each such supervisor 
customarily and regularly directs the work of two of those workers.
    (c) An employee who merely assists the manager of a particular 
department and supervises two or more employees only in the actual 
manager's absence does not meet this requirement.
    (d) Hours worked by an employee cannot be credited more than once 
for different executives. Thus, a shared responsibility for the 
supervision of the same two employees in the same department does not 
satisfy this requirement. However, a full-time employee who works four 
hours for one supervisor and four hours for a different supervisor, for 
example, can be credited as a half-time employee for both supervisors.


Sec.  541.106  Working supervisors.

    Employees, sometimes called ``working foremen'' or ``working 
supervisors,'' who have some supervisory functions, such as directing 
the work of other employees, but also perform work unrelated or only 
remotely related to the supervisory activities are not exempt 
executives if, instead of having management as their primary duty as 
required in Sec.  541.100, their primary duty consists of either the 
same kind of work as that performed by their subordinates; work that, 
although not performed by their own subordinates, consists of ordinary 
production or sales work; or routine, recurrent or repetitive tasks.


Sec.  541.107  Supervisors in retail establishments.

    Supervisors in retail establishments often perform work such as 
serving

[[Page 15587]]

customers, cooking food, stocking shelves, cleaning the establishment 
or other non-exempt work. Performance of such non-exempt work by a 
supervisor in a retail establishment does not disqualify the employee 
from the exemption if the requirements of Sec.  541.100 are otherwise 
met. Thus, an assistant manager whose primary duty includes such 
activities as scheduling employees, assigning work, overseeing product 
quality, ordering merchandise, managing inventory, handling customer 
complaints, authorizing payment of bills or performing other management 
functions may be an exempt executive even though the assistant manager 
spends the majority of the time on non-exempt work.

Subpart C--Administrative Employees


Sec.  541.200  General rule for administrative employees.

    (a) The term ``employee employed in a bona fide administrative 
capacity'' in section 13(a)(1) of the Act shall mean any employee:
    (1) Compensated on a salary or fee basis at a rate of not less than 
$425 per week (or $360 per week, if employed in American Samoa by 
employers other than the Federal Government), exclusive of board, 
lodging or other facilities;
    (2) With a primary duty of the performance of office or non-manual 
work related to the management or general business operations of the 
employer or the employer's customers; and
    (3) Who holds a position of responsibility with the employer.
    (b) The term ``salary basis'' is defined at Sec.  541.602; ``fee 
basis'' is defined at Sec.  541.605; ``board, lodging or other 
facilities'' is defined at Sec.  541.606; and ``primary duty'' is 
defined at Sec.  541.700.


Sec.  541.201  Related to management or general business operations.

    (a) To qualify for the administrative exemption, an employee must 
perform work related to the management or general business operations 
of the employer or the employer's customers. The phrase ``related to 
management or general business operations'' refers to the type of work 
performed by the employee. To meet this requirement, an employee must 
perform work related to assisting with the running or servicing of the 
business, as distinguished, for example, from working on a 
manufacturing production line or selling a product.
    (b) Work related to management or general business operations 
includes, for example, work in areas such as tax, finance, accounting, 
auditing, insurance, quality control, purchasing, procurement, 
advertising, marketing, research, safety and health, personnel 
management, human resources, employee benefits, labor relations, public 
relations, government relations and similar activities. Some of these 
activities may be performed by employees who also would qualify for 
another exemption. For example, a tax attorney and an accountant likely 
are performing work that qualifies for the professional exemption.
    (c) An employee may qualify for the administrative exemption if the 
employee performs work related to the management or general business 
operations of the employer's customers. Thus, for example, employees 
acting as advisers and consultants to their employer's clients or 
customers (as tax experts or financial consultants, for example) may be 
exempt.


Sec.  541.202  Position of responsibility.

    To qualify for the administrative exemption, an employee must hold 
a position of responsibility with the employer. The phrase ``position 
of responsibility'' refers to the importance to the employer of the 
work performed or the high level of competence required by the work 
performed. To meet this requirement, an employee must either 
customarily and regularly perform work of substantial importance or 
perform work requiring a high level of skill or training. The phrase 
``customarily and regularly'' is defined at Sec.  541.710.


Sec.  541.203  Work of substantial importance.

    (a) The phrase ``work of substantial importance'' means work that, 
by its nature or consequence, affects the employer's general business 
operations or finances to a significant degree.
    (b) Work of substantial importance includes activities such as 
formulating, interpreting or implementing management policies; 
providing consultation or expert advice to management; making or 
recommending decisions that have a significant impact on general 
business operations or finances; analyzing and recommending changes to 
operating practices; planning long or short-term business objectives; 
analyzing data, drawing conclusions and recommending changes; handling 
complaints, arbitrating disputes or resolving grievances; representing 
the company during important contract negotiations; and work of similar 
impact on general business operations or finances. Work of substantial 
importance thus is not limited to employees who participate in the 
formulation of management policies or in the operation of the business 
as a whole. It includes the work of employees who carry out major 
assignments in conducting the operations of the business, or whose work 
affects general business operations to a significant degree, even 
though their assignments are tasks related to the operation of a 
particular segment of the business.
    (1) For example, an employee who is a buyer of a particular type of 
equipment in an industrial plant or who is an assistant buyer for a 
retail or service establishment may have a significant impact on the 
business, even though the work may be limited to purchasing for a 
particular department. Similarly, although comparison shopping by an 
employee who merely reports findings on a competitor's prices is not 
work of substantial importance, the buyer who evaluates such reports to 
set the employer's prices does perform work of substantial importance.
    (2) Insurance claims adjusters also generally perform work of 
substantial importance, whether they work for an insurance company or 
other type of company, if their duties include activities such as 
interviewing insureds, witnesses and physicians; inspecting property 
damage; reviewing factual information to prepare damage estimates; 
evaluating and making recommendations regarding coverage of claims; 
determining liability and total value of a claim; negotiating 
settlements; and making recommendations regarding litigation.
    (3) An employee who leads a team of other employees assigned to 
complete a major project for the employer (such as purchasing, selling 
or closing all or part of the business, negotiating a real estate 
transaction or a collective bargaining agreement, or designing and 
implementing productivity improvements) performs work of substantial 
importance, even if the employee does not have direct supervisory 
responsibility over the other employees on the team.
    (4) Other employees that perform work of substantial importance, 
even if their decisions or recommendations are reviewed for possible 
modification or rejection at a higher level, include: a human resources 
manager who formulates employment policies; a management consultant who 
studies the operations of a business and proposes change in 
organization; a purchasing agent who is required to consult with top 
management officials when making a purchase commitment for raw 
materials in excess of the contemplated plant needs; or an executive or 
administrative assistant to a proprietor or chief executive of a 
business if such

[[Page 15588]]

employee, without specific instructions or prescribed procedures, has 
been delegated authority to arrange meetings, handle callers and answer 
correspondence.
    (c) Work of substantial importance does not include clerical or 
secretarial tasks, recording or tabulating data, or performing other 
mechanical, repetitive, recurrent or routine work. For example, an 
employee who simply tabulates data is not exempt, even if labeled as a 
``statistician.'' An example of an employee who does not perform work 
of substantial importance is a personnel clerk engaged in ``screening'' 
of applicants (collecting data and rejecting applicants who do not meet 
basic qualifications), but who is not involved in making the decision 
to hire.
    (d) An employer's volume of business may make it necessary to 
employ a number of employees to perform the same or similar work. The 
fact that many employees perform identical work or work of the same 
relative importance does not mean that the work of each such employee 
is not work of substantial importance.
    (e) The work of an employee does not meet this requirement merely 
because the employer will experience financial losses if the employee 
fails to perform the job properly. For example, a messenger who is 
entrusted with carrying large sums of money does not perform work of 
substantial importance even though serious consequences may flow from 
the employee's neglect. An employee who operates very expensive 
equipment is not performing work of substantial importance merely 
because improper performance of the employee's duties may cause serious 
financial loss to the employer.


