[Federal Register Volume 84, Number 56 (Friday, March 22, 2019)]
[Proposed Rules]
[Pages 10900-10969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04514]
[[Page 10899]]
Vol. 84
Friday,
No. 56
March 22, 2019
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. 84 , No. 56 / Friday, March 22, 2019 /
Proposed Rules
[[Page 10900]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1235-AA20
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: Using a longstanding and commonsense methodology and based on
broad-based input, the Department of Labor (Department) proposes to
update and revise the regulations issued under the Fair Labor Standards
Act (FLSA or Act) implementing the exemption from minimum wage and
overtime pay requirements for executive, administrative, professional,
outside sales, and computer employees.
DATES: Submit written comments on or before May 21, 2019.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA20, 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 Melissa
Smith, 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'' heading of the
supplementary information 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: Robert Waterman, 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 website for a nationwide listing of WHD
district and area offices at http://www.dol.gov/whd/america2.htm.
Electronic Access and Filing Comments
Public Participation: This proposed rule is available through the
Federal Register and the http://www.regulations.gov website. You may
also access this document via WHD's website 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-AA20'' 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. The FLSA
B. Regulatory History
C. Overview of Existing Regulatory Requirements
III. Need for Rulemaking
IV. Proposed Regulatory Revisions
A. Standard Salary Level
B. Special Salary Tests
C. Inclusion of Nondiscretionary Bonuses, Incentive Payments,
and Commissions in the Salary Level Requirement
D. Highly Compensated Employees
E. Future Updates to the Earnings Thresholds
V. Paperwork Reduction Act
VI. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review, and Executive Order 13563, Improving
Regulation and Regulatory Review
A. Introduction
B. Methodology To Determine the Number of Potentially Affected
EAP Workers
C. Determining the Revised Salary and Compensation Levels
D. Effects of Revised Salary and Compensation Levels
VII. Initial Regulatory Flexibility Analysis (IRFA)
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
VIII. Unfunded Mandates Reform Act Analysis
A. Authorizing Legislation
B. Assessment of Costs and Benefits
C. Least Burdensome Option or Explanation Required
IX. Executive Order 13132, Federalism
X. Executive Order 13175, Indian Tribal Governments
Proposed Amendments to Regulatory Text
I. Executive Summary
The Fair Labor Standards Act (FLSA or Act) requires covered
employers to pay employees a minimum wage and, for employees who work
more than 40 hours in a week, overtime premium pay at least 1.5-times
their regular rate of pay. The FLSA provides a number of exemptions to
these two requirements.
Section 13(a)(1) of the FLSA, commonly referred to as the ``white
collar'' or ``EAP'' exemption, exempts ``bona fide'' executive,
administrative,
[[Page 10901]]
professional, outside sales, and computer employees from the minimum
wage and overtime requirements of the FLSA. The statute delegates to
the Secretary of Labor (the Secretary) the authority to define and
delimit the terms of this white collar exemption. Since 1940, the
regulations implementing the exemption generally have required three
things: (1) The employee must be paid a predetermined and fixed salary
that is not subject to reduction because of variations in the quality
or quantity of work performed (the ``salary basis test''); (2) the
amount of salary paid must meet a minimum specified amount (the
``salary level test''); and (3) the employee's job duties must
primarily involve executive, administrative, or professional duties as
defined by the regulations (the ``duties test'').
The Department has long used the salary level test as a tool to
help define the white collar exemption on the basis that employees paid
less than the salary level are unlikely to be bona fide executives,
administrators, or professionals, and, conversely, that nearly all bona
fide executives, administrators, and professionals are paid at least
that much. The salary level test provides certainty for employers and
employees, as well as efficiency for government enforcement agencies.
The salary level test's usefulness, however, diminishes as the wages of
employees entitled to overtime increase and the real value of the
salary threshold falls.
The Department increased the weekly salary level from $455 ($23,660
per year) to $913 ($47,476 per year) in a final rule published May 23,
2016 (``2016 final rule''). That rulemaking was challenged in court,
and on November 22, 2016, the U.S. District Court for the Eastern
District of Texas enjoined the Department from implementing and
enforcing the rule. On August 31, 2017, the court granted summary
judgment against the Department, invalidating the 2016 final rule. An
appeal of that decision to the United States Court of Appeals for the
Fifth Circuit, based on the salary threshold, is being held in
abeyance. Currently, the Department is enforcing the regulations in
effect on November 30, 2016, including the $455 per week standard
salary level, which is the same level set in place during the 2004
final rule.
The Department has reconsidered the $913 per week standard salary
level set in the 2016 final rule in light of the district court's
decisions, public comments received in response to a July 26, 2017
Request for Information (RFI), and feedback received at public
listening sessions the Department held around the country to receive
additional public input on issues related to the salary level test.\1\
The Department agrees with the vast majority of RFI commenters that the
standard salary level needs to exceed $455 per week to more effectively
serve its purpose. But the Department now also believes that increasing
the standard salary level to $913 per week was inappropriate. The
increase excluded from exemption 4.2 million employees whose duties
would have otherwise qualified them for exemption, a result in
significant tension with the text of section 13(a)(1). As the district
court noted in its decision invalidating the 2016 final rule, the
increase also untethered the salary level test from its historical
justification: Setting a dividing line between nonexempt and
potentially exempt employees by screening out from exemption a swath of
employees who are unlikely to be bona fide executives, administrators,
or professionals because of their compensation level.
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\1\ Timely comments and listening session records may be
reviewed at www.regulations.gov, docket ID: WHD-2017-0002.
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To address the district court's and the Department's concerns with
the 2016 final rule and set a more appropriate salary level, the
Department proposes to rescind formally the 2016 final rule and simply
to update the 2004 standard salary level by applying the same
methodology to current data. The 2004 final rule set the standard
salary level at approximately the 20th percentile of earnings of full-
time salaried workers in the lowest-wage census region (then and now
the South) and in the retail sector. This proposed rule would do the
same. When this method is applied to 2017 data, and projected forward
to January 2020 (the approximate date this rule is anticipated to be
effective), it results in a proposed standard salary level of $679 per
week ($35,308 per year). The Department anticipates using 2018 data in
development of the final rule. The Department estimates that in 2020,
1.1 million currently exempt employees who earn at least $455 per week
but less than the proposed standard salary level of $679 per week
would, without some intervening action by their employers,\2\ gain
overtime eligibility.\3\ In an attempt to align the regulations better
with modern pay practices, the Department also proposes to allow
employers to count nondiscretionary bonuses and incentive payments
(including commissions) to satisfy up to 10 percent of the standard
salary level test, provided such bonuses are paid annually or more
frequently. The Department is not proposing any changes to the standard
duties test.
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\2\ Employers may opt to raise salary levels, reorganize
workloads, adjust work schedules, or spread work hours in order to
avoid payment of overtime pay.
\3\ The Department also estimates that an additional 2.0 million
white collar workers who are currently nonexempt because they do not
satisfy the EAP duties tests and currently earn at least $455 per
week but less than $679 per week would have their overtime-eligible
status strengthened in 2020 because these employees would now fail
both the salary level and duties tests.
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The Department believes that the proposed update to the standard
salary level will maintain the traditional purposes of the salary level
test, and will help employers more readily identify exempt employees.
In proposing a new salary level, the Department considered the district
court's conclusion that the salary level set in the 2016 final rule
exceeded the Department's authority by ``exclud[ing] so many employees
who perform exempt duties'' thereby making ``salary rather than an
employee's duties determinative'' of the applicability of the EAP
exemption.\4\ The Department has also considered the comments received
in response to the RFI and those presented by interested parties at the
nationwide listening sessions.
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\4\ Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d 795, 807
(E.D. Tex. 2017).
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The Department considered other methods for setting the standard
salary level, as described in sections IV.A.v and VI.C. The Department
seeks comments on these or other methods that would update the standard
salary level to reflect wage growth, are consistent with the salary
level's purposes, and are reasonable considering the interests of
employers and employees.
In the 2004 final rule, the Department for the first time
incorporated a Highly Compensated Employee (HCE) test, which paired a
reduced duties requirement with a higher compensation level ($100,000).
To update the HCE total annual compensation level (set to $100,000 in
the 2004 final rule and increased to $134,004 in the 2016 final rule),
the Department is adopting the same methodology used in the 2016 final
rule. The Department proposes to set the level equivalent to the 90th
percentile of full-time salaried workers nationally, similarly
projected forward to 2020, which results in an increase in the annual
compensation level to $147,414 per year. Without intervening action by
their employers, an estimated 201,100 currently exempt workers who earn
at least $100,000 per year but less than the
[[Page 10902]]
proposed HCE annual compensation level of $147,414 per year, and who
meet the HCE duties test but not the standard duties test, would also
gain overtime eligibility.
Additionally, the Department is proposing special salary levels for
certain U.S. territories and an updated base rate for employees in the
motion picture producing industry. Furthermore, to prevent the earnings
threshold levels from becoming significantly outdated in the future and
to provide predictability and certainty for the benefit of workers and
employers, the Department intends to propose updates to these levels
every four years through notice-and-comment rulemaking, and solicits
comment from the public regarding that intention.
This proposed rule is expected to be an Executive Order 13771
deregulatory action. When the Department uses a perpetual time horizon
to allow for cost comparisons under Executive Order 13771, and using
the 2016 rule as the baseline, the annualized cost savings of this
proposed rule is $224.0 million with 7 percent discounting. The net
present value of the cost savings is $3.2 billion using a perpetual
time horizon and a 7 percent discount rate.
Because the Department is currently enforcing the 2004 salary
level, the economic analysis uses the 2004 rule as the baseline for
calculating costs and transfers. The economic analysis quantifies three
direct costs resulting from the proposal: (1) Regulatory
familiarization costs; (2) adjustment costs; and (3) managerial costs.
The Department estimates that annualized direct employer costs in the
first 10 years following the rule's effective date will be $120.5
million, including $464.2 million in Year 1 and $67.8 million in Year
10. This proposed rulemaking will also give employees higher earnings
in the form of transfers of income from employers to employees.
Annualized transfers are estimated to be $429.4 million over the first
ten years, including $526.9 million in Year 1. Details on the estimated
reduced burdens and cost savings of this proposed rule are in the
rule's economic analysis.
II. Background
A. The FLSA
On June 25, 1938, the FLSA was signed into law. 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 at least 1.5-times the regular rate of pay for
all hours worked over 40 in a workweek.\5\
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\5\ 29 U.S.C. 201, et seq.
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The FLSA exempts certain employees from its minimum wage and
overtime requirements. Section 13(a)(1) exempts EAP employees from the
minimum wage provisions of section 206 \6\ and the overtime pay
provisions of section 207, and delegates to the Secretary the authority
to define and delimit the terms of the exemption in regulations.\7\
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\6\ ``[E]xcept subsection (d) in the case of paragraph (1) of
this subsection . . . .'' 29 U.S.C. 213(a).
\7\ Id.
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Pursuant to Congress' grant of rulemaking authority, in 1938 the
Department issued the first regulations at 29 CFR part 541, defining
the scope of the section 13(a)(1) exemptions. Since 1940, the
implementing regulations have generally imposed three requirements for
the exemption to apply: (1) An 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. Regulatory History
The first version of part 541, establishing the criteria for exempt
status under section 13(a)(1), was promulgated in October 1938.\8\ The
Department revised its regulations in 1940,\9\ 1949,\10\ 1954,
1958,\11\ 1961, 1963, 1967, 1970, 1973, and 1975.\12\ A final rule
increasing the salary levels was published on January 13, 1981, but was
stayed indefinitely on February 12, 1981.\13\ In 1985, the Department
published an Advance Notice of Proposed Rulemaking that was never
finalized.\14\ In 1992, the Department twice revised the part 541
regulations. First, the Department created a limited exception from the
salary basis test for public employees.\15\ The Department then
implemented the 1990 law exempting employees in certain computer-
related occupations.\16\
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\8\ 3 FR 2518 (Oct. 20, 1938).
\9\ 5 FR 4077 (Oct. 15, 1940). The 1940 regulations were
informed by what has come to be known as the Stein Report. See
Executive, Administrative, Professional . . . Outside Salesman
Redefined, Wage and Hour Division, U.S. Department of Labor, Report
and Recommendations of the Presiding Officer [Harold Stein] at
Hearings Preliminary to Redefinition (Oct. 10, 1940) (``Stein
Report'').
\10\ 14 FR 7705 (Dec. 24, 1949); 14 FR 7730 (Dec. 28, 1949). The
1949 regulations were informed by what has come to be known as the
Weiss Report. See Report and Recommendations on Proposed Revisions
of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage
and Hour and Public Contracts Divisions, U.S. Department of Labor
(June 30, 1949) (``Weiss Report'').
\11\ 23 FR 8962 (Nov. 18, 1958). The 1958 regulations were
informed by what has come to be known at the Kantor Report. See
Report and Recommendations on Proposed Revision of Regulations, Part
541, Under the Fair Labor Standards Act, by Harry S. Kantor,
Assistant Administrator, Office of Regulations and Research, Wage
and Hour and Public Contracts Divisions, U.S. Department of Labor
(Mar. 3, 1958) (``Kantor Report'').
\12\ See 19 FR 4405 (July 17, 1954); 26 FR 8635 (Sept. 15,
1961); 28 FR 9505 (Aug. 30, 1963); 32 FR 7823 (May 30, 1967); 35 FR
883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); 40 FR 7091 (Feb. 19,
1975).
\13\ 46 FR 11972 (Feb. 12, 1981).
\14\ 50 FR 47696 (Nov. 19, 1985).
\15\ 57 FR 37677 (Aug. 19, 1992).
\16\ 57 FR 46742 (Oct. 9, 1992); see Sec. 2, Public Law 101-583,
104 Stat. 2871 (Nov. 15, 1990), codified at 29 U.S.C. 213 Note.
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From 1949 until 2004, the part 541 regulations contained two
different tests for exemption--a ``long'' test that paired a more
rigorous duties test with a lower salary level, and a ``short'' test
that paired a more flexible duties test with a higher salary level. On
April 23, 2004, the Department issued a final rule (2004 final rule),
which replaced the ``long'' and ``short'' test system for determining
exemption status with a single ``standard'' salary level paired with a
``standard'' duties test. The Department set the standard salary level
at $455 per week.\17\
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\17\ 69 FR 22122 (Apr. 23, 2004).
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On May 23, 2016, the Department issued another final rule (2016
final rule), which raised the standard salary level to $913 per week
and instituted a mechanism to automatically update the salary level
every three years.\18\ The 2016 final rule also permitted employers,
for the first time, to satisfy up to 10 percent of the standard salary
requirement with nondiscretionary bonuses and incentive payments
(including commissions), provided that those forms of compensation were
paid at least quarterly. The rule set an effective date of December 1,
2016.
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\18\ 81 FR 32391 (May 23, 2016).
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On November 22, 2016, the United States District Court for the
Eastern District of Texas issued a preliminary injunction, enjoining
the Department from implementing and enforcing the 2016 final rule,
pending further review.\19\ On August 31, 2017, the district court
granted summary judgment against the Department of Labor.\20\ The court
held that the 2016 final rule's salary level exceeded the Department's
authority and that the
[[Page 10903]]
entire final rule was therefore invalid. The court determined that a
salary level that excludes from exemption an unusually high number of
employees who pass the duties test stands in tension with Congress's
command to exempt bona fide EAP employees.
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\19\ See Nevada v. U.S. Dep't of Labor, 218 F. Supp. 3d 520
(E.D. Tex. 2016).
\20\ See Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d 795
(E.D. Tex. 2017).
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On July 26, 2017, the Department published a Request for
Information (RFI) asking for public input on what changes the
Department should propose in a new NPRM on the EAP exemption.\21\ The
Department received over 200,000 comments on the RFI, which are
discussed below. On October 30, 2017, the Government appealed the
district court's summary judgment decision to the United States Court
of Appeals for the Fifth Circuit. On November 6, 2017, the Fifth
Circuit granted the Government's motion to hold that appeal in abeyance
while the Department undertook further rulemaking to redetermine the
salary level. Further, between September 7 and October 17, 2018, the
Department held listening sessions in all five Wage and Hour regions
throughout the country to supplement feedback received as part of the
RFI.\22\
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\21\ 82 FR 34616 (July 26, 2017).
\22\ Listening Session transcripts may be viewed at
www.regulations.gov, docket ID WHD-2017-0002.
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C. 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, and outside sales employees,
as well as 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). The employer bears the burden
of establishing the applicability of any exemption from the FLSA's pay
requirements.\23\ Job titles, job descriptions, or the payment of
salary instead of an hourly rate are insufficient, standing alone, to
confer exempt status on an employee.
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\23\ See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S.
190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547-48
(1947).
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To qualify for the EAP exemption, employees must meet certain tests
regarding their job duties \24\ and generally must be paid on a salary
basis at least the amount specified in the regulations.\25\ Some
employees, such as doctors, lawyers, teachers, and outside sales
employees, are not subject to salary tests.\26\ Others, such as
academic administrative personnel and computer employees, are subject
to special, contingent earning thresholds.\27\ In 2004, the standard
salary level for EAP employees was set at $455 per week (equivalent to
$23,660 per year for a full-time worker), and the total annual
compensation level for highly compensated employees was set at
$100,000.\28\ In light of the district court's decision invalidating
the 2016 final rule, these are the salary levels currently enforced by
the Department.\29\
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\24\ See Sec. Sec. 541.100 (executive employees); 541.200
(administrative employees); 541.300, 541.303-.304 (teachers and
professional employees); 541.400 (computer employees); 541.500
(outside sales employees).
\25\ Alternatively, administrative and professional employees
may be paid on a ``fee basis'' for a single job regardless of the
time required for its completion as long as the hourly rate for work
performed (i.e., the fee payment divided by the number of hours
worked) would total at least the weekly amount specified in the
regulation if the employee worked 40 hours. See Sec.
[thinsp]541.605.
\26\ See Sec. Sec. [thinsp]541.303(d); 541.304(d); 541.500(c);
541.600(e). Such employees are also not subject to a fee-basis test.
\27\ See Sec. [thinsp]541.600(c)-(d).
\28\ 69 FR 22123.
\29\ The current text of the Code of Federal Regulations (CFR)
reflects the updates made in the 2016 final rule. Therefore, unless
otherwise indicated, citations to part 541 refer to the current CFR,
and the proposed amendments to the regulatory text reflect the
current CFR's inclusion of the 2016 updates. However, because the
Department is currently enforcing the 2004 standard salary and total
annual compensation levels, the NPRM references the 2004 standard
salary and total annual compensation levels.
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The 2004 final rule created the ``highly compensated employee''
(HCE) test for exemption. Under the HCE test, employees who receive at
least a specified total annual compensation (which must include at
least the standard salary amount 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.\30\ The HCE
test applies only to employees whose primary duty includes performing
office or non-manual work.\31\ 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.\32\
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\30\ Sec. [thinsp]541.601.
\31\ Sec. 541.601(d).
\32\ Id.
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Finally, the FLSA does not preempt stricter state standards. If a
State establishes a stricter standard to qualify for exemption from
state overtime standards than the corresponding FLSA standard (e.g.,
higher earnings thresholds or more rigorous duties tests), the stricter
standard continues to apply for state law purposes.\33\
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\33\ See 29 U.S.C. 218.
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III. Need for Rulemaking
The primary goal of this rulemaking is to update the weekly salary
amounts used by the Department to help define and delimit the EAP
exemption, as required by the Act. In light of the district court's
decision ruling that the 2016 final rule was invalid, the Department is
currently enforcing the $455 per week standard salary level from the
2004 final rule. The Department recognizes that the $455 per week
standard salary level, which the Department has enforced for nearly a
decade and a half, should be updated to reflect current wages.
Therefore, the Department's proposed approach for this rulemaking
is simple. It proposes to apply the same method used to calculate the
salary threshold in 2004 to current data. The Department expects that
this method will keep the standard salary level aligned with the
intervening years' growth in wages. This approach has withstood the
test of time, is familiar to employees and employers, and can be used
without causing significant hardship or disruption to employers or the
economy, while ensuring overtime-eligible workers continue to receive
the protections intended by Congress.
The Department's proposed approach would also address concerns with
the 2016 final rule identified by the district court. The salary level
test has historically served as a dividing line between nonexempt and
potentially exempt employees, excluding from exemption a large swath of
employees on the reasoning that employees compensated below the salary
level are very unlikely to be employed ``in a bona fide executive,
administrative, or professional capacity.'' \34\ Given these purposes,
the salary level cannot be set too high, or it would unduly deny
exemption to bona fide executive, administrative, and professional
employees who, Congress has instructed, ``shall not'' be subject to the
FLSA's overtime and minimum wage requirements.\35\ The 2016 final rule
went beyond the limited traditional purpose of setting a salary
``floor'' to identify certain obviously nonexempt employees, and
instead excluded from exemption many employees who had previously been,
and should have continued to be, exempt by reference to their duties.
The Department's proposed
[[Page 10904]]
approach in this rulemaking would address that concern.
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\34\ 29 U.S.C. 213(a)(1).
\35\ 29 U.S.C. 213(a).
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The proposed rule includes several additional updates. The
Department proposes updating the HCE total annual compensation
threshold to an amount of $147,414. The Department also proposes to
allow the inclusion of nondiscretionary bonuses and incentive payments
(including commissions) paid on an annual or more-frequent basis to
satisfy up to 10 percent of the standard salary level, and to revise
the special salary levels provided under part 541. The Department
intends to propose an update to the part 541 earnings thresholds every
four years to prevent the levels from becoming outdated. More regular
updates would promote greater stability, avoiding the disruptive salary
level increases that can result from lengthy gaps between updates, and
provide appropriate wage protection for those under the threshold.
Summary of Comments on the Request for Information and at the Listening
Sessions
On July 26, 2017, WHD published an RFI to solicit public input to
inform the Department's work in developing a proposal to revise the
part 541 regulations. The RFI solicited feedback on questions related
to the salary level test, the duties test, the possibility of multiple
salary levels, the inclusion of nondiscretionary bonuses and incentive
payments to satisfy a portion of the salary level, the annual
compensation test for highly compensated employees, and the automatic
updating of the standard salary and HCE annual compensation level
tests. The RFI was published in the Federal Register with a 60-day
public comment period.\36\
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\36\ 82 FR 34616.
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Over 200,000 comments were received from a broad array of
stakeholders, including small business owners, large companies,
employer and employee associations, state and local governments,
unions, higher education institutions, non-profit organizations, law
firms, workers, and other interested members of the public.
In the RFI, the Department asked several questions about the
standard salary level, seeking input on the appropriate level to
fulfill the salary level's historical role in determining exemption
status. In particular, the Department asked whether updating the 2004
salary level for inflation or applying the 2004 methodology to current
salary data would be appropriate, whether differing standard salary
levels should be set for different regions or employer sizes, and
whether the Department should set different standard salary levels for
the executive, administrative, and professional exemptions. The
Department also sought information about the actions taken by employers
in anticipation of the 2016 final rule, as well as the effect of
increased salary levels on particular occupations.
Commenters expressed diverse views about the standard salary level,
but mostly favored increasing the salary level above $455 per week,
with only a small minority requesting that the salary level be
eliminated or kept at its current amount. Nearly all commenters
representing employers opposed the standard salary level of $913 per
week set in the 2016 final rule. Many expressed the view that this
level conflicted with the salary level's longstanding role of screening
out obviously nonexempt employees, and would improperly deny exemption
for millions of employees who passed the duties test. Several employers
expressed concern that raising the standard salary level as high as
$913 per week could lead to significant costs for employers. Many of
these commenters also expressed concern that the salary level should
account for salaries paid in lower-wage regions and industries.
Commenters representing employers offered varied methodologies for
setting the salary level, including adjusting the $455-per-week
threshold to account for inflation since 2004 and applying the 2004
final rule's salary-setting methodology to contemporary earnings data.
In contrast, most commenters who were employees or represented
employees urged the Department to implement the $913 per week level
adopted in the 2016 final rule, although some commenters urged an even
higher threshold. For example, some commenters representing employee
interests favored applying the pre-2004 short test methodology, or
setting the salary level at the 50th percentile of earnings among full-
time salaried workers nationwide.
Most commenters supported the continuation of a single nationwide
salary level, and expressed concern that introducing multiple standard
salary levels--whether differing by region, industry, employer size, or
between the executive, administrative, and professional categories--
would complicate the regulations. Some commenters representing
employers supported region-specific salary levels, and some stated that
regional salary levels would be appropriate if the alternative is a
single salary level that is too high in low-wage regions or industries.
Relatedly, the Department sought views on whether there should be
multiple annual compensation levels (by region or by size of employer)
for the HCE exemption. The Department received few comments on this
subject, but those that addressed it generally favored a single HCE
annual compensation level given its simplicity, and some stated that
adding additional levels would increase litigation costs.
The Department also inquired whether it should periodically update
the standard salary level and the HCE total annual compensation levels.
Most commenters representing employers opposed automatic updating.
Commenters in favor of periodic automatic updates, including most
commenters representing employees, asserted that updating is needed to
preserve a ``meaningful'' standard salary level. Commenters that opined
on the frequency of potential periodic updates generally offered a
range of 3 to 5 years for the updates, although some suggested more
frequent updates.
In addition to questions regarding the salary level, the Department
asked whether it should, as it did with the 2016 final rule, permit
nondiscretionary bonuses and incentive payments (including commissions)
to satisfy up to 10 percent of an employee's salary for purposes of the
salary level test, and whether this was an appropriate limit. Many
commenters supported including at least a portion of nondiscretionary
bonuses and incentive payments in the standard salary threshold
calculation, but there was some disagreement among commenters about the
amount of such payments that should be included and the frequency of
the relevant bonus payments. Many commenters representing employees
supported a 10-percent cap on inclusion of nondiscretionary bonuses
(the same cap was part of the 2016 final rule), or alternatively, not
counting bonuses toward the salary level at all. Conversely, many
commenters representing employers advocated that a higher percentage of
nondiscretionary bonuses, or all types of bonuses and incentive
payments, should be counted, in part because they asserted that such a
cap disadvantages industries that rely on incentive compensation. But
not all employers agreed. In particular, some public sector employers
and smaller non-profits, whose funding restrictions may preclude them
from awarding nondiscretionary bonuses and incentive payments,
expressed their view that permitting nondiscretionary bonuses to count
toward an employee's salary creates a competitive disadvantage for
them.
[[Page 10905]]
Finally, the Department inquired whether a test for exemption based
solely on employee duties is preferable to the current standard test.
