Federal Register, Volume 80 Issue 128 (Monday, July 6, 2015)

[Federal Register Volume 80, Number 128 (Monday, July 6, 2015)]
[Proposed Rules]
[Pages 38516-38612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-15464]

[[Page 38515]]

Vol. 80

Monday,

No. 128

July 6, 2015

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. 80 , No. 128 / Monday, July 6, 2015 /
Proposed Rules

[[Page 38516]]

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1235-AA11

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

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Proposed rule and request for comments.

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SUMMARY: The Fair Labor Standards Act (FLSA or Act) guarantees a
minimum wage and overtime pay at a rate of not less than one and one-
half times the employee's regular rate for hours worked over 40 in a
workweek. While these protections extend to most workers, the FLSA does
provide a number of exemptions. The Department of Labor (Department)
proposes to update and revise the regulations issued under the FLSA
implementing the exemption from minimum wage and overtime pay for
executive, administrative, professional, outside sales, and computer
employees. This exemption is referred to as the FLSA's ``EAP'' or
``white collar'' exemption. 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 a specified minimum amount. The
standard salary level required for exemption is currently $455 a week
($23,660 for a full-year worker) and was last updated in 2004.
By way of this rulemaking, the Department seeks to update the
salary level to ensure that the FLSA's intended overtime protections
are fully implemented, and to simplify the identification of nonexempt
employees, thus making the EAP exemption easier for employers and
workers to understand. The Department also proposes automatically
updating the salary level to prevent the level from becoming outdated
with the often lengthy passage of time between rulemakings. Lastly, the
Department is considering whether revisions to the duties tests are
necessary in order to ensure that these tests fully reflect the purpose
of the exemption.

DATES: Submit written comments on or before September 4, 2015.

ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA11, by either of the following methods:
Electronic Comments: Submit comments through the Federal eRulemaking
Portal http://www.regulations.gov. Follow the instructions for
submitting comments. Mail: Address written submissions to Mary Ziegler,
Director of the Division of Regulations, Legislation, and
Interpretation, Wage and Hour Division, U.S. Department of Labor, Room
S-3502, 200 Constitution Avenue NW., Washington, DC 20210.
Instructions: Please submit only one copy of your comments by only one
method. All submissions must include the agency name and RIN,
identified above, for this rulemaking. Please be advised that comments
received will become a matter of public record and will be posted
without change to http://www.regulations.gov, including any personal
information provided. All comments must be received by 11:59 p.m. on
the date indicated for consideration in this rulemaking. Commenters
should transmit comments early to ensure timely receipt prior to the
close of the comment period as the Department continues to experience
delays in the receipt of mail in our area. For additional information
on submitting comments and the rulemaking process, see the ``Public
Participation'' section of this document. For questions concerning the
interpretation and enforcement of labor standards related to the FLSA,
individuals may contact the Wage and Hour Division (WHD) local district
offices (see contact information below). Docket: For access to the
docket to read background documents or comments, go to the Federal
eRulemaking Portal at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Mary Ziegler, Director of the Division
of Regulations, Legislation, and Interpretation, Wage and Hour
Division, U.S. Department of Labor, Room S-3502, 200 Constitution
Avenue NW., Washington, DC 20210; telephone: (202) 693-0406 (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) 693-0675 (this is not a toll-free number).
TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information
or request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or log onto WHD's Web site at http://www.dol.gov/whd/america2.htm
for a nationwide listing of WHD district and area offices.

Electronic Access and Filing Comments

Public Participation: This proposed rule is available through the
Federal Register and the http://www.regulations.gov Web site. You may
also access this document via WHD's Web site at http://www.dol.gov/whd/
. To comment electronically on Federal rulemakings, go to the Federal
eRulemaking Portal at http://www.regulations.gov, which will allow you
to find, review, and submit comments on Federal documents that are open
for comment and published in the Federal Register. You must identify
all comments submitted by including ``RIN 1235-AA11'' in your
submission. Commenters should transmit comments early to ensure timely
receipt prior to the close of the comment period (11:59 p.m. on the
date identified above in the DATES section); comments received after
the comment period closes will not be considered. Submit only one copy
of your comments by only one method. Please be advised that all
comments received will be posted without change to http://www.regulations.gov, including any personal information provided.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary
II. Background
A. What the FLSA Provides
B. Legislative History
C. Regulatory History
D. Overview of Existing Regulatory Requirements
III. Presidential Memorandum
IV. Need for Rulemaking
V. Proposed Regulatory Revisions
A. Setting the Standard Salary Level
B. Special Salary Tests
C. Inclusion of Nondiscretionary Bonuses in the Salary Level
Requirement
D. Highly Compensated Employees
E. Automatically Updating the Salary Levels
F. Duties Requirements for Exemption
VI. Paperwork Reduction Act
VII. Analysis Conducted In Accordance With Executive Order 12866,
Regulatory Planning and Review, and Executive Order 13563, Improving
Regulation and Regulatory Review
A. Introduction
B. Methodology To Determine the Number of Potentially Affected
EAP Workers
C. Determining the Revised Salary Level Test Values
D. Impacts of Revised Salary and Compensation Level Test Values
E. Automatic Updates
F. Duties Test
Appendix A: Methodology for Estimating Exemption Status
Appendix B: Additional Tables
VIII. Initial Regulatory Flexibility Analysis (IRFA)

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A. Reasons Why Action by the Agency Is Being Considered
B. Statement of Objectives and Legal Basis for the Proposed Rule
C. Description of the Number of Small Entities to Which the
Proposed Rule Will Apply
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Proposed Rule
E. Identification to the Extent Practicable, of All Relevant
Federal Rules That May Duplicate, Overlap, or Conflict With the
Proposed Rule
IX. Unfunded Mandates Reform Act Analysis
A. Authorizing Legislation
B. Assessment of Costs and Benefits
C. Summary of State, Local, and Tribal Government Input
D. Least Burdensome Option or Explanation Required
X. Executive Order 13132, Federalism
XI. Executive Order 13175, Indian Tribal Governments
XII. Effects on Families
XIII. Executive Order 13045, Protection of Children
XIV. Environmental Impact Assessment
XV. Executive Order 13211, Energy Supply
XVI. Executive Order 12630, Constitutionally Protected Property
Rights
XVII. Executive Order 12988, Civil Justice Reform Analysis
Proposed Amendments to Regulatory Text

I. Executive Summary

The FLSA was passed to both guarantee a minimum wage and to limit
the number of hours an employee could work without additional
compensation. Section 13(a)(1), which excludes certain white collar
employees from minimum wage and overtime pay protections, was included
in the original Act in 1938. The exemption was premised on the belief
that the exempted workers earned salaries well above the minimum wage
and enjoyed other privileges, including above-average fringe benefits,
greater job security, and better opportunities for advancement, setting
them apart from workers entitled to overtime pay. The statute delegates
to the Secretary of Labor the authority to define and delimit the terms
of the exemption.
On March 13, 2014, President Obama signed a Presidential Memorandum
directing the Department to update the regulations defining which white
collar workers are protected by the FLSA's minimum wage and overtime
standards. 79 FR 18737 (Apr. 3, 2014). Consistent with the President's
goal of ensuring workers are paid a fair day's pay for a fair day's
work, the memorandum instructed the Department to look for ways to
modernize and simplify the regulations while ensuring that the FLSA's
intended overtime protections are fully implemented.
Since 1940, the regulations implementing the white collar exemption
have generally required each of three tests to be met for the exemption
to apply: (1) The employee must be paid a predetermined and fixed
salary that is not subject to reduction because of variations in the
quality or quantity of work performed (the ``salary basis test''); (2)
the amount of salary paid must meet a minimum specified amount (the
``salary level test''); and (3) the employee's job duties must
primarily involve executive, administrative, or professional duties as
defined by the regulations (the ``duties test'').
One of the Department's primary goals in this rulemaking is
updating the section 13(a)(1) exemption's salary requirements. The
Department has updated the salary level requirements seven times since
1938, most recently in 2004. Under the current regulations, an
executive, administrative, or professional employee must be paid at
least $455 per week ($23,660 per year for a full-year worker) in order
to come within the standard exemption; in order to come within the
exemption for highly compensated employees (HCE), such an employee must
earn at least $100,000 in total annual compensation.
The Department has long recognized the salary level test as ``the
best single test'' of exempt status. If left at the same amount over
time, however, the effectiveness of the salary level test as a means of
determining exempt status diminishes as the wages of employees entitled
to overtime increase and the real value of the salary threshold falls.
In order to maintain the effectiveness of the salary level test, the
Department proposes to set the standard salary level equal to the 40th
percentile of earnings for full-time salaried workers ($921 per week,
or $47,892 annually for a full-year worker, in 2013).\1\ The Department
is also proposing to set the highly compensated employee annual
compensation level equal to the 90th percentile of earnings for full-
time salaried workers ($122,148 annually). Furthermore, in order to
prevent the levels from becoming outdated, the Department is proposing
to include in the regulations a mechanism to automatically update the
salary and compensation thresholds on an annual basis using either a
fixed percentile of wages or the CPI-U.
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\1\ The BLS data set used to set the salary level for this
rulemaking consists of earnings for full-time (defined as at least
35 hours per week) non-hourly paid employees. For the purpose of
this rulemaking, the Department considers data representing
compensation paid to non-hourly workers to be an appropriate proxy
for compensation paid to salaried workers. The Department relied
upon 2013 data in the development of the NPRM. The Department will
update the data used in the Final Rule resulting from this proposal,
which will change the dollar figures. If, after consideration of
comments received, the Final Rule were to adopt the proposed salary
level of the 40th percentile of weekly earnings, the Department
would likely rely on data from the first quarter of 2016. The latest
data currently available are for the first quarter of 2015, in which
the 40th percentile of weekly earnings is $951, which translates
into $49,452 for a full-year worker. Assuming two percent growth
between the first quarter of 2015 and the first quarter of 2016, the
Department projects that the 40th percentile weekly wage in the
final rule would likely be $970, or $50,440 for a full-year worker.
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The Department is proposing to update the salary and compensation
levels to ensure that the FLSA's intended overtime protections are
fully implemented and to simplify the identification of overtime-
protected and exempt employees, thus making the exemptions easier for
employers and workers to understand. The proposed increase to the
standard salary level is also intended to address the Department's
conclusion that the salary level set in 2004 was too low to efficiently
screen out from the exemption overtime-protected white collar employees
when paired with the standard duties test. The Department believes that
a standard salary level at the 40th percentile of all full-time
salaried employees ($921 per week, or $47,892 for a full-year worker,
in 2013) will accomplish the goal of setting a salary threshold that
adequately distinguishes between employees who may meet the duties
requirements of the EAP exemption and those who likely do not, without
necessitating a return to the more detailed long duties test.\2\ The
Department believes that the proposed salary compensates for the
absence of a long test, which would have allowed employers to claim the
exemption at a lower salary level, but only if they could satisfy a
more restrictive duties test; moreover, it does so without setting the
salary at a level that excludes from exemption an unacceptably high
number of employees who meet the duties test. The Department also
believes that, by reducing the number of workers for whom employers
must apply the duties test to determine exempt status, this proposal is
responsive to the President's directive to simplify the exemption.
Similarly, the Department believes that the proposal to set the HCE
total annual compensation level at the annualized value of the 90th
percentile of weekly wages of all full-time salaried employees
($122,148 per year) will ensure that the HCE

[[Page 38518]]

exemption continues to cover only employees who almost invariably meet
all the other requirements for exemption. Finally, the Department
proposes to automatically update the standard salary and compensation
levels annually to ensure that they maintain their effectiveness going
forward, either by maintaining the levels at a fixed percentile of
earnings or by updating the amounts based on changes in the CPI-U. The
Department believes that regularly updating the salary and compensation
levels is the best method to ensure that these tests continue to
provide an effective means of distinguishing between overtime-eligible
white collar employees and those who may be bona fide EAP employees.
The Department is not making specific proposals to modify the standard
duties tests but is seeking comments on whether the tests are working
as intended to screen out employees who are not bona fide EAP
employees; in particular, the Department is concerned that in some
instances the current tests may allow exemption of employees who are
performing such a disproportionate amount of nonexempt work that they
are not EAP employees in any meaningful sense.
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\2\ From 1949 until 2004 the regulations contained two different
tests for exemption--a long duties test for employees paid a lower
salary, and a short duties test for employees paid at a higher
salary level.
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In 2013, there were an estimated 144.2 million wage and salary
workers in the United States, of whom the Department estimates that
43.0 million are white collar salaried employees who may be impacted by
a change to the Department's part 541 regulations. Of these workers,
the Department estimates that 21.4 million are currently exempt EAP
workers who are subject to the salary level requirement and may be
potentially affected by the proposed rule.\3\
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\3\ White collar salaried workers not subject to the EAP salary
level test include teachers, academic administrative personnel,
physicians, lawyers, judges, and outside sales workers.
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In Year 1 the Department estimates 4.6 million currently exempt
workers who earn at least the current weekly salary level of $455 but
less than the 40th earnings percentile ($921) would, without some
intervening action by their employers, become entitled to minimum wage
and overtime protection under the FLSA (Table ES1). Similarly, an
estimated 36,000 currently exempt workers who earn at least $100,000
but less than the 90th earnings percentile ($122,148) per year and who
meet the HCE duties test but not the standard duties test may also
become eligible for minimum wage and overtime protection. In Year 10,
with automatic updating of the salary levels, the Department projects
that between 5.1 and 5.6 million workers will be affected by the change
in the standard salary level test and between 33,000 and 42,000 workers
will be affected by the change in the HCE total annual compensation
test, depending on the updating methodology used (CPI-U or fixed
percentile of wage earnings, respectively). Additionally, the
Department estimates that an additional 6.3 million white collar
workers who are currently overtime eligible because they do not satisfy
the EAP duties tests and who currently earn at least $455 per week but
less than the proposed salary level would have their overtime
protection strengthened in Year 1 because their exemption status would
be clear based on the salary test alone without the need to examine
their duties.
Three direct costs to employers are quantified in this analysis:
(1) Regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs. Assuming a 7 percent discount rate, the Department
estimates that average annualized direct employer costs will total
between $239.6 and $255.3 million per year, depending on the updating
methodology used as shown in (Table ES1). In addition to the direct
costs, this proposed rulemaking will also transfer income from
employers to employees in the form of higher earnings. Average
annualized transfers are estimated to be between $1,178.0 and $1,271.4
million, depending on which of the two updating methodologies analyzed
in this proposal is used. The Department also projects average
annualized deadweight loss of between $9.5 and $10.5 million, and notes
that the projected deadweight loss is small in comparison to the amount
of estimated costs.
Impacts of the proposed rule extend beyond those quantitatively
estimated. For example, a potential impact of the rule's proposed
increase in the salary threshold is a reduction in litigation costs.
Other unquantified transfers, costs, and benefits are discussed in
section VII.D.vii.

Table ES1--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels With Automatic Updating
[Millions 2013$]
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Future years \c\ Average annualized value
Cost/Transfer \a\ Automatic updating method Year 1 ---------------------------------------------------------------
\b\ Year 2 Year 10 3% Real rate 7% Real rate
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Affected Workers (1,000s)
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Standard.................................. Percentile.................. 4,646 4,747 5,568 -- --
CPI-U....................... 4,646 4,634 5,062 -- --
HCE....................................... Percentile.................. 36 36 42 -- --
CPI-U....................... 36 35 33 -- --
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Costs and Transfers (Millions 2013$)
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Direct employer costs..................... Percentile.................. 592.7 188.8 225.3 248.8 255.3
CPI-U....................... 592.7 181.1 198.6 232.3 239.6
Transfers \d\............................. Percentile.................. 1,482.5 1,160.2 1,339.6 1,271.9 1,271.4
CPI-U....................... 1,482.5 1,126.4 1,191.4 1,173.7 1,178.0
DWL....................................... Percentile.................. 7.4 10.8 11.2 10.5 10.5
CPI-U....................... 7.4 10.3 9.7 9.6 9.5
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\a\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\b\ The percentile method sets the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers and the HCE
compensation level at the 90th percentile. The CPI-U method adjusts both levels based on the annual percent change in the CPI-U.
\c\ These costs/transfers represent a range over the nine-year span.

[[Page 38519]]

\d\ This is the net transfer from employers to workers. There may also be transfers of hours and income from some workers to other workers. Unquantified
transfers, costs and benefits are addressed in Section VII.

The Department believes that the proposed increase in the standard
salary level to the 40th percentile of weekly earnings for full-time
salaried workers and increasing the HCE compensation level to the 90th
percentile of full-time salaried workers' earnings, combined with
annual updating, is the simplest method for securing the effectiveness
of the salary level as a bright-line for ensuring that employees
entitled to the Act's overtime provisions are not exempted. The
Department recognizes that the proposed standard salary threshold is
lower than the historical average salary for the short duties test (the
basis for the standard duties test) but believes that it will
appropriately distinguish between overtime-eligible white collar
salaried employees and those who may meet the EAP duties test without
necessitating a return to the more rigorous long duties test. A
standard salary threshold significantly below the 40th percentile, or
the absence of a mechanism for automatically updating the salary level,
however, would require a more rigorous duties test than the current
standard duties test in order to effectively distinguish between white
collar employees who are overtime protected and those who may be bona
fide EAP employees. The Department believes that this proposal is the
least burdensome but still cost-effective mechanism for updating the
salary and compensation levels, and indexing future levels, and is
consistent with the Department's statutory obligations.

II. Background

A. What the FLSA Provides

The FLSA generally requires covered employers to pay their
employees at least the federal minimum wage (currently $7.25 an hour)
for all hours worked, and overtime premium pay of one and one-half
times the employee's regular rate of pay for all hours worked over 40
in a workweek.\4\ However, there are a number of exemptions from the
FLSA's minimum wage and overtime requirements. Section 13(a)(1) of the
FLSA, codified at 29 U.S.C. 213(a)(1), exempts from both minimum wage
and overtime protection ``any employee employed in a bona fide
executive, administrative, or professional capacity . . . or in the
capacity of outside salesman (as such terms are defined and delimited
from time to time by regulations of the Secretary, subject to the
provisions of [the Administrative Procedure Act] . . .).'' The FLSA
does not define the terms ``executive,'' ``administrative,''
``professional,'' or ``outside salesman.'' Pursuant to Congress' grant
of rulemaking authority, the Department in 1938 issued the first
regulations at 29 CFR part 541, defining the scope of the section
13(a)(1) exemptions. Because Congress explicitly delegated to the
Secretary of Labor the power to define and delimit the specific terms
of the exemptions through notice and comment rulemaking, the
regulations so issued have the binding effect of law. See Batterton v.
Francis, 432 U.S. 416, 425 n.9 (1977).
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\4\ As discussed infra, the Department estimates that 128.5
million workers are subject to the FLSA and the Department's
regulations. Most of these workers are covered by the Act's minimum
wage and overtime pay protections.
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The Department has consistently used its rulemaking authority to
define and clarify the section 13(a)(1) exemptions. Since 1940, the
implementing regulations have generally required each of three tests to
be met for the exemptions to apply: (1) The employee must be paid a
predetermined and fixed salary that is not subject to reduction because
of variations in the quality or quantity of work performed (the
``salary basis test''); (2) the amount of salary paid must meet a
minimum specified amount (the ``salary level test''); and (3) the
employee's job duties must primarily involve executive, administrative,
or professional duties as defined by the regulations (the ``duties
test'').

B. Legislative History

Although section 13(a)(1) exempts covered employees from both the
FLSA's minimum wage and overtime requirements, its most significant
impact is its removal of these employees from the Act's overtime
protections. It is widely recognized that the general requirement that
employers pay a premium rate of pay for all hours worked over 40 in a
workweek is a cornerstone of the Act, grounded in two policy
objectives. The first is to spread employment by incentivizing
employers to hire more employees rather than requiring existing
employees to work longer hours, thereby reducing involuntary
unemployment. See, e.g., Davis v. J.P. Morgan Chase, 587 F.3d 529, 535
(2d Cir. 2009) (``The overtime requirements of the FLSA were meant to
apply financial pressure to spread employment to avoid the extra wage
and to assure workers additional pay to compensate them for the burden
of a workweek beyond the hours fixed in the act.'') (internal quotation
marks omitted). The second policy objective is to reduce overwork and
its detrimental effect on the health and well-being of workers. See,
e.g., Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728,
739 (1981) (``The FLSA was designed to give specific minimum
protections to individual workers and to ensure that each employee
covered by the Act would receive a fair day's pay for a fair day's work
and would be protected from the evil of overwork as well as
underpay.'') (internal quotation marks and brackets omitted).
Section 13(a)(1) was included in the original Act in 1938 and was
based on provisions contained in the earlier National Industrial
Recovery Act of 1933 (NIRA) and state law precedents. Specific
references in the legislative history to the exemptions contained in
section 13(a)(1) are scant. However, the exemptions were premised on
the belief that the exempted workers typically earned salaries well
above the minimum wage and were presumed to enjoy other privileges to
compensate them for their long hours of work, 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. See Report of the Minimum Wage Study Commission, Volume
IV, pp. 236 and 240 (June 1981).\5\ Further, the type of work exempt
employees performed was difficult to standardize to any time frame and
could not be easily spread to other workers after 40 hours in a week,
making enforcement of the overtime provisions difficult and generally
precluding the potential job expansion intended by the FLSA's time-and-
a-half overtime premium. Id.
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\5\ Congress created the Minimum Wage Study Commission as part
of the Fair Labor Standards Amendments of 1977. See Sec. 2(e)(1),
Public Law 95-151, 91 Stat. 1246 (Nov. 1, 1977). This independent
commission was tasked with examining many FLSA issues, including the
Act's minimum wage and overtime exemptions, and issuing a report to
the President and to Congress with the results of its study.
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The universe of employees eligible for the exemptions has
fluctuated with amendments to the FLSA. Initially, persons employed in
a ``local retailing capacity'' were exempt, but Congress eliminated
that language from section 13(a)(1) in 1961 when the FLSA was expanded
to cover retail and service enterprises. See Public Law 87-30, 75 Stat.
65 (May 5, 1961). Teachers and

[[Page 38520]]

academic administrative personnel were added to the exemption when
elementary and secondary schools were made subject to the FLSA in 1966.
Sec. 214, Public Law 89-601, 80 Stat. 830 (Sept. 23, 1966). The
Education Amendments of 1972 made the Equal Pay provisions, section
6(d) of the FLSA, expressly applicable to employees who were otherwise
exempt from the FLSA under section 13(a)(1). Sec. 906(b)(1), Public Law
92-318, 86 Stat. 235 (June 23, 1972).
A 1990 enactment expanded the exemptions to include in the
regulations defining exempt executive, administrative, and professional
employees, 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.
Sec. 2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990). The
compensation test for computer-related occupations was subsequently
capped at $27.63 an hour (6\1/2\ times the minimum wage in effect at
the time) as part of the 1996 FLSA Amendments, when Congress enacted
the new section 13(a)(17) exemption for such computer employees.
Section 13(a)(17) also incorporated much of the regulatory language
that resulted from the 1990 enactment. See 29 U.S.C. 213(a)(17), as
added by the 1996 FLSA Amendments (Sec. 2105(a), Public Law 104-188,
110 Stat. 1755 (Aug. 20, 1996)).

C. Regulatory History

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

The Department revised the part 541 regulations twice in 1992.
First, the Department created a limited exception from the salary basis
test for public employees, permitting public employers to follow public
sector pay and leave systems requiring partial-day deductions from pay
for absences for personal reasons or due to illness or injury not
covered by accrued paid leave, or due to budget-driven furloughs,
without defeating the salary basis test required for exemption. 57 FR
37677 (Aug. 19, 1992). The Department also implemented the 1990 law
requiring it to promulgate regulations permitting employees in certain
computer-related occupations to qualify as exempt under section
13(a)(1) of the FLSA. 57 FR 46744 (Oct. 9, 1992); see Sec. 2, Public
Law 101-583, 104 Stat. 2871 (Nov. 15, 1990).
On March 31, 2003, the Department published a Notice of Proposed
Rulemaking proposing significant changes to the part 541 regulations.
68 FR 15560 (Mar. 31, 2003). On April 23, 2004, the Department issued a
Final Rule (2004 Final Rule), which raised the salary level for the
first time since 1975, and made other changes, some of which are
discussed below. 69 FR 22122 (Apr. 23, 2004). Current regulations
retain the three tests for exempt status that have been in effect since
1940: A salary basis test, a salary level test, and a job duties test.

D. Overview of Existing Regulatory Requirements

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

\9\ Alternatively, administrative and professional employees may
be paid on a ``fee basis.'' This occurs where an employee is paid an
agreed sum for a single job regardless of the time required for its
completion. Sec. 541.605(a). Salary level test compliance for fee
basis employees is assessed by determining whether the hourly rate
for work performed (i.e., the fee payment divided by the number of
hours worked) would total at least $455 per week if the employee
worked 40 hours. See Sec. 541.605(b). Some employees, such as
doctors and lawyers (Sec. 541.600(e)), teachers (Sec. 541.303(d);
Sec. 541.600(e)), and outside sales employees (Sec. 541.500(c)),
are not subject to a salary or fee basis test. Some, such as
academic administrative personnel, are subject to a special,
contingent salary level. See Sec. 541.600(c). There is also a
separate salary level in effect for workers in American Samoa (Sec.
541.600(a)), and a special salary test for motion picture industry
employees (Sec. 541.709).
---------------------------------------------------------------------------

The Department last updated the salary levels in the 2004 Final
Rule, setting the standard test threshold at $455 per week for
executive, administrative, and professional employees. Since its prior
revision in 1975, the salary level tests had grown outdated and were
thus no longer effective at distinguishing between exempt and nonexempt
employees. Mindful that nearly 30 years had elapsed between salary
level increases, and in response to commenter concerns that similar
lapses would occur in the future, in the 2004 Final Rule the Department
expressed the intent to

[[Page 38521]]

``update the salary levels on a more regular basis.'' 69 FR 22171.
Under the current part 541 regulations, an exempt executive
employee must be compensated on a salary basis at a rate of not less
than $455 per week and have a primary duty of managing the enterprise
or a department or subdivision of the enterprise. Sec. 541.100(a)(1)-
(2). An exempt executive must also customarily and regularly direct the
work of at least two employees and have the authority to hire or fire,
or the employee's suggestions and recommendations as to the hiring,
firing, or other change of status of employees must be given particular
weight. Sec. 541.100(a)(3)-(4).
An exempt administrative employee must be compensated on a salary
or fee basis at a rate of not less than $455 per week and have a
primary duty of the performance of office or non-manual work directly
related to the management or general business operations of the
employer or the employer's customers. Sec. 541.200. An exempt
administrative employee's primary duty must include the exercise of
discretion and independent judgment with respect to matters of
significance. Id.
An exempt professional employee must be compensated on a salary or
fee basis at a rate of not less than $455 per week and have a primary
duty of (1) work requiring knowledge of an advanced type in a field of
science or learning customarily acquired by prolonged, specialized,
intellectual instruction and study, or (2) work that is original and
creative in a recognized field of artistic endeavor, or (3) teaching in
a school system or educational institution, or (4) work as a computer
systems analyst, computer programmer, software engineer, or other
similarly-skilled worker in the computer field. Sec. Sec. 541.300;
541.303; 541.400. An exempt professional employee must perform work
requiring the consistent exercise of discretion and judgment, or
requiring invention, imagination, or talent in a recognized field of
artistic endeavor. Sec. 541.300(a)(2). The salary requirements do not
apply to certain licensed or certified doctors, lawyers, and teachers.
Sec. Sec. 541.303(d); 541.304(d).
An exempt outside salesperson must be customarily and regularly
engaged away from the employer's place of business and have a primary
duty of making sales, or obtaining orders or contracts for services or
for the use of facilities. Sec. 541.500. There are no salary or fee
requirements for exempt outside sales employees. Id.
The 2004 Final Rule created a new ``highly compensated'' test for
exemption. Under the HCE exemption, employees who are paid total annual
compensation of at least $100,000 (which must include at least $455 per
week paid on a salary or fee basis) are exempt from the FLSA's overtime
requirements if they customarily and regularly perform at least one of
the exempt duties or responsibilities of an executive, administrative,
or professional employee identified in the standard tests for
exemption. Sec. 541.601. The HCE exemption applies only to employees
whose primary duty includes performing office or non-manual work; non-
management production line workers and employees who perform work
involving repetitive operations with their hands, physical skill, and
energy are not exempt under this section no matter how highly paid. Id.
Employees who meet the requirements of part 541 are excluded from
both the Act's minimum wage and overtime pay protections. As a result,
employees may work any number of hours in the workweek and not be
subject to the FLSA's minimum wage and overtime pay requirements. Some
state laws have stricter exemption standards than those described
above. The FLSA does not preempt any such stricter state standards. If
a State establishes a higher standard than the provisions of the FLSA,
the higher standard applies in that State. See 29 U.S.C. 218.

III. Presidential Memorandum

On March 13, 2014, President Obama signed a Presidential Memorandum
directing the Department to update the regulations defining which
``white collar'' workers are protected by the FLSA's minimum wage and
overtime standards. 79 FR 18737 (Apr. 3, 2014). The memorandum
instructed the Department to look for ways to modernize and simplify
the regulations while ensuring that the FLSA's intended overtime
protections are fully implemented. As the President noted at the time,
the FLSA's overtime protections are a linchpin of the middle class and
the failure to keep the salary level requirement for the white collar
exemption up-to-date has left millions of low-paid salaried workers
without this basic protection.\10\ The current salary level threshold
for exemption of $455 per week, or $23,660 annually, is below the
poverty threshold for a family of four.\11\
---------------------------------------------------------------------------

\10\ http://www.whitehouse.gov/the-press-office/2014/03/13/fact-sheet-opportunity-all-rewarding-hard-work-strengthening-overtime-pr.
\11\ See http://www.census.gov/hhes/www/poverty/data/threshld/index.html. The current salary level is less than the 10th
percentile of full-time salaried workers.
---------------------------------------------------------------------------

Following issuance of the memorandum, the Department embarked on an
extensive outreach program, conducting listening sessions in
Washington, DC, and several other locations, as well as by conference
call. The listening sessions were attended by a wide range of
stakeholders: Employees, employers, business associations, non-profit
organizations, employee advocates, unions, state and local government
representatives, tribal representatives, and small businesses. In these
sessions the Department asked stakeholders to address, among other
issues: (1) What is the appropriate salary level for exemption; (2)
what, if any, changes should be made to the duties tests; and (3) how
can the regulations be simplified.
Stakeholders representing employers expressed a wide variety of
views on the appropriate salary level, ranging from a few who said the
salary should not be raised, to several who noted their entry level
managers already earned salaries far above the current annual salary
level of $23,660. A number of representatives of national employers
also noted regional variations in the salary levels they pay to EAP
employees. Several employers encouraged the Department to consider
nondiscretionary bonuses in determining whether the salary level is
met, noting that such bonuses are a key part of exempt employees'
compensation in their industries and contribute to an ``ownership
mindset.'' Many employer stakeholders stated that they consider first-
line managerial positions to be the gateway to developing their future
senior managers and organizational leadership. A number of these
employer stakeholders also raised concerns about changing currently
exempt employees to nonexempt employees as a result of an increase in
the salary requirement, stating that employees are attached to the
perceived higher status of being in exempt salaried positions, and
value the time flexibility and steady income that comes with such
positions. These stakeholders also stressed the need for flexibility
under the regulations, in particular emphasizing the value they place
on a work culture that encourages managers to lead by example and
``pitch in'' to assist nonexempt employees. They stressed that changing
the duties tests to limit exempt employees' ability to perform
nonexempt work--such as California's 50 percent primary duty rule--
would negatively impact the culture of the workplace, be difficult and
costly to implement, and lead to increased litigation. They also noted
the significant investment they made in

[[Page 38522]]

reviewing employee classifications as a result of the 2004 Final Rule
to determine whether employees met the revised duties tests. Finally,
several employer representatives suggested that adding to the
regulations additional examples of how the exemptions may apply to
specific occupations would simplify employers' determinations of EAP
exemption status.
Stakeholders representing employees universally endorsed the need
to increase the salary level, noting that it has not been updated since
2004. Several employee advocates also stressed the need to index the
salary level to ensure that it maintains its effectiveness as a
demarcation line between exempt and overtime-eligible employees without
having to rely on time consuming future rulemaking. Both individual
employees and their representatives shared their concerns that some
employers are taking advantage of exempt employees, requiring them to
perform large amounts of routine work in order to keep down labor
costs, and a few suggested that there needs to be a maximum hours cap
for EAP exempt employees. They stressed that employees in
``management'' positions who are required to spend disproportionate
amounts of time performing routine nonexempt tasks (ringing up
customers, stocking shelves, bussing tables, cleaning stores and
restaurants, etc., alongside or in place of front line workers) are not
bona fide executives and do not, in fact, enjoy the flexibility and
status traditionally associated with such positions and therefore are
entitled to the overtime protections the FLSA was designed to provide.
Employee advocates pointed to the California overtime rule as more
protective of such workers.
While the HCE exemption was not a primary focus of any of the
listening sessions, a number of business stakeholders stated that the
$100,000 total annual compensation requirement was too high, and a few
suggested that the duties test for the HCE exemption should be dropped
and the exemption should be based on compensation level alone. In
contrast, the employee stakeholders who addressed the issue argued that
the HCE duties test was too lax and that the $100,000 total annual
compensation requirement was too low, particularly in light of the wage
gains at the top end of the earnings spectrum since 2004. Some employee
advocates suggested eliminating the HCE exemption. While the outside
sales exemption was also not a central focus of the sessions, several
stakeholders representing employer interests argued that the
distinction between inside and outside sales positions in the
application of the EAP exemption does not reflect the realities of the
modern workplace.\12\
---------------------------------------------------------------------------

\12\ Section 13(a)(1) expressly includes within the EAP
exemption ``any employee employed . . . in the capacity of outside
salesman.'' 29 U.S.C. 213(a)(1). As discussed in the 2004 Final
Rule, ``the Administrator does not have statutory authority to
exempt inside sales employees from the FLSA minimum wage and
overtime requirements under the outside sales exemption.'' 69 FR
22162.
---------------------------------------------------------------------------

The Department's outreach has made clear that there are also some
widespread misconceptions about overtime eligibility under the FLSA.
For example, many employers and employees mistakenly believe that
payment of a salary automatically disqualifies an employee from
entitlement to overtime compensation irrespective of the duties
performed. Many employees are also unaware of the duties required to be
performed in order for the exemption to apply. Additionally, many
employers seem to mistakenly believe that nonexempt white collar
employees must be converted to hourly compensation. Similarly, other
employers erroneously believe that they are prohibited from paying
nondiscretionary bonuses to EAP employees, given that they cannot be
used to satisfy the salary requirement. Some employers also mistakenly
believe that the EAP regulations limit their ability to permit white
collar employees to work part-time or job share.\13\ The Department
believes that many of these misconceptions can be addressed through its
education and outreach efforts.\14\
---------------------------------------------------------------------------

\13\ As the Department has previously explained, there is no
special salary level for EAP employees working less than full-time.
69 FR 22171. Employers, however, can pay white collar employees
working part-time or job sharing a salary of less than the required
EAP salary threshold and will not violate the Act so long as the
salary equals at least the minimum wage for all hours worked and the
employee does not work more than 40 hours a week. FLSA2008-1NA (Feb.
14, 2008).
\14\ Such misconceptions are not new. In 1940 the Department
responded to the related argument that employers would convert
overtime-eligible white collar employees to hourly pay instead of
more secure salaries, stating: ``Without underestimating the general
desirability of weekly or monthly salaries which enable employees to
adjust their expenditures on the basis of an assured income (so long
as they remain employed), there is little advantage in salaried
employment if it serves merely as a cloak for long hours of work.
Further, such salaried employment may well conceal excessively low
hourly rates of pay.'' Stein Report at 7.
---------------------------------------------------------------------------

Lastly, the Department notes that multiple stakeholders on both
sides of the issue expressed frustration with the exempt/nonexempt
terminology and asked the Department to consider more descriptive
terms. The Department recognizes that the terms ``exempt'' and
``nonexempt'' are not intuitive and can be confusing to both employers
and employees. In an attempt to address this concern, the Department
uses the terms ``overtime protected'' and ``overtime eligible'' at
times in this NPRM as synonyms for nonexempt, and ``not overtime
protected'' and ``overtime ineligible'' as synonyms for exempt. While
the Department will continue to use the terms exempt and nonexempt as
technical terms to ensure accuracy and continuity, we will, where
appropriate, endeavor to use these more descriptive terms to aid the
regulated community. The Department also uses the term ``EAP
exemption'' throughout this NPRM to reflect the section 13(a)(1)
exemption for executive, administrative, and professional employees.
The discussions in the listening sessions have informed not just
the development of this NPRM, but also the Department's understanding
of the role of overtime in the modern workplace. Some of the issues
raised in the listening sessions are specifically referenced below in
the Department's proposals; some issues that were raised are either
beyond the scope of this rulemaking or beyond the Department's
authority under the FLSA. For example, several employers expressed
concern that employees who would become newly entitled to overtime
under a higher salary level requirement would lose the flexibility they
currently enjoy to work remotely on electronic devices because of
employer concerns about overtime liability. Because this concern
involves compensation for hours worked by overtime-protected employees,
it is beyond the scope of this rulemaking. The Department, however,
understands the importance of this concern and will publish a Request
for Information in the near future seeking information from
stakeholders on the use of electronic devices by overtime-protected
employees outside of scheduled work hours.
The Department appreciates the views of all the participants in the
listening sessions and welcomes further input from the public in
response to this NPRM. Finally, consistent with the President's
commitment to a 21st-century regulatory system, the Department would
consider conducting a retrospective review of the Final Rule resulting
from this proposal at an appropriate time in the future.

IV. Need for Rulemaking

One of the Department's primary goals in this rulemaking is
updating the section 13(a)(1) exemption's salary level requirement. A
salary level test has been part of the regulations since 1938 and

[[Page 38523]]

has been long recognized as ``the best single test'' of exempt status.
Stein Report at 19, 42; see Weiss Report at 8-9; Kantor Report at 2-3.
The salary an employer pays an employee provides ``a valuable and
easily applied index to the `bona fide' character of the employment for
which exemption is claimed'' and ensures that section 13(a)(1) of the
FLSA ``will not invite evasion of section 6 and section 7 for large
numbers of workers to whom the wage-and-hour provisions should apply.''
Stein Report at 19. The 1949 Weiss Report's statement remains true
today: ``The experience of [the Department] since 1940 supports the
soundness of the inclusion of the salary criteria in the regulations.''
Weiss Report at 8. In setting the salary level for the long test (which
paired a lower salary with a limitation on the amount of non-exempt
work an exempt worker could perform) the Department sought to provide a
ready guide to assist employers in identifying employees who were
unlikely to meet the duties tests for the exemptions.
The salary level's function in differentiating exempt from
nonexempt employees takes on greater importance when there is only one
duties test that has no limitation on the amount of nonexempt work that
an exempt employee may perform, as has been the case since 2004. The
Department set the standard salary level in 2004 equivalent to the
former long test salary level, thus not adjusting the salary threshold
to account for the absence of the more rigorous long duties test. The
long test salary level was designed to operate as a ready guide to
assist employers in identifying employees who were unlikely to meet the
duties tests for the EAP exemption. The salary level required for
exemption under section 13(a)(1) is currently $455 a week and has not
been updated in more than 10 years. The annual value of the salary
level ($23,660) is now lower than the poverty threshold for a family of
four. If left at the same amount, the effectiveness of the salary level
test as a means of helping determine exempt status diminishes as the
wages of employees entitled to overtime pay increase and the real value
of the salary threshold falls.
By way of this rulemaking, the Department seeks to update the
salary level to ensure that the FLSA's intended overtime protections
are fully implemented, and to simplify the identification of overtime-
eligible employees, thus making the exemptions easier for employers and
workers to understand. For similar reasons, the Department also
proposes to update the total annual compensation required for the HCE
exemption, since it too has been unchanged since 2004, and the current
level could lead to inappropriate classification given the minimal
duties test for that exemption.
In a further effort to respond to changing conditions in the
workplace, the Department is also considering whether to allow
nondiscretionary bonuses to satisfy some portion of the standard test
salary requirement. Currently, such bonuses are only included in
calculating total annual compensation under the HCE test, but some
stakeholders have urged broader inclusion, pointing out that in some
industries, particularly the retail and restaurant industries,
significant portions of salaried EAP employees' earnings may be in the
form of such bonuses.
The Department also proposes automatically updating the salary
levels based on changes in the economy to prevent the levels from
becoming outdated with the often lengthy passage of time between
rulemakings. The Department proposes to automatically update the
standard salary test, the annual compensation requirement for highly
compensated employees, and the special salary levels for American Samoa
and for motion picture industry employees, in order to ensure the
continued utility of these tests over time. As explained in the Weiss
Report, the salary test is only a strong measure of exempt status if it
is up to date, and a weakness of the salary test is that increases in
wage rates and salary levels over time gradually diminish its
effectiveness. See Weiss Report at 8. In the 1970 rulemaking, in
response to a comment requesting that the regulations provide for
annual review and updating of the salary level, the Department noted
that the idea ``appears to have some merit particularly since past
practice has indicated that approximately 7 years elapse between
amendment of these salary requirements,'' but concluded that such a
proposal would require further study. 35 FR 884. In the 2004 Final
Rule, the Department declined to adopt a process for automatically
updating the salary level and instead stated our intent ``in the future
to update the salary levels on a more regular basis'' as we did prior
to 1975. Yet competing regulatory priorities, overall agency workload,
and the time-intensive nature of the notice and comment process have
hindered the Department's ability to achieve this goal, which would
require nearly continuous future rulemaking. A rule providing for
automatic updates to the salary level using a methodology that has been
subject to notice and comment rulemaking would maintain the utility of
the dividing line set by the salary level without the need for frequent
rulemaking. This modernization of the regulations would provide
predictability for employers and employees by replacing infrequent, and
thus more drastic, salary level increases with gradual changes
occurring at set intervals. Regular annual increases in the salary and
compensation levels, instead of large changes that result from sporadic
rulemaking, will provide more certainty and stability for employers.
The Department is also considering revisions to the duties tests in
order to ensure that they fully reflect the purpose of the exemption.
Possible revisions include requiring overtime-ineligible employees to
spend a specified amount of time performing their primary duty (e.g., a
50 percent primary duty requirement as required under California state
law) or otherwise limiting the amount of nonexempt work an overtime-
ineligible employee may perform, and adding to the regulations
additional examples illustrating how the exemption may apply to
particular occupations. As previously discussed, during listening
sessions held in advance of this proposed rule, the Department asked
stakeholders what, if any, changes should be made to the existing
duties tests for exemption. Stakeholders from the business community,
while noting the uncertainty caused by litigation surrounding their
application of the current duties tests, generally advocated for no
changes to the current duties tests and raised specific concerns about
the difficulty of imposing any limit on the amount of nonexempt work
that exempt employees may perform. These stakeholders indicated that
the uncertainty which would result from any changes in the duties tests
would be much more problematic than the challenges encountered with the
current tests. Employees and stakeholders representing employee
interests, however, generally advocated for stricter requirements to
ensure that overtime-ineligible employees spend a sufficient amount of
time performing exempt duties, and do not spend excessive amounts of
time on nonexempt work. These stakeholders argued that such
requirements would clarify the application of the exemption and restore
overtime protection to employees whose duties are not, in fact, those
of a bona fide executive, administrative, or professional employee.
Several business stakeholders also suggested that adding additional
examples of how the exemptions apply

[[Page 38524]]

to particular occupations would simplify application of the exemption
for employers and increase the clarity of the current duties tests.

V. Proposed Regulatory Revisions

The Department's current proposal focuses primarily on updating the
salary and compensation levels by proposing that the standard salary
level be set at the 40th percentile of weekly earnings for full-time
salaried workers, proposing to increase the HCE annual compensation
requirement to the annualized value of the 90th percentile of weekly
earnings of full-time salaried workers, and proposing a mechanism for
automatically updating the salary and compensation levels going forward
to ensure that they will continue to provide a useful and effective
test for exemption. While the primary regulatory changes proposed are
in Sec. Sec. 541.600 and 541.601, additional conforming changes are
proposed to update references to the salary level throughout part 541
as well as to update the special salary provisions for American Samoa
and the motion picture industry. The proposal also discusses the
inclusion of nondiscretionary bonuses to satisfy a portion of the
standard salary requirement but does not propose specific regulatory
changes. Additionally, the proposal discusses the duties tests,
requests comments on the current requirements, and solicits suggestions
for additional occupation examples, but does not make any specific
proposals for revisions to these sections.

A. Setting the Standard Salary Level

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

Table A--Weekly Salary Levels for Exemption
----------------------------------------------------------------------------------------------------------------
Long test
Date enacted -------------------------------------------------- Short test
Executive Administrative Professional (all)
----------------------------------------------------------------------------------------------------------------
1938.......................................... $30 $30 .............. ..............
1940.......................................... 30 50 $50 ..............
1949.......................................... 55 75 75 $100
1958.......................................... 80 95 95 125
1963.......................................... 100 100 115 150
1970.......................................... 125 125 140 200
1975.......................................... 155 155 170 250
----------------------------------------------------------------------------------------------------------------
Standard Test
----------------------------------------------------------------------------------------------------------------
2004.......................................... $455
----------------------------------------------------------------------------------------------------------------

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

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

Id. at 6. Taking into account the average salary levels for employees
in numerous industries, and the percentage of employees earning below
these amounts, the Department set the salary level for each exemption
slightly below the ``dividing line'' suggested by these averages.
In 1949, the Department again looked at salary data from state and
federal agencies, including the Bureau of Labor Statistics (BLS). The
data reviewed included wages in small towns and low-wage industries,
earnings of federal employees, average weekly earnings for exempt
employees, starting salaries for college graduates, and salary ranges
for different occupations such as bookkeepers, accountants, chemists,
and mining engineers. Weiss Report at 10, 14-17, 19-20. The Department
noted that the ``salary level adopted must exclude the great bulk of
nonexempt persons if it is to be effective''. Id. at 18. Recognizing
that the ``increase in wage rates and salary levels'' since 1940 had
``gradually weakened the effectiveness of the present salary tests as a
dividing line between exempt and nonexempt employees,'' the Department
calculated the percentage increase in weekly

[[Page 38525]]

earnings from 1940 to 1949, and then adopted new salary levels ``at a
figure slightly lower than might be indicated by the data'' in order to
protect small businesses. Id. at 8, 14. The Department also cautioned
that ``a dividing line cannot be drawn with great precision but can at
best be only approximate.'' Id. at 11
In 1949, the Department also established a second, less-stringent
duties test for each exemption, but only for those employees who were
paid at or above a higher ``short test'' salary level. Those paid above
the higher salary level were exempt if they also met a ``short'' duties
test, which lessened the duties requirements for exemption.\15\ The
rationale for this short test was that employees who met the higher
salary level were more likely to meet all the requirements for
exemption, and thus a ``short-cut test for exemption . . . would
facilitate the administration of the regulations without defeating the
purposes of section 13(a)(1).'' Id. at 22-23. Employees who met only
the lower ``long test'' salary level, and not the higher short test
salary level, were still required to satisfy the default ``long''
duties test, which included a 20 percent limitation on the amount of
nonexempt work that could be performed by an exempt employee. While the
long test salary level was set based on an analysis of the defined
sample, the short test salary level was set in relation to the long
test salary. The existence of separate short and long tests--with short
test salary levels ranging from approximately 130 to 180 percent of the
long test salary levels--remained part of the Department's regulations
until 2004.\16\ See Table A.
---------------------------------------------------------------------------

\15\ These higher salary levels are presented under the ``Short
Test'' heading in Table A.
\16\ The smallest ratio was in 1963 between the long test salary
requirement for professionals ($115) and the short test salary level
($150). The largest ratio was in 1949 between the long test salary
requirement for executives ($55) and the short test salary level
($100).
---------------------------------------------------------------------------

In setting the long test salary level in 1958, the Department
considered data collected during 1955 WHD investigations on the
``actual salaries paid'' to employees who ``qualified for exemption''
(i.e., met the applicable salary and duties tests), grouped by
geographic region, broad industry groups, number of employees, and city
size, and supplemented with BLS and Census data to reflect income
increases of white collar and manufacturing employees during the period
not covered by the Department's investigations. Kantor Report at 6. The
Department then set the salary level tests for exempt employees ``at
about the levels at which no more than about 10 percent of those in the
lowest-wage region, or in the smallest size establishment group, or in
the smallest-sized city group, or in the lowest-wage industry of each
of the categories would fail to meet the tests.'' Id. at 6-7. In other
words, the Department set the salary level so that only a limited
number of workers performing EAP duties (about 10 percent) in the
lowest-wage regions and industries would fail to meet the salary level
test and therefore be overtime protected. In laying out this
methodology, the Department echoed comments from the Weiss Report that
the salary tests ``simplify enforcement by providing a ready method of
screening out the obviously nonexempt employees[,]'' and that
``[e]mployees that do not meet the salary test are generally also found
not to meet the other requirements of the regulations.'' Id. at 2-3.
The Department also noted that in our experience misclassification of
overtime-protected employees occurs more frequently when the salary
levels have ``become outdated by a marked upward movement of wages and
salaries.'' Id. at 5.
The Department followed a similar methodology when determining the
appropriate long test salary level increase in 1963, using data
regarding salaries paid to exempt workers collected in a 1961 WHD
survey. 28 FR 7002. The salary level for executive and administrative
employees was increased to $100 per week, for example, when the 1961
survey data showed that 13 percent of establishments paid one or more
exempt executives less than $100 per week, and 4 percent of
establishments paid one or more exempt administrative employees less
than $100 a week. 28 FR 7004. The professional exemption salary level
was increased to $115 per week, when the 1961 survey data showed that
12 percent of establishments surveyed paid one or more professional
employees less than $115 per week. Id. The Department noted that these
salary levels approximated the same percentages used in 1958:

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

Id.
The Department continued to use a similar methodology when updating
the long test salary level in 1970. After examining data from 1968 WHD
investigations, 1969 BLS wage data, and information provided in a
report issued by the Department in 1969 that included salary data for
executive, administrative, and professional employees,\17\ the
Department increased the long test salary level for executive employees
to $125 per week when the salary data showed that 20 percent of
executive employees from all regions and 12 percent of executive
employees in the West earned less than $130 a week. 35 FR 884-85. The
Department also increased the long test salary levels for
administrative and professional employees to $125 and $140,
respectively.
---------------------------------------------------------------------------

\17\ Earnings Data Pertinent to a Review of the Salary Tests for
Executive, Administrative and Professional Employees As Defined in
Regulations Part 541, (1969), cited in 34 FR 9935.
---------------------------------------------------------------------------

In 1975, instead of following these prior approaches, the
Department set the long test salary levels based on increases in the
Consumer Price Index (CPI), although the Department adjusted the salary
level downward ``in order to eliminate any inflationary impact.'' 40 FR
7091. As a result of this recalibration of the 1970 levels, the long
test salary level for the executive and administrative exemptions was
set at $155, while the professional level was set at $170. The salary
levels adopted were intended as interim levels ``pending the completion
and analysis of a study by [BLS] covering a six month period in
1975[,]'' and were not meant to set a precedent for future salary level
increases. Id. at 7091-92. Although the Department intended to increase
the salary levels after completion of the BLS study of actual salaries
paid to employees, the envisioned process was never completed, and the
``interim'' salary levels remained unchanged for the next 29 years.
As reflected in Table A, the short test salary level increased in
tandem with the long test level throughout the various rulemakings
since 1949. Because the short test was designed to capture only those
white collar employees whose salary was high enough to indicate a
stronger likelihood of exempt status and thus warrant a less stringent
duties requirement, the short test salary level was always set
significantly higher than the long test

[[Page 38526]]

salary level. Thus, in 1975 while the long test salary levels ranged
from $155 to $170, the short test level was $250.
The salary level test was most recently updated in 2004, when the
Department abandoned the concept of separate long and short tests,
opting instead for one ``standard'' test, and set the salary level
under a new standard duties test at $455 for executive, administrative,
and professional employees. Due to the lapse in time between the 1975
and 2004 rulemakings, the salary threshold for the long duties tests
(i.e., the lower salary level) did not reflect salaries being paid in
the economy and had become ineffective at distinguishing between
overtime-eligible and overtime-ineligible white collar employees. For
example, at the time of the 2004 Final Rule, the salary levels for the
long duties tests were $155 for executive and administrative employees
and $170 for professional employees, while a full-time employee working
40 hours per week at the federal minimum wage ($5.15 per hour) at that
time earned $206 per week. 69 FR 22164. Even the short test salary
level at $250 per week was not far above the minimum wage.
The Department in the 2004 Final Rule based the new ``standard''
duties tests on the short duties tests (which did not limit the amount
of nonexempt work that could be performed), and tied them to a single
salary test level that was updated from the long test salary (which
historically had been paired with a cap on nonexempt work). 69 FR
22164, 22168-69; see also 68 FR 15570 (``Under the proposal, the
minimum salary level to qualify for exemption from the FLSA minimum
wage and overtime requirements as an executive, administrative, or
professional employee would be increased from $155 per week to $425 per
week. This salary level would be referred to as the `standard test,'
thus eliminating the `short test' and `long test' terminology. The
separate, higher salary level test for professional employees also
would be eliminated.''). The Department concluded that it would be
burdensome to require employers to comply with a more complicated long
duties test given that the passage of time had rendered the long test
salary level largely obsolete. 69 FR 22164; 68 FR 15564-65. The
Department believed at the time that the new standard test salary level
accounted for the elimination of the long duties test. 69 FR 22167.
In determining the new salary level in 2004, the Department
reaffirmed our oft-repeated position that the salary level is the
``best single test'' of exempt status. 69 FR 22165. Consistent with
prior rulemakings, the Department relied on actual earnings data and
set the salary level near the lower end of the current range of
salaries. Specifically, the Department used Current Population Survey
(CPS) data that encompassed most salaried employees, and set the salary
level to exclude roughly the bottom 20 percent of these salaried
employees in each of the subpopulations: (1) The South and (2) the
retail industry. Although several prior salary levels were based on
salaries of approximately the lowest 10 percent of exempt salaried
employees (the Kantor method), the Department stated that the change in
methodology was warranted in part to account for the elimination of the
short and long duties tests, and because the utilized data sample
included nonexempt salaried employees, as opposed to only exempt
salaried employees. However, as the Department acknowledged, the salary
arrived at by this method was, in fact, equivalent to the salary
derived from the Kantor method. 69 FR 22168. Based on the adopted
methodology, the Department ultimately set the salary level for the new
standard test at $455 per week.
In the 2004 Final Rule the Department also created a test for
highly compensated employees, which provided a minimal duties test for
workers within the highest compensation range. Reasoning that an
especially high salary level negated the need for a probing duties
analysis, the Department provided that employees who earned at least
$100,000 in total annual compensation (of which at least $455 was paid
weekly on a salary or fee basis) were covered by the exemption if they
customarily and regularly spent time on one or more exempt duties, and
were not engaged in manual work. 69 FR 22172.
In summary, the regulatory history reveals a common methodology
used, with some variations, to determine appropriate salary levels. In
almost every case, the Department examined a broad set of data on
actual wages paid to salaried employees and then set the salary level
at an amount slightly lower than might be indicated by the data. In
1940 and 1949, the Department looked to the average salary paid to the
lowest level of exempt employees. Beginning in 1958, the Department set
salary levels to exclude approximately the lowest-paid 10 percent of
exempt salaried employees in low-wage regions, employment size groups,
city size, and industry sectors, and we followed a similar methodology
in 1963 and 1970. The levels were based on salaries in low-wage
categories in order to protect the ability of employers in those areas
and industries to utilize the exemptions and in order to mitigate the
impact of higher-paid regions and sectors. In 1975, the Department
increased the salary levels based on changes in the CPI, adjusting
downward to eliminate any potential inflationary impact. 40 FR 7091
(``However, in order to eliminate any inflationary impact, the interim
rates hereinafter specified are set at a level slightly below the rates
based on the CPI.''). In 2004, the Department raised the salary level
to $455 per week using earnings data of full-time salaried employees
(both exempt and nonexempt) in the South and in the retail sector. As
in the past, the use of lower-salary data sets was intended to
accommodate those businesses for which salaries were generally lower
due to geographic or industry-specific reasons. This most recent
revision eliminated the short and long duties requirements in favor of
a standard duties test for each exemption and a single salary level for
executive, administrative, and professional employees.
Between 1938 and 1975, the Department increased the salary level
every five to nine years. Following the 1975 rulemaking, however, 29
years passed before the salary level was again raised. In the 2004
Final Rule, the Department expressed a commitment to updating the
salary levels ``on a more regular basis,'' particularly when ``wage
survey data and other policy concerns support such a change.'' 69 FR
22171. Regular updates to the salary level test are imperative to
ensuring that the salary level does not become obsolete over time, and
providing predictability for employers and employees. Not only does the
annualized current salary level of $23,660 a year not reflect increases
in nationwide salary levels since 2004, but this figure, as noted
above, is below the 2014 poverty threshold of $24,008 per year for a
family of four.\18\ Moreover, since the salary level test was last
increased in 2004, the federal minimum wage has increased three times,
from $5.15 to the current rate of $7.25 an hour,\19\ raising the wages
of overtime-protected employees. The absence of an

[[Page 38527]]

increase in the salary level when combined with past (and future)
increases to the minimum wage further undermines the effectiveness of
the salary level to serve as a line of demarcation between overtime-
protected and exempt workers. Mindful of such developments, the
Department proposes to increase the salary level annually to ensure the
test's ability to serve as an effective dividing line between exempt
and nonexempt employees.
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\18\ The 2014 poverty threshold for a family of four with two
related people under 18 in the household. Available at: http://www.census.gov/hhes/www/poverty/data/threshld/index.html.
\19\ The U.S. Troop Readiness, Veterans' Care, Katrina Recovery,
and Iraq Accountability Appropriations Act, 2007, Public Law 110-28,
121 Stat. 112 (Mary 25, 2007), included an amendment to the FLSA
that increased the applicable Federal minimum wage under section
6(a) of the FLSA in three steps: To $5.85 per hour effective July
24, 2007; to $6.55 per hour effective July 24, 2008; and to $7.25
per hour effective July 24, 2009.
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ii. Purpose of the Salary Level Requirement
The Department has long recognized that the line of demarcation
between the salaries of white collar employees who are overtime-
protected and those who are exempt EAP employees cannot be reduced to a
standard formula. There will always be white collar overtime-eligible
employees who are paid above the salary threshold, and employees
performing EAP duties who are paid below the salary threshold. The
salary level selected will inevitably affect the number of workers
falling into each of these categories. As the Department has noted:

Inevitably, if the salary tests are to serve their purpose in a
situation where salaries and wages have risen, some employees who
have been classified as exempt under the present salary tests will
no longer be within the exemption under any new tests adopted. Such
employees include some whose status in management or the professions
is questionable in view of their low salaries. Also included in the
group who would not be exempt are employees whose exempt status, on
the basis of their duties and responsibilities, is questionable.