Sec.  541.204  High level of skill or training.

    (a) The phrase ``work requiring a high level of skill or training'' 
means administrative work requiring specialized knowledge or abilities, 
or advanced training. The specialized knowledge or abilities need not 
be acquired through any particular course of academic training or 
study. Also, the high level of training required may involve advanced 
academic instruction or advanced on-the-job training, or a combination 
of both. Administrative work that satisfies the ``high level of skill 
or training'' standard includes advisory work performed for the 
management of the company (or for the management of the company's 
customers), as is typically performed by financial advisors, tax 
advisors, insurance experts, credit managers, employee benefits 
experts, human resource consultants, labor relations consultants, 
marketing consultants, safety directors, account executives of 
advertising agencies and stock brokers. Employees with a high level of 
skill or training also may perform special assignments, including 
assignments performed away from their employer's place of business if 
the employee serves as a field representative for the employer.
    (b) Work requiring a high level of skill or training may include 
work by employees who use a reference manual. The use of such a manual 
can require a high level of skill and training if the manual contains 
highly technical, scientific, legal, financial or other similarly 
complex information that can be interpreted properly only by those with 
advanced training or specialized knowledge or skills. Such manuals are 
used to provide guidance in addressing very difficult or novel 
circumstances. Thus, if an employee performs administrative work that 
satisfies the ``high level of skill or training'' standard, using this 
type of reference manual would not affect the employee's exempt status.
    (c) Work requiring a high level of skill or training does not 
include work requiring the employee simply to look up information (from 
a handbook, for example) to determine the correct response to an 
inquiry or set of circumstances. Nor does it include clerical or 
secretarial work, recording or tabulating data, or other mechanical, 
repetitive, recurrent or routine work. Employees such as inspectors, 
examiners and graders who use established techniques, procedures or 
standards to accept or reject a product do not perform work requiring a 
high level of skill or training, even though such employees may have 
some leeway in the performance of their work.


Sec.  541.205  Educational establishments.

    (a) The term ``employee employed in a bona fide administrative 
capacity'' in section 13(a)(1) of the Act also includes employees:
    (1) Compensated for services on a salary or fee basis at a rate of 
not less than $425 per week (or $360 per week, if employed in American 
Samoa by employers other than the Federal Government) exclusive of 
board, lodging or other facilities, or on a salary basis which is at 
least equal to the entrance salary for teachers in the educational 
establishment by which employed; and
    (2) With a primary duty of performing administrative functions 
directly related to academic instruction or training in an educational 
establishment or department or subdivision thereof.
    (b) The term ``educational establishment'' means an elementary or 
secondary school system, an institution of higher education or other 
educational institution. Sections 3(v) and 3(w) of the Act define 
elementary and secondary schools as those day or residential schools 
that provide elementary or secondary education, as determined under 
State law. Under the laws of most States, such education includes the 
curricula in grades 1 through 12; under many it includes also the 
introductory programs in kindergarten. Such education in some States 
may also include nursery school programs in elementary education and 
junior college curricula in secondary education. The term ``educational 
establishment'' includes special schools for mentally or physically 
disabled or gifted children, regardless of any classification of such 
schools as elementary, secondary or higher. Also, for purposes of the 
exemption, no distinction is drawn between public and private schools, 
or between those operated for profit and those that are not for profit.
    (c) The phrase ``performing administrative functions directly 
related to academic instruction or training'' means work related to the 
academic operations and functions in a school rather than to 
administration along the lines of general business operations. Such 
academic administrative functions include operations directly in the 
field of education. Jobs relating to areas outside the educational 
field are not within the definition of academic administration.
    (1) Employees engaged in academic administrative functions include: 
the superintendent or other head of an elementary or secondary school 
system, and any assistants, responsible for administration of such 
matters as curriculum, quality and methods of instructing, measuring 
and testing the learning potential and achievement of students, 
establishing and maintaining academic and grading standards, and other 
aspects of the teaching program; the principal and any vice-principals 
responsible for the operation of an elementary or secondary school; 
department heads in institutions of higher education responsible for 
the administration of the mathematics department, the English 
department, the foreign language department, etc.; and other employees 
with similar responsibilities.
    (2) Jobs relating to building management and maintenance, jobs 
relating to the health of the students, and academic staff such as 
social workers, psychologists, lunch room managers or dietitians do not 
perform

[[Page 15589]]

academic administrative functions. Although such work is not considered 
academic administration, such employees may qualify for exemption under 
Sec.  541.200 or under other sections of this part provided the 
requirements for such exemptions are met.

Subpart D--Professional Employees


Sec.  541.300  General rule for professional employees.

    (a) The term ``employee employed in a bona fide professional 
capacity'' in section 13(a)(1) of the Act shall mean any employee:
    (1) Compensated on a salary or fee basis at a rate of not less than 
$425 per week (or $360 per week, if employed in American Samoa by 
employers other than the Federal Government), exclusive of board, 
lodging, or other facilities; and
    (2) With a primary duty of performing office or non-manual work:
    (i) Requiring knowledge of an advanced type in a field of science 
or learning customarily acquired by a prolonged course of specialized 
intellectual instruction, but which also may be acquired by alternative 
means such as an equivalent combination of intellectual instruction and 
work experience; or
    (ii) Requiring invention, imagination, originality or talent in a 
recognized field of artistic or creative endeavor.
    (b) The term ``salary basis'' is defined at Sec.  541.602; ``fee 
basis'' is defined at Sec.  541.605; ``board, lodging or other 
facilities'' is defined at Sec.  541.606; and ``primary duty'' is 
defined at Sec.  541.700.


Sec.  541.301  Learned professionals.