Most commenters opposed instituting a duties-only test for the section
13(a)(1) exemptions or returning to the long and short duties test
combination that existed before the 2004 final rule. Some of these
commenters worried that a duties-only test would result in a more rigid
test that includes quantitative limits on the performance of nonexempt
work, which they felt would unduly burden business operations and
increase litigation costs.
As follow-up to the RFI, between September 7 and October 17, 2018,
the Department broadened its outreach and conducted listening sessions
in diverse locations around the country.\37\ A wide range of
stakeholders attended the listening sessions, including higher
education, employees, employers, business associations, non-profit
organizations, small businesses, employee advocates, unions, state and
local government representatives, and members of Congress. At the
listening sessions, the Department requested input on the following
issues:
---------------------------------------------------------------------------
\37\ The Department conducted listening sessions in a
representative city from each of WHD's five regions to get diverse
input from stakeholders across the country and assess the impact to
each region.
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1. What is the appropriate salary level (or range of salary levels)
above which the overtime exemptions for bona fide executive,
administrative, or professional employees may apply? Why?
2. What benefits and costs to employees and employers might
accompany an increased salary level? How would an increased salary
level affect real wages (e.g., increasing overtime pay for employees
whose current salaries are below a new level but above the current
threshold)? Could an increased salary level reduce litigation costs by
reducing the number of employees whose exemption status is unclear?
Could this additional certainty produce other benefits for employees
and employers?
3. What is the best methodology to determine an updated salary
level? Should the update derive from wage growth, cost-of-living
increases, actual wages paid to employees, or some other measure?
4. Should the Department more regularly update the standard salary
level and the total-annual-compensation level for highly compensated
employees? If so, how should these updates be made? How frequently
should updates occur? What benefits, if any, could result from more
frequent updates? \38\
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\38\ 83 FR 49869 (Oct. 3, 2018); 83 FR 43825 (Aug. 28, 2018).
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For the most part, feedback provided at the listening sessions was
consistent with and reinforced the comments received in response to the
RFI. Stakeholders expressed a wide variety of views on the appropriate
salary level and salary level methodology, timing for implementing
changes, review of the duties tests, and potential impacts of the
Department's rulemaking. Stakeholders overwhelmingly supported
increasing the salary level. Many commenters expressed concerns about
the size of the increase in the 2016 final rule, while others supported
the level set in that rule. While the HCE exemption was not a primary
focus of any of the listening sessions, a number of business
stakeholders supported retaining the $100,000 total annual compensation
requirement set in the 2004 final rule.
The Department appreciates and has considered the views of all
those who submitted comments in response to the RFI and participated in
the listening sessions, and welcomes further input from the public in
response to this NPRM. The comments to the RFI and the input from the
listening sessions have informed the development of this NPRM and the
Department's understanding of the effect of the part 541 regulations in
the workplace.
IV. Proposed Regulatory Revisions
The Department proposes to rescind formally the 2016 final rule,
replacing it with a new rule that updates the standard salary and HCE
annual compensation levels under part 541 by setting the standard
salary level using the 2004 methodology applied to current data and
setting the HCE annual compensation level using the 2016 methodology
applied to current data, and projecting both levels to January 2020. In
addition, the Department proposes to apply a special salary level to
Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the
Northern Mariana Islands, a separate special salary level to American
Samoa, and an updated special weekly ``base rate'' to the motion
picture producing industry. The Department also proposes that
nondiscretionary bonuses and incentive payments (including commissions)
paid on an annual or more frequent basis may be used to satisfy up to
10 percent of the standard salary level. Finally, moving forward, the
Department intends to propose updates to the salary and compensation
levels every four years to ensure that these levels continue to provide
useful tests for exemption. The Department believes that this proposal
addresses the legal concerns that led to the invalidation of the 2016
final rule, and appropriately updates the part 541 regulations.
Given the recent history of litigation in this area, the Department
here explains for the benefit of commenters the operative effects of
the proposed rule. If finalized, the proposed rule would replace the
2016 final rule functionally by revising the part 541 regulatory text
in the Code of Federal Regulations. But a final rule based on this
proposal would also formally rescind the 2016 final rule. That
rescission would operate independently of the new content in the final
rule, as the Department intends it to be severable from the substantive
proposal for revising part 541. As explained more fully below, the
Department believes that rescission of the 2016 final rule is
appropriate, regardless of the new content proposed for its
replacement. Thus, even if the substantive provisions of a new final
rule revising part 541 were invalidated, enjoined, or otherwise not put
into effect, the Department would intend the 2004 final rule to remain
operative, not the enjoined 2016 final rule that it now proposes to
rescind.
A. Standard Salary Level
i. History of the Standard Salary Level
The first version of part 541, issued in October 1938, set a salary
level of $30 per week for executive and administrative employees.\39\
The Department updated the salary levels in 1940, maintaining the
salary level for executive employees, increasing the salary level for
administrative employees, and establishing a salary level for
professional employees. In setting those rates, the Department
considered surveys of private industry by federal and state government
agencies, experience gained under the National Industrial Recovery Act,
and Federal Government salaries to identify a salary level that
reflected a reasonable ``dividing line'' between employees performing
exempt and nonexempt work.\40\ The Department set the salary level for
each exemption slightly below the average salary dividing exempt from
nonexempt employees, taking into account salaries paid in numerous
industries and the percentage of employees earning below these amounts.
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\39\ 3 FR 2518 (Oct. 20, 1938).
\40\ Stein Report at 9, 20-21, 31-32.
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[[Page 10906]]
In 1949, the Department evaluated salary data from state and
federal agencies, including the Bureau of Labor Statistics (BLS). The
Department considered wages in small towns and low-wage industries,
wages 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.\41\ The Department also looked at data showing
increases in exempt employee salaries since 1940, and supplemented it
with nonexempt employee earnings data to approximate the ``prevailing
minimum salaries of exempt employees.'' \42\ 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
considered the increase in weekly earnings from 1940 to 1949 for
various industries, and then adopted new salary levels at ``figure
slightly lower than might be indicated by the data'' to protect small
businesses.\43\ Also in 1949, the Department established a second,
less-stringent duties test for each exemption, which applied to
employees paid at or above a higher ``short test'' salary level. The
original, more-rigorous duties test became known as the ``long test.''
Apart from the differing salary requirements, the most significant
difference between the short test and the long test was that the long
test limited the amount of time an exempt employee could spend on
nonexempt duties.\44\ The short duties tests did not include a specific
limit on nonexempt work.
---------------------------------------------------------------------------
\41\ Weiss Report at 10, 14-17, 19-20.
\42\ Id. at 12.
\43\ Id. at 8, 14-20. The Department also justified its modest
increases by noting evidence of slow wage growth for executive
employees ``in some areas and some industries.'' Id. at 14.
\44\ The Department instituted a 20 percent cap on nonexempt
work as part of the long duties test for executive and professional
employees in 1940, and for administrative employees in 1949. 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 the EAP exemption. See 29 U.S.C.
213(a)(1).
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In 1958, the Department set the long test salary levels using data
collected by WHD on salaries paid to employees who 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 for white collar and
manufacturing employees during the period not covered by the
Department's investigations.\45\ The Department then set the long test
salary levels for exempt employees ``at about the levels at which no
more than about 10 percent of those in the lowest-wage region, or in
the smallest size establishment group, or in the smallest-sized city
group, or in the lowest-wage industry of each of the categories would
fail to meet the tests.'' \46\ Thus, the Department set the long test
salary levels so that about 10 percent of workers performing EAP duties
in the lowest-wage regions and industries would not meet the salary
level test and would therefore be nonexempt based on their salary level
alone.
---------------------------------------------------------------------------
\45\ Kantor Report at 6.
\46\ Id. at 6-7.
---------------------------------------------------------------------------
The Department followed a similar methodology when determining the
salary level increase in 1963. The Department examined data on salaries
paid to exempt workers collected in a 1961 WHD survey.\47\ 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 per week.\48\ The professional
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.\49\ The Department
noted that these salary levels approximated the same percentages used
to update the salary level in 1958.\50\
---------------------------------------------------------------------------
\47\ 28 FR 7002 (July 9, 1963).
\48\ Id. at 7004.
\49\ Id.
\50\ See id.
---------------------------------------------------------------------------
The Department applied a similar methodology when adopting salary
level increases in 1970. After examining data from WHD investigations,
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, the Department increased
the long test salary level for executive employees to $125 per week
when the salary level 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.\51\ The Department also increased
the long test salary levels for administrative and professional
employees to $125 and $140 per week, respectively.
---------------------------------------------------------------------------
\51\ 35 FR 884-85.
---------------------------------------------------------------------------
In 1975, rather than follow the prior approaches, the Department
updated the 1970 salary levels based on increases in the Consumer Price
Index, but adjusted downward ``to eliminate any inflationary impact.''
\52\ This resulted in a long test salary level for the executive and
administrative exemptions of $155 per week, and $170 per week for the
professional exemption. The short test salary level increased to $250
per week in 1975.\53\ 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.'' \54\ Although the
Department intended to increase the salary levels based on that study
of actual salaries paid to employees, the process was never completed,
and the ``interim'' salary levels remained in effect for the next 29
years.
---------------------------------------------------------------------------
\52\ 40 FR 7091.
\53\ Each time the short test was increased between 1949 and
1975, it was set significantly higher than the long test salary
levels.
\54\ Id.
---------------------------------------------------------------------------
In 2004, the Department replaced the separate long and short tests
with a single ``standard'' salary level test of $455 per week, which
was paired with a ``standard'' duties test for executive,
administrative, and professional employees, respectively. The
Department noted, in accord with numerous comments received during that
rulemaking, that as a result of the outdated salary level, ``the `long'
duties tests [had], as a practical matter, become effectively dormant''
because relatively few salaried employees earned below the short test
salary level.\55\ The Department estimated that 1.3 million workers
earning between $155 and $455 per week would become nonexempt under the
new standard salary level.\56\
---------------------------------------------------------------------------
\55\ 69 FR 22126.
\56\ Id. at 22123.
---------------------------------------------------------------------------
In setting the new standard salary level in 2004, the Department
used Current Population Survey (CPS) Merged Outgoing Rotation Group
(MORG) data collected by BLS that encompassed most salaried employees,
including nonexempt salaried employees. The Department selected a
standard salary level roughly equivalent to earnings at the 20th
percentile of two subpopulations: (1) Salaried employees in the South
and (2) salaried employees in the retail industry nationwide. Although
prior salary levels had been based on salaries of approximately the
lowest 10 percent of exempt salaried employees in low-wage regions and
industries, the Department explained that the change in methodology was
[[Page 10907]]
warranted in part to account for the elimination of the short and long
tests, and because the data sample included nonexempt salaried
employees, as opposed to only exempt salaried employees.\57\ As in the
past, the Department used lower-salary data sets to accommodate
businesses for which salaries were generally lower due to geographic-
or industry-specific reasons.
---------------------------------------------------------------------------
\57\ Id. at 22167.
---------------------------------------------------------------------------
The Department published a final rule updating the salary level
twelve years later, in 2016.\58\ The Department set the standard salary
level at an amount that would exclude from exemption the bottom 40
percent of full-time salaried workers (exempt and nonexempt) in the
lowest-wage Census Region (the South).\59\ The Department estimated
that increasing the standard salary level from $455 per week to $913
per week would make 4.2 million workers earning between those levels
newly nonexempt, absent other changes by their employers.\60\ The
Department made no changes to the standard duties test. As previously
discussed, on August 31, 2017, the U.S. District Court for Eastern
District of Texas declared the 2016 final rule invalid, and the
Department's appeal of that decision has been held in abeyance. Until
the Department issues a new final rule, it is enforcing the part 541
regulations in effect on November 30, 2016, including the $455 per week
standard salary level.
---------------------------------------------------------------------------
\58\ 81 FR 32391.
\59\ Id. at 32408.
\60\ Id. at 32393.
---------------------------------------------------------------------------
ii. Purpose of the Salary Level Requirement
The FLSA states that its minimum wage and overtime requirements
``shall not apply with respect to . . . any employee employed in a bona
fide executive, administrative, or professional capacity . . . (as such
terms are defined and delimited from time to time by regulations of the
Secretary . . .).'' \61\ The Department has long used a salary level
test as part of its method for defining and delimiting that exemption.
---------------------------------------------------------------------------
\61\ 29 U.S.C. 213(a)-(a)(1).
---------------------------------------------------------------------------
In 1949, the Department summarized the role of the salary level
tests over the preceding decade. The Department explained:
In this long experience, the salary tests, even though too low in
the later years to serve their purpose fully, 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. The salary requirements also have furnished a
practical guide to the inspector as well as to employers and employees
in borderline cases. In an overwhelming majority of cases, it has been
found by careful inspection that personnel who did not meet the salary
requirements would also not qualify under other sections of the
regulations as the Divisions and the courts have interpreted them.\62\
---------------------------------------------------------------------------
\62\ Weiss Report at 8.
---------------------------------------------------------------------------
The Department again referenced these principles in the Kantor
Report, reiterating, for example, that the salary level tests
``provide[ ] a ready method of screening out the obviously nonexempt
employees,'' and that employees ``who do not meet the salary test are
generally also found not to meet the other requirements of the
regulations.'' \63\ The Department's 2004 final rule likewise
referenced these principles.\64\ The Department now proposes to update
the standard salary level in light of increased employee earnings, so
that it maintains its usefulness in ``screening out the obviously
nonexempt employees.''
---------------------------------------------------------------------------
\63\ Kantor Report at 2-3; see also U.S. Dep't of Labor, 28th
Annual Report of the Secretary of Labor for the Fiscal Year Ended
June 30, 1940 (1940), at 236 (``the power to define is the power to
exclude'').
\64\ See 69 FR 22165; 2003 NPRM, 68 FR 15560, 15570 (Mar. 31,
2003).
---------------------------------------------------------------------------
For over 75 years the Department has used a salary level test as a
criterion for identifying bona fide executive, administrative, and
professional employees. Some statements in the Department's regulatory
history have at times, however, suggested a greater role for the salary
level test. The statements include, for instance, from the 1940 Stein
Report, that salary is `` `the best single test of the employer's good
faith in characterizing the employment as of a professional nature.' ''
\65\ The Stein Report even went so far as to state that ``if an
employer states that a particular employee is of sufficient importance
. . . to be classified as an `executive' employee and thereby exempt
from the protection of the [A]ct, the best single test of the
employer's good faith in attributing importance to the employee's
services is the amount he pays for them.'' \66\
---------------------------------------------------------------------------
\65\ 81 FR 32413 (quoting Stein Report at 42); see also 69 FR
22165 (quoting Stein Report at 42).
\66\ Stein Report at 19; see also id. at 5 (``the good faith
specifically required by the [A]ct is best shown by the salary
paid''); id. at 19 (salary provides ``a valuable and easily applied
index to the `bona fide' character of the employment for which
exemption is claimed''); cf. Weiss Report at 9 (``salary is the best
single indicator of the degree of importance involved in a
particular employee's job''); Kantor Report at 2 (``[Salary] is an
index of the status that sets off the bona fide executive from the
working squad-leader, and distinguishes the clerk or sub-
professional from one who is performing administrative or
professional work.''). The Department ``is not bound by the [Stein,
Weiss, and Kantor] reports,'' though they have been carefully
considered. 69 FR 22124.
---------------------------------------------------------------------------
The district court's invalidation of the 2016 final rule has
prompted the Department to clarify these and similar statements in
light of the salary level test's purposes and regulatory history. The
concept of a ``dividing line'' should not be misconstrued to suggest
that the Department views the salary level test as an effort to divide
all exempt white collar employees from all nonexempt employees. A
salary level is helpful to determine who is not an exempt executive,
administrative or professional employee--the employees who fall beneath
it. But the salary level has significantly less probative value for the
employees above it. They may be exempt or nonexempt. Above the
threshold, the Department evaluates an employee's status as exempt or
nonexempt based on an assessment of the duties that employee performs.
An approach that emphasizes salary alone, irrespective of employee
duties, would stand in significant tension with the Act. Section
13(a)(1) directs the Department to define and delimit employees based
on the ``capacity'' in which they are employed. Salary is a helpful
indicator of the capacity in which an employee is employed, especially
among lower-paid employees. But it is not ``capacity'' in and of
itself.
The district court's summary judgment decision endorsed the
Department's historical approach to setting the salary level and held
the 2016 final rule unlawful because it departed from it. The district
court approvingly cited the Weiss Report and explained that setting
``the minimum salary level as a floor to `screen[ ] out the obviously
nonexempt employees' '' is ``consistent with Congress's intent.'' \67\
Further endorsing the Department's earlier rulemakings, the district
court stated that prior to the 2016 final rule, ``the Department ha[d]
used a permissible minimum salary level as a test for identifying
categories of employees Congress intended to exempt.'' \68\ The court
then explained that in contrast to these acceptable past practices, the
2016 standard salary level of $913 per week was unlawful because
[[Page 10908]]
it would exclude from exemption ``so many employees who perform exempt
duties.'' \69\ In support, the court cited the Department's estimate
that, without some intervening action by their employers, the new
salary level would result in 4.2 million workers becoming
nonexempt.\70\ The court also emphasized the magnitude of the salary
level increase, stating that the 2016 final rule ``more than double[d]
the previous minimum salary level'' and that ``[b]y raising the salary
level in this manner, the Department effectively eliminate[d] a
consideration of whether an employee performs `bona fide executive,
administrative, or professional capacity duties.' '' \71\ The district
court declared the final rule invalid because the Department had
unlawfully excluded from exemption ``entire categories of previously
exempt employees who perform `bona fide executive, administrative, or
professional capacity' duties.'' \72\
---------------------------------------------------------------------------
\67\ 275 F. Supp. 3d at 806 (quoting Weiss Report at 7-8); see
also id. at 807 at n.6 (supporting salary level that operates ``as
more of a floor'') (internal quotation marks and citation omitted).
\68\ Id. at 806 (emphasis in opinion).
\69\ Id. at 807.
\70\ Id. at 806.
\71\ Id. at 807 (quoting 29 U.S.C. 213(a)(1)).
\72\ Id. at 806 (quoting 29 U.S.C. 213(a)(1)).
---------------------------------------------------------------------------
The Department has reexamined the 2016 final rule in light of the
district court's decision. That rule contained language suggesting that
the salary level test had a greater role to play than its modest
historical function. For example, the Department stated that in light
of the new, single standard duties test, ``the salary threshold must
play a greater role in protecting overtime-eligible employees,'' and
specifically that ``it is necessary to set the salary level higher . .
. because the salary level must perform more of the screening function
previously performed by the long duties test.'' \73\ Such language is
inconsistent with the salary level's historical purpose of setting a
floor for exemption.
---------------------------------------------------------------------------
\73\ 81 FR 32412, 32465-66.
---------------------------------------------------------------------------
The 2016 final rule's approach--under which salary alone would
determine exempt status in many more instances--also led to a result in
tension with the Act. As the district court recognized, the 2016 final
rule removed the EAP exemption from 4.2 million workers who would have
otherwise been exempt because they passed the salary basis and duties
tests established under the 2004 final rule. In contrast, had the
Department simply applied the 2004 methodology to set the standard
salary level, the 2016 final rule would have resulted in approximately
683,000 workers who satisfied the duties test becoming nonexempt.\74\
The Department has long recognized that the salary level test is ``a
dividing line [that] cannot be drawn with great precision but can at
best be only approximate,'' \75\ and so any salary level set by the
Department will exclude from exemption some employees who pass the
duties test. But a salary level that exempts an unusually high number
of those employees--as occurred with the 2016 final rule \76\--stands
in tension with Congress's command to exempt bona fide EAP employees. A
salary level set that high does not further the purpose of the Act, and
is inconsistent with the salary level test's useful, but limited, role
in defining the EAP exemption.
---------------------------------------------------------------------------
\74\ See 81 FR 32504 (Table 32).
\75\ Weiss Report at 11.
\76\ The Department explained that (at the time of the analysis)
12.2 million salaried white collar workers earned more than $455 per
week but were overtime eligible because they failed the duties test,
while 838,000 salaried white collar workers were overtime eligible
because even though they passed the standard duties test they earned
below $455 per week. The Department then estimated that a $913-per-
week salary level would result in 6.5 million salaried white collar
workers who failed only the duties test, and increase to 5.0 million
the number of salaried white collar workers who passed the duties
test but would be overtime eligible because they failed the salary
level test. See 81 FR 32464-65; see also id. at 32413.
---------------------------------------------------------------------------
The Department justified the change in the 2016 final rule in part
by explaining that when the salary level increases, ``it is inevitable
that `some employees who have been classified as exempt under the
present salary tests will no longer be within the exemption under any
new tests adopted.' '' \77\ However, this consequence (which follows
any salary level increase) does not itself inform what salary level the
Department should set. The Department also stated in 2016 that the new
salary level would narrow the gap between the number of workers who are
nonexempt because they fail only the salary level test and those who
are nonexempt because they fail only the duties test.\78\ But the
Department has never compared the number of employees who are nonexempt
based exclusively on the salary or duties tests, respectively, to
determine the effectiveness of the salary level. To the contrary,
parity between these groups would create tension with the salary
level's historical purpose of ``screening out the obviously nonexempt
employees.''
---------------------------------------------------------------------------
\77\ Id. at 32413 (quoting Kantor Report at 5).
\78\ See supra n.76 (citing 81 FR 32464-65; 81 FR 32413).
---------------------------------------------------------------------------
The Department also justified the 2016 final rule's salary level by
stating that it was correcting a ``mismatch'' between the 2004 final
rule's salary level and the standard duties test. The Department stated
that while it historically had paired a more rigorous duties test (the
long test) with a lower salary level and a less rigorous duties test
(the short test) with a higher salary level, the 2004 final rule paired
a less rigorous duties test with a lower salary level:
Because the long duties test included a limit on the amount of
nonexempt work that could be performed, it could be paired with a low
salary that excluded few employees performing EAP duties. In the
absence of such a limitation in the duties test, it is necessary to set
the salary level higher (resulting in the exclusion of more employees
performing EAP duties) because the salary level must perform more of
the screening function previously performed by the long duties test.
Accordingly the salary level set in this Final Rule corrects for the
mismatch in the 2004 Final Rule between a low salary threshold and a
less rigorous duties test.\79\
---------------------------------------------------------------------------
\79\ 81 FR 32409.
---------------------------------------------------------------------------
The Department's solution to the purported mismatch, however,
introduced a new issue. The 2016 final rule's salary level, which was
``at the low end of the historical salary range of short test salary
levels,'' \80\ failed to account for the absence of a long test that
employers could use to claim the exemption for lower-paid white collar
workers who were traditionally exempt. The Department's analysis did
not sufficiently account for this change, and as a result, the $913 per
week standard salary level deviated from the Department's longstanding
policy of setting a salary level that does not ``disqualify[ ] any
substantial number of'' bona fide executive, administrative, and
professional employees from exemption.\81\
---------------------------------------------------------------------------
\80\ Id. at 32414.
\81\ Kantor Report at 5.
---------------------------------------------------------------------------
More fundamentally, except at the relatively low levels of
compensation where EAP employees are unlikely to be found, the salary
level is not a substitute for an analysis of an employee's duties. It
is, at most, an indicator of those duties. For most white collar,
salaried employees, the exemption should turn on an analysis of their
actual functions, not their salaries, as Congress commanded. The salary
level test's primary and modest purpose is to identify potentially
exempt employees by screening out obviously nonexempt employees.
The mismatch rationale also failed to account fully for the
Department's part 541 exemption history. The standard duties test was
introduced by the 2004 final rule and has been in effect for 15 years.
The short duties test, which it is similar to, was functionally the
[[Page 10909]]
predominant test in use for the preceding 13 years, since the 1975 long
test salary levels were equaled or surpassed by the FLSA minimum wage
in 1991.\82\ Altogether, most employers and employees have effectively
been covered by this one-test system for over 25 years. This practice
is highly relevant to any update by the Department's approach.
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\82\ In 1975, the Department set a long test salary level of
$155 per week for executive and administrative employees, and of
$170 per week for professional employees. See 40 FR 7092. On April
1, 1991, the federal minimum wage increased to $4.25 per hour, which
equals $170 for a 40-hour workweek. See Sec. 2, Public Law 101-157,
103 Stat. 938 (Nov. 17, 1989).
---------------------------------------------------------------------------
In light of the considerations above, the Department concludes
that, while an increase in the standard salary level from $455 per week
was warranted, the increase to $913 per week was inappropriate. As the
district court stated, that increase departed from the salary level's
purpose as a floor to `` `screen[ ] out the obviously nonexempt
employees.' '' \83\ The Department is engaging in this rulemaking to
realign the salary level with its appropriate limited purpose, to
address the concerns about the 2016 final rule identified by the
district court, and to update the salary level in light of increased
employee earnings.
---------------------------------------------------------------------------
\83\ Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d at 806
(quoting Weiss Report at 7-8).
---------------------------------------------------------------------------
iii. Salary Level Methodology
The Department, nearly all RFI commenters, and almost all those who
spoke during the Department's listening sessions agree that the salary
level must exceed $455 per week to achieve its intended purpose. Most
commenters to the RFI and in the listening sessions favored the
simplicity of a single nationwide salary level over varying region-
specific levels, and urged the Department not to return to its past
practice of setting different salary levels for executive,
administrative, and professional employees. However, some commenters
representing employers supported establishing multiple salary levels
based on region, industry, or employer size. Nearly all commenters
opposed reinstating separate long and short tests with corresponding
salary levels and duties tests.
After considering the issues at length, reviewing public comments
responding to the RFI, and considering comments provided in the
listening sessions, the Department is proposing simply to update the
standard salary level set in 2004 using current data. The Department
believes that adherence to the 2004 final rule's methodology is
reasonable and appropriate. The Department has enforced the 2004 final
rule's salary level for nearly 15 years--the second-longest period
(after the salary levels set in 1975) for any part 541 salary level.
The Department paired that level with the standard duties test when it
was enacted, and revisions to the standard duties test are not proposed
as part of this rulemaking. After so many years, workers and employers
are familiar with a single standard weekly salary level and a single
standard duties test. Notably, the 2004 final rule has never been
challenged in court. Using the 2004 salary level methodology as the
basis for determining an updated salary level thus promotes familiarity
and stability for the workplace, ensures workers the important wage
protections contained in the Act, and minimizes the uncertainty and
potential legal vulnerabilities that could accompany a novel and
untested approach.