Kantor Report at 5. Historically, when setting the lower, long test
salary level, the Department strived to ensure that the salary
threshold reasonably served to reduce instances where obviously
overtime-protected white collar employees were classified as exempt,
while avoiding undue exclusions from exemption of employees performing
bona fide executive, administrative, and professional duties. In 1949,
the Department noted:

Regulations of general applicability such as these must be drawn
in general terms to apply to many thousands of different situations
throughout the country. In view of the wide variation in their
applicability the regulations cannot have the precision of a
mathematical formula. The addition to the regulations of a salary
requirement furnishes a completely objective and precise measure
which is not subject to differences of opinion or variations in
judgment. The usefulness of such a precise measure as an aid in
drawing the line between exempt and nonexempt employees,
particularly in borderline cases, seems . . . to be established
beyond doubt.

Weiss Report at 9. Since 1958, the Department's approach has emphasized
minimizing the number of white collar employees performing bona fide
EAP duties who are excluded from the exemption by the salary level.
This approach was appropriate when there was a long duties test with a
specific cap on the amount of time that overtime-ineligible employees
could spend performing nonexempt work. However, this approach is not
effective in the absence of that limitation, as it does not take into
sufficient account the inefficiencies (in terms of the administrative
costs of classifying positions) of applying the duties test to large
numbers of overtime-eligible white collar employees and the possibility
of misclassification of those employees as exempt (and possible
litigation costs associated with misclassification).
A thorough review of the regulatory history of the seven previous
increases to the salary levels reveals an essentially common
methodology to determine the appropriate level, which has been refined
periodically in order to better meet the salary level test's goals. In
almost every case, the Department considered a broad set of salary data
and then set the salary level at an amount slightly lower than the
dividing line between exempt and nonexempt that might be indicated by
the data, or otherwise set it ``at points near the lower end of the
current range of salaries for each of the [EAP] categories.'' Kantor
Report at 5. The exact line of demarcation set by the Department,
however, has varied, and is guided by practical considerations that
allow it to best serve the underlying principles of the exemption, that
is, to differentiate exempt and nonexempt white collar employees.
With that objective in mind, the Department proposes to increase
the minimum salary level required to qualify for the EAP exemptions
from $455 per week to the 40th percentile of weekly earnings for full-
time salaried workers ($921 per week).\20\ This proposed methodology is
conceptually similar to the methodology utilized by the Department in
the 2004 Final Rule, which in turn was largely modeled on the salary
level methodology first set forth in the Kantor Report in 1958 and used
by the Department in nearly every salary level rulemaking thereafter.
See 69 FR 22167-68; Kantor Report at 6-7. Both the proposed methodology
and its predecessors set the salary level based on a percentile of the
salaries actually paid to a specified pool of salaried employees.
---------------------------------------------------------------------------

\20\ The BLS sample used for this rulemaking consists of usual
weekly earnings for full-time (defined as at least 35 hours per
week) non-hourly paid employees. For the purpose of this rulemaking,
the Department considers data representing compensation paid to non-
hourly workers to be an appropriate proxy for compensation paid to
salaried workers.
---------------------------------------------------------------------------

iii. Sources for the Salary Level Requirement
After a careful review of the guidance articulated in the
Department's previous part 541 rulemakings, and observing more than a
decade of experience since the 2004 salary level test update, the
Department has chosen to rely on the general methodology used in every
previous update except 1975, with a few changes designed to simplify
and improve the methodology as a tool for differentiating exempt and
nonexempt workers. Specifically, in the interest of making the salary
methodology simpler and more transparent, the Department is using
nationwide CPS data on full-time salaried employees (both exempt and
nonexempt) to set the proposed salary level. As discussed infra, the
Department is not further modifying the sample as we did in 2004. See
69 FR 22168.\21\
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\21\ As discussed infra, the CPS data on full-time salaried
workers which the Department is now proposing to use excludes
certain groups, such as the self-employed, unpaid volunteers,
workers under age 16, and members of the military on active duty.
However, BLS automatically excludes these groups when it generates
the sample. In 2004, the Department took additional steps to exclude
other categories of workers from the sample.
---------------------------------------------------------------------------

This is not the first time the Department has modified the
methodology, in part because the specific sources of the Department's
data have changed over the years. In 1940, the Department considered
salary surveys by government agencies, experience under the NIRA, state
laws, and federal government salaries. Stein Report at 9, 20-21, 31-32.
In 1949, the Department looked at salary data collected by state and
federal agencies, including the BLS, and considered wages in small
towns and low-wage industries, earnings of federal employees, average
weekly earnings for exempt employees, wages of clerical employees, and
starting salaries for college graduates. Weiss Report at 10, 13-20. In
1958, the Department used a data set that consisted of data collected
during WHD investigations on actual salaries paid to employees who
qualified for the exemption, grouped by geographic region, broad
industry groups, number of employees, and size of city, and the
Department supplemented the investigation data with BLS and Census data
on the income increases of white collar and

[[Page 38528]]

manufacturing employees for the period not covered by the Department's
investigations. Kantor Report at 6-9. Subsequent salary level updates
in 1963 and 1970 followed a similar approach, looking to WHD data on
actual salaries paid to exempt employees and augmenting the 1970
analysis with BLS data. 28 FR 7002; 35 FR 884. The Department diverged
from our practice of looking to actual salary data in the 1975 rule,
when the Department increased the salary levels set in 1970 based on
the CPI and adjusted slightly ``in order to eliminate any inflationary
impact''; those salary levels, however, were intended to be ``interim''
levels, pending receipt and review of data on actual salary levels. 40
FR 7091.
The Department made some adjustments in 2004 to broaden the data
set used, rather than continuing to rely upon WHD's limited enforcement
data. The Department continued to carefully review actual salary
levels, but did so by using the CPS as the data source. The CPS is a
large, statistically robust survey jointly administered by the Census
Bureau and BLS, and it is widely used and cited by industry analysts.
It surveys 60,000 households a month, covering a nationally
representative sample of workers, industries, and geographic areas.\22\
Households are surveyed for four months, excluded from the survey for
eight months, surveyed for an additional four months, then permanently
dropped from the sample. During months 4 and 16 in the sample (the
outgoing rotation months), employed respondents complete a
supplementary questionnaire (the merged outgoing rotation group or
MORG) in addition to the regular survey, which contains the detailed
information on earnings necessary to estimate a worker's exemption
status. However, because the Department was unable to precisely
identify which workers would qualify for the exemption, the Department
based the salary level in the 2004 Final Rule on a pool of employees
that generally included those full-time salaried employees covered by
the FLSA and by the part 541 regulations. Where possible, the
Department excluded from our analysis workers who were excluded
entirely from the FLSA's overtime requirements or from the salary
tests.\23\ 69 FR 22167-68. The Department concluded that it was
preferable to move away from using a sample limited to exempt salaried
employees, as was done in the Kantor method, because in order to create
such a pool of likely-exempt salaried employees one would have to rely
upon ``uncertain assumptions regarding which employees are actually
exempt.'' Id. at 22167. In addition, the Department used CPS data
rather than salary data from the limited pool of our own investigations
because there would have been too few observations from these
investigations to yield statistically meaningful results.
---------------------------------------------------------------------------

\22\ http://www.census.gov/cps; http://www.census.gov/cps/methodology.
\23\ The 2004 pool of salaried employees excluded: (1) The self-
employed, unpaid volunteers and religious workers who are not
covered by the FLSA; (2) agricultural workers, certain
transportation workers, and certain automobile dealership employees
who are exempt from overtime under other provisions of the Act; (3)
teachers, academic administrative personnel, certain medical
professionals, outside sales employees, lawyers and judges who are
not subject to the part 541 salary tests; and (4) federal employees
who are not subject to the part 541 regulations. 69 FR 22168.
---------------------------------------------------------------------------

In this proposed rule, the Department continues to adhere to the
basic methodological principle of looking to actual salaries paid to
employees, but as in the 2004 rulemaking, the Department has reexamined
the precise contours of the sample to ensure that it is as transparent,
accessible, and easily replicated as possible. By moving to an even
more standardized sample than the one used in 2004--the proposed rule
includes all full-time salaried employees nationwide, without
exclusions--the Department seeks to further improve upon the
methodology.
The proposed rule uses CPS data comprising all full-time salaried
employees to determine the proposed salary levels, and the Department
is not further restricting the sample. Inclusion of those employees
previously excluded by the Department in 2004 achieves a more robust
sample that is more representative of salary levels throughout the
economy. For example, while teachers, physicians, lawyers, outside
sales employees, and federal employees were excluded from the 2004
sample because they are not subject to the part 541 salary level test,
they nonetheless are part of the universe of salaried employees and, as
such, their salaries shed light on the salaries paid to employees
performing exempt EAP duties. Furthermore, replicating this sample from
the CPS public-use files would require no adjustments, making it easier
for members of the public to access it and use it.\24\ In contrast, the
sample from the 2004 rulemaking required filtering out various
employees based on interpretations of a number of statutory and
regulatory exclusions from coverage or the salary requirement--a
process that is inconsistent with the simplification, streamlining, and
transparency objectives of the current rulemaking.
---------------------------------------------------------------------------

\24\ The Department notes that the public will not be able to
exactly replicate the weekly earnings and percentiles used in this
NPRM from the public-use data files made available by BLS. As with
all BLS data, to ensure the confidentiality of survey respondents,
data in the public-use files use adjusted weights and therefore
minor discrepancies between internal BLS files and public-use files
exist. BLS publishes quarterly the earnings deciles of full-time
salaried workers on which the Department relies to set the proposed
salary level at http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
---------------------------------------------------------------------------

Using a broader sample does not diminish the soundness of the
ultimate salary level derived. As the Department noted with respect to
our change in the sample for the 2004 rulemaking, different
``approaches are capable of reaching exactly the same endpoint [i.e., a
percentile that accomplishes the purpose of the salary level test].''
69 FR 22167.
iv. Setting the Required Salary Level
In addition to looking to a less-restricted sample, this proposed
rule also differs from the 2004 Final Rule in that the Department
proposes to set the standard salary level at a higher percentile of the
salary distribution and relies upon salaries nationwide rather than
salaries in a limited geographic area or industry. The Department is
also proposing to set the salary level as a percentile of weekly
earnings of full-time salaried workers rather than a specific dollar
amount because we believe a percentile serves as a better proxy for
distinguishing between overtime-eligible and exempt white collar
workers as it is rooted in the relative distribution of earnings which
are linked to the type of work undertaken by salaried workers. The
proposed standard salary level of the 40th percentile of weekly
earnings for all full-time salaried employees is higher than the
percentile used by the Department in either the 2004 Final Rule or the
Kantor method. In the 2004 Final Rule, the Department set the required
standard salary level at approximately the 20th percentile of salaried
employees in the South region and in the retail industry, and in 1958,
using the Kantor method which had both the long and short tests, the
Department set the required salary level at approximately the 10th
percentile of exempt EAP workers' salaries in low-wage regions,
employment size groups, city size, and industries. As explained in the
2004 Final Rule, those two methods produced roughly equivalent salary
levels when taking into account their differing samples. See 69 FR
22167-68; Kantor Report at 6. Applying

[[Page 38529]]

these methods today would result in salary levels of $577 per week
(2004 method) or $657 per week (Kantor method), which would equate to
approximately the 15th and 20th percentiles of weekly earnings for all
full-time salaried workers.
However, the higher percentile proposed here is necessary to
correct for the current pairing of a salary based on the lower salary
long test with a duties test based on the less rigorous short duties
test, and ensure that the proposed salary is consistent with the
Department's longstanding goal of finding an appropriate line of
demarcation between exempt and nonexempt employees. See, e.g., Weiss
Report at 11 (``The salary tests in the regulations are essentially
guides to help in distinguishing bona fide executive, administrative,
and professional employees from those who were not intended by the
Congress to come within these categories.''). Currently, approximately
85 percent of white collar salaried workers who fail the EAP duties
test earn at least $455 per week. Because the current salary level is
only screening from exemption approximately 15 percent of overtime-
eligible white collar salaried employees, it is not an effective test
for exemption and does not serve the intended purpose of simplifying
application of the exemption by reducing the number of employees for
whom employers must perform a duties analysis. Increasing the standard
salary level to the 40th percentile of weekly earnings for full-time
salaried workers would reduce by 6.3 million the number of white collar
employees whose exemption status currently can only be determined by
applying the duties test.\25\ Conversely, only approximately 4 percent
of all white collar salaried employees who meet the duties test earn
less than the current salary level. The proposed increase in the
standard salary level would increase the number of overtime-eligible
white collar salaried employees who meet the duties test and earn less
than the proposed salary level to approximately 25 percent.
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\25\ These workers are salaried, white collar workers who do not
satisfy the EAP duties tests and who earn at least $455 per week but
less than the proposed salary level. Some workers in this group may
be overtime ineligible due to another non-EAP exemption.
---------------------------------------------------------------------------

The proposed percentile diverges from the percentiles adopted in
both the 2004 Final Rule and the Kantor method because it more fully
accounts for the Department's elimination of the long duties test. As
discussed in detail below, the Department acknowledged in the 2004
Final Rule that it was necessary in setting the salary level to account
for the shift to a single standard duties test that was equivalent to
the less rigorous short duties test. The Department intended the change
from the 10th to the 20th percentile to address, in part, the
elimination of the long duties test. 69 FR 22167. The Department also
intended this change, however, to account for the use of a different
data set. 69 FR 22168. Based on further consideration of our analysis
of the 2004 salary, the Department has now concluded that the $455
salary level did not adequately account for both the shift to a sample
including all salaried workers covered by the part 541 regulations,
rather than just EAP exempt workers, and the elimination of the long
duties test that had historically been paired with the lower salary
level. Accordingly, this proposal is intended to correct for that error
by setting a salary level that fully accounts for the fact that the
standard duties test is significantly less rigorous than the long
duties test and, therefore, the salary threshold must play a greater
role in protecting overtime-eligible employees. This proposal is also
responsive to the President's desire to simplify the exemption, and it
addresses the Department's concern that overtime-eligible workers may
be misclassified as exempt based solely on the salaries they receive.
This is the first time that the Department has needed to correct
for such a mismatch between the existing salary level and the
applicable duties test. Under the old short test/long test structure,
the Department routinely focused on setting a long test salary level
that would minimize the number of employees performing bona fide EAP
duties deemed overtime-eligible based on their salaries (keeping the
number of such excluded employees to about 10 percent of those who
qualified for exemption based upon their duties). This approach was
possible because the long duties test included a limit on the amount of
nonexempt work that could be performed and thus provided an adequate
safeguard against the exemption of white collar workers who should be
overtime-protected but who exceeded the salary level. The creation of a
single standard test based on the less rigorous short duties test
caused new uncertainty as to what salary level is sufficient to ensure
that employees intended to be overtime-protected are not subject to
inappropriate classification as exempt, while minimizing the number of
employees disqualified from the exemption even though their primary
duty is EAP exempt work.
A brief history of the long duties test illustrates the importance
of offsetting its elimination with a corresponding increase in the
salary level. The so-called long test was the sole test for all
employees until 1949. The Department devised a separate short test in
1949 to supplement the long test with a short-cut, more permissive,
method for determining exempt status for only those employees meeting a
higher salary requirement. For example, the long duties test in effect
from 1949 to 2004 for administrative employees required that an exempt
employee: (1) Have a primary duty consisting of the performance of
office or non-manual work directly related to management policies or
general business operations of the employer or the employer's
customers; (2) customarily and regularly exercise discretion and
independent judgment; (3) regularly and directly assist a proprietor or
a bona fide executive or administrative employee, or perform under only
general supervision work along specialized or technical lines requiring
special training, experience, or knowledge, or execute under only
general supervision special assignments and tasks; and (4) not devote
more than 20 percent (or 40 percent in a retail or service
establishment) of hours worked in the workweek to activities that are
not directly and closely related to the performance of the work
described above. 29 CFR 541.2 (2003). By contrast, the short duties
test in effect during the 1949 to 2004 period provided that an
administrative employee paid at or above the short test salary level
qualified for exemption if the employee's primary duty consisted of the
performance of office or non-manual work directly related to management
policies or general business operations of the employer or the
employer's customers which includes work requiring the exercise of
discretion and independent judgment. Id.
Between 1949 and 2004, employers were only able to claim the
exemption based on the less-stringent short duties test for employees
who were paid a specified higher salary level. The Department reasoned
that, ``in the categories of employees under consideration the higher
the salaries paid the more likely the employees are to meet all the
requirements for exemption, and the less productive are the hours of
inspection time spent in analysis of the duties performed.'' Weiss
Report at 22. The original, more thorough duties test became known as
the long test, and remained for decades

[[Page 38530]]

the test employers were required to satisfy for those employees whose
salary was insufficient to meet the higher short test salary level.
Apart from the differing salary requirements, the most significant
difference between the short test and the long test was the long test's
limit on the amount of time an exempt employee could spend on nonexempt
duties while allowing the employer to claim the exemption. For all
three EAP exemptions, the long duties test imposed a limit on nonexempt
duties. A bright-line, 20 percent cap on nonexempt work was instituted
in 1940 for executive and professional employees, and in 1949 for
administrative employees.\26\ The short duties tests did not include a
limitation on nonexempt work because employees paid the higher short
test salary level were likely to ``meet all of the requirements of the
Administrator's basic definitions of exempt employees, including the
requirements with respect to nonexempt work.'' Weiss Report at 23. The
Department reasoned that if the test were to exempt those for whom
``the nonexempt work is substantial,'' this would be ``contrary to the
objectives of the Fair Labor Standards Act.'' Id. at 33.
---------------------------------------------------------------------------

\26\ By statute, beginning in 1961, retail employees could spend
up to 40 percent of their hours worked performing nonexempt work and
still be found to meet the duties tests for EAP exemption. 29 U.S.C.
213(a)(1).
---------------------------------------------------------------------------

In 2004 the Department discontinued the use of the long duties test
because it had effectively become dormant due to the passage of time
since the required salary level had last been raised in 1975, and
because the Department believed that reinstituting it would be
administratively burdensome. Instead the Department essentially adopted
the short duties tests as the standard duties tests, stating that the
new standard duties tests ``are substantially similar to the current
short duties tests,'' 69 FR 22214, and that ``it is impossible to
quantitatively estimate the number of exempt workers resulting from the
de minimis differences in the standard duties tests compared to the
current short duties tests.'' Id. at 22192-93. The Department
recognized the need to adjust the salary percentile previously used to
set the long test salary level upward to account for the transition to
a single more lenient duties test. Indeed, the Department stated that
the increase to the 20th percentile instead of the 10th percentile was
intended to account for two changes made in 2004: ``because of the
proposed change from the `short' and `long' test structure and because
the data included nonexempt salaried employees.'' 69 FR 22167; see 68
FR 15571. However, although the Department recognized the need to make
an adjustment because of the elimination of the long duties test, the
amount of the increase in the required salary actually only accounted
for the fact that the data set used to set the salary level included
nonexempt workers while the Kantor method considered only the salaries
paid to exempt employees. As the data tables in the 2004 Final Rule
show, a salary of $455 excluded from the exemption 20.2 percent of all
salaried employees in the South and 20.0 percent of all salaried
employees in retail. 69 FR 22169, Table 3. However, that same $455
salary level excluded only 8.2 percent of likely exempt employees in
the South and 10.2 percent of likely exempt employees in retail. 69 FR
22169, Table 4. In other words, ``by setting a salary level excluding
from the exemptions approximately the lowest 20 percent of all salaried
employees, rather than the Kantor report's 10 percent of exempt
employees,'' the Department in 2004 actually adopted a percentile that
produced a salary amount roughly equivalent to the long test salary
yielded at the 10th percentile using the Kantor method's data set. Id.
at 22168 (emphases in original). The Department had not, in fact, made
any additional adjustment to account for the elimination of the long
duties test.
Thus, although the Department had identified the need to adjust the
required salary percentile to account for the elimination of the long
duties test, the Department effectively paired the short test's less
stringent duties requirements with the lower salary level historically
associated with the long duties test.\27\ The long duties tests had
limited the amount of nonexempt work that could be performed by
employees for whom the employer claimed the EAP exemption; only
employees who were paid the higher short test salary level were not
required to meet the nonexempt duties caps. Because the standard duties
tests do not contain a cap on the amount of nonexempt work that may be
performed, after the 2004 rulemaking the salary level test must play a
larger role in screening out overtime-protected white collar employees.
---------------------------------------------------------------------------

\27\ Throughout both the 2003 NPRM and 2004 Final Rule, the
Department emphasized that it was increasing the standard salary
level from the $155 long test salary level last previously updated
in 1975. See, e.g., 68 FR 15570; 69 FR 22123 (``The final rule
nearly triples the current $155 per week minimum salary level
required for exemption to $455 per week.''); id. at 22171. Neither
the 2003 NPRM nor the 2004 Final Rule compared the magnitude of the
new standard salary level against the former $250 per week short
test salary level.
---------------------------------------------------------------------------

While the role of the salary level test as an initial test for
exemption increased in 2004, the Department has always recognized the
impact of the threshold on overtime-eligible white collar employees. In
the Stein Report, the Department looked at the impact of various salary
thresholds on overtime-eligible bookkeepers, noting that approximately
50 percent of surveyed bookkeepers earned more than the then applicable
$30 weekly salary threshold, while that number decreased to
approximately 8 percent at the $50 dollar level at which the applicable
salary level was ultimately set. Stein Report at 32. The Department
went on to note that evidence that a salary of $50 ``would not also
exclude persons who properly deserve the exemption is illustrated by
the fact that almost 50 percent of the accountants and auditors [many
of whom are properly considered administrative or professional] earn at
least $50 a week.'' Id. Similarly, the Weiss Report noted that
``[a]nother guide of value in determining the appropriate levels of a
salary test for administrative and professional employees is the
probable percentage of persons in clerical, subprofessional, or other
nonexempt occupations who would meet the various salary requirements.
The salary level adopted must exclude the great bulk of nonexempt
persons if it is to be effective.'' Weiss Report at 18. The Weiss
Report went on to look at salaries paid to bookkeepers in New York and
nine other surveyed cites and noted that, at a salary of $80 per week,
some hand-bookkeepers in 9 of the 10 cities surveyed would exceed the
salary level; at $75 per week, the salary test would be met by some
hand-bookkeepers in all 10 cities. The report noted that the data ``all
tend to indicate that a salary requirement of about $75 or $80 a week
for administrative employees is necessary in order to provide adequate
protection against misclassification since many obviously nonexempt
employees earn salaries at or near these figures.'' Id. The Department
set the salary level for administrative employees at $75 per week.
The Department's 2004 pairing of the lower long test salary level
with the short test duties requirements also runs contrary to the
Department's rationale for the short duties test that ``the higher the
salaries paid the more likely the employees are to meet all the
requirements for exemption,'' and at ``the higher salary levels in such
classes of employment, the employees have almost invariably been found
to meet all

[[Page 38531]]

the other requirements of the regulations for exemption.'' Weiss Report
at 22. Further, in establishing the short test the Department cautioned
that ``the salary level must be high enough to include only those
persons about whose exemption there is normally no question.'' Id. at
23. Setting the standard salary level at the 40th percentile of
earnings for full-time salaried workers would effectively correct for
the Department's establishment in the 2004 Final Rule of a single
standard duties test that was equivalent to the former short duties
test without a correspondingly higher salary level. In the absence of
the protection provided by the long duties test, the lower salary level
increased the risk that employees who should be entitled to overtime
protection might be inappropriately classified as exempt and denied
that protection. The lower salary level associated with the former long
duties test was never intended to ensure that the employees earning
that amount meet ``all the requirements for exemption . . . including
the requirement with respect to nonexempt work.'' Id. at 22-23.
Therefore, without a more rigorous duties test, the salary level set in
the 2004 Final Rule is inadequate to serve the salary's intended
purpose of the ``drawing of a line separating exempt from nonexempt
employees[.]'' 69 FR 22165.
The importance of adjusting the salary level threshold upward to
account for the lack of a long duties test is illustrated by the
Department's Burger King litigation in the early 1980's, when the long
test was still actively in use. The Department brought two actions
arguing that Burger King restaurants in the northeast had misclassified
their assistant managers as exempt executive employees and that these
employees were, in fact, entitled to overtime protection. Sec'y of
Labor v. Burger King Corp., 675 F.2d 516 (2d Cir. 1982); Sec'y of Labor
v. Burger King Corp., 672 F.2d 221 (1st Cir. 1982). The assistant
managers at issue all performed the same duties, which included
spending significant amounts of time performing the same routine,
nonexempt work as their subordinates. One group of assistant managers
was paid between $155 and $249 per week--and therefore subject to the
long duties test; the other group was paid $250 or more--and therefore
subject to the short duties test. The Department argued that neither
group of assistant managers had management as their primary duty. Both
appellate courts found that the employees did have management as their
primary duty; however, for the lower paid group, both courts found the
employees to be overtime protected because they spent more than 40
percent of their time performing nonexempt work and therefore did not
satisfy the requirements of the long duties test. Accordingly, the
lower paid employees were protected by application of the more rigorous
long duties test, while the higher paid employees were found to be
exempt under the easier short duties test. If the less rigorous short
duties test had been paired with the long test's lower salary
threshold--as the Department did in 2004--the lower paid assistant
managers would have lost their overtime protection.
The continued extensive litigation regarding employees for whom
employers assert the EAP exemption also demonstrates that using the
20th percentile of salaried employees in the South and in retail as the
threshold has not met the Department's goals as stated in the 2004
Final Rule of simplifying enforcement and reducing litigation. Id.
According to a recent Government Accountability Office (GAO) report,
statistics from the Federal Judicial Center show that the number of
wage and hour lawsuits filed in federal courts ``has increased
substantially, with most of this increase occurring in the last
decade.'' GAO-14-69, ``Fair Labor Standards Act,'' December 2013, at 2,
6.\28\ A ``total of 8,148 FLSA lawsuits [were] filed in fiscal year
2012. Since 2001, when 1,947 FLSA lawsuits were filed, the number of
FLSA lawsuits has increased sharply.'' Id. at 6. Stakeholders advised
GAO that one of the reasons for the increased litigation was employer
confusion about which workers should be classified as EAP exempt. Id.
at 11. Adjusting the salary level upward to account for the absence of
a more rigorous duties test will ensure that the salary threshold
serves as a more clear line of demarcation between employees who are
entitled to overtime and those who are not, and will reduce the number
of white collar employees who may be misclassified and therefore
decrease litigation related to application of the EAP duties test. At
the 40th percentile of full-time salaried workers, there will be 10.9
million fewer white collar employees for whom employers could be
subject to potential litigation regarding whether they meet the duties
test for exemption (4.6 million who would be newly entitled to overtime
due to the increase in the salary threshold and 6.3 million who
previously failed the duties test and would now also fail the salary
level test).
---------------------------------------------------------------------------

\28\ http://gao.gov/products/GAO-14-69.
---------------------------------------------------------------------------

As discussed previously, the salary component of the EAP test for
exemption has always worked hand-in-hand with the duties test in order
to simplify the application of the exemption. At a lower salary level,
more overtime-eligible employees will exceed the salary threshold, and
a more rigorous duties test would be required to ensure that they are
not classified as falling within an EAP exemption and therefore denied
overtime pay. At a higher salary level, more employees performing bona
fide EAP duties will become entitled to overtime because they are paid
a salary below the salary threshold. Setting the salary threshold too
low reduces the risk that workers who pass the duties test become
entitled to overtime protection, but does so at the cost of increasing
the number of overtime-eligible employees exceeding the salary level
who are subject to the duties test and possible misclassification. In
contrast, setting the salary level too high reduces the number of
overtime-protected employees subject to the duties test and eliminates
their risk of misclassification, but at the cost of requiring overtime
protection for workers who pass the duties test. With those concerns in
mind, the Department has reviewed a variety of data sources to
ascertain the appropriate amount to increase the required salary level
in order to ensure that it works effectively with the standard duties
tests to distinguish between overtime-eligible white collar employees
and employees performing bona fide EAP duties.
In the 1949, 1958, 1963, 1970 and 1975 updates to the salary level,
all of which featured a long test/short test structure, the short test
salary level was set at approximately 130 to 180 percent of the long
duties test salary level to adequately establish a salary level that
obviated the need to engage in a more probing duties analysis. To
remedy the Department's error from 2004 of pairing the lower long test
salary with the less stringent short test duties, the Department is
setting the salary level within the range of the historical short test
salary ratio so that it will work appropriately with the current
standard duties test. The Department recognizes that the proposed
salary amount is only about 140 percent of the long duties test salary
level under the Kantor method, and thus may be viewed as slightly out
of line with the historic average of approximately 150 percent of the
long test at which the short-test salary has

[[Page 38532]]

been set.\29\ This suggests that a salary significantly lower than the
40th percentile of full-time salaried workers would pose an
unacceptable risk of inappropriate classification of overtime-protected
employees without a change in the standard duties test. The Department
believes that setting the salary level at the 40th percentile of weekly
wages for all full-time salaried employees will result in a salary
threshold that properly distinguishes between employees who may meet
the duties requirements of the EAP exemption and those who likely do
not, without necessitating a return to the more detailed long duties
test. The Department notes that currently approximately 75 percent of
white collar employees who do not meet the duties test earn less than
the proposed salary threshold. The Department believes that the 40th
percentile is appropriate because there is no longer a lower salary/
long duties test for EAP exemption to which employers can turn if
employees do not satisfy the standard salary level. By proposing a
lower salary level than traditionally used for the short duties test,
the Department intends to minimize the potential that additional bona
fide exempt employees might become entitled to overtime because they
fall below the proposed salary level. The Department notes that
currently approximately 78 percent of all exempt EAP workers--those who
are paid on a salary basis of at least $455 per week and meet the
duties test--earn at least $921 per week.
---------------------------------------------------------------------------

\29\ The Department estimated the average historic ratio of 149
percent as the simple average of the fifteen historical ratios of
the short duties salary level to the long duties salary level
(salary levels were set in 5 years and in each year the salary level
varied between the three exemptions: executive, administrative, and
professional). If the Department had weighted the average ratio
based on the length of time the historic salary levels were in
effect, this would have yielded an average historic ratio of 152
percent.
---------------------------------------------------------------------------

This salary level also accounts for the fact that the salary
threshold will apply to all employees nationwide, including employees
who work in low-wage regions and low-wage industries. In this
rulemaking, we are proposing a salary level of the 40th percentile of
the weekly wages of all full-time salaried workers nationwide. The
Department believes that setting the salary level based on nationwide
salary data is consistent with the goals of modernizing and simplifying
the regulations. Using nationwide salary data will also produce a
salary level appropriate to both low- and high-wage areas and
industries. While the proposed salary level is lower than the average
historical short test salary ratio under the Kantor method, a higher
percentile more in line with the historical short duties test could
have a negative impact on the ability of employers in low-wage regions
and industries to claim the EAP exemptions for employees who have bona
fide executive, administrative, or professional duties as their primary
duty, particularly in the absence of a long duties test as an
alternative. As will be discussed in section VII.D., the Department
believes this proposal is appropriate in low-wage areas and low-wage
industries.
The proposal also is consistent with the Department's practice in
prior rulemakings, including the 2004 Final Rule, of establishing a
national salary level, rather than multiple levels for different
regions or industries. As stated in the 2004 Final Rule, the Department
does not believe that having different salary levels for different
areas of the country or for different kinds or sizes of businesses ``is
administratively feasible because of the large number of different
salary levels this would require.'' 69 FR 22171. The Department came to
the same conclusion in 1940 when the Department rejected suggestions
for varying salary levels, stating that it would present serious
difficulties in enforcement, and that the FLSA is a national law that
cannot take

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

Stein Report at 6; see Weiss Report at 9 (``Regulations of general
applicability such as these must be drawn in general terms to apply to
many thousands of different situations throughout the country.'').
Setting the salary level at the 40th percentile of full-time
salaried workers places it far enough above the minimum wage to provide
an effective means of screening out workers who should be overtime
protected. As the Stein Report noted, ``[i]t must be assumed that
[executive employees] enjoy compensatory privileges and this assumption
will clearly fail if they are not paid a salary substantially higher
than the wages guaranteed as a mere minimum under section 6 of the
act.'' Stein Report at 19. Furthermore, the failure to require a salary
level of substantially more than the minimum wage would ``invite
evasion of section 6 and 7 for large numbers of workers to whom the
wage-and-hour provisions should apply.'' Id. Accordingly, following
each update from 1949 to 1975 (those which included a short duties test
similar to the current standard test), the ratio of the short test
salary level to the earnings of a full-time, nonexempt, minimum wage
worker equaled between approximately 3.0 and 6.25.\30\ See Table B. For
instance, the ratio was its highest in 1949 at 6.25 ($100 salary level
divided by the product of $0.40 and 40 hours) and its lowest in 1975 at
2.98 ($250/($2.10 x 40)). Because the 2004 standard salary level was
based on the 1975 long test salary and not the short test salary, it
deviated from the pattern observed over the previous decades, resulting
in a salary threshold of just 2.21 times full-time minimum wage
earnings ($455/($5.15 x 40)). The proposed salary level is 3.18 times
full-time minimum wage earnings ($921/($7.25 x 40)), which is
consistent with the historical average. Therefore, the Department
believes that the proposed salary level is appropriate in comparison
with prior minimum wage ratios.
---------------------------------------------------------------------------

\30\ The 6.25 ratio is an outlier that was set in December 1949
(when the short test was created) and the minimum wage increased
from $.40 to $.75 per hour one month later (which reduced the ratio
to 3.33). To return to the 6.25 ratio, the weekly salary level would
have to be set at $1,812.50, which is around the 80th percentile of
all full-time salaried employees.

Table B--Ratios of Salary Test Levels to Full-Time Minimum Wage Earnings
----------------------------------------------------------------------------------------------------------------
MW earnings for Exempt short Ratio of short
Year Minimum wage a 40-hour test salary salary test to
(MW) workweek level MW earnings
----------------------------------------------------------------------------------------------------------------
1949.................................... $0.40 $16 $100 6.25
1958.................................... 1.00 40 125 3.13

[[Page 38533]]

1963.................................... 1.25 50 150 3.00
1970.................................... 1.60 64 200 3.13
1975.................................... 2.10 84 250 2.98
----------------------------------------------------------------------------------------------------------------
Year Minimum wage MW earnings for Exempt short Ratio of short
(MW) a 40-hour test salary salary test to
workweek level MW earnings
----------------------------------------------------------------------------------------------------------------
2004.................................... $5.15 $206 $455 2.21
2015.................................... 7.25 290 921 3.18
(proposed)
----------------------------------------------------------------------------------------------------------------

Moreover, the median earnings for all salaried workers provides
further support for the proposed salary level. The Weiss Report
observed approvingly that in the Stein Report, the ``dividing line
[between subprofessional and professional employees was] based on the
midpoint salaries'' of federal government service classifications of
administrative and professional employees, and thus suggested that a
midpoint value of the aggregated earnings of such workers is an
appropriate benchmark for the salary level. Weiss Report at 16-17
(referencing Stein Report at 43). In 1947, 1962, 1969, and 2003, data
showing median increases in earnings for all employees in various
industries were generated and considered instructive to a determination
of an appropriate salary level.\31\ The 2013 national median earnings
for all full-time salaried workers was $1,065 per week, giving support
to the Department's proposed salary level of $921. Thus, using median
earnings as a point of comparison supports that the 40th percentile of
full-time salaried workers would provide an appropriate line of
demarcation between overtime-eligible white collar employees and
potentially exempt EAP employees.
---------------------------------------------------------------------------

\31\ Statistical Materials Bearing on the Salary Requirement in
Regulations Part 541 (1947), at 2, 6, 27-30, 56-57; Salary Tests for
EAP Employees DOL Report--Wage and Hour Public Contracts Division
(1962), at 3, 7-15, 18, 20; Salary Tests WHD Report (1969), at 19,
48.
---------------------------------------------------------------------------

The Department's proposed salary level is further supported by its
increased ability to distinguish overtime-eligible employees. The
primary objective of the salary level test has always been the drawing
of a line separating overtime-eligible white collar salaried employees
from employees who may be bona fide EAP employees. At the current
salary threshold, there are 11.6 million salaried white collar workers
who are overtime protected but are paid at or above the $455 salary
level and therefore must be subjected to a duties analysis to determine
their overtime eligibility. At the proposed salary level, the number of
overtime-eligible salaried white collar employees paid at or above the
salary level would be reduced by more than 50 percent. Thus a salary
level at the 40th percentile of weekly earnings for salaried workers
would be more efficient at distinguishing overtime-eligible employees.
v. Alternatives Considered
While the Department has largely followed historical precedent in
determining the proposed salary threshold by basing it on the level of
salaries that employers currently pay and making only modest changes to
our time-tested model, the Department did consider other approaches to
determine the appropriate salary test level.\32\ First, the Department
considered adjusting either the 2004 standard salary test level or the
1975 short test salary level for inflation using the CPI, similar to
the methodology used to set the salary levels in the 1975 interim
update. The Department noted in 1975 that ``[t]he rapid increase in the
cost of living since the salary tests were last adjusted justifies an
interim increase in those tests . . . [and] the widely accepted [CPI]
may be utilized as a guide for establishing these interim rates.'' 40
FR 7091. However, the Department noted at that time that the adoption
of interim rates, while necessary to expeditiously provide protection
for workers affected by a salary level rendered obsolete by rapid cost-
of-living changes, was not considered a precedent for future rulemaking
(and those same inflationary conditions do not exist today). Id. at
7092. In other years, however, the Department has looked at inflation
when increasing the salary level, but has never established the actual
numerical salary level based on inflation.
---------------------------------------------------------------------------

\32\ The alternatives the Department considered are discussed in
more detail in section VII.C.
---------------------------------------------------------------------------

The Department has thus recognized that measures of inflation and
losses in purchasing power provide helpful background for setting the
salary level because they indicate how far the levels erode between
updates and underscore the need for an update. They can also point very
generally to ranges in which new salary levels might be considered.
Indeed, with respect to the current rulemaking, looking at inflation
provides added support for the proposed salary level. Updating the 2004
standard salary level for inflation based on the Consumer Price Index
for all urban consumers (CPI-U) would result in a salary level of $561
per week (approximately the 15th percentile of weekly earnings for all
full-time salaried workers). Updating the 1975 short test salary level
with the CPI-U would result in a salary level of $1,083 per week
(approximately the 50th percentile of weekly earnings for all full-time
salaried workers). Considering that the standard test most closely
approximates the historic short duties test, looking at an inflation
adjustment would support a higher salary level than that being
proposed. However, inflation has been used as a method for setting the
precise salary level only in the breach, as in 1975 when practical
considerations prevented a more complete analysis of actual salaries.
The Department continues to believe that looking to the actual earnings
of workers provides the best evidence of the rise in prevailing salary
levels and, thus, constitutes the best source for setting the proposed
salary requirement. This viewpoint reflects guidance from previous
updates, including the Weiss Report, where the Department rejected
suggestions to base the salary level on the change in the cost of
living. Weiss Report at 12 (``The change in the cost of living which
was urged by several witnesses as a basis for determining the
appropriate levels is, in

[[Page 38534]]

my opinion, not a measure for the rise in prevailing minimum
salaries.'').
The Department also considered setting the salary level using the
2004 method (20th percentile of full-time salaried employees in the
South and retail) or Kantor method (10th percentile of likely exempt
employees in low-wage regions, employment size groups, city size, and
industries). While these methods produced similar salaries in 2004 when
the Department last revised the salary levels, over time they have
diverged significantly and today would result in salaries of $577 and
$657 per week, respectively (approximately the 15th and 20th
percentiles of weekly earnings for all full-time salaried workers).
Because the Kantor method was based on the long test duties
requirements (which limited the amount of nonexempt work that EAP
employees could perform), the Department concluded that the resulting
salary level was inappropriately low when paired with the standard
duties test (which was based on the short test). For similar reasons
the Department concluded that the 2004 method (which paired the lower
long test salary level with a standard duties test based on the short
duties test) also resulted in an inappropriately low salary level.
The Department further considered setting the standard salary level
equal to the median earnings for all full-time wage and salaried
workers combined (i.e., not just salaried, also workers paid by the
hour). This median provides a rough dividing line between the generally
lower-paid hourly workers who are overtime protected and the generally
higher-paid salaried workers who may be exempt. The national median
earnings for all full-time workers, both wage and salary, in all
occupations and industries, and across metropolitan and rural areas,
was $776 per week (approximately the 30th percentile of weekly earnings
for all full-time salaried workers). The Department concluded, however,
that it would not be appropriate to include the wages of hourly workers
in setting the EAP salary threshold and that the resulting salary level
was too low to work effectively with the standard duties test.
The Department also considered updating the Kantor long test salary
level of $657 to a short test level, reflecting the historical
relationship of the short test to the long test which has ranged from
approximately 130 percent to 180 percent of the long test level and
averaged approximately 150 percent. This would result in a salary level
between $854 and $1,183 per week, with the historical average yielding
a salary level of $979 per week. The end points of the historical range
are approximately the 35th and 55th percentiles of weekly earnings for
all full-time salaried workers, respectively. While the Department
thought that salaries throughout this historical salary range would
work appropriately with the standard duties test, we were concerned
that the top end of the resulting range would be too high for low-wage
regions and industries, particularly because employers no longer have a
long duties test to fall back on for purposes of exempting lower-
salaried workers performing bona fide EAP duties.
Finally, the Department considered setting the standard salary
equal to the 50th percentile, or median, of weekly earnings for all
full-time salaried workers. This method would be similar to the
proposed method but would use a higher percentile. Using the 50th
percentile would result in a standard salary level of $1,065 per week.
The Department believes that the salary level generated with this
method would be too high for low-wage regions and industries,
particularly in light of the absence of a lower salary long duties
test.
When measured against inflation or previous methods of setting the
salary levels (standard, short, and long), the proposed salary level is
within the range that was the historical norm until the 2004 update.
For instance, this level falls well below the 1975 inflation-adjusted
short test level ($1,083 per week) and is lower than the salary level
comparable to the average historical ratio between the short and long
test salary ($979 per week). But the proposed salary exceeds the
inflation-adjusted 2004 salary level and the levels suggested by the
Kantor and 2004 methods (all of which were based on the long test
salary). While, for the reasons stated herein, none of these
alternative measures was used as a methodology to establish the
proposed salary test level, they confirm that the 40th percentile of
weekly earnings of all full-time salaried employees ($921) proposed by
the Department is in line with previous updates.
vi. Summary of Proposed Change to Standard Salary Level
Therefore, for the reasons stated above, the Department proposes to
increase the standard salary level to qualify for exemption from the
FLSA minimum wage and overtime requirements as an executive,
administrative, or professional employee from $455 a week to the weekly
earnings of the 40th percentile of full-time salaried employees ($921 a
week). The Department reached the proposed salary level after
considering available data on actual salary levels currently being paid
in the economy. The Department believes that, in view of the regulatory
history and all other relevant considerations, using the earnings of
all full-time salaried workers (exempt and nonexempt) as the basis for
setting the proposed salary level is appropriate here, and setting the
salary level at the 40th percentile establishes an appropriate dividing
line helping differentiate between white collar workers who are
overtime-eligible and those who are not.
The Department invites comments on this proposed salary level and
on any alternative salary level amounts, or methodologies for
determining the salary level, that appropriately distinguish between
overtime-eligible white collar workers and bona fide EAP workers. In
addition, the Department invites comments on the effectiveness of the
proposed salary level to both limit the number of employees who pass
the EAP duties tests but become overtime eligible because of the
increased salary level, and reduce the number of employees who fail the
EAP duties test but are subject to a duties analysis and possible
misclassification by their employers.

B. Special Salary Tests

i. American Samoa
The Department has historically applied a special salary level test
to employees in American Samoa because minimum wage rates in that
jurisdiction have remained lower than the federal minimum wage. See 69
FR 22172. Prior to July 24, 2007, industry-specific minimum wage rates
for American Samoa were set by a special industry committee appointed
by the Department. See Sec. 5, Pub. L. 87-30, 75 Stat. 67 (May 5,
1961). The Fair Minimum Wage Act of 2007 replaced this methodology with
a system of incremental increases. See Sec. 8103, Pub. L. 110-28, 121
Stat. 188 (May 25, 2007). As amended, this law provides that the
American Samoa minimum wage for each industry will increase by $0.50 on
September 30, 2015, and continue to increase every three years
thereafter until each equals the federal minimum wage. See Sec. 4, Pub.
L. 112-149, 126 Stat. 1145 (July 26, 2012). The minimum wage in
American Samoa currently ranges from $4.18 to $5.59 an hour depending
on the industry,\33\ and

[[Page 38535]]

so the disparity with the federal minimum wage is expected to remain
for the foreseeable future. Accordingly, the Department proposes to
maintain a special salary level test for employees in American Samoa.
---------------------------------------------------------------------------

\33\ See WHD Minimum Wage Poster for American Samoa, available
at http://www.dol.gov/whd/minwage/americanSamoa/ASminwagePoster.pdf.
---------------------------------------------------------------------------

Consistent with our practice since 1975, in the 2004 Final Rule the
Department set the special salary level test for employees in American
Samoa at approximately 84 percent of the standard salary test level--
which computed to $380 per week. See 69 FR 22172. The Department
believes that our approach in the 2004 Final Rule remains appropriate
given the continued gap between American Samoa and federal minimum wage
rates. Accordingly, the Department proposes to set the American Samoa
special salary level test at $774, which equals approximately 84
percent of the proposed standard salary level of the 40th percentile of
weekly earnings for full-time salaried workers ($921). The Department
also proposes that when the minimum wage rate for any industry in
American Samoa equals the federal minimum wage, the standard salary
level will then apply in full for all EAP employees in all industries
in American Samoa.
The Department invites comments on this special salary level
proposal.
ii. Motion Picture Producing Industry
The Department currently permits employers to classify as exempt
employees in the motion picture producing industry who are paid at a
base rate of at least $695 per week (or a proportionate amount based on
the number of days worked), so long as they meet the duties tests for
the EAP exemptions. Sec. 541.709. This exception from the ``salary
basis'' requirement was created to address the ``peculiar employment
conditions existing in the [motion picture] industry'' (18 FR 2881 (May
19, 1953)), and applies, for example, when a motion picture industry
employee works less than a full workweek and is paid a daily base rate
that would yield at least $695 if six days were worked. Id. The
Department has provided this industry-specific exception to the salary
basis requirement since 1953. 18 FR 3930 (July 7, 1953).
In the 2004 Final Rule the Department increased the base rate for
motion picture industry employees by the same percentage that the
salary level tests, on average, increased.\34\ See 69 FR 22190.
Consistent with the 2004 Final Rule methodology, the Department
proposes to increase the required base rate proportionally to the
proposed increase in the standard salary level test. The Department is
proposing to increase the standard salary level by approximately 102
percent--from $455 to $921. Accordingly, in Sec. 541.709, the
Department proposes to increase the current base rate for employees in
the motion picture industry by approximately 102 percent--from $695 to
$1,404 per week (or a proportionate amount based on the number of days
worked).
---------------------------------------------------------------------------

\34\ Specifically, in the 2004 Final Rule the Department
increased the standard salary level test by approximately 170
percent for professional employees (from a long test salary level of
$170 to a standard test salary level of $455), and by roughly 190
percent for executive and administrative employees (from a long test
salary level of $155 to a standard test salary level of $455). The
Department averaged these two percentiles and increased the base
rate for motion picture industry employees by 180 percent--from $250
to $695. See 69 FR 22190.
---------------------------------------------------------------------------

The Department invites comments on this base rate proposal.

C. Inclusion of Nondiscretionary Bonuses in the Salary Level
Requirement

The Department has consistently assessed compliance with the salary
level test by looking only at actual salary or fee payments made to
employees and, with the exception of the highly compensated test, has
not included bonus payments of any kind in this calculation. During
stakeholder listening sessions several business representatives asked
the Department to include nondiscretionary bonuses and incentive
payments as a component of any revised salary level requirement. These
stakeholders conveyed that nondiscretionary bonuses and incentive
payments are an important component of employee compensation in many
industries and stated that such compensation might be curtailed if the
standard salary level was increased and employers had to shift
compensation from bonuses to salary to satisfy the new standard salary
level. They asserted that such a change would have a negative impact on
the workplace and would undermine managers' sense of ``ownership'' in
their organizations. A few employer stakeholders also raised the
possibility of counting fringe benefits and/or commissions toward the
salary level requirement.
The Department's longstanding position has been to allow employers
to pay additional compensation in the form of bonuses in addition to
the required salary. Sec. 541.604(a). However, in recognition of the
increased role bonuses play in many compensation systems, and as part
of the Department's efforts in this rulemaking to modernize these
regulations, the Department is now considering whether to also permit
nondiscretionary bonuses and incentive payments to count toward a
portion of the standard salary level test for the executive,
administrative, and professional exemptions.\35\ Such payments may
include, for example, nondiscretionary incentive bonuses tied to
productivity and profitability. Thus, the Department is considering
whether compensation such as a nondiscretionary bonus for meeting
specified performance metrics, in combination with a minimum weekly
salary amount, may be counted in satisfying the standard salary level
test.
---------------------------------------------------------------------------

\35\ The Department notes that overtime-eligible (i.e.,
nonexempt) employees may also receive such bonuses. Where
nondiscretionary bonuses or incentive payments are made to overtime-
eligible employees, the payments must be included in the regular
rate when calculating overtime pay. The Department's regulations at
Sec. Sec. 778.208-.210 explain how to include nondiscretionary
bonuses in the regular rate calculation. One way to calculate and
pay such bonuses is as a percentage of the employee's total
earnings. Under this method, the payment of the bonus includes the
simultaneous payment of overtime due on the bonus payment. See Sec.
778.210.
---------------------------------------------------------------------------

The Department is also considering how to include nondiscretionary
bonuses and incentive payments as part of the salary level test, if
such a change is implemented. Compliance with the HCE exemption's
$100,000 total compensation requirement is assessed annually, and
employers are permitted to make a ``catch-up'' payment at or shortly
after the end of the year that counts toward this amount. Employees for
whom the HCE exemption is claimed must receive the full standard salary
amount, currently $455, weekly on a salary or fee basis. See Sec.
541.601(b). The Department believes that a different approach would be
needed for the standard salary test. Because the only compensation
guaranteed to employees for whom the employer claims the standard EAP
exemption is the standard salary threshold amount, the Department
believes it is important to strictly limit the amount of the salary
requirement that could be satisfied through the payment of
nondiscretionary bonuses and incentive pay. The Department is
considering whether to permit such payments to satisfy 10 percent of
the standard weekly salary level. The Department recognizes that some
businesses pay significantly larger bonuses and where larger bonuses
are paid, the amount attributable toward the EAP standard salary
requirement would be capped at 10 percent of the salary level if such a
provision were adopted. The

[[Page 38536]]

Department also believes that the time period over which such
compensation should be considered must be limited. Permitting bonuses
to be paid as much as a year out would significantly undermine the
crucial protection provided by the salary basis requirement, which
ensures that exempt workers receive a minimum level of compensation on
a consistent basis. Accordingly, the Department envisions that in order
for employers to be permitted to credit such compensation toward the
weekly salary requirement employees would need to receive the bonus
payments monthly or more frequently. For similar reasons, the
Department is not considering permitting employers to make a yearly
catch-up payment like under the HCE exemption.
With these parameters in mind, the Department seeks comments on
whether it should modify the standard exemption for executive,
administrative, and professional employees to permit nondiscretionary
bonuses and incentive payments to count toward partial satisfaction of
the salary level test. The Department seeks information on what
industries commonly have pay arrangements that include nondiscretionary
bonuses and incentive payments, what types of employees typically earn
nondiscretionary bonuses and incentive payments, the types of
nondiscretionary compensation employees receive, and to what extent
including nondiscretionary bonuses and incentive payments as part of
the salary level would advance or hinder that test's ability to serve
as a dividing line between exempt and nonexempt employees. The
Department also seeks comments on whether payment on a monthly basis is
the appropriate interval for such nondiscretionary compensation that
will be credited toward the weekly salary requirement, and whether 10
percent is the appropriate limit on the amount of the salary
requirement that can be satisfied by nondiscretionary bonuses and
incentive payments (with the remaining 90 percent paid on a salary or
fee basis in accordance with the regulations).
Consistent with the rule for highly compensated employees (which
counts nondiscretionary bonuses toward the total annual compensation
requirement), the Department is not considering expanding the salary
level test calculation to include discretionary bonuses. The Department
is also not considering changing the exclusion of board, lodging, or
other facilities from the salary calculation, a position that it has
held consistently since the salary requirement was first adopted.
Similarly, the Department also declines to consider including in the
salary requirement payments for medical, disability, or life insurance,
or contributions to retirement plans or other fringe benefits. See
Sec. 541.601(b)(1). The Department is also concerned it would be
inappropriate to count commissions toward the salary level requirement,
as employees who earn commissions are usually sales employees who--with
the exception of outside sales employees--are generally unable to
satisfy the standard duties test (which is more stringent than the HCE
duties test) for the EAP exemptions. However, the Department seeks
comments on the appropriateness of including commissions as part of
nondiscretionary bonuses and other incentive payments that could
partially satisfy the standard salary level test.

D. Highly Compensated Employees

In the 2004 Final Rule, the Department created a new highly
compensated exemption for EAP employees. Section 541.601(a) provides
that such employees are exempt if they earn at least $100,000 in total
annual compensation and customarily and regularly perform any one or
more of the exempt duties or responsibilities of an executive,
administrative, or professional employee. Section 541.601(b)(1) states
that employees must receive at least $455 per week on a salary or fee
basis, while the remainder of the total annual compensation may include
commissions, nondiscretionary bonuses, and other nondiscretionary
compensation. It also clarifies that total annual compensation does not
include board, lodging, and other facilities, and does not include
payments for medical insurance, life insurance, retirement plans, or
other fringe benefits. Pursuant to Sec. 541.601(b)(2), an employer is
permitted to make a final payment (catch-up pay) during the final pay
period or within one month after the end of the 52-week period to bring
an employee's compensation up to the required level. If an employee
does not work for a full year, Sec. 541.601(b)(3) permits an employer
to pay a pro rata portion of the required annual compensation, based
upon the number of weeks of employment (and one final payment may be
made, as under paragraph (b)(2), within one month for employees who
leave employment during the year).
In the 2003 NPRM, where the HCE test was first introduced, the
Department had proposed to require total annual compensation of at
least $65,000. The Department stated that, ``[t]o 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.'' 68 FR 15571. However, in the 2004 Final Rule, the
Department recognized that the required compensation level had to ``be
set high enough to avoid the unintended exemption of large numbers of
employees--such as secretaries in New York City or Los Angeles--who
clearly are outside the scope of the exemptions and are entitled to the
FLSA's minimum wage and overtime pay provisions.'' 69 FR 22174.
Therefore, the Department increased the required annual compensation to
$100,000, to ``address commenters' concerns regarding the associated
duties test, the possibility that workers in high-wage regions and
industries could inappropriately lose overtime protection, and the
effect of future inflation.'' Id. at 22175.
The Department set the level at $100,000 because our experience
demonstrated that

virtually every salaried ``white collar'' employee with a total
annual compensation of $100,000 per year would satisfy any duties
test. Employees earning $100,000 or more per year are at the very
top of today's economic ladder, and setting the highly compensated
test at this salary level provides the Department with the
confidence that, in the words of the Weiss report: ``in the rare
instances when these employees do not meet all other requirements of
the regulations, a determination that such employees are exempt
would not defeat the objectives of section 13(a)(1) of the Act.''

Id. at 22174 (quoting Weiss Report at 22-23). The Department further
noted that ``[o]nly roughly 10 percent of likely exempt employees who
are subject to the salary tests earn $100,000 or more per year,'' which
the Department noted was ``broadly symmetrical with the Kantor approach
of setting the minimum salary level for exemption at the lowest 10
percent of likely exempt employees. In contrast, approximately 35
percent of likely exempt employees subject to the salary tests exceed
the proposed $65,000 salary threshold.'' Id.
The Department continues to believe that an HCE test for exemption
is an appropriate means of testing whether highly compensated employees
qualify as bona fide executive, administrative, or professional
employees. In the 2004 Final Rule, the Department concluded that the
requirement for $100,000 in total annual compensation struck the

[[Page 38537]]

right balance by matching a much higher compensation level than was
required for the standard salary level test with a duties test that was
more flexible than the standard duties test, thereby creating a bright-
line test that allowed only appropriate workers to qualify for
exemption. See 69 FR 22174. This total annual compensation requirement
was set more than four times higher than the standard salary
requirement of $455 per week, which totals $23,660 per year. Id. at
22175. Such a balancing of a substantially higher compensation
requirement with a minimal duties test still is appropriate, so long as
the required annual compensation threshold is sufficiently high to
ensure that it covers only employees who ``have almost invariably been
found to meet all the other requirements of the regulations for
exemption.'' Id. at 22174.
Therefore, the Department proposes to increase the total annual
compensation required by Sec. 541.601 in order to ensure that it
remains a meaningful and appropriate standard when matched with the
minimal duties test. Just as with the standard salary level test, it is
imperative to increase the compensation level that was established more
than ten years ago to ensure that it continues to allow for the
exemption of only bona fide exempt employees. Over the past decade, the
percentage of salaried employees who earn more than $100,000 annually
has increased substantially to approximately 17 percent of full-time
salaried workers. Accordingly, the Department proposes to increase the
total annual compensation requirement to the annualized weekly earnings
of the 90th percentile of all full-time salaried workers ($122,148). As
discussed earlier with respect to the standard salary level, the
Department is proposing to set the annual compensation requirement as
the annualized value of a percentile of weekly earnings of full-time
salaried workers rather than a specific dollar amount because we
believe it serves as a better proxy for distinguishing those white
collar workers who meet the requirements of the HCE exemption.
Consistent with the current regulations, the Department also proposes
that at least the standard salary requirement must be paid on a salary
or fee basis.\36\ The Department is not proposing any changes to the
HCE duties test created in 2004.
---------------------------------------------------------------------------

\36\ Should the Department implement in the final rule resulting
from this proposed rule a provision allowing employers to take a
credit against the standard salary level for nondiscretionary
bonuses paid to the employee, that credit would not be applicable in
determining compliance with the standard salary requirement for HCE
workers.
---------------------------------------------------------------------------

The Department believes that the 90th percentile of full-time
salaried workers is appropriate because it brings the required
compensation level more in line with the level established in 2004;
therefore, it will ensure that, as in 2004, the HCE exemption covers
only those employees who are at the very top of today's economic ladder
and minimizes ``the possibility that workers in high-wage regions and
industries could inappropriately lose overtime protection.'' 69 FR
22175. The proposed $122,148 requirement also generally corresponds to
the increase that would result from updating the $100,000 level by the
amount of the increase in the CPI-U between 2004 and 2013 (the CPI-U
increase would result in a compensation level of approximately
$123,000). The Department invites comments on whether the 90th
percentile is the correct HCE total annual compensation level and
whether the Department should make any other changes to the
requirements for the use of the HCE exemption.