    (a) Learned professionals must have a primary duty of performing 
office or non-manual work requiring advanced knowledge in a field of 
science or learning. The term ``advanced knowledge'' means knowledge 
that is customarily acquired through a prolonged course of specialized 
intellectual instruction, but which also may be acquired by alternative 
means such as an equivalent combination of intellectual instruction and 
work experience. The learned professions include the professions of 
law, medicine, theology, teaching, accounting, actuarial computation, 
engineering, architecture, various types of physical, chemical and 
biological sciences, pharmacy, and other similar occupations that have 
a recognized professional status based on the acquirement of advanced 
knowledge and performance of work that is predominantly intellectual in 
character as opposed to routine, mental, manual, mechanical or physical 
work.
    (b) The phrase ``knowledge of an advanced type'' means knowledge 
that cannot be attained at the high school level.
    (c) The phrase ``field of science or learning'' distinguishes the 
learned professions from the mechanical arts where in some instances 
the knowledge is of a fairly advanced type, but not in a field of 
science or learning.
    (d) The phrase ``customarily acquired by a prolonged course of 
specialized intellectual instruction'' generally restricts the 
exemption to professions where specialized academic training is a 
standard prerequisite for entrance into the profession. The best prima 
facie evidence that an employee meets this requirement is possession of 
the appropriate academic degree. However, the word ``customarily'' 
means that the exemption is also available to employees in such 
professions who have substantially the same knowledge level as the 
degreed employees, but who attained such knowledge through a 
combination of work experience, training in the armed forces, attending 
a technical school, attending a community college or other intellectual 
instruction.
    (e) The following professions have been found by the Administrator 
generally to meet the primary duty requirement for learned 
professionals in Sec.  541.300(b)(1):
    (1) Registered or certified medical technologists. Registered or 
certified medical technologists who have successfully completed three 
academic years of pre-professional study in an accredited college or 
university plus a fourth year of professional course work in a school 
of medical technology approved by the Council of Medical Education of 
the American Medical Association.
    (2) Registered nurses. Nurses who are registered by the appropriate 
State examining board.
    (3) Dental hygienists. Dental hygienists who have successfully 
completed four academic years of pre-professional and professional 
study in an accredited college or university approved by the Commission 
on Accreditation of Dental and Dental Auxiliary Educational Programs of 
the American Dental Association.
    (4) Physician assistants. Physician assistants who have 
successfully completed three years of pre-professional study (or 2,000 
hours of patient care experience in a military or civilian occupation 
such as laboratory technology, nursing, psychology, biology, or related 
activity) plus not less than one year of professional course work in a 
medical school or hospital.
    (5) Accountants. Certified public accountants, except in unusual 
cases, meet the primary duty requirement for the learned professional 
exemption. In addition, many other accountants who are not certified 
public accountants but perform similar job duties may qualify as exempt 
learned professionals. However, accounting clerks and other employees 
who normally perform a great deal of routine work generally will not 
qualify as exempt professionals.
    (6) Chefs. Chefs, such as executive chefs and sous chefs, who have 
attained a college degree in a culinary arts program, meet the primary 
duty requirement for the learned professional exemption.
    (f) Professional occupations do not include those whose duties may 
be performed with the general knowledge acquired by an academic degree 
in any field or with knowledge acquired through an apprenticeship or 
from training in routine mental, manual or physical processes. Thus, 
for example, the professional exemption does not apply to occupations 
such as carpenters, electricians, mechanics, plumbers, iron workers, 
craftsmen, operating engineers, longshoremen, construction workers, 
teamsters and other employees who perform manual work that does not 
require an advanced academic degree.
    (g) The areas in which professional exemptions may be available are 
expanding. As knowledge is developed, academic training is broadened 
and specialized degrees are offered in new and diverse fields, thus 
creating new specialists in particular fields of science or learning. 
When a specialized degree has become a standard requirement for a 
particular occupation, that occupation may have acquired the 
characteristics of a learned profession.


Sec.  541.302  Creative professionals.

    (a) Creative professionals must have a primary duty of performing 
office or non-manual work requiring invention, imagination, originality 
or talent in a recognized field of artistic or creative endeavor as 
opposed to routine mental, manual, mechanical or physical work. The 
exemption does not apply to work which can be produced by a person with 
general manual ability and training.
    (b) To qualify for exemption as a creative professional, the work 
performed must be ``in a recognized field of artistic or creative 
endeavor.'' This includes such fields as music, writing, acting and the 
graphic arts.
    (c) The requirement of ``invention, imagination, originality or 
talent'' distinguishes the creative professions from work that 
primarily depends on

[[Page 15590]]

intelligence, diligence and accuracy. This requirement generally is met 
by actors, musicians, composers, conductors, and soloists; painters who 
at most are given the subject matter of their painting; cartoonists who 
are merely told the title or underlying concept of a cartoon and must 
rely on their own creative ability to express the concept; essayists, 
novelists, short-story writers and screen play writers who choose their 
own subjects and hand in a finished piece of work to their employers 
(the majority of such persons are, of course, not employees but self-
employed); and persons holding the more responsible writing positions 
in advertising agencies. This requirement generally is not met by a 
person who is employed as a copyist, as an ``animator'' of motion-
picture cartoons, or as a retoucher of photographs, since such work is 
not properly described as creative in character.
    (d) Journalists may qualify as creative professionals if their work 
generally requires invention, imagination, originality or talent. 
Writers for newspapers, news magazines, television news programs, the 
Internet and other media, for example, generally perform work involving 
originality and talent. Radio announcers and television announcers also 
perform work that requires artistic or creative talent. Exempt work 
includes conducting interviews, reporting or analyzing public events, 
and acting as a narrator, announcer or commentator. Positions that 
primarily require the employee to collect and record routine facts or 
data without analysis, interpretation, synthesis, or creative or 
original writing would not qualify for the creative professional 
exemption.


Sec.  541.303  Teachers.

    (a) The term ``employee employed in a bona fide professional 
capacity'' in section 13(a)(1) of the Act also means any employee with 
a primary duty of teaching, tutoring, instructing or lecturing in the 
activity of imparting knowledge and who is employed and engaged in this 
activity as a teacher in an educational establishment by which the 
employee is employed. The term ``educational establishment'' is defined 
in Sec.  541.205(b).
    (b) Exempt teachers include, but are not limited to: regular 
academic teachers; teachers of kindergarten or nursery school pupils; 
teachers of gifted or disabled children; teachers of skilled and 
semiskilled trades and occupations; teachers engaged in automobile 
driving instruction; aircraft flight instructors; home economics 
teachers; and vocal or instrumental music instructors. Those faculty 
members who are engaged as teachers but also spend a considerable 
amount of their time in extracurricular activities such as coaching 
athletic teams or acting as moderators or advisors in such areas as 
drama, speech, debate or journalism are engaged in teaching. Such 
activities are a recognized part of the schools' responsibility in 
contributing to the educational development of the student.
    (c) The possession of an elementary or secondary teacher's 
certificate provides a clear means of identifying the individuals 
contemplated as being within the scope of the exemption for teaching 
professionals. Teachers who possess a teaching certificate qualify for 
the exemption regardless of the terminology (e.g., permanent, 
conditional, standard, provisional, temporary, emergency, or unlimited) 
used by the State to refer to different kinds of certificates. However, 
private schools and public schools are not uniform in requiring a 
certificate for employment as an elementary or secondary school 
teacher, and a teacher's certificate is not generally necessary for 
employment in institutions of higher education or other educational 
establishments. Therefore, a teacher who is not certified may be 
considered for exemption, provided that such individual is employed as 
a teacher by the employing school or school system.
    (d) The requirements of Sec.  541.300 and subpart G (salary 
requirements) of this part do not apply to the teaching professionals 
described in this section.


Sec.  541.304  Practice of law or medicine.

    (a) The term ``employee employed in a bona fide professional 
capacity'' in section 13(a)(1) of the Act also shall mean:
    (1) Any employee who is the holder of a valid license or 
certificate permitting the practice of law or medicine or any of their 
branches and is actually engaged in the practice thereof; and
    (2) Any employee who is the holder of the requisite academic degree 
for the general practice of medicine and is engaged in an internship or 
resident program pursuant to the practice of the profession.
    (b) In the case of medicine, the exemption applies to physicians 
and other practitioners licensed and practicing in the field of medical 
science and healing or any of the medical specialties practiced by 
physicians or practitioners. The term ``physicians'' includes medical 
doctors including general practitioners and specialists, osteopathic 
physicians (doctors of osteopathy), podiatrists, dentists (doctors of 
dental medicine), and optometrists (doctors of optometry or bachelors 
of science in optometry).
    (c) Employees engaged in internship or resident programs, whether 
or not licensed to practice prior to commencement of the program, 
qualify as exempt professionals if they enter such internship or 
resident programs after the earning of the appropriate degree required 
for the general practice of their profession.
    (d) The requirements of Sec.  541.300 and subpart G (salary 
requirements) of this part do not apply to the licensed lawyers and 
medical professionals described in this section.

Subpart E--Computer Employees


Sec.  541.400  General rule for computer employees.