There are other reasons for this simple approach. The method
proposed here is straightforward and avoids new regulatory burdens. It
is consistent with the Department's established belief that adopting
different salary levels for different areas of the country would create
significant administrative difficulties ``because of the large number
of different salary levels this would require,'' \84\ and would create
undue regulatory complexity. Furthermore, as discussed below, the
Department believes that the proposed salary level accounts for
nationwide differences in employee earnings and would work
appropriately with the standard duties test.The proposed standard
salary level also addresses the concerns raised in the district court's
summary judgment decision. The $913 per week standard salary level set
in the 2016 final rule more than doubled the 2004 final rule's salary
level of $455 per week, which the district court concluded resulted in
``entire categories of previously exempt employees'' being disqualified
from exemption ``based on salary alone.'' \85\ The Department proposes
to address this problem by setting a salary level that would more
appropriately identify obviously nonexempt employees, without including
too great a proportion of employees who would otherwise be exempt. This
is consistent with the Department's understanding that salary may be
used to identify a category of employees who are not bona fide
executive, administrative, and professional employees without unduly
excluding employees from the exemption. The proposed $679 per week
standard salary level would preserve the 2004 methodology--which was
based on salaries in the South and in the low-wage retail industry--
while updating that salary level to reflect the growth of nominal wages
and salaries.
---------------------------------------------------------------------------
\84\ 69 FR 22171.
\85\ 275 F. Supp. 3d at 806. Moreover, the Department estimated
in the 2016 final rule that the salary level would rise to $984 per
week in January 2020. 81 FR 32393.
---------------------------------------------------------------------------
The appropriateness of the proposed salary level is further
supported by the number of workers it would affect--i.e., the number of
employees who currently pass the standard duties test and earn between
$455 and $679 per week, and thus would become nonexempt absent some
intervening action by their employers. The district court's decision
raised concerns regarding the large number of exempt workers--4.2
million--who earned between $455 and $913 per week and thus would
``automatically become eligible'' for overtime under the $913 per week
standard salary level.\86\ The district court noted that this
relatively high number indicated that the salary level was displacing
the role of the duties test in determining exemption status. The
Department acknowledges these concerns and, additionally, in this
proposal seeks to update the standard salary level in a manner that
does not unduly disrupt employers' operations; dramatically shift
employee salaries, hours, or morale; or result in adverse economic
effects.
---------------------------------------------------------------------------
\86\ 275 F. Supp. 3d at 806-07.
---------------------------------------------------------------------------
As for the details of the methodology, the Department has followed
the methodology it used in 2004. In 2004, the Department set the
standard salary level at approximately the 20th percentile of earnings
for full-time salaried workers in the lowest-wage Census region (the
South) and in the retail sector. The Department set the salary level
using the 2002 CPS MORG dataset (the most recent CPS dataset
practically available), after excluding from the dataset certain
classes of workers that are exempt from the FLSA or its salary-level
test.\87\
---------------------------------------------------------------------------
\87\ See 69 FR 22168.
---------------------------------------------------------------------------
In this proposed rulemaking, the Department used pooled CPS MORG
data for 2015-2017, adjusted to reflect 2017 (hereafter referred to as
pooled CPS MORG data; see Section VI.B.ii for full description). This
is the most recently available data. If this approach is adopted in the
final rule, the Department anticipates using 2018 CPS data. The
Department believes the CPS dataset would be the most appropriate
dataset to use to ascertain worker earnings because of its size
(approximately 60,000 households
[[Page 10910]]
monthly; 15,000 in the MORG dataset) and its breadth of detail (e.g.,
occupation classifications, salary, hours worked, and industry).
Consistent with its proposal to update the salary levels for workers
subject to them, the Department analyzed a subset of this CPS MORG
data, composed of employed workers age 16 years and older who are
covered by the FLSA; subject to the part 541 salary tests; not in
``named occupations'' \88\; and not exempt from the FLSA due to the
agricultural or transportation exemptions. Thus, the subset excluded
27.9 million workers.
---------------------------------------------------------------------------
\88\ This includes teachers, physicians, lawyers, judges, and
outside sales workers who pass the standard duties test.
---------------------------------------------------------------------------
Using this subset of the CPS MORG data, the Department proposes to
set the standard salary level at approximately the 20th percentile of
earnings for full-time salaried workers in the lowest-wage Census
region, again the South in this case, and/or in the retail sector.\89\
Normally, this would result in a weekly salary level of $641 per week
($33,332 annually), which is also approximately the 20th percentile of
both: (1) Earnings for full-time salaried workers in the South, and (2)
earnings for full-time salaried workers in the retail sector. However,
the Department proposes to inflate this figure to reflect anticipated
wage growth through January 2020. This results in the standard salary
level proposed in this NPRM, which is $679 per week ($35,308 annually).
---------------------------------------------------------------------------
\89\ In the 2004 final rule the Department selected a standard
salary level roughly equivalent to earnings at the 20th percentile
of two subpopulations: (1) Full-time salaried employees in the South
and (2) full-time salaried employees in the retail industry
nationwide. In this rulemaking, the Department is setting the
standard salary level at the 20th percentile of the combined
subpopulations of full-time salaried employees in the South and
full-time salaried employees in the retail industry nationwide. This
is a change from how the Department modeled the 2004 methodology in
the 2016 final rule, when it used combined subpopulations of full-
time salaried employees in the South and full-time salaried
employees in leisure and hospitality, other services, and public
administration. 81 FR 32462.
---------------------------------------------------------------------------
The Department proposes this small adjustment to better reflect
employees' anticipated compensation at the time the rule becomes
effective. In the 2004 final rule, the Department set the salary level
using earning percentiles as they were two years earlier (2002) than
the rule's effective date (2004), since the 2002 data was the most
recent practically available data. In contrast, this proposed rule
would set its salary level with a projection to January 2020, the
approximate date this proposed rule is expected to become effective.
The projection would ensure that the standard salary level reflects the
20th percentile of salaried workers in the South and/or in retail when
the rule becomes effective, rather than the 20th percentile as of a
year or two earlier. The Department acknowledges that the projected
number may differ slightly from the results of comprehensive salary
data when that data becomes available, but the Department believes that
a modest projection is preferable to relying on data that could be a
year or two old by the time the final rule becomes effective.
The Department has inflated the salary level by estimating the
compound annual growth rate from the standard salary level set in 2004
($455) to the standard salary level as it would be using the same
methodology in 2017 ($641), then used that growth rate to project the
standard salary level forward to January 2020. The Department
considered alternative indices for inflation. The reasons for not using
them are described below.
v. Alternatives Considered
In determining a proposed salary level, the Department considered
the methodologies applied in past rulemakings and other alternatives
such as using an index to inflate the 2004 salary level to 2017 and to
project it forward to 2020.
The Department considered using price indices such as the Personal
Consumption Expenditures Price Index (PCEPI), the Consumer Price Index
for All Urban Consumers (CPI-U), and the Chained CPI-U; as well as a
wage-based measure such as the Employment Cost Index (ECI). The PCEPI
measures the change in the nominal prices of goods and services (1)
purchased directly by U.S. households and by nonprofit institutions
serving U.S. households and (2) purchased by firms and governments on
behalf of U.S. households (e.g., medical expenditures paid by Medicare,
Medicaid, or private insurance plans). The Consumer Price Index for All
Urban Consumers (CPI-U) measures the change in nominal prices for a
constant-quality market basket of goods and services purchased by urban
consumers, who represent 93 percent of the U.S. population.\90\ The
Bureau of Labor Statistics also developed the Chained CPI-U in 2002 as
an alternative to the CPI-U that would provide a better approximation
of cost-of-living for all urban consumers by accounting for a
substitution effect.\91\
---------------------------------------------------------------------------
\90\ See the Bureau of Labor Statistics Handbook of Methods,
updated February 14, 2018, p. 2, at https://www.bls.gov/opub/hom/pdf/homch17.pdf (``A unifying framework for dealing with practical
questions that arise in the construction of the CPI is provided by
the concept of the cost-of-living index (COLI).'').
\91\ See Cage et al., Introducing the Chained Consumer Price
Index. https://www.bls.gov/cpi/additional-resources/chained-cpi-introduction.pdf.
---------------------------------------------------------------------------
The Department considered the Employment Cost Index (ECI) for wages
and salaries of either all civilian workers or just for private sector
workers.\92\ The ECI is calculated on a quarterly basis by the BLS
using the results of the National Compensation Survey (NCS), a survey
of non-Federal employers that gathers comprehensive data on employee
salaries, wages, and benefits.\93\ The ECI measures changes over time
in wages and salaries across the overall non-Federal civilian workforce
generally and among different subgroups.
---------------------------------------------------------------------------
\92\ See generally Bureau of Labor Statistics, Employment Cost
Trends, How to Use the Employment Cost Index for Escalation, https://www.bls.gov/ncs/ect/escalator.htm.
\93\ See Bureau of Labor Statistics, National Compensation
Survey, https://www.bls.gov/ncs/.
---------------------------------------------------------------------------
The Department has decided against proposing these alternatives for
three reasons. The paramount reason is that none is as straightforward,
consistent, or accurate as using current salary data. Each is a
projection of what current costs are likely to be; however, such costs
can be more readily ascertained simply by measuring them. Second, each
is a cost index, (albeit to measure wages) rather than a measure of
actual salaries. Third, each of the alternatives (and this would hold
for any other alternative as well) would be a significant departure
from the methodology that served well in 2004--the methodology the
Department is proposing to employ again here with minor adjustments and
improvements. For the reasons stated earlier--including familiarity,
stability, and the standard duties test that accompanied the standard
salary level set in 2004--the Department believes an approach that
simply updates the 2004 level with current data is preferable to an
entirely new methodology.
The Department also considered these same indices for inflating a
2017 salary level (set using the 2004 final rule's methodology and
current data) to January 2020. So used, PCEPI would result in a salary
level of $671 per week, the C-CPI-U would result in $671 per week, the
CPI-U would result in $675 per week, the ECI for civilian workers would
result in $678 per week, and the ECI for private sector workers would
result in $679 per week.
The Department did not choose to propose any of these alternatives
for two reasons. First, the approach being proposed is the most
straightforward
[[Page 10911]]
and consistent using current salary data. It measures the actual wage
growth between the 2004 final rule salary level and the 2017 salary
level and applies that growth rate to current data; essentially
assuming that wage growth will continue at the same pace. Second, there
are disadvantages to some of the other indices described above. The
PCEPI, CPI-U, and Chained CPI-U, for example, measure the nominal
prices of goods and services to consumers, whereas the standard salary
level is meant to demarcate worker salaries. It seems more sensible to
use data that measures worker compensation than consumers' cost of
living to set such a level. Additionally, the Department notes that use
of the ECI for all private sector workers comes to the same result as
the methodology chosen.
The salary level increase proposed here would, as discussed in
detail in the economic analysis, section VI, result in approximately
1.1 million affected workers losing exempt status (absent other action
from their employers). The Department recognizes that any increase to
the standard salary level would increase the number of workers who pass
the duties test but are paid below the standard salary level; however,
the $679-per-week salary level, while necessarily imprecise, would
identify a large number of obviously nonexempt employees ``without
disqualifying any substantial number of'' bona fide executive,
administrative, and professional employees from exemption.\94\
Additionally, the 1.1 million workers likely to be affected by this
rule's proposed increase to the standard salary level is close to the
1.3 million workers who were affected by the 2004 final rule's salary
level increase.\95\ The Department also anticipates that 3.6 million
employees paid between $455 and $679 per week who fail the standard
duties test (i.e., that are and will remain nonexempt)--2.0 million
salaried white collar workers and 1.6 million salaried blue collar
workers--will have their nonexempt status made clearer because their
salary will fall below the proposed threshold.
---------------------------------------------------------------------------
\94\ Kantor Report at 5.
\95\ 69 FR 22213. The 2004 rule estimated that 1,297,855 workers
would, without some intervening action by their employers, lose
exempt status as a result of the $455 standard salary level set at
that time. See 69 FR 22213, 22253.
---------------------------------------------------------------------------
vi. Summary of Standard Salary Level Proposal
For the reasons discussed above, the Department proposes to set the
standard salary level to qualify for exemption from the FLSA's minimum
wage and overtime requirements as an executive, administrative, or
professional employee at $679 per week. The Department believes that
the proposed standard salary level would help employers identify a
large group of employees who perform nonexempt duties, would aid in
identifying bona fide EAP employees, and would address the legal
concerns that led to the invalidation of the salary level set in the
2016 final rule. The Department invites comments on this proposed
salary level and on any alternative salary level or methodology,
including but not limited to whether the use of the indices described
above, would be more appropriate.
B. Special Salary Tests
i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the
Northern Mariana Islands \96\
---------------------------------------------------------------------------
\96\ Under the proposal, the special salary tests would not
apply to employees of the Federal government employed in Puerto
Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the
Northern Mariana Islands, and American Samoa.
---------------------------------------------------------------------------
Since 2004, the Department has applied the standard salary level to
Puerto Rico.\97\ After the Department published the 2016 final rule,
Congress passed the Puerto Rico Oversight, Management, and Economic
Stability Act (PROMESA).\98\ Section 404 of PROMESA states that ``any
final regulations issued related to'' the Department's 2015 overtime
rule NPRM--i.e., the 2016 final rule--``shall have no force or effect''
in Puerto Rico until the Comptroller General of the Unites States
completes and transmits a report to Congress assessing the impact of
applying the final regulations to Puerto Rico, and the Secretary of
Labor, ``taking into account the assessment and report of the
Comptroller General, provides a written determination to Congress that
applying such rule to Puerto Rico would not have a negative impact on
the economy of Puerto Rico.'' \99\
---------------------------------------------------------------------------
\97\ See 69 FR 22172.
\98\ See Public Law 114-187, 130 Stat. 549 (June 30, 2016).
\99\ See 48 U.S.C. 2193(a)-(b). The Comptroller General's report
was published on June 29, 2018 and is available at: https://www.gao.gov/products/GAO-18-483.
---------------------------------------------------------------------------
The Department believes that PROMESA does not apply to this NPRM
because it is a new rulemaking and thus is not ``related to'' the 2015
overtime rule NPRM within the meaning of PROMESA. Nonetheless, section
404 reflects Congress' concern with increasing the salary level in
Puerto Rico, and Puerto Rico's current economic climate reinforces the
importance of the Department exercising caution on this issue.
Accordingly, the Department proposes to set a special salary level in
Puerto Rico of $455 per week--the level that currently applies under
PROMESA. The Department seeks comments on this proposal.
The Department currently applies the standard salary level to the
Virgin Islands, Guam, and the Commonwealth of the Northern Mariana
Islands (CNMI).\100\ The Department understands that U.S. territories
face their own economic challenges and that an increase in the salary
level affects them differently than the States. In recognition of these
challenges and to promote special salary level consistency across U.S.
territories, the Department is proposing to also set a special salary
level of $455 per week for the Virgin Islands, Guam, and the CNMI. The
Department seeks comment on whether this special salary level is
appropriate, or whether instead the Department should continue applying
the standard salary level to these U.S. territories.
---------------------------------------------------------------------------
\100\ In Guam and the CNMI, the Department has applied the
salary level test(s) applicable to the States. In the Virgin
Islands, the Department applied a special salary level test prior to
2004, but applied the standard salary level beginning in 2004.
---------------------------------------------------------------------------
ii. American Samoa
The Department has historically applied a special salary level test
to employees in American Samoa because minimum wage rates there have
remained lower than the federal minimum wage.\101\ The Fair Minimum
Wage Act of 2007, as amended, provides that industry-specific minimum
wages rates in American Samoa will increase every three years until
each equals the federal minimum wage.\102\ 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
for employees in American Samoa.
---------------------------------------------------------------------------
\101\ See 69 FR 22172.
\102\ See Sec. 1, Public Law 114-61, 129 Stat. 545 (Oct. 7,
2015).
---------------------------------------------------------------------------
The special salary level test for employees in American Samoa has
historically equaled approximately 84 percent of the standard salary
level.\103\ The Department proposes to maintain this percentage and
considered whether to set the special salary level in American Samoa
equal to 84 percent of the proposed standard salary level ($679 per
week)--resulting in a special salary level of $570 per week--or to set
it equal to approximately 84 percent of the proposed special salary
level applicable to the other U.S. territories ($455 per week)--
resulting in a special salary
[[Page 10912]]
level of $380 per week. The Department is proposing to set a special
salary level of $380 per week in American Samoa. This approach not only
maintains the special salary level that the Department is currently
enforcing in American Samoa, but also ensures that American Samoa,
which has a lower minimum wage than the other U.S. territories, does
not have a higher special salary level. The Department seeks comments
on this proposal.
---------------------------------------------------------------------------
\103\ See, e.g., 69 FR 22172.
---------------------------------------------------------------------------
iii. Motion Picture Producing Industry
The Department has permitted employers to classify as exempt
employees in the motion picture producing industry who are paid a
specified base rate per week (or a proportionate amount based on the
number of days worked), so long as they meet the duties tests for the
EAP exemption.\104\ This exception from the ``salary basis''
requirement was created in 1953 to address the ``peculiar employment
conditions existing in the [motion picture producing] industry,'' and
applies, for example, when a motion picture producing industry employee
works less than a full workweek and is paid a daily base rate that
would yield the weekly base rate if 6 days were worked.\105\ Consistent
with its practice since the 2004 final rule, the Department proposes to
increase the required base rate proportionally to the proposed increase
in the standard salary level test, resulting in a proposed base rate of
$1,036 per week (or a proportionate amount based on the number of days
worked).\106\ The Department seeks comments on this proposal.
---------------------------------------------------------------------------
\104\ See Sec. 541.709.
\105\ 18 FR 2881 (May 19, 1953).
\106\ The Department calculated this figure by dividing the
proposed weekly salary level ($679) by $455, and then multiplying
this result (rounded to the nearest hundredth) by the base rate set
in the 2004 final rule ($695 per week). This produces a new base
rate of $1,036 (per week), when rounded to the nearest whole dollar.
---------------------------------------------------------------------------
C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and
Commissions in the Salary Level Requirement
Since 1940, the part 541 regulations have required that exempt EAP
employees be paid on a salary basis. Historically, the Department
assessed compliance with the salary level test by looking only at the
salary or fee payments made to employees and, with the exception of the
total annual compensation requirement of the highly compensated
employee (HCE) test introduced in 2004, did not include bonus payments
of any kind in this calculation. The Department's longstanding position
has been to allow employers to pay additional compensation in the form
of bonuses, but those payments did not count toward the payment of the
required minimum salary.
During public listening sessions held by the Department prior to
issuing the 2015 proposal, stakeholders encouraged the Department to
consider including nondiscretionary bonuses in determining whether the
salary level is met.\107\ The stakeholders noted that such bonuses can
be a significant part of exempt employees' compensation, and therefore
supported the inclusion of bonuses in determining whether the salary
level is met.\108\ In the 2016 final rule, the Department for the first
time allowed employers to use nondiscretionary bonuses and incentive
payments that were paid quarterly or more frequently to satisfy up to
10 percent of the standard salary level.\109\ Although the 2016 final
rule was invalidated,\110\ the Department believes that there are
benefits to this approach because such bonuses and incentives are an
important part of many employers' compensation systems.
---------------------------------------------------------------------------
\107\ 80 FR 38516, 38521 (July 6, 2015).
\108\ Id.
\109\ 81 FR 32423-27.
\110\ See 275 F. Supp. 3d at 808. The nondiscretionary bonuses
provision was not discussed in the decision.
---------------------------------------------------------------------------
In the 2017 RFI and the listening sessions, many commenters
reiterated the view that nondiscretionary bonuses and incentive
payments should count toward the salary threshold to some degree,
although commenters disagreed about the percentage allowance, and some
opposed counting such payments toward the salary level at all. Some RFI
commenters also expressed concern about the 2016 final rule's
requirement that such bonuses be paid at least quarterly to count
toward the salary level. These commenters explained that annual bonuses
can be substantial, and employers would be penalized if those bonuses
were only creditable in the quarter in which they were paid. Having
considered these comments, and consistent with its goal of modernizing
the part 541 regulations, the Department proposes to permit
nondiscretionary bonuses and incentive payments (including commissions)
to satisfy up to 10 percent of the standard salary level test for the
executive, administrative, and professional exemptions, provided that
such bonuses or payments are paid annually or more frequently.\111\
Such payments may include, for example, nondiscretionary incentive
bonuses tied to productivity and profitability.\112\
---------------------------------------------------------------------------
\111\ The employer may use any 52-week period, such as a
calendar year, a fiscal year, or an anniversary of the hire year.
The Department recognizes that some businesses pay significantly
larger bonuses. Where larger bonuses are paid, the amount
attributable toward the EAP standard salary level requirement would
be capped at 10 percent of the salary level.
\112\ The Department notes that nonexempt employees may also
receive such bonuses. Where nondiscretionary bonuses or incentive
payments are made to nonexempt 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 believes this approach is appropriate because such
payments have become associated with EAP duties, such as the exercise
of independent judgment and management skills. However, the Department
received information during the 2016 rulemaking from State and local
governments and nonprofits stating that they do not traditionally use
such pay methods and might be at a competitive disadvantage if the
overtime rule allowed a significant portion of the salary level to be
met through such bonus payments. The Department accordingly determined
that limiting the amount of the salary requirement that may be
satisfied through such payments to 10 percent would help maintain
parity between industries that use such pay methods and those that
traditionally have not done so, such as nonprofit organizations, and
ensure that exempt employees are paid regularly, as required by
regulation. The Department did receive comments in the 2016 rulemaking
that bonuses are an important part of compensation for some exempt
employees. But the standard salary level test is meant to identify a
class of nonexempt employees. The Department believes that employees
with wages below the proposed standard salary level, who would be
nonexempt by definition, also do not typically receive a substantial
portion of their wages through bonuses. While the Department proposes
to allow employers up to one year to apply nondiscretionary bonus or
incentive payments to satisfy 10 percent of the standard salary level,
the remaining 90 percent must be paid on a salary or fee basis in
accordance with the regulations.
Finally, the Department proposes to permit employers to make a
final ``catch-up'' payment within one pay period after the end of each
52-week period to bring an employee's
[[Page 10913]]
compensation up to the required level. Under the proposal, each pay
period an employer must pay the exempt executive, administrative, or
professional employee 90 percent of the standard salary level ($611.10
per week), and if at the end of the 52-week period the salary paid plus
the nondiscretionary bonuses and incentive payments (including
commissions) paid does not equal the standard salary level for 52 weeks
($35,308), the employer would have one pay period to make up for the
shortfall (up to 10 percent of the standard salary level, $3,530.80).
Any such catch-up payment would count only toward the prior year's
salary amount and not toward the salary amount in the year in which it
was paid.\113\
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\113\ Because employers may use nondiscretionary bonuses to
satisfy the vast majority of the total annual compensation paid to
HCEs, such bonuses will not be permitted to satisfy the standard
salary level portion of their compensation.
---------------------------------------------------------------------------
The Department seeks comments on its proposal to permit
nondiscretionary bonuses and incentive payments (including commissions)
to satisfy part of the standard salary level. The Department further
requests comment on whether the proposed 10 percent cap is appropriate,
or if a higher or lower cap is preferable.\114\
---------------------------------------------------------------------------
\114\ The Department is 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. See Sec. 541.600. 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).
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D. Highly Compensated Employees
The 2004 final rule created a new test under the EAP exemption,
known as the highly compensated employee (HCE) test. The HCE test is
based on the rationale that it is unnecessary to apply the standard
duties test to employees who earn at least a certain amount annually--
an amount substantially higher than the annual equivalent of the weekly
standard salary level--because such employees ``have almost invariably
been found to meet all the other requirements of the regulations for
exemption.'' \115\ Thus, the HCE test combines a high compensation
requirement with a less-stringent, more-flexible duties test.
---------------------------------------------------------------------------
\115\ 69 FR 22174 (quoting Weiss Report at 22); see Sec.
541.601(c) (``A high level of compensation is a strong indicator of
an employee's exempt status, thus eliminating the need for a
detailed analysis of the employee's job duties.'').
---------------------------------------------------------------------------
To be exempt under the HCE test, an employee must earn at least the
amount specified in the regulations in total annual compensation and
must customarily and regularly perform any one or more of the exempt
duties or responsibilities of an executive, administrative, or
professional employee.\116\ The HCE test applies ``only to employees
whose primary duty includes performing office or non-manual work.''
\117\ Additionally, such an employee must receive at least the standard
salary level per week on a salary or fee basis, while the remainder of
the employee's total annual compensation may include commissions,
nondiscretionary bonuses, and other nondiscretionary compensation.\118\
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.\119\ An employer
is permitted to make a final ``catch-up'' payment ``during the last 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.\120\ If an
employee works for less than a full year, the employee may still
qualify for exemption under the HCE test if the employee receives a pro
rata portion of the required annual compensation, based upon the number
of weeks of employment.\121\
---------------------------------------------------------------------------
\116\ Sec. 541.601(a).
\117\ Sec. 541.601(d).
\118\ Sec. 541.601(b)(1).
\119\ Id.
\120\ Sec. 541.601(b)(2).
\121\ Sec. 541.601(b)(3). Similar to employees who work for a
full year, one final ``catch-up'' payment may be made ``within one
month after the end of employment.'' Id.
---------------------------------------------------------------------------
The 2004 final rule set the HCE total annual compensation amount at
$100,000. In the 2016 final rule, the Department reaffirmed the
appropriateness of the HCE test, and increased the total annual
compensation requirement to reflect increases in salaries.\122\ The
Department explained that like the standard salary level, the 2004 HCE
total annual compensation value had ``eroded over time'' and that the
share of full-time salaried workers with salaries exceeding $100,000 in
fiscal year 2017 was predicted to be about three times the share who
earned that amount in 2004.\123\ In response, the Department increased
the total annual compensation requirement for the HCE test to the
annualized weekly earnings of the 90th percentile of full-time salaried
workers nationally, which was $134,004 based on the fourth quarter of
2015.\124\ As a result of the district court's decision invalidating
the 2016 final rule, the Department is currently enforcing the 2004
final rule, including its $100,000 total annual compensation level and
the requirement that $455 per week must be paid on a salary or fee
basis.\125\
---------------------------------------------------------------------------
\122\ 81 FR 32428-29.
\123\ Id. at 32429. Whereas approximately 6.3 percent of full-
time salaried workers had salaries exceeding $100,000 in 2004, see
69 FR 22169, this number was predicted to be approximately 20
percent by fiscal year 2017, see 81 FR 32429. By January 2021, this
number is expected to be approximately 26 percent.
\124\ 81 FR 32429.
\125\ The district court's decision did not specifically discuss
the HCE test; however, the decision invalidated the entire 2016
final rule.