E. Automatically Updating the Salary Levels

As previously discussed, the salary level test plays a crucial role
in ensuring that the EAP exemptions effectively differentiate between
exempt and overtime-protected workers. But even a well-calibrated
salary level that is fixed becomes obsolete as wages for nonexempt
workers increase over time. Since the EAP regulations were first issued
in 1938, the Department has increased the salary level only seven
times--in 1940, 1949, 1958, 1963, 1970, 1975, and 2004. The lapses
between rulemakings have resulted in salary levels that are based on
outdated salary data and thus ill-equipped to help employers assess
which employees are unlikely to meet the duties tests for the
exemptions. During stakeholder listening sessions several employee
advocates called on the Department to index the EAP salary level
requirement to ensure that the revised salary test set in this
rulemaking does not suffer the same fate as the salary tests in the
Department's prior rulemakings.
After careful consideration of the history of EAP salary increases
and the impact on the regulated community of routine updating of the
salary test, the Department is proposing to modernize the EAP
exemptions by establishing a mechanism for automatically updating the
standard salary test, as well as the total annual compensation
requirement for highly compensated employees. The addition of automatic
updating will ensure that the salary test level is based on the best
available data (and thus remains a meaningful, bright-line test),
produce more predictable and incremental changes in the salary required
for the EAP exemptions, and therefore provide certainty to employers,
and promote government efficiency by removing the need to continually
revisit this issue through resource-intensive notice and comment
rulemaking. The Department also proposes to update annually the special
salary level test for employees in American Samoa and the base rate
test for motion picture industry employees, as described infra.
The Department is considering two alternative methodologies for
annually updating the salary and compensation thresholds. One method
would update the thresholds based on a fixed percentile of earnings for
full-time salaried workers. The other method would update the
thresholds based on changes in the CPI-U. Both methods are described in
detail below and the Department seeks comments on which methodology
would be the most appropriate basis for annual updates to the salary
and compensation thresholds.
i. History of Automatically Updating the Salary Levels
The Department has only directly commented twice on the subject of
automatically updating the salary level test for the EAP exemptions. In
the 1970 rulemaking, the Department stated that a comment ``propos[ing]
to institute a provision calling for an annual review and adjustment of
the salary tests . . . appears to have some merit, particularly since
past practice has indicated that approximately 7 years elapse between
amendment of the salary level requirements.'' 35 FR 884. Despite
recognizing the potential value of this approach, the Department
ultimately determined that ``such a proposal will require further
study.'' Id. In the 2004 Final Rule the Department declined to adopt
commenter requests for automatic increases to the salary level,
reasoning in part that ``the salary levels should be adjusted when wage
survey data and other policy concerns support such a change'' and that
``the Department finds nothing in the legislative or regulatory history
that would support indexing or automatic increases.'' 69 FR 22171.
Although the Department acknowledged the lack of historical guidance
related to the automatic updating of salary levels, in the 2004 Final
Rule we did not discuss the Department's authority to promulgate such
an approach through notice and comment rulemaking. Rather than explore
in greater depth whether

[[Page 38538]]

automatic updates to the salary levels posed a viable solution to
problems created by lapses between rulemakings, the Department
expressed our intent ``in the future to update the salary levels on a
more regular basis, as it did prior to 1975.'' Id. As discussed below,
difficulties in achieving this goal have led the Department to examine
the possibility of automatically updating salary levels in greater
detail.
The lack of Congressional guidance either supporting or prohibiting
automatic updating is unsurprising given the origin and evolution of
the salary level test, and does not foreclose the Department's
proposal. Congress did not specifically set forth precise criteria,
such as a salary level test, for defining the EAP exemptions, but
instead delegated that task to the Secretary. The Department
established the first salary level tests by regulation in 1938, using
our delegated authority to define and delimit the EAP exemptions. See
29 U.S.C. 213(a)(1). The fact that the salary level tests were created
by regulation after the FLSA was enacted helps explain why the FLSA's
early legislative history does not address the salary level tests or
methods for updating the salary level. Despite numerous amendments to
the FLSA over the past 75 years, Congress has continued to entrust the
Department with promulgating, updating, and enforcing the salary test
regulations. Significant regulatory changes since 1938 include adding a
separate salary level for professional employees in 1940, adopting
separate short and long test salary levels in 1949, and creating a
single standard salary level test and a new HCE exemption in 2004.
These changes were all made without express Congressional guidance, and
none have been superseded by statute. Other than directing the
Department in 1990 to include in the section 13(a)(1) exemption
regulations certain computer employees paid at least six-and-a-half
times the minimum wage on an hourly basis, see Sec. 2, Pub. L. 101-583,
104 Stat. 2871 (Nov. 15, 1990), Congress has never amended the FLSA in
a manner that affects the salary level tests. It has also never enacted
limits on the Department's ability to update the salary levels. Just as
the Department has authority under 29 U.S.C. 213(a)(1) to establish and
update the salary level tests, it likewise has authority to adopt a
methodology through notice and comment rulemaking for automatically
updating the salary levels to ensure that the tests remain effective.
This interpretation is consistent with the well-settled principle that
agencies have authority to `` `fill any gap left, implicitly or
explicitly, by Congress.' '' Long Island Care at Home, Ltd. v. Coke,
551 U.S. 158, 165 (2007) (quoting Chevron, U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 843 (1984)).
ii. Rationale for Automatically Updating Salary Levels
The addition of an automatic updating mechanism will ensure that
the standard salary level and the HCE total annual compensation
requirement remain meaningful tests for distinguishing between bona
fide EAP workers who are not entitled to overtime and overtime-
protected white collar workers. Experience has shown that the salary
level test is only a strong measure of exempt status if it is up to
date. Left unchanged, the test becomes substantially less effective as
wages for overtime-protected workers increase over time. See Weiss
Report at 8 (``The increase in wage rates and salary levels gradually
weakened the effectiveness of the present salary tests as a dividing
line between exempt and nonexempt employees.''); see also 69 FR 22164
(explaining that 1975 salary levels had grown outdated and were ``no
longer useful in distinguishing between exempt and nonexempt
employees''). For example, in 2005 18.6 million workers subject to the
FLSA were potentially covered by the EAP exemptions and in 2013 that
number had grown to 21.4 million--an increase of 15 percent--while the
number of workers subject to the FLSA grew only 5.8 percent during that
period. See Figure A. Automatically updating the salary level using the
most recent data ensures that the salary level test continues to
accurately reflect current salary conditions. This specific proposal
also helps fulfill the President's instruction to modernize the part
541 regulations. 79 FR 18737.

[[Page 38539]]

Figure A: Employees Subject to EAP Salary Level Requirement
[GRAPHIC] [TIFF OMITTED] TP06JY15.005

Automatically updating the salary level will ensure that it
continues to be a reliable proxy for identifying overtime-eligible
white collar employees, thus reducing one source of uncertainty for
employers and employees. Regular updates to the salary level will also
prevent the more drastic and unpredictable salary level increases that
have resulted from the differing time periods between rulemakings. For
example, between 1940 and 2004 the time between salary level updates
ranged from five to 29 years. In part as a result of these breaks, long
test salary level increases between 1940 and 1975 ranged from roughly
five to 50 percent, and the 2004 standard salary level test represented
an average 180 percent increase from the 1975 long test salary levels.
Automatically updating the standard salary level test will ensure that
future salary level increases occur at regular intervals and at more
even increments.
The Department recognizes that instituting a mechanism for
automatically updating the salary level is a change to the part 541
regulations. As explained in the 2004 Final Rule, the Department's
reluctance to institute automatic updating was tied in part to our
preference for issuing new salary level regulations when new wage
survey data necessitated such action. 69 FR 22171. However, a review of
salary test history shows that the Department has updated the salary
level only once since 1975, and has gone nine or more years between
updates on several occasions. This history underscores the difficulty
in maintaining an up-to-date and effective salary level test, despite
the Department's best intentions. Competing regulatory priorities,
overall agency workload, and the time-intensive nature of notice and
comment rulemaking have all contributed to the Department's difficulty
in updating the salary level test as frequently as necessary to reflect
changes in workers' salaries. These impediments are exacerbated because
unlike most regulations, which can remain both unchanged and forceful
for many years if not decades, in order for the salary level test to be
effective, frequent updates are imperative to keep pace with changing
employee salary levels. Confronted with this regulatory landscape, the
Department believes automatic updating is the most viable and efficient
way to ensure that the standard salary level test and the HCE total
annual compensation requirement remain current and can serve their
intended function of helping differentiate between white collar workers
who are overtime-eligible and those who are not.
iii. Proposal for Automatic Updating of the Standard Salary Level Test
The Department proposes to insert a new provision in the
regulations in the Final Rule that will establish a set methodology for
recalculating the required salary level annually. The Department is not
proposing specific regulatory text because it has not chosen the
updating methodology and is instead seeking comments on two
alternatives--using a fixed percentile of wage earnings or using the
CPI-U. In the 1970 rulemaking, the Department recognized the potential
merit of automatically updating the salary level test, but determined
that such action would ``require further study.'' 35 FR 884. The
Department has now examined a range of possible updating methodologies
and concluded, for the reasons stated herein, that either maintaining
the standard salary level at the 40th percentile of weekly wages of all
full-time salaried workers or

[[Page 38540]]

updating the standard salary threshold based on changes in the CPI-U
would maintain the effectiveness of the salary level in distinguishing
overtime-eligible white collar salaried employees from those who may be
exempt. Regardless of the updating method used, the Department proposes
to publish the revised salary and compensation levels annually using
the most recent data as determined and published by BLS. The Department
will publish a notice with the new salary level in the Federal
Register, as well as on the WHD Web site, at least sixty days before
the updated rates would become effective. Should the Department choose
to make any changes to the updating methodology in the future, such
changes would require notice and comment rulemaking.
1. Fixed Percentile Approach to Automatically Updating the Standard
Salary Level
The ``fixed percentile'' approach would permit the Department to
reset the salary level test by applying the same methodology proposed
in this rulemaking to update the standard salary level. As explained at
length in section V.A. of this preamble, the proposed salary level test
methodology closely tracks prior rulemakings, with a few adjustments
drawn from the Department's long history of administering the part 541
regulations. The chosen population--all full-time salaried workers--
represents the broadest pool of workers who could potentially be denied
overtime pay as bona fide EAP workers. The BLS data for this pool is
readily available and transparent (all full-time salaried workers in
the CPS data set are included), and at the 40th percentile level is
representative of those employees who may be bona fide executive,
administrative or professional workers. The Department has proposed
raising the salary percentile to the 40th percentile in part to reflect
our conclusion that the 20th percentile figure used in the 2004 Final
Rule did not fully account for the elimination of the more stringent
long duties test; by updating the long--rather than the short--test
salary level, and effectively pairing it with the less rigorous short
duties test, we inadvertently made the exemptions over-inclusive and
increased the risk of misclassification. The proposed salary level
percentile reflects the Department's best estimate of the appropriate
line of demarcation between exempt and nonexempt workers, and
maintaining the salary level at the 40th percentile by updating it
annually would ensure that the salary level test continues to fulfill
its intended purpose. Further, because annual salary level updates
would be based on actual salaries that employers are currently paying,
it is consistent with the methodology the Department has used in prior
rulemakings when setting the required salary level.
Other factors make the fixed percentile approach well-suited for
automatic updating. For example, on a quarterly basis, BLS publishes a
table of deciles of the weekly wages of full-time salaried workers,
calculated using CPS data,\37\ which would provide employers with
information on changes in salary levels prior to the annual updates.
While employers may be more familiar with the CPI-U, the quarterly
publishing of weekly earnings deciles would provide employers with
information on changes in wages and allow them to plan for changes in
the salary threshold. The Department would be able to update the salary
level test annually using this published BLS table, without modifying
the data in any way or otherwise engaging in complex data analysis.
This transparent process would further the President's instruction to
simplify and modernize the part 541 regulations. It would also ensure
that salary level updates occur in a manner established in the
regulations and, thus, do not require additional, time-consuming notice
and comment rulemaking. Additionally, maintaining the standard salary
level test at the 40th percentile would ensure that increases in
overtime-protected employee salaries do not render the salary level
threshold obsolete; such increases have lessened the effectiveness of
the salary level test in the past when they were not promptly
recognized. For all of these reasons, the Department believes that
automatically updating the standard salary level test annually by
maintaining the salary level at the 40th percentile of weekly earnings
for all full-time salaried workers would ensure the standard salary
level remains a meaningful test for distinguishing between overtime-
protected and potentially exempt white collar employees.
---------------------------------------------------------------------------

\37\ http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
---------------------------------------------------------------------------

2. Automatically Updating the Standard Salary Level Using the CPI-U
The Department could also automatically update the salary level
test based on changes to the CPI-U--a commonly used economic indicator
for measuring inflation. The CPI-U calculates inflation by measuring
the average change over time in the prices paid by urban consumers for
a set basket of consumer goods and services.\38\ The CPI-U is the
``broadest and most comprehensive'' of the many CPI statistics
calculated by BLS, and is published monthly.\39\
---------------------------------------------------------------------------

\38\ http://stats.bls.gov/cpi/cpifaq.htm.
\39\ Id.
---------------------------------------------------------------------------

The Department has generally discussed inflation adjustments in the
context of determining how to raise the salary level from a prior
rulemaking, not as a method for ensuring the salary level's ongoing
effectiveness. The Department has expressed concern in prior part 541
rulemakings with setting a new salary level test by using inflationary
indicators to update the prior salary level. These sentiments were
first raised in 1949 in the Weiss Report, which considered and rejected
proposals to use cost-of-living increases to update the 1940 salary
levels. Weiss Report at 12. More recently, in the 2003 NPRM the
Department considered whether to calculate the new salary level by
adjusting the 1975 salary levels for inflation, and expressed concern
that the 1975 figure was a potentially inaccurate benchmark and that an
inflation-based adjustment would not account for changes in working
conditions over the preceding 28 years. See 68 FR 15570. We also noted
in the 2003 NPRM that setting the salary level based on inflation was
inconsistent with the Department's past practice of looking at actual
salaries and incomes, not inflation-adjusted amounts, id., and we
expressed concern in the 2004 Final Rule that this approach ``could
have an inflationary impact or cause job losses.'' 69 FR 22168.
Although the Department acknowledges these prior concerns regarding
whether the CPI-U will accurately track the actual salaries and
incomes, we believe that using the CPI-U to update the proposed salary
level, which will be set using current data on wages being paid to
full-time salaried workers, would ensure that the salary level remains
a useful tool for distinguishing between overtime-eligible white collar
employees and those who may be exempt. Many of the concerns raised in
prior rulemakings are less troublesome here because the Department is
only proposing to use the CPI-U to automatically update the proposed
salary level going forward; it is not being used to update the salary
from its 2004 level. The related concerns about using an outdated
salary level as a baseline for inflation-based adjustments, and the
inability of inflation-based indicators to account for changes in
working conditions, are not cause for concern in the context of

[[Page 38541]]

automatically updating a newly set salary level going forward. The
proposed salary level provides the most appropriate baseline to
subsequently update using the CPI-U, and year-to-year changes in
working conditions should be negligible (especially compared to the
changes between 1975 and 2004). While the Department considers it
unlikely that cumulative changes in job duties, compensation practices,
and other relevant working conditions would undermine application of
the CPI-U over an extended period of time, should such changes occur
the Department could adjust the salary level test through notice and
comment rulemaking.
The Department expressed concern in the 2003 NPRM about the effect
that adjusting the 1975 salary levels for inflation ``would have on
certain segments of industry and geographic areas of the county,
particularly in the retail industry and in the South, which tend to pay
lower salaries.'' 68 FR 15570. In the 2004 Final Rule the Department
explained that these concerns applied ``equally when considering
automatic increases to the salary levels'' and declined to adopt
commenter requests to institute a mechanism for automatically updating
the salary level. 69 FR 22171-72.
The Department continues to believe that any automatic updating
mechanism must adequately protect low-wage industries and geographic
areas. However, two related factors have led the Department to conclude
that updating the salary level using the CPI-U would not harm
vulnerable business sectors or have other negative economic effects.
First, the Department's proposal to set the salary level test at the
40th percentile of the salaries of all full-time salaried workers
already accounts for and protects low-wage industries and geographic
areas. In choosing to set the salary level as a percentile of full-time
salaried workers, the Department set the salary level at the 40th
percentile rather than a higher percentile to account for low-wage
regions and industries. Second, the Department has analyzed the
historical relationship between the 40th percentile benchmark and the
CPI-U, and determined that the data does not substantiate the
Department's past concerns about the likely effects on low-wage regions
and industries of updating the salary level test using an inflation-
based updating mechanism.
As discussed in section VII.E., the CPI-U has largely tracked the
earnings rates of the 40th percentile of weekly wages of full-time
salaried workers. The two updating methodologies are thus expected to
produce roughly equivalent salary growth in the future; or, put another
way, past evidence suggests that updating the salary level using the
CPI-U would result in a comparable salary level to updating using the
fixed percentile approach. Since the 40th percentile figure adequately
protects low-wage industries and areas, it follows that CPI-U based
updating would do likewise, while also maintaining the appropriate line
of demarcation between white collar workers who are overtime-eligible
and those who are not. This congruence also supports the conclusion
that updating the salary level using the CPI-U, as opposed to actual
salary and income data, would not produce an appreciably different
result.
Automatically updating the salary level test using the CPI-U would
provide a familiar and well understood method for updating the salary
level and ensure that the real value of the salary level does not
degrade over time. The CPI-U is commonly applied as an automatic
updating mechanism. For example, the Internal Revenue Service uses the
CPI-U to adjust personal tax brackets, 26 U.S.C. 1(f)(3)-(5), and
multiple federal agencies use the CPI-U to determine eligibility for a
wide range of government programs.\40\ And although it was not intended
to serve as a precedent for future rulemakings, in 1975 the Department
set salary levels using the consumer price index. 40 FR 7092. Most
importantly, given the comparable growth rates of the 40th percentile
benchmark and the CPI-U between 1998 and 2013, the Department believes
that updating the salary levels using the CPI-U would maintain the
effectiveness of the standard salary level test.
---------------------------------------------------------------------------

\40\ See http://fas.org/sgp/crs/misc/R42000.pdf.
---------------------------------------------------------------------------

The Department seeks comments on both methods to update the
standard salary level test--the fixed percentile approach and the CPI-
U--including comments on whether one approach is better suited to
maintaining the effectiveness of the salary level test. Additionally,
the Department seeks comments on whether to schedule updates based on
the effective date of the Final Rule, on January 1, or some other
specified date. The Department also seeks comments on how often
automatic updates to the salary level test should occur. In order to
ensure that the salary level tests are based on the best available
data, the Department proposes to update the salary level annually,
which will produce predictable and incremental changes. However, we
seek comments identifying whether a different updating period would be
more appropriate.
v. Automatic Updates to the Special Salary Test for American Samoa
As discussed in subpart V.B., the Department has historically set a
special salary test for employees in American Samoa because minimum
wage rates there are lower than the federal minimum wage. This gap is
likely to remain for the foreseeable future since American Samoa's
industry-specific minimum wage rates are scheduled to increase only
every three years (Sec. 4, Pub. L. 112-149), and as a result the
industry with the highest minimum wage will not equal the current
federal minimum wage ($7.25 an hour) until September 30, 2027.
Consistent with the 2004 Final Rule, the Department is proposing to
set the special salary level for employees in American Samoa at 84
percent of the proposed standard salary level ($774 per week). In
future years, the Department proposes to automatically update the
special salary level test in American Samoa with the same frequency as
the standard salary level and to maintain the 84 percent ratio. The
Department will publish the updated American Samoa special salary level
and standard salary level simultaneously. Once any industry-specific
minimum wage rate in American Samoa equals the federal minimum wage,
the special salary level will no longer be operative and the standard
salary level test will apply in full to all EAP employees in all
industries in American Samoa. The Department seeks comments on this
proposal.
vi. Automatic Updates to the Base Rate for Motion Picture Industry
Employees
As discussed in subpart V.B., the Department is proposing to
increase the base rate for the motion picture industry exception from
the salary basis requirement with the same frequency and by the same
percentage as the proposed increase to the standard salary level test.
This updating method will ensure that the base rate remains a
meaningful test for helping determine exempt status for motion picture
industry employees who work partial workweeks and are paid a daily
rate, rather than a weekly salary. The Department will publish the
updated base rate and the standard salary test level simultaneously.
The Department seeks comments on this proposal.

[[Page 38542]]

vii. Proposal for Automatically Updating the Total Annual Compensation
Requirement for Highly Compensated Employees
The Department is also proposing to automatically update the total
annual compensation requirement for highly compensated employees. This
change is needed to ensure that only those who are ``at the very top of
[the] economic ladder'' satisfy the total annual compensation
requirement and are thus subject to a minimal duties test analysis. 69
FR 22174. Leaving the total annual compensation requirement at a fixed
dollar amount would risk exempting increasingly large numbers of
employees, thus diluting the effectiveness of the HCE total annual
compensation test and allowing exemption of increasing numbers of
employees who do not meet the standard duties test. Id. Only by
automatically updating the requirement so that it does not become
obsolete can the Department ensure that the workers who satisfy the HCE
compensation test continue to ``almost invariably . . . meet all the
other requirements'' for exemption. Id.
The Department proposes to update the HCE total annual compensation
requirement with the same method and frequency used to update the
standard salary level test--either by maintaining the required total
annual compensation level at the annualized value of the 90th
percentile of the weekly wages of all full-time salaried workers or by
updating the total annual compensation requirement based on changes in
the CPI-U. As discussed with regard to the standard salary level,
either method for updating the required compensation would preserve
what the Department has identified as the appropriate dividing line for
the use of the minimal duties test. The Department also proposes to
update the portion of the total annual compensation that employers are
required to pay on a salary basis (proposed to be $921 per week) so
that it continues to mirror the standard salary requirement as it is
updated. The Department seeks comments on both methods of updating the
HCE total annual compensation requirement, including comments on
whether one method is better suited to maintaining the effectiveness of
the compensation test.

F. Duties Requirements for Exemption

While the Department has long viewed the salary level test as an
initial bright-line test for white collar overtime eligibility, we have
always recognized the salary level test works in tandem with the duties
test. As previously explained, the part 541 regulations set forth three
criteria that, in most instances, must be met for an employee to be
excluded from the Act's minimum wage and overtime pay protections.
Employees must (1) be paid on a salary basis, (2) be paid at least a
fixed minimum salary per week, and (3) meet certain requirements as to
their job duties.\41\ From the outset, examination of the duties
performed by the employee was an integral part of the determination of
exempt status, and employers must establish that the employee's
``primary duty'' is the performance of exempt work in order for the
exemption to apply. Each of the categories included in section 13(a)(1)
has separate duties requirements. From 1949 until 2004 the regulations
contained two different duties tests for executive, administrative, and
professional employees depending on the salary level paid--a long
duties test for employees paid a lower salary, and a short duties test
for employees paid at a higher salary level. The long duties test
included a 20 percent limit on the time spent on nonexempt tasks (40
percent for employees in the retail or service industries). In the 2004
Final Rule, the Department replaced the differing short and long duties
tests with a single standard test for executive, administrative, and
professional employees that did not include a cap on the amount of
nonexempt work that could be performed.
---------------------------------------------------------------------------

\41\ The exemptions for outside sales employees, doctors,
lawyers, teachers, and computer employees are distinct from the
other exemptions with respect to their salary requirements.
---------------------------------------------------------------------------

The duties test has always worked in conjunction with the salary
requirement to correctly identify exempt EAP employees. The Department
has often noted that as salary levels rise a less robust examination of
the duties is needed. This inverse correlation between the salary level
and the need for an extensive duties analysis was the basis of the
historical short and long duties tests. While the salary provides an
initial bright-line test for EAP exemption, application of a duties
test is imperative to ensure that overtime-eligible employees are not
swept into the exemption. While the contours of the duties tests have
evolved over time, the Department has steadfastly maintained that
meeting a duties test remains a core requirement for the
exemptions.\42\
---------------------------------------------------------------------------

\42\ Over the years since the original EAP regulations were
first implemented, commenters have repeatedly suggested that salary
should be the sole basis for the exemption. For example, at a 1949
hearing, ``some of the management witnesses were sufficiently
convinced of the desirability of salary tests to propose the
adoption of a salary level as the sole basis of exemption.'' Weiss
Report at 9. The Department declined to use salary as the sole basis
for exemption, stating that the ``Administrator would undoubtedly be
exceeding his authority if he included within the definition of
these terms craftsmen, such as mechanics, carpenters, or linotype
operators, no matter how highly paid they might be.'' Weiss Report
at 23. As recently as the 2004 Final Rule, the Department has
maintained the view ``that the Secretary does not have authority
under the FLSA to adopt a `salary only' test for exemption'' and
rejected suggestions from employer groups to do so. 69 FR 22173.
---------------------------------------------------------------------------

During the stakeholder listening sessions held in advance of this
proposed rule, the Department heard from employer stakeholders,
particularly in the retail and restaurant industries, who advocated for
the need to maintain flexibility in the duties tests. These
stakeholders stated that the ability of a store or restaurant manager
or assistant manager to ``pitch in'' and help line employees when
needed was a key part of their organizations' management culture and
necessary to enhancing the customer experience. They emphasized that
the employees in these entry-level management positions are critically
important to their organizations and that the experience they gain in
these positions will lead to higher level management opportunities.
Employer stakeholders universally urged the Department not to consider
any changes to the current duties tests, explaining that while the
duties tests are sometimes difficult to apply and may not be perfect,
employers have an understanding of the meaning and application of the
current duties tests and any changes might engender costly litigation
as parties try to adapt to and interpret the new rules.
Employee stakeholders, on the other hand, stated that the current
duties tests, particularly the 50 percent primary duty rule of thumb
(Sec. 541.700(c)) and the concurrent duties doctrine for executives
(Sec. 541.106), are insufficiently protective of employees. In
particular, they expressed concern with cases in which the exemption
has been applied to employees who have spent large amounts of time
(sometimes more than 90 percent) performing nonexempt work. They
asserted that some businesses, particularly in the retail industry,
have built into their business model having exempt store managers
perform significant amounts of nonexempt work in order to keep labor
costs down. These employee stakeholders argued that where employees are
essentially required to perform significant amounts of nonexempt work,
the employees do not, in fact, have a primary duty of management in any
meaningful sense.

[[Page 38543]]

In response to this concern, a few employer stakeholders argued that
the concurrent duties regulation already addresses this issue by
distinguishing between exempt executive employees who choose when to
perform nonexempt duties and nonexempt employees who must perform
duties as they are assigned. Sec. 541.106(a).
The Department appreciates the views shared by employer and
employee stakeholders on this important issue. The Department
understands the importance of managers ``pitching in'' and leading by
example. At the same time, the Department is concerned that employees
in lower-level management positions may be classified as exempt and
thus ineligible for overtime pay even though they are spending a
significant amount of their work time performing nonexempt work. The
Department believes that, at some point, a disproportionate amount of
time spent on nonexempt duties may call into question whether an
employee is, in fact, a bona fide EAP employee. The Department is
concerned that the removal of the more protective long duties test in
2004 has exacerbated these concerns and led to the inappropriate
classification as EAP exempt of employees who pass the standard duties
test but would have failed the long duties test. The issue sometimes
arises when a manager is performing exempt duties less than 50 percent
of the time, but it is argued that those duties are sufficiently
important to nonetheless be considered the employee's primary duty. The
issue also arises when a manager who is performing nonexempt duties
much of the time is deemed to perform exempt duties concurrently with
those nonexempt duties, and it is argued the employee is exempt on that
basis. While the regulations provide that exempt executives can perform
exempt duties concurrently with nonexempt duties, Sec. 541.106, this
rule can be difficult to apply and can lead to varying results. Compare
In re Family Dollar FLSA Litigation, 637 F.3d 508 (4th Cir. 2011)
(manager of retail chain store considered an executive exempt from
overtime pay requirements under the FLSA whether collecting cash,
sweeping the floor, stocking shelves, working with employee schedules,
or running a cash register); with Morgan v. Family Dollar Stores, Inc.,
551 F.3d 1233 (11th Cir. 2008) (store managers not exempt executives
where they spent most of their time performing manual, not managerial,
tasks). California has addressed this issue by requiring that exempt
EAP employees spend at least 50 percent of their time performing their
primary duty, and not counting time during which nonexempt work is
performed concurrently. Cal. Lab. Code Sec. 515(a), (e); see Heyen v.
Safeway Inc., 157 Cal. Rptr. 3d 280, 302 (Cal. Ct. App. 2013).
Taking into account the views of stakeholders, the Department is
seeking to determine whether, in light of our salary level proposal,
changes to the duties tests are also warranted. The duties test must
adequately protect overtime-eligible white collar employees who exceed
the salary threshold from misclassification as exempt EAP employees.
The Department is proposing to set the salary threshold at the 40th
percentile of weekly earnings of full-time salaried employees. As
previously discussed, because the standard duties test is based on the
short duties test--which was intended to work with a higher salary
level--and the proposed salary level is below the historic average for
the short test salary, a salary level significantly below the 40th
percentile would necessitate a more robust duties test to ensure proper
application of the exemption. The Department believes that the salary
level increase proposed in this NPRM, coupled with automatic updates to
maintain the effectiveness of the salary level test, will address most
of the concerns relating to the application of the EAP exemption. A
regularly updated salary level will assist in screening out employees
who spend significant amounts of time on nonexempt duties and for whom
exempt work is not their primary duty. However, the Department invites
comments on whether adjustments to the duties tests are necessary,
particularly in light of the proposed change in the salary level test.
The Department recognizes that duties remain a critical metric of
exempt status and invites comment on the effectiveness of the duties
tests found in the current regulations.
While the Department is not proposing specific regulatory changes
at this time, the Department is seeking additional information on the
duties tests for consideration in the Final Rule. Specifically, the
Department seeks comments on the following issues:
A. What, if any, changes should be made to the duties tests?
B. Should employees be required to spend a minimum amount of time
performing work that is their primary duty in order to qualify for
exemption? If so, what should that minimum amount be?
C. Should the Department look to the State of California's law
(requiring that 50 percent of an employee's time be spent exclusively
on work that is the employee's primary duty) as a model? Is some other
threshold that is less than 50 percent of an employee's time worked a
better indicator of the realities of the workplace today?
D. Does the single standard duties test for each exemption category
appropriately distinguish between exempt and nonexempt employees?
Should the Department reconsider our decision to eliminate the long/
short duties tests structure?
E. Is the concurrent duties regulation for executive employees
(allowing the performance of both exempt and nonexempt duties
concurrently) working appropriately or does it need to be modified to
avoid sweeping nonexempt employees into the exemption? Alternatively,
should there be a limitation on the amount of nonexempt work? To what
extent are exempt lower-level executive employees performing nonexempt
work?
In addition to seeking comments on the duties tests, the Department
is also considering whether to add to the regulations examples of
additional occupations to provide guidance in administering the EAP
exemptions. Employer stakeholders have indicated that examples of how
the exemptions may apply to specific jobs, such as those provided in
current Sec. Sec. 541.203, 541.301(e), and 541.402, are useful in
determining exempt status and should be expanded. The Department agrees
that examples of how the general executive, administrative, and
professional exemption criteria may apply to specific occupations are
useful to the regulated community and seeks comments on what specific
additional examples of nonexempt and exempt occupations would be most
helpful to include.
Computer Related Occupations
In further effort to provide effective guidance to the public on
the administration of the EAP exemptions, the Department is considering
the suggestions of employer stakeholders from the computer and
information technology sectors to include additional examples of the
application of the EAP exemptions to occupational categories in
computer-related fields. The Department has, as a threshold matter,
reviewed the authority by which it might include additional examples of
computer-related occupations. For the reasons articulated in the
preamble to the 2004 Final Rule, the Department continues to believe
that we should not expand the EAP exemption beyond the computer
exemption currently set forth in section 13(a)(17), given the clarity

[[Page 38544]]

with which Congress has set forth the scope of that exemption.\43\ 69
FR 22160.
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\43\ Although the 1990 amendments to the FLSA afforded the
Department some discretion to elaborate on computer-specific
exemption criteria distinct from the standard EAP exemption criteria
(Sec. 2, Pub. L. 101-583, 104 Stat 2871 (Nov. 15, 1990)), the
Department concluded in the 2004 Final Rule that, because Congress
subsequently codified the criteria for a computer employee exemption
in FLSA section 13(a)(17) (Sec. 2105(a), Pub. L. 104-188, 110 Stat.
1755 (Aug. 20, 1996)), it would be ``inappropriate'' to engage in
further rulemaking after Congress had spoken on the issue. 69 FR
22160.
---------------------------------------------------------------------------

However, in the 2004 Final Rule, the Department did add additional
examples of occupations within the computer industry such as systems
analysts and computer programmers which, subject to a case-by-case
duties analysis, might fall within the section 13(a)(1) administrative
and executive exemptions. Sec. 541.402. In response to stakeholder
input and as part of our broader effort to simplify part 541, the
Department is again exploring the possibility of listing additional
illustrative examples that typically do or do not fall within the
general criteria for the three basic EAP exemptions (see Sec. Sec.
541.100, .200, .300), as opposed to those falling within the computer-
specific exemption set forth in section 13(a)(17), to bring additional
clarity to employers and employees within the computer and information
technology industries.
The Department continues to be cognizant of the ``tremendously
rapid pace of significant changes occurring in the information
technology industry'' (69 FR 22158), and therefore requests comments
from employer and employee stakeholders in the computer and information
technology sectors as to what additional occupational titles or
categories should be included as examples in the part 541 regulations,
along with what duties are typical of such categories and would thus
cause them to generally meet or fail to meet the relevant EAP exemption
criteria. To provide additional context, the Department, as an initial
matter, expresses the view that a help desk operator whose responses to
routine computer inquiries (such as requests to reset a user's password
or address a system lock-out) are largely scripted or dictated by a
manual that sets forth well-established techniques or procedures would
not possess the discretion and independent judgment necessary for the
administrative exemption, nor would that individual likely qualify for
any other EAP exemption. On the other hand, an information technology
specialist who, without supervision, routinely troubleshoots and
repairs significant glitches in his company's point of sale software
for the company's retail clients might be an example of an
administrative employee pursuant to Sec. 541.200 as this employee's
work appears to be directly related to the management or business
operation of his employer or employer's customers and requires the use
of discretion and independent judgment with respect to matters of
significance.

VI. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, as well as the impact of paperwork and other
information collection burdens imposed on the public, and how to
minimize those burdens. The PRA typically requires an agency to provide
notice and seek public comments on any proposed collection of
information contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B);
5 CFR 1320.8. Persons are not required to respond to the information
collection requirements until they are approved by the Office of
Management and Budget (OMB) under the PRA. This NPRM would revise the
existing information collection requirements previously approved under
OMB control number 1235-0018 (Records to be Kept by Employers--Fair
Labor Standards Act) and OMB control number 1235-0021 (Employment
Information Form) in that employers would need to maintain records of
hours worked for more employees and more employees may file complaints
to recover back wages under the overtime pay provision. As required by
the PRA, the Department has submitted the information collection
revisions to OMB for review in order to reflect changes that would
result from this proposed rule were it to be adopted.
Summary: FLSA section 11(c) requires all employers covered by the
FLSA to make, keep, and preserve records of employees and of wages,
hours, and other conditions of employment. A FLSA-covered employer must
maintain the records for such period of time and make such reports as
prescribed by regulations issued by the Secretary of Labor. The
Department has promulgated regulations at 29 CFR part 516 to establish
the basic FLSA recordkeeping requirements. No new information
collection requirements would be imposed by the adoption of this NPRM;
rather, burdens under existing requirements are expected to increase as
more employees receive minimum wage and overtime protections due to the
proposed increase in the salary level requirement. More specifically,
the proposed changes in this NPRM may cause an increase in burden on
the regulated community because employers will have additional
employees to whom certain long-established recordkeeping requirements
apply (e.g., maintaining daily records of hours worked by employees who
are not exempt from the both minimum wage and overtime provisions).
Additionally, the proposed changes in this NPRM may cause an initial
increase in burden if more employees file a complaint with WHD to
collect back wages under the overtime pay requirements. We anticipate
this increased burden will wane over time as employers adjust to the
new rule.
Purpose and Use: WHD and employees use employer records to
determine whether covered employers have complied with various FLSA
requirements. Employers use the records to document compliance with the
FLSA, including showing qualification for various FLSA exemptions.
Additionally, WHD uses the Employment Information form to document
allegations of non-compliance with labor standards the agency
administers.
Technology: The regulations prescribe no particular order or form
of records and employers may preserve records in forms of their
choosing provided that facilities are available for inspection and
transcription of the records.
Minimizing Small Entity Burden: Although the FLSA recordkeeping
requirements do involve small businesses, including small state and
local government agencies, the Department minimizes respondent burden
by requiring no specific order or form of records in responding to this
information collection. Burden is reduced on complainants by providing
a template to guide answers.
Public Comments: As part of its continuing effort to reduce
paperwork and respondent burden, the Department conducts a preclearance
consultation program to provide the general public and Federal agencies
with an opportunity to comment on proposed and continuing collections
of information in accordance with the PRA. This program helps to ensure
that requested data can be provided in the desired format, reporting
burden (time and financial resources) is minimized, collection
instruments are clearly understood, and the impact of collection
requirements on respondents can be properly assessed. The Department
seeks public comments regarding the

[[Page 38545]]

burdens imposed by the information collections associated with this
NPRM. Commenters may send their views about this information collection
to the Department in the same manner as all other comments (e.g.,
through the regulations.gov Web site). All comments received will be
made a matter of public record and posted without change to http://www.regulations.gov, including any personal information provided.
As previously noted, an agency may not conduct an information
collection unless it has a currently valid OMB approval, and the
Department has submitted information collection requests under OMB
control numbers 1235-0018 and 1235-0021 in order to update them to
reflect this rulemaking and provide interested parties a specific
opportunity to comment under the PRA. See 44 U.S.C. 3507(d); 5 CFR
1320.11. Interested parties may receive a copy of the full supporting
statements by sending a written request to the mail address shown in
the ADDRESSES section at the beginning of this preamble. In addition to
having an opportunity to file comments with the Department, comments
about the paperwork implications may be addressed to OMB. Comments to
OMB should be directed to: Office of Information and Regulatory
Affairs, Attention OMB Desk Officer for the Wage and Hour Division,
Office of Management and Budget, Room 10235, Washington, DC 20503;
Telephone: 202-395-7316/Fax: 202-395-6974 (these are not toll free
numbers). OMB will consider all written comments that the agency
receives within 30 days of publication of this proposed rule.
Commenters are encouraged, but not required, to send the Department a
courtesy copy of any comments sent to OMB. The courtesy copy may be
sent via the same channels as comments on the rule.
OMB and the Department are particularly interested in comments
that:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
agency, including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronic submission of responses).
Total annual burden estimates, which reflect both the existing and
new responses for the recordkeeping and complaint process information
collections at the proposed salary, are summarized as follows:
Type of Review: Revisions to currently approved information
collections.
Agency: Wage and Hour Division, Department of Labor.
Title: Records to be Kept by Employers--Fair Labor Standards Act.
OMB Control Number: 1235-0018.
Affected Public: Private sector businesses or other for-profits,
farms, not-for-profit institutions, state, local and tribal
governments, and individuals or households.
Estimated Number of Respondents: 3,771,434 (unaffected by this
rulemaking).
Estimated Number of Responses: 50,467,523 (6,909,600 added by this
rulemaking).
Estimated Burden Hours: 1,235,161 hours (230,320 added by this
rulemaking).
Estimated Time per Response: Various (unaffected by this
rulemaking).
Frequency: Various (unaffected by this rulemaking).
Other Burden Cost: 0.
Title: Employment Information Form.
OMB Control Number: 1235-0021.
Affected Public: Businesses or other for-profit, farms, not-for-
profit institutions, state, local and tribal governments, and
individuals or households.
Total Respondents: 38,138 (2,788 added by this rulemaking).
Estimated Number of Responses: 38,138 (2,788 added by this
rulemaking).
Estimated Burden Hours: 12,713 (930 hours added by this
rulemaking).
Estimated Time per Response: 20 minutes (unaffected by this
rulemaking).
Frequency: once.
Other Burden Cost: 0.

VII. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review, and Executive Order 13563, Improving
Regulation and Regulatory Review

Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if the
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility.
Under Executive Order 12866, the Department must determine whether
a regulatory action is economically ``significant,'' defined as having
an annual effect on the economy of $100 million or more, and therefore
subject to review by OMB and the requirements of the Executive Order.
This proposed rule is economically significant within the meaning of
Executive Order 12866; therefore, the Department has prepared a
Preliminary Regulatory Impact Analysis (PRIA) in connection with this
proposed rule as required under section 6(a)(3) of Executive Order
12866, and OMB has reviewed the rule.

A. Introduction

i. Background
The FLSA applies to all enterprises that have employees engaged in
commerce or in the production of goods for commerce and have an annual
gross volume of sales made or business done of at least $500,000
(exclusive of excise taxes at the retail level that are separately
stated); or are engaged in the operation of a hospital, an institution
primarily engaged in the care of the sick, the aged, or individuals
with intellectual disabilities who reside on the premises; a school for
intellectually or physically disabled or gifted children; a preschool,
elementary or secondary school, or an institution of higher education
(without regard to whether such hospital, institution or school is
public or private, or operated for profit or not); or are engaged in an
activity of a public agency. See 29 U.S.C. 203(s).
There are two ways an employee may be covered by the provisions of
the FLSA: (1) Enterprise coverage, in which any employee of an
enterprise covered by the FLSA is covered, and (2) individual coverage,
in which even employees of non-covered enterprises may be covered if
they are engaged in interstate commerce or in the production of goods
for commerce, or are employed in domestic service. The FLSA requires
employers to: (1) Pay employees who are covered and not exempt from the
Act's requirements not less than the Federal minimum wage for all hours
worked and overtime premium pay at a rate of not less than one and one-
half times the employee's regular rate of pay for all hours worked over
40 in a workweek, and (2) make, keep, and preserve records of the
persons

[[Page 38546]]

employed by the employer and of the wages, hours, and other conditions
and practices of employment. It is widely recognized that the general
requirement that employers pay a premium rate of pay for all hours
worked over 40 in a workweek is a cornerstone of the Act, grounded in
two policy objectives. The first is to spread employment by
incentivizing employers to hire more employees rather than requiring
existing employees to work longer hours, thereby reducing involuntary
unemployment. The second policy objective is to reduce overwork and its
detrimental effect on the health and well-being of workers.
The FLSA provides a number of exemptions from the Act's minimum
wage and overtime pay provisions, including one for bona fide
executive, administrative, and professional employees. Such employees
typically receive more monetary and non-monetary benefits than most
blue collar and lower-level office workers and therefore are less
likely to need the Act's protection. Thus, Congress created the
exemption from the FLSA's minimum wage and overtime pay protections for
employees employed in a bona fide executive, administrative, or
professional capacity and for outside sales employees, as those terms
are ``defined and delimited'' by the Department. 29 U.S.C. 213(a)(1).
The Department's regulations implementing those exemptions are codified
at 29 CFR part 541.
For an employer to exclude an employee from minimum wage and
overtime protection pursuant to the EAP exemptions, the employee
generally must meet three criteria: (1) The employee must be paid a
predetermined and fixed salary that is not subject to reduction because
of variations in the quality or quantity of work performed (the
``salary basis test''); (2) the amount of salary paid must meet a
minimum specified amount (the ``salary level test''); and (3) the
employee's job duties must primarily involve executive, administrative,
or professional duties as defined by the regulations (the ``duties
test''). The regulations governing these tests have been updated
periodically since the FLSA's enactment in 1938, most recently in 2004
when, among other revisions, the Department increased the salary level
test to $455 per week.
As a result of inflation and the low value of the salary threshold,
the annual value of this salary level test, $23,660 ($455 per week for
52 weeks), is now slightly below the 2014 poverty threshold for a
family of four ($24,008),\44\ making it inconsistent with Congress'
intent to exempt only bona fide EAP workers, who typically earn
salaries well above those of any workers they may supervise and
presumably enjoy other privileges of employment such as above average
fringe benefits, greater job security, and better opportunities for
advancement. Stein Report at 21-22.
---------------------------------------------------------------------------

\44\ The 2014 poverty threshold for a family of four with two
related people under 18 in the household. Available at: http://www.census.gov/hhes/www/poverty/data/threshld/index.html.
---------------------------------------------------------------------------

In the 2004 Final Rule, the Department also changed the structure
of the duties test. Between 1949 and 2004, the EAP exemptions included
two versions of the duties test. Assuming that a worker was paid on a
salary basis, the exemptions would be met if a worker passed either a
``long'' test, which involved a more rigorous set of duties criteria,
paired with a lower salary level, or a ``short'' test, which imposed
fewer duties requirements, paired with a higher salary level. In the
1975 update, the last before the 2004 Final Rule, the Department set
the long test salary levels at $155 per week for executive and
administrative employees and $170 per week for professional employees.
The short test salary level was set at $250 per week for all three EAP
categories. In 2004, the Department replaced the two-test structure
with a single ``standard'' duties test for each category, which closely
resembles the former short test duties requirements, and a single
salary level test of $455 per week based on an update of the 1975 long
test salary level. The Department also introduced a highly compensated
employee (HCE) exemption in the 2004 Final Rule, under which an
employee may be exempt if he or she passes a very minimal duties test,
receives at least $455 per week paid on a salary basis, and is highly
compensated, defined in the 2004 Final Rule as earning total annual
compensation, which may include commissions and nondiscretionary
bonuses in addition to a salary, of at least $100,000. The HCE duties
test is much more abbreviated than the historical short test duties
requirements.
The premise behind the salary level tests is that employers are
more likely to pay higher salaries to workers in bona fide EAP jobs
than to workers performing nonexempt duties. A high salary is
considered a measure of an employer's good faith in classifying an
employee as exempt, because an employer is less likely to have
misclassified a worker as exempt if he or she is paid a high wage.
Stein Report at 5; Weiss Report at 8.
The salary level requirement was created to identify the dividing
line distinguishing workers performing truly exempt duties from the
nonexempt workers Congress intended to be protected by the FLSA's
minimum wage and overtime provisions. Throughout the regulatory history
of the FLSA, the Department has considered the salary level test the
``best single test'' of exempt status. Stein Report at 19. This bright-
line test is easily observed, objective, and clear. Id.
ii. Need for Rulemaking
The salary level test has been updated seven times since it was
implemented in 1938. Table 1 presents the weekly salary levels
associated with the EAP exemptions since 1938, organized by exemption
and long/short/standard duties test.

Table 1--Historical Salary Levels for the EAP Exemptions
----------------------------------------------------------------------------------------------------------------
Long test
Date enacted -------------------------------------------------- Short test
Executive Administrative Professional (all)
----------------------------------------------------------------------------------------------------------------
1938.......................................... $30 $30 .............. ..............
1940.......................................... 30 $50 $50 ..............
1949.......................................... 55 75 75 $100
1958.......................................... 80 95 95 125
1963.......................................... 100 100 115 150

[[Page 38547]]

1970.......................................... 125 125 140 200
1975.......................................... 155 155 170 250
----------------------------------------------------------------------------------------------------------------
Standard Test
----------------------------------------------------------------------------------------------------------------
2004.......................................... $455
----------------------------------------------------------------------------------------------------------------

The standard salary level was set at $455 per week in 2004.
Following more than ten years of inflation, the purchasing power, or
real value, of the standard salary level test has eroded substantially,
and as a result increasingly more workers earn above the salary
threshold. By 2013 the real value of the standard salary level had
declined 18.9 percent since 2004, calculated using the Consumer Price
Index for all urban consumers (CPI-U).\45\ Figure 1 demonstrates how
the real values of the salary levels have changed since 1949, measured
in 2013 dollars.
---------------------------------------------------------------------------

\45\ CPI-U data available at: http://data.bls.gov/cgi-bin/cpicalc.pl.
[GRAPHIC] [TIFF OMITTED] TP06JY15.000

As a result of the erosion of the real value of the standard salary
level, more and more workers lack the clear protection the salary level
test is meant to provide. Each year that the salary level is not
updated, its utility as a distinguishing mechanism between exempt and
nonexempt workers declines. The Department has revised the levels just
once in the 40 years since 1975. In contrast, in the 37 years between
1938 and 1975, salary test levels were increased approximately every
five to nine years. In our 2004 rulemaking, the Department stated the
intention to ``update the salary levels on a more regular basis, as it
did prior to 1975,'' and added that ``the salary levels should be
adjusted when wage survey data and other policy concerns support such a
change.'' 69 FR 22171.
The real value of the salary level test has fallen substantially
both when measured against its 2004 level and the 1975 levels. If the
standard EAP salary level established in 2004 had kept up with
inflation (measured using the CPI-U), it would be $561 per week in 2013
dollars, a 23.3 percent increase relative

[[Page 38548]]

to its current level. If the EAP salary level for the short test
established in 1975 had kept up with inflation, it would be $1,083 per
week, a 137.9 percent increase relative to the current salary level.
In order to restore the value of the standard salary level as a
line of demarcation between those workers for whom Congress intended to
provide minimum wage and overtime protections and those workers who may
be performing bona fide EAP duties, and to maintain its continued
validity, the Department proposes to set the standard salary level
equal to the 40th percentile of weekly earnings for all full-time
salaried workers. Based on 2013 salary data,\46\ this is equivalent to
a standard salary level of $921 per week. The Department also proposes
to automatically update the standard salary level annually in the
future. Furthermore, the Department proposes to set the HCE
compensation level at the 90th percentile of annualized weekly earnings
for full-time salaried workers, equivalent to $122,148, and to update
the level annually in the future. Automatic updating would preserve the
value of these earnings thresholds, eliminate the volatility associated
with previous changes in the thresholds, and provide certainty for
employers with respect to future changes. It would also simplify the
updating process, as the Department would simply publish a notice in
the Federal Register of the updated salary and compensation thresholds
on an annual basis, and additional notice and comment rulemaking to
adjust the salary and annual compensation thresholds would not be
necessary unless the Department determined in the future that the
methodology for setting the standard salary or the HCE total
compensation levels needed to be adjusted.
---------------------------------------------------------------------------

\46\ Unless otherwise noted, the Department relied upon 2013
data in the development of the NPRM. The Department will update the
data used in the Final Rule resulting from this proposal.
---------------------------------------------------------------------------

iii. Summary of Affected Workers, Costs, Benefits, and Transfers
The Department estimated the number of affected workers and
quantified costs and transfer payments associated with this proposed
rulemaking.\47\ All estimates are based on analysis of the Current
Population Survey (CPS), a monthly survey of 60,000 households
conducted by the U.S. Census Bureau. In 2013, there were an estimated
144.2 million wage and salary workers in the United States, of whom
128.5 million were subject to the FLSA and the Department's
regulations.^{48 49} Of these 128.5 million workers, the
Department estimates that 43.0 million are white collar salaried
employees who may be affected by a change to the Department's part 541
regulations and are not covered by another (non-EAP)
exemption.^{50 51} The remaining 85.5 million workers include
blue collar workers, workers paid on an hourly basis, and workers
eligible for another (non-EAP) overtime exemption. These workers were
excluded because they will generally not be affected by this proposed
rulemaking. Of the 43.0 million workers discussed above, the Department
estimates that 28.5 million are exempt from the minimum wage and
overtime pay provisions under the part 541 EAP exemptions, while 14.4
million do not satisfy the duties tests for EAP exemption and/or earn
less than $455 per week.\52\ However, of the 28.5 million EAP exempt
workers, 7.1 million were in ``named occupations'' and thus need only
pass the duties tests to be subject to the standard EAP exemptions.\53\
Therefore, these workers were not considered in the analysis, leaving
21.4 million EAP exempt workers potentially affected by this proposed
rule.
---------------------------------------------------------------------------

\47\ Because the Department has not proposed specific changes to
the duties tests, potential changes to the duties tests are not
included in this RIA. However, the Department discusses a potential
methodology for determining the impact of any changes to the duties
test in section VII.F.
\48\ Data on wage and salary workers are from the CPS, series
ID: LNU02000000.
\49\ Workers not covered as employees by the FLSA and/or the
Department's regulations include: members of the military, unpaid
volunteers, the self-employed, many religious workers, and most
federal employees. The number of workers covered by the FLSA was
estimated using the CPS Merged Outgoing Rotation Group (MORG) data.
\50\ As discussed in more detail later, the Department used
pooled data from 2011-2013 to represent the 2013 population in order
to increase sample size, and thus the granularity of results.
\51\ As discussed later, the Department excluded from this
analysis certain workers for whom their employer could claim a non-
EAP exemption from the FLSA's minimum wage and overtime pay
provisions, and certain workers for whom the employer could claim an
overtime pay exemption. For simplicity, the Department refers to
these exemptions as other (non-EAP) exemptions.
\52\ Here and elsewhere in this analysis, numbers are reported
at varying levels of aggregation, and are generally rounded to a
single decimal point. However, calculations are performed using
exact numbers. Therefore, as in this case, some numbers may not
match the reported total or the calculation shown due to rounding of
components.
\53\ Workers not subject to the EAP salary level test include
teachers, academic administrative personnel, physicians, lawyers,
judges, and outside sales workers.
---------------------------------------------------------------------------

The Department proposes to increase the standard salary level from
$455 per week to the 40th percentile of weekly earnings for all full-
time salaried workers, which translates to $921 per week, an increase
of $466 over the current level (Table 2).\54\ The Department also
proposes to increase the HCE annual compensation level to the 90th
percentile of annualized weekly earnings for full-time salaried
workers, which translates to $122,148 annually.
---------------------------------------------------------------------------

\54\ The BLS data set used for this rulemaking consists of
earnings for all full-time (defined as at least 35 hours per week)
non-hourly paid employees. For the purpose of this rulemaking, the
Department considers data representing compensation paid to non-
hourly workers to be an appropriate proxy for compensation paid to
salaried workers.

Table 2--Proposed Salary Levels
----------------------------------------------------------------------------------------------------------------
Total increase
Salary level Current salary Proposed -------------------------------
level salary level $ %
----------------------------------------------------------------------------------------------------------------
Standard exemption.............................. $455/week $921/week 466 102.4
HCE exemption................................... 100,000/year 122,148/year 22,148 22.1
----------------------------------------------------------------------------------------------------------------

The Department also proposes to annually update the standard salary
level to ensure the ongoing effectiveness of the salary level as a
means of delimiting workers who should not fall within the EAP
exemption. Similarly, the Department proposes to annually update the
HCE total annual compensation level to ensure the effectiveness of the
annual compensation requirement as a test for which employees should be
subject to the minimal duties test for the HCE exemption.
In Year 1, an estimated 4.6 million workers would be affected by
the increase in the standard salary level test (Table 3). This figure
consists of currently EAP-exempt workers who earn at least $455 per
week but less than the 40th percentile ($921) of all full-

[[Page 38549]]

time salaried workers. Additionally, an estimated 36,000 workers would
be affected by the increase in the HCE compensation test. In Year 10,
with automatic updating, between 5.1 and 5.6 million workers are
projected to be affected by the change in the standard salary level
test and between 33,000 and 42,000 workers affected by the change in
the HCE total annual compensation test, depending on the updating
methodology used.

Table 3--Estimated Number of Affected EAP Workers, Ten-Year Projections With and Without Automatic Updating
----------------------------------------------------------------------------------------------------------------
Without automatic Updated with fixed Updated with CPI-U
updating percentiles -------------------------
Affected EAP workers (1,000s) \a\ ----------------------------------------------------
Year 1 Year 10 Year 1 Year 10 Year 1 Year 10
----------------------------------------------------------------------------------------------------------------
Standard exemption................ 4,646 2,685 4,646 5,568 4,646 5,062
HCE exemption..................... 36 7 36 42 36 33
----------------------------------------------------------------------------------------------------------------
\a\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
under the proposed salary levels (if their weekly earnings do not increase to the proposed salary levels).

Three direct costs to employers are quantified in this analysis:
(1) Regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs. Regulatory familiarization costs are the costs
incurred to read and become familiar with the requirements of the rule.
Adjustment costs are the costs accrued to determine workers' new
exemption statuses, notify employees of policy changes, and update
payroll systems. Managerial costs associated with this proposed
rulemaking occur because hours of workers who are newly entitled to
overtime may be more closely scheduled and monitored to minimize or
avoid paying the overtime premium.
The costs presented here are the combined costs for both the change
in the standard salary level test and the HCE annual compensation level
(these will be disaggregated in section VII.D.iv.). With updating,
total average annualized direct employer costs were estimated to be
between $239.6 and $255.3 million, assuming a 7 percent discount rate;
hereafter, unless otherwise specified, average annualized values will
be presented using the 7 percent real discount rate (Table 4).
Deadweight loss (DWL) is also a cost but not a direct employer cost.
DWL is a function of the difference between the wage employers are
willing to pay for the hours lost, and the wage workers are willing to
take for those hours. In other words, DWL represents the decrease in
total economic surplus in the market arising from the change in the
regulation. Average annualized DWL was estimated to be between $9.5 and
$10.5 million, depending on updating methodology.
In addition to the direct costs, this proposed rulemaking will also
transfer income from employers to employees in the form of wages.
Average annualized transfers were estimated to be between $1,178.0 and
$1,271.4 million, depending on updating methodology. The majority of
these transfers are from employers to affected EAP workers who become
overtime protected due to changes in the EAP regulations.
Employers may incur additional costs, such as hiring new workers.
These other costs are discussed in section VII.D.iv.5. Another
potential impact of the rule's proposed increase in the salary
threshold is a reduction in litigation costs. Other unquantified
transfers, costs, and benefits are discussed in section VII.D.vii.