    (a) Computer systems analysts, computer programmers, software 
engineers or other similarly skilled workers in the computer field are 
eligible for exemption as professionals under section 13(a)(1) of the 
Act and under section 13(a)(17) of the Act. Employees who qualify for 
this exemption are highly skilled in computer systems analysis, 
programming, software engineering or similar computer functions. 
Because job titles vary widely and change quickly in the computer 
industry, job titles are not determinative of the applicability of this 
exemption. To qualify for the computer occupations exemption, the 
employee must:
    (1) Be compensated on a salary or fee basis at a rate of not less 
than $425 per week (or $360 per week, if employed in American Samoa by 
employers other than the Federal Government), exclusive of board, 
lodging or other facilities, or on an hourly basis at a rate not less 
than $27.63 an hour; and
    (2) Have a primary duty consisting of:
    (i) The application of systems analysis techniques and procedures, 
including consulting with users, to determine hardware, software or 
system functional specifications;
    (ii) The design, development, documentation, analysis, creation, 
testing or modification of computer systems or programs, including 
prototypes, based on and related to user or system design 
specifications;
    (iii) The design, documentation, testing, creation or modification 
of computer programs related to machine operating systems; or
    (iv) A combination of the aforementioned duties, the performance of 
which requires the same level of skills.

[[Page 15591]]

    (b) The term ``salary basis'' is defined at Sec.  541.602; ``fee 
basis'' is defined at Sec.  541.605; ``board, lodging or other 
facilities'' is defined at Sec.  541.606; and ``primary duty'' is 
defined at Sec.  541.700.


Sec.  541.401  High level of skill and expertise.

    The exemption for computer employees applies only to highly-skilled 
employees who have achieved a level of proficiency in the theoretical 
and practical application of highly-specialized knowledge in computer 
systems analysis, programming and software engineering. This exemption 
does not include trainees or employees in entry level positions 
learning to become proficient in such areas or to employees in computer 
occupations who have not attained a level of skill and expertise which 
allows them to work generally without close supervision. The level of 
expertise and skill required to qualify for this exemption is generally 
attained through combinations of education, specialized training and 
experience in the field. No particular academic degree is required for 
this exemption, nor are there any requirements for licensure or 
certification.


Sec.  541.402  Computer operation, manufacture and repair.

    The exemption for employees in computer occupations does not 
include employees engaged in the operation of computers or in the 
manufacture, repair or maintenance of computer hardware and related 
equipment. Employees whose work is highly dependent upon, or 
facilitated by, the use of computers and computer software programs 
(e.g., engineers, drafters and others skilled in computer-aided design 
software), but who are not in computer systems analysis and programming 
occupations, are also not exempt computer professionals.


Sec.  541.403  Executive and administrative computer employees.

    Computer employees within the scope of this exemption, as well as 
those employees not within its scope, may also have executive and 
administrative duties which qualify the employees for exemption under 
subpart B or subpart C of this part. For example, systems analysts and 
computer programmers whose primary duties are to plan, schedule, and 
coordinate activities required to develop systems to solve complex 
business, scientific or engineering problems of the employer or the 
employer's customers are performing work of substantial importance 
related to management or general business operations and may qualify as 
exempt administrative employees under Sec.  541.200. Similarly, a 
senior or lead computer programmer whose primary duty is to manage and 
direct the work of other programmers in a customarily recognized 
department or subdivision may qualify as an exempt executive employee 
under Sec.  541.100.

Subpart F--Outside Sales Employees


Sec.  541.500  General rule for outside sales employees.

    (a) The term ``employee employed in the capacity of outside 
salesman'' in section 13(a)(1) of the Act shall mean any employee:
    (1) With a primary duty of:
    (i) Making sales within the meaning of section 3(k) of the Act, or
    (ii) Obtaining orders or contracts for services or for the use of 
facilities for which a consideration will be paid by the client or 
customer; and
    (2) Who is customarily and regularly engaged away from the 
employer's place or places of business in performing such primary duty.
    (b) The term ``primary duty'' is defined at Sec.  541.700. In 
determining the primary duty of an outside sales employee, work 
performed incidental to and in conjunction with the employee's own 
outside sales or solicitations, including incidental deliveries and 
collections, shall be regarded as exempt outside sales work. Other work 
that furthers the employee's sales efforts also shall be regarded as 
exempt work including, for example, writing sales reports, updating or 
revising the employee's sales or display catalog, planning itineraries 
and attending sales conferences. The requirements of subpart G (salary 
requirements) of this part do not apply to the outside sales employees 
described in this section.


Sec.  541.501  Making sales or obtaining orders.

    (a) Section 541.500 requires that the employee be engaged in:
    (1) Making sales within the meaning of section 3(k) of the Act, or
    (2) Obtaining orders or contracts for services or for the use of 
facilities.
    (b) Sales within the meaning of section 3(k) of the Act include the 
transfer of title to tangible property, and in certain cases, of 
tangible and valuable evidences of intangible property. Section 3(k) of 
the Act states that ``sale'' or ``sell'' includes any sale, exchange, 
contract to sell, consignment for sale, shipment for sale, or other 
disposition.
    (c) Exempt outside sales work includes not only the sales of 
commodities, but also ``obtaining orders or contracts for services or 
for the use of facilities for which a consideration will be paid by the 
client or customer.'' Obtaining orders for ``the use of facilities'' 
includes the selling of time on radio or television, the solicitation 
of advertising for newspapers and other periodicals, and the 
solicitation of freight for railroads and other transportation 
agencies.
    (d) The word ``services'' extends the outside sales exemption to 
employees who sell or take orders for a service, which may be performed 
for the customer by someone other than the person taking the order.


Sec.  541.502  Away from employer's place of business.

    (a) An outside sales employee must be customarily and regularly 
engaged ``away from the employer's place or places of business.'' This 
requirement is based on the obvious connotation of the word ``outside'' 
in the statutory term ``outside salesman.'' The Administrator does not 
have authority to define this exemption for ``outside'' sales under 
section 13(a)(1) of the Act as including inside sales work. Section 
13(a)(1) does not exempt inside sales and other inside work (except 
work performed incidental to and in conjunction with outside sales and 
solicitations). However, section 7(i) of the Act exempts commissioned 
inside sales employees of qualifying retail or service establishments 
if those employees meet the compensation requirements of section 7(i).
    (b) The outside sales employee is an employee who makes sales at 
the customer's place of business or, if selling door-to-door, at the 
customer's home. Outside sales does not include sales made by mail, 
telephone or the Internet unless such contact is used merely as an 
adjunct to personal calls. Thus, any fixed site, whether home or 
office, used by a salesperson as a headquarters or for telephonic 
solicitation of sales is considered one of the employer's places of 
business, even though the employer is not in any formal sense the owner 
or tenant of the property. However, an outside sales employee does not 
lose the exemption by displaying samples in hotel sample rooms during 
trips from city to city; these sample rooms should not be considered as 
the employer's places of business.


Sec.  541.503  Promotion work.

    (a) Promotion work is one type of activity often performed by 
persons who make sales, which may or may not be exempt outside sales 
work, depending upon the circumstances under which it is performed. 
Promotional work that is actually performed incidental to and in

[[Page 15592]]

conjunction with an employee's own outside sales or solicitations is 
exempt work. On the other hand, promotional work that is incidental to 
sales made, or to be made, by someone else is not exempt outside sales 
work.
    (b) A manufacturer's representative, for example, may perform 
various types of promotional activities such as putting up displays and 
posters, removing damaged or spoiled stock from the merchant's shelves 
or rearranging the merchandise. Such an employee can be considered an 
exempt outside sales employee if the employee's primary duty is making 
sales or contracts. Promotion activities directed toward consummation 
of the employee's own sales are exempt. Promotional activities designed 
to stimulate sales that will be made by someone else are not exempt.
    (c) Another example is a company representative who visits chain 
stores, arranges the merchandise on shelves, replenishes stock by 
replacing old with new merchandise, consults with the store manager as 
to the requirements of the store, fills out a requisition for the 
quantity wanted, but leaves the requisition with the store manager to 
be transmitted to the central warehouse of the chain store company 
which later ships the quantity requested. The arrangement of 
merchandise on the shelves or the replenishing of stock is not exempt 
work unless it is incidental to and in conjunction with the employee's 
own outside sales. Because the employee in this instance does not 
consummate the sale nor direct efforts toward the consummation of a 
sale, the work in this example is not exempt.