---------------------------------------------------------------------------
The Department continues to believe that the HCE test is a useful
alternative to the standard salary level and duties tests for highly
compensated employees. The Department also believes that the HCE
compensation level set in 2004, $100,000 per year, was an appropriate
level at the time, given that only roughly 10 percent of likely exempt
employees who were subject to the salary tests earned at least that
amount annually.\126\ However, as with the standard salary level, the
HCE total annual compensation level must be updated to ensure that it
remains a meaningful and appropriate standard when paired with the
more-flexible HCE duties test. In 2004, the Department concluded that
the HCE compensation level was appropriate because ``white collar''
employees who earn such high salaries would nearly always satisfy any
duties test, and ``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.'' \127\ Accordingly, it is important to ensure
that the HCE total annual compensation level keeps pace with growth in
nominal wages and salaries so that it applies only to those employees
for whom it was originally intended, namely, those ``at the very top of
[the] economic ladder.'' \128\ Additionally, setting an appropriately
high total annual compensation level for highly compensated employees
ensures that employers continue to apply the standard duties test to
employees whose exemption status is less clear.
---------------------------------------------------------------------------
\126\ 69 FR 22174.
\127\ Id. (quoting Weiss Report at 22-23).
\128\ Id.
---------------------------------------------------------------------------
The Department proposes to update the HCE test by setting it at the
90th percentile of all full-time salaried workers nationally using 2017
CPS data, then inflated to January 2020. This is similar to the method
used in the 2016 final rule, which likewise set the HCE threshold at
the 90th percentile of all full-time salaried workers. The inflation
[[Page 10914]]
to January 2020 is proposed for the same reason as inflating the
standard salary level: To more accurately reflect the salaries of
employees at the time the rule becomes effective, rather than at the
time data was collected. This results in a proposed HCE total annual
compensation level of $147,414, of which $679 must be paid weekly on a
salary or fee basis.\129\ Notably, this proposed HCE threshold is
slightly lower in relative terms than when the HCE threshold was
initially adopted in 2004, when it covered 93.7 percent of all full-
time salaried workers.\130\ But the Department continues to believe
that this simpler approach--i.e., pegging the HCE threshold to the 90th
percentile of all full-time salaried earnings nationwide--would result
in a threshold high enough to ``ensure that virtually every salaried
white collar employee [above it] would satisfy any duties test.'' \131\
---------------------------------------------------------------------------
\129\ Although the Department is proposing that employers may
use nondiscretionary bonuses to satisfy up to 10 percent of the
weekly standard salary level when applying the standard salary and
duties tests, the Department's proposal does not permit employers to
use nondiscretionary bonuses to satisfy the weekly standard salary
level requirement for HCE workers. Employers may use commissions,
nondiscretionary bonuses, and other nondiscretionary compensation to
satisfy the remaining portion of the HCE total annual compensation
amount. Because employers may use nondiscretionary bonuses to
satisfy the vast majority of the total annual compensation paid to
HCE employees, it is not necessary to permit the use of such bonuses
to satisfy the standard salary level portion of their compensation.
\130\ The $100,000 annual compensation level set in 2004
corresponded to approximately 89.8 percent of likely exempt
employees and 93.7 percent of full-time salaried workers. See 69 FR
22169-70 (Tables 3 and 4).
\131\ 81 FR 32429.
---------------------------------------------------------------------------
Additionally, as with the standard salary level, to ensure that the
Department regularly reviews the appropriateness of the HCE total
annual compensation amount, the Department intends to propose an update
to the level every four years, as discussed further in section IV.E
below. The Department estimates that 201,100 workers--those who earn
between $100,000 and the proposed HCE total annual compensation level
and pass the HCE duties test, but not the standard duties test--would,
without some intervening action by their employers, be affected by the
increase in the HCE compensation level.
E. Future Updates to the Earnings Thresholds
Congress has instructed the Department to define and delimit the
overtime and minimum wage exemptions ``from time to time.'' \132\ The
rationale for updating the standard salary and HCE total compensation
levels is straightforward: As employees' earnings rise over time, they
begin surpassing the earnings thresholds set in the past; the earnings
thresholds thus become a less useful measure of employees' relative
earnings, and a less useful method for identifying exempt employees. As
the Department noted in 2004, outdated regulations ``allow unscrupulous
employers to avoid their overtime obligations and can serve as a trap
for the unwary but well-intentioned employer''; they can also lead
increasing numbers of nonexempt employees to ``resort to lengthy court
battles to receive their overtime pay.'' \133\ Moreover, lengthy delays
between updates to the earnings thresholds may necessitate disruptively
large increases when the thresholds are updated.
---------------------------------------------------------------------------
\132\ 29 U.S.C. 213(a)(1); see also FLSA Amendments of 1961,
Public Law 87-30; 75 Stat. 65 (May 5, 1961).
\133\ 69 FR 22122.
---------------------------------------------------------------------------
While the need to update the part 541 earnings thresholds on a
regular basis is clear, the method and frequency of doing so has been
contested. The Department has historically used notice-and-comment
rulemaking to update the salary level tests, but various stakeholders
throughout the years have submitted comments asking the Department to
establish a mechanism to update the thresholds automatically. In the
1970 final rule, the Department remarked that one commenter's
suggestion to implement automatic annual updates to the salary tests
based on BLS earnings data ``appear[ed] to have some merit'' given the
delays between some of the Department's earlier updates, but ultimately
concluded that ``such a proposal [would] require further study.'' \134\
In the 2004 final rule, the Department declined commenter requests to
create an automatic updating mechanism. Instead, the Department
expressed its intent ``in the future to update the salary levels on a
more regular basis.'' \135\
---------------------------------------------------------------------------
\134\ 35 FR 884.
\135\ 69 FR 22171-72.
---------------------------------------------------------------------------
When the Department next revisited the part 541 regulations in
2016, however, it adopted a mechanism to automatically update the
earnings thresholds every three years, applying the same methodology
used to initially set each threshold in that rulemaking.\136\ The
stated purpose of the 2016 final rule's updating mechanism was to
``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
exemption, and therefore provide certainty to employers, and promote
government efficiency.'' \137\ The district court's summary judgment
decision invalidating the 2016 final rule stated that because the
standard salary level established by the 2016 final rule was unlawful,
the mechanism to automatically update that standard salary level was
``similarly . . . unlawful.'' \138\
---------------------------------------------------------------------------
\136\ Specifically, the mechanism provided for using the 40th
percentile of non-hourly earnings in the lowest-wage Census Region
to automatically update the standard salary level, the 90th
percentile of non-hourly earnings nationwide to automatically update
the HCE total annual compensation threshold, and making
proportionate increases to the special salary levels provided
elsewhere in part 541.
\137\ 81 FR 32430.
\138\ 275 F. Supp. 3d at 808.
---------------------------------------------------------------------------
In light of the district court's decision and the concerns about
lengthy delays between updates to the part 541 earnings thresholds, the
Department asked for feedback in the 2017 RFI on how the salary and
compensation levels should be updated going forward.\139\ Responses to
this question were mixed. Proponents of an automatic updating mechanism
cited lengthy delays between earlier salary level updates, disruptively
large increases necessitated by such delays, and the desire for added
certainty. Other stakeholders, however, argued that the Department
lacked the authority to update the salary level automatically, that an
automatic updating mechanism might not be sufficiently flexible to
account for unique economic circumstances, and that affected members of
the public would not have any influence over the magnitude or timing of
future salary level updates. Commenters generally agreed that the
earning thresholds should be updated more frequently than to date, but
some commenters were concerned that frequent updating would be unduly
disruptive.
---------------------------------------------------------------------------
\139\ 82 FR 34619.
---------------------------------------------------------------------------
After considering the feedback provided in response to the RFI and
at the listening sessions, the Department is committing to evaluate
more frequently the part 541 earnings thresholds going forward.
Specifically, the Department believes that the standard salary level
and the HCE total annual compensation threshold should be proposed to
be updated on a quadrennial basis (i.e., once every four years) through
an NPRM published in the Federal Register, followed by notice-and-
comment rulemaking. The Department intends to propose such updates
using the same
[[Page 10915]]
methodology as the most recent final rule, meaning, in the first
instance, the methodology employed by the final rule for which this
NPRM is providing notice and opportunity to comment. In these future
rulemakings, the Department also intends to seek comment on whether to
update the special salary levels that apply to the U.S. territories.
Proposed quadrennial updates would ensure public input on how earning
thresholds could continue to be up-to-date, while giving businesses
sufficient time to adjust to these more frequent (and thus smaller)
increases. The Secretary, however, may forestall proposing updates if
economic or other factors so indicate. Accordingly, the Department
proposes to delete the current (though not enforced) Sec. 541.607,
while affirming its intention to propose increasing the earnings
thresholds every four years.\140\ The Department seeks comment from the
public regarding this proposal.
---------------------------------------------------------------------------
\140\ Were the Department to codify this commitment in the final
rule, the codified provision could have the following two features.
First, it could provide that the Department publish a Notice of
Proposed Rulemaking in the Federal Register in January 2023, and
every four years thereafter, proposing an update to the standard
salary level and highly compensated employee threshold in accord
with the same methodology in the Department's most recent final rule
establishing that salary level and threshold (the Notice would
propose to retain the most recent levels set for the special salary
levels applicable to U.S. territories, while inviting comment on
whether to change them). And second, it could provide that the
Secretary may, in his or her sole discretion, decline to publish the
Notice of Proposed Rulemaking due to economic or other factors, with
an accompanying notice published in the Federal Register giving the
reason or reasons for declining.
---------------------------------------------------------------------------
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, 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 the Office of Management and Budget (OMB)
approves them under the PRA. This NPRM would revise the existing
information collection requirement 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 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. An FLSA-covered employer
must maintain the records for such period of time and make such reports
as prescribed by regulations issued by the Secretary of Labor. The
Department has promulgated regulations at 29 CFR part 516 to establish
the basic FLSA recordkeeping requirements. This NPRM, if adopted, would
not impose any new information collection requirements; rather, using
the currently enforced 2004 salary level as the baseline, burdens under
existing requirements are expected to increase as more employees
receive minimum wage and overtime protections. More specifically, the
proposed changes in this NPRM may cause an increase in burden on
employers because they 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 increase in burden if more employees
file a complaint with WHD to collect back wages under the overtime pay
requirements. The Department anticipates that 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 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 website). 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 mailing 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, 725 17th Street NW,
Washington, DC 20503; Telephone: 202-395-5806 (this is not a toll-free
number). OMB will consider all written comments that the
[[Page 10916]]
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, 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: 5,588,627 (unaffected by this
rulemaking).
Estimated Number of Responses: 48,101,522 (2,583,333 added by this
rulemaking).
Estimated Burden Hours: 3,631,819 hours (2,583,333 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: 35,819 (242 added by this rulemaking).
Estimated Number of Responses: 35,819 (242 added by this
rulemaking).
Estimated Burden Hours: 11,940 (81 hours added by this rulemaking).
Estimated Time per Response: 20 minutes (unaffected by this
rulemaking).
Frequency: Once.
Other Burden Cost: 0.
VI. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review, and Executive Order 13563, Improving
Regulation and Regulatory Review
Executive Orders 12866 and 13563 direct agencies to assess the
costs and benefits of a regulation and to adopt a regulation only upon
a reasoned determination that the regulation's net benefits (including
potential economic, environmental, public health and safety effects,
distributive impacts, and equity) justify its costs. Executive Order
13563 emphasizes the importance of quantifying both costs and benefits,
of reducing costs, of harmonizing rules, and of promoting flexibility.
Under Executive Order 12866, the Office of Management and Budget
(OMB) must determine whether a regulatory action is a ``significant
regulatory action,'' which includes an action that has an annual effect
of $100 million or more on the economy. Significant regulatory actions
are subject to review by OMB. As described below, this proposed rule is
economically significant. Therefore, the Department has prepared a
Preliminary Regulatory Impact Analysis (RIA) \141\ in connection with
this NPRM as required under section 6(a)(3) of Executive Order 12866,
and OMB has reviewed the rule.
---------------------------------------------------------------------------
\141\ The terms ``regulatory impact analysis'' and ``economic
impact analysis'' are used interchangeably throughout this Proposed
Rule.
---------------------------------------------------------------------------
When the Department uses a perpetual time horizon to allow for cost
comparisons under Executive Order 13771,\142\ the annualized cost
savings of the proposed rule is $224.0 million with 7 percent
discounting. This proposed rule is accordingly expected to be an
Executive Order 13771 deregulatory action.
---------------------------------------------------------------------------
\142\ 82 FR 9339 (Feb. 3, 2017).
---------------------------------------------------------------------------
A. Introduction
i. Background
The FLSA requires covered employers to: (1) Pay employees who are
covered and not exempt from the Act's requirements not less than the
federal minimum wage for all hours worked and overtime premium pay at a
rate of not less than one and one-half times the employee's regular
rate of pay for all hours worked over 40 in a workweek, and (2) make,
keep, and preserve records of their employees 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 policy
objective is to reduce overwork and its detrimental effect on the
health and well-being of workers. The second is to spread employment
(or, in other words, reduce involuntary unemployment) by incentivizing
employers to hire more employees rather than requiring existing
employees to work longer hours.
The FLSA provides a number of exemptions from the Act's minimum
wage and overtime pay provisions, including one for bona fide
executive, administrative, and professional (EAP) employees. Such
employees perform work that cannot easily be spread to other workers
after 40 hours in a week and that is difficult to standardize to any
timeframe. They also typically receive more monetary and non-monetary
benefits than most blue collar and lower-level office workers. The
exemption applies to employees employed in a bona fide executive,
administrative, or professional capacity and to outside sales
employees, as those terms are ``defined and delimited'' by the
Department.\143\ The Department's regulations implementing these
``white collar'' exemptions are codified at 29 CFR part 541.
---------------------------------------------------------------------------
\143\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------
In 2004, the Department determined that two earnings level tests
should be used to help employers distinguish nonexempt employees from
exempt employees: The standard salary test, which it set at $455 a
week, and the highly compensated employee (HCE) total-compensation
test, which it set at $100,000 per year (see II.C. for further
discussion). In 2016, the Department published a final rule setting the
standard salary level at $913 per week and the HCE annual compensation
level at $134,004. As previously discussed, the U.S. District Court for
Eastern District of Texas declared the 2016 final rule invalid.
The standard salary level should be an appropriate dividing-line
between employees who are nonexempt and employees who may be performing
exempt duties. The threshold essentially
[[Page 10917]]
screens out obviously nonexempt employees whom Congress intended the
FLSA's minimum wage and overtime provisions to protect. Therefore,
employers are not burdened with conducting a duties analysis to
determine nonexempt status for the employees who fall below the
threshold, as those employees are unlikely to pass the duties test for
exemption.
ii. Need for Rulemaking
The Department has updated the salary level test seven times since
its implementation in 1938. Table 1 presents the weekly salary levels
associated with the EAP exemptions since 1938, organized by exemption
and long/short/standard duties tests.\144\ The Department has revised
the levels once in the 44 years since 1975.\145\ In contrast, in the 37
years between 1938 and 1975, the Department increased salary test
levels approximately every five to nine years.
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\144\ From 1949 until 2004 the regulations contained two
different tests for exemption--a long test for employees paid a
lower salary that included a more rigorous examination of employees'
duties, and a short test for employees paid at a higher salary level
that included a more flexible duties test.
\145\ The Department revised the EAP salary levels in 2004. In
2016, the Department also issued a final rule revising the EAP
salary levels; however, on August 31, 2017, the U.S. District Court
for Eastern District of Texas held that the 2016 final rule's
standard salary level exceeded the Department's authority and was
therefore invalid. See Nevada v. U.S. Dep't of Labor, 275 F. Supp.
3d 795 (E.D. Tex. 2017). Until the Department issues a new final
rule, it is enforcing the part 541 regulations in effect on November
30, 2016, including the $455 per week standard salary level set in
the 2004 final rule.
Table 1--Historical Salary Levels for the EAP Exemptions
----------------------------------------------------------------------------------------------------------------
Long test
Date enacted ------------------------------------------------------------ Short test (all)
Executive Administrative Professional
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
Since the update in 2004, the purchasing power, or real value, of
the standard-salary level test has eroded substantially, and as a
result, increasingly more workers earn above the salary threshold.
Between 2004 and 2017, the real value of the standard-salary level
declined 22.9 percent, calculated using the Consumer Price Index for
all urban consumers (CPI-U).\146\
---------------------------------------------------------------------------
\146\ CPI-U data available at: https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------
As a result of the erosion of the real value of the standard-salary
level, more and more workers earn above the standard salary level. Each
year that the salary level is not updated, its utility as a
distinguishing mechanism between nonexempt and potentially exempt
workers declines. For example, the annualized equivalent of the
standard salary level set in 2004 ($23,660, or $455 per week for 52
weeks) is now below the 2017 poverty threshold for a family of four
($24,858).\147\ Similarly, in 2017, approximately 23 percent of full-
time salaried workers earned at least $100,000 annually, more than
three times the share who earned that amount (6.3 percent) when the HCE
test was created in 2004.\148\
---------------------------------------------------------------------------
\147\ This is the 2017 poverty threshold for a family of four
with two related people under 18 in the household. Available at:
https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-thresholds.html.
\148\ Calculated using pooled CPS MORG data.
---------------------------------------------------------------------------
In the 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.'' \149\ In
the 2016 final rule, the Department recognized that the salary level
had become outdated and that an update was needed. As previously
discussed, the U.S. District Court for Eastern District of Texas
declared the 2016 final rule invalid because the standard salary level
excluded from exemption too many employees who perform exempt duties.
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\149\ 69 FR 22171.
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Now, to restore the value of the standard salary level as a line of
demarcation between those workers for whom Congress clearly intended to
provide minimum wage and overtime protections and other workers who may
be bona fide EAPs, and to maintain the salary level's continued
validity, the Department proposes to update standard salary level using
the 2004 methodology with current CPS data. Using pooled 2017 CPS MORG
data, a salary level of $641 ($33,332 annually) corresponds to the 20th
percentile of earnings for full-time salaried workers in the South
Census region and/or in the retail industry.\150\ To account for
expected changes between 2017 and January 2020, and to make it so that
the salary level will accurately reflect compensation at the
approximate effective date, the salary level was inflated using the
compound annual growth rate that increased the standard salary level
from $455 to $641 over 15 years (2.31 percent = (($641/
$455)1/15-1).\151\ Applying this growth rate for an
additional 2.5 years (assuming 2017 data represents mid-2017 on
average) results in a January 2020 salary level of $679 ($641 x
1.0231\2.5\). Similarly, to update the HCE total compensation
requirement, the Department used CPS MORG data to ascertain the 90th
percentile of all full-time salaried workers in 2017 ($139,464),
calculated the compound annual growth rate from 2002 to 2017 (2.24
percent), then applied that rate over 2.5 years to inflate the 2017
level to $147,414 for January 2020.
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\150\ Excluding workers who are not subject to FLSA, not subject
to the salary level test, or in agriculture or transportation.
\151\ The standard salary level of $455 per week became
effective in 2004. However, this level was determined using 2002 CPS
MORG data. We therefore calculated the compound annual growth rate
over 15 years, from 2002 to 2017.
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Additionally, as just discussed, in this proposed rule the
Department commits
[[Page 10918]]
to evaluate more frequently the part 541 earnings thresholds going
forward. Specifically, the Department intends to update the earnings
thresholds once every four years (see section IV.E for further
discussion). Such proposed quadrennial updates would preserve the
effectiveness of the salary level as a dividing line between nonexempt
workers and workers who may be exempt, eliminate the volatility
associated with previous changes in the thresholds, and increase
certainty for employers with respect to future changes.
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
rule, using the currently enforced 2004 salary level as the baseline.
To produce these estimates, the Department used data from the pooled
CPS MORG data. See section VI.B. Most critically, the Department
estimates that 1.1 million workers who would otherwise be exempt under
the currently enforced standard salary level of $455 per week would
become eligible for overtime, and that 3.6 million employees paid
between $455 and $679 per week who fail the standard duties test (i.e.,
that are and will remain nonexempt) would have their overtime
eligibility made clearer because their salary would fall below the
proposed threshold.
The Department estimated that in Year 1, there would be 46.2
million white collar salaried employees whom a change to the
Department's part 541 regulations may affect.\152\ Of these workers,
the Department estimated that 31.9 million would be exempt from the
minimum wage and overtime pay provisions under the part 541 EAP
regulations promulgated in 2004 (i.e., in the baseline scenario without
the rule taking effect). The other 14.3 million workers would not
satisfy the duties tests for EAP exemption and/or earn less than $455
per week.\153\ However, of the 31.9 million workers, 7.6 million were
in ``named occupations'' and thus only needed to pass the duties tests
to be subject to the standard EAP exemptions.\154\ Therefore, these
workers were not considered in the analysis, leaving 24.3 million EAP
exempt workers potentially affected by this proposed rule.
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\152\ This excludes workers who are exempt under another FLSA
exemption and thus would remain exempt from minimum wage and
overtime pay protections without qualifying for the EAP exemption.
\153\ 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, some numbers may not match the reported
total or the calculation shown due to rounding of components.
\154\ Workers not subject to the EAP salary level test include
teachers, physicians, lawyers, judges, and outside sales workers.
Additionally, academic administrative personnel are not subject to
the EAP salary level test if they are paid on a salary basis
equivalent to an entry level teacher in their institution.
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In Year 1, an estimated 1.1 million workers would be affected by
the proposed increase in the standard salary level test (Table 2). This
figure consists of currently exempt workers subject to the salary level
test who earn at least $455 per week but less than $641 per week (the
Department analyzed the economic effects of a standard salary level of
$641 per week using pooled 2017 CPS MORG data as the best
representation of the likely economic effects of the proposed standard
salary level of $679 per week taking effect in 2020).\155\
Additionally, an estimated 201,100 workers would be affected by the
increase in the HCE compensation test from $100,000 per year to
$139,464 per year (the Department analyzed the economic effects of an
HCE compensation level of $139,464 per year using pooled 2017 CPS MORG
data as the best representation of the likely economic effects of the
proposed HCE compensation level of $147,414 per year taking effect in
2020). By Year 10,\156\ the Department estimates that 625,000 workers
would be affected by the change in the standard salary level test and
426,000 workers would be affected by the change in the HCE total annual
compensation test, compared to a baseline assuming the currently
enforced earnings thresholds (i.e., $455 per week and $100,000 per
year) remain unchanged.\157\
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\155\ The Department performed a preliminary check of an
analogous three-year gap that indicates that 2014 data would yield a
prediction of more potentially affected workers than the 2017 data.
This result may be driven by the late 2016 and 2017 data showing the
effects of employers adjusting workers' salaries, implicit wages,
and hourly/salaried status in anticipation of the 2016 rule taking
effect.
\156\ Although the Department anticipates proposing to update
the standard salary and HCE compensation level requirements
periodically, the proposed updates are not required under this
rulemaking and therefore are not included in this RIA. Future
updates will be proposed and promulgated through notice and comment
rulemaking and will be accompanied by their own RIA.
\157\ In later years, earnings growth will cause some workers to
no longer be affected because their earnings will exceed the new
salary threshold. Additionally, some workers will become newly
affected because their earnings will exceed $455 per week, and in
the absence of this Proposed Rule would have lost their overtime
protections. To estimate the total number of affected workers over
time, the Department accounts for both of these effects.
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This analysis quantifies three direct costs to employers: (1)
Regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs (see section VI.D.iii for further discussion on
costs). The costs presented here are the combined costs for both the
change in the standard salary level test and the HCE total compensation
level (these will be disaggregated in section VI.D.iii). Total
annualized direct employer costs over the first 10 years were estimated
to be $120.5 million, assuming a 7 percent discount rate \158\ (Table
2).
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\158\ Hereafter, unless otherwise specified, annualized values
will be presented using the 7 percent real discount rate.
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In addition to the costs described above, this proposed rule will
also transfer income from employers to employees in the form of wages.
The Department estimated annualized transfers would be $429.4 million.
The majority of these transfers would be attributable to the FLSA's
overtime provision; a smaller share would be attributable to the FLSA's
minimum wage requirement. Transfers also include salary increases for
some affected EAP workers to preserve their exempt status. Employers
may incur additional costs, such as hiring new workers. These other
potential costs are discussed in section VI.D.iii. The proposed
rulemaking could provide some benefits; however, these benefits could
not be quantified due to data limitations, requiring the Department to
discuss such benefits qualitatively. See VI.D.v.
[[Page 10919]]
Table 2--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
[Millions in 2017$]
----------------------------------------------------------------------------------------------------------------
Future years \a\ Annualized value
-------------------------------------------------------------------
Impact Year 1 3% Real discount 7% Real discount
Year 2 Year 10 rate rate
----------------------------------------------------------------------------------------------------------------
Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard.................... 1,070 1,027 625 ................ ................
HCE......................... 201 215 426 ................ ................
-----------------------------------------------------------------------------------
Total................... 1,271 1,241 1,051 ................ ................
----------------------------------------------------------------------------------------------------------------
Costs and Transfers (Millions in 2017$)
----------------------------------------------------------------------------------------------------------------
Direct employer costs....... $464.2 $74.2 $67.8 $112.6 $120.5
Transfers \c\............... 526.9 421.3 447.1 428.0 429.4
----------------------------------------------------------------------------------------------------------------
\a\ These cost and transfer figures represent a range over the nine-year span.
\b\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\c\ This is the net transfer from employers to workers. There may also be transfers of hours and income from
some workers to others.
iv. Terminology and Abbreviations
The following terminology and abbreviations will be used throughout
this RIA.
Affected EAP workers: The population of potentially affected EAP
workers who either pass the standard duties test and earn at least $455
but less than the new salary level (for this analysis modeled as $641
in Year 1), or pass only the HCE duties test and earn at least $100,000
but less than the new HCE compensation level (for this analysis modeled
as $139,464 in Year 1). This was estimated to be 1.3 million workers.
Baseline EAP exempt workers: The projected number of workers who
would be EAP exempt if the rulemaking did not take effect.
BLS: Bureau of Labor Statistics.
CPI-U: Consumer Price Index for all urban consumers.
CPS: Current Population Survey.
Duties test: To be exempt from the FLSA's minimum wage and overtime
requirements under section 13(a)(1), the employee's primary job duty
must involve bona fide executive, administrative, or professional
duties as defined by the regulations. The Department distinguishes
among four such tests:
Standard duties test: The duties test used in conjunction with the
standard salary level test, as set in 2004 and applied to date, to
determine eligibility for the EAP exemptions. It replaced the short and
long tests in effect from 1949 to 2004, but its criteria closely follow
those of the former short test.
HCE duties test: The duties test used in conjunction with the HCE
total annual compensation requirement, as set in 2004 and applied to
date, to determine eligibility for the HCE exemption. It is much less
stringent than the standard and short duties tests to reflect that very
highly paid employees are much more likely to be properly classified as
exempt.