Table 4--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels With Automatic Updating
[Millions 2013$]
----------------------------------------------------------------------------------------------------------------
Future years \c\ Average annualized value
Automatic ---------------------------------------------------
Cost/transfer \a\ updating method Year 1 3% real 7% real
\b\ Year 2 Year 10 rate rate
----------------------------------------------------------------------------------------------------------------
Direct employer costs........ Percentile...... $592.7 $188.8 $225.3 $248.8 $255.3
CPI-U........... 592.7 181.1 198.6 232.3 239.6
Transfers \d\................ Percentile...... 1,482.5 1,160.2 1,339.6 1,271.9 1,271.4
CPI-U........... 1,482.5 1,126.4 1,191.4 1,173.7 1,178.0
DWL.......................... Percentile...... 7.4 10.8 11.2 10.5 10.5
CPI-U........... 7.4 10.3 9.7 9.6 9.5
----------------------------------------------------------------------------------------------------------------
\a\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\b\ The percentile method sets the standard salary level at the 40th percentile of weekly earnings for full-time
salaried workers and the HCE compensation level at the 90th percentile. The CPI-U method adjusts both levels
based on the annual percent change in the CPI-U.
\c\ These costs/transfers represent a range over the nine-year span.
\d\ This is the net transfer from employers to workers. There may also be transfers of hours and income from
some workers to other workers.

iv. Terminology and Abbreviations
The following terminology and abbreviations will be used throughout
this Regulatory Impact Analysis (RIA).
Affected EAP workers: The population of potentially affected EAP
workers who either earn between $455 and the proposed salary level of
the 40th percentile of weekly earnings ($921) or qualify for the HCE
exemption and earn between $100,000 and the 90th percentile of earnings
($122,148 annually). This is estimated to be 4.7 million workers.\55\
---------------------------------------------------------------------------

\55\ Setting the standard salary level at the 40th percentile is
estimated to affect 4,646,000 workers. See Table 3. Additionally,
36,000 workers are potentially affected by the change in the HCE
exemption's total compensation level. Id. Accordingly, throughout
this NPRM we refer to the total affected workers as 4.7 million
(4,646,000 + 36,000, rounded to the nearest 100,000 workers).
However, when discussing only those workers affected by the change
in the standard salary level test, the number decreases to 4.6
million (4,646,000, similarly rounded).

---------------------------------------------------------------------------

[[Page 38550]]

BLS: Bureau of Labor Statistics.
CPI-U: Consumer Price Index for all urban consumers.
CPS: Current Population Survey.
Duties test: To be exempt from the FLSA's minimum wage and overtime
requirements under section 13(a)(1), the employee's primary job duty
must involve bona fide executive, administrative, or professional
duties as defined by the regulations. The Department distinguishes
among four such tests:
Standard duties test: The duties test used in conjunction with the
standard salary level test, as set in 2004 and applied to date, to
determine eligibility for the EAP exemptions. It replaced the short and
long tests in effect from 1949 to 2004, but its criteria closely follow
those of the former short test.
HCE duties test: The duties test used in conjunction with the HCE
compensation level test, as set in 2004 and applied to date, to
determine eligibility for the HCE exemption. It is much less stringent
than the standard and short duties tests to reflect that very highly
paid employees are much more likely to be properly classified as
exempt.
Long duties test: One of two duties tests used from 1949 until
2004; this more restrictive duties test had a greater number of
requirements, including a limit on the amount of nonexempt work that
could be performed, and was used in conjunction with a lower salary
level test to determine eligibility for the EAP exemptions (see Table
1).
Short duties test: One of two duties tests used from 1949 to 2004;
this less restrictive duties test had fewer requirements and was used
in conjunction with a higher salary level test to determine eligibility
for the EAP exemptions (see Table 1).
DWL: Deadweight loss; the loss of economic efficiency that can
occur when equilibrium in a market for a good or service is not
achieved.
EAP: Executive, administrative, and professional.
HCE: Highly compensated employee; a category of EAP-exempt
employee, established in 2004 and characterized by high earnings and a
minimal duties test.
MORG: Merged Outgoing Rotation Group supplement to the CPS.
Named occupations: Workers in named occupations are not subject to
the salary level or salary basis tests. These occupations include
teachers, academic administrative personnel,\56\ physicians,\57\
lawyers, and judges.\58\
---------------------------------------------------------------------------

\56\ Academic administrative personnel (including admissions
counselors and academic counselors) need to be paid either (1) the
salary level or (2) a salary that is at least equal to the entrance
salary for teachers in the educational establishment at which they
are employed (see Sec. 541.204). Entrance salaries at the
educational establishment of employment cannot be distinguished in
the data and so this alternative is not considered (thus these
employees were excluded from the analysis, the same as was done in
the 2004 Final Rule).
\57\ The term physician 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 with a Bachelor
of Science in optometry). Sec. 541.304(b).
\58\ Judges may not be considered ``employees'' under the FLSA
definition. However, since this distinction cannot be made in the
data, all judges are excluded from the analysis (the same as was
done in the 2004 Final Rule).
---------------------------------------------------------------------------

Overtime Workers
Occasional overtime workers: Workers who report they usually work
40 hours or less per week (identified with variable PEHRUSL1 in CPS
MORG) but in the survey week worked more than 40 hours (variable
PEHRACT1 in CPS MORG).
Regular overtime workers: Workers who report they usually work more
than 40 hours per week (identified with variable PEHRUSL1 in CPS MORG).
Pooled data for 2011-2013: CPS MORG data from 2011-2013 with
earnings inflated to 2013 dollars and sample observations weighted to
reflect the population in 2013; used to increase sample size.
Potentially affected EAP workers: EAP exempt workers who are not in
named occupations and are included in the analysis (i.e., white collar,
salaried, not eligible for another (non-EAP) overtime pay exemption).
This is estimated to be 21.4 million workers.
Price elasticity of demand (with respect to wage): The percentage
change in labor hours demanded in response to a one percent change in
wages.
Real dollars (2013$): Dollars adjusted using the CPI-U to reflect
the purchasing power they would have in 2013.
Salary basis test: The EAP exemptions' requirement that workers be
paid on a salary basis, that is, a pre-determined amount that cannot be
reduced because of variations in the quality or quantity of the
employee's work.
Salary level test: The salary a worker must earn in order to be
subject to the EAP exemptions. The Department distinguishes among four
such tests:
Standard salary level: The weekly salary level associated with the
standard duties test that determines (in part) eligibility for the EAP
exemptions. The standard salary level was set at $455 per week in the
2004 Final Rule.
HCE compensation level: Workers who meet the standard salary level
requirement but not the standard duties test nevertheless are exempt if
they pass a minimal duties test and earn at least the HCE total annual
compensation required amount. The HCE required compensation level was
set at $100,000 per year in the 2004 Final Rule, of which at least $455
per week must be paid on a salary or fee basis.
Short test salary level: The weekly salary level associated with
the short duties test (eliminated in 2004).
Long test salary level: The weekly salary level associated with the
long duties test (eliminated in 2004).
Workers covered by the FLSA and subject to the Department's
regulations: Includes all workers except those excluded from the
analysis because they are not covered by the FLSA or subject to the
Department's requirements. Excluded workers include: members of the
military, unpaid volunteers, the self-employed, many religious workers,
and federal employees (with a few exceptions).\59\
---------------------------------------------------------------------------

\59\ Employees of firms with annual revenue less than $500,000
who are not engaged in interstate commerce are also not covered by
the FLSA. However, these workers are not excluded from this analysis
because the Department has no reliable way of estimating the size of
this worker population, although the Department believes it composes
a small percent of workers. These workers were also not excluded
from the 2004 Final Rule.
---------------------------------------------------------------------------

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

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

i. Overview
This section explains the methodology used to estimate the number
and characteristics of workers who are subject to the EAP exemptions.
In this proposed rule, as in the 2004 Final Rule, the Department
estimated the number of EAP exempt workers because there is no data
source that identifies workers as EAP exempt. Employers are not
required to report EAP exempt workers to any central agency or as part
of any employee or establishment survey. The methodology described here
is largely based on the approach the Department used in the 2004 Final
Rule. 69 FR 22196-209. All tables include estimates for 2013. Some
tables also include estimates for 2005

[[Page 38551]]

(the first full calendar year after the most recent increase to the
salary level was implemented) to demonstrate how the prevalence of the
EAP exemption has changed from 2005 through 2013. Figure 2 illustrates
how the U.S. civilian workforce was analyzed through successive stages
to estimate the number of potentially affected EAP workers.
[GRAPHIC] [TIFF OMITTED] TP06JY15.001

ii. Data
The estimates of EAP exempt workers are based on data drawn from
the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and
the BLS. The CPS is a large, nationally representative sample of the
labor force. Households are surveyed for four months, excluded from the
survey for eight months, surveyed for an additional four months, then
permanently dropped from the sample. During the last month of each
rotation in the sample (month 4 and month 16), employed respondents
complete a supplementary questionnaire (the MORG) in addition to the
regular survey. This supplement contains the detailed information on
earnings necessary to estimate a worker's exemption status.
Although the CPS is a large scale survey, administered to 60,000
households representing the entire nation, it is still possible to have
relatively few observations when looking at subsets of employees, such
as exempt workers in a specific occupation employed in a specific
industry, or workers in a specific region. To increase the sample size,
the Department pooled together three years of CPS MORG data (2011
through 2013). Earnings for each 2011 and 2012 observation were
inflated to 2013 dollars using the CPI-U, and the weight of each
observation was adjusted so that the total number of potentially
affected EAP workers in the pooled sample remained the same as the
number represented by the 2013 CPS MORG. Thus, the pooled CPS MORG
sample uses roughly three times as many observations to represent the
same total number of workers in 2013. The additional observations allow
the Department to better estimate certain attributes of the potentially
affected labor force.
Some assumptions had to be made to use these data as the basis for
the analysis. For example, the Department eliminated workers who
reported that their weekly hours vary and provided no additional
information on hours worked. This was done because the Department
cannot estimate impacts for these workers since it is unknown whether
they work overtime and therefore unknown whether there would be any
need to pay for overtime if their status changed from exempt to
nonexempt. The Department reweighted the rest of the sample to account
for this change (to keep the same total population estimates). This
adjustment assumes that the distribution of hours worked by workers
whose hours do not vary is representative of hours worked by workers
whose hours do vary. The Department believes that without more
information this is an appropriate assumption.\60\ To the extent these
excluded workers are exempt, if they tend to work more overtime than
other workers, then transfer payments, costs, and DWL may be
underestimated. Conversely, if they work fewer overtime hours then
transfer payments, costs, and DWL may be overestimated.
---------------------------------------------------------------------------

\60\ This is justifiable because other employment
characteristics are similar across these two populations. The share
of all workers whose hours vary is 6.3 percent.

---------------------------------------------------------------------------

[[Page 38552]]

iii. Number of Workers Covered by the Department's Part 541 Regulations
To estimate the number of workers covered by the FLSA and subject
to the Department's part 541 regulations, the Department first excluded
workers who are not protected by the FLSA or are not subject to the
Department's regulations for a variety of reasons--for instance, they
may not be covered by, or considered to be employees under, the FLSA.
These workers include:
Military personnel,
unpaid volunteers,
self-employed individuals,
clergy and other religious workers, and
federal employees (with a few exceptions described below).
Many of these workers are excluded from the CPS MORG: members of
the military on active duty, unpaid volunteers, and the self-employed.
For other categories that are not automatically excluded from the CPS
data, such as unpaid workers, that is, workers with zero wages and
earnings but who report being employed, the Department has implemented
measures to screen them out.
Religious workers were excluded from the analysis after being
identified by their occupation codes: `clergy' (Census occupational
code 2040), `directors, religious activities and education' (2050), and
`religious workers, all other' (2060). Most employees of the federal
government are covered by the FLSA but are not subject to the
Department's part 541 regulations because their minimum wage and
overtime pay are regulated by the Office of Personnel Management
(OPM).\61\ See 29 U.S.C. 204(f). Exceptions exist for U.S. Postal
Service employees, Tennessee Valley Authority employees, and Library of
Congress employees. See 29 U.S.C. 203(e)(2)(A). These covered federal
workers were identified and included in the analysis using occupation
and/or industry codes.\62\ Employees of firms that have annual revenue
of less than $500,000 and who are not engaged in interstate commerce
are also not covered by the FLSA. The Department does not exclude them
from the analysis because it has no reliable way of estimating the size
of this worker population, although the Department believes it is a
small percentage of workers. The 2004 Final Rule analysis similarly did
not adjust for these workers.
---------------------------------------------------------------------------

\61\ Federal workers are identified in the CPS MORG with the
class of worker variable PEIO1COW.
\62\ Postal Service employees were identified with Census
industry code 6370. Tennessee Valley Authority employees were
identified as federal workers employed in the electric power
generation, transmission, and distribution industry (570) and in
Kentucky, Tennessee, Mississippi, Alabama, Georgia, North Carolina,
or Virginia. Library of Congress employees were identified as
federal workers under Census industry `libraries and archives'
(6770) and residing in Washington, DC.
---------------------------------------------------------------------------

Table 5 presents the Department's estimates of the total number of
workers, and the number of workers covered by the FLSA and subject to
the Department's part 541 regulations in 2005 and 2013. The Department
estimated that in 2013 there were 144.2 million wage and salary workers
in the United States. Of these, 128.5 million were covered by the FLSA
and subject to the Department's regulations (89.1 percent). The
remaining 15.7 million workers were excluded from coverage by the FLSA
for the reasons described above and delineated in Table 6.

Table 5--Estimated Number of Workers Covered by the FLSA and Subject to the Department's Part 541 Regulations,
2005 and 2013
----------------------------------------------------------------------------------------------------------------
Subject to the Department's
Civilian regulations
Year employment -------------------------------
(1,000s) Number
(1,000s) Percent
----------------------------------------------------------------------------------------------------------------
2005............................................................ 142,126 122,716 86.3
2013............................................................ 144,214 \a\ 128,511 89.1
----------------------------------------------------------------------------------------------------------------
\a\ Estimate uses pooled data for 2011-2013.

Table 6--Reason Not Subject to the Department's Part 541 Regulations,
2013
------------------------------------------------------------------------
Number
Reason (1,000s)
------------------------------------------------------------------------
Total...................................................... 15,703
Self-employed and unpaid workers........................... 12,130
Religious workers.......................................... 518
Federal employees \a\...................................... 3,057
------------------------------------------------------------------------
Note: 2013 estimates use pooled data for 2011-2013.
\a\ Most employees of the federal government are covered by the FLSA but
are not covered by part 541. Exceptions are for U.S. Postal Service
employees, Tennessee Valley Authority employees, and Library of
Congress employees.

iv. Number of Workers in the Analysis
After limiting the analysis to workers covered by the FLSA and
subject to the Department's regulations, several other groups of
workers are identified and excluded from further analysis since they
are unlikely to be affected by this proposed rule. These include:
Blue collar workers,
workers paid hourly, and
workers who are exempt under certain other (non-EAP)
exemptions.
In 2013 there were 46.6 million blue collar workers (Table 7).
These workers were identified in the CPS MORG data using data from the
U.S. Government Accountability Office's (GAO) 1999 white collar
exemptions report \63\ and the Department's 2004 regulatory impact
analysis. Supervisors in traditionally blue collar industries are
classified as white collar workers because their duties are generally
managerial or administrative, and therefore they were not excluded as
blue collar workers. In 2013, 76.1 million workers were paid on an
hourly basis.\64\
---------------------------------------------------------------------------

\63\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, GAO/HEHS-99-164, p. 40-41.
\64\ The CPS MORG variable PEERNHRY is used to determine hourly
status.
---------------------------------------------------------------------------

Also excluded from further analysis were workers who are exempt
under certain other (non-EAP) exemptions. Although some of these
workers may also be exempt under the EAP exemptions, even if these
workers lost their EAP exempt status they would remain exempt from the
minimum wage and/or overtime pay provisions and thus were excluded from
the analysis. In 2013 an estimated 4.2 million workers, including some
agricultural and transportation workers, were excluded from further
analysis because they were subject to another (non-EAP) overtime
exemption. See Appendix A: Methodology for Estimating Exemption Status,
for details on how this population was identified.

[[Page 38553]]

Table 7--Estimated Number of Workers Covered by the FLSA and Subject to the Department's Regulations, 2005 and 2013 (1,000s)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reason Excluded \b\
Subject to Workers in Excluded -------------------------------------------------------------------
Year DOL's Part the from Another exemption \c\
541 Reg. analysis analysis Blue collar Hourly -----------------------------------------
\a\ workers workers Agriculture Transportation Other
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005......................................... 122,716 39,689 83,027 46,245 74,192 773 1,944 1,006
2013......................................... 128,511 42,970 85,541 46,644 76,113 911 1,827 1,484
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: 2013 estimates use pooled data for 2011-2013.
\a\ Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption.
\b\ Numbers do not add to total due to overlap.
\c\ Eligible for another (non-EAP) overtime pay exemption.

The Department excluded some of these workers from the population
of potentially affected EAP workers in the 2004 Final Rule, but not all
of them. Agricultural and transportation workers are two of the largest
groups of workers excluded from this analysis, and they were similarly
excluded in 2004. Agricultural workers were identified by occupational-
industry combination.\65\ Transportation workers were defined as those
who are subject to the following FLSA exemptions: section 13(b)(1),
section 13(b)(2), section 13(b)(3), section 13(b)(6), or section
13(b)(10). This methodology is the same as in the 2004 Final Rule and
is explained in Appendix A. The Department excluded 911,000
agricultural workers and 1.8 million transportation workers from the
analysis. The remaining 1.5 million excluded workers are included in
multiple FLSA minimum wage and overtime exemptions and are detailed in
Appendix A. However, of these 1.5 million workers, all but 28,000 are
either blue collar or hourly and thus the impact of excluding these
workers is negligible.
---------------------------------------------------------------------------

\65\ In the 2004 Final Rule all workers in agricultural
industries were excluded. 69 FR 22197. Here only workers also in
select occupations were excluded since not all workers in
agricultural industries qualify for the agricultural overtime pay
exemptions. This method better approximates the true number of
exempt agricultural workers and provides a more conservative--i.e.,
greater--estimate of the number of affected workers.
---------------------------------------------------------------------------

For 2013 there were a total of 85.5 million workers excluded from
the analysis for the reasons denoted above. These eliminations left
43.0 million workers covered by the FLSA and potentially affected by
this proposed rulemaking.
v. Number of Potentially Affected EAP Workers
After excluding workers not subject to the Department's FLSA
regulations and workers who are unlikely to be affected by this
proposed rulemaking (i.e., blue collar workers, workers paid hourly,
workers who are subject to another (non-EAP) overtime exemption), the
Department estimated the number of workers for whom employers might
claim the EAP exemptions. There are two ways a worker can lose overtime
protection pursuant to the EAP exemptions: the standard EAP test and
the HCE test. To be exempt under the standard EAP test the employee
must:
Be paid a predetermined and fixed salary that is not
subject to reductions because of variations in the quality or quantity
of work performed (the salary basis test),
earn at least a designated salary amount; the salary level
has been set at $455 per week since 2004 (the salary level test), and
perform work activities that primarily involve executive,
administrative, or professional duties as defined by the regulations
(the duties test).
The HCE test requires the employee to pass the same standard salary
basis and salary level tests. However, the HCE duties test is much less
restrictive than the standard duties test, and the employee must earn
at least $100,000 in total annual compensation, including at least $455
per week paid on a salary or fee basis, while the balance may be paid
as nondiscretionary bonuses and commissions.
Hourly computer employees who earn at least $27.63 per hour and
perform certain duties are exempt under section 13(a)(17) of the FLSA.
These workers are considered part of the EAP exemptions but were
excluded from the analysis because they are paid hourly and will not be
affected by this proposed rulemaking (these workers were similarly
excluded in the 2004 analysis). Salaried computer workers are exempt if
they meet the salary and duties tests applicable to the EAP exemptions,
and are included in the analysis since they will be impacted by this
proposed rulemaking.
Additionally, administrative and professional employees may be paid
on a fee basis,\66\ as opposed to a salary basis, at a rate of at least
the amount specified by the Department in the regulations. However, the
CPS MORG does not identify workers paid on a fee basis (only hourly or
non-hourly). Thus in the analysis, workers paid on a fee basis are
considered with non-hourly workers and consequently classified as
``salaried'' (as was done in the 2004 Final Rule).
---------------------------------------------------------------------------

\66\ Payment on a ``fee basis'' occurs where an employee is paid
an agreed sum for a single job regardless of the time required for
its completion. Sec. 541.605(a). Salary level test compliance for
fee basis employees is assessed by determining whether the hourly
rate for work performed (i.e., the fee payment divided by the number
of hours worked) would total at least $455 per week if the employee
worked 40 hours. Sec. 541.605(b).
---------------------------------------------------------------------------

Weekly earnings are also available in the data, which allowed the
Department to identify which workers passed the salary level tests.\67\
The CPS MORG data do not capture information about job duties.
Therefore, to determine whether a worker met the duties test, the
Department used an analysis performed by officials from the WHD in 1998
in response to a request from the GAO. Because WHD enforces the FLSA's
overtime requirements and regularly assesses workers' exempt status,
WHD's representatives were uniquely qualified to provide the analysis.
The analysis was used in both the GAO's 1999 white collar exemptions
report \68\ and the Department's 2004 regulatory impact analysis. See
69 FR 22198.
---------------------------------------------------------------------------

\67\ The CPS MORG variable PRERNWA, which measures weekly
earnings, is used to identify weekly salary. The CPS variable
includes nondiscretionary bonuses and commissions, which do not
count toward the standard salary level test. This discrepancy
between the earnings variable used and the FLSA definition of salary
may cause a slight overestimate of the number of workers estimated
to meet the standard test.
\68\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place. (1999). GAO/HEHS-99-164, p. 40-41.
---------------------------------------------------------------------------

WHD's representatives examined 499 occupational codes, excluding
nine that

[[Page 38554]]

were not relevant to the analysis for various reasons (one code was
assigned to unemployed persons whose last job was in the Armed Forces,
some codes were assigned to workers who are not FLSA covered, others
had no observations). Of the remaining occupational codes, WHD's
representatives determined that 251 occupational codes likely included
EAP exempt workers and assigned one of four probability codes
reflecting the estimated likelihood, expressed as ranges, that a worker
in a specific occupation would perform duties required to meet the EAP
duties tests. The Department supplemented this analysis in the 2004
Final Rule regulatory impact analysis when the HCE exemption was
introduced. The Department modified the four probability codes for
highly paid workers based upon our analysis of the provisions of the
highly compensated test relative to the standard duties test (Table 8).
To illustrate, WHD representatives assigned exempt probability code 3
to the occupation ``first-line supervisors/managers of construction
trades and extraction workers'' (Census code 6200), which indicates
that a worker in this occupation has a 10 to 50 percent likelihood of
meeting the standard EAP duties test. However, if that worker earns at
least $100,000 annually, he or she has between a 58.4 percent and 60
percent probability of being exempt under the shorter HCE test.
The occupations identified by the GAO in 1999 and used by the
Department in the 2004 Final Rule map to an earlier occupational
classification scheme (the 1990 Census Occupational Codes). Therefore,
for this proposed rule an occupational crosswalk was used to map the
previous occupational codes to the 2002 Census Occupational Codes which
are used in the CPS MORG 2002 through 2010 data, and to the 2010 Census
Occupational Codes which are used in the CPS MORG 2011 through 2013
data.\69\ If a new occupation is comprised of more than one previous
occupation, then the new occupation's probability code is the weighted
average of the previous occupations' probability codes, rounded to the
closest probability code.
---------------------------------------------------------------------------

\69\ Crosswalks and methodology available at: http://www.census.gov/people/io/methodology/.

Table 8--Probability Worker in Category Passes the Duties Test
----------------------------------------------------------------------------------------------------------------
The Standard EAP Test The HCE Test
---------------------------------------------------------------
Probability code Lower bound Upper bound Lower bound Upper bound
(percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
0............................................... 0 0 0 0
1............................................... 90 100 100 100
2............................................... 50 90 94 96
3............................................... 10 50 58.4 60
4............................................... 0 10 15 15
----------------------------------------------------------------------------------------------------------------

These codes provide information on the likelihood an employee met
the duties test but they do not identify the workers in the CPS MORG
who actually passed the test. Therefore, the Department designated
workers as exempt or nonexempt based on the probabilities. For example,
for every ten public relations managers, between five and nine were
estimated to pass the standard duties test (based on probability
category 2). However, it is unknown which of these ten workers are
exempt; therefore, the Department must determine the status for these
workers. Exemption status could be randomly assigned with equal
probability, but this would ignore the earnings of the worker as a
factor in determining the probability of exemption. The probability of
qualifying for the exemption increases with earnings because higher
paid workers are more likely to perform the required duties, an
assumption adhered to by both the Department in the 2004 Final Rule and
the GAO in its 1999 Report.\70\ The Department estimated the
probability of exemption for each worker as a function of both earnings
and the occupation's exempt probability category using a gamma
distribution.\71\ Based on these revised probabilities, each worker was
assigned exempt or nonexempt status based on a random draw from a
binomial distribution using the worker's revised probability as the
probability of success. Thus, if this method is applied to ten workers
who each have a 60 percent probability of being exempt, six workers
would be expected to be designated as exempt.\72\ However, which
particular workers are designated as exempt may vary with each set of
ten random draws. For details see Appendix A.
---------------------------------------------------------------------------

\70\ For the EAP exemptions, the relationship between earnings
and exemption status is not linear and is better represented with a
gamma distribution. For the HCE exemption, the relationship between
earnings and exemption can be well represented with a linear
function because the relationship is linear at high salary levels
(as determined by the Department in the 2004 Final Rule). Therefore,
the gamma model and the linear model would produce similar results.
See 69 FR 22204-08, 22215-16.
\71\ The gamma distribution was chosen because, during the 2004
revision, this non-linear distribution best fit the data compared to
the other non-linear distributions considered (i.e., normal and
lognormal). A gamma distribution is a general statistical
distribution that is based on two parameters that control the scale
(alpha) and shape (in this context, called the rate parameter,
beta).
\72\ A binominal distribution is frequently used for a
dichotomous variable where there are two possible outcomes; for
example, whether one owns a home (outcome of 1) or does not own a
home (outcome of 0). Taking a random draw from a binomial
distribution results in either a zero or a one based on a
probability of ``success'' (outcome of 1). This methodology assigns
exempt status to the appropriate share of workers without biasing
the results with manual assignment.
---------------------------------------------------------------------------

The Department estimated that of the 43.0 million workers
considered in the analysis, 28.5 million qualified for the EAP
exemptions (Table 9). However, some of these workers were excluded from
further analysis because they would not be affected by the proposed
rule. This excluded group contains workers in named occupations who are
not required to pass the salary requirements (although they must still
pass the duties tests) and therefore whose exemption status is not
dependent on their earnings. These occupations include physicians
(identified with Census occupation codes 3010, 3040, 3060, 3120),
lawyers (2100), teachers (occupations 2200-2550 and industries 7860 or
7870), academic administrative personnel (school counselors (occupation
2000 and industries 7860 or 7870) and educational administrators
(occupation 0230 and industries 7860 or 7870)), and outside sales
workers (a subset of occupation 4950). Out of the 28.5

[[Page 38555]]

million workers who are EAP exempt, 7.1 million, or 25.1 percent, were
in named occupations in 2013. Thus these workers would be unaffected by
changes in the standard salary level test. The 21.4 million EAP exempt
workers remaining in the analysis are referred to in this proposed
rulemaking as ``potentially affected.'' In addition to the 21.4 million
potentially affected EAP exempt workers, the Department estimates that
an additional 6.3 million salaried white collar workers who do not
satisfy the duties test and who currently earn at least $455 per week
but less than the proposed salary level will have their overtime
protection strengthened because their exemption status will be clear
based on the salary test alone without the need to examine their
duties.

Table 9--Estimated Percentages of EAP Exempt Workers in Named Occupations, 2005 and 2013
----------------------------------------------------------------------------------------------------------------
EAP exempt in % of EAP
Workers in the EAP exempt named exempt in
Year analysis (millions) occupations named
(millions) \a\ (millions) \b\ occupations
----------------------------------------------------------------------------------------------------------------
2005............................................ 39.7 25.0 6.4 25.7
2013............................................ 43.0 28.5 7.1 25.1
----------------------------------------------------------------------------------------------------------------
Note: 2013 estimates use pooled data for 2011-2013.
\a\ Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime
exemption.
\b\ Workers not subject to a salary level test includes, but is not limited to, teachers, academic
administrative personnel, physicians, lawyers, and judges.

There are three groups of workers who lose minimum wage and
overtime protections under the EAP exemptions: (1) Those passing just
the standard EAP tests (i.e., passing the standard duties test, the
salary basis test, and the standard salary level test and not passing
the HCE tests); (2) those passing just the HCE tests (i.e., passing the
HCE duties test, salary basis test, and the total compensation test and
not passing the standard duties tests); and (3) those passing both
tests. Based on analysis of the occupational codes and CPS earnings
data, the Department has concluded that in 2013, of the 21.4 million
potentially affected EAP workers, approximately 15.7 million passed
only the standard EAP test, 5.6 million passed both the standard and
the HCE tests, and approximately 75,000 passed only the HCE test (Table
10). When impacts are discussed in section VII.D., workers who pass
both tests will be considered with those who pass only the standard
salary level test because this salary level test is more restrictive
(i.e., the worker may continue to pass the standard salary level test
even if he or she no longer passes the HCE compensation test).

Table 10--Estimated Number of Workers Exempt Under the EAP Exemptions by Test Type, 2005 and 2013
----------------------------------------------------------------------------------------------------------------
Potentially affected EAP workers (millions)
---------------------------------------------------------------
Year Pass standard Pass both Pass HCE test
Total test only tests only
----------------------------------------------------------------------------------------------------------------
2005............................................ 18.6 15.8 2.8 0.03
2013............................................ 21.4 15.7 5.6 0.08
----------------------------------------------------------------------------------------------------------------
Note: 2013 estimates use pooled data for 2011-2013.

vi. Characteristics of Potentially Affected EAP Workers
After estimating the population of workers who are subject to the
EAP exemptions and potentially affected by this proposed rulemaking,
the Department tabulated the characteristics of these workers. The
characteristics considered and presented here include: industry of
employment, occupation, and Metropolitan Statistical Area (MSA) status.
As previously noted, the Department estimated 2013 values using CPS
MORG data pooled from 2011-2013 in order to increase the sample size.
Table 11 presents the estimated number of potentially affected EAP
workers broken down into 13 major industry groups.\73\ The industry
with the most potentially affected EAP workers was professional and
business services, with 4.2 million potentially affected EAP workers.
Other industries where a large number of workers were potentially
affected are education and health services (3.4 million), financial
activities (3.3 million), and manufacturing (3.3 million). The industry
with the smallest number of potentially affected EAP workers was
agriculture, forestry, fishing, and hunting (33,000).
---------------------------------------------------------------------------

\73\ See Appendix B: Additional Tables, for potentially affected
workers categorized into the more detailed 51 industry group
classifications.
---------------------------------------------------------------------------

Looking at exemption status by occupation, 10.8 million workers
employed in the management, business, and financial occupations were
potentially affected; this occupation category accounts for roughly
half of all potentially affected EAP workers. Professional and related
occupations also employed many of the potentially affected EAP workers
(7.0 million, which is 32.9 percent of all potentially affected EAP
workers).
The Department considered MSA status because workers in cities and
suburban areas tend to be paid more than workers in rural areas. The
percentage of potentially affected EAP workers (92.0 percent) who live
in MSAs is larger than the percentage of the total workforce (85.8
percent) who live in MSAs.

[[Page 38556]]

Table 11--Potentially Affected EAP Workers by Industry, Occupation, and
MSA Status, Number and as Percent of Total, 2013
------------------------------------------------------------------------
Potentially As percent of
affected EAP potentially
Industry, occupation, MSA status workers affected EAP
(millions) workers
------------------------------------------------------------------------
Total................................... 21.4 100.0
------------------------------------------------------------------------
By Industry
------------------------------------------------------------------------
Agriculture, forestry, fishing, & 0.03 0.2
hunting................................
Mining.................................. 0.18 0.8
Construction............................ 0.76 3.6
Manufacturing........................... 3.27 15.3
Wholesale & retail trade................ 2.42 11.3
Transportation & utilities.............. 0.80 3.7
Information............................. 0.90 4.2
Financial activities.................... 3.30 15.4
Professional & business services........ 4.20 19.6
Education & health services............. 3.41 15.9
Leisure & hospitality................... 0.75 3.5
Other services.......................... 0.55 2.6
Public administration................... 0.83 3.9
------------------------------------------------------------------------
By Occupation
------------------------------------------------------------------------
Management, business, & financial....... 10.79 50.4
Professional & related.................. 7.04 32.9
Services................................ 0.19 0.9
Sales & related......................... 2.19 10.2
Office & administrative support......... 0.97 4.5
Farming, fishing, & forestry............ 0.00 0.0
Construction & extraction............... 0.02 0.1
Installation, maintenance, & repair..... 0.05 0.2
Production.............................. 0.10 0.5
Transportation & material moving........ 0.04 0.2
------------------------------------------------------------------------
By MSA Status
------------------------------------------------------------------------
MSA..................................... 19.67 92.0%
Non-MSA................................. 1.62 7.6%
Not Identified.......................... 0.09 0.4%
------------------------------------------------------------------------
Note: Pooled data for 2011-2013.

C. Determining the Revised Salary Level Test Values

i. Background
The Department proposes to set the EAP standard salary level at the
40th percentile of the weekly earnings distribution for all full-time
salaried workers and to set the HCE compensation test equal to the 90th
percentile (at an annual salary equivalent) of this distribution. These
methods were used because they generate salary levels that (1) were
deemed to be appropriate in distinguishing between workers who should
and should not be exempt; (2) are easy to calculate and thus easy to
replicate, creating transparency through simplicity; and (3) generate
consistent salary levels.\74\ The Department believes that setting the
standard salary level at the 40th percentile earnings ($921 per week)
allows for reliance on the current standard duties test without an
unacceptably high risk of overtime-eligible employees being
misclassified as EAP exempt and denied overtime protection.
Additionally, the Department believes that setting the standard salary
level at the 40th percentile earnings will not result in an
unacceptably high risk that employees performing bona fide EAP duties
will become entitled to overtime protection by virtue of the salary
test.
---------------------------------------------------------------------------

\74\ On a quarterly basis, BLS publishes a table of deciles of
the weekly wages of full-time salaried workers, calculated using CPS
data, which will provide employers with information on changes in
salary levels prior to the annual updates. http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
---------------------------------------------------------------------------

The methodologies used to revise the EAP salary levels have varied
somewhat across the seven updates to the salary level test since it was
implemented in 1938. To guide the determination of the proposed salary
level, the Department considered methodologies used previously to
revise the EAP salary levels. In particular, the Department focused on
the 1958 revisions and the most recent revisions in 2004. The 1958
methodology is particularly instructive in that it synthesized previous
approaches to setting the salary level, and the basic structures it
adopted have been a touchstone in subsequent rulemakings (with the
exception of 1975).
The 1958 Revisions
In 1958, the Department updated the salary levels based on a 1958
Report and Recommendations on Proposed Revision of Regulations, Part
541, by Harry S. Kantor (Kantor Report). To determine the revised
salary levels the Department looked at data collected during WHD
investigations on actual salaries paid to exempt EAP employees, grouped
by geographic region, industry groups, number of employees, and size of
city. The Department then set the salary level so that no more than
about 10 percent of those in the lowest-wage

[[Page 38557]]

region, lowest-wage industry, smallest establishment group, or smallest
city group would fail to meet the test. Kantor Report at
6.^{75 76} This methodology is referred to as the Kantor method
and the Department followed a similar methodology in setting the salary
levels in 1963 and 1970.
---------------------------------------------------------------------------

\75\ The Kantor method was based on an analysis of a survey of
exempt workers as determined by investigations conducted by WHD.
Subsequent analyses, including both the 2004 rulemaking and this
proposed rule, have estimated exempt status using multiple data
sources.
\76\ Because the salary level test is likely to have the largest
impact on the low-wage categories of the economy (e.g., low-wage
regions and industries), salaries in those regions/industries were
selected as the basis for the required salary level under the Kantor
method.
---------------------------------------------------------------------------

The 2004 Revisions
A significant change in 2004 from the Kantor method was that the
salaries of both exempt and nonexempt full-time salaried workers in the
South and retail industry were used to determine levels (hereafter
referred to as the 2004 method), rather than the salaries of exempt
workers only. However, because the salaries of exempt workers on
average are higher than the salaries of all full-time salaried workers,
the Department selected a higher earnings percentile for full-time
salaried workers. Based on the Department's 2004 analysis, the 20th
percentile of earnings for exempt and nonexempt full-time salaried
workers in the South and retail industry achieved a result very similar
to the 10th percentile for workers in the lowest-wage regions and
industries who were estimated to be exempt. 69 FR 22169.
ii. Proposed Methodology for the Standard Salary Level
The Department proposes to set the standard salary level at the
40th percentile of the distribution of weekly earnings for all full-
time salaried workers nationwide. For the purposes of this proposed
rulemaking, the Department relied on BLS calculations of the dollar
value of the 40th earnings percentile from the CPS MORG data. BLS
limited the population to salaried workers who work at least 35 hours
per week and determined the specified percentile of the resulting
weighted weekly earnings distribution.\77\
---------------------------------------------------------------------------

\77\ The Census Bureau publishes a public-use version of the CPS
MORG data, which is very similar to the data used by BLS but
involves a few changes to protect respondents' confidentiality. The
salary level found with the public-use files is only very slightly
different from that obtained with the confidential data.
---------------------------------------------------------------------------

This methodology differs somewhat in specifics from previous
revisions to the salary levels but the general concept holds: define a
relevant population of workers, estimate an earnings distribution for
that population, then set the salary level to a designated percentile
of that distribution in order for the salary to serve as a meaningful
line of demarcation between those Congress intended to protect and
those who may qualify for exemption. The proposed method continues the
evolution of the Department's approach from the Kantor method to the
2004 method.
The Department spent considerable time evaluating the previous
methodologies. Where the proposed methodology differs from past
methodologies, the Department believes the proposed methodology is an
improvement. The Department compared the proposed method with the past
methods, and the reasons for selecting the proposed method are detailed
in the rest of this section.
The Kantor and 2004 Methods
The Department replicated the Kantor method and the 2004 method to
evaluate and compare them to the proposed methodology.\78\ Although the
Department was able to replicate the 1958 and 2004 methods reasonably
well, we could not completely replicate those methods due to changes in
data availability, occupation classification systems, and incomplete
documentation. In general, there are four steps in the process:
---------------------------------------------------------------------------

\78\ The Department followed the same methodology used in the
2004 Final Rule for estimating the Kantor method with minor
adjustments. In an attempt to more accurately estimate the Kantor
method, for example, this analysis included non-MSAs as a low-wage
sector as Kantor did but the 2004 revisions did not.
---------------------------------------------------------------------------

1. Identify workers likely to be members of the population of
interest.
2. Further narrow the population of interest by distinguishing that
sub-population employed in low-wage categories.
3. Estimate the distribution of earnings for these workers.
4. Identify the salary level that is equal to a pre-determined
percentile of the distribution.
The population of workers considered for purposes of setting the
salary level depends on whether the 2004 method or the Kantor method is
used. In replicating both methods, we limited the population to workers
subject to the FLSA and covered by the Department's part 541
provisions, and excluded EAP exempt workers in named occupations, and
those exempt under another (non-EAP) exemption. For the 2004 method,
the Department further limited the population to full-time salaried
workers, and for the Kantor method we further limited the population of
interest by only including those workers determined as likely to be EAP
exempt (see more detailed methodology explanations in section VII.B.
and Appendix A).
During the 2004 revisions the Department identified two low-wage
categories: The South (low-wage geographic region), and the retail
industry (low-wage industry). For this proposed rule the Department
identified low-wage categories by comparing average weekly earnings
across categories for the populations of workers used in the Kantor
method and the 2004 method. The South was determined to be the lowest-
wage region and was used for the 2004 method; however, the Department
chose to use a more detailed geographical break-down for the Kantor
method to reflect the geographic categories Kantor used. Therefore, for
the Kantor method the East South Central Division is considered the
lowest-wage geographical area.\79\ The Department found that the
industry with the lowest mean weekly earnings depends on whether the
Kantor method or the 2004 method's population was used. Therefore,
three industries are considered low-wage: Leisure and hospitality,
other services, and public administration. The Department also
considered non-MSAs as a low-wage sector in the Kantor method. The 2004
revision did not consider population density but the Kantor method
examined earnings across population size groups. In conclusion, the
2004 method looks at workers in the South and low-wage industries
whereas the Kantor method looks at workers in the East South Central
Division, non-MSAs, and the three low-wage industries.
---------------------------------------------------------------------------

\79\ The East South Central Division is a subset of the South
and includes Alabama, Kentucky, Mississippi, and Tennessee. If the
South is used instead, the resulting salary levels would increase
slightly.
---------------------------------------------------------------------------

Next, the Department estimated the distributions of weekly earnings
of two populations: (1) Workers who are in at least one of the low-wage
categories and in the Kantor population, and (2) workers who are in at
least one of the low-wage categories and in the 2004 population. From
these distributions, alternate salary levels were identified based on
pre-determined percentiles. For the Kantor method, the salary level for
the long duties test is identified based on the 10th percentile of
weekly earnings for the relevant population of likely EAP exempt
workers, while the 2004 method salary level is identified based on the
20th percentile of weekly

[[Page 38558]]

earnings for the relevant population of both exempt and nonexempt
salaried workers. Using 2013 CPS MORG data, the 2004 method resulted in
a salary level of $577 per week and the Kantor method resulted in a
salary level of $657 per week. Table 12 presents the distribution of
weekly earnings used to estimate the salary levels under the proposed
method, the 2004 method, and the Kantor method.

Table 12--Weekly Earnings Distribution, 2013
----------------------------------------------------------------------------------------------------------------
Distribution of weekly earnings Distribution of annual earnings \a\
-----------------------------------------------------------------------------
Percentile Full-Time 2004 Kantor Full-Time 2004 Kantor
Salaried Method \b\ Method \c\ Salaried Method \b\ Method \c\
----------------------------------------------------------------------------------------------------------------
5................................. $378 $330 $577 $19,656 $17,148 $30,000
10................................ 490 416 657 25,480 21,632 34,176
15................................ 586 500 721 30,472 26,000 37,500
20................................ 645 577 780 33,540 30,000 40,586
25................................ 726 634 850 37,752 32,968 44,200
30................................ 773 697 913 40,196 36,247 47,486
35................................ 852 769 976 44,304 39,988 50,732
40................................ 921 812 1,035 47,892 42,209 53,817
45................................ 981 878 1,095 51,012 45,659 56,960
50................................ 1,065 961 1,171 55,380 49,972 60,879
55................................ 1,154 1,015 1,250 60,008 52,762 65,000
60................................ 1,248 1,095 1,346 64,896 56,960 69,992
65................................ 1,363 1,194 1,434 70,876 62,093 74,566
70................................ 1,478 1,295 1,538 76,856 67,317 80,000
75................................ 1,626 1,433 1,659 84,552 74,533 86,245
80................................ 1,828 1,576 1,827 95,056 81,952 95,000
85................................ 2,000 1,792 1,999 104,000 93,208 103,958
90................................ 2,349 2,071 2,341 122,148 107,707 121,721
95................................ 3,077 2,732 2,885 160,004 142,050 150,000
----------------------------------------------------------------------------------------------------------------
Note: Estimates for the full-time salaried percentiles are from BLS. Estimates for the 2004 method and the
Kantor method are based on pooled CPS MORG public-use data for 2011-2013. The use of pooled data allows us to
better represent both earnings distributions and the characteristics of affected EAP workers.
\a\ Weekly earnings multiplied by 52.
\b\ Full-time salaried workers in the South or employed in a low-wage industry (excludes workers not subject to
the FLSA, not subject to the salary level test, and in agriculture or transportation).
\c\ Salaried, white collar workers who earn at least $455 per week, pass the EAP duties test, and either live in
the East South Central Division or a non-MSA or are employed in a low-wage industry (excludes workers not
subject to FLSA, not subject to the salary level test, and in agriculture or transportation).

iii. Rationale for the Methodology Chosen
The salary level test has historically been intended to serve as an
initial bright-line test for overtime eligibility for white collar
employees. As discussed previously, however, there will always be white
collar overtime-eligible employees who are paid above the salary
threshold. A low salary level increases the number of these employees.
The necessity of applying the duties test to these overtime-protected
employees consumes employer resources, may result in misclassification
(which imposes additional costs to employers and society in the form of
litigation), and is an indicator of the effectiveness of the salary
level. Similarly, there will always be employees performing bona fide
EAP duties who are paid below the salary threshold; the inability of
employers to claim the EAP exemption for these employees is also an
indicator of the effectiveness of the salary level. Selecting the
standard salary level will inevitably affect the number of workers
falling into each of these two categories. The Kantor method sought to
minimize the number of white collar employees who pass the duties test
but were excluded from the exemption by the salary threshold and
therefore set the salary level at the bottom 10 percent of exempt EAP
employees in low wage regions and industries so as to prevent
``disqualifying any substantial number of such employees.'' Kantor
Report at 5; see Weiss Report at 9. This method was based on the long/
short test structure, in which employees paid at lower salary levels
were protected by significantly more rigorous duties requirements than
are part of the current standard duties test. This approach, however,
does not take into sufficient account the inefficiencies of applying
the duties test to large numbers of overtime-eligible white collar
employees and the possibility of misclassification of those employees
as exempt.
In this rulemaking, the Department wants to correct for the
elimination of the long duties test and set a salary level that
appropriately classifies white collar workers as entitled to minimum
wage and overtime protection or potentially exempt. Thus the
Department's proposed standard salary level is higher than the level
the Kantor or 2004 methods would generate but still lower than the
historical average for the short test. Setting the salary level at the
40th percentile of weekly earnings for full-time salaried workers will
reduce the number of employees subject to the standard duties test by
raising the salary threshold; the Department believes that this will
simplify the determination of exemption status for employers and will
result in reduced misclassification of overtime-eligible white collar
workers as exempt and reduced litigation. At the 40th percentile, 10.6
million white collar employees would no longer be subject to potential
litigation over the duties they perform (4.6 million currently EAP
exempt employees who would be newly entitled to overtime due to the
increase in the salary threshold and 6.0 million overtime-eligible
white collar employees who are paid between $455 and $921 per week
whose exemption status would no longer depend on the application of the
duties test). The proposed salary level will therefore more efficiently
distinguish between employees who may meet the duties requirement of
the

[[Page 38559]]

EAP exemption and those who do not, without necessitating a return to
the more detailed long duties test.
The proposed salary level also affects the likelihood of workers
being misclassified as exempt from overtime pay. This provides an
additional measure of the effectiveness of the salary level as a
bright-line test delineating exempt and nonexempt workers. The
Department estimated the number of workers misclassified as exempt as
the number of salaried white collar workers who: Earn at least $455 per
week; do not satisfy the EAP duties tests; are not in a named
occupation (or exempt under another (non-EAP) exemption); usually work
overtime; and do not usually receive overtime pay.\80\ The Department
estimates that almost 20 percent of the 11.6 million salaried white
collar workers who fail the duties test are misclassified as exempt.
The Department estimates that at the proposed salary level, the number
of overtime-eligible white collar workers earning at or above the
salary level will decrease by 6.0 million, and that approximately
806,562 (13.5 percent) of these workers are currently misclassified as
exempt.
---------------------------------------------------------------------------

\80\ Based on workers' response to the CPS-MORG question
concerning whether they receive overtime pay, tips, or commissions
at their job (``PEERNUOT'' variable).
---------------------------------------------------------------------------

In this section the Department assesses the impact of the standard
salary level as a bright-line test for the EAP exemptions by examining:
(1) The number of white collar workers who pass the salary level test
but not the duties test and (2) the number of white collar workers who
pass the duties test but not the salary level test. The Department
makes this assessment at the current salary level and the proposed
salary level, while holding all other factors determining exempt status
constant (e.g., not considering whether the duties test is correctly
applied or potential employer response to the change in the salary
level test). Examining the impact of the salary threshold in isolation
from the application of the duties test or employer adjustments to pay
or hours does not provide a complete picture of the impact of a new
salary threshold. It does, however, allow the Department to evaluate
the effectiveness of the salary level in protecting overtime-eligible
white collar employees without unduly excluding from the exemption
employees performing EAP duties.
In order to calculate the potential impact on the two groups of
workers, the Department estimated: (1) The number of salaried white
collar workers who are eligible for overtime pay because they do not
pass the standard EAP duties test, but earn above a specific salary
level; and (2) the number of salaried white collar workers who satisfy
the standard duties test but earn less than a specific standard salary
level.\81\ These numbers were estimated at the current salary level
($455) and the proposed standard salary level of the 40th percentile of
weekly wages of all full-time salaried workers ($921).
---------------------------------------------------------------------------

\81\ These populations are limited to salaried, white collar
workers subject to the FLSA and the Department's part 541
regulations, and not eligible for another (non-EAP) exemption, not
in a named occupation, and not HCE only.
---------------------------------------------------------------------------

As a benchmark, the Department estimates that at the current
standard salary threshold, there are 11.6 million salaried white collar
workers who fail the standard duties test and are therefore overtime
eligible, but earn at least the $455 threshold, while there are only
845,500 salaried white collar workers who pass the standard duties test
but earn less than the $455 level. Thus the number of white collar
workers who pass the current salary threshold test but not the duties
test is nearly 14 times the number of white collar workers who pass the
duties test but are paid below the salary threshold. This underscores
the large number of overtime-eligible workers for whom employers must
perform a duties analysis, and who may be at risk of misclassification
as EAP exempt. If the salary threshold were raised to the 40th
percentile, the number of overtime-eligible salaried white collar
workers who would earn at least the threshold but do not pass the
duties test would be reduced to 5.6 million. At the 40th percentile,
the number of salaried white collar workers who would pass the standard
duties test but earn less than the 40th percentile would be 4.6 million
(approximately 25 percent of all white collar salaried employees who
pass the standard duties test). While this number is higher than the
number of such employees under the Kantor method, it includes employees
who would not have passed the more rigorous long duties test and
therefore were not included under that approach.

[[Page 38560]]

[GRAPHIC] [TIFF OMITTED] TP06JY15.002

As illustrated in Figure 3, as the salary level increases there is
a decrease in the share of overtime-eligible white collar workers for
whom employers would be required to make an assessment under the duties
test and who would be subject to possible misclassification. At the
same time, as the salary level increases there is an increase in the
share of white collar workers who pass the duties test but are screened
from exemption by the salary threshold. At the current salary level,
there is a very large gap between white collar workers who are overtime
eligible but earn at least the threshold (about 85 percent of all
salaried white collar workers who fail the duties test are paid at
least $455 per week) and white collar workers who pass the standard
duties test but do not meet the current salary level (about 4 percent
of all salaried white collar workers who pass the duties test are paid
less than $455 per week). At the proposed salary level of the 40th
percentile of weekly earnings of full-time salaried workers, the
percentage of overtime-eligible white collar workers who earn above the
threshold (and thus would be at risk of misclassification) remains
substantially higher than the percentage of white collar workers who
pass the duties test but earn less than the salary threshold (and would
become overtime protected).\82\ The salary threshold would have to be
considerably higher (at a salary level of approximately $1,015,
approximately the 50th percentile level of full-time salaried workers)
before the percentage of white collar workers who earn less than the
threshold but pass the duties test would equal the percentage who are
overtime eligible but earn at least the salary threshold.
---------------------------------------------------------------------------

\82\ Approximately 41 percent of white collar salaried workers
who do not pass the duties test earn at least the proposed salary
level ($921 per week). Conversely, approximately 25 percent of
employees who pass the standard duties test (and 22 percent of
employees who are currently exempt) earn less than the proposed
salary level.
---------------------------------------------------------------------------

The Department has also looked at the impact of the proposed salary
level on these two groups of workers in low-wage (East South Central)
and high-wage (Pacific) regions in addition to nationally.\83\ For the
East South Central region, the salary level at which the percentages of
the two groups are about equal is approximately $914 per week, while in
the Pacific region, the salary at which the percentages of the two
groups are equal is approximately $1,154 per week. The Department's
proposed salary level of the 40th percentile of weekly earnings of
full-time salaried workers ($921 per week) falls appropriately within
this range. This supports the Department's use of nationwide data to
set a salary level that is appropriate for classifying workers as
entitled to minimum wage and overtime pay or potentially exempt, and
takes into account the impact on employers in low-wage regions.
---------------------------------------------------------------------------

\83\ Of the nine Census Region Divisions, the East South Central
and Pacific divisions correspond to the divisions with the lowest
and highest earnings using the Kantor method. The East South Central
includes Alabama, Kentucky, Mississippi, and Tennessee. The Pacific
includes Alaska, California, Hawaii, Oregon, and Washington.
---------------------------------------------------------------------------

Appropriateness. The standard salary level serves as a bright-line
test for employers, intended to assist in identifying those workers
with duties that may make them truly bona fide executive,
administrative, or professional employees. As explained in the
preceding analysis, the Department has determined that setting the
proposed standard salary level at the 40th percentile of earnings for
full-time salaried workers ($921) appropriately balances the tradeoff
between denying the exemption for employees who are currently exempt
and exposing workers who fail to meet the duties test to the risk of
misclassification as exempt. In the absence of a long duties test which
limits the amount of nonexempt work that can be performed, the
Department believes a salary level at or above the proposed salary
level appropriately distinguishes between overtime-protected and
potentially exempt employees. Of employees currently

[[Page 38561]]

exempt under the part 541 regulations, that is, those who are paid on a
salary basis of at least $455 and meet the duties test, approximately
78 percent earn at least the proposed level of $921 per week.
Conversely, among overtime-eligible white collar employees (both
salaried and hourly), approximately 75 percent earn less than the
proposed salary level.
Simplicity. The proposed method of basing the standard salary
threshold on a particular percentile of weekly earnings for full-time
salaried employees involves less estimation than previous updates,
making it easier to implement, less prone to error, and more
transparent than before. The proposed method reduces computation by
simplifying the classification of workers to just two criteria: Wage or
salaried, and full-time or part-time. Application of the Kantor method,
in particular, would involve significant work to replicate since one
would need to identify likely EAP exempt workers, a process which
requires applying the standard duties test to determine the population
of workers used in the earnings distribution. The proposed method is
easier for stakeholders to replicate and understand because the
standard duties test does not need to be applied to determine the
population of workers used in the earnings distribution.
Consistency. A method that produces very different salary levels in
consecutive years will reduce confidence that the salary levels in any
given year are optimal. Since 2003, the 40th percentile of full-time
salaried workers' weekly earnings has increased by an average of 2.6
percent annually. Similarly, the salary levels that would have been
generated by the 2004 method increased 2.4 percent annually on average
between 2003 and 2013. Conversely, since 2003 the salary levels that
would have been generated by the Kantor method increased 3.6 percent on
average annually. The larger growth rate for the Kantor method explains
why despite the Kantor method and 2004 method generating very similar
salary levels for the 2004 rulemaking, by 2013 these levels differ
significantly (Kantor = $657; 2004 = $577). The primary reason the
Kantor method generates a larger salary level than the 2004 method in
2013 is because the Kantor method uses the value of the current salary
level test to identify the population of workers from which the
earnings distribution is determined. Therefore, the Kantor method
limits the pool of workers in the sample to those who meet the required
salary level before evaluating the salaries of workers in low-wage
regions and industries, while the 2004 method looks to all salaried
workers in the South and retail industry but does not exclude workers
with salaries below the current salary level. For example, in 2003 the
Kantor method population of interest was limited to workers earning at
least $155 per week (the 1975 long test salary level); in this proposed
rule the Kantor method's population was restricted to workers earning
at least $455 per week. Therefore the population considered in Kantor's
method changes each time the salary level is changed. The Department's
proposed method, like the 2004 method, considers all full-time salaried
workers and does not limit the pool to only those workers who meet the
current salary level test, thus avoiding this potential shortcoming of
the Kantor method.
Based on the comparison of the characteristics of the methods
reviewed in this section, the Department has determined that the
proposed method, for the reasons identified, meets the objectives of
appropriateness, simplicity, and consistency.
iv. Standard Salary Levels With Alternative Methodologies
When assessing the effects of the proposed standard salary level on
the U.S. economy, the Department also evaluated several alternatives.
This section presents the alternative salary levels considered and the
bases for identifying those alternative levels. As shown in Table 13,
the alternative salary levels evaluated are:
Alternative 1: Calculate the salary level by adjusting the
2004 salary level of $455 for inflation from 2004 to 2013 as measured
by the CPI-U. This results in a salary level of $561 per week.
Alternative 2: Use the 2004 method to set the salary level
at $577 per week.
Alternative 3: Use the Kantor method to set the salary
level at $657 per week.
Alternative 4: Use the 50th earnings percentile of full-
time hourly and salaried workers. This results in a salary level of
$776 per week.
Alternative 5: Adjust the salary level from the Kantor
method to reflect the historical ratio between the long and short test
salary levels. This results in a salary level of $979 per week.
Alternative 6: Use the 50th earnings percentile of full-
time salaried workers. This results in a salary level of $1,065 per
week.
Alternative 7: Adjust the 1975 short test salary level of
$250 for inflation from 1975 to 2013. This results in a salary level of
$1,083 per week.

Table 13--Proposed Standard Salary Level and Alternatives, 2013
------------------------------------------------------------------------
Salary level Total increase \a\
Alternative (weekly/ -------------------------
annually) $ %
------------------------------------------------------------------------
Alternative #1: Inflate 2004 $561/$29,178 106 23.3
levels.......................
Alternative #2: 2004 method... 577/30,000 122 26.8
Alternative #3: Kantor method. 657/34,176 202 44.4
Alternative #4: Median full- 776/40,352 321 70.5
time hourly and salaried
workers......................
Proposed (40th percentile full- 921/47,892 466 102.4
time salaried)...............
Alternative #5: Kantor short 979/50,922 524 115.2
test.........................
Alternative #6: Median full- 1,065/55,380 610 134.1
time salaried................
Alternative #7: Inflate 1975 1,083/56,291 628 137.9
short test level.............
------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Average weekly change between proposed/alternative salary level and
the salary level set in 2004 ($455 per week).