Sec.  541.504  Drivers who sell.

    (a) Drivers who deliver products and also sell such products may 
qualify as exempt outside sales employees only if the employee has a 
primary duty of making sales. If the employee has a primary duty of 
making sales, all work performed incidental to and in conjunction with 
the employee's own sales efforts, including loading, driving or 
delivering products, is exempt work.
    (b) Several factors should be considered in determining if a driver 
has a primary duty of making sales, including: a comparison of the 
driver's duties with those of other employees engaged as truck drivers 
and as salespersons; possession of a selling or solicitor's license 
when such license is required by law or ordinances; presence or absence 
of customary or contractual arrangements concerning amounts of products 
to be delivered; description of the employee's occupation in collective 
bargaining agreements; the employer's specifications as to 
qualifications for hiring; sales training; attendance at sales 
conferences; method of payment; and proportion of earnings directly 
attributable to sales.
    (c) Drivers who may qualify as exempt outside sales employees 
include:
    (1) A driver who provides the only sales contact between the 
employer and the customers visited, who calls on customers and takes 
orders for products, who delivers products from stock in the employee's 
vehicle or procures and delivers the product to the customer on a later 
trip, and who receives compensation commensurate with the volume of 
products sold.
    (2) A driver who obtains or solicits orders for the employer's 
products from persons who have authority to commit the customer for 
purchases.
    (3) A driver who calls on new prospects for customers along the 
employee's route and attempts to convince them of the desirability of 
accepting regular delivery of goods,
    (4) A driver who calls on established customers along the route and 
carrying an assortment of the employer's products who persuades regular 
customers to accept delivery of increased amounts of goods or of new 
products, even though the initial sale or agreement for delivery was 
made by someone else.
    (d) Drivers who generally would not qualify as exempt outside sales 
employees include:
    (1) A route driver whose primary duty is to transport products sold 
by the employer through vending machines and to keep such machines 
stocked, in good operating condition, and in good locations does not 
have a primary duty of making sales.
    (2) A driver who often calls on established customers day after day 
or week after week, delivering a quantity of the employer's products at 
each call when the sale was not significantly affected by solicitations 
of the customer by the delivering driver or the amount of the sale is 
determined by the volume of the customer's sales since the previous 
delivery.
    (3) A driver primarily engaged in making deliveries to customers 
and performing activities intended to promote sales by customers 
(including placing point-of-sale and other advertising materials, price 
stamping commodities, arranging merchandise on shelves, in coolers or 
in cabinets, rotating stock according to date, and cleaning and 
otherwise servicing display cases), unless such work is in furtherance 
of the driver's own sales efforts.

Subpart G--Compensation Requirements


Sec.  541.600  Amount of salary required.

    (a) To qualify as an exempt executive, administrative or 
professional employee under section 13(a)(1) of the Act, an employee 
must be compensated on a salary basis at a rate of not less than $425 
per week (or $360 per week, if employed in American Samoa by employers 
other than the Federal Government), exclusive of board, lodging or 
other facilities. Administrative and professional employees may also be 
paid on a fee basis, as defined in Sec.  541.605.
    (b) The $425 a week may be translated into equivalent amounts for 
periods longer than one week. The requirement will be met if the 
employee is compensated biweekly on a salary basis of $850, semimonthly 
on a salary basis of $920.84, or monthly on a salary basis of 
$1,841.67. However, the shortest period of payment that will meet this 
compensation requirement is one week.
    (c) In the case of academic administrative employees, the 
compensation requirement also may be met by compensation on a salary 
basis at a rate at least equal to the entrance salary for teachers in 
the educational establishment by which the employee is employed, as 
provided in Sec.  541.206(a)(1).
    (d) In the case of computer employees, the compensation requirement 
also may be met by compensation on an hourly basis at a rate not less 
than $27.63 an hour, as provided in Sec.  541.400(a).
    (e) In the case of professional employees, the compensation 
requirements in this section shall not apply to employees engaged as 
teachers (Sec.  541.303); employees who hold a valid license or 
certificate permitting the practice of law or medicine or any of their 
branches and are actually engaged in the practice thereof (see Sec.  
541.304); or to employees who hold the requisite academic degree for 
the general practice of medicine and are engaged in an internship or 
resident program pursuant to the practice of the profession (see Sec.  
541.304). In the case of medical occupations, the exception from the 
salary or fee requirement does not apply to pharmacists, nurses, 
therapists, technologists, sanitarians, dietitians, social workers, 
psychologists, psychometrists, or other professions which service the 
medical profession.


Sec.  541.601  Highly compensated employees.

    (a) An employee who performs office or non-manual work and is 
guaranteed a total annual compensation of at least

[[Page 15593]]

$65,000 ($55,000 if employed in American Samoa by employers other than 
the Federal Government) is deemed exempt under section 13(a)(1) of the 
Act if the employee performs any one or more of the exempt duties or 
responsibilities of an executive, administrative or professional 
employee identified in subparts B, C or D of this part.
    (b) The phrase ``total annual compensation'' excludes board, 
lodging or other facilities as defined in Sec.  541.606, but includes 
base salary, commissions, non-discretionary bonuses and other non-
discretionary compensation.
    (1) The base salary, commissions and non-discretionary compensation 
must be settled and paid out to the employee as due on at least a 
monthly basis. Thus, for example, employees told they will receive a 
commission of 1 percent of all monthly sales orders that exceed $1 
million must receive any commission due each month. Of course, if sales 
do not exceed $1 million in a particular month, no commission is due 
for that month. Similarly, employees who are told they will receive a 
$300 production bonus for each ton of product manufactured in excess of 
a weekly quota must receive any bonus earned at least monthly. Again, 
there may be months in which no bonus is due because production did not 
exceed the quota in any week of the month.
    (2) If an employee's base salary and non-discretionary compensation 
do not total at least the minimum guarantee established in Sec.  
541.601(a) by end of the year, the employer may, by the next pay period 
after the end of the year, make a final payment sufficient to achieve 
the guaranteed level. For example, an employee may earn $36,000 in 
guaranteed base salary, and the employer may anticipate based upon past 
sales that the employee also will earn $36,000 in commissions. However, 
due to poor sales in the final quarter of the year, the employee 
actually only earns $26,000 in commissions. In this situation, the 
employer may by the next pay period after the end of the year make a 
payment of $3,000 to the employee. If the employer fails to make such a 
payment, the employee does not qualify as a highly compensated 
employee, but may still qualify as exempt under subparts B, C or D of 
this part.
    (3) An employee who does not work a full year for the employer, 
either because the employee is newly hired after the beginning of the 
year or ends the employment before the end of the year, may qualify for 
exemption under this section if the employee receives a pro rata 
portion of the minimum guarantee established in Sec.  541.601(a), based 
upon the number of weeks that the employee will be or has been 
employed. The employer may utilize any 52-week period as the year, such 
as a calendar year, a fiscal year, or an anniversary of hire year. If 
the employer does not identify some other year period in advance, the 
calendar year will apply.
    (c) A high level of compensation is a strong indicator of an 
employee's exempt status, thus eliminating the need for a detailed 
analysis of the employee's job duties. Thus, a highly compensated 
employee may qualify for exemption if the employee performs any one or 
more of the exempt duties or responsibilities of an executive, 
administrative or professional employee identified in subparts B, C or 
D of this part. Thus, an employee may qualify as a highly compensated 
executive employee, for example, if the employee directs the work of 
two or more other employees, even though the employee does not have 
authority to hire and fire.
    (d) This section applies only to employees performing office or 
non-manual work. carpenters, electricians, mechanics, plumbers, iron 
workers, craftsmen, operating engineers, longshoremen, construction 
workers, teamsters and other employees who perform manual work are not 
exempt under this section no matter how highly paid they might be.