Long duties test: One of two duties tests used from 1949 until
2004; this more restrictive duties test had a greater number of
requirements, including a limit on the amount of nonexempt work that
could be performed, and was used in conjunction with a lower salary
level to determine eligibility for the EAP exemptions (see Table 1).
Short duties test: One of two duties tests used from 1949 to 2004;
this less restrictive duties test had fewer requirements, did not limit
the amount of nonexempt work that could be performed, and was used in
conjunction with a higher salary level to determine eligibility for the
EAP exemptions (see Table 1).
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.
Hourly wage: For the purpose of this PRIA, the amount an employee
is paid for an hour of work.
Base hourly wage: The hourly wage excluding any overtime payments.
Also used to express the wage rate without accounting for benefits.
Implicit hourly wage: Hourly wage calculated by dividing reported
weekly earnings by reported hours worked.
Straight time wage: Another term for the hourly wage excluding any
overtime payments.
MORG: Merged Outgoing Rotation Group supplement to the CPS.
Conducted on approximately one-fourth of the CPS sample monthly to
obtain information on weekly hours worked and earnings.
Named occupations: Workers in named occupations are not subject to
the salary level or salary basis tests. These occupations include
teachers, academic administrative personnel,\159\ physicians,\160\
lawyers, judges,\161\ and outside sales workers.
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\159\ 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(a)(1). 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).
\160\ 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). See Sec. 541.304(b).
\161\ Judges may not be considered ``employees'' under the FLSA
definition. However, since this distinction cannot be made in the
data, all judges are excluded (the same as was done in the 2004
final rule). Including these workers in the model as FLSA employees
would not impact the estimate of affected workers.
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Overtime workers: The Department distinguishes between two types of
overtime workers in this analysis.
Occasional overtime workers: The Department uses two steps to
identify occasional overtime workers. First, all workers who report
they usually work 40 hours or less per week (identified with variable
PEHRUSL1 in CPS MORG) but in the survey (or reference) week worked more
than 40 hours (variable PEHRACT1 in CPS MORG) are classified as
occasional overtime workers. Second, some additional workers who do not
report usually working overtime and did not report working overtime in
the reference week
[[Page 10920]]
are randomly selected to be classified as occasional overtime workers
so that the proportion of workers who work overtime in our sample
matches the proportion of workers, measured using SIPP data, who work
overtime at some point in the year.
Regular overtime workers: Workers who report they usually work more
than 40 hours per week (identified with variable PEHRUSL1 in CPS MORG).
Pooled 2017 CPS MORG data: CPS MORG data from 2015-2017 with
earnings inflated to 2017 dollars and sample observations weighted to
reflect employment in 2017. Pooled data were used to increase sample
size. The analytic database will be updated to pool CPS MORG data from
2016-2018 for the final rulemaking.
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 24.3 million workers.
Price elasticity of demand (with respect to wage): The percentage
change in labor hours demanded in response to a one percent change in
wages.
Real dollars (2017$): Dollars adjusted using the CPI-U to estimate
the purchasing power they would have in 2017.
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 to be subject to
the EAP exemptions. The Department distinguishes among four such tests:
Standard salary level: The weekly salary level associated with the
standard duties test that determines eligibility for the EAP
exemptions. The standard salary level was set at $455 per week in the
2004 final rule.
HCE compensation level: Workers who meet the standard salary level
requirement but not the standard duties test nevertheless are exempt if
they pass a minimal duties test and earn at least the HCE total annual
compensation required amount. The HCE required compensation level was
set at $100,000 per year in the 2004 final rule, of which at least $455
per week must be paid on a salary or fee basis.
Short test salary level: The weekly salary level associated with
the short duties test (eliminated in 2004).
Long test salary level: The weekly salary level associated with the
long duties test (eliminated in 2004).
SIPP: Survey of Income and Program Participation.
Workers covered by the FLSA and subject to the Department's part
541 regulations: Includes all workers except those excluded from the
analysis because they are not covered by the FLSA or subject to the
Department's requirements. Excluded workers include: Members of the
military, unpaid volunteers, the self-employed, many religious workers,
and federal employees (with a few exceptions).\162\
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\162\ 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.
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The Department also notes that the terms employee and worker are
used interchangeably throughout this analysis.
B. Methodology To Determine the Number of Potentially Affected EAP
Workers
i. Overview
This section explains the methodology used to estimate the number
of workers who are subject to the part 541 regulations and the number
of potentially affected EAP workers. 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.\163\
The methodology described here is largely based on the approach the
Department used in the 2004 and 2016 final rules.\164\
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\163\ In 2015, RAND released results from a survey conducted to
estimate EAP exempt workers. However, this survey does not have the
variables or sample size necessary for the Department to base the
RIA on this analysis. Rohwedder, S. and Wenger, J.B. (2015). The
Fair Labor Standards Act: Worker Misclassification and the Hours and
Earnings Effects of Expanded Coverage. RAND Labor and Population.
\164\ See 69 FR 22196-209; 81 FR 32453-60. Where the proposal
follows the methodology used to determine affected workers in both
the 2004 and 2016 final rules citations to both rules are not always
included.
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ii. Data
The estimates of EAP exempt workers were based on data drawn from
the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and
the BLS. The CPS is a large, nationally representative sample of the
labor force. Households are surveyed for four months, excluded from the
survey for eight months, surveyed for an additional four months, then
permanently dropped from the sample. During the last month of each
rotation in the sample (month 4 and month 16), employed respondents
complete a supplementary questionnaire in addition to the regular
survey.\165\ This supplement contains the detailed information on
earnings necessary to estimate a worker's exemption status. Responses
are based on the reference week, which is always the week that includes
the 12th day of the month.
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\165\ This is the outgoing rotation group (ORG); however, this
analysis uses the data merged over twelve months and thus will be
referred to as MORG.
---------------------------------------------------------------------------
Although the CPS MORG is a large scale survey, administered to
approximately 15,000 households monthly representing the entire nation,
it is still possible to have relatively few observations when looking
at subsets of employees, such as exempt workers in a specific
occupation employed in a specific industry, or workers in a specific
geographic location. To increase the sample size, the Department pooled
together three years of CPS MORG data (2015 through 2017). Earnings for
each 2015 and 2016 observation were inflated to 2017 dollars using the
CPI-U. The Department requests comments on whether there are better
options for projecting salary growth than the application of a broad
inflation index, and if a broad index is used, whether it should be
CPI-U, or whether another inflation measure such as the GDP Deflator or
the Personal Consumption Expenditures (PCE) price index would be more
appropriate. The weight of each observation was adjusted so that the
total number of potentially affected EAP workers in the pooled sample
remained the same as the number for the 2017 CPS MORG. Thus, the pooled
CPS MORG sample uses roughly three times as many observations to
represent the same total number of workers in 2017. The additional
observations allow the Department to better characterize certain
attributes of the potentially affected labor force. This pooled dataset
is used to estimate all impacts of the proposed rulemaking. For the
analyses supporting the final rule, the Department anticipates using
pooled CPS-MORG data updated to include 2016 through 2018.
Some assumptions were necessary 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
[[Page 10921]]
worked. This was done because the Department cannot estimate effects
for these workers since it is unknown whether they work overtime and
therefore unknown whether there would be any need to pay for overtime
if their status changed from exempt to nonexempt. The Department
reweighted the rest of the sample to account for this change (i.e., to
keep the same total employment estimates).\166\ 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.\167\
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\166\ The Department also reweighted for workers reporting zero
earnings. In addition, the Department eliminated, without
reweighting, workers who both reported usually working zero hours
and working zero hours in the past week.
\167\ This is justifiable because demographic and employment
characteristics are similar across these two populations (e.g., age,
gender, education, distribution across industries, share paid
nonhourly). The share of all workers who stated that their hours
vary (but provided no additional information) is 5.2 percent. To the
extent these excluded workers are exempt, if they tend to work more
overtime than other workers, then transfer payments and costs may be
underestimated. Conversely, if they work fewer overtime hours, then
transfer payments and costs may be overestimated.
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iii. Number of Workers Covered by the Department's Part 541 Regulations
To estimate the number of workers covered by the FLSA and subject
to the Department's part 541 regulations, the Department excluded
workers who are not subject to its regulations or whom the FLSA does
not cover. This may happen, for instance, if a worker is not an
employee 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, including
members of the military on active duty and unpaid volunteers. Self-
employed and unpaid workers are included in the CPS MORG, but have no
earnings data reported and thus are excluded from the analysis. The
analysis excluded religious workers 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 not the Department's part 541 regulations because the Office
of Personnel Management (OPM) regulates their entitlement to minimum
wage and overtime pay.\168\ Exceptions exist for U.S. Postal Service
employees, Tennessee Valley Authority employees, and Library of
Congress employees.\169\ The analysis identified and included these
covered federal workers using occupation and/or industry codes.\170\
The FLSA also does not cover employees of firms that have annual
revenue of less than $500,000 and who are not engaged in interstate
commerce. The Department does not exclude them from the analysis,
however, 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.
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\168\ See 29 U.S.C. 204(f). Federal workers are identified in
the CPS MORG with the class of worker variable PEIO1COW.
\169\ See id.
\170\ Postal Service employees were identified with the Census
industry classification for postal service (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.
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The Department estimated that in Year 1 there would be 160.7
million wage and salary workers in the United States (Figure 1). Of
these, 135.9 million would be covered by the FLSA and subject to the
Department's regulations (84.6 percent). The remaining 24.8 million
workers would be excluded from FLSA coverage for the reasons described
above. Figure 1 illustrates how the Department analyzed the U.S.
civilian workforce through successive stages to estimate the number of
potentially affected EAP workers.
[[Page 10922]]
[GRAPHIC] [TIFF OMITTED] TP22MR19.000
iv. Number of Workers in the Analysis
After limiting the analysis to workers covered by the FLSA and
subject to the Department's part 541 regulations, several other groups
of workers were identified and excluded from further analysis since
this proposed rule is unlikely to affect them. These include blue
collar workers, workers paid on an hourly basis, and workers who are
exempt under certain other (non-EAP) exemptions.
The Department excluded a total of 89.7 million workers from the
analysis for one or more of these reasons, which often overlapped
(e.g., many blue collar workers are also paid hourly). The Department
estimated that in 2017 there were 49.0 million blue collar workers.
These workers were identified in the CPS MORG data following the
methodology from the U.S. Government Accountability Office's (GAO) 1999
white collar exemptions report \171\ and the Department's 2004
regulatory impact analysis. See 69 FR 22240-44. Supervisors in
traditionally blue collar industries were classified as white collar
workers because their duties are generally managerial or
administrative, and therefore they were not excluded as blue collar
workers. Using the CPS variable indicating a respondent's hourly wage
status, the Department determined that 79.9 million workers were paid
on an hourly basis in 2017.\172\
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\171\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41.
\172\ CPS MORG variable PEERNHRY.
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Also excluded from further analysis were workers who were exempt
under certain other (non-EAP) exemptions. Although some of these
workers may also be exempt under the EAP exemptions, they would
independently remain exempt from the minimum wage and/or overtime pay
provisions based on the non-EAP exemptions. The Department excluded an
estimated 4.9 million workers, including some agricultural and
transportation workers, from further analysis because they would be
subject to another (non-EAP) overtime exemption. See Appendix A:
Methodology for Estimating Exemption Status, contained in the
rulemaking docket, for details on how this population was identified.
Agricultural and transportation workers are two of the largest
groups of workers excluded from the population of potentially affected
EAP workers in the current analysis, and with some exceptions, they
were similarly excluded in 2004. The 2004 final rule excluded all
workers in agricultural industries from the analysis,\173\ while the
current analysis, similar to the 2016 analysis, only excludes
agricultural workers from specified occupational-industry combinations
since not all workers in agricultural industries qualify for the
agricultural overtime pay exemptions. The exclusion of transportation
workers matched the method for the 2004 final rule. 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). The Department excluded 1.0
million agricultural workers and 2.1 million transportation workers
from the analysis. In addition, the Department excluded another 1.8
million workers who fall within one or more other FLSA minimum wage and
overtime exemptions. The criteria for determining exempt status for
agricultural and transportation workers are detailed in
[[Page 10923]]
Appendix A. However, of these 1.8 million workers, all but 23,700 are
either blue collar or hourly, and thus the effect of excluding these
workers is negligible.
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\173\ 69 FR 22197.
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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 rule (i.e., blue collar workers, workers paid hourly, workers
who are subject to another (non-EAP) overtime exemption), the
Department estimated there would be 46.2 million salaried white collar
workers for whom employers might claim either the standard EAP
exemption or the HCE exemption. To be exempt under the standard EAP
test, the employee must:
Be paid a predetermined and fixed salary that is not
subject to reduction because of variations in the quality or quantity
of work performed (the salary basis test); \174\
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\174\ Some computer employees may be exempt even if they are not
paid on a salary basis. 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 Rule (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 Rule. Additionally,
administrative and professional employees may be paid on a fee
basis, as opposed to a salary basis. Sec. 541.605(a). Although, the
CPS MORG does not identify workers paid on a fee basis, they are
considered nonhourly workers in the CPS and consequently are
correctly classified as ``salaried'' (as was done in the 2004 final
rule).
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earn at least a designated salary amount (the 2004 final
rule set the salary level at $455 per week (the standard salary level
test)); and
primarily perform exempt work, as defined by the
regulations (the standard duties test).
The 2004 final rule's HCE test allows certain highly-paid employees
to qualify for exemption as long as they customarily and regularly
perform one or more exempt job duties. The HCE annual compensation
level set in the 2004 final rule was $100,000, including at least $455
per week paid on a salary or fee basis. The CPS annual earnings
variable is topcoded at $150,000 (i.e., workers earning above $2,884.61
($150,000/52 weeks) per week are reported as earning $2,884.61 per
week). Topcoding helps protect respondent confidentiality. Because the
proposed HCE salary level is close to the topcoded value, the
Department imputed earnings for topcoded workers in the CPS data to
adequately estimate affected workers when the HCE compensation level
exceeds $150,000.175 176 Earnings were not imputed for
previous rulemakings because the HCE salary level was significantly
below the topcoded value.
---------------------------------------------------------------------------
\175\ We used the standard Pareto distribution approach to
impute earnings above the topcoded value as described in Armour, P.
and Burkhauser, R. (2013). Using the Pareto Distribution to Improve
Estimates of Topcoded Earnings. Center for Economic Studies (CES).
\176\ Earnings exceeding the topcoded value only affect the
analyses regarding potential updates.
---------------------------------------------------------------------------
Salary Basis
The Department included only nonhourly workers in the analysis
based on CPS data.\177\ For this rulemaking, the Department considered
data representing compensation paid to nonhourly workers to be an
appropriate proxy for compensation paid to salaried workers. The
Department notes that it made the same assumption regarding nonhourly
workers in the 2004 final rule.\178\
---------------------------------------------------------------------------
\177\ The CPS variable PEERNHRY identifies workers as either
hourly or nonhourly.
\178\ See 69 FR 22197.
---------------------------------------------------------------------------
The CPS population of ``nonhourly'' workers includes workers who
are paid on a piece-rate, a day-rate, or largely on bonuses or
commissions. Data in the CPS are not available to distinguish between
salaried workers and these other nonhourly workers. However, the Panel
Study of Income Dynamics (PSID) provides additional information on how
nonhourly workers are paid. In the PSID, respondents are asked how they
are paid on their main job and are also asked for more detail if their
response is other than salaried or hourly. Possible responses include
piecework, commission, self-employed/farmer/profits, and by the job/
day/mile. The Department analyzed the PSID data and found that
relatively few nonhourly workers were paid by methods other than
salaried. The Department is not aware of any statistically robust
source that more closely reflects salary as defined in its regulations.
Salary Level
Weekly earnings are available in the CPS MORG data, which allowed
the Department to estimate how many nonhourly workers pass the salary
level tests.\179\ However, the CPS earnings variable does not perfectly
reflect the Department's definition of earnings. First, the CPS
includes all nondiscretionary bonuses and commissions, which may be
used to satisfy up to 10 percent of the new standard salary level under
this proposed rule. This discrepancy between the earnings variable used
and the FLSA definition of salary may cause a slight overestimation of
the number of workers estimated to meet the standard salary level test.
Second, CPS earnings data includes overtime pay, commissions, and tips.
The Department notes that employers may factor into an employee's
salary a premium for expected overtime hours worked. To the extent they
do so, that premium would be reflected in the data. Similarly, the
Department believes tips will be an uncommon form of payment for these
workers since tips are uncommon for white collar workers. The
Department also believes that commissions make up a relatively small
share of earnings among nonhourly employees.\180\
---------------------------------------------------------------------------
\179\ The CPS MORG variable PRERNWA, which measures weekly
earnings, is used to identify weekly salary.
\180\ In the PSID, relatively few nonhourly workers were paid by
commission. Additionally, according to the BLS ECI, about 5 percent
of the private workforce is incentive-paid workers (incentive pay is
defined as payment that relates earnings to actual individual or
group production). See William J. Wiatrowski, Bureau of Labor
Statistics, The Effect of Incentive Pay on Rates of Change in Wages
and Salaries (November 24, 2009), http://www.bls.gov/opub/mlr/cwc/the-effect-of-incentive-pay-on-rates-of-change-in-wages-and-salaries.pdf, at 1.
---------------------------------------------------------------------------
Duties
The CPS MORG data do not capture information about job duties;
therefore, the Department used occupational titles, combined with
probability estimates of passing the duties test by occupational title,
to estimate the number of workers passing the duties test. This
methodology is very similar to the methodology used in the 2004
rulemaking, and the Department believes it is the best available
methodology. In 2004, to determine whether a worker met the duties
test, the Department used an analysis performed by WHD in 1998 in
response to a request from the GAO. Because WHD enforces the FLSA's
overtime requirements and regularly assesses workers' exempt status,
WHD was uniquely qualified to provide the analysis. The analysis was
used in both the GAO's 1999 white collar exemptions report \181\ and
the Department's 2004 regulatory impact analysis.\182\
---------------------------------------------------------------------------
\181\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, supra note 171, at 40-41, https://www.gao.gov/assets/230/228036.pdf.
\182\ See 69 FR 22198.
---------------------------------------------------------------------------
WHD examined 499 occupational codes, excluding nine that were not
relevant to the analysis for various reasons (one code was assigned to
unemployed persons whose last job was in the Armed Forces, some codes
were assigned to workers who are not FLSA covered, others had no
observations). Of the remaining occupational codes, WHD
[[Page 10924]]
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 3). To illustrate, WHD
assigned exempt probability code 4 to the occupation ``first-line
supervisors/managers of construction trades and extraction workers''
(Census code 6200), which indicates that a worker in this occupation
has a 0 to 10 percent likelihood of meeting the standard EAP duties
test. However, if that worker earned at least $100,000 annually, he or
she was assigned a 15 percent probability of passing the shorter HCE
duties test.
The occupations identified in GAO's 1999 report and used by the
Department in the 2004 final rule map to an earlier occupational
classification scheme (the 1990 Census occupational codes). For this
proposed rule, the Department used occupational crosswalks to map the
previous occupational codes to the 2002 Census occupational codes and
then to the 2010 Census occupational codes, which are used in the CPS
MORG 2015 through 2017 data.\183\ If a new occupation comprises more
than one previous occupation, then the new occupation's probability
code is the weighted average of the previous occupations' probability
codes, rounded to the closest probability code.
---------------------------------------------------------------------------
\183\ References to occupational codes in this analysis refer to
the 2002 Census occupational codes. Crosswalks and methodology
available at: https://www.census.gov/topics/employment/industry-occupation/guidance/code-lists.html.
Table 3--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
(%) (%) (%) (%)
----------------------------------------------------------------------------------------------------------------
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 that an employee
in a category met the duties test but they do not identify the workers
in the CPS MORG who actually passed the test. Therefore, the Department
designated workers as exempt or nonexempt based on the probabilities.
For example, for every ten public relations managers, between five and
nine were estimated to pass the standard duties test (based on
probability category 2). However, it is unknown which of these ten
workers are exempt; therefore, the Department must determine the status
for these workers. Exemption status could be randomly assigned with
equal probability, but this would ignore the earnings of the worker as
a factor in determining the probability of exemption. The probability
of qualifying for the exemption increases with earnings because higher
paid workers are more likely to perform the required duties, an
assumption to which both the Department in the 2004 final rule and the
GAO in its 1999 Report adhered.\184\
---------------------------------------------------------------------------
\184\ For the standard exemption, 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.
---------------------------------------------------------------------------
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.\185\ 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.\186\ However, which particular workers are
designated as exempt may vary with each set of ten random draws. For
details see Appendix A, (in the rulemaking docket).
---------------------------------------------------------------------------
\185\ 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 type of statistical
distribution that is based on two parameters that control the scale
(alpha) and shape (in this context, called the rate parameter,
beta).
\186\ 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 acknowledges that the probability codes used to
determine the share of workers in an occupation who are EAP exempt are
21-years old. However, the Department believes the probability codes
continue to estimate exemption status accurately given the fact that
the standard duties test is not substantively different from the former
short duties tests reflected in the codes. For the 2016 rulemaking, the
Department looked at O*NET \187\ to determine the extent to which the
1998 probability codes reflected current occupational duties. The
Department's review of O*NET verified the continued appropriateness of
the 1998 probability codes.
---------------------------------------------------------------------------
\187\ The O*NET database contains hundreds of standardized and
occupation-specific descriptions. See http://www.onetcenter.org.
---------------------------------------------------------------------------
Potentially Affected Exempt EAP Workers
The Department estimated that of the 46.2 million salaried white
collar workers considered in the analysis, 31.9 million qualified for
the EAP exemption under the current regulations. Some of these workers
were excluded from further analysis because the proposed rule would not
affect them. This excluded group contains workers in named occupations
who are not required to pass the salary requirements
[[Page 10925]]
(although they must still pass a duties test) and therefore whose
exemption status does not depend 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 31.9 million workers who were EAP exempt, 7.6 million, or 23.9
percent, were expected to be in named occupations in 2017. Thus,
changes in the standard salary level and HCE compensation tests would
not affect these workers. The 24.3 million EAP exempt workers remaining
in the analysis are referred to in this proposed rule as ``potentially
affected.''
Based on analysis of the occupational codes and CPS earnings data
(described above), the Department has concluded that in Year 1, in the
baseline scenario in which the rule does not change, of the 24.3
million potentially affected EAP workers, approximately 15.8 million
will pass only the standard EAP test, 8.2 million will pass both the
standard and the HCE tests, and approximately 310,000 will pass only
the HCE test.
C. Determining the Revised Salary and Compensation Levels
For the reasons discussed in section IV.A.iii, the Department has
decided to update the 2004 standard salary level by reapplying the 2004
methodology. Using pooled 2017 CPS MORG data, the 20th percentile of
earnings for full-time salaried workers in the South and/or in the
retail industry roughly corresponds to a standard salary level of
$641.\188\ The proposed rule then inflates this standard salary level
to January 2020 by applying 2.5 years of growth, calculated as the
compound annual growth rate between a weekly salary level of $455
(based on 2002 data) and a weekly salary level of $641 (based on 2017
data) (2.31 percent).\189\ Applying this rate to the $641 salary level
results in a January 2020 salary level of $679.
---------------------------------------------------------------------------
\188\ Excluding workers who are not subject to FLSA, not subject
to the salary level test, or in some agriculture or transportation
occupations.
\189\ The standard salary level of $641 per week was calculated
from 2017 CPS MORG data that included the entire 2017 calendar year.
Thus, the value reflects an average over the entire calendar year,
and is best characterized as representing the salary level at the
midpoint of 2017 (i.e., July 1). Therefore, the Department inflated
both the 2017 standard salary and HCE earnings levels 2.5 years to
estimate the value for January 1, 2020.
---------------------------------------------------------------------------
For the HCE compensation level, the Department used 2017 CPS MORG
data to ascertain the earnings for the 90th percentile of all full-time
salaried workers ($139,464),\190\ which, when inflated to January 2020
using the compound annual growth rate between 2002 and 2017 in the HCE
compensation level (2.24 percent), results in a proposed HCE annual
compensation level of $147,414.\191\
---------------------------------------------------------------------------
\190\ BLS. Available at: https://www.bls.gov/cps/research_nonhourly_earnings_2017.htm.
\191\ The Department used 2002 data to determine the 2004 HCE
earnings level.
---------------------------------------------------------------------------
i. Rationale for the Methodologies Chosen
As explained in greater detail earlier in sections IV.A.iii and
IV.D, upon further consideration, the Department believes that the
earnings thresholds and methodology established in the 2004 final
rule--i.e., the $455 per week standard salary level and the $100,000
per year HCE total annual compensation requirement--were appropriate at
the time they were adopted. Those thresholds have never been challenged
in court, and their use promotes familiarity and stability. The
Department accordingly believes that reapplying the 2004 method to
update the salary levels set in 2004 to account for earnings growth in
the intervening years is also appropriate. The Department proposes to
use the same methodology used in 2004 for the standard salary level,
setting it at the 20th percentile of full-time salaried workers in the
South and/or in the retail sector nationally. The Department proposes
to set the HCE total annual compensation requirement using the 2016
final rule methodology, i.e., equivalent to the earnings of the 90th
percentile of all full-time salaried workers nationally. The Department
proposes to then inflate the salary levels to their anticipated value
in January 2020.
As an alternative, the Department also considered setting the
standard salary level by adjusting the 2004 earnings threshold levels
for inflation, that is, a sustained increase in the general price level
of goods and services over time that can undermine the effectiveness of
the part 541 earnings thresholds. The Department considered using price
indices such as the Personal Consumption Expenditures Price Index
(PCEPI), the Consumer Price Index for All Urban Consumers (CPI-U), and
the Chained CPI-U; as well as a wage-based measure such as the
Employment Cost Index (ECI).
The Department decided against using an index to adjust the 2004
salary level for inflation, because it is not as straightforward,
consistent, or accurate as using current salary data. The Department
believes that an approach that simply updates the 2004 methodology with
current data is preferable to an entirely new methodology. Table 4
presents possible 2017 standard salary levels as calculated using each
alternative approach considered:
Alternative 0: Maintain the average minimum wage
protection in place since 2004.
Alternative 1: Inflate the 2004 weekly salary level using
the PCEPI.
Alternative 2: Inflate the 2004 weekly salary level using
Chained CPI-U.
Alternative 3: Inflate the 2004 weekly salary level using
CPI-U.
Alternative 4: Inflate the 2004 weekly salary level using
the ECI for wages and salaries for civilian workers.
Alternative 5: Inflate the 2004 weekly salary level using
the ECI for wages and salaries for private sector workers.