Alternatives 2 (2004 method) and 3 (Kantor method) were already
discussed. Alternative 5 (Kantor short test) is also based on the
Kantor method but, whereas alternative 3 generates the salary level
associated with the long duties test, alternative 5 generates a level
more closely resembling the salary associated with the short duties
test. In the 2004 Final Rule, the Department replaced the structure of
a short and a long duties test with a single standard

[[Page 38562]]

duties test based on the less restrictive short duties test, which had
historically been paired with a higher salary level test. However, the
Department set the standard salary level in 2004 at a level that was
equivalent to the Kantor long test salary level, which was associated
with the long duties test and limited the amount of nonexempt work that
the employee could perform. In alternative 5, the Department therefore
considered revising the standard salary level to approximate the short
test salary that better matches the standard duties test. On average,
the salary levels set in 1949 through 1975 were 149 percent higher for
the short test than the long test. Therefore, the Department inflated
the 2013 Kantor estimate of $657 by 149 percent, which generated a
short salary level equivalent of $979.\84\ While the Department used
the average difference between the Kantor long and short tests for this
alternative, the ratio of the short to long salary tests ranged from
approximately 130 percent to 180 percent between 1949 and 2004. The low
end of this range would result in a salary of $854; the high end would
result in a salary of $1,183.
---------------------------------------------------------------------------

\84\ The Department estimated the average historic ratio of 149
percent as the simple average of the fifteen historical ratios of
the short duties salary level to the long duties salary level
(salary levels were set in 5 years and in each year the salary level
varied between the three exemptions: executive, administrative, and
professional). If the Department had weighted the average ratio
based on the length of time the historic salary levels were in
effect, this would have yielded an average historic ratio of 152
percent and a salary level of $999.
---------------------------------------------------------------------------

Alternatives 1 (inflating the 2004 level) and 7 (inflating the 1975
short test level) use similar approaches to each other. Both begin with
an exemption salary level set in an earlier rulemaking, and use the
CPI-U to adjust that salary level to account for inflation between the
year it was set and 2013. Where the two approaches differ is in the
selection of the starting point. Alternative 1 assumes the 2004
standard salary level was set at an appropriate level, and that changes
in earnings since that time can be reflected well by changes in prices.
Alternative 1 is inappropriate because the salary level set in 2004
does not fully account for changes in the sample and the change from
long and short duties tests to a single standard test that is
comparable to the old short duties test. Alternative 7 assumes that the
1975 salary levels were set to a more appropriate level than the 2004
levels; inflating the 1975 short duties test salary level to 2013
results in a salary level of $1,083 per week. This alternative is
inappropriate because it is based on interim salary rates. 40 FR 7091.
Additionally, the Department thinks the salary level generated with
this method is too high in light of the fact that there no longer is a
long duties test with an associated lower salary level that employers
may use to claim that employees are exempt.
Alternatives 4 and 6 set the standard salary equal to the 50th
percentile, or median, of weekly earnings for two groups of workers:
full-time hourly and salaried workers and full-time salaried workers,
respectively. These approaches are similar to the proposed method in
that they set the salary level equal to a percentile of an earnings
distribution. The 50th earnings percentile of all full-time hourly and
salaried workers results in a salary level of $776. The Department
concluded, however, that it would not be appropriate to include the
wages of hourly workers in setting the EAP salary threshold and that
the resulting salary level was too low to work effectively with the
standard duties test. Selecting the 50th earnings percentile of full-
time salaried workers results in a standard salary level of $1,065,
which is only $18 per week less than alternative 7. Like alternative 7,
the Department believes that the salary level generated with this
method is too high because there is no longer a long duties test with
an associated lower salary level that employers may use to claim that
employees are exempt.
Section VII.D. will detail the transfers, costs, and benefits of
the proposed salary levels and alternatives. A comparison of the costs
and benefits justifies the Department's decision to propose a standard
salary level of the 40th percentile of weekly earnings for all full-
time salaried workers ($921 per week).
v. Proposed Methodology for the HCE Total Annual Compensation Level
The Department proposes to set the HCE compensation level equal to
the annual equivalent of the 90th percentile of the distribution of
earnings for all full-time salaried workers. BLS calculated the salary
level from the CPS MORG data by limiting the population to non-hourly
workers who work full-time (i.e., at least 35 hours per week) and
determining the 90th percentile of the resulting weighted weekly
earnings distribution. The 90th percentile of weekly earnings ($2,349)
was then multiplied by 52 to determine the annual earnings equivalent
($122,148). This mirrors the method used to set the standard salary
level but uses a percentile towards the top of the earnings
distribution to reflect the minimal duties criteria associated with the
highly compensated exemption.
The Department also evaluated the following alternative HCE
compensation levels:
HCE alternative 1: Leave the HCE compensation level
unchanged at $100,000 per year.
HCE alternative 2: Set the HCE compensation level at
$150,000 per year, which is approximately the annualized level of
weekly earnings exceeded by 6.3 percent of full-time salaried workers.
This is the same percent of such workers that exceeded the HCE
compensation level in 2004.
The Department concluded that HCE alternative 1 was inappropriate
because leaving the HCE compensation level unchanged at $100,000 per
year would ignore more than 10 years of wage growth. In 2013,
approximately 17 percent of full-time salaried workers earned at least
$100,000 annually, more than twice the share who earned that amount in
2004. Conversely, HCE alternative 2 would set the annual compensation
level at $150,000.\85\ The Department believes this salary level would
be too high to provide a meaningful alternative test for exemption.
Thus, the Department believes its proposal to adjust the HCE total
annual compensation to reflect the 90th percentile of earnings of full-
time salaried workers strikes the appropriate balance.
---------------------------------------------------------------------------

\85\ This compensation level corresponds to the annual value of
the highest weekly earnings reported in the CPS MORG public-use
data.
---------------------------------------------------------------------------

D. Impacts of Revised Salary and Compensation Level Test Values

i. Overview
Impacts due to the proposed increases in the EAP salary levels will
depend on how employers respond. Employer response is expected to vary
by the characteristics of the affected EAP workers. For workers who
usually work 40 hours a week or less, the Department assumes that
employers will reclassify these workers as overtime-eligible and will
pay the same weekly earnings for the same number of hours worked. While
these employees will become overtime eligible, employers can continue
to pay their current salaries and need make no adjustments as long as
the employees' hours do not exceed 40 hours in a workweek.\86\ For
employees who work overtime, employers may: (1) Pay the required
overtime premium for the current number of overtime hours based upon
the current implicit regular rate of pay;

[[Page 38563]]

(2) reduce the regular rate of pay so total weekly earnings and hours
do not change after overtime is paid; (3) eliminate overtime hours; (4)
increase employees' salaries to the proposed salary level; or (5) use
some combination of these responses. Transfers from employers to
employees, direct employer costs, and DWL depend on how employers
respond to the proposed rulemaking.
---------------------------------------------------------------------------

\86\ Assuming the worker earns the minimum wage. Otherwise,
wages and hours will be adjusted to reflect compliance with minimum
wage requirements.
---------------------------------------------------------------------------

The cost, benefit and transfer estimates appearing throughout this
section represent nationwide aggregates. Given the potential for this
proposed rule to have impacts that differ by region or industry, the
Department invites detailed comment, data and analysis that would allow
for estimation of impacts on a regional or industry basis.
ii. Summary of Quantified Impacts
Table 14 presents the aggregated projected costs, transfers, and
DWL associated with increasing the standard EAP salary level from $455
per week to the 40th earnings percentile, $921 per week, and the HCE
compensation level from $100,000 to the 90th earnings percentile,
$122,148 annually (without automatic updating). The Department
estimated that the direct employer costs of this proposal will total
$592.7 million in the first year, with average annualized direct costs
of $194.2 million per year over 10 years. In addition to the direct
costs, this proposed rulemaking would also transfer income from
employers to employees. Year 1 transfers would equal $1,482.5 million,
with average annualized transfers estimated at $872.9 million per year
over 10 years. Finally, the 10-year average annualized DWL was
estimated to be $7.2 million.
In order to increase the sample size and the reliability and
granularity of results in this analysis, the Department used three
years (2011-2013) of CPS MORG data to represent the 2013 labor market.
Monetary values in 2011 and 2012 were inflated to 2013 dollars and the
sample was reweighted to reflect the population of potentially affected
workers in 2013. The potential employer costs due to reduced profits
and additional hiring were not quantified but are discussed in section
VII.D.iv.5.

Table 14--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels, Without Automatic Updating
(millions 2013$)
----------------------------------------------------------------------------------------------------------------
Future years \b\ Average annualized value
---------------------------------------------------
Cost/Transfer \a\ Year 1 3% Real 7% Real
Year 2 Year 10 rate rate
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs:
Regulatory familiarization................. $254.5 $0.0 $0.0 $29.0 $33.9
Adjustment................................. 160.1 1.1 0.1 18.4 21.5
Managerial................................. 178.1 169.0 93.1 135.9 138.9
----------------------------------------------------------------
Total direct costs \c\................. 592.7 170.0 93.1 183.2 194.2
----------------------------------------------------------------------------------------------------------------
Transfers from Employers to Workers \d\
Due to minimum wage........................ 46.7 44.0 9.9 27.9 29.3
Due to overtime pay........................ 1,435.8 1,017.1 490.2 815.7 843.6
----------------------------------------------------------------
Total transfers \d\.................... 1,482.5 1,061.2 500.1 843.6 872.9
----------------------------------------------------------------------------------------------------------------
DWL \e\ ........... ........... ........... ........... ...........
DWL........................................ 7.4 9.8 4.3 7.0 7.2
----------------------------------------------------------------------------------------------------------------
\a\ Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the
text.
\b\ These costs/transfers represent a range over the nine-year span.
\c\ Components may not add to total due to rounding.
\d\ This is the net transfer from employers to workers. There may also be transfers of hours and income from
some workers to others.
\e\ DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since
the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime
pay, the vast majority of this cost is attributed to the overtime pay provision.

iii. Affected EAP Workers
1. Overview
Costs, transfer payments, DWL, and benefits of this proposed
rulemaking depend on the number of affected EAP workers and labor
market adjustments made by employers. The Department estimated there
were 21.4 million potentially affected EAP workers, that is EAP workers
who either (1) passed the salary basis test, the standard salary level
test, and the standard duties test, or (2) passed the salary basis
test, passed the standard salary level test, the HCE total compensation
level test, and the HCE duties test. This number excludes workers in
named occupations who are not subject to the salary tests or who
qualify for another (non-EAP) exemption.
The Department estimated that increasing the standard salary level
from $455 per week to the 40th earnings percentile of all full-time
salaried workers ($921 per week) would directly affect 4.6 million
workers (i.e., the number of potentially affected workers who earn at
least $455 per week but less than $921 per week). These affected
workers compose 21.7 percent of potentially affected EAP workers. The
Department also estimated that 36,000 workers would be directly
affected by an increase in the HCE compensation level from $100,000 to
the 90th earnings percentile (the number of potentially affected
workers who earn between $100,000 and $122,148 annually and pass the
minimal duties test but not the standard duties test; about 0.2 percent
of the pool of potentially affected EAP workers).
Table 15 presents the number of affected EAP workers, the mean
number of overtime hours they work per week, and their average weekly
earnings. The 4.6 million workers affected by the increase in the
standard salary level average 1.6 hours of overtime per week and earn
an average of $731 per week.

[[Page 38564]]

The average number of overtime hours is low because most of these
workers (3.7 million) do not usually work overtime.\87\ However, the
estimated 988,000 affected workers who regularly work overtime average
11.1 hours of overtime per week. The 36,000 EAP workers affected by the
proposed change in the HCE annual compensation level average 5.8 hours
of overtime per week and earn an average of $2,103 per week.
---------------------------------------------------------------------------

\87\ That is, workers who report they usually work 40 hours or
less per week (identified with variable PEHRUSL1 in CPS MORG).
---------------------------------------------------------------------------

Although most affected EAP workers who typically do not work
overtime might experience little or no change in their daily work
routine, those who regularly work overtime may experience significant
changes. The Department expects that workers who routinely work some
overtime or who earn less than the minimum wage are most likely to be
tangibly impacted by the revised salary level.\88\ Employers might
respond by: converting such employees to overtime eligible, paying at
least the minimum wage, and paying the overtime premium; reducing
overtime hours; reducing workers' regular wage rates (where the rate
exceeds the minimum wage); increasing the employees' salary to the
proposed salary level; or use some combination of these responses.
---------------------------------------------------------------------------

\88\ A small proportion (0.3 percent) of affected EAP workers
earns implicit hourly wages that are less than the applicable
minimum wage (the higher of the state or federal minimum wage). The
implicit hourly wage is calculated as an affected EAP employee's
total weekly earnings divided by total weekly hours worked.

Table 15--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, 2013
----------------------------------------------------------------------------------------------------------------
Affected EAP workers \a\
-------------------------------- Mean overtime Mean usual
Type of affected EAP worker Number hours weekly
(1,000s) % of total earnings
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........................ 4,646 100 1.6 $731
Earn less than the minimum wage \b\............. 12 0.3 36.4 529
Regularly work overtime......................... 988 21.3 11.1 743
Occasionally work overtime \c\.................. 180 3.9 8.0 729
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........................ 36.2 100 5.8 2,103
Earn less than the minimum wage \b\............. .............. .............. .............. ..............
Regularly work overtime......................... 14.5 40.1 14.3 2,119
Occasionally work overtime \c\.................. 1.0 2.6 6.5 2,120
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
under the proposed salary levels (if their weekly earnings do not increase to the proposed salary levels).
\b\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE
workers will not be impacted by the minimum wage provision.
\c\ Workers who do not usually work overtime but did in the survey week. Mean overtime hours are actual overtime
hours in the survey week.

The Department considered two types of overtime workers in this
analysis: regular overtime workers and occasional overtime workers.\89\
Regular overtime workers typically worked more than 40 hours per week.
Occasional overtime workers typically worked 40 hours or less per week,
but they worked more than 40 hours in the week they were surveyed. The
Department considers these two populations separately in the analysis
because labor market responses to overtime pay requirements may differ
for these two types of workers.
---------------------------------------------------------------------------

\89\ Regular overtime workers were identified in the CPS MORG
with variable PEHRUSL1. Occasional overtime workers were identified
in the CPS MORG with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------

An estimated 181,000 occasional overtime workers will be affected
by either the standard salary level or the HCE total annual
compensation level increase in any given week (3.9 percent of all
affected EAP workers). They averaged 8.0 hours of overtime per week.
This group represents the number of workers with occasional overtime
hours in the week the CPS MORG survey was conducted. In other weeks,
these specific individuals may not work overtime but other workers, who
did not work overtime in the survey week, may work overtime. Because
the survey week is a representative week, the Department believes the
prevalence of occasional overtime in the survey week, and the
characteristics of these workers, is representative of other weeks
(even though a different group of workers would be identified as
occasional overtime workers in a different week).\90\
---------------------------------------------------------------------------

\90\ The Department can estimate the average number of
occasional overtime workers in any given week but cannot estimate
the total number of individuals working occasional overtime in the
year since the Department does not know how many weeks in a year a
specific worker works overtime.
---------------------------------------------------------------------------

2. Characteristics of Affected EAP Workers
In this section the Department examines the characteristics of
affected EAP workers. Table 16 presents the distribution of affected
workers across industries, occupations, and MSA status. The industry
with the largest number of affected EAP workers was education and
health services (1.0 million). The management, business, and financial
occupation category accounted for the most affected EAP workers by
occupation (2.1 million). A substantial majority of affected EAP
workers resided in MSAs (4.1 million). Employers in non-MSAs and low-
wage industries may perceive a greater impact due to the lower wages
and salaries typically paid in those areas and industries. However,
because the vast majority of potentially affected workers reside in
MSAs and do not work in low-wage industries, the Department believes
that the proposed salary level is appropriate.

[[Page 38565]]

Table 16--Estimated Number of Exempt Workers With the Current and Proposed Salary Levels, by Industry,
Occupation, and MSA Status, 2013
----------------------------------------------------------------------------------------------------------------
Potentially affected EAP workers (millions)
\a\
-----------------------------------------------
With updated standard and HCE
Industry, occupation, and MSA status levels
At current -------------------------------
salary levels Reduction
Number \b\ (affected
workers) \c\
----------------------------------------------------------------------------------------------------------------
Total........................................................... 21.38 16.70 4.68
----------------------------------------------------------------------------------------------------------------
By Industry
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, & hunting....................... 0.03 0.03 0.01
Mining.......................................................... 0.18 0.16 0.02
Construction.................................................... 0.76 0.61 0.16
Manufacturing................................................... 3.27 2.86 0.41
Wholesale & retail trade........................................ 2.42 1.76 0.66
Transportation & utilities...................................... 0.80 0.64 0.16
Information..................................................... 0.90 0.71 0.18
Financial activities............................................ 3.30 2.61 0.68
Professional & business services................................ 4.20 3.46 0.73
Education & health services..................................... 3.41 2.41 0.99
Leisure & hospitality........................................... 0.75 0.49 0.26
Other services.................................................. 0.55 0.36 0.18
Public administration........................................... 0.83 0.59 0.24
----------------------------------------------------------------------------------------------------------------
By Occupation
----------------------------------------------------------------------------------------------------------------
Management, business, & financial............................... 10.79 8.69 2.10
Professional & related.......................................... 7.04 5.63 1.40
Services........................................................ 0.19 0.11 0.08
Sales & related................................................. 2.19 1.57 0.62
Office & administrative support................................. 0.97 0.53 0.44
Farming, fishing, & forestry.................................... 0.00 0.00 0.00
Construction & extraction....................................... 0.02 0.02 0.01
Installation, maintenance, & repair............................. 0.05 0.04 0.01
Production...................................................... 0.10 0.08 0.02
Transportation & material moving................................ 0.04 0.03 0.01
----------------------------------------------------------------------------------------------------------------
By MSA Status
----------------------------------------------------------------------------------------------------------------
MSA............................................................. 19.67 15.53 4.14
Non-MSA......................................................... 1.62 1.11 0.52
Not identified.................................................. 0.09 0.06 0.02
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a
named occupation.
\b\ Workers who continue to be exempt after the proposed increases in the salary levels (assuming affected
workers' weekly earnings do not increase to the proposed salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
under the proposed salary levels (if their weekly earnings do not increase to the proposed salary levels).

iv. Costs
1. Summary
Three direct costs to employers were quantified in this analysis:
(1) Regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs. Regulatory familiarization costs are costs to learn
about the change in the regulation and only occur in Year 1. Adjustment
costs are costs incurred by firms to determine workers' exemption
statuses, notify employees of policy changes, and update payroll
systems. Managerial costs associated with this proposed rulemaking
occur because employers may spend more time scheduling newly nonexempt
employees and more closely monitor their hours to minimize or avoid
paying the overtime premium.
The Department estimated costs in Year 1 assuming the first year of
the analysis was 2013. The Department estimated that in Year 1
regulatory familiarization costs would equal $254.5 million, Year 1
adjustment costs would sum to $160.1 million, and Year 1 managerial
costs would total $178.1 million (Table 17). Total direct employer
costs in Year 1 were estimated to equal $592.7 million. Adjustment
costs and management costs are ongoing and will need to be projected
for future years (section VII.D.x.).
Costs that are not quantified are discussed in section VII.D.iv.5.
Adjustment costs and managerial costs associated with automatically
updating the standard salary level are discussed in section VII.E.iii.

[[Page 38566]]

Table 17--Summary of Year 1 Direct Employer Costs of This Proposed Rule (Millions)
----------------------------------------------------------------------------------------------------------------
HCE
Direct employer costs Standard Compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\.................................. .............. .............. $254.5
Adjustment...................................................... 158.8 $1.2 160.1
Managerial...................................................... 176.0 2.1 178.1
-----------------------------------------------
Total direct costs.......................................... 334.8 3.3 592.7
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the
HCE compensation level.

2. Regulatory Familiarization Costs
A change in the standard EAP weekly salary test to the proposed
level would impose direct costs on businesses by requiring them to
review the regulation. It is not clear whether regulatory
familiarization costs are a function of the number of establishments or
the number of firms. The Department believes that generally the
headquarters of a firm will conduct the regulatory review for the
entire company; however, some firms provide more autonomy to their
establishments, and in such cases regulatory familiarization may occur
at the establishment level. To be conservative, the Department uses the
number of establishments in its cost estimate because this provides a
larger cost estimate.
The Department believes that all establishments will incur
regulatory familiarization costs, even if they do not employ exempt
workers, because all establishments will need to confirm whether this
proposed rulemaking includes any provisions that may impact their
workers. Firms with more affected EAP workers will likely spend more
time reviewing the regulation than firms with fewer or no affected EAP
workers (since a careful reading of the regulations will probably
follow the initial decision that the firm is affected). However, the
Department does not know the distribution of affected EAP workers
across firms and so an average cost per establishment is used.
No data were identified from which to estimate the amount of time
required to review the regulation. The Department requests that
commenters provide data if possible. For this NPRM, the Department
estimated establishments will use on average one hour of time because
the proposed regulation is narrowly focused on the salary level tests.
To estimate the total regulatory familiarization costs, three
pieces of information must be estimated: (1) A wage level for the
employees reviewing the rule; (2) the number of hours each employee
spends reviewing the rule; and (3) the number of establishments
employing workers. The Department's analysis assumed that mid-level
human resource workers with a median wage of $23.63 per hour will
review the proposed rule.\91\ Assuming benefits are paid at a rate of
45 percent of the base wage and one hour of time is required for
regulatory familiarization, the average cost per establishment is
$34.19.\92\ The number of establishments with paid employees in 2011
was 7.44 million.\93\
---------------------------------------------------------------------------

\91\ Calculated as the median wage in the CPS for workers with
the occupation ``human resources, training, and labor relations
specialists'' (0620) in 2013. The Department determined this
occupation includes most of the workers who would conduct these
tasks. Bureau of Labor Statistics, U.S. Department of Labor,
Occupational Outlook Handbook, 2014-15 Edition, Human Resources
Specialists and Labor Relations Specialists, available at: http://www.bls.gov/ooh/business-and-financial/human-resources-specialists-and-labor-relations-specialists.htm.
\92\ The benefits-earnings ratio is derived from the BLS's
Employer Costs for Employee Compensation (ECEC) data.
\93\ Data for 2011 was the most recent available at the time of
writing. Survey of U.S. Businesses 2011. Available at: https://www.census.gov/econ/susb/. Also included in the number of
establishments incurring regulatory familiarization costs are the
90,106 state and local governments reported in the 2012 Census of
Governments: Employment Summary Report. Available at: http://www2.census.gov/govs/cog/g12_org.pdf.
---------------------------------------------------------------------------

Regulatory familiarization costs in Year 1 were estimated to be
$254.5 million ($34.19 per establishment x 1 hour x 7.44 million
establishments).\94\ In future years, new firms will be formed and may
incur regulatory familiarization costs. However, the Department
believes the incremental cost of this regulation will be zero since new
firms will only need to familiarize themselves with the updated law,
instead of the old law.
---------------------------------------------------------------------------

\94\ As previously noted, the Department chose to use the number
of establishments rather than the number of firms to provide a more
conservative estimate of the regulatory familiarization cost. Using
the number of firms, 5.8 million, would result in a reduced
regulatory familiarization cost estimate of $197.4 million in Year
1.
---------------------------------------------------------------------------

3. Adjustment Costs
A change in the EAP salary test to the proposed level will impose
direct costs on firms by requiring them to re-determine the exemption
status of employees, update and adapt overtime policies, notify
employees of policy changes, and adjust their payroll systems. The
Department believes the size of these costs will depend on the number
of affected EAP workers and will occur in any year when the salary
level is raised and exemption status is changed for some workers. To
estimate adjustment costs three pieces of information must be
estimated: (1) A wage level for the employees making the adjustments;
(2) the amount of time spent making the adjustments; and (3) the
estimated number of newly affected EAP workers. The Department again
estimated that the average wage with benefits for human resources,
training, and labor relations specialists is $34.19 per hour (as
explained above). No applicable data were identified from which to
estimate the amount of time required to make these adjustments.\95\ The
Department requests that commenters provide any applicable data. For
this NPRM, the Department chose to use one hour of time per affected
worker. The estimated number of affected EAP workers in Year 1 is 4.682
million (as discussed in section VII.D.iii.). Therefore, total Year 1
adjustment costs were estimated to equal $160.1 million ($34.19 x 1
hour x 4.682 million workers).
---------------------------------------------------------------------------

\95\ Costs in the 2004 Final Rule were considered but because
that revision included changes to the duties test the cost estimates
are not directly applicable.
---------------------------------------------------------------------------

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

[[Page 38567]]

4. Managerial Costs
If employers reclassify employees as overtime eligible due to the
changes in the salary levels, then firms may incur ongoing managerial
costs associated with this proposed rulemaking because the employer may
schedule and more closely monitor an employee's hours to minimize or
avoid paying the overtime premium. These costs are in addition to the
one-time regulatory familiarization and adjustment costs described
above. For example, when scheduling hours the manager may have to
assess whether the marginal benefit of scheduling the worker for more
than 40 hours exceeds the marginal cost of paying the overtime premium.
Additionally, the manager may have to spend more time monitoring the
employee's work and productivity since the marginal cost of employing
the worker per hour has increased.
Because there was little precedent or data to aid in evaluating
these costs, the Department examined several sources to estimate costs.
First, prior part 541 rulemakings were reviewed to determine whether
managerial costs were estimated. No estimates were found. This cost was
not quantified for the 2004 rulemaking. Second, a literature review was
conducted in an effort to identify information to help guide the cost
estimates; again, no estimates were found. The Department requests data
from the public applicable to this cost estimate. Despite a lack of
available data, the Department chose to include estimated managerial
costs to produce as full and accurate a cost estimate to employers as
possible.
To provide a sense of the potential magnitude of these costs, the
Department estimated these costs assuming that management spends an
additional five minutes per week scheduling and monitoring each
affected worker expected to be reclassified as overtime eligible as a
result of this NPRM, and whose hours are adjusted (1,022,000 affected
EAP workers as calculated in section VII.D.vi.). As will be discussed
in detail below, most affected workers do not currently work overtime,
and there is no reason to expect their hours worked to change when
their status changes from exempt to nonexempt. Similarly, employers are
likely to find that it is less costly to give some workers a raise in
order to maintain their exempt status. For both these groups of
workers, management will have little or no need to increase their
monitoring of hours worked. Under these assumptions, the additional
managerial hours worked per week were estimated to be 85,200 hours
rounded ((5 minutes/60 minutes) x 1,022,000 workers).
The median hourly wage in 2013 for a manager was $27.78 and
benefits were paid at a rate of 45 percent of the base wage, which
totaled $40.20 per hour.^{96 97} Multiplying the additional
85,200 weekly managerial hours by the hourly wage of $40.20 and 52
weeks per year, the Year 1 costs were estimated to total $178.1 million
for the proposed standard salary level. Although the exact magnitude
would vary with the number of affected EAP workers each year, these
costs would be incurred annually.
---------------------------------------------------------------------------

\96\ Calculated as the median wage in the CPS for workers in
management occupations (excluding chief executives) in 2013.
\97\ The adjustment ratio is derived from the BLS's Employer
Costs for Employee Compensation (ECEC) data using variables
CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------

5. Other Potential Costs
In addition to the costs discussed above, there may be additional
costs that have not been quantified. Other categories of unquantified
costs are discussed in section VII.D.vii and immediately below.
Reduced Profits
The increase in worker earnings' resulting from the revised salary
level is a transfer of income from firms to workers, not a cost, and is
thus neutral concerning its primary effect on welfare and gross
domestic product (GDP). However, there are potential secondary effects
(both costs and benefits) of the transfer due to the potential
difference in the marginal utility of income and the marginal
propensity to consume between workers and business owners. The transfer
may result in societal gain during periods when the economy is
operating below potential to the extent that transferring income to
workers with a relatively high marginal propensity to consume results
in a larger multiplier effect and impact on GDP. Conversely, this
transfer may also reduce the profits available to firms for business
investment.
Hiring Costs
One of Congress' goals in enacting the FLSA in 1938 was to spread
employment to a greater number of workers by effectively raising the
wages of employees working more than 40 hours per week. To the extent
that firms respond to an update to the salary level test by reducing
overtime, they may do so by spreading hours to other workers,
including: Current workers employed for less than 40 hours per week by
that employer, current workers who retain their exempt status, and
newly hired workers. If new workers are hired to absorb these
transferred hours, then the associated hiring costs are a cost of this
proposed rulemaking. The reduction in hours is considered in more
detail in section VII.D.v.
v. Transfers
1. Overview
Transfer payments occur when income is redistributed from one party
to another. The Department has quantified two possible transfers likely
to result from this proposed update to the salary level tests: (1)
Transfers to employees from employers to ensure compliance with the
FLSA minimum wage provision; and (2) transfers to employees from
employers to ensure compliance with the FLSA overtime pay provision.
Transfers in Year 1 to workers from employers due to the minimum wage
provision were estimated to equal $46.7 million. The proposed increase
in the HCE exemption compensation level does not affect minimum wage
transfers because workers eligible for the HCE exemption earn well
above the minimum wage. Transfers to employees from employers due to
the overtime pay provision were estimated to be $1,435.8 million,
$1,394.2 million of which is from the increased standard salary level,
while the remainder is attributable to the increased HCE compensation
level. Total Year 1 transfers were estimated to be $1,482.5 million
(Table 18).

Table 18--Summary of Year 1 Regulatory Transfers
(Millions)
----------------------------------------------------------------------------------------------------------------
HCE
Transfer from employers to workers Standard Compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............................................. $46.7 $0.0 $46.7

[[Page 38568]]

Due to overtime pay............................................. 1,394.2 41.7 1,435.8
-----------------------------------------------
Total transfers............................................. 1,440.8 41.7 1,482.5
----------------------------------------------------------------------------------------------------------------

Because the overtime premium depends on the base wage, the
estimates of minimum wage transfers and overtime transfers are linked.
This can be considered a two-step approach. The Department first
identified affected EAP workers with an implicit regular hourly wage
lower than the minimum wage, and then calculated the wage increase
necessary to reach the minimum wage. The implicit regular rate of pay
is calculated as usual weekly earnings divided by usual weekly hours
worked. For those employees whose implicit regular rate of pay is below
the minimum wage, the overtime premium was based on the minimum wage as
the regular rate of pay.
2. Transfers Due to the Minimum Wage Provision
Transfers from employers to workers to ensure compliance with the
federal minimum wage are small compared to the transfers attributed to
overtime pay and are only associated with the change in the standard
salary level (workers currently eligible for the HCE test earn well
above the minimum wage). For purposes of this analysis, the hourly rate
of pay is calculated as usual weekly earnings divided by usual weekly
hours worked. In addition to earning low wages, this set of workers
earns an hourly rate below the federal minimum wage and also works many
hours per week. To demonstrate, in order to earn less than the federal
minimum wage of $7.25 per hour, but at least $455 per week, these
workers must regularly work significant amounts of overtime (since
$455/$7.25 = 62.8 hours). The applicable minimum wage is the higher of
the federal minimum wage and the state minimum wage. Most affected EAP
workers already receive at least the minimum wage; an estimated 12,000
affected EAP workers (less than 0.3 percent of all affected EAP
workers) currently earn an implicit hourly rate of pay less than the
minimum wage. The Department estimated transfers due to payment of the
minimum wage by calculating the change in earnings if wages rose to the
minimum wage for workers who become nonexempt and thus would have to be
paid the minimum wage.\98\
---------------------------------------------------------------------------

\98\ Because these workers' hourly wages will be set at the
minimum wage after the proposed rule, their employers will not be
able to adjust their wages downward to offset part of the cost of
paying the overtime pay premium (which will be discussed in the
following section). Therefore, these workers will generally receive
larger transfers attributed to the overtime pay provision than other
workers.
---------------------------------------------------------------------------

In response to an increase in the regular rate of pay to the
minimum wage, employers may reduce the workers' hours, which must be
considered when estimating transfers attributed to payment of the
minimum wage to newly overtime-eligible workers. In theory, because the
quantity of labor hours demanded is inversely related to wages, a
higher mandated wage could result in fewer hours of labor demanded.
However, the weight of the empirical evidence finds that increases in
the minimum wage have caused little or no significant job loss.\99\
Thus, in the case of this proposed regulation, the Department believes
that any disemployment effect due to the effect of the minimum wage
provision would be negligible. This is partially due to the small
number of workers affected by this provision. The Department estimated
the potential disemployment effects (i.e., the estimated reduction in
hours) of the transfer attributed to the minimum wage by multiplying
the percent change in the regular rate of pay by a labor demand
elasticity of -0.075.\100\
---------------------------------------------------------------------------

\99\ Belman, D., and P.J. Wolfson (2014). What Does the Minimum
Wage Do? Kalamazoo, MI: W.E. Upjohn Institute for Employment
Research. Dube, A., T.W. Lester, and M. Reich. (2010). Minimum Wage
Effects Across State Borders: Estimates Using Contiguous Counties.
IRLE Working Paper No. 157-07. http://irle.berkeley.edu/workingpapers/157-07.pdf. Schmitt, J. (2013). Why Does the Minimum
Wage Have No Discernible Effect on Employment? Center for Economic
and Policy Research.
\100\ This is based on the estimated impact of a change in the
minimum wage from $7.25 to $9.00 per hour on the employment of
teenagers from Congressional Budget Office. (2014). The Effects of a
Minimum-Wage Increase on Employment and Family Income. While an
elasticity estimate for adult workers would be more appropriate, the
report stated that the elasticity for adults was ``about one-third
of the elasticity'' for teenagers, without providing a specific
value. In addition, the literature for adults is more limited.
---------------------------------------------------------------------------

At the proposed salary level ($921 per week), the Department
estimated that 12,000 affected EAP workers will on average see an
hourly wage increase of $0.98, work 1.0 fewer hour per week, and
receive an increase in weekly earnings of $74.0 as a result of coverage
by the minimum wage provisions (Table 19). Thus, the total change in
weekly earnings due to the payment of the minimum wage was estimated to
be $897,300 per week ($74.0 x 12,000) or $46.7 million in Year 1.

Table 19--Minimum Wage Only: Mean Hourly Wages, Usual Overtime Hours, and Weekly Earnings for Affected EAP
Workers, 2013
----------------------------------------------------------------------------------------------------------------
Total weekly
Hourly wage Usual weekly Usual weekly transfer
\a\ hours earnings (1,000s) \b\
----------------------------------------------------------------------------------------------------------------
Before proposed regulation...................... $7.09 76.4 $529.1 --
After proposed regulation....................... 8.07 75.4 603.1 --
Change.......................................... 0.98 -1.0 74.0 $897.3
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.
\b\Usual weekly earnings multiplied by the 12,000 exempt workers with an implicit regular rate of pay below the
minimum wage who would lose their exemption status under the proposed rulemaking if weekly earnings did not
change.

[[Page 38569]]

3. Transfers Due to the Overtime Pay Provision
The proposed rule will also transfer income to affected EAP workers
working in excess of 40 hours per week through payment of overtime to
workers earning between the current and proposed salary levels. The
size of the transfers will depend largely on how employers respond to
the proposed salary level for affected EAP workers who work overtime.
Employers may respond by: (1) Paying the required overtime premium to
affected workers for the same number of overtime hours at the same
implicit regular rate of pay; (2) reducing the regular rate of pay for
workers working overtime; (3) eliminating overtime hours and
potentially transferring some of these hours to other workers; (4)
increasing workers' salary to the proposed salary level; or (5) using
some combination of these responses. How employers will respond depends
on the relative costs of each of these alternatives; in turn, the
relative costs of each of these alternatives are a function of workers'
earnings and hours worked.
The simplest approach to estimating these transfer payments would
be to multiply an employee's regular rate of pay (after compliance with
the minimum wage) by 1.5 for all overtime hours; this is referred to as
the ``full overtime premium'' model.\101\ However, due to expected wage
and hour adjustments by employers, this would likely overestimate the
size of the transfer. Therefore, the Department used a methodology that
allows for employer adjustments, such as changes in the regular rate of
pay or hours worked. The size of these adjustments is likely to vary
depending on the affected worker's salary and work patterns.
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\101\ The implicit regular rate of pay is calculated as usual
weekly earnings divided by usual weekly hours worked. For example,
the regular rate of pay for an employee previously ineligible for
overtime whose usual weekly earnings was $600 and usual weekly hours
was 50 would be $12. Under the full overtime premium model, this
employee would receive $660 (40 hours x $12) + (10 hours x $12 x
1.5).
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Employer Adjustments to the Regular Rate of Pay
This section focuses on evaluating employers' responses to affected
EAP workers who work regular overtime (usually work more than 40 hours
in a week). The requirement that employers pay newly nonexempt
employees in accordance with minimum wage and overtime requirements may
result in changes in employment conditions; requiring an overtime
premium increases the marginal cost of labor, which employers will
likely try to offset by adjusting wages or hours. How employers respond
to a new salary level and the ensuing changes in employment conditions
will depend on the demand for labor, current wages, employer and
employee bargaining power, and other factors. To model employer
responses, the Department used a method that reflects the average
response among all employers for all affected workers. However,
individual employer responses will vary.
Two conceptual models are useful for thinking about how employers
may respond to reclassifying certain employees as overtime eligible:
The ``full overtime premium'' model and the ``employment contract''
model.\102\ These models make different assumptions about the demand
for overtime hours and the structure of the employment agreement which
result in different implications for predicting employer responses.
---------------------------------------------------------------------------

\102\ The employment contract model is also known as the fixed-
job model. See Trejo, S.J. (1991). The Effects of Overtime Pay
Regulation on Worker Compensation. American Economic Review, 81(4),
719-740 and Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
---------------------------------------------------------------------------

The full overtime premium model is based on the traditional ``labor
demand'' model of determining wage and hour conditions. In the labor
demand model, employers and employees negotiate fixed hourly wages and
then subsequently negotiate hours worked, rather than determining both
hours and pay simultaneously. This model assumes employees are aware of
the hourly wage rate they negotiated and may be more reluctant to
accept downward adjustments. The labor demand model would apply if
employees had a contract to be paid at an hourly rate, meaning that
employers could not reduce the regular rate of pay in response to the
requirement to pay a 50 percent premium on hours worked beyond 40 in a
week. However, the increase in the cost of labor would lead to a
reduction in the hours of labor demanded as long as labor demand is not
completely inelastic. The full overtime premium model is a particular
scenario of the labor demand model in which the demand for labor is
completely inelastic, that is employers will demand the same number of
hours worked regardless of the cost.
In the employment contract model, employers and employees negotiate
total pay and hours simultaneously, rather than negotiating a fixed
hourly wage and then determining hours. Under this model, when
employers are required to pay employees an overtime premium, they
adjust the employees' implicit hourly rate of pay downward so that when
the overtime premium is paid total employee earnings (and thus total
employer cost) remain constant, along with the employees' hours. The
employer does not experience a change in cost and the employee does not
experience a change in earnings or hours. The employment contract model
would hold if the workers who are reclassified as overtime protected
had an employment agreement specifying set total earnings and hours of
work.
The employment contract model tends to be more applicable to
salaried workers while the labor demand model is generally more
applicable to workers paid hourly. Since all affected EAP workers in
this analysis are salaried, the Department believes the employment
contract model may be more appropriate for estimating employer response
to the proposed salary increase. However, the employment contract model
may not always hold true due to market constraints, employer
incentives, or workers' bargaining power. Four examples are provided.
Employers are constrained because they cannot reduce an
employee's implicit hourly rate of pay below the minimum wage. If the
employee's implicit hourly rate of pay before the change is at or below
the minimum wage, then employers will not be able to reduce the rate of
pay to offset the cost of paying the overtime premium.
Employees generally have some, albeit limited, bargaining
power which may prevent employers from reducing the employee's implicit
hourly rate of pay to fully offset increased costs.
Employers may be hesitant to reduce the employee's
implicit hourly rate of pay by the entire amount predicted by the
employment contract model because it may hurt employee morale and
consequently productivity.
Employers are often limited in their ability to pay
different regular rates of pay to different employees who perform the
same work and have the same qualifications. In order to keep wages
constant across employees and reduce wages for overtime workers,
employers would need to reduce the implicit hourly rate of pay for
employees who do not work overtime as well as those who do work
overtime. This would reduce total earnings for these non-overtime
employees (potentially causing retention problems, productivity losses,
and morale concerns).
Therefore, the likely outcome will fall somewhere between the
conditions predicted by the full overtime premium and employment
contract models. For

[[Page 38570]]

example, the implicit hourly rate of pay may fall, but not all the way
to the wage predicted by the employment contract model, and overtime
hours may fall but not be eliminated since the implicit hourly rate of
pay has fallen. The Department conducted a literature review to
evaluate how the market would adjust to a change in the requirement to
pay overtime.
Barkume (2010) and Trejo (1991) empirically tested for evidence of
these two competing models by measuring labor market responses to the
application of FLSA overtime pay regulations.\103\ Both concluded that
wages partially adjust toward the level consistent with the employment
contract model in response to the overtime pay provision.\104\ Barkume
found that employee wage rates were adjusted downward by 40 to 80
percent of the amount the employment contract model predicted,
depending on modeling assumptions. Earlier research had demonstrated
that in the absence of regulation some employers may voluntarily pay
workers some overtime premium to entice them to work longer hours, to
compensate workers for unexpected changes in their schedules, or as a
result of collective bargaining.\105\ Thus Barkume assumed that workers
would receive an average voluntary overtime pay premium of 28 percent
in the absence of an overtime pay regulation. Including this voluntary
overtime pay from employers, he estimated that in response to overtime
pay regulation, the wage adjusted downward by 80 percent of the amount
that would occur with the employment contract model. Conversely, when
Barkume assumed workers would receive no voluntary overtime pay premium
in the absence of an overtime pay regulation, wages adjusted downward
40 percent of the amount the employment contract model
predicted.^{106 107} However, while it seemed reasonable that
some premium was paid for overtime in the absence of regulation,
Barkume's assumption of a 28 percent initial overtime premium is likely
too high for the salaried workers potentially affected by a change in
the salary and compensation level requirements for the EAP
exemptions.\108\
---------------------------------------------------------------------------

\103\ Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142. Trejo, S.J. (1991). The Effects of Overtime Pay
Regulation on Worker Compensation. American Economic Review, 81(4),
719-740.
\104\ Since both papers were based on cross-sectional data,
findings were assumed to be at the final equilibrium wages. Studies
showing wage contracts are likely to be stickier in the short run
than in the long run have limited applicability here since this
analysis deals exclusively with salaried workers who are less likely
to be aware of their implicit hourly wage rate. The Department has
modeled a sticky adjustment process by assuming the wage elasticity
of demand for labor is smaller in Year 1 than in subsequent years.
\105\ Barzel, Y. (1973). The Determination of Daily Hours and
Wages. The Quarterly Journal of Economics, 87(2), 220-238
demonstrated that modest fluctuations in labor demand could justify
substantial overtime premiums in the employment contract model.
Hart, R.A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium?
IZA Discussion Paper No. 163, showed that establishing an overtime
premium in an employment contract can reduce inefficiencies.
\106\ Barkume's estimates are consistent with Trejo's 1991
finding that the wage adjustment when there is no overtime premium
was only about 40 percent of the full employment contract model
adjustment. Trejo's estimates range from 25 percent to 49 percent
and average 40 percent. Trejo, S.J. (1991). The Effects of Overtime
Pay Regulation on Worker Compensation. American Economic Review,
81(4), 719-740.
\107\ Consider a worker earning $500 and working 50 hours per
week. Assuming no overtime premium is paid the imputed hourly rate
of pay is $10. Assuming a 28 percent overtime premium, the hourly
rate of pay is $9.47 (($9.47 x 40) + (($9.47 x 1.28) x 10)) = $500.
If the hourly rate of pay was fully adjusted to the employment
contract model level when overtime pay is newly required, the hourly
rate of pay would be $9.09 (($9.09 x 40) + (($9.09 x 1.5) x 10)) =
$500. Forty percent of the adjustment from $10 to $9.09 results in
an adjusted regular rate of pay of $9.64. Eighty percent of the
adjustment from $9.47 to $9.09 results in an adjusted hourly rate of
pay of $9.17. The Department took the average of these two adjusted
wages to estimate that the resulting hourly rate of pay would be
$9.40.
\108\ Barkume (2010) based this assumption on the findings of
Bell, D. and Hart, R. (2003). Wages, Hours, and Overtime Premia:
Evidence from the British Labor Market. Industrial and Labor
Relations Review, 56(3), 470-480. This study used 1998 data on male,
non-managerial full-time workers in Britain. British workers were
likely paid a larger voluntary overtime premium than American
workers because Britain did not have a required overtime pay
regulation and so collective bargaining played a larger role in
implementing overtime pay.
---------------------------------------------------------------------------

Modeling Employer Adjustments to the Hourly Rate of Pay and Overtime
Hours
In practice, employers do not seem to adjust wages of regular
overtime workers to the full extent indicated by the employment
contract model, and thus employees appear to get a small but
significant increase in weekly earnings due to coverage by overtime pay
regulations. Barkume and Trejo found evidence partially supporting both
the employment contract model and the full overtime premium model in
response to a 50 percent overtime premium requirement: A decrease in
the regular rate of pay for workers with overtime (but not the full
decrease to the employment contract model level) and a decrease in the
probability of working overtime. Therefore, when modeling employer
responses with respect to the adjustment to the regular rate of pay,
the Department used a method that falls somewhere between the
employment contract model and the full overtime premium model (i.e.,
the partial employment contract model).
Barkume reported two methods to estimate this partial employment
contract wage, depending on the amount of overtime pay assumed to be
paid in the absence of regulation. As noted above, the Department
believes both the model assuming a voluntary 28 percent overtime
premium and the model assuming no voluntary overtime premium are
unrealistic for the affected population. Therefore, lacking more
information, the Department determined that an appropriate estimate of
the impact on the implicit hourly rate of pay for regular overtime
workers after the proposed rule should be determined using the average
of Barkume's two estimates of partial employment contract model
adjustments: A wage change that is 40 percent of the wage change
assuming an initial zero overtime pay premium, and a wage change that
is 80 percent of the wage change assuming an initial 28 percent
overtime pay premium.\109\ This is approximately equivalent to assuming
that overtime workers received a 14 percent overtime premium in the
absence of regulation (the mid-point between 0 and 28 percent).
---------------------------------------------------------------------------

\109\ Both studies considered a population that included hourly
workers. Evidence is not available on how the adjustment towards the
employment contract model differs between salaried and hourly
workers. The employment contract model may be more likely to hold
for salaried workers than for hourly workers since salaried workers
directly observe their weekly total earnings, not their implicit
equivalent hourly wage. Thus, applying the partial adjustment to the
employment contract model as estimated by these studies may
overestimate the transfers from employers to workers who are
salaried.
---------------------------------------------------------------------------

How employers adjust workers' wages and hours depends on employment
conditions. The discussion begins with a description of how employment
conditions affect employers' wage adjustments depending on the
differing work characteristics of their employees. However, changing
employees' earnings is also likely to result in adjustments to hours
worked. Thus, after estimating wage adjustments the Department
calculated the adjustments to hours worked as a function of the new
wage. Finally, transfers from employers to employees were estimated as
a function of the changes in wages and the changes in hours.
The Department identified four types of workers whose work
characteristics impact how employers were modeled to respond to the
proposed changes in both the standard and HCE salary levels:

[[Page 38571]]

Type 1: Workers who do not work overtime. These workers
will not experience any adjustment in their hourly rate of pay.
Type 2: Workers who do not regularly work overtime but
occasionally work overtime.\110\ Some of these workers' implicit hourly
rate of pay will fall.\111\ Others will have no change in their hourly
rate of pay.
---------------------------------------------------------------------------

\110\ Type 2 workers are those who worked overtime in the survey
week (the week referred to in the CPS MORG questionnaire). If a
different week was chosen as the survey week then likely some of
these workers would not have worked overtime. However, because the
data are representative of both the population and all twelve months
in a year, the Department believes the share of Type 2 workers in
the given week is representative of an average week in the year.
\111\ The Department assumes that Type 2 workers are currently
paid additional wages for overtime hours worked at the usual hourly
wage rate. Specifically, Type 2 workers' actual earnings for the
week are calculated as (usual weekly earnings/usual hours worked) x
(actual hours worked last week).
---------------------------------------------------------------------------

Type 3: Workers who regularly work overtime. These
workers' implicit hourly rate of pay falls to reflect the partial
employment contract model adjustment.\112\
---------------------------------------------------------------------------

\112\ The reduction in the regular hourly wage is restricted by
the minimum wage; the wage cannot fall below the minimum wage.
---------------------------------------------------------------------------

Type 4: Workers who regularly work overtime. These workers
differ from the Type 3 workers in that once wages and hours are
adjusted, weekly earnings are greater than the proposed salary level,
so employers will increase these workers' earnings to the proposed
salary level so they can continue to claim the EAP exemption for
them.\113\
---------------------------------------------------------------------------

\113\ It is possible that employers will increase the salaries
paid to some ``occasional'' overtime workers to maintain the
exemption for the worker, but the Department has no way of
identifying these workers.
---------------------------------------------------------------------------

Type 1 affected EAP workers will become overtime eligible, but
since they do not work overtime, they will see no change in their
weekly earnings. Type 2 and Type 3 affected EAP workers will become
overtime eligible and must be paid the overtime premium for any
overtime hours worked and may see changes in their regular rate of pay,
and/or hours, and thus weekly earnings. As explained in more detail
below, Type 2 and Type 3 affected workers were modeled differently due
to the difference in the nature of the overtime hours worked. Type 3
workers receive wages adjusted for partial compliance with the
employment contract model and their hours adjust in response. Type 4
workers are those who regularly work overtime, but will remain exempt
because their weekly earnings will be raised to the proposed EAP salary
level (either the standard salary level or HCE compensation level
depending on which test the worker passed). How employers respond to
workers who work overtime hours is described in more detail in the
following paragraphs for Type 2 and Type 3 workers.
The Department distinguishes those who regularly work overtime
(Type 3 workers) from those who occasionally, or irregularly, work
overtime (Type 2 workers) because employer adjustment to the proposed
rule may differ accordingly. The Department believes that employers are
more likely to adjust hours worked and wages for regular overtime
workers because their hours are predictable. Conversely, it may be more
difficult to adjust hours and wages for occasional overtime workers
because employers may be responding to a transient, perhaps
unpredicted, shift in market demand for the good or service they
provide. In this case it is likely advantageous for the employer to pay
for this occasional overtime rather than to adjust permanent staffing.
Additionally, the transient and possibly unpredicted nature of the
change may make it difficult to adjust wages for these workers.
The Department treats Type 2 affected workers in two ways due to
the uncertainty of the nature of these occasional overtime hours
worked. If these workers work extra hours on an unforeseen, short-term,
as-needed basis (e.g., to adjust to unanticipated increases in demand),
then there may be less opportunity for employers to adjust straight-
time wages downward.\114\ However, if these workers work extra hours on
a foreseen, periodic basis (e.g., work a few extra hours one week each
month, but workers do not consider it ``regular overtime'' because they
do not work overtime during three weeks each month), then there may be
some opportunity for employers to adjust straight-time wages downward
(e.g., so pre- and post-revision monthly income is more similar). That
this overtime is periodic and predictable is what makes it much more
similar to that worked by Type 3 workers, and provides employers with
more opportunity to adjust hours and wages. Since in reality there is
likely a mix of these two occasional overtime scenarios, the Department
combines models representing these two scenarios when estimating
impacts.\115\
---------------------------------------------------------------------------

\114\ Employers may be reluctant to reset hourly wage rates to
respond to unexpected changes to the need for overtime because the
negative impact on worker morale may outweigh the gains from
adjusting wages to unexpected shifts in demand. Of relevance is the
well-established literature that shows employers do not quickly
adjust wages downward in regard to downturns in the economy; the
same logic applies to our approach to unexpected changes in demand.
See, for example: Bewley, T. (1999). Why Wages Don't Fall During a
Recession. Cambridge, MA: Harvard University Press. See also Barzel,
Y. (1973). The Determination of Daily Hours and Wages. The Quarterly
Journal of Economics, 87(2), 220-238.
\115\ Trejo and Barkume's adjustments are averages; excluding
some workers (i.e., half of Type 2 workers) from these adjustments
could potentially bias the size of the adjustment for the workers
who continue to receive the adjustment. This bias would exist if
Barkume and Trejo estimated the average adjustment for a sample of
workers including irregular overtime workers and the size of the
adjustment for these workers differs from other workers. It is not
clear whether Trejo's and Barkume's samples include both occasional
and regular overtime workers; however, the Department's
interpretation is that Trejo includes only workers who usually work
overtime and Barkume includes both. If these assumptions are
correct, the magnitude of this RIA's adjustment made for the workers
whose wages and hours are adjusted would be appropriate if it were
applying Trejo's results but may, due to applying Barkume's, result
in an underestimate of the average fall in base wages. We believe
the magnitude of any potential bias will be small because the half
of Type 2 workers who are occasional overtime workers (and thus
treated differently) compose only 8 percent of Type 2 and Type 3
workers.
---------------------------------------------------------------------------

Our estimate for how Type 2 workers are affected is based on the
assumption that 50 percent of these workers who worked occasional
overtime worked expected overtime hours and the other 50 percent worked
unexpected overtime. Workers were randomly assigned to these two
groups. Workers with expected occasional overtime hours were treated
like Type 3 affected workers (partial employment contract model
adjustments). Workers with unexpected occasional overtime hours were
assumed to receive a 50 percent pay premium for the overtime hours
worked (full overtime premium model).
Since affected Type 2 and Type 3 EAP workers work more than 40
hours per week, whether routinely or occasionally, they will now be
overtime protected. These workers will receive an overtime premium
based on their implicit hourly wage adjusted as described above.
Because employers must now pay more for the same number of labor hours,
they will seek to reduce those hours; in economics, this is described
as a decrease in the quantity of labor hours demanded (a movement to
the left along the labor demand curve). It is the net effect of these
two changes that will determine the final weekly earnings for affected
EAP workers. Next we describe how these workers' hours adjust in
response to the change in their implicit hourly wage and the
requirement to pay an overtime premium on that wage for each hour
worked in excess of 40 hours per week.
The reduction in hours is calculated using the elasticity of labor
demand with respect to wages. The Department used a short-run demand
elasticity of

[[Page 38572]]

-0.20 to estimate the percentage decrease in hours worked resulting
from the increase in average hourly wages in Year 1 calculated using
the adjusted base wage and the overtime wage premium.\116\ The
interpretation of the short run demand elasticity in this context is
that a 10 percent increase in wages will result in a 2 percent decrease
in hours worked. Transfers projected for years 2 through 10 used a
long-run elasticity; this will be discussed in section VII.D.x.1.\117\
---------------------------------------------------------------------------

\116\ This elasticity estimate is based on the Department's
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP
No. 7958. Some researchers have estimated larger impacts from own
wage changes on the number of overtime hours worked (Hamermesh, D.
and S. Trejo. (2000). The Demand for Hours of Labor: Direct Evidence
from California. The Review of Economics and Statistics, 82(1), 38-
47 conclude the price elasticity of demand for overtime hours is at
least -0.5). The Department decided to use a general measure of
elasticity applied to the average change in wages since the increase
in the overtime wage is somewhat offset by a decrease in the non-
overtime wage as indicated in the employment contract model, and
welcomes comments on the appropriate elasticity to be used in this
analysis.
\117\ In the short-run not all factors of production can be
changed and so the change in hours demanded is smaller than in the
long run, when all factors are flexible.
---------------------------------------------------------------------------

The Department calculates the percent increase in hourly wages
since it must be used with the elasticity of labor demand to determine
the change in hours. This is equal to workers' new average hourly wage
(including overtime pay) divided by their original implicit hourly
wage. For Type 3 affected workers, and the 50 percent of Type 2
affected workers who worked expected overtime, we estimate adjusted
total hours worked after making wage adjustments using the partial
employment contract model. To estimate adjusted hours worked, we set
the percent change in total hours worked equal to the percent change in
average wages multiplied by the wage elasticity of labor demand.\118\
The wage elasticity of labor demand was determined from a review of
published econometric studies. The percent change in average wages is
equal to the adjusted implicit average hourly wage minus the original
implicit average hourly wage divided by the original implicit average
hourly wage. The original implicit average hourly wage is equal to
original weekly earnings divided by original hours worked. The adjusted
implicit average hourly wage is equal to adjusted weekly earnings
divided by adjusted total hours worked. Adjusted weekly earnings equals
the adjusted hourly wage (i.e., after the partial employment contract
model adjustment) multiplied by 40 hours plus adjusted hours worked in
excess of 40 multiplied by 1.5 times the adjusted hourly wage.
---------------------------------------------------------------------------

\118\ In this equation, the only unknown is adjusted total hours
worked. Since adjusted total hours worked is in the denominator of
the left side of the equation and is also in the numerator of the
right side of the equation, solving for adjusted total hours worked
requires solving a quadratic equation.
---------------------------------------------------------------------------

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

[[Page 38573]]

[GRAPHIC] [TIFF OMITTED] TP06JY15.003

\a\ Affected EAP workers are those who are exempt under the
current EAP exemptions and would gain minimum wage and overtime
protection or receive a raise to the proposed increased salary
level.
\b\ Depending on how employers respond to this rule, some
workers may experience adverse consequences due to a reduction in
their hours of work, potentially necessitating a second job to
maintain their pre-rule earnings level.
\c\ Occasional overtime workers are those who responded that
they (1) do not usually work overtime and (2) worked overtime in the
survey week. In any given week different workers may be working
occasional overtime but the Department assumes the total number of
occasional overtime workers and occasional overtime hours are
similar across weeks.
\d\ The amount wages are adjusted downwards depends on whether
the employment contract model or the labor demand model holds. The
Department's preferred method uses a combination of the two.
Employers reduce the regular hourly wage rate somewhat in response
to overtime pay requirements, but the wage is not reduced enough to
keep total compensation constant.
\e\ Based on hourly wage and weekly hours it is more cost
efficient for the employer to increase the worker's weekly salary to
the updated salary level than to pay overtime pay.
\f\ The Department assumed hours would not change due to lack of
data and relevant literature; however, it is possible employers will
increase these workers' hours in response to paying them a higher
salary.
Estimates of the Number of and Impacts on Affected EAP workers
The Department projects 4.7 million workers will be affected by
either (1) an increase in the standard salary level to the 40th
earnings percentile because they earn salaries between $455 per week
and $921 per week or (2) an increase in the HCE compensation level to
the 90th earnings percentile, $122,148 annually. These workers are
categorized into the four ``types'' identified previously. There are
3.5

[[Page 38574]]

million Type 1 workers (74.7 percent of all affected EAP workers),
those who work 40 hours per week or less and thus will not be paid an
overtime premium despite their expected change in status to overtime
protected (Table 20). Type 2 workers, those who are expected to become
overtime eligible and do not usually work overtime but did work
overtime in the survey week (i.e., occasional overtime workers), total
181,000 workers (3.9 percent of all affected EAP workers). Type 3
workers, those who are expected to become overtime eligible and be paid
the overtime premium, are composed of an estimated 931,000 workers
(19.9 percent of all affected EAP workers). The number of affected Type
4 workers was estimated to be 71,000 workers (1.5 percent of all
affected workers); these are workers who the Department believes will
remain exempt because firms will have a financial incentive to increase
their weekly salaries to the proposed salary level so that they remain
exempt, rather than pay a premium for overtime hours.\119\
---------------------------------------------------------------------------

\119\ As previously described, the Department calculated a wage
and hour adjustment for all regular overtime workers. Consider, by
way of example, a worker who initially earned $900 and worked 70
hours per week. Suppose the partial employment contract adjustment
results in a regular rate of pay of $11.94 and 69.5 hours worked per
week. After the partial employment contract adjustments, this worker
would receive approximately $1,006 per week ((40 x $11.94) + (29.5 x
($11.94 x 1.5)). Since this is greater than the proposed standard
salary level, the Department estimated that this worker would have
his salary increased to $921 and remain exempt at that threshold.