Sec.  541.602  Salary basis.

    (a) General rule. An employee will be considered to be paid on a 
``salary basis'' within the meaning of these regulations if the 
employee regularly receives each pay period on a weekly, or less 
frequent basis, a predetermined amount constituting all or part of the 
employee's compensation, which amount is not subject to reduction 
because of variations in the quality or quantity of the work performed. 
Subject to the exceptions provided in paragraph (b) of this section, an 
exempt employee must receive the full salary for any week in which the 
employee performs any work without regard to the number of days or 
hours worked. Exempt employees need not be paid for any workweek in 
which they perform no work. An employee is not paid on a salary basis 
if deductions from the employee's predetermined compensation are made 
for absences occasioned by the employer or by the operating 
requirements of the business. If the employee is ready, willing and 
able to work, deductions may not be made for time when work is not 
available.
    (b) Exceptions. The prohibition against deductions from pay in the 
salary basis requirement is subject to the following exceptions:
    (1) Deductions from pay may be made when an exempt employee is 
absent from work for a full day for personal reasons, other than 
sickness or disability. Thus, if an employee is absent for two full 
days to handle personal affairs, the employee's salaried status will 
not be affected if deductions are made from the salary for two full-day 
absences. However, if an exempt employee is absent for one and a half 
days for personal reasons, the employer can deduct only for the one 
full-day absence.
    (2) Deductions from pay may be made for absences of a full day or 
more occasioned by sickness or disability (including work-related 
accidents) if the deduction is made in accordance with a bona fide 
plan, policy or practice of providing compensation for loss of salary 
occasioned by such sickness or disability. The employer is not required 
to pay any portion of the employee's salary for full day absences for 
which the employee receives compensation under the plan, policy or 
practice. Deductions for such full day absences also may be made before 
the employee has qualified under the plan, policy or practice, and 
after the employee has exhausted the leave allowance thereunder. Thus, 
for example, if an employer maintains a short-term disability insurance 
plan providing salary replacement for 12 weeks starting on the fourth 
day of absence, the employer may make deductions from pay for the three 
days of absence before the employee qualifies for benefits under the 
plan; for the twelve weeks in which the employee receives salary 
replacement benefits under the plan; and for absences after the 
employee has exhausted the 12 weeks of salary replacement benefits. 
Similarly, an employer may make deductions from pay for absences of a 
full day or more if salary replacement benefits are provided under a 
State disability insurance law or under a State workers' compensation 
law.
    (3) While an employer cannot make deductions from pay for absences 
of an exempt employee occasioned by jury duty, attendance as a witness 
or temporary military leave, the employer can offset any amounts 
received by an employee as jury fees, witness fees or military pay for 
a particular week against the salary due for that particular week 
without loss of the exemption.
    (4) Deductions from pay of exempt employees may be made for 
penalties imposed in good faith for infractions of

[[Page 15594]]

safety rules of major significance. Safety rules of major significance 
include those relating to the prevention of serious danger in the 
workplace or to other employees, such as rules prohibiting smoking in 
explosive plants, oil refineries and coal mines.
    (5) Deductions from pay of exempt employees may be made for unpaid 
disciplinary suspensions of a full day or more imposed in good faith 
for infractions of workplace conduct rules. Such suspensions must be 
imposed pursuant to a written policy applied uniformly to all workers. 
Thus, for example, an employer may suspend an exempt employee without 
pay for three days for violating a uniformly applied written policy 
prohibiting sexual harassment. Similarly, an employer may suspend an 
exempt employee without pay for twelve days for violating a uniformly 
applied written policy prohibiting workplace violence.
    (6) An employer is not required to pay the full salary in the 
initial or terminal week of employment. Rather, an employer may pay a 
proportionate part of an employee's full salary for the time actually 
worked in the first and last week of employment. In such weeks, the 
payment of an hourly or daily equivalent of the employee's full salary 
for the time actually worked will meet the requirement. However, 
employees are not paid on a salary basis within the meaning of these 
regulations if they are employed occasionally for a few days, and the 
employer pays them a proportionate part of the weekly salary when so 
employed.
    (7) An employer is not required to pay the full salary for weeks in 
which an exempt employee takes unpaid leave under the Family and 
Medical Leave Act. Rather, when an exempt employee takes unpaid leave 
under the Family and Medical Leave Act, an employer may pay a 
proportionate part of the full salary for time actually worked. For 
example, if an employee who normally works forty hours per week uses 
four hours of unpaid leave under the Family and Medical Leave Act, the 
employer could deduct 10% of the employee's normal salary that week.
    (c) When calculating the amount of a deduction from pay allowed 
under paragraph (b) of this section, the employer may use the hourly or 
daily equivalent of the employee's full weekly salary or any other 
amount proportional to the time actually missed by the employee. A 
deduction from pay as a penalty for violations of major safety rules 
under paragraph (b)(4) of this section may be made in any amount.


Sec.  541.603  Effect of improper deductions from salary.

    (a) An employer who makes improper deductions from salary shall 
lose the exemption if the facts demonstrate that the employer has a 
pattern and practice of not paying employees on a salary basis. A 
pattern and practice of making improper deductions demonstrates that 
the employer did not intend to pay employees in the job classification 
on a salary basis. Improper deductions that are isolated or 
inadvertent, however, will not result in loss of the exemption. The 
factors to consider when determining whether an employer has a pattern 
and practice of not paying employees on a salary basis include, but are 
not limited to: The number of improper deductions; the time period 
during which the employer made improper deductions; the number and 
geographic location of employees whose salary was improperly reduced; 
the number and geographic location of managers responsible for taking 
the improper deductions; the size of the employer; whether the employer 
has a written policy prohibiting improper deductions; and whether the 
employer corrected the improper pay deductions.
    (b) If the facts demonstrate that the employer has a policy of not 
paying on a salary basis, the exemption is lost during the time period 
in which improper deductions were made for employees in the same job 
classification working for the same managers responsible for the 
improper deductions. Employees in different job classifications who 
work for different managers do not lose their status as exempt 
employees. Thus, for example, if a manager at a company facility 
routinely docks the pay of engineers at that facility for partial-day 
personal absences, then all engineers at that facility whose pay could 
have been improperly docked by the manager would lose the exemption; 
engineers at other facilities or working for other managers, however, 
would remain exempt.
    (c) If an employer has a written policy prohibiting improper pay 
deductions as provided in Sec.  541.602, notifies employees of that 
policy and reimburses employees for any improper deductions, such 
employer will not lose the exemption for any employees unless the 
employer repeatedly and willfully violates the policy or continues to 
make improper deductions after receiving employee complaints. Examples 
of notification include publishing the policy to employees at the time 
of hire, in an employee handbook or on the employer's Intranet.
    (d) This section shall not be construed in an unduly technical 
manner so as to defeat the exemption.