Table 5 projects the selected 2017 standard salary level of $641 to
January 2020 using each of the inflation indices considered above.
Section VI.D details the transfers, costs, and benefits of the
proposed new salary level and the above alternatives.
Table 4--Standard Salary Level and Alternatives in 2017
----------------------------------------------------------------------------------------------------------------
Total increase \a\
Alternative 2017 salary level -------------------------
(weekly/annually) $ %
----------------------------------------------------------------------------------------------------------------
Alt. #0: Maintain average minimum wage protection since 2004 \d\.. $503/$26,156 48 10.5
Alt. #1: Inflate 2004 level using PCEPI \b\....................... 597/31,044 142 31.2
Alt. #2: Inflate 2004 level using Chained CPI \b\................. 599/31,148 144 31.6
[[Page 10926]]
Alt. #3: Inflate 2004 level using CPI-U \b\....................... 620/32,240 165 36.3
Alt. #4: Inflate 2004 level using ECI civilian \b\................ 639/33,228 184 40.4
Proposed rule: 2004 method \c\.................................... 641/$33,332 186 40.9
Alt. #5: Inflate 2004 level using ECI private \b\................. 643/$33,436 188 41.3
----------------------------------------------------------------------------------------------------------------
\a\ Change between salary level or alternative and the salary level set in 2004 ($455 per week).
\b\ Inflated using growth in the index from 2002 to 2017.
\c\ Calculated using pooled 2015-2017 CPS MORG data.
\d\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
threshold was equivalent to the earnings of an employee working 72.2 hours at the minimum wage (including time-
and-a-half for hours beyond the fortieth in a week). That amount fell with increases in the minimum wage and
is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is
59.6 hours, and a threshold that would provide 59.6 hours of $7.25 minimum wage protection and overtime pay
for hours over 40 would be $503.
Table 5--Alternatives for Projecting the 2017 Earnings Levels to January 2020
----------------------------------------------------------------------------------------------------------------
Standard salary level HCE level
---------------------------------------------------------------
Alternative January 2020 Annual growth January 2020 Annual growth
levels rate (%) levels rate (%)
----------------------------------------------------------------------------------------------------------------
Inflate 2017 levels using PCEPI................. $671 1.83 $145,919 1.83
Inflate 2017 levels using Chained CPI-U......... 671 1.86 146,023 1.86
Inflate 2017 levels using CPI-U................. 675 2.08 146,843 2.08
Inflate 2017 levels using ECI civilian.......... 678 2.29 147,593 2.29
Proposed rule: Inflate 2017 levels using growth 679 2.31 147,414 2.24
in earnings levels.............................
Inflate 2017 levels using ECI private........... 679 2.33 147,742 2.33
----------------------------------------------------------------------------------------------------------------
iii. Methodology for the HCE Total Annual Compensation Level and
Alternative Methods
For the reasons described above, the Department proposes to update
the HCE compensation level using earnings for the 90th percentile of
all full-time salaried workers nationally ($139,464 in 2017), inflated
to January 2020 by applying the average growth in the HCE compensation
levels between 2002 and 2017 (2.24 percent annually). The proposed HCE
compensation level is $147,414 in January 2020.
The Department also evaluated the following alternative HCE
compensation levels:
HCE alternative 1: Leave the HCE compensation level
unchanged at $100,000 per year.
HCE alternative 2: Inflate the 2004 level using the PCEPI.
HCE alternative 3: Inflate the 2004 level using Chained
CPI-U
HCE alternative 4: Inflate the 2004 level using CPI-U.
HCE alternative 5: Inflate the 2004 level using the ECI
for wages and salaries for civilian workers.
HCE alternative 6: Inflate the 2004 level using the ECI
for wages and salaries for private sector workers.
Table 6 presents possible 2017 HCE levels as calculated using each
alternative approach considered.
Table 6--HCE Compensation Levels and Alternatives in 2017
----------------------------------------------------------------------------------------------------------------
Total increase \a\
Alternative Salary level -------------------------
(weekly/ annually) $ %
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change............................................ $1,923/$100,000 0 0.0
HCE alt. #2: Inflate 2004 level using PCEPI \b\................... 2,523/131,189 31,189 31.2
HCE alt. #3: Inflate 2004 level using Chained CPI \b\............. 2,534/131,750 31,750 31.8
HCE alt. #4: Inflate 2004 level using CPI-U \b\................... 2,620/136,253 36,253 36.3
Proposed rule: 90th percentile of full-time salaried workers \c\.. 2,682/139,464 39,464 39.5
HCE alt. #5: Inflate 2004 level using ECI civilian................ 2,702/140,480 40,480 40.5
HCE alt. #6: Inflate 2004 level using ECI private................. 2,718/141,337 41,337 41.3
----------------------------------------------------------------------------------------------------------------
\a\ Change between updated/alternative compensation level and the compensation level set in 2004 ($100,000
annually).
\b\ Inflated using growth in the index from 2002 to 2017.
\c\ 2017 salary level available at: https://www.bls.gov/cps/research_nonhourly_earnings_2017.htm.
[[Page 10927]]
D. Effects of Revised Salary and Compensation Levels
i. Overview and Summary of Quantified Effects
The economic effects of increasing the EAP salary and compensation
levels will depend on how employers respond. Employer response is
expected to vary by the characteristics of the affected EAP workers.
Transfers from employers to employees and between employees, and direct
employer costs depend on how employers respond to finalization of the
proposed rule.
The Department anticipates that the proposed rule, once finalized,
will become effective in 2020. Its proposed standard salary level is
derived using the 2004 methodology, and the HCE compensation level is
derived using the 2016 methodology, in both cases using 2017 CPS data,
then projecting these levels to January 2020.
Given that the Department is using 2017 CPS MORG employment and
earnings data--the most recent data available at the time of analysis--
to estimate the economic effects of the proposed rule taking effect in
2020, and given that such data will change between now and 2020, there
are two options to measure the economic effects of the proposed rule
upon taking effect. One option would be to use the proposed standard
salary and HCE total compensation levels and project the CPS MORG data
forward to 2020. However, such a projection would add ``noise'' to the
CPS MORG data, making an analysis using such projections less accurate.
A second option would be to measure the economic effects of the
proposed rule by using the most recent CPS MORG data to determine the
2017 standard salary and HCE compensation levels as if the rule were to
be promulgated in 2017. The potential impacts of the rule are then
assessed using 2017 population characteristics. When measuring the
number of workers affected, using a 2017 salary level on the 2017 CPS
MORG data is a good approximation of a 2020 level on the earnings data
of workers in 2020, so the second option better reflects the economic
effects of the proposed rule than the first option. Therefore, the
Department chose to analyze the economic effects of a standard salary
level of $641 per week and an annual HCE compensation level of $139,464
using 2017 CPS MORG data as the best representation of likely economic
effects of the proposed standard salary level of $679 per week and an
annual HCE compensation level of $147,414 taking effect in 2020.
Table 7 presents the estimated number of affected workers, costs,
and transfers associated with increasing the salary and compensation
levels. The Department estimated that the direct employer costs of this
proposed rule would total $464.2 million in the first year, with 10-
year annualized direct costs of $112.6 million per year using a 3
percent real discount rate and $120.5 million per year using a 7
percent real rate.
In addition to these direct costs, this proposed rule would
transfer income from employers to employees. Year 1 transfers would
equal $526.9 million, with annualized transfers estimated at $428.0
million and $429.4 million per year using the 3-percent and 7-percent
real discount rates, respectively. Potential employer costs due to
reduced profits and additional hiring were not quantified but are
discussed in section VI.D.iii.
Table 7--Summary of Affected Workers and Regulatory Costs and Transfers, Standard and HCE Earnings Thresholds
----------------------------------------------------------------------------------------------------------------
Future years \b\ Annualized value
---------------------------------------------------------------
Impact \a\ Year 1 3% Real 7% Real
Year 2 Year 10 Discount Rate Discount Rate
----------------------------------------------------------------------------------------------------------------
Affected Workers (1000s)
----------------------------------------------------------------------------------------------------------------
Standard........................ 1,070 1,027 625 .............. ..............
HCE............................. 201 215 426 .............. ..............
-------------------------------------------------------------------------------
Total....................... 1,271 1,241 1,051 .............. ..............
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions in 2017$)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization...... $324.9 $0.0 $0.0 $37.0 $43.2
Adjustment \c\.................. 66.6 1.5 3.6 10.0 11.2
Managerial...................... 72.7 72.7 64.2 65.6 66.0
-------------------------------------------------------------------------------
Total direct costs \d\...... 464.2 74.2 67.8 112.6 120.5
----------------------------------------------------------------------------------------------------------------
Transfers from Employers to Workers (Millions in 2017) e
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............. 57.0 30.4 17.6 27.7 28.6
Due to overtime pay............. 469.9 390.9 429.5 400.3 400.7
-------------------------------------------------------------------------------
Total transfers \d\......... 526.9 421.3 447.1 428.0 429.4
----------------------------------------------------------------------------------------------------------------
\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\ Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in
years without updated earnings thresholds because some workers' projected earnings are estimated using
negative earnings growth.
\d\ Components may not add to total due to rounding.
\e\ This is the net transfer from employers to workers. There may also be transfers between workers.
[[Page 10928]]
ii. Affected EAP Workers
1. Overview
The Department estimated there are 24.3 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, the standard salary
level test, the HCE total compensation level test, and the HCE duties
test (but not the standard duties test). This number excluded workers
in named occupations, who are not subject to the salary tests, or those
who qualify for another (non-EAP) exemption.
Using the proposed method described above, the Department estimated
that if the rule were promulgated today, the standard salary level
would increase from $455 per week to $641 per week and would affect 1.1
million exempt workers in Year 1 (Figure 2).\192\ Based on currently
available data, the Department projects that if the final rule becomes
effective in 2020, the standard salary level will be $679 per week. The
Department also estimated that the HCE annual compensation level would
increase from $100,000 to $139,464 if the rule went into effect today,
and 201,100 workers would be affected in Year 1 (the number of workers
who earn at least $100,000 but less than $139,464 and pass the minimal
HCE duties test but not the standard duties test).\193\ The Department
projects that if the final rule takes effect in 2020, the HCE
compensation level will be $147,414. In total, the Department expects
that 1.3 million workers will be affected in Year 1 by the proposed
earnings threshold increases, composing about 5.2 percent of the pool
of potentially affected EAP workers.
---------------------------------------------------------------------------
\192\ This group includes workers who may currently be nonexempt
under more protective state EAP laws and regulations, such as some
workers in Alaska, California, and New York.
\193\ The 2016 final rule applied joint probabilities to
estimate the number of affected HCE workers (i.e., the number of HCE
workers who pass the HCE duties test but fail the standard duties
test). In order to provide a more accurate estimate, this NPRM
applies conditional probabilities to determine the number of
affected HCE workers.
[GRAPHIC] [TIFF OMITTED] TP22MR19.001
Table 8 presents the number of affected EAP workers, the mean
number of overtime hours they work per week, and their average weekly
earnings. The 1.1 million workers affected by the increase in the
standard salary level work on average 1.6 usual hours of overtime per
week and earn on average $564 per week.\194\ However, the majority of
these workers (about 86 percent) work zero usual hours of overtime. The
14 percent of affected workers who regularly work overtime average 11.4
hours of overtime per week. The 201,100 EAP workers affected by the
change in the HCE compensation level average 4.9 hours of overtime per
week and earn an average of $2,179 per week ($113,327 per year). About
60 percent of these workers work zero usual hours of overtime while the
40 percent who work usual hours of overtime average 12.4 hours of
overtime per week.
---------------------------------------------------------------------------
\194\ CPS defines ``usual hours'' as hours worked 50 percent or
more of the time.
---------------------------------------------------------------------------
Although most affected EAP workers who typically do not work
overtime are unlikely to experience significant changes in their daily
work routine, those who regularly work overtime may experience
significant changes. Moreover, affected EAP workers who routinely work
overtime and earn less than the minimum wage are most likely to
experience significant changes because of the revised standard salary
level.\195\ Employers might respond by paying overtime premiums;
reducing or eliminating overtime hours; reducing employees' regular
wage rates (provided that the reduced rates still exceed the minimum
wage); increasing employees' salary to the updated salary level to
preserve their exempt status (although this will be less common for
affected workers earning below the minimum wage); or using some
combination of these responses.
---------------------------------------------------------------------------
\195\ A small proportion (1.4 percent) of affected EAP workers
earn 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. For example, workers
earning the currently enforced $455 per week standard salary level
would earn less than the federal minimum wage if they work 63 or
more hours in a week ($455/63 hours = $7.22 per hour).
[[Page 10929]]
Table 8--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, Year 1
----------------------------------------------------------------------------------------------------------------
Affected EAP Workers \a\
-------------------------------- Mean overtime
Type of affected EAP worker Number hours Mean usual weekly earnings
(1,000s) % of total
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers.......... 1,070 100 1.6 $564
Earn less than the minimum wage 15 1.4 24.1 516
\b\..............................
Regularly work overtime........... 152 14.2 11.4 562
CPS occasionally work overtime \c\ 41 3.8 8.2 566
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers.......... 201 100 4.9 2,179
Earn less than the minimum wage .............. .............. .............. ............................
\b\..............................
Regularly work overtime........... 80 39.8 12.4 2,198
CPS occasionally work overtime \c\ 10 4.9 9.3 2,140
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\b\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE
workers will not be affected by the minimum wage provision. These workers all regularly work overtime and are
also included in that row.
\c\ Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual
overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These
workers are identified later.
The Department considered two types of overtime workers in this
analysis: Regular overtime workers and occasional overtime
workers.\196\ 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 considered these two populations
separately in the analysis because labor market responses to overtime
pay requirements may differ for these two types of workers.
---------------------------------------------------------------------------
\196\ Regular overtime workers were identified in the CPS MORG
with variable PEHRUSL1. Occasional overtime workers were identified
with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------
In a representative week, the increases in the standard salary
level and the HCE compensation level affected an estimated 51,000
occasional overtime workers (4.0 percent of all affected EAP workers).
They averaged 8.4 hours of overtime in the weeks they worked overtime.
This group represents the number of workers with occasional overtime
hours in the week the CPS MORG survey was conducted. 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).
2. Characteristics of Affected EAP Workers
In this section, the Department examined the characteristics of EAP
workers whom the proposed rule would affect. Table 9 presents the
distribution of affected EAP workers by industry and occupation, using
Census industry and occupation codes. The industry with the most
affected EAP workers would be education and health services (293,000),
while the industry with the highest percentage of affected EAP workers
would be leisure and hospitality (about 10 percent). The occupation
category with the most affected EAP workers would be management,
business, and financial (484,000), while the occupation category with
the highest percentage of affected EAP workers would be in services
(about 14 percent).
Finally, approximately 7 percent of potentially affected workers in
private nonprofits would be affected compared with about 5 percent in
private for-profit firms. However, as discussed in section VI.B.iii,
our estimates of workers subject to the FLSA include workers employed
by enterprises that do not meet the enterprise coverage requirements
because there is no reliable way of estimating that population.
Although failing to exclude workers who work for non-covered
enterprises would only affect a small percentage of workers generally,
it may have a larger effect (and result in a larger overestimate) for
workers in nonprofits because when determining enterprise coverage only
revenue derived from business operations, not charitable activities, is
included.
Table 9--Estimated Number of Exempt Workers with the Current and Updated Salary Levels, by Industry and
Occupation, Year 1
----------------------------------------------------------------------------------------------------------------
Workers Potentially Affected as
subject to affected EAP Not-affected Affected share of
Industry/occupation/nonprofit FLSA workers (millions) \b\ (millions) \c\ potentially
(millions) (millions) \a\ affected (%)
----------------------------------------------------------------------------------------------------------------
Total........................... 135.92 24.29 23.02 1.27 5.2
----------------------------------------------------------------------------------------------------------------
By Industry \d\
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, 1.28 0.04 0.04 0.00 5.7
& hunting......................
[[Page 10930]]
Mining.......................... 0.81 0.21 0.20 0.01 2.7
Construction.................... 7.92 0.91 0.88 0.04 4.2
Manufacturing................... 15.34 3.50 3.39 0.11 3.1
Wholesale & retail trade........ 19.18 2.55 2.37 0.18 6.9
Transportation & utilities...... 7.30 0.88 0.84 0.05 5.3
Information..................... 2.73 0.95 0.90 0.05 5.2
Financial activities............ 9.46 3.65 3.48 0.17 4.6
Professional & business services 15.02 5.24 5.05 0.19 3.7
Education & health services..... 33.26 3.98 3.69 0.293 7.4
Leisure & hospitality........... 12.96 0.86 0.78 0.08 9.5
Other services.................. 5.44 0.61 0.56 0.05 8.5
Public administration........... 5.24 0.90 0.84 0.05 6.1
----------------------------------------------------------------------------------------------------------------
By Occupation \d\
----------------------------------------------------------------------------------------------------------------
Management, business, & 20.29 12.23 11.75 0.48 4.0
financial......................
Professional & related.......... 31.48 8.34 7.93 0.41 4.9
Services........................ 23.71 0.20 0.18 0.03 14.5
Sales and related............... 13.77 2.34 2.13 0.21 9.0
Office & administrative support. 17.72 0.96 0.84 0.12 12.3
Farming, fishing, & forestry.... 0.96 0.00 0.00 0.00 0.0
Construction & extraction....... 6.41 0.02 0.02 0.00 6.8
Installation, maintenance, & 4.58 0.04 0.04 0.00 7.5
repair.........................
Production...................... 8.43 0.10 0.09 0.01 8.0
Transportation & material moving 8.57 0.04 0.03 0.01 13.3
----------------------------------------------------------------------------------------------------------------
By Nonprofit and Government Status
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 9.46 1.93 1.80 0.13 6.6
For profit, private............. 107.97 20.36 19.35 1.01 5.0
Government (state, local, and 18.49 2.00 1.86 0.13 6.6
federal).......................
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and
not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\d\ Census industry and occupation categories.
Table 10 presents the distribution of affected EAP workers based on
Census Regions and divisions, and metropolitan statistical area (MSA)
status. The region with the most affected workers would be the South
(544,000), but the South's percentage of affected workers is similar to
other regions (6.4 percent as compared to 4.4 to 5.0 percent
elsewhere). Although 89 percent of affected EAP workers would reside in
MSAs (1.14 of 1.27 million), so do a corresponding 88 percent of all
workers subject to the FLSA.\197\
---------------------------------------------------------------------------
\197\ Identified with CPS MORG variable GTMETSTA.
---------------------------------------------------------------------------
Employers in low-wage industries, regions, and non-metropolitan
areas may be more affected because they typically pay lower wages and
salaries. However, the Department believes the salary level adopted in
this proposed rule is appropriate for these lower-wage sectors because
the methodology used in 2004, and applied for this rulemaking, used
earnings data in the low-wage retail industry and the low-wage Southern
region. Effects by region and industry are considered in section
VI.D.vi.
Table 10--Estimated Number of Potentially Affected EAP Workers with the Current and Updated Salary Levels, by
Region, Division, and MSA Status, Year 1
----------------------------------------------------------------------------------------------------------------
Workers Potentially Affected as
Region/division/metropolitan subject to affected EAP Not-affected Affected share of
status FLSA workers (millions) \b\ (millions) \c\ potentially
(millions) (millions) \a\ affected
----------------------------------------------------------------------------------------------------------------
Total........................... 135.92 24.29 23.02 1.27 5.2
----------------------------------------------------------------------------------------------------------------
[[Page 10931]]
By Region/Division
----------------------------------------------------------------------------------------------------------------
Northeast....................... 24.99 5.09 4.86 0.23 4.4
New England................. 6.81 1.46 1.40 0.06 3.9
Middle Atlantic............. 18.18 3.63 3.46 0.17 4.7
Midwest......................... 30.05 5.03 4.78 0.25 5.0
East North Central.......... 20.38 3.43 3.26 0.17 5.0
West North Central.......... 9.67 1.60 1.51 0.08 5.0
South........................... 49.36 8.53 7.99 0.54 6.4
South Atlantic.............. 25.88 4.80 4.49 0.31 6.4
East South Central.......... 7.38 0.99 0.92 0.07 7.5
West South Central.......... 16.10 2.74 2.58 0.16 6.0
West............................ 31.52 5.64 5.39 0.25 4.5
Mountain.................... 9.93 1.66 1.57 0.09 5.3
Pacific..................... 21.59 3.98 3.82 0.16 4.1
----------------------------------------------------------------------------------------------------------------
By Metropolitan Status
----------------------------------------------------------------------------------------------------------------
Metropolitan.................... 118.99 22.66 21.53 1.14 5.0
Non-metropolitan................ 15.94 1.52 1.40 0.13 8.3
Not identified.................. 0.99 0.10 0.09 0.01 8.9
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and
not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
iii. Costs
1. Summary
The Department quantified three direct costs to employers in this
analysis: (1) Regulatory familiarization costs; (2) adjustment costs;
and (3) managerial costs. The Department estimated costs for Year 1
assuming that the rule will go into effect in 2020 (Table 11). The
Department estimated that in Year 1, regulatory familiarization costs
would be $324.9 million, adjustment costs would be $66.6 million, and
managerial costs would be $72.7 million. Total direct employer costs in
Year 1 would be $464.2 million.
Table 11--Summary of Year 1 Direct Employer Costs
[Millions]
----------------------------------------------------------------------------------------------------------------
HCE
Direct employer costs Standard compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\.................................. .............. .............. $324.9
Adjustment...................................................... $56.1 $10.5 $66.6
Managerial...................................................... 55.4 17.3 72.7
Total direct costs.......................................... 111.4 27.9 464.2
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the
HCE compensation level.
Adjustment costs and management costs are recurring, so we also
projected them for years 2 through 10 in section VI.D.viii. The
Department discusses costs that are not quantified in section
VI.D.iii.5.
2. Regulatory Familiarization Costs
Changing the standard salary level and the HCE total compensation
level will impose direct costs on firms by requiring them to review the
regulation. To estimate these ``regulatory familiarization costs,''
three pieces of information must be estimated: (1) The number of
affected establishments; (2) a wage level for the employees reviewing
the rule; and (3) the amount of time employees spend reviewing the
rule.
It is unclear whether regulatory familiarization costs are a
function of the number of establishments or the number of firms. To
avoid underestimating these costs, the Department assumed that
regulatory familiarization occurs at a decentralized level and used the
number of establishments in its cost estimate; this results in a higher
estimate than would result from using the number of firms. The most
recent data on private sector establishments at the time this NPRM was
drafted are from the 2015 Statistics of U.S. Businesses (SUSB), which
reports 7.66 million establishments with paid employees.\198\
Additionally, there were an estimated 90,106 state and local
governments in 2012, the most recent
[[Page 10932]]
data available.\199\ We thus estimated 7.75 million establishments
altogether.
---------------------------------------------------------------------------
\198\ Statistics of U.S. Businesses 2015, https://www.census.gov/programs-surveys/susb.html.
\199\ 2012 Census of Governments: Government Organization
Summary Report, http://www2.census.gov/govs/cog/g12_org.pdf.
---------------------------------------------------------------------------
The Department believes that all establishments will incur some
regulatory familiarization costs, even if they do not employ exempt
workers, because all establishments will need to confirm whether this
proposed rule includes any provisions that may affect their employees.
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 regulation will probably follow
the initial decision that the firm is affected). However, the
Department did not know the distribution of affected EAP workers across
firms, so it used an average cost per establishment.
The Department believes one hour per establishment is appropriate
because the EAP exemptions have existed in one form or another since
1938. The most significant change proposed by this rulemaking is
setting a new standard salary level for exempt workers, and the
proposed changed regulatory text is only a few pages. The Department
thus believes that one hour is an appropriate average estimate for the
time each establishment will spend reviewing the changes made by this
rulemaking. Time spent to implement the necessary changes was included
in adjustment costs. The Department invites comments and data on the
time required for regulatory familiarization.
The Department's analysis assumed that mid-level human resource
workers with a median wage of $25.64 per hour will review the proposed
rule.\200\ The Department also assumed that benefits are paid at a rate
of 46 percent of the base wage \201\ and overhead costs are paid at a
rate of 17 percent of the base wage,\202\ resulting in an hourly rate
of $41.91. The Department thus estimates regulatory familiarization
costs in Year 1 would be $324.9 million ($41.91 per hour x 1 hour x
7.75 million establishments).\203\
---------------------------------------------------------------------------
\200\ The median wage in the pooled 2017 CPS data for workers
with the Census 2010 occupations ``human resources workers'' (0630);
``compensation, benefits, and job analysis specialists'' (0640); and
``training and development specialists'' (0650). The Department
determined these occupations include most of the workers who would
conduct these tasks. See Bureau of Labor Statistics, U.S. Department
of Labor, Occupational Outlook Handbook.
\201\ The benefits-earnings ratio is derived from the BLS's
Employer Costs for Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate
includes some fixed costs such as health insurance.
\202\ The Department believes that the overhead costs associated
with this rule are small because existing systems maintained by
employers to track currently hourly employees can be used for newly
overtime eligible workers. However, acknowledging that there might
be additional overhead costs, we have included an overhead rate of
17 percent. Because the 2016 final rule did not include overhead
costs in its cost and transfer estimates, estimated costs and
transfers associated with the 2016 final rule have been recalculated
for comparison purposes in section VI.D.ix.
\203\ As previously noted, the Department used the number of
establishments rather than the number of firms, which results in a
higher estimate of the regulatory familiarization cost. Using the
number of firms, 6.0 million, would result in a reduced regulatory
familiarization cost estimate of $251.1 million in Year 1.
---------------------------------------------------------------------------
3. Adjustment Costs
Changes in the standard salary level and HCE compensation level
would also impose direct costs on firms by requiring them to evaluate
the exemption status of employees, update and adapt overtime policies,
notify employees of policy changes, and adjust their payroll
systems.\204\ The Department believes the size of these ``adjustment
costs'' will depend on the number of affected EAP workers and will
occur in any year when exemption status is changed for any workers. To
estimate adjustment costs, three pieces of information must be
estimated: (1) A wage level for the employees making the adjustments;
(2) the amount of time spent making the adjustments; and (3) the
estimated number of newly affected EAP workers. The Department again
estimated that the average wage with benefits and overhead costs for a
mid-level human resource worker would be $41.91 per hour (as explained
above).
---------------------------------------------------------------------------
\204\ While some companies may need to reconfigure information
technology systems to include both exempt and overtime-protected
workers, the Department notes that most organizations affected by
the rule already employ overtime-eligible workers and have in place
payroll systems and personnel practices (e.g., requiring advance
authorization for overtime hours) so that additional costs
associated with the rule should be relatively small in the short
run.