Table 20--Affected EAP Workers by Type (1,000s), 2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Regular OT
No overtime Occasional OT ---------------------------------
Total \a\ worked (T1) (T2) Newly Remain exempt
nonexempt (T3) (T4)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Standard salary level.............................................. 4,646 3,478 180 920 67
HCE compensation level............................................. 36.2 20.7 1.0 11.1 3.4
------------------------------------------------------------------------------------
Total.......................................................... 4,682 3,499 181 931 71
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the proposed salary levels (if their
weekly earnings do not increase to the proposed salary levels).
*Type 1: Workers without regular OT and without occasional OT.
*Type 2: Workers without regular OT but with occasional OT. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and
hours fall for 50 percent of workers.
*Type 3: Workers with regular OT who become nonexempt. Paid overtime premium pay, so average weekly hours increase, but regular rate of pay and hours
fall.
*Type 4: Workers with regular OT who remain exempt (i.e., are paid the proposed salary level).

The proposed rulemaking will likely impact affected workers' wages,
hours, and earnings. How these will change depends on the type of
worker. Predicted changes in implicit wage rates are outlined in Table
21; changes in hours in Table 22; and changes in weekly earnings in
Table 23. Type 1 workers will have no change in wages, hours, or
earnings.\120\
---------------------------------------------------------------------------

\120\ It is possible that these workers may experience an
increase in hours and weekly earnings because of transfers of hours
from overtime workers. Due to the high level of uncertainty in
employers' responses regarding the transfer of hours, the Department
did not have credible evidence to support an estimation of the
number of hours transferred to other workers.
---------------------------------------------------------------------------

Estimating changes in the regular rate of pay for Type 3 workers
and the 50 percent of Type 2 workers who regularly work occasional
overtime requires application of the partial employment contract model,
which predicts a decrease in their average regular rates of pay. The
Department estimates that employers would decrease these workers'
regular hourly rates of pay to the amount predicted by the partial
employment contract model adjustment. Employers would not be able to
adjust the regular rate of pay for the occasional overtime workers
whose overtime is irregularly scheduled and unpredictable (the
remaining 50 percent of Type 2 workers). As a group, Type 2 workers
currently exempt under the standard test would see a decrease in their
average regular hourly wage (i.e., excluding the overtime premium) from
$18.30 to $17.88, a decrease of 2.3 percent. Type 2 workers paid
between $100,000 and the proposed HCE compensation level would see an
average decrease in their regular hourly wage from $52.99 to $50.85, a
decrease of 4.0 percent. However, because workers will now receive a 50
percent premium on their regular hourly wage for each hour worked in
excess of 40 hours per week, average weekly earnings for Type 2 workers
would increase.
Type 3 workers will also receive decreases in their regular hourly
wage as predicted by the partial employment contract model. Type 3
affected workers paid below the proposed standard salary level would
have their regular hourly rate of pay decrease on average from $14.71
to $13.93 per hour, a decrease of 5.3 percent. Type 3 workers paid
between $100,000 and the proposed HCE compensation level would have
their regular rate of pay decrease on average from $39.23 to $36.66 per
hour, a decrease of 6.5 percent. Again, although regular hourly rates
decline, weekly earnings will increase on average because these workers
are now eligible for the overtime premium.
Type 4 workers' implicit hourly rates of pay would increase in
order for their earnings to meet the proposed standard salary level
($921 per week) or the proposed HCE annual compensation level (122,148
annually). The implicit hourly rate for Type 4 affected EAP workers who
had earned between $455 and $921 per week would increase on average
from $16.40 to $16.72 (a 2.0 percent increase) (Table 21). The implicit
hourly rate of pay for Type 4 workers who had earned between $100,000
and $122,148 annually would increase on average from $41.87 to $42.32
(a 1.1 percent increase).

[[Page 38575]]

Table 21--Average Regular Rate of Pay by Type of Affected EAP Worker, 2013
----------------------------------------------------------------------------------------------------------------
Regular OT
No overtime Occasional OT -------------------------------
Total worked (T1) (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Before proposed rule............ $18.38 $19.39 $18.30 $14.71 $16.40
After proposed rule............. 18.21 19.39 17.88 13.93 16.72
Change.......................... -0.17 0.00 -0.42 -0.78 0.33
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before proposed rule............ $47.26 $52.18 $52.99 $39.23 $41.87
After proposed rule............. 46.46 52.18 50.85 36.66 42.32
Change.......................... -0.80 0.00 -2.14 -2.57 0.45
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
*Type 1: Workers without regular OT and without occasional OT.
*Type 2: Workers without regular OT but with occasional OT. Paid overtime premium pay, so average weekly
earnings increase, but regular rate of pay and hours fall for 50 percent of workers.
*Type 3: Workers with regular OT who become nonexempt. Paid overtime premium pay, so average weekly hours
increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., are paid the proposed salary level).

Type 1 and Type 4 workers would have no change in hours. Type 1
workers' hours would not change because they do not work overtime and
thus the requirement to pay an overtime premium does not affect them.
Type 4 workers' hours would not change because they continue to be
exempt, and therefore are not paid a premium for overtime hours. Type 2
and Type 3 workers would see a small decrease in their hours of
overtime worked. This reduction in hours is relatively small and is due
to the effect on labor demand of the increase in the average hourly
base wage as predicted by the employment contract model.\121\
---------------------------------------------------------------------------

\121\ The Department estimates that half of Type 2 workers will
not see a reduction in their hours; however as a group, Type 2
workers are expected to experience a reduction in their hours of
work.
---------------------------------------------------------------------------

Type 2 workers who would be newly overtime eligible would see a
decrease in average weekly hours in weeks where occasional overtime is
worked, from 48.0 to 47.9 hours (0.3 percent) (Table 22).\122\ Type 2
workers who would no longer earn the HCE compensation level would see a
decrease in average weekly hours in applicable weeks from 46.5 to 46.3
(0.4 percent).
---------------------------------------------------------------------------

\122\ Type 2 workers do not see increases in regular earnings to
the new salary level (as Type 4 workers do) even if their new
earnings exceed that new level. This is because the estimated new
earnings only reflect their earnings in that week; their earnings
for the entire year do not necessarily exceed the salary level.
---------------------------------------------------------------------------

Type 3 workers affected by the increase in the standard salary
level would see a decrease in hours worked from 50.7 to 50.3 hours per
week (0.8 percent). Type 3 workers affected by the increase in the HCE
compensation level would see an average decrease from 53.7 to 53.3
hours per week (0.8 percent).

Table 22--Average Weekly Hours for Affected EAP Workers by Type, 2013
----------------------------------------------------------------------------------------------------------------
Regular OT
No overtime Occasional OT -------------------------------
Total worked (T1) (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level \a\
----------------------------------------------------------------------------------------------------------------
Before proposed rule............ 41.6 38.6 48.0 50.7 56.9
After proposed rule............. 41.5 38.6 47.9 50.3 56.9
Change.......................... -0.1 0.0 -0.1 -0.4 0.0
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level \a\
----------------------------------------------------------------------------------------------------------------
Before proposed rule............ 45.8 39.8 46.5 53.7 56.4
After proposed rule............. 45.7 39.8 46.3 53.3 56.4
Change.......................... -0.1 0.0 -0.2 -0.4 0.0
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Usual hours for Types 1, 3, and 4 but actual hours for Type 2.
*Type 1: Workers without regular OT and without occasional OT.
*Type 2: Workers without regular OT but with occasional OT. Paid overtime premium pay, so average weekly
earnings increase, but regular rate of pay and hours fall for 50 percent of workers.
*Type 3: Workers with regular OT who become nonexempt. Paid overtime premium pay, so average weekly hours
increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., are paid the proposed salary level).

[[Page 38576]]

Because Type 1 workers do not experience a change in their regular
rate of pay or hours they would have no change in earnings due to the
proposed rule (Table 23). While their hours are not expected to change,
Type 4 workers' salaries would increase to the proposed standard salary
level or HCE compensation level (depending on which test they pass).
Thus, Type 4 workers' average weekly earnings would increase by $20.47
(2.3 percent) for those affected by the change in the standard salary
level and by $27.36 per week (1.2 percent) for those affected by the
HCE compensation level.
Although both Type 2 and Type 3 workers on average experience a
decrease in both their regular rate of pay and hours worked, their
weekly earnings are expected to increase as a result of the overtime
premium. Based on a standard salary level of $921 per week, Type 2
workers' average weekly earnings increase from $879.35 to $925.33, a
5.2 percent increase.\123\ The average weekly earnings of Type 2
workers affected by the change in the HCE compensation level were
estimated to increase from $2,470.77 to $2,514.22, a 1.8 percent
increase.
---------------------------------------------------------------------------

\123\ For these calculations, the Department assumed Type 2
workers are paid their regular rate of pay for all occasional
overtime hours. For example, if a Type 2 worker earned $700 per week
and normally worked a 40 hour workweek then his or her regular rate
of pay would be $17.50 per hour. If that person worked 10 hours of
overtime in some week, he or she would earn $875 ($700 + $17.50 x
10) in that week. This is why baseline average weekly earnings are
higher than for other types of workers. These workers do not see
increases in regular earnings to the new salary level since their
earnings only exceed the salary level in some weeks. If instead, the
Department assumed Type 2 workers received no additional pay for
occasional overtime hours, but merely received their usual weekly
salary, then estimated baseline earnings would be smaller, and
estimated transfers would be larger for these workers.
---------------------------------------------------------------------------

Average weekly earnings of Type 3 workers also increase. For Type 3
workers affected by the standard salary level, average weekly earnings
would increase from $731.54 to $751.13, an increase of 2.7 percent.
Type 3 workers affected by the change in the HCE compensation level
have an increase in average weekly earnings from $2,057.41 to
$2,117.56, an increase of 2.9 percent.

Table 23--Average Weekly Earnings for Affected EAP Workers by Type, 2013
----------------------------------------------------------------------------------------------------------------
Regular OT
-------------------------------
Total No overtime Occasional OT Newly
worked (T1) (T2) Nonexempt Remain exempt
(T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level \a b\
----------------------------------------------------------------------------------------------------------------
Before proposed rule............ $730.58 $719.31 $879.35 $731.54 $900.53
After proposed rule............. 736.54 719.31 925.33 751.13 921.00
Change.......................... 5.96 0.00 45.97 19.60 20.47
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level \a b\
----------------------------------------------------------------------------------------------------------------
Before proposed rule............ 2,103.26 2,075.18 2,470.77 2,057.41 2,321.64
After proposed rule............. 2,125.42 2,075.18 2,514.22 2,117.56 2,349.00
Change.......................... 22.16 0.00 43.45 60.15 27.36
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the
weekly earnings because the product of two averages is not necessarily equal to the average of the product.
\b\ Weekly earnings for weeks where overtime is worked. Thus for Type 3 and 4 workers weekly earnings is derived
by multiplying the wage by usual hours worked but for Type 2 workers weekly earnings is derived by multiplying
the wage by actual hours worked in the survey week.
* Type 1: Workers without regular OT and without occasional OT.
* Type 2: Workers without regular OT but with occasional OT. Paid overtime premium pay, so average weekly
earnings increase, but regular rate of pay and hours fall for 50 percent of workers.
* Type 3: Workers with regular OT who become nonexempt. Paid overtime premium pay, so average weekly hours
increase, but regular rate of pay and hours fall.
* Type 4: Workers with regular OT who remain exempt (i.e., are paid the proposed salary level).

Weekly earnings after an increase to the proposed standard salary
level were estimated using the new wage (i.e., the partial employment
contract model wage) and the reduced number of overtime hours worked.
At the proposed standard salary level, the average weekly earnings of
all affected workers will increase from $730.58 to $736.54, a change of
$5.96 (0.8 percent). However, these figures mask the impact on workers
whose hours and earnings will change because Type 1 workers make up
more than 70 percent of the pool of affected workers. If Type 1
workers, who do not work overtime, are excluded the average increase in
weekly earnings is $23.72.
At the proposed standard salary level, multiplying the average
change of $5.96 by the 4.6 million affected standard EAP workers equals
an increase in earnings of $27.7 million per week or $1,441 million in
the first year (Table 24). Of the weekly total, $897,000 is due to the
minimum wage provision and $26.8 million stems from the overtime pay
provision. For workers affected by the change in the HCE compensation
level, average weekly earnings increase by $22.16 ($51.91 if Type 1
workers, who do not work overtime, are excluded). When multiplied by
36,000 affected workers, the national increase in weekly earnings will
be $801,000 per week, or $41.7 million in the first year. Thus, Year 1
transfer payments attributable to this proposed rule total $1,482.5
million. If the Department assumed Type 2 workers received no
additional pay for occasional overtime hours prior to the rulemaking
(as discussed above), then Year 1 transfers would instead be $1,499.1
million.

[[Page 38577]]

Table 24--Total Change in Weekly and Annual Earnings for Affected EAP
Workers by Provision, 2013
------------------------------------------------------------------------
Total change in earnings
(1,000s)
Provision -------------------------------
Weekly Annual
------------------------------------------------------------------------
Total \a\............................... $28,509 $1,482,490
Standard salary level Total............. 27,708 1,440,825
Minimum wage only................... 897 46,662
Overtime pay only \b\............... 26,811 1,394,163
HCE compensation level Total............ 801 41,665
Minimum wage only................... .............. ..............
Overtime pay only \b\............... 801 41,665
------------------------------------------------------------------------
\a\ Due to both the minimum wage and overtime pay provisions and
proposed changes in both the standard salary level and the HCE
compensation level.
\b\ Estimated by subtracting the minimum wage transfer from the total
transfer.

4. Potential Transfers Not Quantified
There may be additional transfers attributable to this proposed
rulemaking; however, the magnitude of these other transfers could not
be quantified. These transfers are discussed in this section, as well
as in section VII.D.vii, below.
Converted to Hourly Status From Salaried Status
Changing the EAP salary and HCE compensation level tests may impact
whether a worker is classified as overtime ineligible or overtime
eligible. Some evidence suggests that it is more costly for an employer
to employ a salaried worker than an hourly worker. If true, employers
may choose to accompany the change in exemption status with a change to
the employee's method of pay, from salary to an hourly basis, since
there is no longer an incentive to classify the worker as
salaried.\124\ Several employer stakeholders noted that salaried
workers may perceive such a change as a loss of status.
---------------------------------------------------------------------------

\124\ There is no requirement that overtime eligible employees
be paid on an hourly basis. Paying such employees on a salary basis
is appropriate so long as the employee receives overtime pay for
working more than 40 hours in the workweek. See 29 CFR 778.113.
---------------------------------------------------------------------------

If the worker prefers to be salaried rather than hourly, then this
change may impact the worker. The likelihood of this impact occurring
depends on the costs to employers and benefits to employees of being
salaried. Research has shown that salaried workers (who are not
synonymous with exempt workers, but whose status is correlated with
exempt status) are more likely than hourly workers to receive benefits
such as paid vacation time and health insurance \125\ and are more
satisfied with their benefits,\126\ and that when employer demand for
labor decreases hourly workers tend to see their hours cut before
salaried workers, making earnings for hourly workers less
predictable.\127\ However, this literature generally does not control
for differences between salaried and hourly workers such as education,
job title, or earnings; therefore, this correlation is not necessarily
attributable to hourly status.
---------------------------------------------------------------------------

\125\ Lambert, S. J. (2007). Making a Difference for Hourly
Employees. In A. Booth, & A. C. Crouter, Work-Life Policies that
Make a Real Difference for Individuals, Families, and Communities.
Washington, DC: Urban Institute Press.
\126\ Balkin, D. B., & Griffeth, R. W. (1993). The Determinants
of Employee Benefits Satisfaction. Journal of Business and
Psychology, 7(3), 323-339.
\127\ Lambert, S. J., & Henly, J. R. (2009). Scheduling in
Hourly Jobs: Promising Practices for the Twenty-First Century
Economy. The Mobility Agenda. Lambert, S. J. (2007). Making a
Difference for Hourly Employees.
---------------------------------------------------------------------------

Additionally, even if a worker's salaried status is not officially
changed, a salaried worker may effectively become an hourly worker if
managers have to monitor hours more closely, so the worker may have
less flexibility in work schedule.\128\
---------------------------------------------------------------------------

\128\ Swanberg, J. E., Pitt-Catsouphes, M., & Drescher-Burke, K.
(2005). A Question of Justice: Disparities in Employees' Access to
Flexible Schedule Arrangements. Journal of Family Issues, 26 (6),
866-895. WorldatWork Research. (2009). Flexible Work Arrangements
for Nonexempt Employees. WorldatWork Research.
---------------------------------------------------------------------------

Reduced earnings for some workers
Holding regular rate of pay and work hours constant, payment of an
overtime premium will increase weekly earnings for workers who work
overtime. However, as discussed previously, employers may try to
mitigate cost increases by reducing the number of overtime hours
worked, either by transferring these hours to other workers or
monitoring hours more closely. Depending on how hours are adjusted, a
specific worker may earn less pay after this proposed rulemaking. For
example, assume an exempt worker is paid for overtime hours at his
regular rate of pay (not paid the overtime premium but still acquires a
benefit from each additional hour worked over 40 in a week). If the
employer does not raise the worker's salary to the new level, requiring
the overtime premium may cause the employer to reduce the worker's
hours to 40 per week. If the worker's regular rate of pay does not
increase, the worker will earn less due to the lost hours of work.
vi. Deadweight Loss
Deadweight loss (DWL) occurs when a market operates at less than
optimal equilibrium output. This typically results from an intervention
that sets, in the case of a labor market, wages above their equilibrium
level. While the higher wage results in transfers from employers to
workers, it also causes a decrease in the total number of labor hours
that are being purchased on the market. DWL is a function of the
difference between the wage the employers were willing to pay for the
hours lost and the wage workers were willing to take for those hours.
In other words, DWL represents the total loss in economic surplus
resulting from a ``wedge'' between the employer's willingness to pay
and the worker's willingness to accept work arising from the proposed
change. DWL may vary in magnitude depending on market parameters, but
is typically small when wage changes are small or when labor supply and
labor demand are relatively price (wage) inelastic.
The DWL resulting from this proposed rulemaking was estimated based
on the average decrease in hours worked and increase in hourly wages
calculated in section VII.D.v. As the cost of labor rises due to the
requirement to pay the overtime premium, the demand for overtime hours
decreases, which results in fewer hours of overtime worked. To
calculate the DWL, the following values must be estimated:
The increase in average hourly wages for affected EAP
workers,
the decrease in average hours per worker, and

[[Page 38578]]

the number of affected EAP workers.
Only 50 percent of Type 2 workers (those who work regular or
predictable occasional overtime) and Type 3 workers are included in the
DWL calculation because the other workers either do not work overtime
(Type 1), continue to work the same number of overtime hours (Type 4),
or their employers are unable to adjust their hourly wage because their
overtime hours worked are unpredictable (the other 50 percent of Type 2
workers). As described above, after taking into account a variety of
potential responses by employers, the Department estimated the average
wage change for EAP affected workers whose hours change. Workers
impacted by the change in the standard salary level are considered
separately from workers impacted by the change in the HCE compensation
level.
For workers affected by the revised standard salary level, and who
experience a change in hours, average wages (including overtime) will
increase by $0.68 per hour. Average hours will fall by 0.40 per week.
These changes result in an average DWL of $0.14 per week per Type 2
(the 50 percent who work foreseeable overtime) and Type 3 worker. An
estimated 1.01 million workers will be eligible for the overtime
premium on some of their hours worked after employer adjustments are
taken into account. Multiplying the $0.14 per worker estimate by the
number of affected workers results in a total DWL of $7.2 million in
the first year of this proposed rulemaking attributable to the revised
standard salary level (1.01 million workers in DWL analysis x $0.14 per
worker per week x 52 weeks).
For workers affected by the revised HCE compensation level and who
experience a change in hours, the average hourly wage will increase by
$2.14 and average hours worked will fall by 0.41 per week. This results
in an average DWL of $0.44 per week for each of the estimated 12,000
workers affected by the compensation level who will see their hours
fall. Multiplying this per worker estimate by the number of affected
workers results in a DWL of $273,000 in the first year attributable to
the HCE component of this proposed rulemaking (12,000 workers in DWL
analysis x $0.44 per worker x 52 weeks). Thus, total DWL attributed to
the proposed rulemaking is estimated to be $7.4 million in Year 1,
which is small in comparison to the size of the costs and transfers
associated with this proposal.

Table 25--Summary of Deadweight Loss Component Values
------------------------------------------------------------------------
HCE
Component Standard compensation
salary level level
------------------------------------------------------------------------
Average hourly wages:
Pre................................. $15.01 $40.31
Post................................ $15.70 $42.45
Change.............................. $0.68 $2.14
Average overtime hours:
Pre................................. 10.45 13.14
Post................................ 10.05 12.73
Change.............................. -0.40 -0.41
Affected EAP workers.................... 1,010,433 12,042
DWL:
DWL per worker per week............. $0.14 $0.44
Total annual DWL (millions)......... $7.15 $0.27
------------------------------------------------------------------------
Note: DWL analysis is limited to Type 2 (50%) and Type 3 workers who
experience hour adjustments.

vii. Other Benefits, Costs and Transfers
1. Benefits, Costs and Transfers Due to Strengthening Overtime
Protection for Other Workers
In addition to the 4.7 million affected EAP workers who will be
newly eligible for overtime protection (absent employer response to
increase the salary level to retain the exemption), overtime protection
will be strengthened for an additional 10.0 million salaried workers
who earn between the current salary level of $455 per week and the
proposed salary level of $921 per week. These workers, who were
previously vulnerable to misclassification through misapplication of
the duties test, will now be automatically overtime protected because
their salary falls below the new salary level and therefore they will
not be subject to the duties test. These 10.0 million workers include:
6.3 million salaried white collar workers who are at
particular risk of being misclassified because they currently pass the
salary level test but do not satisfy the duties test; and
3.7 million salaried workers in blue collar occupations
whose overtime protection will be strengthened because their salary
will fall below the proposed salary threshold.\129\ (Identification of
blue collar workers is explained in section VII.B.iv).
---------------------------------------------------------------------------

\129\ Some workers in this group may be overtime ineligible due
to another non-EAP exemption.
---------------------------------------------------------------------------

Although these workers are currently entitled to minimum wage and
overtime protection, their protection is better assured with the
proposed salary level. The salary level test is considered a bright-
line test because it is clear to employers and employees alike whether
or not a worker passes. The duties test (which is the reason employers
cannot claim the EAP exemption for the above workers) is more
discretionary and therefore harder to apply. An outdated salary level
reduces the effectiveness of this bright-line test. At the proposed
salary level, the number of overtime-eligible white collar workers
earning at or above the salary level will decrease by 6 million, and an
estimated 806,562 (13.5 percent) of these workers are currently
misclassified as exempt. Therefore, increasing the salary level is
expected to result in less worker misclassification. Employers will be
able to more readily determine their legal obligations and comply with
the law, thus leading to benefits, costs and transfers that are
qualitatively similar to the impacts discussed elsewhere in this
analysis but the magnitudes of which have not been estimated.
2. Cost Savings: Reduction in Litigation
Reducing the number of white collar employees for whom a duties
analysis must be performed in order to

[[Page 38579]]

determine entitlement to overtime will also reduce litigation related
to the EAP exemption. As previously discussed, employer uncertainty
about which workers should be classified as EAP exempt has contributed
to a sharp increase in FLSA lawsuits over the past decade. Much of this
litigation has involved whether employees who satisfy the salary level
test also meet the duties test for exemption. See, e.g, Soehnle v. Hess
Corp., 399 F. App'x 749 (3d Cir. 2010) (gas station manager earning
approximately $654 per week satisfied duties test for executive
employee); Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233 (11th
Cir. 2008) (store managers earning an average weekly salary of up to
$706 did not satisfy duties test for executive exemption).
Setting an appropriate salary level for the standard duties test
and maintaining the salary level with automatic updates will restore
the test's effectiveness as a bright-line method for determining exempt
status, and in turn decrease the litigation risk created when employers
must apply the duties test to employees who generally are not
performing bona fide EAP work. This will eliminate legal challenges
regarding the duties test involving employees earning between the
current salary level ($455) and the proposed level ($921). See, e.g.,
Little v. Belle Tire Distribs., Inc., 588 F. App'x 424 (6th Cir. 2014)
(applicability of administrative or executive exemption to tire store
assistant manager earning $1,100 semi-monthly); Taylor v. Autozone,
Inc., 572 F. App'x 515 (9th Cir. 2014) (applicability of executive
exemption to store managers earning as little as $800 per week); Diaz
v. Team Oney, Inc., 291 F. App'x. 947 (11th Cir. 2008) (applicability
of executive duties test to pizza restaurant assistant manager earning
$525 per week). Setting the salary level test at the proposed level
will alleviate the need for employers to apply the duties test in these
types of cases, which is expected to result in decreased litigation as
employers will be able to determine employee exemption status through
application of the salary level test without the need to perform a
duties analysis. See Weiss Report at 8 (The salary tests ``have amply
proved their effectiveness in preventing the misclassification by
employers of obviously nonexempt employees, thus tending to reduce
litigation. They have simplified enforcement by providing a ready
method of screening out the obviously nonexempt employees, making an
analysis of duties in such cases unnecessary.'')
3. Benefits and Costs: Reduction in Uncertainty about Future Overtime
Hours and Pay
The proposed rule may have an impact on employees who are not
currently working any overtime, but will now be entitled to minimum
wage and overtime pay protections. These workers may face a lower risk
of being asked to work overtime in the future, because they are now
entitled to an overtime premium, which could reduce their uncertainty
and improve their welfare if they do not desire to work overtime.
Additionally, if they are asked to work overtime, they are compensated
for the inconvenience with an overtime premium.
Economic theory suggests that workers tend to assign monetary
values to risk or undesirable job characteristics, as evidenced by the
presence of compensating wage differentials for undesirable jobs,
relative to other jobs the worker can perform in the marketplace. To
the extent a compensating wage differential exists, compensation may
decrease with the reduction in uncertainty.\130\ For this reason,
overall compensation would be expected to decrease for workers whose
uncertainty decreases. Employees who prefer the reduced uncertainty to
the wage premium would experience a net benefit of the rule, and
employees who prefer the wage premium to the reduced uncertainty would
experience a net harm as a result of the rule. The Department believes
that attempting to model the net monetary value of reduced uncertainty
is not feasible due to its heavy reliance on data that are not readily
available, and the potentially questionable nature of the resulting
estimates.\131\
---------------------------------------------------------------------------

\130\ In this case, the size of the compensating wage
differential is a function of the likelihood of working overtime and
the amount of overtime worked. If the probability of working
overtime is small then the wage differential may not exist.
\131\ For a discussion of compensating wage differentials, see
Gronberg, T. J., & Reed, W. R. (1994). Estimating Workers' Marginal
Willingness to Pay for Job Attributes using Duration Data. Journal
of Human Resources, 29(3), 911-931.
---------------------------------------------------------------------------

4. Benefits and Costs: Work-Life Balance
Due to the increase in marginal cost for overtime hours, employers
will demand fewer hours from some of the workers affected by this
rule.\132\ The estimated transfer payment does not take into account
the benefit to these workers of working fewer hours in exchange for
more (or equal) pay. Therefore, an additional benefit of this proposed
rulemaking is the increase in time off for affected EAP workers. On
average, affected EAP workers were estimated to work 5.2 minutes less
per week after the proposed rulemaking. The effect is much more
pronounced when limited to just those workers whose hours are adjusted
(50 percent of Type 2 and all Type 3 workers); they would on average
work 23.9 minutes less per week after the proposed rulemaking. The
additional time off may help these workers better balance work-life
commitments, thus potentially making them better off.
---------------------------------------------------------------------------

\132\ The Department recognizes that not all workers would
prefer to work fewer hours and thus some of these workers might
experience an adverse impact. The Department has no basis for
estimating this potential impact.
---------------------------------------------------------------------------

Empirical evidence shows that workers in the United States
typically work more than workers in other comparatively wealthy
countries.\133\ Although estimates of the actual level of overwork vary
considerably, executive, administrative, and professional occupations
have the highest percentage of workers who would prefer to work fewer
hours compared to other occupational categories.\134\ Therefore, the
Department believes that the proposed rule may result in increased time
off for a group of workers who may prefer such an outcome. However, the
empirical evidence does not allow us to estimate how many workers would
prefer fewer hours or how much workers value this additional time off
so it is difficult to monetize the benefit they may receive. However,
if we use affected workers' average wage to approximate the value they
place on this time ($15.31), then the benefit of this additional time
off would total $6.2 million weekly (0.40 hours x 1.02 million workers
x $15.31). This would result in an estimated total benefit of $324.4
million per year.
---------------------------------------------------------------------------

\133\ For more information, see OECD series, average annual
hours actually worked per worker, available at: http://stats.oecd.org/index.aspx?DataSetCode=ANHRS.
\134\ Hamermesh, D.S., Kawaguchi, D., Lee, J. (2014). Does Labor
Legislation Benefit Workers?
Well-Being after an Hours Reduction. IZA DP No. 8077.
Golden, L., & Gebreselassie, T. (2007). Overemployment
mismatches: the preference for fewer work hours. Monthly Labor
Review, 130(4), 18-37.
Hamermesh, D.S. (2014). ``Not enough time?'' American Economist,
59(2).
---------------------------------------------------------------------------

This is likely an overestimate to the extent that not all workers
would prefer to work fewer hours and thus some of these workers might
experience an adverse impact. In addition, the estimated work loss
represents an average over all affected workers, and some workers may
experience a larger reduction in hours.\135\
---------------------------------------------------------------------------

\135\ It is possible that some employers may choose to eliminate
all overtime for affected workers and hire additional workers or
spread the work to existing employees to replace the lost hours. The
potential for this adjustment is uncertain, and the Department has
found no studies that estimate the potential magnitude of this
effect. In addition, an employer may be limited in his or her
ability to make such adjustments; many affected employees work only
a few hours of overtime each week; affected employees' tasks may not
be easily divisible; and hiring new workers and/or managing
different work flows will impose additional costs on the employer
that will offset the savings from avoiding paying the overtime
premium.

---------------------------------------------------------------------------

[[Page 38580]]

5. Additional Benefits and Costs not Quantified
The largest benefit to workers from the proposed rule is the
transfer of income from employers (as discussed in the transfer section
of the analysis); but, to the extent that the benefits to workers
outweigh the costs to employers, there may be a societal welfare
increase due to this transfer. The channels through which societal
welfare may increase and other secondary benefits may occur are
discussed below and include increased productivity and improved worker
outcomes, such as improved health. The discussion references the
potential magnitude of these benefits where possible; however, due to
data limitations and mixed evidence on the significance of such
effects, the Department was not able to quantify the size of these
potential benefits.

Health

Working long hours is correlated with an increased risk of injury
or health problems.\136\ Therefore, by reducing overtime hours, some
affected EAP workers' health may improve. This would benefit the
worker's welfare, their family's welfare, and society since fewer
resources would need to be spent on health. Health has also been shown
to be highly correlated with productivity.\137\ These beneficial
effects, and how they compare with other potential responses by
employers, especially regarding workers who pass the duties test and
whose salaries are either already above the proposed threshold or would
be adjusted to be so, have not been quantified.
---------------------------------------------------------------------------

\136\ Keller, S. M. (2009). Effects of Extended Work Shifts and
Shift Work on Patient Safety, Productivity, and Employee Health.
AAOHN Journal, 57(12), 497-502.
\137\ Loeppke, R., Taitel, M., Richling, D., Parry, T., Kessler,
R., Hymel, P., et al. (2007). Health and Productivity as a Business
Strategy. Journal of Occupational and Environmental Medicine, 49(7),
712-721.
---------------------------------------------------------------------------

Increased productivity

This proposed rule is expected to increase the marginal cost of
some workers' labor, predominately due to the overtime pay requirement
since almost all affected EAP workers already earn the federal minimum
wage. However, some of the cost to employers of paying the overtime
premium may be offset by increased worker productivity. This may occur
through a variety of channels, including: increased marginal
productivity as fewer hours are worked, reduction in turnover,
efficiency wages, and worker health.
Reduction in turnover: Research demonstrates a positive correlation
between earnings and employee turnover: as earnings increase, employee
turnover decreases.\138\ \139\ Reducing turnover may increase
productivity, at least partially because new employees have less firm-
specific capital (i.e., skills and knowledge that have productive value
in only one particular company) and thus are less productive and
require additional supervision and training.\140\ In short, replacing
experienced workers with new workers decreases productivity, and
avoiding that will increase productivity. Reduced turnover should also
reduce firms' hiring and training costs. As a result, even though
marginal labor costs rise, they may rise by less than the amount of the
wage change because the higher wages may be offset by lower turnover
rates, increased productivity, and reduced hiring costs for firms.
---------------------------------------------------------------------------

\138\ Howes, Candace, (2005). Living Wages and Retention of
Homecare Workers in San Francisco. Industrial Relations, 44(1), 139-
163. Dube, A., Lester, T.W., & Reich, M. (2014). Minimum Wage
Shocks, Employment Flows and Labor Market Frictions. IRLE Working
Paper #149-13.
\139\ Note that this literature tends to focus on changes in
earnings for a specific sector or subset of the labor force. The
impact on turnover when earnings increase across sectors (as would
be the case with this regulation) may be smaller.
\140\ Argote, L., Insko, C. A., Yovetich, N., & Romero, A. A.
(1995). Group Learning Curves: The Effects of Turnover and Task
Complexity on Group Performance. Journal of Applied Social
Psychology, 25(6), 512-529.
Shaw, J. D. (2011). Turnover Rates and Organizational
Performance: Review, Critique, and Research Agenda. Organizational
Psychology Review, 1(3), 187-213.
---------------------------------------------------------------------------

It is difficult to estimate the impact of reduced turnover on
worker productivity and firm hiring costs. The potential reduction in
turnover is a function of several variables: the current wage, hours
worked, turnover rate, industry, and occupation. Additionally,
estimates of the cost of replacing a worker who quits vary
significantly. Therefore, quantifying the potential benefit associated
with a decrease in turnover attributed to this proposed rule is
difficult.
Efficiency wages: By increasing earnings this proposed rulemaking
may increase a worker's productivity by incentivizing the worker to
work harder. Thus the additional cost to firms may be partially offset
by higher productivity. In particular, the estimated managerial costs
associated with greater monitoring effort may be offset due to this
effect. A strand of economic research, commonly referred to as
``efficiency wages,'' considers how an increase in wages may be met
with greater productivity.\141\ However, this literature tends to focus
on firms voluntarily paying higher wages, and thus distinguishing
themselves from other firms. Since this rulemaking mandates wage
increases, extrapolating from efficiency wage theory may not provide a
reliable guide to the likely effects of the rule.
---------------------------------------------------------------------------

\141\ Akerlof, G. A. (1982). Labor Contracts as Partial Gift
Exchange. The Quarterly Journal of Economics, 97(4), 543-569.
---------------------------------------------------------------------------

Conversely, there are channels through which mandating overtime pay
may reduce productivity. For example, some overtime hours may be spread
to other workers. If the work requires significant project-specific
knowledge or skills, then the new worker receiving these transferred
hours may be less productive than the first worker, especially if there
is a steep learning curve. Additionally, having an additional worker
versed in the project may be beneficial to the firm if the first worker
leaves the firm or is temporarily away (e.g., sick) or by providing
benefits of teamwork (e.g., facilitating information exchange).
6. Transfers: Reduction in Social Assistance Expenditures
The transfer of income resulting from this proposed rule may result
in reduced need for social assistance (and by extension reduced social
assistance expenditures by the government). A worker earning the
current salary level of $455 per week earns $23,660 annually. If this
worker resides in a family of four and is the sole earner, then the
family will be considered impoverished. This makes the family eligible
for many social assistance programs. Thus, transferring income to these
workers may reduce eligibility for government social assistance
programs and government expenditures. A social welfare improvement will
result from the reduced resource needs for making those transfer
payments.
Benefits for which currently EAP exempt workers may qualify include
Medicaid, the Supplemental Nutrition Assistance Program (SNAP), the
Temporary Assistance for Needy Families (TANF) program, the Special
Supplemental Nutrition Program for Women, Infants, and Children (WIC),
and school breakfasts and lunches. Quantifying the impact of this
proposed rulemaking on government expenditures

[[Page 38581]]

is complex and thus not estimated here. In order to conduct such an
analysis, the Department would need estimates of the transfer per
worker, his or her current income level, other sources of family
income, number of family members, state of residence, and receipt of
aid.
viii. Bounds on Transfer Payments
Because the Department cannot predict the precise reaction of
employers to the proposed rule, the Department also calculated bounds
to the size of the estimated transfers from employers to workers using
a variety of assumptions. Since transfer payments are the largest
component of this proposed rulemaking the scenarios considered here are
bounds around the transfer estimate. Based on the assumptions made,
these bounds do not generate bounded estimates for costs or DWL.
The maximum potential upper limit occurs with the assumption that
the demand for labor is completely inelastic, and therefore neither the
implicit regular hourly rate of pay nor hours worked adjust in response
to the changes in the EAP standard salary level and HCE annual
compensation level test. Employers then pay workers one and a half
times their current implicit hourly rate of pay for all overtime hours
currently worked (i.e., the full overtime premium). The minimum
potential lower bound occurs when wages adjust completely and weekly
earnings are unchanged as predicted by the employment contract model.
The Department believes that both the maximum upper bound scenario and
the minimum lower bound scenario are unrealistic; therefore, we
constructed more credible bounds.
For a more realistic upper bound on transfer payments, the
Department assumed that all occasional overtime workers and half of
regular overtime workers would receive the full overtime premium, as it
was computed in the maximum upper bound methodology (i.e., such workers
would work the same number of hours but be paid 1.5 times their
implicit initial hourly wage for all overtime hours). Conversely, in
the preferred model we assumed that only 50 percent of occasional
overtime workers and no regular overtime workers would receive the full
overtime premium. It was assumed that employers could not
instantaneously adjust earnings for the 50 percent of affected EAP
workers who regularly work overtime. However, for the other half of
regular overtime workers, the Department assumed they would have their
implicit hourly wage adjusted as predicted by the partial employment
contract model (wage rates fall and hours are reduced but total
earnings continue to increase, as in the preferred method). Table 26
summarizes the assumptions described above.
The plausible lower transfer bound also depends on whether
employees work regular overtime or occasional overtime. For those who
regularly work overtime hours and half of those who work occasional
overtime, the Department assumes the employees' wages will fully adjust
as predicted by the employment contract model, whenever possible (in
the preferred method their wages adjust based on the partial employment
contract model).\142\ For the other half of employees with occasional
overtime hours, the lower bound assumes they will be paid one and one-
half times their implicit hourly wage for overtime hours worked (full
overtime premium).
---------------------------------------------------------------------------

\142\ The straight-time wage adjusts to a level that keeps
weekly earnings constant when overtime hours are paid at 1.5 times
the straight-time wage. In cases where adjusting the straight-time
results in a wage less than the minimum wage, the straight-time wage
is set to the minimum wage.

Table 26--Summary of the Assumptions Used To Calculate the Lower
Estimate, Preferred Estimate, and Upper Estimate of Transfers
------------------------------------------------------------------------
Upper transfer
Lower transfer estimate Preferred estimate estimate
------------------------------------------------------------------------
Occasional Overtime Workers (Type 2)
------------------------------------------------------------------------
50% full employment contract 50% partial 100% full overtime
model adj. employment premium.
contract model
adj.
------------------------------------------------------------------------
50% full overtime premium....... 50% full overtime
premium.
------------------------------------------------------------------------
Regular Overtime Workers (Type 3)
------------------------------------------------------------------------
100% full employment contract 100% partial 50% partial
model adj. employment employment
contract model contract model
adj. adj 50% full
overtime premium.
------------------------------------------------------------------------
Legend:
* Full overtime premium: Regular rate of pay equals the implicit hourly
wage prior to the proposed regulation (with no adjustments); workers
are paid 1.5 times this base wage for the same number of overtime
hours worked prior to the regulation (assuming the worker was paid the
minimum wage, otherwise the wage increases to the minimum wage and
overtime hours may decrease).
* Full employment contract model adjustment: Base wages are set at the
higher of: (1) a rate such that total earnings and hours remain the
same before and after the proposed regulation; thus the base wage
falls, and workers are paid 1.5 times the new base wage for overtime
hours (the employment contract model) or (2) the minimum wage.
* Partial employment contract model adjustment: Regular rates of pay are
partially adjusted to the wage implied by the employment contract
model. The resulting regular rate of pay is the midpoint of: (1) a
base wage that adjusts 40 percent of the way to the employment
contract model wage level, assuming no overtime premium was initially
paid and (2) a base wage that adjusts 80 percent of the way to the
employment contract model wage level, assuming the workers initially
received a 28 percent premium for overtime hours worked.

The cost and transfer payment estimates associated with the bounds
are presented in Table 27. Regulatory familiarization costs and
adjustment costs do not vary across the scenarios. These employer costs
are a function of the number of affected firms or affected workers,
human resource personnel hourly wages, and time estimates. None of
these vary based on the assumptions made above. Conversely, managerial
costs are lower under these alternative employer response assumptions
because fewer workers' hours are adjusted by employers and thus
managerial costs, which depend on the number of workers whose hours
change, will be smaller. Managerial costs vary according to employers'
response to the proposed rule.
Depending on how employers adjust the implicit regular hourly wage,
the estimated transfer may range from $543.7 million to $2,851.2
million, with the preferred estimate equal to $1,482.5 million. The DWL
associated with the preferred estimate is $7.4 million. The

[[Page 38582]]

upper transfer estimate of DWL is smaller than the preferred estimate
because the assumptions made for this upper bound scenario result in
fewer hours lost. For the lower transfer estimate DWL was estimated to
be less than $400,000; for the upper transfer estimate scenario the DWL
was estimated to be $3.7 million.

Table 27--Bounds on Annual Cost and Transfer Payment Estimates, 2013 (Millions)
----------------------------------------------------------------------------------------------------------------
Lower transfer Preferred Upper transfer
Cost/transfer estimate \a\ estimate estimate
----------------------------------------------------------------------------------------------------------------
Direct employer costs...........................................
Reg. familiarization........................................ $254.5 $254.5 $254.5
Adjustment costs............................................ 160.1 160.1 160.1
Managerial costs............................................ 1.7 178.1 82.8
Total direct employer costs..................................... 416.3 592.7 497.4
Transfers \a\................................................... 543.7 1,482.5 2,851.2
DWL............................................................. 0.4 7.4 3.7
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and
the HCE compensation level.

ix. Regulatory Alternatives
The Department proposes in this NPRM to update the standard salary
level to the 40th percentile of weekly earnings for all full-time
salaried workers ($921 per week). The Department considered a range of
alternatives before deciding on this level. Seven alternatives are
presented here. Two of these (alternatives 1 and 7) inflate the value
of earlier salary levels to take into account inflation in the
intervening years. Three others (alternatives 2, 3, and 5) adapt the
2004 method or the Kantor method to set the salary level. Alternatives
4 and 6 set the salary level to the median weekly salary for either all
full-time hourly and salaried workers or full-time salaried workers,
respectively. Table 28 presents the alternative salary levels
considered and the number of workers estimated to be affected under
these salary levels.
Alternative 1 increases the 2004 salary level of $455 per week by
the rate of inflation between 2004 and 2013 as measured by the CPI-U.
This results in a salary level of $561 per week. At this salary level
576,000 workers would be affected in Year 1, imposing direct adjustment
and managerial costs of $36.1 million, transferring $127.9 million in
earnings from employers to employees, and resulting in DWL of $0.5
million.
Alternative 2 sets the salary level using the 2004 method resulting
in a salary level of $577 per week. At this salary level 734,000
workers would be affected, Year 1 adjustment and managerial costs would
equal $44.5 million, with transfers of $151.5 million, while DWL would
equal $0.7 million.
Alternative 3 sets the salary level using the Kantor method. This
results in a salary level of $657 per week. At this salary level, 1.4
million workers are affected, Year 1 adjustment and managerial costs
are $91.8 million, Year 1 transfers are $318.6 million, and Year 1 DWL
is $1.7 million.
Alternative 4 sets the salary level equal to the 50th percentile,
or median, of weekly earnings for full-time hourly and salaried
workers. This results in a salary level of $776 per week. At this
salary level, 2.7 million workers would be affected in Year 1, employer
costs would total $179.8 million with transfers of $686.6 million, and
DWL would be $3.6 million.
Alternative 5 is based on the Kantor method but, whereas
alternative 3 generates the salary level associated with the long
duties test, alternative 5 generates a level more appropriate to the
short duties test (as explained in section VII.C) and results in a
salary level of $979 per week. At this salary level, 5.6 million
workers would be affected in Year 1, with adjustment and managerial
costs of $404.2 million, transfers of $1.8 billion, and DWL equal to
$10.3 million. As previously noted, while this alternative uses the
average difference between the Kantor long and short tests, the ratio
of the short to long salary tests ranged between approximately 130
percent and 180, which would result in a salary between $854 and
$1,183.
Alternative 6 sets the standard salary equal to the 50th
percentile, or median, of weekly earnings for full-time salaried
workers. This approach is similar to the proposed method but uses a
higher weekly earnings percentile: 50th instead of the 40th. This
results in a salary level of $1,065 per week. At this salary level, 6.9
million workers would be affected in Year 1, employer costs would total
$522.1 million with transfers of $2.5 billion, and DWL would be $14.8
million.
Alternative 7 increases the 1975 short test salary level of $250
per week by the rate of inflation from 1975 to 2013. This results in a
salary level of $1,083 per week. At this salary level, 7.1 million
workers would be affected in Year 1, employer costs would total $543.0
million with transfers of $2.7 billion, and DWL would be $15.5 million.
The Department also examined alternatives to the proposed HCE
compensation level. HCE alternative 1 left the current $100,000 annual
compensation level unchanged. Therefore, no employer costs, transfers,
or DWL are associated with this alternative.
HCE alternative 2 sets the HCE annual compensation level at
$150,000 per year. This compensation level would affect 52,000 workers
in Year 1 (compared to 36,000 at the proposed compensation level),
impose adjustment and managerial costs on employers of $5.5 million,
transfer $71.2 million in earnings from employers to employees, and
generate $600,000 in DWL. Because regulatory familiarization costs
cannot realistically be differentiated into those relevant to the
standard salary level, and those relevant to the HCE compensation
level, the Department does not separately estimate those costs for the
HCE alternatives.

[[Page 38583]]

Table 28--Proposed Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs,
and Transfers, 2013
----------------------------------------------------------------------------------------------------------------
Year 1 impacts (Millions)
Affected EAP -----------------------------------------------
Alternative Salary level workers Adj. &
(1,000s) managerial Transfers DWL \b\
costs \a\
----------------------------------------------------------------------------------------------------------------
Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Proposed........................ $921 4,646 $334.8 $1,440.8 $7.2
Alt. #1: Inflate 2004 levels.... 561 576 36.1 127.9 0.5
Alt. #2: 2004 method............ 577 734 44.5 151.5 0.7
Alt. #3: Kantor method.......... 657 1,390 91.8 318.6 1.7
Alt. #4: Median full-time hourly 776 2,704 179.8 686.6 3.6
and salaried workers...........
Alt. #5: Kantor short test...... 979 5,632 404.2 1,821.3 10.3
Alt. #6: Median full-time 1,065 6,855 522.1 2,525.8 14.8
salaried.......................
Alt. #7: Inflate 1975 short test 1,083 7,128 543.0 2,666.1 15.5
level..........................
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
Proposed........................ $122,148 36 $3.3 $41.7 $0.0
Alt. #1: No change.............. 100,000 0 .............. .............. ..............
Alt. #2: 2004 percentile........ 150,000 52 5.5 71.2 0.6
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Regulatory familiarization costs are excluded because they are a one-time cost that do not vary based on the
proposed salary levels.
\b\ DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since
the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime
pay, the vast majority of this cost is attributed to the overtime pay provision.

x. Projections
1. Methodology
In addition to estimating Year 1 costs and transfers, the
Department projected costs and transfers forward for ten years. To
project costs and transfers, the Department used several pieces of
data, specifically the median wage growth rate and the employment
growth rate. These calculations are described below, after which the
ten-year projected costs and transfers are presented.
The projections presented in this section assume the proposed
salary level remains constant over ten years. Thus, the number and
percent of affected EAP workers decline over time as real earnings
increase.\143\ The section on automatic updating of the salary level
will present the estimated ten-year impacts based on how real earnings
change relative to an automatically updated salary level because the
selection of the salary level is conceptually separate from the
decision to update (and how to update) the salary level. Thus, the
costs and impacts of each are considered and presented separately.
---------------------------------------------------------------------------

\143\ As described in the following paragraphs, the Department
used historical wage growth rates to project wage growth rates.
---------------------------------------------------------------------------

In order to identify workers whose projected salaries fall between
the current salary level ($455 per week) and the proposed salary level
based on the 40th earnings percentile ($921 per week), a wage growth
rate must be applied to current earnings. The Department applied an
annual real growth rate based on the average annual growth rate in
median wages from 2005 to 2012.\144\ The wage growth rate is calculated
as the geometric growth rate in median wages using the historical CPS
MORG data for exempt workers by occupation-industry categories. The
geometric growth rate is the constant annual growth rate that when
compounded (applied to the first year's wage, then to the resulting
second year's wage, etc.) yields the last historical year's wage. This
method only depends on the value of the wage in the first available
year and the last available year, and may be a flawed measure if either
or both of those years were atypical; however, in this instance these
values seem typical.
---------------------------------------------------------------------------

\144\ In order to maximize the number of observations used in
calculating the median wage for each occupation-industry group,
three years of data were pooled for each of the endpoint years.
Specifically, data from 2004, 2005, and 2006 (converted to 2005
dollars) were used to calculate the 2005 median wage and data from
2011, 2012, and 2013 (converted to 2012 dollars) were used to
calculate the 2012 median wage.
---------------------------------------------------------------------------

An alternative method would be to use the time series of median
wage data to estimate the linear trend in the values and continue this
to project future median wages. This method may be preferred if either
or both of the endpoint years are outliers, since the trend will be
less influenced by them. The linear trend may be flawed if there are
outliers in the interim years (because these have no impact on the
geometric mean but will influence the estimate of a linear trend). The
Department chose to use the geometric mean because individual year
fluctuations are difficult to predict and applying the geometric growth
rate to each year provides a better estimate of the long-term growth in
wages. Using this method is also consistent with the estimation of the
employment growth rate as described below.
The geometric wage growth rate was also calculated from the BLS'
Occupational Employment Statistics (OES) and used as a validity
check.\145\ Additionally, in occupation-industry categories where the
CPS MORG data had an insufficient number of observations to reliably
calculate median wages, the Department used the growth rate in median
wages calculated from the OES data.\146\ Any remaining occupation-
industry combinations without estimated median growth rates were
assigned the median of the growth rates in median wages from the CPS
MORG data for EAP exempt workers.
---------------------------------------------------------------------------

\145\ The difference between the OES and CPS growth measures
averaged -0.0002 percent, but ranged from -7.2 to 5.8 percent,
depending on the occupation-industry category. The CPS growth
estimates were used as the primary source because the sample could
be restricted to EAP exempt workers (the relevant population).
\146\ To lessen small sample bias in the estimation of the
median growth rate, this rate was only calculated using CPS MORG
data when these data contained at least 10 observations in each time
period.

---------------------------------------------------------------------------

[[Page 38584]]

The Department calculated projected earnings for each worker in the
sample by applying the annual projected wage growth rate to current
earnings for each projected year. In each projected year, affected EAP
workers were identified as those who are exempt in the current year
(prior to the rule change) but have projected earnings in the projected
year that are less than the proposed salary level.
The employment growth rate is the geometric annual growth rate
based on the ten-year employment projection from BLS' National
Employment Matrix (NEM) within an occupation-industry category. This is
the constant annual growth rate that when compounded yields the NEM
ten-year projection. An alternative method is to spread the total
change in the level of employment over the ten years evenly across
years (constant change in the number employed). The Department believes
that on average employment is more likely to grow at a constant
percentage rate rather than by a constant level (a decreasing
percentage rate). To account for population growth, the Department
applied the growth rates to the sample weights of the workers. This is
because the Department cannot introduce new observations to the CPS
MORG data to represent the newly employed.
Affected EAP workers may experience a reduction in hours since the
wage they receive for overtime hours is higher after the proposed
rulemaking. The reduction in hours is calculated as described in
section VII.D.v. The only difference is that for projections the long-
run elasticity of labor demand is used instead of the short-run
elasticity. The Department used a long-run elasticity of -0.4.\147\
---------------------------------------------------------------------------

\147\ This elasticity estimate is based on the Department's
analysis of the following paper: Lichter, A., Peichl, A. & Siegloch,
A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-
Regression Analysis. IZA DP No. 7958.
---------------------------------------------------------------------------

2. Estimated Projections
Projected costs and transfers both depend on the projected number
of affected EAP workers. The Department estimated that in Year 1 4.7
million EAP workers will be affected, with about 36,000 of these
attributable to the revised HCE compensation level. In Year 10, if the
salary levels are not updated, the number of affected EAP workers was
estimated to equal 2.7 million, with fewer than 8,000 attributed to the
HCE exemption. The projected number of affected EAP workers accounts
for projected employment growth by increasing the number of workers
represented by the affected EAP workers (i.e., increasing sampling
weights). However, with no additional changes in the salary level and
most workers experiencing positive wage growth, workers affected in
Year 1 become less likely to still be affected in each future year.
That is, some of these workers return to exempt status over time as
their growing salaries eventually exceed the proposed standard salary
level of $921 per week. The net impact is a decrease in the number of
affected EAP workers in each subsequent year.
The projected number of affected workers only includes workers who
were originally determined to be exempt in 2013. However, additional
workers may be affected in future years who were not EAP exempt in the
base year but would have become exempt in the absence of this proposed
rule. For example, a worker may earn less than $455 in 2013 but at
least $455 (and less than the proposed salary level) in subsequent
years; such a worker would not be counted as an affected worker in the
projections above. In the absence of this proposed rule he or she would
likely have become exempt at some point in the 10-year projections
period; however, as a result of the proposed rule, this worker remains
nonexempt, and is thus affected by the proposed rule.
Therefore, the Department estimated the number of workers who were:
Paid on a salary basis, pass the duties test, and earn less than $455
per week in 2013, but are projected to earn at least $455 (but less
than the proposed salary level) per week at some point in the following
nine years. The Department found that in Year 10, an additional 398,000
workers meet these criteria and therefore are also affected workers.
Similarly, the Department estimated the number of workers who are paid
on a salary basis, meet the HCE duties test, and currently earn less
than $100,000 annually but are projected to earn more than $100,000 per
year at some point in the following nine years. The Department
estimated that, in Year 10, an additional 115,000 workers meet these
criteria and therefore are also affected workers. The Department did
not estimate costs, transfers, or DWL for these workers because it
would be necessary to make additional assumptions such as how employers
respond by adjusting workers' wages and hours.
The Department quantified three types of direct employer costs in
the ten-year projections: (1) Regulatory familiarization costs; (2)
adjustment costs; and (3) managerial costs. Regulatory familiarization
costs are one-time costs and only occur in Year 1. Although start-up
firms must still become familiar with the FLSA following Year 1, the
difference between the time necessary for familiarization with the
current part 541 exemptions and those exemptions as modified by the
proposed rule is essentially zero. Therefore, projected regulatory
familiarization costs over the next nine years are zero. Similarly,
adjustment costs are only incurred when workers' status changes from
exempt to nonexempt, so adjustment costs are incurred predominately in
Year 1 (some very minor adjustment costs may exist in projected years
because some workers' earnings decrease and thus these workers may
transition from exempt to nonexempt).
However, managerial costs recur for all affected EAP workers whose
hours are adjusted and were projected through Year 10. The Department
estimated that Year 1 managerial costs would be $178.1 million (section
VII.D.iv.4.); by Year 10 these costs would fall to $93.1 million (Table
29). Over 97 percent of this amount ($176.0 million) in Year 1, and
roughly 99 percent ($92.6 million) in Year 10 is attributable to the
revised standard salary level. The projected reduction in managerial
costs over the years is due to the reduction in the number of affected
EAP workers over time as workers' earnings increase relative to the
constant salary and compensation levels.
The Department also projected two transfers associated with workers
affected by the proposed regulation: (1) Transfers to workers from
employers due to the minimum wage provision and (2) transfers to
workers from employers due to the overtime pay provision. Transfers to
workers from employers due to the minimum wage provision, estimated to
be $46.7 million in Year 1, are projected to decline to $9.9 million in
Year 10 as increased earnings over time move workers' regular rate of
pay above the minimum wage.\148\ Transfers to workers from employers
due to the overtime pay provision decrease from $1,435.8 million in
Year 1 to $490.2 million in Year 10. Workers affected by the revised
standard salary level account for 97 percent of overtime transfers in
Year 1, and 99 percent in Year 10. Again, the decrease in transfers is
primarily due to the reduction in the number of affected workers over
time.
---------------------------------------------------------------------------

\148\ In states with higher minimum wages, then effective state
minimum wages were used in 2013 and 2014 and minimum wages on
December 31, 2014 were used for projected years.
---------------------------------------------------------------------------

Table 29 also summarizes average annualized costs and transfers
over the ten-year projection period, using 3

[[Page 38585]]

percent and 7 percent real discount rates. The Department estimated
that total direct employer costs have an average annualized value of
$194.2 million per year over ten years when using a 7 percent real
discount rate. Of this total, average annualized regulatory
familiarization costs were estimated to be $33.9 million; the
Department does not apportion these out between the revised standard
salary and HCE annual compensation levels. Average annualized
adjustment costs were estimated to be $21.5 million; roughly 99 percent
of adjustment costs were attributed to the revised standard salary
level. The remaining $138.9 million in average annualized direct costs
were accounted for by managerial costs, of which 99 percent were
associated with the revised standard salary level.
The average annualized value of total transfers was estimated to
equal $872.9 million. The largest component of this was the average
annualized transfer from employers to workers due to overtime pay,
which was $843.6 million per year, while average annualized transfers
due to the minimum wage totaled $29.3 million per year. None of the
transfer associated with the minimum wage was attributed to the revised
HCE compensation level. Although composing less than one percent of
affected workers, those receiving overtime due to the revised HCE
compensation level account for 2.2 percent of total average annualized
transfers ($19.5 of $872.9 million) because of their high implicit
regular hourly rate of pay. The remaining $853.4 million in transfers
accrue to those affected by the revised standard salary level.