Sec.  541.604  Minimum guarantees plus extras.

    (a) An exempt employee may receive additional compensation, 
consistent with the exemption and the salary basis requirement, if the 
employment arrangement also includes a guarantee of at least the 
minimum weekly-required amount paid on a salary basis. Thus, for 
example, an exempt employee guaranteed at least $425 each week paid on 
a salary basis may also receive additional compensation of a one 
percent commission on sales. An exempt employee also may receive a 
percentage of the sales or profits of the employer if the employment 
arrangement also includes a guarantee of at least $425 each week paid 
on a salary basis. Similarly, the exemption is not lost if an exempt 
employee who is guaranteed at least $425 each week paid on a salary 
basis also receives additional compensation based on hours worked. Such 
additional compensation may be paid on any basis (e.g. flat sum, bonus 
payment, straight-time hourly amount, time and one-half or any other 
basis).
    (b) An exempt employee's salary may be computed on an hourly, a 
daily or a shift basis, consistent with the exemption and the salary 
basis requirement, if the employment arrangement also includes a 
guarantee of at least the minimum weekly required amount paid on a 
salary basis regardless of the number of hours, days or shifts worked 
and a reasonable relationship exists between the guaranteed amount and 
the amount actually earned. The reasonable relationship test will be 
met if the weekly guarantee is roughly equivalent to the employee's 
usual earnings at the assigned hourly, daily or shift rate for the 
employee's normal scheduled workweek. Thus, for example, an exempt 
employee guaranteed compensation of at least $500 for any week in which 
the employee performs any work, and who normally works four or five 
shifts each week, may be paid $150 per shift consistent with the salary 
basis requirement.


Sec.  541.605  Fee basis.

    (a) Administrative and professional employees may be paid on a fee 
basis, rather than on a salary basis. An employee will be considered to 
be paid on a ``fee basis'' within the meaning of these regulations if 
the employee is paid an agreed sum for a single job regardless of the 
time required for its completion. These payments in a sense resemble

[[Page 15595]]

piecework payments with the important distinction that generally a 
``fee'' is paid for the kind of job that is unique rather than for a 
series of jobs repeated an indefinite number of times and for which 
payment on an identical basis is made over and over again. Payments 
based on the number of hours or days worked and not on the 
accomplishment of a given single task are not considered payments on a 
fee basis.
    (b) To determine whether the fee payment meets the minimum amount 
of salary required for exemption under these regulations, the amount 
paid to the employee will be tested by determining the time worked on 
the job and whether the fee payment is at a rate that would amount to 
at least $425 per week if the employee worked 40 hours. Thus, an artist 
paid $250 for a picture that took 20 hours to complete meets the 
minimum salary requirement for exemption since earnings at this rate 
would yield the artist $500 if 40 hours were worked.


Sec.  541.606  Board, lodging or other facilities.

    (a) To qualify for exemption under section 13(a)(1) of the Act, an 
employee must earn the minimum salary amount set forth in Sec.  
541.600, ``exclusive of board, lodging or other facilities.'' The 
phrase ``exclusive of board, lodging or other facilities'' means ``free 
and clear'' or independent of any claimed credit for non-cash items of 
value that an employer may provide to an employee. Thus, the costs 
incurred by an employer to provide an employee with board, lodging or 
other facilities may not count towards the minimum salary amount 
required for exemption under this part 541. Such separate transactions 
are not prohibited between employers and their exempt employees, but 
the costs to employers associated with such transactions may not be 
considered when determining if an employee has received the full 
required minimum salary payment.
    (b) Regulations defining what constitutes ``board, lodging, or 
other facilities'' are contained in 29 CFR part 531. As described in 29 
CFR 531.32, the term ``other facilities'' refers to items similar to 
board and lodging, such as meals furnished at company restaurants or 
cafeterias or by hospitals, hotels, or restaurants to their employees; 
meals, dormitory rooms, and tuition furnished by a college to its 
student employees; merchandise furnished at company stores or 
commissaries, including articles of food, clothing, and household 
effects; housing furnished for dwelling purposes; and transportation 
furnished to employees for ordinary commuting between their homes and 
work.

Subpart H--Definitions and Miscellaneous Provisions


Sec.  541.700  Primary duty.

    To qualify for exemption under this part, an employee must have a 
``primary duty'' of performing exempt work. The term ``primary duty'' 
means the principal, main, major or most important duty that the 
employee performs. Determination of an employee's primary duty must be 
based on all the facts in a particular case. Factors to consider when 
determining the primary duty of an employee include, but are not 
limited to the relative importance of the exempt duties as compared 
with other types of duties; the amount of time spent performing exempt 
work; the employee's relative freedom from direct supervision; and the 
relationship between the employee's salary and the wages paid to other 
employees for the same kind of nonexempt work. The term ``primary 
duty'' does not require that employees spend over fifty percent of 
their time performing exempt work. Thus, for example, an assistant 
manager in a retail establishment who performs exempt work such as 
supervising and directing the work of other employees, ordering 
merchandise, handling customer complaints and authorizing payment of 
bills may have management as the primary duty, even if the assistant 
manager spends more than fifty percent of the time performing non-
exempt work such as running the cash register. However, the amount of 
time spent performing exempt work can be a useful guide, and employees 
who spend over fifty percent of the time performing exempt work will be 
considered to have a primary duty of performing exempt work. The fact 
that an employer has well-defined operating policies or procedures 
should not by itself defeat an employee's exempt status.


Sec.  541.701  Customarily and regularly.

    The phrase ``customarily and regularly'' means a frequency that 
must be greater than occasional but which, of course, may be less than 
constant. Tasks or work performed ``customarily and regularly'' 
includes work normally and recurrently performed every work week; it 
does not included isolated or one-time tasks.


Sec.  541.702  Exempt and nonexempt work.

    The term ``exempt work'' means all work described in Sec. Sec.  
541.100, 541.101, 541.102, 541.200, 541.206, 541.300, 541.301, 541.302, 
541.303, 541.304, 541.400 and 541.500, and the activities directly and 
closely related to such work. All other work is considered 
``nonexempt.''


Sec.  541.703  Directly and closely related.

    (a) Work that is ``directly and closely related'' to the 
performance of exempt work is also considered exempt work. The phrase 
``directly and closely related'' means tasks that are related to exempt 
duties and that contribute to or facilitate performance of exempt work. 
Thus, ``directly and closely related'' work may include physical tasks 
and menial tasks that arise out of exempt duties, and the routine work 
without which the exempt employee's more important work cannot be 
performed properly. Work ``directly and closely related'' to the 
performance of exempt duties may also include recordkeeping; monitoring 
and adjusting machinery; taking notes; using the computer to create 
documents or presentations; opening the mail for the purpose of reading 
it and making decisions; and using a photocopier or fax machine. Work 
is not ``directly and closely related'' if the work is remotely related 
or completely unrelated to exempt duties.
    (b) The following examples further illustrate the type of work that 
is and is not normally considered as directly and closely related to 
exempt work:
    (1) Keeping time, production or sales records for subordinates is 
work directly and closely related to an exempt executive's function of 
managing a department and supervising employees.
    (2) The distribution of materials, merchandise or supplies to 
maintain control of the flow of and expenditures for such items is 
directly and closely related to the performance of exempt duties.
    (3) A supervisor who spot checks and examines the work of 
subordinates to determine whether they are performing their duties 
properly, and whether the product is satisfactory, is performing work 
which is directly and closely related to managerial and supervisory 
functions, so long as the checking is distinguishable from the work 
ordinarily performed by a nonexempt inspector.
    (4) A supervisor who sets up a machine may be engaged in exempt 
work, depending upon the nature of the industry and the operation. In 
some cases the setup work, or adjustment of the machine for a 
particular job, is typically performed by the same employees who 
operate the machine. Such setup work is part of the production 
operation and is not exempt. In other cases, the setting up of the work 
is a highly skilled operation which the ordinary production worker or 
machine