---------------------------------------------------------------------------
The Department estimated that it will take establishments an
average of 75 minutes per affected worker to make the necessary
adjustments. Little applicable data were identified from which to
estimate the amount of time required to make these adjustments.\205\
Therefore, the Department used the estimate of 1.25 hours from the 2016
final rule after reviewing public comments on the 2015 NPRM. The
estimated number of affected EAP workers in Year 1 is 1.3 million (as
discussed in section VI.D.ii). Therefore, total Year 1 adjustment costs
would be $66.6 million ($41.91 x 1.25 hours x 1.3 million workers).
---------------------------------------------------------------------------
\205\ Costs from the 2004 final rule were considered, but
because that revision included changes to the duties test, the cost
estimates are not directly applicable; in addition, the 2004 final
rule did not separately account for managerial costs. The 2015 NPRM
separately accounted for managerial costs. Some commenters responded
with higher time estimates, but these estimates were not
substantiated with data or were considered excessive.
---------------------------------------------------------------------------
A reduction in the cost to employers of determining employees'
exempt status may partially offset adjustment costs. Currently, to
determine whether an employee is exempt, employers must apply the
duties test to salaried workers who earn at least $455 per week. If
finalized as proposed, firms will no longer be required to apply the
potentially time-consuming duties test to employees earning less than
the proposed standard salary level. This will be a clear cost savings
to employers for the approximately 3.6 million salaried employees (2.0
million in white collar occupations and 1.6 million in blue collar
occupations) who do not pass the duties test and earn at least $455 per
week but less than the updated salary level. The Department did not
estimate the potential size of this cost savings.
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 because the employer may spend more time developing work
schedules and closely monitoring an employee's hours to minimize or
avoid overtime. For example, the manager of a reclassified worker may
have to assess whether the marginal benefit of scheduling the worker
for more than 40 hours exceeds the marginal cost of paying the overtime
premium. Additionally, the manager may have to spend more time
monitoring the employee's work and productivity since the marginal cost
of employing the worker per hour has increased. Unlike regulatory
familiarization and adjustment costs, which occur primarily in Year 1,
managerial costs are incurred more uniformly every year.
There was little precedent or data to aid in evaluating these
costs. With the exception of the 2016 rulemaking, prior part 541
rulemakings did not estimate managerial costs. The Department likewise
found no estimates of managerial costs after reviewing the literature.
We thus used the same methodology as the 2016 final rule, which the
Department adopted after considering comments on the 2015 NPRM.
The Department applied managerial costs to workers who (1) are
reclassified as nonexempt, overtime-protected and (2) either regularly
work overtime or occasionally work overtime, but on a
[[Page 10933]]
predictable basis--an estimated 344,300 workers (see Table 14 and
accompanying explanation). 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 nonexempt, overtime-eligible as a result of this rule,
and whose hours are adjusted. As 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. For that group of workers, management will have
little or no need to increase their monitoring of hours worked;
therefore, these workers are not included in the managerial cost
calculation. Under these assumptions, the additional managerial hours
worked per week would be 28,700 hours ((5 minutes/60 minutes) x 344,300
workers).
The median hourly wage in 2017 for a manager was $29.81 and
benefits were estimated to be paid at a rate of 46 percent of the base
wage.\206\ Together with the 17 percent overhead costs used for this
analysis, this totals $48.72 per hour. Thus, the Year 1 managerial
costs would total $72.7 million (28,700 hours/week x 52 weeks x $48.72/
hour). Although the exact magnitude would vary with the number of
affected EAP workers each year, employers would incur managerial costs
annually.
---------------------------------------------------------------------------
\206\ Calculated as the projected median wage in the CPS for
workers in management occupations (excluding chief executives) in
2015-2017, adjusted to reflect 2017. The adjustment ratio is derived
from the BLS' Employer Costs for Employee Compensation data using
variables CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------
The Department believes that most companies already manage a mix of
exempt and nonexempt employees and have policies and recordkeeping
systems in place for nonexempt employees. Thus, most companies would be
unlikely to purchase systems or hire additional monitoring personnel as
a result of this rulemaking. Moreover, this rulemaking would not impose
any new recordkeeping requirements.
5. Other Potential Costs
In addition to the costs discussed above, the proposed rule may
impose additional costs that have not been quantified. These costs are
discussed qualitatively below, but we note that in some cases (e.g.,
schedule flexibility, salaried status) these costs may directly affect
workers' wages because they face a tradeoff in the labor market between
cash wages and the nonpecuniary aspects of jobs.\207\
---------------------------------------------------------------------------
\207\ See, e.g., Ashenfelter, O. & Layard, R. (1986). Handbook
of Labor Economics. Volume 1. 641-92. https://www.sciencedirect.com/science/article/abs/pii/S1573446386010155.
---------------------------------------------------------------------------
Reduced Scheduling Flexibility
Exempt workers may enjoy more scheduling flexibility because their
hours are less likely to be monitored than nonexempt workers. If so,
the proposed rule could impose costs on newly nonexempt, overtime-
eligible workers by, for example, limiting their ability to adjust
their schedules to meet personal and family obligations. But the
proposed rule does not require employers to reduce scheduling
flexibility. Employers can continue to offer flexible schedules and
require workers to monitor their own hours and to follow the employers'
timekeeping rules. Additionally, some exempt workers already monitor
their hours for billing purposes. For these reasons, and because there
is little data or literature on these costs, the Department did not
quantify potential costs regarding scheduling flexibility.
Preference for Salaried Status
Some of the workers that become nonexempt as a result of the
proposed rule and are changed by their employer from salaried to hourly
status may have preferred to remain salaried. Research has shown that
salaried workers are more likely than hourly workers to receive
benefits such as paid vacation time and health insurance,\208\ and are
more satisfied with their benefits.\209\ Additionally, when employer
demand for labor decreases, hourly workers tend to see their hours cut
before salaried workers, making earnings for hourly workers less
predictable.\210\ 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.
---------------------------------------------------------------------------
\208\ 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.
\209\ Balkin, D. B., & Griffeth, R. W. (1993). The Determinants
of Employee Benefits Satisfaction. Journal of Business and
Psychology, 7(3), 323-339.
\210\ 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. In A. Booth, & A. C. Crouter, Work-
Life Policies that Make a Real Difference for Individuals, Families,
and Communities. Washington, DC: Urban Institute Press.
---------------------------------------------------------------------------
If workers are reclassified as hourly, and hourly workers have
fewer benefits than salaried workers, this could reduce workers'
benefits. But the Department notes that this rule does not require such
reclassification. These workers may continue to be paid a salary, as
long as that salary is equivalent to a base wage at least equal to the
minimum wage rate for every hour worked, and the employee receives a 50
percent premium on that base wage for any overtime hours each
week.\211\
---------------------------------------------------------------------------
\211\ Sec. Sec. 778.113-.114.
---------------------------------------------------------------------------
Quality of Services
To the extent that employers respond to this rule by restricting
employee work hours, this rulemaking could negatively affect the
quality of public services provided by local governments and
nonprofits. However, the Department believes the effect of the rule on
public services will be small. The Department acknowledges that some
employees who work overtime providing public services may see a
reduction in hours as an effect of the rulemaking. But if the services
are in demand, the Department believes additional workers may be hired,
as funding availability allows, to make up some of these hours, and
productivity increases may offset some reduction in services. In
addition, the Department expects many employers will adjust base wages
downward to some degree so that even after paying the overtime premium,
overall pay and hours of work for many employees will be relatively
minimally impacted. Additionally, as noted above, many nonprofits are
non-covered enterprises because when determining enterprise coverage
only revenue derived from business operations, not charitable
activities, are included.
Increased Prices
Business firms may pass along increased labor costs to consumers
through higher prices. The Department anticipates that some firms may
offset part of the additional labor costs through charging higher
prices for the firms' goods and services. However, because costs and
transfers are, on average, small relative to payroll and revenues, the
Department does not expect the proposed rule to have a significant
effect on prices. The Department estimated that, on average, costs and
transfers make up less than 0.02 percent of payroll and less than 0.003
percent of revenues, although for specific industries and firms this
percentage may be larger. Therefore, any potential change in prices
would be modest. Further, any significant price increases would not
represent a separate category of effects from those estimated
[[Page 10934]]
in this economic analysis; rather, such price increases (where they
occur) would be the channel through which consumers, rather than
employers or employees, bear rule-induced costs (including transfers).
Reduced Profits
The increase in workers' earnings resulting from the revised salary
level is a transfer of income from firms to workers, not a cost. The
Department acknowledges that the increased employer costs and transfer
payments as a result of this proposed rule may reduce the profits of
business firms, although (1) some firms may offset some of these costs
and transfers by making payroll adjustments, and (2) some firms may
mitigate their reduced profits due to these costs and transfers through
increased prices.\212\ To the extent that the proposed rule would
reduce profits at business firms after all these adjustments are made,
these firms would have marginally lower after-tax returns on new
investments in equipment, structures, and intellectual property and
would therefore make fewer such investments going forward. All else
equal, less business investment slows economic growth and reduces
employment. However, the Department expects that any anti-growth
effects of the proposed rule would be minimal.
---------------------------------------------------------------------------
\212\ Because costs and transfers compose on average less than
0.003 percent of revenues, the Department expects any such price
increases to be minor.
---------------------------------------------------------------------------
Hiring Costs
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 rule.
iv. Transfers
1. Overview
Transfer payments occur when income is redistributed from one party
to another. The Department has quantified two transfers from employers
to employees that would likely result from the proposed rule: (1)
Transfers to ensure compliance with the FLSA minimum wage provision;
and (2) transfers to ensure compliance with the FLSA overtime pay
provision. Transfers in Year 1 due to the minimum wage provision were
estimated to be $57.0 million. The increase in the HCE compensation
level does not affect minimum wage transfers because workers eligible
for the HCE exemption earn well above the minimum wage. Transfers due
to the overtime pay provision would be $469.9 million: $195.5 million
from the increased standard salary level and $274.3 million from the
increased HCE compensation level. Total Year 1 transfers would be
$526.9 million (Table 12).
Table 12--Summary of Year 1 Regulatory Transfers
[Millions]
----------------------------------------------------------------------------------------------------------------
HCE
Transfer from employers to workers Standard compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............................................. $57.0 $0.0 $57.0
Due to overtime pay............................................. 195.5 274.3 469.9
-----------------------------------------------
Total transfers............................................. 252.5 274.3 526.9
----------------------------------------------------------------------------------------------------------------
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.
2. Transfers Due to the Minimum Wage Provision
For purposes of this analysis, the hourly rate of pay was
calculated as usual weekly earnings divided by usual weekly hours
worked. To earn less than the federal or state minimum wage, this set
of workers must work many hours per week. For example, a worker paid
$455 per week must work 62.8 hours to earn less than the federal
minimum wage of $7.25 per hour ($455/$7.25 = 62.8).\213\ The applicable
minimum wage is the higher of the federal minimum wage and the state
minimum wage as of January 1, 2017. Most affected EAP workers already
receive at least the minimum wage; only an estimated 1.4 percent of
them (15,100 in total) 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.\214\
---------------------------------------------------------------------------
\213\ Workers in states with minimum wages higher than the
federal minimum wage could earn less than the state minimum wage
working fewer hours.
\214\ Because these workers' hourly wages will be set at the
minimum wage after this 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. Since the
quantity of labor hours demanded is inversely related to wages, a
higher mandated wage will result in fewer hours of labor demanded. 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 -0.2.\215\
---------------------------------------------------------------------------
\215\ This elasticity estimate represents a short run demand
elasticity for general labor, and 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. We selected a general labor demand elasticity because
employers will adjust their demand based on the cumulative change in
employees' earnings, not on a conceptual differentiation between
increases attributable to the minimum wage and the overtime
provisions of the FLSA.
---------------------------------------------------------------------------
At the new standard salary level, the Department estimated that
15,100 affected EAP workers would, on average, see an hourly wage
increase of $1.45, work 3.2 fewer hours per week, and receive an
increase in weekly earnings of $72.68 as a result of
[[Page 10935]]
coverage by the minimum wage provisions (Table 13). The total change in
weekly earnings due to the payment of the minimum wage was estimated to
be $1.1 million per week ($72.68 x 15,100) or $57.0 million in Year 1.
Table 13--Minimum Wage Only: Mean Hourly Wages, Usual Overtime Hours, and Weekly Earnings for Affected EAP
Workers, Year 1
----------------------------------------------------------------------------------------------------------------
Total weekly
Hourly wage Usual weekly Usual weekly transfer
\a\ hours earnings (1,000s)
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............................ $8.29 64.1 $515.88 ..............
After Proposed Rule............................. 9.75 61.0 588.56 ..............
Change.......................................... 1.45 -3.2 72.68 $1,097
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.
3. Transfers Due to the Overtime Pay Provision
Introduction
The proposed rule will transfer income to affected workers who work
in excess of 40 hours per week. Requiring an overtime premium increases
the marginal cost of labor, which employers will likely try to offset
by adjusting wages and/or hours of affected workers. The size of the
transfer will depend largely on how employers respond to the updated
salary levels. Employers may respond by: (1) Paying overtime premiums
to affected workers; (2) reducing overtime hours of affected workers
and potentially transferring some of these hours to other workers; (3)
reducing the regular rate of pay for affected workers working overtime
(provided that the reduced rates still exceed the minimum wage); (4)
increasing affected workers' salaries to the updated salary or
compensation level to preserve their exempt status; or (5) using some
combination of these responses. How employers will respond depends on
many factors, including the relative costs of each of these
alternatives; in turn, the relative costs of each of these alternatives
are a function of workers' earnings and hours worked.
Literature on Employer Adjustments
Two conceptual models are useful for thinking about how employers
may respond to reclassifying certain employees as overtime-eligible:
(1) The ``fixed-wage'' or ``labor demand'' model, and (2) the ``fixed-
job'' or ``employment contract'' model.\216\ 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.
---------------------------------------------------------------------------
\216\ 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 fixed-wage model assumes that the standard hourly wage is
independent of the statutory overtime premium. Under the fixed-wage
model, a reclassification of workers from overtime exempt to overtime
non-exempt would cause a reduction in overtime hours for affected
workers, an increase in the prevalence of a 40-hour workweek among
affected workers, and an increase in the earnings of affected workers
who continue to work overtime.
In contrast, the fixed job model assumes that the standard hourly
wage is affected by the statutory overtime premium. Thus, employers can
neutralize any reclassification of workers from overtime exempt to
overtime non-exempt by reducing the standard hourly wage of affected
workers so that their weekly earnings and hours worked are unchanged,
except when minimum wage laws prevent employers from lowering the
standard hourly wage below the minimum wage. Under the fixed-job model,
a reclassification of workers from overtime exempt to overtime non-
exempt would have differential effects on minimum-wage workers and
above-minimum-wage workers. Similar to the fixed-wage model, minimum-
wage workers would experience a reduction in overtime hours, an
increase in the prevalence of a 40-hour workweek at a given employer
(though not necessarily overall), and an increase in earnings for the
portion of minimum-wage workers that continue to work overtime for a
given employer. Unlike the fixed-wage model, however, above-minimum-
wage workers would experience no change.
The Department conducted a literature review to evaluate studies of
how labor markets adjust to a change in the requirement to pay
overtime. In general, these studies are supportive of the fixed-job
model of labor market adjustment, in that wages adjust to offset the
requirement to pay an overtime premium as predicted by the fixed-job
model, but do not adjust enough to completely offset the overtime
premium as predicted by the model.
The Department believes the two most important papers in this
literature are the studies by Trejo (1991) and Barkume (2010).
Analyzing the economic effects of the overtime pay provisions of the
FLSA, Trejo (1991) found ``the data analyzed here suggest the wage
adjustments occur to mitigate the purely demand-driven effects
predicted by the fixed-wage model, but these adjustments are not large
enough to neutralize the overtime pay regulations completely.'' Trejo
noted, ``In accordance with the fixed job model, the overtime law
appears to have a greater impact on minimum-wage workers.'' He also
stated, ``[T]he finding that overtime pay coverage status
systematically influences the hours-of-work distribution for non-
minimum wage works is supportive of the fixed-wage model. No
significant differences in weekly earnings were discovered between the
covered and non-covered sectors, which is consistent with the fixed-job
model.'' However, ``overtime pay compliance is higher for union than
for nonunion workers, a result that is more easily reconciled with the
fixed wage model.'' Trejo's findings are supportive of the fixed-wage
model whose adjustment is incomplete largely due to the minimum-wage
requirement.\217\
---------------------------------------------------------------------------
\217\ Trejo, S. J. (1991). The Effects of Overtime Pay
Regulation on Worker Compensation. American Economic Review, 81(4),
719-740.
---------------------------------------------------------------------------
A second paper by Trejo (2003) took a different approach to testing
the consistency of the fixed-wage adjustment models with overtime
coverage and data on hours worked. In this paper, he examined time-
series data on employee hours by industry. After controlling for
underlying trends in hours worked over 20 years, he found changes in
overtime coverage had no
[[Page 10936]]
impact on the prevalence of overtime hours worked. This result supports
the fixed-job model. Unlike the 1991 paper, however, he did not examine
impacts of overtime coverage on employees' weekly or hourly earnings,
so this finding in support of the fixed-job model only analyzes one
implication of the model.\218\
---------------------------------------------------------------------------
\218\ Trejo, S. J. (2003). Does the Statutory Overtime Premium
Discourage Long Workweeks? Industrial and Labor Relations Review,
56(3), 375-392.
---------------------------------------------------------------------------
Barkume (2010) built on the analytic method used in Trejo
(1991).\219\ However, Barkume observed that Trejo did not account for
``quasi-fixed'' employment costs (e.g., benefits) that do not vary with
hours worked, and therefore affect employers' decisions on overtime
hours worked. After incorporating these quasi-fixed costs in the model,
Barkume found results consistent with those of Trejo (1991): ``though
wage rates in otherwise similar jobs declined with greater overtime
hours, they were not enough to prevent the FLSA overtime provisions
from increasing labor costs.'' Barkume also determined that the 1991
model did not account for evidence 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.\220\ Barkume found that how much wages and hours worked
adjusted in response to the overtime pay requirement depended on what
overtime pay would be in absence of regulation.
---------------------------------------------------------------------------
\219\ Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
\220\ 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.
---------------------------------------------------------------------------
In addition, Bell and Hart (2003) examined the standard hourly
wage, average hourly earnings (including overtime), the overtime
premium, and overtime hours worked in the United Kingdom. Unlike the
United States, the United Kingdom does not have national labor laws
regulating overtime compensation. Bell and Hart found that after
accounting for overtime, average hourly earnings are generally uniform
in a given industry because firms paying below-market level straight-
time wages tend to pay above-market overtime premiums and firms paying
above-market level straight-time wages tend to pay below-market
overtime premiums. Bell and Hart concluded ``this is consistent with a
model in which workers and firms enter into an implicit contract that
specifies total hours at a constant, market-determined, hourly wage
rate.\221\ Their research is also consistent with studies showing that
employers may pay overtime premiums either in the absence of a
regulatory mandate (e.g., Britain), or when the mandate exists but the
requirements are not met (e.g., United States).\222\
---------------------------------------------------------------------------
\221\ Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and
Overtime Premia: Evidence from the British Labor Market, Industrial
and Labor Relations Review, 56(3), 470-480.
\222\ Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an
Overtime Premium? IZA Discussion Paper No. 163
---------------------------------------------------------------------------
On balance, the Department finds strong support for the fixed-job
model as the best approximation for the likely effects of a
reclassification of above-minimum-wage workers from overtime exempt to
overtime non-exempt and the fixed-wage model as the best approximation
of the likely effects of a reclassification of minimum-wage workers
from overtime exempt to overtime non-exempt. In addition, the studies
suggest that although observed wage adjustment patterns are consistent
with the fixed-job model, this evidence also suggests that the actual
wage adjustment is less than 100 percent as predicted by the fixed-job
model. Thus, the hybrid model used in this analysis may be described as
a substantial, but incomplete fixed-job model.
To determine the magnitude of the adjustment, the Departments
accounted for the following findings. 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.\223\ Barkume (2010) found that the
measured adjustment of wages and hours to overtime premium requirements
depended on what overtime premium might be paid in absence of any
requirement to do so. Thus, when Barkume assumed that workers would
receive an average voluntary overtime pay premium of 28 percent in the
absence of an overtime pay regulation, which is the average overtime
premium that Bell and Hart (2003) found British employers paid in the
absence of any overtime regulations, the straight time hourly wage
adjusted downward by 80 percent of the amount that would occur with the
fixed-job model. When Barkume assumed workers would receive no
voluntary overtime pay premium in the absence of an overtime pay
regulation, the results were more consistent with Trejo's (1991)
findings that the adjustment was a smaller percentage. The Department
modeled an adjustment process between these two findings. Although 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 because this assumption is based on
a study of 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.\224\
---------------------------------------------------------------------------
\223\ 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.
\224\ 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.
---------------------------------------------------------------------------
The Department requests comment on this analysis, and how employers
would likely respond to an increase in the salary level.
Identifying Types of Affected Workers
The Department identified four types of workers whose work
characteristics affect how it modeled employers' responses to the
changes in both the standard and HCE salary levels:
Type 1: Workers who do not work overtime.
Type 2: Workers who do not regularly work overtime but
occasionally work overtime.
Type 3: Workers who regularly work overtime and become
overtime eligible (nonexempt).
Type 4: Workers who regularly work overtime and remain
exempt, because it is less expensive for the employer to pay the
updated salary level than to pay overtime and incur additional
managerial costs.\225\
---------------------------------------------------------------------------
\225\ There is some evidence that employers will respond in this
manner. In response to the RFI, one employer association reported
that when making adjustments in anticipation of the 2016 final rule,
more than 40 percent of its members raised the salaries of at least
one worker above the 2016 final rule salary level. Similarly, 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.
---------------------------------------------------------------------------
[[Page 10937]]
The Department began by identifying the number of workers in each
type. After modeling employer adjustments, it estimated transfer
payments. Type 3 and 4 workers were identified as those who regularly
work overtime (CPS variable PEHRUSL1 greater than 40). Distinguishing
Type 3 workers from Type 4 workers involved a four-step process. First,
the Department identified all workers who regularly work overtime. Then
the Department estimated each worker's weekly earnings if they became
nonexempt, to which it added weekly managerial costs for each affected
worker of $4.06 ($48.72 per hour x (5 minutes/60 minutes)).\226\ Last,
the Department identified as Type 4 those workers whose expected
nonexempt earnings plus weekly managerial costs exceeds the updated
standard salary level, and, conversely, as Type 3 those whose expected
nonexempt earnings plus weekly managerial costs are less than the new
standard salary.\227\ The Department assumed that firms will include
incremental managerial costs in their determination of whether to treat
an affected employee as a Type 3 or Type 4 worker because those costs
are only incurred if the employee is a Type 3 worker.
---------------------------------------------------------------------------
\226\ See supra Sec. VI.D.iii.4 (managerial costs).
\227\ When analyzing impacts of increasing the standard salary
level, Rohwedder and Wenger conducted a similar analysis; however,
they use straight-time pay rather than overtime pay to calculate
earnings in the absence of a pay raise to remain exempt. Rohwedder,
S. and Wenger, supra note 163.
---------------------------------------------------------------------------
Identifying Type 2 workers involved two steps. First, using CPS
MORG data, the Department identified those who do not usually work
overtime but did work overtime in the survey week (the week referred to
in the CPS questionnaire, variable PEHRACT1 greater than 40). Next, the
Department supplemented the CPS data with data from the Survey of
Income and Program Participation (SIPP) to look at likelihood of
working some overtime during the year. Based on 2012 data, the most
recent available, the Department found that 39.4 percent of non-hourly
workers worked overtime at some point in a year. Therefore, the
Department classified a share of workers who reported they do not
usually work overtime, and did not work overtime in the reference week
(previously identified as Type 1 workers), as Type 2 workers such that
a total of approximately 39.4 percent of affected workers were Type 2,
3, or 4.
Modeling Changes in Wages and Hours
The substantial, but incomplete fixed-job model (hereafter referred
to as the incomplete fixed-job model) predicts that employers will
adjust wages of regular overtime workers but not to the full extent
indicated by fixed-job model, and thus some employees may receive a
small increase in weekly earnings due to overtime pay coverage.
Therefore, when modeling employer responses with respect to the
adjustment to the regular rate of pay, the Department used the
incomplete fixed-job model.
The Department determined that an appropriate estimate of the
effect on the implicit hourly rate of pay for regular overtime workers
should be determined using the average of two estimates of the
incomplete fixed-job model adjustments: Trejo's (1991) estimate that
the overtime-induced wage change is 40 percent of the adjustment toward
the amount predicted by the fixed-job model, assuming an initial zero
overtime pay premium, and Barkume's (2010) estimate that the wage
change is 80 percent of the predicted adjustment assuming an initial 28
percent overtime pay premium.\228\ This is approximately equivalent to
assuming that salaried overtime workers implicitly receive the
equivalent of a 14 percent overtime premium in the absence of
regulation (the midpoint between 0 and 28 percent).
---------------------------------------------------------------------------
\228\ 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 salaried workers. We do
not attempt to quantify the magnitude of this potential
overestimate.
---------------------------------------------------------------------------
Modeling changes in wages, hours, and earnings for Type 1 and Type
4 workers was relatively straightforward. Type 1 affected EAP workers
will become overtime-eligible, but because they do not work overtime,
they will see no change in their weekly earnings. Type 4 workers will
remain exempt because their earnings will be raised to at least the
updated EAP level (either the standard salary level or HCE compensation
level). These workers' earnings will increase by the difference between
their current earnings and the amount necessary to satisfy the new
salary or compensation level. It is possible employers will increase
these workers' hours in response to paying them a higher salary, but
the Department did not have enough information to model this potential
change.\229\
---------------------------------------------------------------------------
\229\ Cherry, Monica, ``Are Salaried Workers Compensated for
Overtime Hours?'' Journal of Labor Research 25(3): 485-494,
September 2004, found that exempt full-time salaried employees earn
more when they work more hours, but her results do not lend
themselves to the quantification of the effect on hours of an
increase in earnings.
---------------------------------------------------------------------------
Modeling changes in wages, hours, and earnings for Type 2 and Type
3 workers was more complex. The Department distinguished those who
regularly work overtime (Type 3 workers) from those who occasionally
work overtime (Type 2 workers) because employer adjustment to the
proposed rule may differ accordingly. Employers are more likely to
adjust hours worked and wages for regular overtime workers because
their hours are predictable. However, in response to a transient,
perhaps unpredicted, shift in market demand for the good or service
such employers provide, employers are more likely to pay for occasional
overtime rather than adjust hours worked and pay.