Table 29--Projected Costs and Transfers Without Automatic Updating, Standard and HCE Salary Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected EAP Costs Transfers
Year (Year #) workers -------------------------------------------------------------------------------- DWL \a\
(Millions) Reg. Fam. Adjustment Managerial Due to MW Due to OT
--------------------------------------------------------------------------------------------------------------------------------------------------------
.............. (Millions 2013$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year
2013 (1) 4.7 $254.5 $160.1 $178.1 $46.7 $1,435.8 $7.4
2014 (2) 4.5 0.0 1.1 169.0 44.0 1,017.1 9.8
2015 (3) 4.2 0.0 0.0 155.8 39.5 923.9 8.9
2016 (4) 4.0 0.0 0.0 146.1 33.0 843.1 8.1
2017 (5) 3.8 0.0 0.0 137.5 27.4 771.4 7.5
2018 (6) 3.6 0.0 0.0 128.5 22.6 702.0 6.8
2019 (7) 3.4 0.0 0.0 118.4 18.3 640.1 6.0
2020 (8) 3.1 0.0 0.0 108.9 14.9 582.0 5.3
2021 (9) 2.9 0.0 0.0 100.6 11.8 539.2 4.9
2022 (10) 2.7 0.0 0.1 93.1 9.9 490.2 4.3
Average Annualized
3% real rate .............. 29.0 18.4 135.9 27.9 815.7 7.0
7% real rate .............. 33.9 21.5 138.9 29.3 843.6 7.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum
wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.

The cost to society of lower employment expressed as DWL was
estimated to be $7.4 million in Year 1. After year 2, DWL falls over
time; in Year 10 it is projected to equal $4.3 million. DWL increases
sharply between Year 1 and Year 2 because the Department assumes the
market has had time to fully adjust to the revised standard salary and
HCE annual compensation levels by Year 2. In Year 1 employers may not
be able to fully adjust wages and hours in response to the rulemaking,
so the Department used a short run wage elasticity of labor demand to
reflect this constrained response; in Year 2 employers have sufficient
time to fully adjust, and a long run wage elasticity is used.
Therefore, the decrease in hours worked is larger in Year 2 than Year
1, and the DWL is also larger. Finally, the Department estimated that
average annualized DWL was $7.2 million per year; about $200,000 of DWL
(2.7 percent) was attributed to affected HCE workers, and the remaining
$7.0 million was attributed to workers affected by the revised standard
salary level.
A summary of the estimates used in calculating DWL for years 1, 2
and 10 is presented in Table 30. The size of the DWL depends on the
change in average hourly wages, the change in average hours, and the
number of affected EAP workers. While the change in average hourly
wages generally tends to increase over time in the projected years, the
number of affected EAP workers decreases over time; because the
relative decrease in workers is larger than the relative increase in
wages after Year 2, there is a net decrease in annual DWL over time.

[[Page 38586]]

Table 30--Summary of Projected Deadweight Loss Component Values
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Year 1 Future years
-------------------------------
Component .............. Year 2 Year 10
-----------------------------------------------
Standard
----------------------------------------------------------------------------------------------------------------
Average hourly wages
Pre......................................................... $15.01 $15.09 $15.47
Post \a\.................................................... $15.70 $15.59 $15.98
Change...................................................... $0.68 $0.50 $0.51
Change in average overtime hours................................ -0.40 -0.77 -0.75
Affected EAP workers (1,000s)................................... 1,010 959 532
DWL
Per worker per week......................................... $0.14 $0.19 $0.19
Nominal annual (millions)................................... $7.2 $9.7 $5.3
Real annual (millions of 2013$)............................. $7.2 $9.4 $4.3
----------------------------------------------------------------------------------------------------------------
.............. HCE
----------------------------------------------------------------------------------------------------------------
Average hourly wages
Pre......................................................... $40.31 $40.48 $46.19
Post [a].................................................... $42.45 $41.96 $47.67
Change...................................................... $2.14 $1.48 $1.47
Change in average overtime hours................................ -0.41 -0.80 -0.62
Affected EAP workers (1,000s)................................... 12 11 3
DWL
Per worker per week......................................... $0.44 $0.59 $0.46
Nominal annual (millions)................................... $0.27 $0.34 $0.07
Real annual (millions of 2013$)............................. $0.27 $0.34 $0.07
----------------------------------------------------------------------------------------------------------------
Note: DWL analysis is limited to workers in Types 2 and 3 who experience hour adjustments.
\a\ Despite general growth in wages, the average wage may fall slightly from Year 1 to Year 2 because the
population has changed.

In conclusion, because the number of affected EAP workers and
consequently all costs and transfers diminish over time, the economic
impact of the regulation will decrease over time as the real value of
the salary levels fall. This occurs because real wages increase over
time while the proposed salary levels would remain constant without
automatic updating. However, if the salary levels are annually updated,
the projected costs and transfers would increase over time. Cost and
transfer projections based on the proposed standard salary level with
annual updates are examined in section VII.E.iii.

E. Automatic Updates

i. Background
Between periodic updates to the salary level, nominal wages
typically increase, resulting in an increase in the number of workers
qualifying for the EAP exemption even if there has been no change in
their duties or real earnings. Thus, workers whom Congress intended to
be covered by the minimum wage and overtime pay provisions of the FLSA
lose that protection. Automatically updating the salary level would
allow the level to keep pace with changes in either prices or earnings,
keeping the real value of the salary level constant over time.
The Department proposes to include in the regulations a mechanism
for automatically updating the proposed standard salary level and
proposed HCE annual compensation level annually either by maintaining a
fixed percentile of earnings (40th and 90th percentile of weekly wages
for full-time salaried workers, respectively) or by updating the salary
and compensation levels based on changes in the CPI-U. Automatically
updating the EAP standard salary level and HCE compensation level would
allow these levels to continue to serve as an effective dividing line
between potentially exempt and nonexempt workers.
Furthermore, automatically updating the standard salary level and
HCE compensation level would provide employers more certainty in
knowing that the salary and compensation levels would change by a small
amount each year, rather than the more disruptive increases caused by
much larger changes after longer, uncertain increments of time. This
would allow firms to better predict short- and long-term costs and
employment needs.
ii. Automatic Updating Methods
1. Introduction
There are many indices that could be used to adjust the salary
levels. In general, these indices are classified into two groups: Price
indices and earnings indices.
Price indices are normalized averages of prices used to measure the
change in the average level of prices in an economy over time. The
general growth rate of prices, also known as the inflation rate, is
calculated as the annual percentage increase in the average price
level. A price index is intended to measure the cost of achieving a
given level of economic well-being or utility.\149\ Because one cannot
directly observe utility or well-being, a ``market basket'' of goods
and services is selected to represent a given level of utility. By
keeping the contents of this basket constant, one can approximate the
cost of obtaining the same level of utility at different points in
time. In order to keep utility or the cost-of-living constant, incomes
must rise by the same amount as the price index.
---------------------------------------------------------------------------

\149\ Nordhaus, W.D. (1998). Quality Change in Price Indexes.
Journal of Economic Perspectives, 12(1), 59-68.
---------------------------------------------------------------------------

An alternative to indexing the salary level to a price level is to
update the salary level based upon an earnings measure. Price indices
are intended to keep a consumer's utility constant by adjusting for
changes in the cost of living due to inflation. However, while price
indices account for changes to the price of products in the market
basket, they may not reflect the real growth in

[[Page 38587]]

wages, growth that might result in the ability to purchase a larger
``market basket.'' Updating the salary level by maintaining it at a
fixed percentile of earnings would reflect real growth in wages and
keep the percentage of workers exempt roughly constant over time, but
may not fully account for inflation in all circumstances.
2. Updating Methods Considered
This section details the price and earnings indices that were
considered as methods to update the salary levels. The Department
assessed each method's strengths, weaknesses, and current use. The
methods considered include:
Consumer Price Index for all urban consumers (CPI-U)
Chained CPI (C-CPI-U)
Earnings percentiles (fixed percentiles of the
distribution of weekly earnings for full-time salaried workers)

The CPI-U

The CPI-U is the most commonly used price index in the U.S. and is
calculated monthly by BLS. The CPI-U holds quantities constant at base
levels while allowing prices to change. The quantities are fixed to
represent a ``basket of goods and services'' bought by the average
consumer. However, most economists believe that the CPI-U overestimates
the rate of inflation, although there are a broad range of views as to
the sources and size of the overestimate. CPI-U estimates are generally
not subject to revision.
The CPI-U is the primary index used by the government to index
benefit payments, program eligibility levels, and tax payments,
including:
Federal income tax brackets, personal exemptions, and
standard deductions.\150\
---------------------------------------------------------------------------

\150\ 26 U.S.C. 1(f).
---------------------------------------------------------------------------

Both eligibility for and benefits under the Earned Income
Tax Credit (EITC).\151\
---------------------------------------------------------------------------

\151\ Id.
---------------------------------------------------------------------------

Funding allocated to some government grants, such as
funding to the Nutrition Education and Obesity Prevention Grant
Program.\152\
---------------------------------------------------------------------------

\152\ 7 U.S.C. 2036a(d)(1)(F).
---------------------------------------------------------------------------

Treasury inflation-indexed debt securities' interest
rates.\153\
---------------------------------------------------------------------------

\153\ 31 CFR part 456, appendix D.
---------------------------------------------------------------------------

Many government programs' income eligibility requirements,
including school meal programs.\154\
---------------------------------------------------------------------------

\154\ 42 U.S.C. 1758(b)(1).
---------------------------------------------------------------------------

Federal poverty levels, which determine eligibility for
many government social assistance programs.\155\
---------------------------------------------------------------------------

\155\ 42 U.S.C. 9902(2).
---------------------------------------------------------------------------

The Chained CPI-U (C-CPI-U)
The C-CPI-U is a variation of the CPI-U. The C-CPI-U is an index
that accounts for changes in the market basket of goods from one year
to the next. The C-CPI-U results in inflation estimates roughly 0.3
percentage points lower than the CPI-U.\156\
---------------------------------------------------------------------------

\156\ Congressional Budget Office. (2010). Using a Different
Measure of Inflation for Indexing Federal Programs and the Tax Code.
http://www.cbo.gov/publication/25036.
---------------------------------------------------------------------------

Although the C-CPI-U is viewed by some as a more accurate measure
of inflation than the CPI-U, it has shortcomings as an indexation
method. ``The C-CPI-U requires data on changes in consumers' spending
patterns. Since those data are not available for several years the BLS
releases preliminary estimates of the C-CPI-U and revises them over the
following two years.'' \157\ Thus any measure using the C-CPI-U would
have to be either (1) indexed to a preliminary estimate of the C-CPI-U
that is subject to estimation error and revision or (2) indexed to
changes in prices from a few years prior.
---------------------------------------------------------------------------

\157\ See http://www.bls.gov/cpi/cpisupqa.htm.
---------------------------------------------------------------------------

Earnings percentiles (fixed percentiles of the distribution of
weekly earnings for full-time salaried workers)
Updating the salary levels based upon the growth rate of earnings
at a specified percentile of the earnings distribution is consistent
with the Department's historical practice of using salary level as a
key criterion for the exemption. The growth rate of earnings reflecting
labor market conditions is an appropriate measure of the relative
status, responsibility, and independence that characterize exempt
workers.
While earnings and prices generally mirror one another over time,
they do not change in tandem. A price index maintains a constant level
of utility or economic well-being; an earnings index reflects real
gains in the standard of living. Accordingly, if earnings grow more
quickly than prices an earnings index will increase the salary levels
by more than a price index. Conversely, if prices grow more quickly
than earnings a price index will increase the salary levels more than
an earnings index.
3. Comparison of Indices
The Department proposes to automatically update the standard salary
level and the HCE annual compensation level annually either by
maintaining them at a fixed percentile of earnings (the 40th and 90th
percentiles of weekly wages for full-time salaried workers,
respectively) or by updating the levels based on changes in the CPI-U.
Updating salary and compensation levels based on earnings would keep
the share of workers who are exempt fairly constant over time, while
updating based on prices will keep the earnings power of the levels
constant over time.
The Department is seeking detailed comments on both methods of
updating the standard salary and HCE compensation levels. The CPI-U is
based on a tremendous amount of data that represents average prices
paid by a majority of Americans and is by far the best-known and most
widely-used index. While earnings percentiles are less familiar, BLS
publishes the deciles of weekly earnings for full-time salaried workers
on a quarterly basis. In recent years the CPI-U has grown at a rate
very closely aligned with the 40th percentile of earnings for full-time
salaried workers; between 2003 and 2013 the average annual growth rates
for the 40th percentile and CPI-U have been: 2.6 percent and 2.4
percent respectively. The Department therefore expects that both
methods would produce similar standard salary levels in future years.
Growth in CPI-U in recent years has been smaller than growth at the
90th percentile of earnings, however, so the HCE total annual
compensation levels generated by these two methods may vary in the
future.
iii. Estimated Impacts of Automatically Updating the EAP Salary and HCE
Compensation Levels
In section VII.D.x. the Department projected ten years of costs and
transfers due to a one-time increase in the standard salary and HCE
compensation levels. Updating these salary levels annually will
increase the number of affected workers because more workers will earn
below the higher indexed salary levels than the fixed salary levels.
Consequently, the projected costs and transfers of the proposed rule
will increase with indexation.
In this section, the Department describes and quantifies the annual
costs and transfer payments associated with automatically updating the
salary levels under both methods (fixed percentile and CPI-U). To
predict the salary and compensation levels in 2014 through 2022 using
the fixed percentile method, the Department estimated the salary levels
using data from 2003 through 2013, calculated the geometric average
annual growth rate, and applied it to the future years. For example,
between 2003 and 2013 the 40th percentile of earnings for full-time
salaried workers increased by an average of 2.6 percent annually;
therefore, the projected salary level for Year 2 is $945 ($921 x
1.026). For the

[[Page 38588]]

CPI-U method, the Department used the predicted annual CPI-U values for
2014 through 2022 from the Congressional Budget Office.\158\ For
example, CPI-U for 2014 is predicted to be 1.5 percent; therefore, the
projected salary level for Year 2 is $935 ($921 x 1.015). In other
years, predicted CPI-U ranges from 1.9 percent to 2.4 percent.
---------------------------------------------------------------------------

\158\ Congressional Budget Office. (2014). The Budget and
Economic Outlook: 2014 to 2024. Pub. No. 4869. Table G-2.
---------------------------------------------------------------------------

As the required salary levels are updated in Year 2 through Year 10
of the analysis, more workers will potentially be affected with
automatic updating than without. With automatic updating of the salary
levels, the number of affected EAP workers is projected to increase
from 4.7 million to between 5.1 and 5.6 million over 10 years,
depending on the updating methodology used. Conversely, in the absence
of automatic updating, the number of affected EAP workers is projected
to decline from 4.7 to 2.7 million (Table 31). The relatively constant
number of affected workers over the years with updating validates the
choice of indexing methods. Starting in Year 1 and running through Year
10 the population of affected workers as a percent of potentially
affected workers (defined using the current salary level) increases
modestly from 21.9 to 23.4 percent using the fixed percentile method,
but declines modestly to 21.2 percent using the CPI-U method.
The three costs to employers previously considered are (1)
regulatory familiarization costs, (2) adjustment costs, and (3)
managerial costs. Regulatory familiarization costs only occur in Year 1
and thus do not vary with automatic updating. Adjustment costs and
managerial costs are a function of the number of affected EAP workers
and so will be higher with automatic updating. Adjustment costs will
occur in projected years when workers are newly affected (which--while
relatively rare--will be more common with automatic updating than
without). Management costs recur each year for all affected EAP workers
whose hours are adjusted. Therefore, managerial costs fall
significantly over time without updating (since the number of affected
EAP workers decreases over time) but increase modestly over time with
annual updating (where the number of affected EAP workers increases
over time because of the higher salary level). Similarly, transfers and
DWL will both be higher with automatic updating than without because
the number of affected workers will increase, rather than decrease,
over time.
Table 31 presents the projected estimated costs, transfer payments,
and DWL with and without automatic updating. Total direct costs were
projected to decrease from $592.7 million in Year 1 to $225.3 million
in Year 10 with fixed percentile updating and to $198.6 million in Year
10 with CPI-U updating. In the absence of automatic updating, costs
were projected to decrease to $93.1 million in Year 10. Transfers from
employers to employees were projected to decrease from $1,482.5 million
to $1,339.6 million using the fixed percentile method, and to $1,191.4
million using the CPI-U method. Without updating, transfers were
projected to decrease to $500.1 million in Year 10. DWL increases over
time with automatic updating, but decreases over time without it. With
updating, DWL was estimated to increase from $7.4 million to $11.2
million (fixed percentile method) or to $9.7 million (CPI-U method),
but decline from $7.4 million to $4.3 million without updating.

Table 31--Projected Costs and Transfers; Standard and HCE Salary Levels, With and Without Automatic Updating
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year
Automatic updating method \a\ -------------------------------------------------------------------------------------------
1 2 3 . . . 8 9 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected Workers (Millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Without..................................................... 4.7 4.5 4.2 . . . 3.1 2.9 2.7
Percentile.................................................. 4.7 4.8 4.9 . . . 5.4 5.5 5.6
CPI-U....................................................... 4.7 4.7 4.7 . . . 4.9 5.0 5.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Direct Employer Costs (Millions 2013$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Without..................................................... $592.7 $170.0 $155.8 . . . $108.9 $100.6 $93.1
Percentile.................................................. 592.7 188.8 191.9 . . . 214.8 220.1 225.3
CPI-U....................................................... 592.7 181.1 178.6 . . . 191.6 195.2 198.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Transfers (Millions 2013$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Without..................................................... $1,482.5 $1,061.2 $963.4 . . . $596.9 $551.0 $500.1
Percentile.................................................. 1,482.5 1,160.2 1,162.4 . . . 1,315.2 1,320.6 1,339.6
CPI-U....................................................... 1,482.5 1,126.4 1,104.3 . . . 1,150.6 1,192.7 1,191.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
DWL (Millions 2013$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Without..................................................... $7.4 $9.8 $8.9 . . . $5.3 $4.9 $4.3
Percentile.................................................. 7.4 10.8 10.9 . . . 11.0 11.1 11.2
CPI-U....................................................... 7.4 10.3 10.1 . . . 9.7 9.7 9.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: For the purposes of projecting costs, transfers, and DWL, Year 1 corresponds to 2013 and Year 10 corresponds to 2022.
\a\ The percentile method sets the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers and the HCE
compensation level at the 90th percentile. The CPI-U method adjusts both salary levels based on the annual percent change in the CPI-U.

[[Page 38589]]

In Years 1 through 10, using a 7 percent real discount rate, total
annualized adjustment and managerial costs were estimated to average
between $205.7 and $221.4 million per year with automatic updating
(using CPI-U or fixed percentile, respectively) and $160.3 million
without updating (Table 32). Therefore, the incremental average
annualized direct employer costs of automatic updating is between $45.4
and $61.1 million per year. Average annualized total transfers were
estimated to be between $1,178.0 and $1,271.4 million with automatic
updating (using CPI-U or fixed percentile, respectively) and $872.9
million without updating, resulting in incremental transfers of between
$305.2 and $398.5 million per year. Projected average annualized DWL
totals between $9.5 and $10.5 million per year with automatic updating
(using CPI-U or fixed percentile, respectively) and $7.2 million per
year without updating. Thus, automatic updating increases DWL by
between $2.3 and $3.3 million per year on average. Benefits were not
monetized for either Year 1 or Years 2 through 10; therefore this
section does not repeat the previous discussion on potential benefits.

Table 32--Summary of Ten-Year Average Annualized Regulatory Costs and Transfers, Standard and HCE Salary Levels,
With and Without Automatic Updating
----------------------------------------------------------------------------------------------------------------
Average annualized values (Millions 2013$) \a\
----------------------------------------------------------------
Cost/transfer Fixed percentile CPI-U
Without ---------------------------------------------------
updating Values Difference Values Difference
----------------------------------------------------------------------------------------------------------------
Regulatory Familiarization Costs
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \b\................. $33.9 $33.9 $0.0 $33.9 $0.0
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Adj. & managerial costs........................ $158.7 $218.6 $59.9 $203.3 $44.6
Transfers...................................... 853.4 1,232.4 379.1 1,144.2 290.8
DWL............................................ 7.0 10.0 3.0 9.2 2.2
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Adj. & managerial costs........................ $1.7 $2.9 $1.2 $2.4 $0.8
Transfers...................................... 19.5 39.0 19.5 33.8 14.3
DWL............................................ 0.2 0.5 0.3 0.3 0.2
----------------------------------------------------------------------------------------------------------------
Total
----------------------------------------------------------------------------------------------------------------
Adj. & managerial costs........................ $160.3 $221.4 $61.1 $205.7 $45.4
Transfers...................................... 872.9 1,271.4 398.5 1,178.0 305.2
DWL............................................ 7.2 10.5 3.3 9.5 2.3
----------------------------------------------------------------------------------------------------------------
\a\ Over ten years, using a discount rate of 7 percent.
\b\ Regulatory familiarization costs are a one-time cost that do not vary based on the proposed salary levels or
automatic updating.

The above table demonstrates that the two updating methods yield
similar costs and transfers estimates. However, this does not imply
these indices will necessarily result in similar salary levels over
time. The Department compared the standard salary levels that would
have resulted from 1998 to 2013 if (1) the standard salary level was
set each year to the 40th percentile of weekly earnings for full-time
salaried workers, and (2) the standard salary level was set using the
growth in the CPI-U (and setting the level in 2013 to match the 40th
percentile earnings level, i.e., $921 per week) (Figure 5). While not
identical, the data show that during this sixteen year period these two
methods produced similar results.

[[Page 38590]]

[GRAPHIC] [TIFF OMITTED] TP06JY15.004

F. Duties Test

The Department has not proposed specific revisions to the standard
duties tests; however, as mentioned in section III., we received
significant input regarding this issue from both employer and employee
representatives during the Department's stakeholder listening sessions.
If changes were made to the standard duties tests, the Department would
need to consider whether any of the probabilities of exemption for
specific occupations used in the analysis would need to be revised
since the new duties test would potentially result in workers in some
occupations being more or less likely to meet the duties tests.
The Department has begun to consider whether O*NET can be used to
identify any occupations for which the Department may need to adjust
its assumptions of the likelihood of exemption should the Department
revise the duties test. The O*NET database contains information on
hundreds of standardized and occupation-specific descriptors. The
database, which is available to the public, is continually updated by
surveying a broad range of workers from each occupation. The database
of occupational requirements and worker attributes describes
occupations in terms of the skills and knowledge required, how the work
is performed, and typical work settings.\159\
---------------------------------------------------------------------------

\159\ See http://www.onetcenter.org/overview.html.
---------------------------------------------------------------------------

For each occupation, O*NET includes a list of tasks performed, and
rates the tasks' frequency, importance, relevance, and whether it is a
core or supplemental task. O*NET also includes data on work activities,
including the importance, relevancy, and frequency of specified tasks
performed in each occupation. This information could inform the
Department in determining whether the task is indicative of exempt
duties.
The Department believes it could use O*NET data to construct a
model to identify occupations for which the probability of exemption
would be impacted by any changes to the duties tests. The Department
also could look to O*NET data to determine changes to the probability
codes for those identified occupations. Therefore, if there are any
changes to the duties test, the Department would likely update its
estimate of the impact of the rule based on its analysis of the O*NET
data for any occupations for which the probability codes were modified.
The Department invites detailed comments on this proposed
methodology and alternative data sources for determining the impact of
any changes to the standard duties tests.

Appendix A: Methodology for Estimating Exemption Status

The number of workers exempt under the FLSA's part 541 regulations
is unknown. It is neither reported by employers to any central agency
nor asked in either an employee or establishment survey. The Department
estimated the number of exempt workers using the following methodology.
This methodology is based largely on the approach used during the 2004
revisions.\160\ This appendix expands on the methodology description in
this NPRM. The methodology explained there is not repeated here unless
additional details are provided.
---------------------------------------------------------------------------

\160\ 69 FR 22196-22209 (Apr. 23, 2004).
---------------------------------------------------------------------------

A.1 The Duties Tests Probability Codes

The CPS MORG data do not include information about job duties. To
determine whether a worker meets the duties test the Department again
employs the methodology it used in the 2004 Final Rule. Each occupation
is assigned a probability representing the odds that a worker in that
occupation would pass the duties test. For the EAP duties test, the
five probability intervals are:
Category 0: Occupations not likely to include any workers
eligible for the EAP exemptions.
Category 1: Occupations with probabilities between 90 and
100 percent.
Category 2: Occupations with probabilities between 50 and
90 percent.
Category 3: Occupations with probabilities between 10 and
50 percent.
Category 4: Occupations with probabilities between 0 and
10 percent.\161\
---------------------------------------------------------------------------

\161\ Table A2 lists the probability codes by occupation used to
estimate exemption status.
---------------------------------------------------------------------------

The occupations identified in this classification system represent
an earlier occupational classification scheme (the 1990 Census Codes).
Therefore, an occupational crosswalk was used to map the previous
occupational codes to

[[Page 38591]]

the 2002 Census Occupational Codes which are used in the CPS MORG 2002
through 2010 data.^{162 163} When the new occupational category
was comprised of more than one previous occupation, the Department
assigned a probability category using the weighted average of the
previous occupations' probabilities, rounded to the closest category
code.
---------------------------------------------------------------------------

\162\ To match 1990 Census Codes to the corresponding 2000
Census Codes see: http://www.census.gov/people/io/methodology/. To
translate the 2000 Census Codes into the 2002 Census Codes each code
is multiplied by 10.
\163\ Beginning January 2011, the MORG data use the 2010 Census
Codes. The Department translates these codes into the equivalent
2002 Census Codes to create continuity. The crosswalk is available
at: http://www.census.gov/people/io/methodology/.
---------------------------------------------------------------------------

Next, the Department must determine which workers to classify as
exempt.\164\ For example, the probability codes indicate that out of
every ten public relation managers between five and nine are exempt;
however, the Department does not know which five to nine workers are
exempt. Exemption status could be randomly assigned but this would bias
the earnings of exempt workers downward, since higher paid workers are
more likely to perform the required duties. Therefore, the probability
of being classified as exempt should increase with earnings. First, the
Department assigned the upper bound of the probability range in each
exemption category to workers with top-coded weekly earnings. For all
other white collar salaried workers earning at least $455 per week in
each exemption category, the Department estimated the probability of
exemption for each worker in the data based on both occupation and
earnings using a gamma distribution.^{165 166} For the gamma
distribution, the shape parameter alpha was set to the squared quotient
of the sample mean divided by the sample standard deviation, and the
scale parameter beta was set to the sample variance divided by the
sample mean. These parameter calculations are based on the method
described in the 2004 rulemaking, except for the use of the standard
deviation instead of the standard error.\167\ Table A1 shows that the
expected number of workers exempt using a gamma distribution method is
similar to the expected number exempt when assigning the midpoint of
each probability code range to all workers in that probability code.
After determining the probabilities of exemption for each worker in the
data (dependent on both occupation and earnings), the Department
randomly assigns exemption status to each worker, conditional on the
worker's probability of exemption.
---------------------------------------------------------------------------

\164\ These probabilities are applied to the population of
workers who are either (1) in occupational categories associated
with named occupations or (2) white collar, earn $455 or more per
week, and are salaried.
\165\ The gamma distribution was chosen because during the 2004
revision it fit the data the best of the non-linear distributions
considered, which included normal, lognormal, and gamma. 69 FR
22204-08.
\166\ A gamma distribution is a general type of statistical
distribution that is based on two parameters, in this case alpha and
beta.
\167\ Since the standard error is much smaller than the sample
standard deviation, using the standard error to calculate the shape
and location parameters resulted in probabilities that vary less
with earnings.

Table A1--Comparison of Part 541--Exempt Worker Estimates a
------------------------------------------------------------------------
Midpoint Gamma
Probability code category probability distribution
estimate model estimate
------------------------------------------------------------------------
High probability of exemption (1). 21,947,066 22,014,576
Probably exempt (2)............... 4,557,146 4,573,895
Probably not exempt (3)........... 1,617,632 1,605,096
Low or no probability of exemption 281,382 297,336
(4)..............................
Total......................... 28,403,227 28,490,903
------------------------------------------------------------------------
\a\ Numbers shown are the expected value of the number of workers exempt
in each of the four probability code categories.

The 2004 Final Rule assigned probabilities for whether workers in
each occupation would pass the HCE abbreviated duties test if they
earned $100,000 or more in total annual compensation; these
probabilities are:
Category 0: Occupations not likely to include any workers
eligible for the HCE exemption.
Category 1: Occupations with a probability of 100 percent.
Category 2: Occupations with probabilities between 94 and
96 percent.
Category 3: Occupations with probabilities between 58.4
and 60 percent.
Category 4: Occupations with a probability 15 percent.
Like under the standard test, there is a positive relationship
between earnings and exemption status; however, unlike the standard
test, the relationship for the HCE analysis can be represented well
with a linear function. Once individual probabilities are determined,
workers are randomly assigned to exemption status.
A.2 Other Exemptions
There are many other exemptions to the minimum wage and overtime
pay provisions of the FLSA. Accordingly, in the 2004 Final Rule, the
Department excluded workers in agriculture and certain transportation
occupations from the analysis. The Department now is, in addition,
estimating those workers who fall under one of the other exemptions in
section 13(a) of the FLSA, because such workers are exempt from both
minimum wage and overtime pay under the relevant section and would
remain exempt regardless of any changes to the EAP exemption. In fact,
many of the workers estimated below as falling within one of the
section 13(a) exemptions will already have been excluded from the
analysis because they are paid on an hourly basis or are in a blue
collar occupation. The methodology for identifying the workers who fall
under the section 13(a) exemptions is explained here and is based
generally on the methodology the Department used in 1998 when it issued
its last report under section 4(d) of the FLSA. Section 4(d) previously
required the Department to submit a report to Congress every two years
regarding coverage under the FLSA.
A.2.1 Section 13(a)(1) Outside Sales Workers
Outside sales workers are a subset of the section 13(a)(1)
exemptions, but since they are not affected by the salary regulations
they are not discussed in detail in the preamble. Outside sales workers
are included in occupational category ``door-to-door sales workers,
news and street vendors, and related workers'' (Census code 4950). This
category is composed of workers who both would and would not qualify
for the outside sales worker exemption; for

[[Page 38592]]

example, street vendors would not qualify. Therefore, the percentage of
these workers that qualify for the exemption was estimated. The
Department believes that, under the 1990 Census Codes system, outside
sales workers were more or less uniquely identified with occupational
category ``street & door-to-door sales workers'' (277). Therefore, the
Department exempts the share of workers in category 4950 who under the
old classification system would have been classified as code 277 (43
percent).
A.2.2 Agricultural Workers
Similar to the 2004 analysis, the Department excluded agricultural
workers from the universe of affected employees. Agricultural workers
were identified by occupational-industry combination. However, in the
2004 Final Rule all workers in agricultural industries were excluded;
here only workers also in select occupations were excluded since not
all workers in agricultural industries qualify for the agricultural
overtime pay exemptions. This method better approximates the true
number of exempt agricultural workers and provides a more conservative
estimate of the number of affected workers. Industry categories
include: ``crop production'' (0170), ``animal production'' (0180), and
``support activities for agriculture and forestry'' (0290).
Occupational categories include all blue collar occupations (identified
with the probability codes), ``farm, ranch, and other agricultural
managers'' (0200), ``general and operations managers'' (0020), and
``first-line supervisors/managers of farming, fishing, and forestry
workers'' (6000).
A.2.3 Other Section 13(a) Exemptions
The following methodology relies mainly on CPS MORG data but also
incorporates alternative data sources when necessary.

Section 13(a)(3): Seasonal amusement and recreational establishment

Any employee of an amusement or recreational establishment may be
exempt from minimum wage and overtime pay if the establishment meets
either of the following tests: (a) It operates for seven months or less
during any calendar year, or (b) its revenue for the six lowest months
of the year is less than one-third of the other six months of such
year. Amusement and recreational establishments are defined as
``establishments frequented by the public for its amusement or
recreation,'' and ``typical examples of such are the concessionaires at
amusement parks and beaches.'' \168\ In the CPS MORG data the
Department identifies general amusement and recreation in the following
industry categories:
---------------------------------------------------------------------------

\168\ 29 CFR 779.385.

``independent artists, performing arts, spectator sports,
and related industries'' (8560),
``museums, art galleries, historical sites, and similar
institutions'' (8570),
``bowling centers'' (8580),
``other amusement, gambling, and recreation industries''
(8590), and
``recreational vehicle parks and camps, and rooming and
boarding houses'' (8670).\169\
---------------------------------------------------------------------------

\169\ The Department does not believe that all employees in this
industry category would qualify for this exemption. However, we had
no way to segregate in the data employees who would and would not
qualify for exemption.
---------------------------------------------------------------------------

The CPS MORG data does not provide information on employers'
operating information or revenue. Using Business Employment Dynamics
(BED) data, the Department estimated the share of leisure and
hospitality employees working for establishments that are closed for at
least one quarter a year.\170\ Although not technically the same as the
FLSA definition of ``seasonal,'' this is the best available
approximation of ``seasonal'' employees. The Department estimated that
3 percent of amusement and recreational workers will be exempt.
---------------------------------------------------------------------------

\170\ Seasonal employment was calculated by taking the
difference in employment between establishment openings (all
establishments that are either opening for the first time or
reopening) and establishment births (establishments that are opening
for the first time)--resulting in employment in only establishments
reopening. Similarly, seasonal employment was estimated by taking
the difference in employment between establishment closings and
establishment deaths. These two estimates were then averaged. The
analysis is limited to the leisure and hospitality industry. Since
the exemption is limited to workers in ``establishments frequented
by the public for its amusement or recreation'' the Department must
assume the rate of employment in seasonal establishments, relative
to all establishments, is equivalent across these amusement or
recreation establishments and all leisure and hospitality
establishments.
---------------------------------------------------------------------------

The 1998 section 4(d) report estimated the number of exempt workers
by applying an estimate determined in 1987 by a detailed report from
the Employment Standards Administration. The Department chose not to
use this estimate because it is outdated.
Section 13(a)(3) also exempts employees of seasonal religious or
non-profit educational centers, but many of these workers have already
been excluded from the analysis either as religious workers (not
covered by the FLSA) or as teachers (professional exemption) and so are
not estimated.

Section 13(a)(5): Fishermen

Any employee, such as a fisherman, employed in the catching,
harvesting, or farming of fish or other aquatic life forms, is exempt
from minimum wage and overtime pay. Fishermen are identified in
occupational categories ``fishers and related fishing workers'' (6100)
and ``ship and boat captains and operators'' (9310) and the industry
category ``fishing, hunting, and trapping'' (0280). Workers identified
in both these occupational and industry categories are considered
exempt.

Section 13(a)(8): Small, local newspapers

This exemption from minimum wage and overtime pay applies to any
employee employed by a newspaper with circulation of less than 4,000
and circulated mainly within the county where published. Newspaper
employees are identified in the following occupational categories:
``news analysts, reporters and correspondents'' (2810),
``editors'' (2830),
``technical writers'' (2840),
``writers and authors'' (2850), and
``miscellaneous media and communication workers'' (2860).
The exemption is limited to the industry category ``newspaper
publishers'' (6470). To limit the exemption to small, local papers, the
Department limits the exemption to employees in rural areas. Although
employment in a rural area is not synonymous with employment at a small
newspaper, this is the best approach currently available.
Alternatively, the Department could use data from Dun and Bradstreet
(D&B) as was done in the 1998 section 4(d) report. This data would
provide information on which establishments are in rural areas; from
this the Department could estimate the share of employment in rural
areas. This approach would be much more time intensive but would not
necessarily provide a better result.

Section 13(a)(10): Switchboard operators

An independently owned public telephone company that has not more
than 750 stations may claim the minimum wage and overtime pay exemption
for its switchboard operators. ``Switchboard operators, including
answering service'', are exempt under occupation code 5010 and industry
classifications ``wired telecommunications carriers'' (6680) and
``other telecommunications carriers'' (6690). Using the 2007 Economic
Census, the Department

[[Page 38593]]

estimated that 0.84 percent of employees in the relevant
telecommunication sub-industries are employed by firms with fewer than
ten employees (the estimated level of employment necessary to service
seven hundred and fifty stations).
According to the 1998 section 4(d) report, fewer than 10,000
workers were exempt in 1987 and so the Department did not develop a
methodology for estimating the number exempt.

Section 13(a)(12): Seamen on foreign vessels

Any employee employed as a seaman on a vessel other than an
American vessel is exempt from minimum wage and overtime pay. Seamen
are identified by occupational categories:
``sailors and marine oilers'' (9300),
``ship and boat captains and operators'' (9310), and
``ship engineers'' (9330).
The CPS MORG data does not identify whether the vessel is foreign
or domestic. The best approach the Department has devised is to assume
that the number of workers in the occupation ``deep sea foreign
transportation of freight'' (SIC 441) in 2000 is roughly equivalent to
the number of workers on foreign vessels. The 2000 Occupational
Employment Statistics estimates there were 14,210 workers in this
occupation and thus that number of seamen are assigned exempt status on
a random basis.\171\
---------------------------------------------------------------------------

\171\ Revisions to the SIC classification system since 2000 have
eliminated this category; thus, more recent data are not available.

---------------------------------------------------------------------------
Section 13(a)(15): Companions

Domestic service workers employed to provide ``companionship
services'' for an elderly person or a person with an illness, injury,
or disability are not required to be paid the minimum wage or overtime
pay. Companions are classified under occupational categories:
``nursing, psychiatric, and home health aides'' (3600) and
``personal and home care aides'' (4610).

And industry categories:

``home health care services'' (8170),
``individual and family services'' (8370), and
``private households'' (9290).

All the workers who fall within these occupational and industry
categories were previously excluded from the analysis because they are
paid on an hourly basis and/or are in an occupation where workers have
no likelihood of qualifying for the section 13(a)(1) exemption.

Section 13(a)(16): Criminal investigators

The criminal investigator must be employed by the federal
government and paid ``availability pay.'' \172\ Criminal investigators
are identified in occupational categories:
---------------------------------------------------------------------------

\172\ Availability pay is compensation for hours when the agent
must be available to perform work over and above the standard 40
hours per week. See http://www.opm.gov/oca/pay/HTML/AP.HTM.
---------------------------------------------------------------------------

``detectives and criminal investigators'' (3820),
``fish and game wardens'' (3830), and
``private detectives and investigators'' (3910).
This exemption was not mentioned in the 1998 section 4(d) report.
The Department exempts all workers in the occupations identified above
and employed by the federal government.

Section 13(a)(17): Computer workers

Computer workers who meet the duties test are exempt under two
sections of the FLSA. Salaried computer workers who earn a weekly
salary of not less than $455 are exempt under section 13(a)(1) and
computer workers who are paid hourly are exempt under section 13(a)(17)
if they earn at least $27.63 an hour.
Occupations that may be considered exempt include: ``computer and
information systems managers'' (110), ``computer scientists and systems
analysts'' (1000), ``computer programmers'' (1010), ``computer software
engineers'' (1020), ``computer support specialists'' (1040), ``database
administrators'' (1060), ``network and computer systems
administrators'' (1100), ``network systems and data communications
analysts'' (1110), ``computer operators'' (5800), and ``computer
control programmers and operators'' (7900).
To identify computer workers exempt under section 13(a)(17), we
restrict the population to workers who are paid on an hourly basis and
who earn at least $27.63 per hour. To determine which of these workers
pass the computer duties test, we use the probabilities of exemption
assigned to these occupations by the Department and assume a linear
relationship between earnings and exemption status.
A.2.4 Section 13(b) Exemptions
Section 13(b)(1): Motor carrier employees

This exemption eliminated overtime pay for ``any employee with
respect to whom the Secretary of Transportation has power to establish
qualifications and maximum hours of service pursuant to the provisions
of Section 31502 of Title 49[.]'' In essence, these are motor carrier
workers,\173\ identified by industry category ``truck transportation''
(6170).
---------------------------------------------------------------------------

\173\ 49 U.S.C. 31502. The text of the law is available at:
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title49/html/USCODE-2011-title49-subtitleVI-partB-chap315-sec31502.htm.
---------------------------------------------------------------------------

To be exempt, these workers must engage in ``safety affecting
activities''. Examples of exempt occupations include: ``driver,
driver's helper, loader, or mechanic''.\174\ The relevant occupational
categories are:
---------------------------------------------------------------------------

\174\ Fact Sheet #19: The Motor Carrier Exemption under the Fair
Labor Standards Act (FLSA).
---------------------------------------------------------------------------

``electronic equipment installers and repairers, motor
vehicles'' (7110),
``automotive service technicians and mechanics'' (7200),
``bus and truck mechanics and diesel engine specialists''
(7210),
``heavy vehicle and mobile equipment service technicians
and mechanics'' (7220), and
``driver/sales workers and truck drivers'' (9130).\175\
---------------------------------------------------------------------------

\175\ The 2004 methodology used 1990 Census codes 505, 507, and
804 which crosswalk to these occupations. However, occupations 605,
613, and 914 (included in the 1990 Census code 804 crosswalk) were
excluded because under the new classification system they were
deemed irrelevant.

---------------------------------------------------------------------------
Section 13(b)(2): Rail carrier employees

Section 13(b)(2) exempts ``any employee of an employer engaged in
the operation of a rail carrier subject to part A of subtitle IV of
Title 49.'' \176\ This includes industrial category ``rail
transportation'' (6080). The 1998 methodology did not include
occupational requirements but the 2004 methodology did, so this
restriction was included. Occupations are limited to:
---------------------------------------------------------------------------

\176\ 49 U.S.C. 10101-11908. Text of the law is available at:
http://www.gpo.gov/fdsys/pkg/USCODE-2013-title49/pdf/USCODE-2013-title49-subtitleIV-partA.pdf.
---------------------------------------------------------------------------

``locomotive engineers and operators'' (9200),
``railroad brake, signal, and switch operators'' (9230),
``railroad conductors and yardmasters'' (9240), and
``subway, streetcar, and other rail transportation
workers'' (9260).

Section 13(b)(3): Air carrier employees

This section exempts employees subject to the ``provisions of title
II of the Railway Labor Act.'' \177\ In essence, this exempts air
carrier employees, identified by industry category ``air
transportation'' (6070). The 1998 methodology did not include
occupational requirements but the 2004 methodology did, so this
restriction was included. Occupations are limited to ``aircraft pilots
and flight engineers''

[[Page 38594]]

(9030) and ``aircraft mechanics and service technicians'' (7140).
---------------------------------------------------------------------------

\177\ 45 U.S.C. 181 et seq. Available at: http://www.gpo.gov/fdsys/pkg/USCODE-2013-title45/html/USCODE-2013-title45-chap8-subchapII.htm.

---------------------------------------------------------------------------
Section 13(b)(6): Seamen

Occupational categories include ``sailors and marine oilers''
(9300), ``ship and boat captains and operators'' (9310), and ``ship
engineers'' (9330).\178\ The exemption is limited to the ``water
transportation'' industry (6090).
---------------------------------------------------------------------------

\178\ The 2004 methodology used 1990 Census codes 828, 829, and
833 which crosswalk to these occupations. However, occupation 952
(dredge, excavating, and loading machine operators) was excluded
because under the new classification system they were deemed
irrelevant.

---------------------------------------------------------------------------
Section 13(b)(10): Salesmen, partsmen, or mechanics

The Department limited this exemption to workers employed in a
``nonmanufacturing establishment primarily engaged in the business of
selling such vehicles or implements to ultimate purchasers.'' Industry
classifications include: ``automobile dealers'' (4670) and ``other
motor vehicle dealers'' (4680). In the 2004 Final Rule, the industry
was limited to 1990 Census code 612 which became Census code
``automobile dealers'' (4670). Category 4680 (``other motor vehicle
dealers'') is also included here in keeping with the 1998 section 4(d)
report methodology.
The 1998 methodology did not include an occupational restriction;
however, the 2004 methodology limited the exemption to automobiles,
trucks, or farm implement sales workers and mechanics.

Automobiles, trucks, or farm implement sales workers include:

``parts salespersons'' (4750), and
``retail salespersons'' (4760).\179\
---------------------------------------------------------------------------

\179\ The 2004 methodology used codes 263 and 269 which
crosswalk to these codes plus a few others which have been deemed
irrelevant and excluded (4700, 4740, and 4850).

---------------------------------------------------------------------------
Mechanics include:

``electronic equipment installers and repairers, motor
vehicles'' (7110),
``automotive body and related repairers'' (7150),
``automotive glass installers and repairers'' (7160),
``automotive service technicians and mechanics'' (7200),
``bus and truck mechanics and diesel engine specialists''
(7210),
``heavy vehicle and mobile equipment service technicians
and mechanics'' (7220),
``small engine mechanics'' (7240), and
``miscellaneous vehicle and mobile equipment mechanics,
installers, and repairers'' (7260).\180\
---------------------------------------------------------------------------

\180\ The 2004 methodology used codes 505, 506, 507, and 514
which generally crosswalk to these codes. A few additional codes
were added which were deemed relevant (7240 and 7260).

Table A2--Probability Codes by Occupation
------------------------------------------------------------------------
Probability
2002 Census code Occupation code
------------------------------------------------------------------------
10 Chief executives................. 1
20 General and operations managers.. 1
40 Advertising and promotions 1
managers.
50 Marketing and sales managers..... 1
60 Public relations managers........ 2
100 Administrative services managers. 1
110 Computer and information systems 1
managers.
120 Financial managers............... 1
130 Human resources managers......... 1
140 Industrial production managers... 1
150 Purchasing managers.............. 1
160 Transportation, storage, and 1
distribution managers.
200 Farm, ranch, and other 3
agricultural managers.
210 Farmers and ranchers............. 0
220 Construction managers............ 1
230 Education administrators......... 1
300 Engineering managers............. 1
310 Food service managers............ 3
320 Funeral directors................ 2
330 Gaming managers.................. 2
340 Lodging managers................. 3
350 Medical and health services 1
managers.
360 Natural sciences managers........ 1
400 Postmasters and mail 0
superintendents.
410 Property, real estate, and 3
community association managers.
420 Social and community service 1
managers.
430 Managers, all other.............. 1
500 Agents and business managers of 2
artists, performers, and
athletes.
510 Purchasing agents and buyers, 2
farm products.
520 Wholesale and retail buyers, 2
except farm products.
530 Purchasing agents, except 2
wholesale, retail, and farm
products.
540 Claims adjusters, appraisers, 2
examiners, and investigators.
560 Compliance officers, except 3
agriculture, construction,
health and safety, and
transportation.
600 Cost estimators.................. 1
620 Human resources, training, and 2
labor relations specialists.
700 Logisticians..................... 1
710 Management analysts.............. 2
720 Meeting and convention planners.. 2
730 Other business operations 2
specialists.
800 Accountants and auditors......... 1
810 Appraisers and assessors of real 3
estate.
820 Budget analysts.................. 2

[[Page 38595]]

830 Credit analysts.................. 2
840 Financial analysts............... 2
850 Personal financial advisors...... 2
860 Insurance underwriters........... 1
900 Financial examiners.............. 3
910 Loan counselors and officers..... 2
930 Tax examiners, collectors, and 1
revenue agents.
940 Tax preparers.................... 2
950 Financial specialists, all other. 2
1000 Computer scientists and systems 1
analysts.
1010 Computer programmers............. 2
1020 Computer software engineers...... 1
1040 Computer support specialists..... 1
1060 Database administrators.......... 1
1100 Network and computer systems 1
administrators.
1110 Network systems and data 1
communications analysts.
1200 Actuaries........................ 1
1210 Mathematicians................... 1
1220 Operations research analysts..... 1
1230 Statisticians.................... 1
1240 Miscellaneous mathematical 1
science occupations.
1300 Architects, except naval......... 1
1310 Surveyors, cartographers, and 3
photogrammetrists.
1320 Aerospace engineers.............. 1
1330 Agricultural engineers........... 1
1340 Biomedical engineers............. 1
1350 Chemical engineers............... 1
1360 Civil engineers.................. 1
1400 Computer hardware engineers...... 1
1410 Electrical and electronic 1
engineers.
1420 Environmental engineers.......... 1
1430 Industrial engineers, including 1
health and safety.
1440 Marine engineers and naval 1
architects.
1450 Materials engineers.............. 1
1460 Mechanical engineers............. 1
1500 Mining and geological engineers, 1
including mining safety
engineers.
1510 Nuclear engineers................ 1
1520 Petroleum engineers.............. 1
1530 Engineers, all other............. 1
1540 Drafters......................... 4
1550 Engineering technicians, except 4
drafters.
1560 Surveying and mapping technicians 4
1600 Agricultural and food scientists. 1
1610 Biological scientists............ 1
1640 Conservation scientists and 1
foresters.
1650 Medical scientists............... 1
1700 Astronomers and physicists....... 1
1710 Atmospheric and space scientists. 1
1720 Chemists and materials scientists 1
1740 Environmental scientists and 1
geoscientists.
1760 Physical scientists, all other... 3
1800 Economists....................... 2
1810 Market and survey researchers.... 2
1820 Psychologists.................... 1
1830 Sociologists..................... 2
1840 Urban and regional planners...... 3
1860 Miscellaneous social scientists 2
and related workers.
1900 Agricultural and food science 4
technicians.
1910 Biological technicians........... 4
1920 Chemical technicians............. 4
1930 Geological and petroleum 4
technicians.
1940 Nuclear technicians.............. 4
1960 Other life, physical, and social 4
science technicians.
2000 Counselors....................... 2
2010 Social workers................... 3
2020 Miscellaneous community and 3
social service specialists.
2040 Clergy........................... 0
2050 Directors, religious activities 0
and education.
2060 Religious workers, all other..... 0
2100 Lawyers.......................... 1

[[Page 38596]]

2110 Judges, magistrates, and other 1
judicial workers.
2140 Paralegals and legal assistants.. 4
2150 Miscellaneous legal support 3
workers.
2200 Postsecondary teachers........... 1
2300 Preschool and kindergarten 2
teachers.
2310 Elementary and middle school 1
teachers.
2320 Secondary school teachers........ 1
2330 Special education teachers....... 1
2340 Other teachers and instructors... 1
2400 Archivists, curators, and museum 1
technicians.
2430 Librarians....................... 1
2440 Library Technicians.............. 4
2540 Teacher assistants............... 4
2550 Other education, training, and 1
library workers.
2600 Artists and related workers...... 2
2630 Designers........................ 1
2700 Actors........................... 1
2710 Producers and directors.......... 1
2720 Athletes, coaches, umpires, and 2
related workers.
2740 Dancers and choreographers....... 1
2750 Musicians, singers, and related 1
workers.
2760 Entertainers and performers, 1
sports and related workers, all
other.
2800 Announcers....................... 2
2810 News analysts, reporters and 3
correspondents.
2820 Public relations specialists..... 3
2830 Editors.......................... 3
2840 Technical writers................ 3
2850 Writers and authors.............. 2
2860 Miscellaneous media and 2
communication workers.
2900 Broadcast and sound engineering 4
technicians and radio operators.
2910 Photographers.................... 1
2920 Television, video, and motion 2
picture camera operators and
editors.
2960 Media and communication equipment 4
workers, all other.
3000 Chiropractors.................... 1
3010 Dentists......................... 1
3030 Dietitians and nutritionists..... 3
3040 Optometrists..................... 1
3050 Pharmacists...................... 1
3060 Physicians and surgeons.......... 1
3110 Physician assistants............. 2
3120 Podiatrists...................... 1
3130 Registered nurses................ 1
3140 Audiologists..................... 2
3150 Occupational therapists.......... 3
3160 Physical therapists.............. 2
3200 Radiation therapists............. 3
3210 Recreational therapists.......... 2
3220 Respiratory therapists........... 3
3230 Speech-language pathologists..... 2
3240 Therapists, all other............ 2
3250 Veterinarians.................... 1
3260 Health diagnosing and treating 1
practitioners, all other.
3300 Clinical laboratory technologists 3
and technicians.
3310 Dental hygienists................ 3
3320 Diagnostic related technologists 3
and technicians.
3400 Emergency medical technicians and 3
paramedics.
3410 Health diagnosing and treating 4
practitioner support technicians.
3500 Licensed practical and licensed 4
vocational nurses.
3510 Medical records and health 4
information technicians.
3520 Opticians, dispensing............ 0
3530 Miscellaneous health 2
technologists and technicians.
3540 Other healthcare practitioners 3
and technical occupations.
3600 Nursing, psychiatric, and home 0
health aides.
3610 Occupational therapist assistants 0
and aides.
3620 Physical therapist assistants and 0
aides.
3630 Massage therapists............... 0
3640 Dental assistants................ 0
3650 Medical assistants and other 4
healthcare support occupations.
3700 First-line supervisors/managers 2
of correctional officers.
3710 First-line supervisors/managers 3
of police and detectives.

[[Page 38597]]

3720 First-line supervisors/managers 3
of fire fighting and prevention
workers.
3730 Supervisors, protective service 3
workers, all other.
3740 Fire fighters.................... 0
3750 Fire inspectors.................. 0
3800 Bailiffs, correctional officers, 0
and jailers.
3820 Detectives and criminal 0
investigators.
3830 Fish and game wardens............ 0
3840 Parking enforcement workers...... 0
3850 Police and sheriff's patrol 0
officers.
3860 Transit and railroad police...... 0
3900 Animal control workers........... 0
3910 Private detectives and 4
investigators.
3920 Security guards and gaming 0
surveillance officers.
3940 Crossing guards.................. 0
3950 Lifeguards and other protective 0
service workers.
4000 Chefs and head cooks............. 0
4010 First-line supervisors/managers 3
of food preparation and serving
workers.
4020 Cooks............................ 0
4030 Food preparation workers......... 0
4040 Bartenders....................... 0
4050 Combined food preparation and 0
serving workers, including fast
food.
4060 Counter attendants, cafeteria, 0
food concession, and coffee shop.
4110 Waiters and waitresses........... 0
4120 Food servers, nonrestaurant...... 0
4130 Dining room and cafeteria 0
attendants and bartender helpers.
4140 Dishwashers...................... 0
4150 Hosts and hostesses, restaurant, 4
lounge, and coffee shop.
4160 Food preparation and serving 0
related workers, all other.
4200 First-line supervisors/managers 4
of housekeeping and janitorial
workers.
4210 First-line supervisors/managers 3
of landscaping, lawn service,
and groundskeeping workers.
4220 Janitors and building cleaners... 0
4230 Maids and housekeeping cleaners.. 0
4240 Pest control workers............. 0
4250 Grounds maintenance workers...... 0
4300 First-line supervisors/managers 1
of gaming workers.
4320 First-line supervisors/managers 4
of personal service workers.
4340 Animal trainers.................. 4
4350 Nonfarm animal caretakers........ 0
4400 Gaming services workers.......... 0
4410 Motion picture projectionists.... 0
4420 Ushers, lobby attendants, and 0
ticket takers.
4430 Miscellaneous entertainment 0
attendants and related workers.
4460 Funeral service workers.......... 0
4500 Barbers.......................... 0
4510 Hairdressers, hairstylists, and 0
cosmetologists.
4520 Miscellaneous personal appearance 0
workers.
4530 Baggage porters, bellhops, and 0
concierges.
4540 Tour and travel guides........... 0
4550 Transportation attendants........ 0
4600 Child care workers............... 0
4610 Personal and home care aides..... 0
4620 Recreation and fitness workers... 2
4640 Residential advisors............. 0
4650 Personal care and service 0
workers, all other.
4700 First-line supervisors/managers 2
of retail sales workers.
4710 First-line supervisors/managers 2
of non-retail sales workers.
4720 Cashiers......................... 4
4740 Counter and rental clerks........ 4
4750 Parts salespersons............... 4
4760 Retail salespersons.............. 4
4800 Advertising sales agents......... 2
4810 Insurance sales agents........... 2
4820 Securities, commodities, and 2
financial services sales agents.
4830 Travel agents.................... 4
4840 Sales representatives, services, 3
all other.
4850 Sales representatives, wholesale 3
and manufacturing.
4900 Models, demonstrators, and 4
product promoters.
4920 Real estate brokers and sales 3
agents.
4930 Sales engineers.................. 3
4940 Telemarketers.................... 4

[[Page 38598]]

4950 Door-to-door sales workers, news 4
and street vendors, and related
workers.
4960 Sales and related workers, all 3
other.
5000 First-line supervisors/managers 1
of office and administrative
support workers.
5010 Switchboard operators, including 4
answering service.
5020 Telephone operators.............. 4
5030 Communications equipment 4
operators, all other.
5100 Bill and account collectors...... 4
5110 Billing and posting clerks and 4
machine operators.
5120 Bookkeeping, accounting, and 4
auditing clerks.
5130 Gaming cage workers.............. 4
5140 Payroll and timekeeping clerks... 4
5150 Procurement clerks............... 4
5160 Tellers.......................... 4
5200 Brokerage clerks................. 4
5210 Correspondence clerks............ 4
5220 Court, municipal, and license 4
clerks.
5230 Credit authorizers, checkers, and 3
clerks.
5240 Customer service representatives. 3
5250 Eligibility interviewers, 3
government programs.
5260 File Clerks...................... 4
5300 Hotel, motel, and resort desk 4
clerks.
5310 Interviewers, except eligibility 4
and loan.
5320 Library assistants, clerical..... 4
5330 Loan interviewers and clerks..... 3
5340 New accounts clerks.............. 4
5350 Order clerks..................... 4
5360 Human resources assistants, 4
except payroll and timekeeping.
5400 Receptionists and information 4
clerks.
5410 Reservation and transportation 4
ticket agents and travel clerks.
5420 Information and record clerks, 4
all other.
5500 Cargo and freight agents......... 4
5510 Couriers and messengers.......... 4
5520 Dispatchers...................... 4
5530 Meter readers, utilities......... 4
5540 Postal service clerks............ 4
5550 Postal service mail carriers..... 4
5560 Postal service mail sorters, 4
processors, and processing
machine operators.
5600 Production, planning, and 4
expediting clerks.
5610 Shipping, receiving, and traffic 4
clerks.
5620 Stock clerks and order fillers... 0
5630 Weighers, measurers, checkers, 4
and samplers, recordkeeping.
5700 Secretaries and administrative 4
assistants.
5800 Computer operators............... 4
5810 Data entry keyers................ 4
5820 Word processors and typists...... 4
5830 Desktop publishers............... 4
5840 Insurance claims and policy 3
processing clerks.
5850 Mail clerks and mail machine 4
operators, except postal service.
5860 Office clerks, general........... 4
5900 Office machine operators, except 4
computer.
5910 Proofreaders and copy markers.... 4
5920 Statistical assistants........... 4
5930 Office and administrative support 4
workers, all other.
6000 First-line supervisors/managers 4
of farming, fishing, and
forestry workers.
6010 Agricultural inspectors.......... 3
6020 Animal breeders.................. 3
6040 Graders and sorters, agricultural 0
products.
6050 Miscellaneous agricultural 0
workers.
6100 Fishers and related fishing 0
workers.
6110 Hunters and trappers............. 0
6120 Forest and conservation workers.. 0
6130 Logging workers.................. 0
6200 First-line supervisors/managers 4
of construction trades and
extraction workers.
6210 Boilermakers..................... 0
6220 Brickmasons, blockmasons, and 0
stonemasons.
6230 Carpenters....................... 0
6240 Carpet, floor, and tile 0
installers and finishers.
6250 Cement masons, concrete 0
finishers, and terrazzo workers.
6260 Construction laborers............ 0
6300 Paving, surfacing, and tamping 0
equipment operators.