[[Page 15596]]

tender typically does not perform. In large plants, non-supervisors may 
perform such work. However, particularly in small plants, such work is 
a regular duty of the executive and is directly and closely related to 
the executive's responsibility for the work performance of subordinates 
and for the adequacy of the final product. Under such circumstances, it 
is exempt work.
    (5) A department manager in a retail or service establishment who 
walks about the sales floor observing the work of sales personnel under 
the employee's supervision to determine the effectiveness of their 
sales techniques, checks on the quality of customer service being 
given, or observes customer preferences is performing work which is 
directly and closely related to managerial and supervisory functions.
    (6) A business consultant may take extensive notes recording the 
flow of work and materials through the office or plant of the client; 
after returning to the office of the employer, the consultant may 
personally use the computer to type a report and create a proposed 
table of organization. Standing alone, or separated from the primary 
duty, such note taking and typing would be routine in nature. However, 
because this work is necessary for analyzing the data and making 
recommendations, the work is directly and closely related to exempt 
work. While it is possible to assign note taking and typing to 
nonexempt employees, and in fact it is frequently the practice to do 
so, delegating such routine tasks is not required as a condition of 
exemption.
    (7) A credit manager who makes and administers the credit policy of 
the employer, establishes credit limits for customers, authorizes the 
shipment of orders on credit, and makes decisions on whether to exceed 
credit limits would be performing work exempt under Sec.  541.200. Work 
that is directly and closely related to these exempt duties may include 
checking the status of accounts to determine whether the credit limit 
would be exceeded by the shipment of a new order, removing credit 
reports from the files for analysis, and writing letters giving credit 
data and experience to other employers or credit agencies.
    (8) A traffic manager in charge of planning a company's 
transportation, including the most economical and quickest routes for 
shipping merchandise to and from the plant, contracting for common-
carrier and other transportation facilities, negotiating with carriers 
for adjustments for damages to merchandise, and making the necessary 
rearrangements resulting from delays, damages or irregularities in 
transit is performing exempt work. If the employee also spends part of 
the day taking telephone orders for local deliveries, such order-taking 
is a routine function and is not directly and closely related to the 
exempt work.
    (9) An example of work directly and closely related to exempt 
professional duties is a chemist performing menial tasks such as 
cleaning a test tube in the middle of an original experiment, even 
though such menial tasks can be assigned to laboratory assistants.
    (10) A teacher performs work directly and closely related to exempt 
duties when, while taking students on a field trip, the teacher drives 
a school van or monitors the students' behavior in a restaurant.


Sec.  541.704  Trainees.

    The executive, administrative, professional, outside sales and 
computer employee exemptions do not apply to employees training for 
employment in an executive, administrative, professional, outside sales 
or computer employee capacity who are not actually performing the 
duties of an executive, administrative, professional, outside sales or 
computer employee.


Sec.  541.705  Emergencies.

    (a) An exempt employee will not lose the exemption by performing 
work of a normally nonexempt nature because of the existence of an 
emergency. Thus, when emergencies arise that threaten the safety of 
employees, a cessation of operations or serious damage to the 
employer's property, any work performed in an effort to prevent such 
results is considered exempt work.
    (b) An ``emergency'' does not include occurrences that are not 
beyond control or for which the employer can reasonably provide in the 
normal course of business. Emergencies generally occur only rarely, and 
are events that the employer cannot reasonably anticipate.
    (c) The following examples illustrate the distinction between 
emergency work considered exempt work and routine work that is not 
exempt work:
    (1) A mine superintendent who pitches in after an explosion and 
digs out workers who are trapped in the mine is still a bona fide 
executive.
    (2) Assisting nonexempt employees with their work during periods of 
heavy workload or to handle rush orders is not exempt work.
    (3) Replacing a nonexempt employee during the first day or partial 
day of an illness may be considered exempt emergency work depending on 
factors such as the size of the establishment and of the executive's 
department, the nature of the industry, the consequences that would 
flow from the failure to replace the ailing employee immediately, and 
the feasibility of filling the employee's place promptly.
    (4) Regular repair and cleaning of equipment is not emergency work, 
even when necessary to prevent fire or explosion; however, repairing 
equipment may be emergency work if the breakdown of or damage to the 
equipment was caused by accident or carelessness that the employer 
could not reasonably anticipate.


Sec.  541.706  Occasional tasks.

    Occasional, infrequently recurring tasks that cannot practicably be 
performed by nonexempt employees, but are the means for an exempt 
employee to properly carry out exempt functions and responsibilities, 
are considered exempt work. The following factors should be considered 
in determining whether such work is exempt work: whether the same work 
is performed by any of the executive's subordinates; practicability of 
delegating the work to a nonexempt employee; whether the executive 
performs the task frequently or occasionally; and existence of an 
industry practice for the executive to perform the task.


Sec.  541.707  Combination exemptions.

    Employees who perform a combination of exempt duties as set forth 
in these regulations for executive, administrative, professional, 
outside sales and computer employees may qualify for exemption. Thus, 
for example, an employee who works forty percent of the time performing 
exempt administrative duties and another forty percent of the time 
performing exempt executive duties may qualify for exemption. In other 
words, work that is exempt under one section of this part will not 
defeat the exemption under any other section.


Sec.  541.708  Motion picture producing industry.

    The requirement that the employee be paid ``on a salary basis'' 
does not apply to an employee in the motion picture producing industry 
who is compensated at a base rate of at least $650 a week (exclusive of 
board, lodging, or other facilities). Thus, an employee in this 
industry who is otherwise exempt under subparts B, C and D of this 
part, and who is employed at a base rate of at least $650 a week is 
exempt if paid a proportionate amount (based on a week

[[Page 15597]]

of not more than 6 days) for any week in which the employee does not 
work a full workweek for any reason. Moreover, an otherwise exempt 
employee in this industry qualifies for exemption if the employee is 
employed at a daily rate under the following circumstances:
    (a) The employee is in a job category for which a weekly base rate 
is not provided and the daily base rate would yield at least $650 if 6 
days were worked; or
    (b) The employee is in a job category having a weekly base rate of 
at least $650 and the daily base rate is at least one-sixth of such 
weekly base rate.


Sec.  541.709  Employees of public agencies.

    (a) An employee of a public agency who otherwise meets the salary 
basis requirements of Sec.  541.602 shall not be disqualified from 
exemption under Sec. Sec.  541.100, 541.200, 541.300 or 541.400 on the 
basis that such employee is paid according to a pay system established 
by statute, ordinance or regulation, or by a policy or practice 
established pursuant to principles of public accountability, under 
which the employee accrues personal leave and sick leave and which 
requires the public agency employee's pay to be reduced or such 
employee to be placed on leave without pay for absences for personal 
reasons or because of illness or injury of less than one work-day when 
accrued leave is not used by an employee because:
    (1) Permission for its use has not been sought or has been sought 
and denied;
    (2) Accrued leave has been exhausted; or
    (3) The employee chooses to use leave without pay.
    (b) Deductions from the pay of an employee of a public agency for 
absences due to a budget-required furlough shall not disqualify the 
employee from being paid on a salary basis except in the workweek in 
which the furlough occurs and for which the employee's pay is 
accordingly reduced.

[FR Doc. 03-7449 Filed 3-28-03; 8:45 am]
BILLING CODE 4510-27-P