[[Page 38599]]

6310 Pile-driver operators............ 0
6320 Operating engineers and other 0
construction equipment operators.
6330 Drywall installers, ceiling tile 0
installers, and tapers.
6350 Electricians..................... 0
6360 Glaziers......................... 0
6400 Insulation workers............... 0
6420 Painters, construction and 0
maintenance.
6430 Paperhangers..................... 0
6440 Pipelayers, plumbers, 0
pipefitters, and steamfitters.
6460 Plasterers and stucco masons..... 0
6500 Reinforcing iron and rebar 0
workers.
6510 Roofers.......................... 0
6520 Sheet metal workers.............. 0
6530 Structural iron and steel workers 0
6600 Helpers, construction trades..... 0
6660 Construction and building 3
inspectors.
6700 Elevator installers and repairers 0
6710 Fence erectors................... 0
6720 Hazardous materials removal 0
workers.
6730 Highway maintenance workers...... 0
6740 Rail-track laying and maintenance 0
equipment operators.
6750 Septic tank servicers and sewer 0
pipe cleaners.
6760 Miscellaneous construction and 0
related workers.
6800 Derrick, rotary drill, and 0
service unit operators, oil,
gas, and mining.
6820 Earth drillers, except oil and 0
gas.
6830 Explosives workers, ordnance 0
handling experts, and blasters.
6840 Mining machine operators......... 0
6910 Roof bolters, mining............. 0
6920 Roustabouts, oil and gas......... 0
6930 Helpers--extraction workers...... 0
6940 Other extraction workers......... 0
7000 First-line supervisors/managers 3
of mechanics, installers, and
repairers.
7010 Computer, automated teller, and 0
office machine repairers.
7020 Radio and telecommunications 0
equipment installers and
repairers.
7030 Avionics technicians............. 0
7040 Electric motor, power tool, and 0
related repairers.
7050 Electrical and electronics 0
installers and repairers,
transportation equipment.
7100 Electrical and electronics 0
repairers, industrial and
utility.
7110 Electronic equipment installers 0
and repairers, motor vehicles.
7120 Electronic home entertainment 0
equipment installers and
repairers.
7130 Security and fire alarm systems 0
installers.
7140 Aircraft mechanics and service 0
technicians.
7150 Automotive body and related 0
repairers.
7160 Automotive glass installers and 0
repairers.
7200 Automotive service technicians 0
and mechanics.
7210 Bus and truck mechanics and 0
diesel engine specialists.
7220 Heavy vehicle and mobile 0
equipment service technicians
and mechanics.
7240 Small engine mechanics........... 0
7260 Miscellaneous vehicle and mobile 0
equipment mechanics, installers,
and repairers.
7300 Control and valve installers and 0
repairers.
7310 Heating, air conditioning, and 0
refrigeration mechanics and
installers.
7320 Home appliance repairers......... 0
7330 Industrial and refractory 0
machinery mechanics.
7340 Maintenance and repair workers, 0
general.
7350 Maintenance workers, machinery... 0
7360 Millwrights...................... 0
7410 Electrical power-line installers 0
and repairers.
7420 Telecommunications line 0
installers and repairers.
7430 Precision instrument and 0
equipment repairers.
7510 Coin, vending, and amusement 0
machine servicers and repairers.
7520 Commercial divers................ 4
7540 Locksmiths and safe repairers.... 0
7550 Manufactured building and mobile 0
home installers.
7560 Riggers.......................... 0
7600 Signal and track switch repairers 0
7610 Helpers--installation, 0
maintenance, and repair workers.
7620 Other installation, maintenance, 0
and repair workers.
7700 First-line supervisors/managers 3
of production and operating
workers.
7710 Aircraft structure, surfaces, 0
rigging, and systems assemblers.
7720 Electrical, electronics, and 0
electromechanical assemblers.

[[Page 38600]]

7730 Engine and other machine 0
assemblers.
7740 Structural metal fabricators and 0
fitters.
7750 Miscellaneous assemblers and 0
fabricators.
7800 Bakers........................... 0
7810 Butchers and other meat, poultry, 0
and fish processing workers.
7830 Food and tobacco roasting, 0
baking, and drying machine
operators and tenders.
7840 Food batchmakers................. 0
7850 Food cooking machine operators 0
and tenders.
7900 Computer control programmers and 4
operators.
7920 Extruding and drawing machine 0
setters, operators, and tenders,
metal and plastic.
7930 Forging machine setters, 0
operators, and tenders, metal
and plastic.
7940 Rolling machine setters, 0
operators, and tenders, metal
and plastic.
7950 Cutting, punching, and press 0
machine setters, operators, and
tenders, metal and plastic.
7960 Drilling and boring machine tool 0
setters, operators, and tenders,
metal and plastic.
8000 Grinding, lapping, polishing, and 0
buffing machine tool setters,
operators, and tenders, metal
and plastic.
8010 Lathe and turning machine tool 0
setters, operators, and tenders,
metal and plastic.
8020 Milling and planing machine 0
setters, operators, and tenders,
metal and plastic.
8030 Machinists....................... 0
8040 Metal furnace and kiln operators 0
and tenders.
8060 Model makers and patternmakers, 0
metal and plastic.
8100 Molders and molding machine 0
setters, operators, and tenders,
metal and plastic.
8120 Multiple machine tool setters, 0
operators, and tenders, metal
and plastic.
8130 Tool and die makers.............. 0
8140 Welding, soldering, and brazing 0
workers.
8150 Heat treating equipment setters, 0
operators, and tenders, metal
and plastic.
8160 Lay-out workers, metal and 0
plastic.
8200 Plating and coating machine 0
setters, operators, and tenders,
metal and plastic.
8210 Tool grinders, filers, and 0
sharpeners.
8220 Metalworkers and plastic workers, 0
all other.
8230 Bookbinders and bindery workers.. 0
8240 Job printers..................... 0
8250 Prepress technicians and workers. 0
8260 Printing machine operators....... 0
8300 Laundry and dry-cleaning workers. 0
8310 Pressers, textile, garment, and 0
related materials.
8320 Sewing machine operators......... 0
8330 Shoe and leather workers and 0
repairers.
8340 Shoe machine operators and 0
tenders.
8350 Tailors, dressmakers, and sewers. 0
8360 Textile bleaching and dyeing 0
machine operators and tenders.
8400 Textile cutting machine setters, 0
operators, and tenders.
8410 Textile knitting and weaving 0
machine setters, operators, and
tenders.
8420 Textile winding, twisting, and 0
drawing out machine setters,
operators, and tenders.
8430 Extruding and forming machine 0
setters, operators, and tenders,
synthetic and glass fibers.
8440 Fabric and apparel patternmakers. 0
8450 Upholsterers..................... 0
8460 Textile, apparel, and furnishings 0
workers, all other.
8500 Cabinetmakers and bench 0
carpenters.
8510 Furniture finishers.............. 0
8520 Model makers and patternmakers, 0
wood.
8530 Sawing machine setters, 0
operators, and tenders, wood.
8540 Woodworking machine setters, 0
operators, and tenders, except
sawing.
8550 Woodworkers, all other........... 0
8600 Power plant operators, 0
distributors, and dispatchers.
8610 Stationary engineers and boiler 0
operators.
8620 Water and liquid waste treatment 0
plant and system operators.
8630 Miscellaneous plant and system 0
operators.
8640 Chemical processing machine 0
setters, operators, and tenders.
8650 Crushing, grinding, polishing, 0
mixing, and blending workers.
8710 Cutting workers.................. 0
8720 Extruding, forming, pressing, and 0
compacting machine setters,
operators, and tenders.
8730 Furnace, kiln, oven, drier, and 0
kettle operators and tenders.
8740 Inspectors, testers, sorters, 0
samplers, and weighers.
8750 Jewelers and precious stone and 0
metal workers.
8760 Medical, dental, and ophthalmic 0
laboratory technicians.
8800 Packaging and filling machine 0
operators and tenders.
8810 Painting workers................. 0
8830 Photographic process workers and 0
processing machine operators.
8840 Semiconductor processors......... 0
8850 Cementing and gluing machine 0
operators and tenders.

[[Page 38601]]

8860 Cleaning, washing, and metal 0
pickling equipment operators and
tenders.
8900 Cooling and freezing equipment 0
operators and tenders.
8910 Etchers and engravers............ 0
8920 Molders, shapers, and casters, 0
except metal and plastic.
8930 Paper goods machine setters, 0
operators, and tenders.
8940 Tire builders.................... 0
8950 Helpers--production workers...... 0
8960 Production workers, all other.... 0
9000 Supervisors, transportation and 3
material moving workers.
9030 Aircraft pilots and flight 4
engineers.
9040 Air traffic controllers and 3
airfield operations specialists.
9110 Ambulance drivers and attendants, 0
except emergency medical
technicians.
9120 Bus drivers...................... 0
9130 Driver/sales workers and truck 0
drivers.
9140 Taxi drivers and chauffeurs...... 0
9150 Motor vehicle operators, all 0
other.
9200 Locomotive engineers and 0
operators.
9230 Railroad brake, signal, and 0
switch operators.
9240 Railroad conductors and 0
yardmasters.
9260 Subway, streetcar, and other rail 0
transportation workers.
9300 Sailors and marine oilers........ 0
9310 Ship and boat captains and 0
operators.
9330 Ship engineers................... 4
9340 Bridge and lock tenders.......... 0
9350 Parking lot attendants........... 0
9360 Service station attendants....... 0
9410 Transportation inspectors........ 0
9420 Other transportation workers..... 0
9500 Conveyor operators and tenders... 0
9510 Crane and tower operators........ 0
9520 Dredge, excavating, and loading 0
machine operators.
9560 Hoist and winch operators........ 0
9600 Industrial truck and tractor 0
operators.
9610 Cleaners of vehicles and 0
equipment.
9620 Laborers and freight, stock, and 0
material movers, hand.
9630 Machine feeders and offbearers... 0
9640 Packers and packagers, hand...... 0
9650 Pumping station operators........ 0
9720 Refuse and recyclable material 0
collectors.
9730 Shuttle car operators............ 0
9740 Tank car, truck, and ship loaders 0
9750 Material moving workers, all 0
other.
------------------------------------------------------------------------

Appendix B. Additional Tables

Table B1--EAP Exempt Workers Potentially Affected by This Proposed
Rulemaking, by Industry, 2013
------------------------------------------------------------------------
Potentially As percent of
affected EAP potentially
Industry workers affected EAP
(millions) workers (percent)
------------------------------------------------------------------------
Total \a\......................... 21.4 100.0
Agriculture....................... 0.0 0.1
Forestry, logging, fishing, 0.0 0.0
hunting, and trapping............
Mining............................ 0.2 0.8
Construction...................... 0.8 3.6
Nonmetallic mineral product 0.1 0.3
manufacturing....................
Primary metals and fabricated 0.2 1.0
metal products...................
Machinery manufacturing........... 0.3 1.4
Computer and electronic product 0.6 2.9
manufacturing....................
Electrical equipment, appliance 0.1 0.5
manufacturing....................
Transportation equipment 0.6 2.6
manufacturing....................
Wood products..................... 0.0 0.2
Furniture and fixtures 0.1 0.2
manufacturing....................
Miscellaneous and not specified 0.3 1.5
manufacturing....................
Food manufacturing................ 0.2 0.8
Beverage and tobacco products..... 0.1 0.3

[[Page 38602]]

Textile, apparel, and leather 0.1 0.3
manufacturing....................
Paper and printing................ 0.1 0.6
Petroleum and coal products 0.1 0.3
manufacturing....................
Chemical manufacturing............ 0.4 2.0
Plastics and rubber products...... 0.1 0.3
Wholesale trade................... 0.8 3.9
Retail trade...................... 1.6 7.5
Transportation and warehousing.... 0.5 2.4
Utilities......................... 0.3 1.3
Publishing industries (except 0.2 0.9
internet)........................
Motion picture and sound recording 0.0 0.2
industries.......................
Broadcasting (except internet).... 0.2 0.8
Internet publishing and 0.0 0.2
broadcasting.....................
Telecommunications................ 0.4 1.6
Internet service providers and 0.0 0.2
data processing services.........
Other information services........ 0.1 0.3
Finance........................... 1.9 9.0
Insurance......................... 1.0 4.7
Real estate....................... 0.3 1.4
Rental and leasing services....... 0.1 0.3
Professional and technical 3.6 16.8
services.........................
Management of companies and 0.1 0.3
enterprises......................
Administrative and support 0.5 2.3
services.........................
Waste management and remediation 0.0 0.2
services.........................
Educational services.............. 0.8 3.9
Hospitals......................... 1.0 4.7
Health care services, except 1.2 5.5
hospitals........................
Social assistance................. 0.4 1.8
Arts, entertainment, and 0.4 1.7
recreation.......................
Accommodation..................... 0.1 0.5
Food services and drinking places. 0.3 1.2
Repair and maintenance............ 0.1 0.5
Personal and laundry services..... 0.1 0.3
Membership associations and 0.4 1.8
organizations....................
Private households................ 0.0 0.0
Public administration............. 0.8 3.9
------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Columns may not sum to total due to rounding.

VIII. Initial Regulatory Flexibility Analysis (IRFA)

The Regulatory Flexibility Act of 1980 (RFA) as amended by the
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),
hereafter jointly referred to as the RFA, 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. See 5 U.S.C.
603. If the rule is not expected to have a significant economic impact
on a substantial number of small entities, the RFA allows an agency to
certify such, in lieu of preparing an analysis. See 5 U.S.C. 605.
The Department specifically invites comment on the impacts of the
proposed rule on small businesses, including whether alternatives exist
that will reduce burden on small entities while still meeting the
objectives of the FLSA. The Chief Counsel for Advocacy of the Small
Business Administration (SBA) was notified of a draft of this rule upon
submission of the rule to OMB under E.O. 12866.

A. Reasons Why Action by the Agency Is Being Considered

The EAP exemption salary level test that is the focus of this
proposed rulemaking has been updated seven times since the FLSA was
originally enacted in 1938. These updates were necessary in order for
the required salary level to keep pace with increases in earnings in
the economy so that it could continue to serve as an effective bright-
line test that separates workers who Congress intended to remain
entitled to minimum wage and overtime protection and those who may
qualify as bona fide EAP exempt workers.
The standard salary level and HCE total compensation levels have
not been updated since 2004 and, as described in detail in section
VII.A.ii., the standard salary level has declined considerably in real
terms relative to both its 2004 and 1975 values. As a result, the
exemption removes workers from overtime protection who were not
intended to be within the exemption. Similarly, the HCE annual
compensation requirement is out of date; more than twice as many
workers earn at least $100,000 annually compared to when it was adopted
in 2004. Therefore, the Department believes that rulemaking is
necessary in order to restore the effectiveness of these levels.

B. Statement of Objectives and Legal Basis for the Proposed Rule

Section 13(a)(1) creates a minimum wage and overtime pay exemption
for

[[Page 38603]]

bona fide executive, administrative, professional, outside sales
employees, and teachers and academic administrative personnel, as those
terms are defined and delimited by the Secretary of Labor. The
regulations in part 541 contain specific criteria that define each
category of exemption. The regulations also define those computer
employees who are exempt under section 13(a)(1) and section 13(a)(17).
To qualify for exemption, employees must meet certain tests regarding
their job duties and generally must be paid on a salary basis at not
less than $455 per week.
The Department's primary objective in this rulemaking is to ensure
that the revised salary levels will continue to provide a useful and
effective test for exemption. The salary levels were designed to
operate as a ready guide to assist employers in deciding which
employees were more likely to meet the duties tests for the exemptions.
If left unchanged, however, the effectiveness of the salary level test
as a means of determining exempt status diminishes as nonexempt
employee wages increase over time.
The Department last updated the salary levels in the 2004 Final
Rule, setting the standard test threshold at $455 per week for EAP
employees. The 2004 Final Rule also created a new ``highly
compensated'' test for exemption. Under the HCE exemption, employees
who are paid total annual compensation of at least $100,000 (which must
include at least $455 per week paid on a salary or fee basis) are
exempt from the FLSA's overtime requirements if they customarily and
regularly perform at least one of the duties or responsibilities of an
exempt EAP employee identified in the standard tests for exemption.
Sec. 541.601.
Employees who meet the requirements of part 541 are excluded from
the Act's minimum wage and overtime pay protections. As a result,
employees may work any number of hours in the workweek and not be
subject to the FLSA's overtime pay requirements. Some State laws have
stricter exemption standards than those described above. The FLSA does
not preempt any such stricter State standards. If a State law
establishes a higher standard than the provisions of the FLSA, the
higher standard applies in that specific state. See 29 U.S.C. 218.
In order to restore the ability of the standard salary level and
the HCE compensation requirement to serve as appropriate bright-line
tests between overtime-protected employees and employees who may be EAP
exempt, the Department proposes to increase the minimum salary level
test from $455 to the 40th percentile of the weekly wages of all full-
time salaried employees ($921 per week), and the level for the HCE test
from $100,000 to the annual equivalent of the 90th percentile of weekly
earnings for full-time salaried employees ($122,148 in annual
earnings). The Department reached the proposed salary levels after
considering available data on actual salary levels currently being paid
in the economy. In order to ensure that these levels continue to
function appropriately in the future, the Department also proposes to
automatically update them annually either by maintaining the respective
earnings percentile or updating the levels based on changes in the CPI-
U.

C. Description of the Number of Small Entities To Which the Proposed
Rule Will Apply

i. Definition of Small Entity
The RFA defines a ``small entity'' as a (1) small not-for-profit
organization, (2) small governmental jurisdiction, or (3) small
business. The Department used the entity size standards defined by SBA
to classify entities as small for the purpose of this analysis. SBA
establishes separate standards for individual 6-digit NAICS industry
codes, and standard cutoffs are typically based on either the average
annual number of employees, or the average annual receipts. For
example, the SBA has two widely used size standards: 500 employees for
manufacturing, and $7 million in annual receipts for nonmanufacturing
services. However, some exceptions do exist, the most notable being
that depository institutions (including credit unions, commercial
banks, and non-commercial banks) are classified by total assets. Small
governmental jurisdictions are another noteworthy exception; they are
defined as the governments of cities, counties, towns, townships,
villages, school districts, or special districts with population of
less than 50,000 people.\181\
---------------------------------------------------------------------------

\181\ See http://www.sba.gov/advocacy/regulatory-flexibility-act
for details.
---------------------------------------------------------------------------

ii. Data Sources and Methods
The Department obtained data from several different sources to
determine employment in small entities for each industry. Categorical
tabulations from the Statistics of U.S. Businesses (SUSB, 2007 and
2011) were used for most industries. Industries that used data from
alternative sources include Credit Unions (National Credit Union
Association, 2010), Commercial and Non-Commercial Banks (Federal
Depository Insurance Corporation, 2013), and Public Administration,
where employees were classified based on employment estimates from the
Census of Governments (2012), and local population estimates from the
Census of Population and Housing (2012). The Department used the latest
available data in each case, so data years differ between sources.\182\
---------------------------------------------------------------------------

\182\ Latest available year of data for each source in
parentheses. SUSB employment data are for 2011 (although since the
time of writing 2012 data have become available) and receipts data
are for 2007.
---------------------------------------------------------------------------

For each industry, the total number of employees is organized in
categories based on different characteristics of the employing entity.
The categories are defined using employment, annual revenue, and
assets. The Department combined these categories with the corresponding
SBA standards to estimate the proportion of workers in each industry
who are employed by a small entity.
The general methodological approach was to classify all employees
in categories below the SBA cutoff as in ``small entity'' employment.
If a cutoff fell in the middle of a defined category, a uniform
distribution of employees across that bracket was assumed in order to
determine what proportion should be classified as in small entity
employment. The Department assumed that the small entity distribution
across revenue categories for Other Depository Institutions, which was
not separately represented in FDIC asset data, was similar to that of
Credit Unions.
iii. Number of Small Entities Impacted by Proposed Rule
It is difficult to estimate precisely the number of small entities
that will be impacted by the proposed rule. The employee, payroll, and
receipts data in SUSB are tabulated by ``enterprise size,'' where the
definition of ``enterprise'' is equivalent to ``entity'' for the
purposes of the current discussion. However, this data does not
directly report the number of enterprises, but instead provides data on
``establishments'' (individual plants, regardless of ownership), and
``firms'' (a collection of all plants with a single owner within a
given state and industry). Therefore, an enterprise may consist of
multiple firms, depending on the number of states and industries it
operates in. Using the SUSB number of small firms as a proxy may thus
overestimate the number of small entities nationally. However, this
effect is unlikely to be large, because most small entities would
probably operate on smaller scales (i.e., will either consist

[[Page 38604]]

of a single establishment, or operate within a single state and
industry).
The estimated probability that an EAP exempt worker is employed by
a small entity is set equal to the calculated proportion of workers
employed in the corresponding industry. For example, if an industry has
50 percent of workers employed in small entities, then on average one
out of every two EAP exempt workers in this industry is expected to be
small-entity employed. The Department applied these probabilities to
the population of EAP exempt workers in order to find the number of
workers (total and affected by the rule) employed by small entities,
their payroll under the current and the proposed salary levels, and the
number of small entities employing affected workers. The Department
also tabulated the total number of affected entities and employees by
industry group.
With these limitations, the Department estimates that the proposed
rule will affect 4.7 million workers in an estimated 290,800
establishments (Table 33).\183\ Among affected workers, 1.8 million
were estimated to be employed by small entities, working in 211,000
small establishments (Table 34). While nearly 40 percent of affected
EAP workers are employed in small entities, this composes a very small
percentage of overall small entity employment in the economy; affected
workers account for 3.5 percent of small establishment employment on
average, with at most 7.0 percent of workers affected in any industry.
The industries with the most affected small entity employees are:
---------------------------------------------------------------------------

\183\ To estimate the number of establishments the ratio of
affected workers to total workers was applied to the total number of
establishments. For example, 4.7 million of the total 132 million
workers are affected, or 3.5 percent; 3.5 percent of the total 7.4
million establishments is 290,000 establishments with affected
workers.
---------------------------------------------------------------------------

Education and health services with 336,800 affected
workers (3.5 percent of employees) in 26,800 establishments;
Professional and business services with 319,200 affected
workers (5.0 percent of employees) in 56,100 establishments; and
Wholesale and retail trade with 241,700 affected workers
(3.7 percent of employees) in 38,000 establishments.
The financial activities industry has the largest percent of
affected small entity employees; 7 percent are affected.

Table 33--Affected Entities Under Proposed Standard Salary and HCE Compensation Level Increases
----------------------------------------------------------------------------------------------------------------
Establishments (1,000s) Workers (1,000s) \a\ Annual
Industry ------------------------------------------------------ payroll
Total Affected \b\ Total Affected (billions)
----------------------------------------------------------------------------------------------------------------
Total........................................ 7,427 290.8 132,084 4,682.4 $5,881
Agriculture, forestry, fishing, & hunting.... 21 0.1 1,150 7.1 35
Mining....................................... 28 0.6 931 20.4 61
Construction................................. 658 15.1 6,804 155.7 314
Manufacturing................................ 296 8.1 14,844 406.1 759
Wholesale & retail trade..................... 1,475 52.1 18,733 662.1 657
Transportation & utilities................... 229 5.2 6,911 156.7 334
Information.................................. 134 8.3 2,969 183.0 164
Financial activities......................... 809 61.4 9,009 683.3 499
Professional & business services............. 1,281 69.2 13,573 733.0 734
Education & health services.................. 910 28.1 32,120 992.4 1,427
Leisure & hospitality........................ 772 16.3 12,166 256.7 303
Other services............................... 722 23.2 5,699 183.2 193
Public administration \c\.................... 90 3.0 7,175 242.7 399
----------------------------------------------------------------------------------------------------------------
Note: Establishment data from the Survey of U.S. Businesses 2011; worker data from CPS MORG using pooled data
for 2011-2013.
\a\ Excludes the self-employed and unpaid workers. Affected workers are those who would become overtime eligible
under the proposed increased salary levels if weekly earnings did not change.
\b\ The number of affected establishments depends on assumptions made by the Department. The numbers presented
here assume the share of establishments that are affected is equal to the share of workers who are affected
within an industry.
\c\ Establishment number represents the total number of governments, including state and local. Data from
Government Organization Summary Report: 2012.

Table 34--Affected Small Entities and Workers Under Proposed Standard Salary and HCE Compensation Level
Increases
----------------------------------------------------------------------------------------------------------------
Small entity Small entity workers Annual
establishments (1,000s) (1,000s) \a\ small
Industry ------------------------------------------------------ entity
payroll
Total Affected \b\ Total Affected \c\ (billions)
----------------------------------------------------------------------------------------------------------------
Total \d\.................................... 6,045 210.6 50,355 1,754.0 $2,110
Agriculture, forestry, fishing, & hunting.... 20 0.1 624 3.9 18
Mining....................................... 23 0.6 351 9.8 23
Construction................................. 640 14.3 4,373 97.8 201
Manufacturing................................ 265 7.2 6,372 172.6 309
Wholesale & retail trade..................... 1,038 38.0 6,600 241.7 251
Transportation & utilities................... 178 4.1 1,711 39.7 76
Information.................................. 73 4.6 768 48.6 40
Financial activities......................... 550 38.7 2,812 198.2 147
Professional & business services............. 1,121 56.1 6,374 319.2 339
Education & health services.................. 763 26.8 9,573 336.8 382
Leisure & hospitality........................ 632 13.0 6,380 131.6 155
Other services............................... 668 23.4 3,724 130.2 134
Public administration \e\.................... 73 2.5 692 23.9 34
----------------------------------------------------------------------------------------------------------------
Note: Establishment data from the Survey of U.S. Businesses 2011; worker data from CPS MORG using pooled data
for 2011-2013.

[[Page 38605]]

\a\ Excludes the self-employed and unpaid workers. Affected workers are those who would become overtime eligible
under the proposed increased salary levels if weekly earnings did not change.
\b\ The number of affected establishments depends on assumptions made by the Department. The numbers presented
here assume the share of workers in small entities who are affected is also the share of small entity
establishments that are affected.
\c\ These numbers are also equal to the number of small entity establishments under the assumption that each
affected establishment has one affected worker.
\d\ The components do not necessarily equal the totals due to when averages are taken.
\e\ Establishment number represents the total number of governments, including state and local.

D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Proposed Rule

The FLSA sets minimum wage, overtime pay, and recordkeeping
requirements for employment subject to its provisions. Unless exempt,
covered employees must be paid at least the minimum wage and not less
than one and one-half times their regular rates of pay for overtime
hours worked.
Every covered employer must keep certain records for each nonexempt
worker. The regulations at part 516 require employers to maintain
records for employees subject to the minimum wage and overtime pay
provisions of the FLSA. Thus, the recordkeeping requirements are not
new requirements; however, employers would need to keep some additional
records for additional affected employees if the NPRM were to be made
final without change. As indicated in this analysis, the NPRM would
expand minimum wage and overtime pay coverage to 4.6 million affected
EAP workers (including HCE workers and excluding Type 4 workers who
remain exempt). This would result in an increase in employer burden and
was estimated in the PRA portion (section VI.) of this NPRM. Note that
the burdens reported for the PRA section of this NPRM include the
entire information collection and not merely the additional burden
estimated as a result of this NPRM.
i. Costs to Small Entities
As detailed in section VII.D.iv., three direct costs to employers
are quantified in this analysis: (1) Regulatory familiarization costs;
(2) adjustment costs; and (3) managerial costs. Regulatory
familiarization costs are the costs incurred to read and become
familiar with the requirements of the rule. Adjustment costs are the
costs accrued to determine workers' new exemption statuses, notify
employees of policy changes, and update payroll systems. Managerial
costs associated with this proposed rulemaking occur because hours of
workers who are newly entitled to overtime may be more closely
scheduled and monitored to minimize or avoid paying the overtime
premium. Regardless of business size, the Department estimates that
each establishment will spend one hour of time for regulatory
familiarization; one hour per each affected worker in adjustment costs;
and five minutes per week scheduling and monitoring each affected
worker expected to be reclassified as overtime eligible as a result of
this proposed rule.
For small entities, the Department projected annual regulatory
familiarization, adjustment, and managerial costs, and payments to
employees in terms of extra wages paid. The Department believes that
the minimum and maximum per-establishment costs are the most accurate
possible estimates for the range of impact of the proposed rule on
individual employers.
As a direct result of this proposed rule, the Department expects
total direct employer costs (regulatory familiarization, adjustment,
and managerial costs) of $134.5 to 186.6 million will be incurred by
small entities in the first year after the promulgation of the proposed
rule (Table 35). The three industries with the most affected small
entity employees (educational and health services, professional and
business services, and wholesale and retail trade) account for more
than 50 percent of direct costs.
Average weekly earnings for affected EAP workers in small entities
are expected to increase by $6.16 per week per affected worker due to
both the standard salary level and HCE total annual compensation level
proposed increases. This results in costs to employer of $561.5 million
in wage increases to employees, which compose 0.1 to 0.8 percent of
aggregate affected entity payroll (Table 36).
The Department evaluated the impacts to small entities employing
affected workers using a range to represent minimum and maximum costs
incurred by an average establishment. To define the average
establishment, the Department divided the total number of employees and
payroll among small establishments by the total number of small
establishments on an industry-specific basis. The minimum level of
impacts is defined by assuming only one worker employed by the average
establishment is affected by the revised salary level. The maximum
level is defined by assuming 100 percent of workers employed by the
average establishment are affected by the revised salary level.\184\ On
average, depending on the number of affected workers it employs, an
affected establishment is expected to incur $100 to $600 in direct
costs and $320 to $2,700 in additional payroll to employees in the
first year after the promulgation of the proposed rule. On average,
these combined first year costs and transfers account for approximately
0.11 to 0.95 percent of average establishment payroll (depending on how
affected small establishments are defined).
---------------------------------------------------------------------------

\184\ Larger than average small establishments in each industry
might employ a larger number of affected employees, and such
establishments might incur larger costs and transfers than the
``average'' establishment used as a benchmark in this analysis.
However, although such establishments' costs and transfers will
increase in proportion to the number of affected workers, these
establishments' payroll will also increase in approximate proportion
to the number of workers they employ. Since such establishments can
never have more than 100 percent of their employees affected by the
proposed rule, the rule's impact as measured by costs and transfers
as a percentage of establishment payroll will be roughly the same
magnitude as an average establishment with 100 percent of employees
affected. Thus, the scalability of the average establishment impacts
adequately captures impacts to establishments both larger and
smaller than average.

[[Page 38606]]

Table 35--Costs to Small Entities Under Proposed Standard Salary and HCE Compensation Level Increases
----------------------------------------------------------------------------------------------------------------
Cost to small entities in year 1 \a\
-----------------------------------------------------------------------------
Total (millions) Per affected Percent of annual
Industry -------------------------- establishment (1,000s) payroll
---------------------------------------------------
Min \b\ Max \b\ Min \b\ Max \b\ Min \b\ Max \b\
----------------------------------------------------------------------------------------------------------------
Total............................. $186.6 $134.5 $0.1 $0.6 $0.03 $0.18%
Agriculture, forestry, fishing, 0.4 0.3 0.1 2.2 0.01 0.25
and hunting......................
Mining............................ 1.0 0.7 0.1 1.2 0.01 0.12
Construction...................... 10.4 7.6 0.1 0.5 0.03 0.17
Manufacturing..................... 18.4 12.7 0.1 1.8 0.01 0.15
Wholesale and retail trade........ 25.7 18.8 0.1 0.5 0.04 0.20
Transportation and utilities...... 4.2 3.0 0.1 0.7 0.03 0.17
Information....................... 5.2 3.7 0.1 0.8 0.02 0.14
Financial activities.............. 21.1 15.6 0.1 0.4 0.04 0.15
Professional and business services 34.0 25.0 0.1 0.4 0.04 0.15
Educational and health services... 35.8 25.2 0.1 0.9 0.02 0.19
Leisure and hospitality........... 14.0 10.0 0.1 0.8 0.04 0.31
Other services.................... 13.9 10.2 0.1 0.4 0.05 0.22
Public administration............. 2.5 1.8 0.1 0.7 0.02 0.15
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Direct costs include regulatory familiarization, adjustment, and managerial costs.
\b\ The range of costs per establishment depends on the number of affected establishments. The minimum assumes
that each affected establishment has one affected worker (therefore, the number of affected establishments is
equal to the number of affected workers). The maximum assumes the share of workers in small entities who are
affected is also the share of small entity establishments that are affected.

Table 36--Transfers for Small Entities under Proposed Standard Salary and HCE Compensation Level Increases
----------------------------------------------------------------------------------------------------------------
Transfers for small entities in year 1 \a\
----------------------------------------------------------------
Per affected Percent of annual
Industry Total establishment (1,000s) payroll
(millions) ---------------------------------------------------
Min \b\ Max \b\ Min \b\ Max \b\
----------------------------------------------------------------------------------------------------------------
Total.......................................... $561.5 $0.32 $2.7 $0.09 $0.76%
Agriculture, forestry, fishing, and hunting.... 0.5 0.12 3.8 0.01 0.42
Mining......................................... 3.1 0.31 4.9 0.03 0.49
Construction................................... 54.4 0.56 3.8 0.18 1.21
Manufacturing.................................. 53.5 0.31 7.4 0.03 0.64
Wholesale and retail trade..................... 101.4 0.42 2.7 0.17 1.10
Transportation and utilities................... 10.2 0.26 2.5 0.06 0.58
Information.................................... 19.9 0.41 4.3 0.07 0.78
Financial activities........................... 53.1 0.27 1.4 0.10 0.51
Professional and business services............. 84.2 0.26 1.5 0.09 0.50
Educational and health services................ 75.1 0.22 2.8 0.04 0.56
Leisure and hospitality........................ 70.0 0.53 5.4 0.22 2.19
Other services................................. 31.4 0.24 1.3 0.12 0.67
Public administration.......................... 4.7 0.20 1.9 0.04 0.39
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2011-2013.
\a\ Aggregate change in total annual payroll experienced by small entities under the proposed salary levels
after labor market adjustments. This amount represents the total amount of (wage) transfers from employers to
employees.
\b\ The range of transfers per establishment depends on the number of affected establishments (the denominator).
The minimum assumes that each affected establishment has one affected worker (therefore, the number of
affected establishments is equal to the number of affected workers). The maximum assumes the share of workers
in small entities who are affected is also the share of small entity establishments that are affected.

ii. Differing Compliance and Reporting Requirements for Small Entities
This NPRM provides no differing compliance requirements and
reporting requirements for small entities. The Department has strived
to minimize respondent recordkeeping burden by requiring no specific
form or order of records under the FLSA and its corresponding
regulations. Moreover, employers would normally maintain the records
under usual or customary business practices.
iii. Least Burdensome Option or Explanation Required
The Department believes it has chosen the most effective option
that updates and clarifies the rule and which results in the least
burden. Among the options considered by the Department, the least
restrictive option was taking no regulatory action and the most
restrictive was updating the 1975 short test salary level for inflation
based upon the CPI-U (which would result in a standard salary level of
$1,083 per week). Taking no regulatory action does not address the
Department's concerns discussed above under Need for Regulation. The
Department found the most restrictive option to be overly burdensome on
business in general and

[[Page 38607]]

specifically small business, and high in light of the fact that there
no longer is a long duties test with an associated lower salary level
that employers may use to establish that employees are exempt.
Pursuant to section 603(c) of the RFA, the following alternatives
are to be addressed:
i. Differing compliance or reporting requirements that take into
account the resources available to small entities. The FLSA creates a
level playing field for businesses by setting a floor below which
employers may not pay their employees. To establish differing
compliance or reporting requirements for small businesses would
undermine this important purpose of the FLSA and appears to not be
necessary given the small annualized cost of the rule. The Year 1 cost
of the proposed rule for the average employer that qualifies as small
was estimated to range from a minimum of $400 to a maximum of $3,300.
The Department makes available a variety of resources to employers for
understanding their obligations and achieving compliance. Therefore the
Department has not proposed differing compliance or reporting
requirements for small businesses.
ii. The clarification, consolidation, or simplification of
compliance and reporting requirements for small entities. The proposed
rule imposes no new reporting requirements. The Department makes
available a variety of resources to employers for understanding their
obligations and achieving compliance.
iii. The use of performance rather than design standards. Under the
proposed rule, employers may achieve compliance through a variety of
means. Employers may elect to continue to claim the EAP exemption for
affected employees by adjusting salary levels, hiring additional
workers or spreading overtime hours to other employees, or compensating
employees for overtime hours worked. The Department makes available a
variety of resources to employers for understanding their obligations
and achieving compliance.
iv. An exemption from coverage of the rule, or any part thereof,
for such small entities. Creating an exemption from coverage of this
rule for businesses with as many as 500 employees, those defined as
small businesses under SBA's size standards, is inconsistent with
Congressional intent in the enactment of the FLSA, which applies to all
employers that satisfy the enterprise coverage threshold or employ
individually covered employees. See 29 U.S.C. 203(s). Moreover,
creating a regulatory exemption for small businesses would be beyond
the scope of the Department's statutory authority to define and delimit
the meaning of the term ``employed in a bona fide executive,
administrative, or professional capacity.'' 29 U.S.C. 213(a)(1).

E. Identification, to the Extent Practicable, of All Relevant Federal
Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule

The Department is not aware of any federal rules that duplicate,
overlap, or conflict with this NPRM.

IX. Unfunded Mandates Reform Act Analysis

The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1501,
requires agencies to prepare a written statement for rules for which a
general notice of proposed rulemaking was published and 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 $156 million ($100 million in 1995 dollars adjusted for
inflation) or more in any one year. This statement must: (1) Identify
the authorizing legislation; (2) present the estimated costs and
benefits of the rule and, to the extent that such estimates are
feasible and relevant, its estimated effects on the national economy;
(3) summarize and evaluate state, local, and tribal government input;
and (4) identify reasonable alternatives and select, or explain the
non-selection, of the least costly, most cost-effective, or least
burdensome alternative.

A. Authorizing Legislation

This proposed 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]. . .).'' 29 U.S.C. 213(a)(1). The requirements of the exemption
provided by this section of the Act are contained in part 541 of the
Department's regulations. Section 3(e) of the FLSA, 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 FLSA, 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.

B. Assessment of Costs and Benefits

For purposes of the UMRA, this rule includes a Federal mandate that
is expected to result in increased expenditures by the private sector
of more than $156 million in at least one year, but the rule will not
result in increased expenditures by state, local and tribal
governments, in the aggregate, of $156 million or more in any one year.
Costs to state and local governments: Based on the RIA, the
Department determined that the proposed rule will result in Year 1
costs for state and local governments totaling $111.5 million; of which
$28.3 million are direct employer costs and $83.2 million are transfers
(Table 37). Additionally, the proposed rule will lead to $0.3 million
in DWL. In subsequent years, the Department estimated that state and
local governments may experience payroll increases of as much as $79.1
million in any one year when the salary level is automatically updated
(with automatic updating using the fixed percentile method).
Costs to the private sector: The Department determined that the
proposed rule will result in Year 1 costs to the private sector of
approximately $2.0 billion, of which $563.8 million are direct employer
costs and $1,396.2 million are transfers. Additionally, the proposed
rule will result in $7.0 million in DWL. In subsequent years, the
Department estimated that the private sector may experience a payroll
increase of as much as $1,219.1 million per year (with automatic
updating using the fixed percentile method).

[[Page 38608]]

Table 37--Summary of Year 1 Affected EAP Workers, Regulatory Costs, and Transfers by Type of Employer
----------------------------------------------------------------------------------------------------------------
Total Private Government \a\
----------------------------------------------------------------------------------------------------------------
Affected EAP Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Number.............................................. 4,682 4,163 507
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization.......................... $254.5 $251.4 $3.1
Adjustment.......................................... 160.1 142.3 17.3
Managerial.......................................... 178.1 170.0 7.9
Total direct costs.................................. 592.7 563.8 28.3
----------------------------------------------------------------------------------------------------------------
Transfers (Millions)
----------------------------------------------------------------------------------------------------------------
From employers to workers........................... $1,482.5 $1,396.2 $83.2
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs & Transfers (Millions)
----------------------------------------------------------------------------------------------------------------
From employers...................................... $2,075.2 $1,960.0 $111.5
----------------------------------------------------------------------------------------------------------------
DWL (Millions)
----------------------------------------------------------------------------------------------------------------
DWL \b\............................................. $7.4 $7.0 $0.3
----------------------------------------------------------------------------------------------------------------
\a\ Includes only state, local, and tribal governments.
\b\ DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions.

The largest benefit to workers is the transfer of income from
employers; but, to the extent that the benefits to workers outweigh the
costs to employers, there may be a societal welfare increase due to
this transfer. The channels through which societal welfare may
increase, and other secondary benefits may occur, include: Decreased
litigation costs due to fewer workers subject to the duties test, the
multiplier effect of the transfer, increased productivity, reduced
dependence on social assistance, and a potential increase in time off
and its associated benefits to the social welfare of workers.
Additionally, because of the increased salary level, overtime
protection will be strengthened for 6.3 million salaried white collar
workers and 3.7 million salaried blue collar workers who do not meet
the duties requirements for the EAP exemption, but who earn between the
current minimum salary level of $455 per week and the proposed salary
level because their right to minimum wage and overtime protection will
be clear rather than depend upon an analysis of their duties.
UMRA requires agencies to estimate the effect of a regulation on
the national economy if, at its discretion, such 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 GDP, or in the range of $41.9 billion to
$83.8 billion (using 2013 GDP). 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 RIA estimates that the total first-year costs
(direct employer costs, transfers from employers to workers, and
deadweight loss) of the proposed rule will be approximately $2.0
billion for private employers and $111.8 million for state and local
governments. 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. Therefore, these costs are compared to payroll
costs and revenue to demonstrate the feasibility of adapting to these
new rules.
Total first-year private sector costs compose less than 0.04
percent of private sector payrolls nationwide (2013 payroll costs were
estimated to be $5.4 trillion).\185\ Total private sector first-year
costs compose less than 0.006 percent of national private sector
revenues (2013 revenues were estimated to be $32.9 trillion).\186\ The
Department concludes that impacts of this magnitude are affordable and
will not result in significant disruptions to typical firms in any of
the major industry categories.
---------------------------------------------------------------------------

\185\ Private sector payroll costs in 2007 were $4.8 trillion
using the 2007 Economic Census of the United States. This was
inflated to 2013 dollars using the CPI-U. Table EC0700A1: All
sectors: Geographic Area Series: Economy-Wide Key Statistics: 2007.
\186\ Private sector revenues in 2007 were $29.3 trillion using
the 2007 Economic Census of the United States. This was inflated to
2013 dollars using the CPI-U. Table EC0700A1: All sectors:
Geographic Area Series: Economy-Wide Key Statistics: 2007.
---------------------------------------------------------------------------

Total first-year state and local government costs compose
approximately 0.01 percent of state and local government payrolls (2013
payroll costs were estimated to be $864 billion).\187\ First-year state
and local government costs compose 0.003 percent of state and local
government revenues (2013 revenues were estimated to be $3.5
trillion).\188\ Impacts of this magnitude will not result in
significant disruptions to typical state and local governments. The
$111.5 million in state and local government costs constitutes an
average of approximately $1,240 for each of the approximately 90,100
state and local entities. The Department considers impacts of this
magnitude to be quite small both in absolute terms and in relation to
payrolls and revenue.
---------------------------------------------------------------------------

\187\ State and local payroll costs in 2012 were reported in the
Census of Governments data as $852 billion. This was inflated to
2013 dollars using the CPI-U. 2012 Census of Governments: Employment
Summary Report. Available at: http://www2.census.gov/govs/apes/2012_summary_report.pdf.
\188\ State and local revenues in 2011 were reported by the
Census as $3.4 trillion. This was inflated to 2013 dollars using the
CPI-U. State and Local Government Finances Summary: 2011. Available
at: http://www2.census.gov/govs/local/summary_report.pdf.

---------------------------------------------------------------------------

[[Page 38609]]

C. Summary of State, Local, and Tribal Government Input

As part of the Department's outreach program prior to the issuance
of this NPRM, the Department conducted stakeholder listening sessions
with representatives of state and local governments and tribal
governments. In these sessions the Department asked stakeholders to
address, among other issues, three questions: (1) What is the
appropriate salary level for exemption; (2) what, if any, changes
should be made to the duties tests; and (3) how can the regulations be
simplified. The input received from state, local, and tribal government
representatives was similar to that provided by representatives of
private businesses and is summarized in section III. of this preamble.
The discussions in the listening sessions have informed the development
of this NPRM. The Department specifically seeks comments from state,
local, and tribal governments concerning the ability of these entities
to absorb the costs related to the proposed revisions.

D. Least Burdensome Option or Explanation Required

The Department's consideration of various options has been
described throughout the preamble. The Department believes that it has
chosen the least burdensome but still cost-effective mechanism to
update the salary level and index future levels that is also consistent
with the Department's statutory obligation. Although some alternative
options considered would have set the standard salary level at a rate
lower than the proposed salary level, which might impose lower direct
payroll costs on employers, that outcome may not necessarily be the
most cost-effective or least burdensome alternative for employers. A
lower salary level--or a degraded stagnant level over time--could
result in a less effective bright-line test for separating exempt
workers from those nonexempt workers intended to be within the Act's
protection. A low salary level will also increase the role of the
duties test in determining whether an employee is exempt, which would
increase the likelihood of misclassification and, in turn, increase the
risk that employees who should receive overtime and minimum wage
protections under the FLSA are denied those protections.
Selecting a standard salary level inevitably impacts both the risk
and cost of misclassification of overtime-eligible employees earning
above the salary level as well as the risk and cost of providing
overtime protection to employees performing bona fide EAP duties who
are paid below the salary level. An unduly low level risks increasing
employer liability from unintentionally misclassifying workers as
exempt; but an unduly high standard salary level increases labor costs
to employers precluded from claiming the exemption for employees
performing bona fide EAP duties. Thus the ultimate cost of the
regulation is increased if the standard salary level is set either too
low or too high. The Department has determined that setting the
standard salary level at the 40th percentile of earnings for full-time
salaried workers and automatically updating this level annually either
by maintaining that earnings percentile or using the CPI-U best
balances the risks and costs of misclassification of exempt status.

X. Executive Order 13132, Federalism

The Department has (1) reviewed this proposed rule in accordance
with Executive Order 13132 regarding federalism and (2) determined that
it does not have federalism implications. The proposed rule would 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.

XI. Executive Order 13175, Indian Tribal Governments

This proposed rule would 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.

XII. Effects on Families

The undersigned hereby certifies that the proposed rule would not
adversely affect the well-being of families, as discussed under section
654 of the Treasury and General Government Appropriations Act, 1999.

XIII. Executive Order 13045, Protection of Children

This proposed rule would have no environmental health risk or
safety risk that may disproportionately affect children.

XIV. Environmental Impact Assessment

A review of this proposed rule in accordance with the requirements
of the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321
et seq.; the regulations of the Council on Environmental Quality, 40
CFR part 1500 et seq.; and the Departmental NEPA procedures, 29 CFR
part 11, indicates that the rule would not have a significant impact on
the quality of the human environment. There is, thus, no corresponding
environmental assessment or an environmental impact statement.

XV. Executive Order 13211, Energy Supply

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

XVI. Executive Order 12630, Constitutionally Protected Property Rights

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

XVII. Executive Order 12988, Civil Justice Reform Analysis

This proposed rule was drafted and reviewed in accordance with
Executive Order 12988 and will not unduly burden the Federal court
system. The proposed 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.

List of Subjects in 29 CFR Part 541

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

Signed at Washington, DC this 18th day of June, 2015.
David Weil,
Administrator, Wage and Hour Division.

For the reasons set out in the preamble, the Department of Labor
proposes to amend title 29 of the Code of Federal Regulations, part 541
as follows:

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

0
1. The authority citation for part 541 is revised to read as follows:

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 01-2014 (Dec. 10, 2014), 79 FR 77527 (Dec. 24,
2014).

0
2. Revise paragraph (a)(1) of Sec. 541.100 to read as follows:

[[Page 38610]]

Sec. 541.100 General rule for executive employees.

(a) * * *
(1) Compensated on a salary basis as of [EFFECTIVE DATE OF FINAL
RULE] at a rate per week of not less than $921 (or $774 per week, if
employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging or other facilities. As of
[DATE TBD] on each subsequent year, compensated on a salary basis at a
rate per week of not less than the updated salary rate published
annually by the Secretary in the Federal Register at least 60 days
earlier (with the rate for American Samoa to be calculated at 84
percent of the updated salary rate, provided that when the highest
industry minimum wage for American Samoa equals the minimum wage under
29 U.S.C. 206(a)(1), exempt employees employed in all industries in
American Samoa shall be paid the full salary rate), exclusive of board,
lodging or other facilities;
* * * * *
0
3. Revise paragraph (a)(1) of Sec. 541.200 to read as follows:

Sec. 541.200 General rule for administrative employees.

(a) * * *
(1) Compensated on a salary or fee basis as of [EFFECTIVE DATE OF
FINAL RULE] at a rate per week of not less than $921 (or $774 per week,
if employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging or other facilities. As of
[DATE TBD] on each subsequent year, compensated on a salary or fee
basis at a rate per week of not less than the updated salary rate
published annually by the Secretary in the Federal Register at least 60
days earlier (with the rate for American Samoa to be calculated at 84
percent of the updated salary rate, provided that when the highest
industry minimum wage for American Samoa equals the minimum wage under
29 U.S.C. 206(a)(1), exempt employees employed in all industries in
American Samoa shall be paid the full salary rate), exclusive of board,
lodging or other facilities;
* * * * *
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4. Revise paragraph (a)(1) of Sec. 541.204 to read as follows:

Sec. 541.204 Educational establishments.

(a) * * *
(1) Compensated on a salary or fee basis as of [EFFECTIVE DATE OF
FINAL RULE] at a rate per week of not less than $921 (or $774 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. As of
[DATE TBD] on each subsequent year, compensated on a salary or fee
basis at a rate per week of not less than the updated salary rate
published annually by the Secretary in the Federal Register at least 60
days earlier (with the rate for American Samoa to be calculated at 84
percent of the updated salary rate, provided that when the highest
industry minimum wage for American Samoa equals the minimum wage under
29 U.S.C. 206(a)(1), exempt employees employed in all industries in
American Samoa shall be paid the full salary rate), 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
* * * * *
0
5. Revise paragraph (a)(1) of Sec. 541.300 to read as follows:

Sec. 541.300 General rule for professional employees.

(a) * * *
(1) Compensated on a salary or fee basis as of [EFFECTIVE DATE OF
FINAL RULE] at a rate per week of not less than $921 (or $774 per week,
if employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging or other facilities. As of
[DATE TBD] on each subsequent year, compensated on a salary or fee
basis at a rate per week of not less than the updated salary rate
published annually by the Secretary in the Federal Register at least 60
days earlier (with the rate for American Samoa to be calculated at 84
percent of the updated salary rate, provided that when the highest
industry minimum wage for American Samoa equals the minimum wage under
29 U.S.C. 206(a)(1), exempt employees employed in all industries in
American Samoa shall be paid the full salary rate), exclusive of board,
lodging or other facilities; and
* * * * *
0
6. Remove the first sentence of Sec. 541.400(b) introductory text and
add three sentences in its place to read as follows:

Sec. 541.400 General rule for computer employees.

* * * * *
(b) The section 13(a)(1) exemption applies to any computer employee
who, as of [EFFECTIVE DATE OF FINAL RULE] is compensated on a salary or
fee basis at a rate per week of not less than $921 (or $774 per week,
if employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging or other facilities. As of
[DATE TBD] on each subsequent year, the section 13(a)(1) exemption
applies to any computer employee who is compensated on a salary or fee
basis at a rate per week of not less than the updated salary rate
published annually by the Secretary in the Federal Register at least 60
days earlier (with the rate for American Samoa to be calculated at 84
percent of the updated salary rate, provided that when the highest
industry minimum wage for American Samoa equals the minimum wage under
29 U.S.C. 206(a)(1), exempt employees employed in all industries in
American Samoa shall be paid the full salary rate), exclusive of board,
lodging or other facilities. The section 13(a)(17) exemption applies to
any computer employee compensated on an hourly basis at a rate of not
less than $27.63 an hour. * * *
* * * * *
0
7. Amend Sec. 541.600 by:
0
a. Removing the first sentence of paragraph (a) and adding two
sentences in its place; and
0
b. Removing the first sentence of paragraph (b) and adding two
sentences in its place.
The additions read as follows:

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 as of [EFFECTIVE DATE OF FINAL
RULE] at a rate per week of not less than $921 (or $774 per week, if
employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging or other facilities. As of
[DATE TBD] on each subsequent year, such employee must be compensated
on a salary basis at a rate per week of not less than the updated
salary rate published annually by the Secretary in the Federal Register
at least 60 days earlier (with the rate for American Samoa to be
calculated at 84 percent of the updated salary rate, provided that when
the highest industry minimum wage for American Samoa equals the minimum
wage under 29 U.S.C. 206(a)(1), exempt employees employed in all
industries in American Samoa shall be paid the full salary rate),
exclusive of board, lodging or other facilities. * * *
(b) The required amount of compensation per week may be translated
into equivalent amounts for periods longer than one week. The

[[Page 38611]]

requirement will be met if the employee is compensated biweekly on a
salary basis of $[DOUBLE THE 40th PERCENTILE AMOUNT], semimonthly on a
salary basis of $[THE 40th PERCENTILE AMOUNT, MULTIPLIED BY 52 AND
DIVIDED BY 24], or monthly on a salary basis of $[THE 40th PERCENTILE
AMOUNT MULTIPLIED BY 52 AND DIVIDED BY 12]. * * *
* * * * *
0
8. Amend Sec. 541.601 by:
0
a. Revising paragraph (a);
0
b. Removing the first sentence of paragraph (b)(1) and adding two
sentences in its place; and
0
c. Revising paragraph (b)(2).
The revisions read as follows:

Sec. 541.601 Highly compensated employees.

(a) An employee with total annual compensation of at least $122,148
as of [EFFECTIVE DATE OF FINAL RULE] is deemed exempt under section
13(a)(1) of the Act if the employee customarily and regularly 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. As of [DATE TBD] on each subsequent
year, an employee with total annual compensation of at least the
updated compensation rate published annually by the Secretary in the
Federal Register at least 60 days earlier is deemed exempt under
section 13(a)(1) of the Act if the employee customarily and regularly
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)(1) ``Total annual compensation'' must include at least a weekly
amount that is, as of [EFFECTIVE DATE OF FINAL RULE] $921 paid on a
salary or fee basis. As of [DATE TBD] of each year, ``total annual
compensation'' must include a weekly amount that is not less than the
updated salary rate published annually by the Secretary in the Federal
Register at least 60 days earlier , paid on a salary or fee basis. * *
*
(2) If an employee's total annual compensation does not total at
least the minimum amount established in paragraph (a) of this section
by the last pay period of the 52-week period, the employer may, during
the last pay period or within one month after the end of the 52-week
period, make one final payment sufficient to achieve the required
level. For example, if the current annual salary level for a highly
compensated employee is $122,148, an employee may earn $100,000 in base
salary, and the employer may anticipate based upon past sales that the
employee also will earn $25,000 in commissions. However, due to poor
sales in the final quarter of the year, the employee actually only
earns $10,000 in commissions. In this situation, the employer may
within one month after the end of the year make a payment of at least
$12,148 to the employee. Any such final payment made after the end of
the 52-week period may count only toward the prior year's total annual
compensation and not toward the total annual compensation in the year
it was paid. 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.
* * * * *
0
9. Revise Sec. 541.604 to read as follows:

Sec. 541.604 Minimum guarantee plus extras.

(a) An employer may provide an exempt employee with additional
compensation without losing the exemption or violating 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, if the current weekly salary level is $921, an
exempt employee guaranteed at least $921 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 $921 each week paid on a salary
basis. Similarly, the exemption is not lost if an exempt employee who
is guaranteed at least $921 each week paid on a salary basis also
receives additional compensation based on hours worked for work beyond
the normal workweek. 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), and may include paid time off.
(b) An exempt employee's earnings may be computed on an hourly, a
daily or a shift basis, without losing the exemption or violating 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, if the weekly
salary level is $921, an exempt employee guaranteed compensation of at
least $1,000 for any week in which the employee performs any work, and
who normally works four or five shifts each week, may be paid $300 per
shift without violating the salary basis requirement. The reasonable
relationship requirement applies only if the employee's pay is computed
on an hourly, daily or shift basis. It does not apply, for example, to
an exempt store manager paid a guaranteed salary per week that exceeds
the current salary level who also receives a commission of one-half
percent of all sales in the store or five percent of the store's
profits, which in some weeks may total as much as, or even more than,
the guaranteed salary.
0
10. Revise paragraph (b) of Sec. 541.605 to read as follows:

Sec. 541.605 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 the minimum required salary per week if the employee worked 40
hours. Thus, if the salary level were $921, an artist paid $500 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 $1000 if 40 hours were worked.
0
11. Revise Sec. 541.709 to read as follows:

Sec. 541.709 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, as of [EFFECTIVE DATE OF FINAL RULE], at a base
rate of at least $1,404 per week (exclusive of board, lodging, or other
facilities); and as of [DATE TBD] on each subsequent year, is
compensated at a base rate of at least $[MOST RECENTLY EFFECTIVE MOTION
PICTURE INDUSTRY BASE RATE INCREASED AT THE SAME RATIO AS THE STANDARD
SALARY LEVEL IS INCREASED] (exclusive of board, lodging, or other
facilities). Thus, an employee in this industry who is otherwise exempt
under subparts B, C, or D of this part, and who is employed at a base
rate of at least the applicable current minimum amount a week is

[[Page 38612]]

exempt if paid a proportionate amount (based on a week 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 the
minimum weekly amount if 6 days were worked; or
(b) The employee is in a job category having the minimum weekly
base rate and the daily base rate is at least one-sixth of such weekly
base rate.

[FR Doc. 2015-15464 Filed 7-2-15; 8:45 am]
BILLING CODE P