The Department treated Type 2 affected workers in two ways due to
the uncertainty of the nature of these occasional overtime hours. The
Department assumed that 50 percent of these occasional overtime workers
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 (incomplete fixed-job model adjustments).
Workers with unexpected occasional overtime hours were assumed to
receive a 50 percent pay premium for the overtime hours worked and
receive no change in base wage or hours (full overtime premium
model).\230\ When modeling Type 2 workers' hour and wage adjustments,
the Department treated those identified as Type 2 using the CPS data as
representative of all Type 2 workers. The Department estimated employer
adjustments and transfers assuming that the patterns observed in the
CPS reference week are representative of an average week in the year.
Thus, the Department assumes total transfers for the year are equal to
52-times the transfers estimated for the single representative week for
which the Department has CPS data. However, these transfers are spread
over a larger group including those who occasionally
[[Page 10938]]
work overtime but did not do so in the CPS reference week.\231\
---------------------------------------------------------------------------
\230\ We use the term ``full overtime premium'' to describe the
adjustment process as modeled. The full overtime premium model is a
special case of the general fixed-wage model in that the Department
assumes the demand for labor under these circumstances is completely
inelastic. That is, employers make no changes to employees' hours in
response to these temporary, unanticipated changes in demand.
\231\ 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 identified in the CPS data in the given week is
representative of an average week in the year.
---------------------------------------------------------------------------
Since employers must now pay more for the same number of labor
hours, for Type 2 and Type 3 EAP workers, the quantity of labor hours
demanded by employers will decrease. It is the net effect of these two
changes that will determine the final weekly earnings for affected EAP
workers. The reduction in hours is calculated using the elasticity of
labor demand with respect to wages. The Department used a short-term
demand elasticity of -0.20 to estimate the percentage decrease in hours
worked in Year 1 and a long-term elasticity of -0.4 to estimate the
percentage decrease in hours worked in Years 2-10.\232\ The Department
acknowledges that the academic literature on elasticity can be
interpreted in multiple ways, and invites comment on the appropriate
elasticity to use.
---------------------------------------------------------------------------
\232\ 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 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 concludes 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 fixed-job model.
---------------------------------------------------------------------------
For Type 3 affected workers, and the 50 percent of Type 2 affected
workers who worked expected overtime, the Department estimated adjusted
total hours worked after making wage adjustments using the incomplete
fixed-job model. To estimate adjusted hours worked, the Department set
the percent change in total hours worked equal to the percent change in
average wages multiplied by the wage elasticity of labor demand.\233\
---------------------------------------------------------------------------
\233\ 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 3 is a flow chart summarizing the four types of affected EAP
workers. Also shown are the effects on exempt status, weekly earnings,
and hours worked for each type of affected worker.
[[Page 10939]]
[GRAPHIC] [TIFF OMITTED] TP22MR19.002
[[Page 10940]]
[GRAPHIC] [TIFF OMITTED] TP22MR19.003
In response to the Department's RFI and at the listening sessions,
some commenters provided information concerning their proposed wage and
hour adjustments in anticipation of an increase to the standard salary
level and HCE total compensation level. Employers indicated they would
respond by making a variety of adjustments to wages, hours worked, or
both.
Estimated Number of and Effects on Affected EAP Workers
The Department estimated the proposed rule would affect 1.3 million
workers (Table 14), of which 760,100 were Type 1 workers (59.8 percent
of all affected EAP workers), 279,500 were estimated to be Type 2
workers (22.0 percent of all affected EAP workers), 204,600 were Type 3
workers (16.1 percent of all affected EAP workers), and 27,100 were
estimated to be Type 4 workers (2.1 percent of all affected workers).
All Type 3 workers and half of Type 2 employees (344,300) are assumed
to work predictable overtime.
Table 14--Affected EAP Workers by Type (1,000s), Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
No overtime Occasional -------------------------------
Total (T1) overtime (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard salary level........... 1,070.2 648.9 269.6 127.4 24.3
HCE compensation level.......... 201.1 111.2 9.9 77.2 2.8
-------------------------------------------------------------------------------
Total....................... 1,271.3 760.1 279.5 204.6 27.1
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
The proposed rule would affect some affected workers' hourly wages,
hours, and weekly earnings. Predicted changes in implicit wage rates
are outlined in Table 15, changes in hours in Table 16, and changes in
weekly earnings in Table 17. How these would change depends on the type
of worker, but on average weekly earnings would be unchanged or
increase while hours worked would be unchanged or decrease.
Type 1 workers would have no change in wages, hours, or
earnings.\234\ Employers were assumed to be unable to adjust the hours
or regular rate of pay for the occasional overtime workers whose
overtime is irregularly scheduled and unpredictable. The Department
used the incomplete fixed-job model to estimate changes in the regular
rate of pay for Type 3 workers and the 50 percent of Type 2 workers who
regularly work occasional overtime. As a group, Type 2 workers would
see a decrease in their average regular hourly wage; however, because
workers would 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.\235\
---------------------------------------------------------------------------
\234\ 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.
\235\ 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 in this week exceed that new level. This is because the
estimated new earnings only reflect their earnings in that week when
overtime is worked; their earnings in typical weeks that they do not
work overtime do not exceed the salary level.
---------------------------------------------------------------------------
Similarly, Type 3 workers would also receive decreases in their
regular hourly wage as predicted by the incomplete fixed-job model but
an increase in weekly earnings because these workers would now be
eligible for the overtime premium. Type 4 workers' implicit hourly
rates of pay would increase to meet the updated standard salary level
or HCE annual compensation level.
[[Page 10941]]
Table 15--Average Regular Rate of Pay by Type of Affected EAP Worker, Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
No overtime Occasional -------------------------------
Total (T1) overtime (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............ $15.70 $16.74 $15.78 $11.32 $10.35
After Proposed Rule............. $15.65 $16.74 $15.72 $10.83 $11.01
Change ($)...................... -$0.06 $0.00 -$0.05 -$0.49 $0.66
Change (%)...................... -0.4% 0.0% -0.3% -4.3% 6.3%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............ $49.71 $54.41 $53.51 $42.66 $44.21
After Proposed Rule............. $48.58 $54.41 $50.70 $40.04 $45.08
Change ($)...................... -$1.13 $0.00 -$2.81 -$2.61 $0.87
Change (%)...................... -2.3% 0.0% -5.2% -6.1% 2.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
* Type 1: Workers without regular OT and without occasional OT and become overtime-eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime-eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
Hours for Type 1 workers would not change. Similarly, hours would
not change for the half of Type 2 workers who work irregular overtime.
Half of Type 2 and all Type 3 workers would see a small decrease in
their hours of overtime worked. This reduction in hours is relatively
small and is due to the effect on labor demand from the increase in the
average hourly wage as predicted by the incomplete fixed-job model
(Table 16). Type 4 workers' hours may increase, but due to lack of
data, the Department assumed hours would not change.
Table 16--Average Weekly Hours for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
Regular OT
No overtime Occasional OT -------------------------------
Total worked (T1) (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............ 39.7 37.2 39.2 49.6 60.5
After Proposed Rule............. 39.6 37.2 39.2 49.1 60.5
Change (hours).................. -0.1 0.0 0.0 -0.5 0.0
Change (%)...................... -0.2% 0.0% -0.1% -0.9% 0.0%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............ 45.1 39.5 49.3 52.1 61.3
After Proposed Rule............. 44.9 39.5 49.0 51.7 61.3
Change (hours).................. -0.2 0.0 -0.3 -0.4 0.0
Change (%)...................... -0.4% 0.0% -0.6% -0.7% 0.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
Because Type 1 workers would 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 17). Although both Type 2 and Type 3
workers would, on average, experience a decrease in both their regular
rate of pay and hours worked, their weekly earnings would increase as a
result of the overtime premium. Weekly earnings after the standard
salary level increased were estimated using the new wage (i.e., the
incomplete fixed-job model wage) and the reduced number of overtime
hours worked. Type 4 workers' salaries would increase to the new
standard salary level or the HCE compensation level.
[[Page 10942]]
Table 17--Average Weekly Earnings for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
No overtime Occasional -------------------------------
Total (T1) overtime (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............ $563.76 $558.32 $577.87 $555.45 $596.04
After Proposed Rule............. $568.30 $558.32 $583.34 $573.43 $641.00
Change ($)...................... $4.54 $0.00 $5.47 $17.98 $44.96
Change (%)...................... 0.8% 0.0% 0.9% 3.2% 7.5%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............ $2,179.37 $2,126.62 $2,623.44 $2,182.02 $2,627.16
After Proposed Rule............. $2,205.61 $2,126.62 $2,683.14 $2,240.70 $2,682.00
Change ($)...................... $26.23 $0.00 $59.70 $58.68 $54.84
Change (%)...................... 1.2% 0.0% 2.3% 2.7% 2.1%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the
weekly earnings because the product of two averages is not necessarily equal to the average of the product.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
At the new standard salary level, the average weekly earnings of
all affected workers would increase $4.54 (0.8 percent), from $563.76
to $568.30. Multiplying the average change of $4.54 by the 1.1 million
affected standard EAP workers and 52 weeks equals an increase in
earnings of $252.5 million in the first year (Table 18). For workers
affected by the change in the HCE compensation level, average weekly
earnings would increase by $26.23. When multiplied by 201,100 affected
workers and 52 weeks, the national increase would be $274.3 million in
the first year. Thus, total Year 1 transfer payments attributable to
this proposed rule would total $526.9 million.
Table 18--Total Change in Weekly and Annual Earnings for Affected EAP
Workers by Provision, Year 1
------------------------------------------------------------------------
Annual change
Provision in earnings
(1,000s)
------------------------------------------------------------------------
Total................................................... $526,894
Standard salary level:
Total............................................... 252,546
Minimum wage only................................... 57,041
Overtime pay only a................................. 195,505
HCE compensation level:
Total............................................... 274,348
Minimum wage only................................... ..............
Overtime pay only a................................. 274,348
------------------------------------------------------------------------
a Estimated by subtracting the minimum wage transfer from the total
transfer.
Rohwedder and Wenger (2015) analyzed the effects of increasing the
standard salary level.\236\ They compared hourly and salaried workers
in the CPS using quantile treatment effects. This methodology estimates
the effect of a worker becoming nonexempt by comparing similar workers
who are hourly and salaried. They found no statistically significant
change in hours or wages on average. However, their point estimates,
averaged across all affected workers, show small increases in earnings
and decreases in hours, similar to our analysis. For example, using a
salary level of $750, they estimated weekly earnings may increase
between $2 and $22 and weekly hours may decrease by approximately 0.4
hours. The Department estimated weekly earnings for workers affected by
the standard salary level would increase by $4.54 and hours would
decrease by 0.1 hours.
---------------------------------------------------------------------------
\236\ Rohwedder and Wenger, supra note 163.
---------------------------------------------------------------------------
4. Potential Transfers Not Quantified
There may be additional transfers attributable to this proposed
rule; however, the magnitude of these other transfers could not be
quantified and therefore are discussed only qualitatively.
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 rule.
[[Page 10943]]
Additional Work for Some Workers
Affected workers who remain exempt would see an increase in pay but
may also see an increase in workload. The Department estimated the net
changes in hours, but due to the data limitations as noted in section
VI.D.iv.3, did not estimate changes in hours for affected workers whose
salary is increased to the new threshold so they remain overtime
exempt.
Reduction in Bonuses and Benefits for Some Workers
Employers may offset increased labor costs by reducing bonuses or
benefits instead of reducing base wages or hours worked. Due to data
limitations, the Department has not modeled this effect separately. The
Department observes that any reductions in bonuses or benefits would be
likely accompanied by smaller reductions in base wages or hours worked.
v. Benefits and Cost Savings
Potential Benefits and Effects Not Discussed Elsewhere
The Department has determined that the proposed rulemaking would
provide some benefits; however, these benefits could not be quantified
due to data limitations, requiring the Department to discuss such
benefits only qualitatively.
1. Reduce Employee Misclassification
The revised salary level reduces the likelihood of workers being
misclassified as exempt from overtime pay, providing an additional
measure of the effectiveness of the salary level as a bright-line test
delineating exempt and nonexempt workers. The Department's analysis of
misclassification drew on CPS data and looked at workers who are white
collar, salaried, subject to the FLSA and covered by part 541
regulations, earn at least $455 but less than $641 per week, and fail
the duties test. Because only workers who work overtime may receive
overtime pay, when determining the share of workers who are
misclassified the sample was limited to those who usually work
overtime. Workers were considered misclassified if they did not receive
overtime pay.\237\ The Department estimated that 9.3 percent of workers
in this analysis who usually worked overtime did not receive overtime
compensation and are therefore misclassified as exempt. Applying this
estimate to the sample of white collar salaried workers who fail the
duties test and earn at least $455 but less than $641 (the 2017
proposed salary level used for the RIA), the Department estimated that
there are approximately 188,100 white collar salaried workers who are
overtime-eligible but whose employers do not recognize them as
such.\238\ These employees' entitlement to overtime pay will now be
abundantly evident.
---------------------------------------------------------------------------
\237\ Overtime pay status was based on worker responses to the
CPS MORG question concerning whether they receive overtime pay,
tips, or commissions at their job (``PEERNUOT'' variable).
\238\ The Department applies the misclassification estimate
derived here to both the group of workers who usually work more than
40 hours and to those who do not.
---------------------------------------------------------------------------
RAND has conducted a survey to identify the number of workers who
may be misclassified as EAP exempt. The survey, a special module to the
American Life Panel, asks respondents: (1) Their hours worked, (2)
whether they are paid on an hourly or salary basis, (3) their typical
earnings, (4) whether they perform certain job responsibilities that
are treated as proxies for whether they would justify exempt status,
and (5) whether they receive any overtime pay. Using these data, Susann
Rohwedder and Jeffrey B. Wenger \239\ found ``11.5 percent of salaried
workers were classified as exempt by their employer although they did
not meet the criteria for being so.'' Using RAND's estimate of the rate
of misclassification (11.5 percent), the Department estimated that
approximately 232,400 salaried workers earning between $455 and $641
per week who fail the standard duties test are currently misclassified
as exempt.\240\ By raising the salary level the proposed rule will
increase the likelihood that these workers will be correctly classified
as nonexempt.
---------------------------------------------------------------------------
\239\ Rohwedder and Wenger, supra note 163.
\240\ The number of misclassified workers estimated based on the
RAND research cannot be directly compared to the Department's
estimates because of differences in data, methodology, and
assumptions. Although it is impossible to reconcile the two
different approaches without further information, by calculating
misclassified workers as a percent of all salaried workers in its
sample, RAND uses a larger denominator than the Department. If
calculated on a more directly comparable basis, the Department
expects the RAND estimate of the misclassification rate would still
be higher than the Department's estimate.
---------------------------------------------------------------------------
2. Reduced Litigation
One result of enforcing the 2004 standard salary level for 14 years
is that the established ``dividing line'' between EAP workers who are
exempt and not exempt has gradually eroded and no longer holds the same
relative position in the distribution of nominal wages and salaries.
Therefore, as nominal wages and salaries for workers have increased
over time, while the standard salary level has remained constant, more
workers earn above the ``dividing line'' and have moved from nonexempt
to potentially exempt. The Department's enforcement of the 2004 salary
levels has burdened employers with performing duties tests to determine
overtime exemption status of white collar workers for a larger
proportion of workers than in 2004 and has created uncertainty
regarding the correct classification of workers as nonexempt or exempt.
This may have contributed to an increase in FLSA lawsuits since
2004,\241\ much of which has involved cases regarding whether workers
who satisfy the salary level test also meet the duties test for
exemption.
---------------------------------------------------------------------------
\241\ See https://www.washingtonpost.com/news/wonk/wp/2015/11/25/people-are-suing-more-than-ever-over-wages-and-hours/?utm_term=.c8dcc2783351; https://www.bna.com/uptick-flsa-litigation-n57982064020/.
---------------------------------------------------------------------------
Updating the standard salary level should restore the relative
position of the standard salary level in the overall distribution of
nominal wages and salaries as set forth in the 2004 rule. Additionally,
proposed regular updates to the standard salary level would maintain
its desired position within the distribution of nominal wages and
salaries and therefore would keep the standard salary test's
effectiveness as a ``dividing line'' for separating nonexempt and
potentially exempt EAP workers. Increasing the standard salary level
from $455 per week to the proposed level of $679 per week would
increase the number of white collar workers for whom the standard
salary-level test is determinative of their nonexempt status, and
employers would no longer have to perform a duties analysis for these
employees. This would reduce the burden on employers and may reduce
legal challenges and the overall cost of litigation faced by employers
in FLSA overtime lawsuits, specifically litigation that turns on
whether workers earning above the current standard salary level ($455
per week) pass the duties test. The size of the potential social
benefit from fewer legal challenges and the corresponding decline in
overall litigation costs is difficult to quantify, but a reduction in
litigation costs would be beneficial to both employers and workers.
To provide a general estimate of the size of the potential benefits
from reducing litigation, the Department used data from the federal
courts' Public Access to Court Electronic Records (PACER) system and
the CPS to estimate the number and percentage of FLSA cases that
concern EAP exemptions and are likely to be affected by the proposed
rule. For this step of the analysis, to avoid using data that could
reflect changed behavior in anticipation of the 2016 final rule, the
Department used the
[[Page 10944]]
data gathered during the 2016 rulemaking. As explained in that rule, to
determine the potential number of cases that would likely be affected
by the proposed rule, the Department obtained a list of all FLSA cases
closed in 2014 from PACER (8,256 cases).\242\ From this list, the
Department selected a random sample of 500 cases. The Department
identified the cases within this sample that were associated with the
EAP exemption. The Department found that 12.0 percent of these FLSA
cases (60 of 500) were related to the EAP exemptions. Next the
Department determined what share of these cases could potentially be
avoided by an increase in the standard salary and HCE compensation
levels.
---------------------------------------------------------------------------
\242\ See 81 FR 32501.
---------------------------------------------------------------------------
The Department estimated the share of EAP cases that may be avoided
due to the proposed rule by using data on the salaried earnings
distribution from the 2017 CPS MORG to determine the share of EAP cases
in which workers earn at least $455 but less than $641 per week or at
least $100,000 but less than $139,464 annually. From CPS, the
Department selected white collar, nonhourly workers as the appropriate
reference group for defining the earnings distribution rather than
exempt workers because if a worker is litigating his or her exempt
status, then we do not know if that worker is exempt or not. Based on
this analysis, the Department determined that 21.3 percent of white
collar nonhourly workers had earnings within these ranges. Applying
these findings to the 12 percent of cases associated with the EAP
exemption yields an estimated 2.6 percent of FLSA cases, or about 211
cases, that may be avoidable. The assumption underlying this method is
that workers who claim they are misclassified as EAP exempt have a
similar earnings distribution as all white collar nonhourly workers.
After determining the potential number of EAP cases that the
proposed rule may avoid, the Department examined a selection of 56 FLSA
cases concluded between 2012 and 2015 that contained litigation cost
information to estimate the average costs of litigation to assign to
the potentially avoided EAP cases.\243\ To calculate average litigation
costs associated with these cases, the Department looked at records of
court filings in the Westlaw Case Evaluator tool and on PACER to
ascertain how much plaintiffs in these cases were paid for attorney
fees, administrative fees, and/or other costs, apart from any monetary
damages attributable to the alleged FLSA violations. (The FLSA provides
for successful plaintiffs to be awarded reasonable attorney's fees and
costs, so this data is available in some FLSA cases.) After determining
the plaintiff's total litigation costs for each case, the Department
then doubled the figures to account for litigation costs that the
defendant employers incurred.\244\ According to this analysis, the
average litigation cost for FLSA cases concluded between 2012 and 2015
was $654,182.\245\ Applying this figure to approximately 211 EAP cases
that could be prevented as a consequence of this rulemaking, the
Department estimated that avoided litigation costs resulting from the
rule may total approximately $138.2 million per year. The Department
believes these totals may underestimate total litigation costs because
some FLSA overtime cases are heard in state court and thus were not
captured by PACER; some FLSA overtime matters are resolved before
litigation or by alternative dispute resolution; and some attorneys
representing FLSA overtime plaintiffs may take a contingency fee atop
their statutorily awarded fees and costs.
---------------------------------------------------------------------------
\243\ The 56 cases used for this analysis were retrieved from
Westlaw's Case Evaluator database using a keyword search for case
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and
``fees.'' Although the initial search yielded 64 responsive cases,
the Department excluded one duplicate case, one case resolving
litigation costs through a confidential settlement agreement, and
six cases where the defendant employer(s) ultimately prevailed.
Because the FLSA only entitles prevailing plaintiffs to litigation
cost awards, information about litigation costs was only available
for the remaining 56 FLSA cases that ended in settlement agreements
or court verdicts favoring the plaintiff employees.
\244\ This is likely a conservative approach to estimate the
total litigation costs for each FLSA lawsuit, as defendant employers
tend to incur greater litigation costs than plaintiff employees
because of, among other things, typically higher discovery costs.
\245\ The median cost was $111,835 per lawsuit.
---------------------------------------------------------------------------
3. Benefits of Transparency and Certainty
The proposed rule also affirms the Department's intention to update
the part 541 earnings thresholds every four years going forward. This
would help maintain the relative position of the standard salary and
HCE compensation levels in the overall distribution of nominal wages
and salaries over time. Proposing to adjust the standard salary level
and HCE compensation test every four years may provide social benefits
from increased transparency and certainty for employers.
The Department believes an update to the salary level tests is long
overdue. Long periods between adjustments result in large changes in
the salary levels to restore the appropriate relative position of the
``dividing line'' between nonexempt and potentially exempt workers. The
size and unpredictability of these changes in the past are challenging
and costly to employers, because there are significant familiarization,
adjustment, and managerial costs associated with infrequent updates.
The Department hopes to increase transparency and certainty by
proposing to update the salary levels routinely. Adjustments that are
more frequent would be smaller and make compliance easier and less
costly to employers, compared to large adjustments, which are more
disruptive. Employers would be aware of the timing of proposed updates
and would be able to anticipate the increase beforehand. The increased
transparency and certainty in regards to future proposed adjustments
would help employers make more effective short- and long-term
employment decisions, as well as improve their estimates of future
costs.
vi. Sensitivity Analysis
This section includes estimated costs and transfers using either
different assumptions or segments of the population. First, the
Department presents bounds on transfer payments estimated using
alternative assumptions. Second, the Department considers costs and
transfers by region and by industry.
1. Bounds on Transfer Payments
Because the Department cannot predict employers' precise reaction
to the proposed rule, the Department calculated bounds on the size of
the estimated transfers from employers to workers. These bounds on
transfers do not generate bounded estimates for costs.
For a reasonable upper bound on transfer payments, the Department
assumed that all occasional overtime workers and half of regular
overtime workers would receive the full overtime premium (i.e., such
workers would work the same number of hours but be paid 1.5 times their
implicit initial hourly wage for all overtime hours) (Table 19). The
full overtime premium model is a special case of the fixed-wage model
where there is no change in hours. For the other half of regular
overtime workers, the Department assumed in the upper-bound method that
they would have their implicit hourly wage adjusted as predicted by the
incomplete fixed-job model (wage rates fall and hours are reduced but
total earnings continue to increase, as in the preferred method). In
the preferred model, the Department assumed that
[[Page 10945]]
only 50 percent of occasional overtime workers and no regular overtime
workers would receive the full overtime premium.
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 fixed-job model.\246\ 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).
---------------------------------------------------------------------------
\246\ 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
wage results in a wage less than the minimum wage, the straight-time
wage is set to the minimum wage.
Table 19--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% fixed-job model............. 50% incomplete 100% full overtime
fixed-job model. premium.
50% full overtime premium....... 50% full overtime
premium.
------------------------------------------------------------------------
Regular Overtime Workers (Type 3)
------------------------------------------------------------------------
100% fixed-job model............ 100% incomplete 50% incomplete
fixed-job model. fixed-job model.
50% full overtime
premium.
------------------------------------------------------------------------
* Full overtime premium model: Regular rate of pay equals the implicit
hourly wage prior to the regulation (with no adjustments); workers are
paid 1.5 times this base wage for the same number of overtime hours
worked prior to the regulation.
* Fixed-job model: Base wages are set at the higher of: (1) A rate such
that total earnings and hours remain the same before and after the
regulation; thus the base wage falls, and workers are paid 1.5 times
the new base wage for overtime hours (the fixed-job model) or (2) the
minimum wage.
* Incomplete fixed-job model: Regular rates of pay are partially
adjusted to the wage implied by the fixed-job model.
The cost and transfer payment estimates associated with the bounds
are presented in Table 20. Regulatory familiarization costs and
adjustment costs do not vary across the scenarios. Managerial costs are
lower under these alternative employer response assumptions because
fewer workers' hours are adjusted by employers and thus managerial
costs, which depend in part on the number of workers whose hours
change, will be smaller.\247\ Depending on how employers adjust the
implicit regular hourly wage, estimated transfers may range from $234.7
million to $1,053.9 million, with the preferred estimate equal to
$526.9 million.
---------------------------------------------------------------------------
\247\ In the lower transfer estimate, managerial costs are for
employees whose hours change because their hourly rate increased to
the minimum wage.
Table 20--Bounds on Year 1 Cost and Transfer Payment Estimates, Year 1 (Millions)
----------------------------------------------------------------------------------------------------------------
Lower transfer Preferred Upper transfer
Cost/transfer estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Direct employer costs..................................... $394.7 $464.2 $409.7
Reg. familiarization.................................. 324.9 324.9 324.9
Adjustment costs...................................... 66.6 66.6 66.6
Managerial costs...................................... 3.2 72.7 18.1
Transfers................................................. 234.7 526.9 1,053.9
----------------------------------------------------------------------------------------------------------------
Note 1: Pooled data for 2015-2017 adjusted to reflect 2017.
2. Effects by Regions and Industries
This section presents estimates of the effects of this proposed
rule by region and by industry. The Department analyzed effects on low-
wage regions by comparing the number of affected workers, costs, and
transfers across the four Census Regions. The region with the largest
number of affected workers would be the South (544,000). However, as a
share of potentially affected workers in the region, the South would
not be significantly more affected relative to other regions (6.4
percent are affected compared with 4.4 to 5.0 percent in other
regions). As a share of all workers in the region, the South would also
not be particularly affected relative to other regions (1.1 percent are
affected compared with 0.8 to 0.9 percent in other regions).
[[Page 10946]]
Table 21--Potentially Affected and Affected Workers, by Region, Year 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected workers
-----------------------------------------------------------------------
Workers subject Potentially Percent of
Region to FLSA affected workers Number Percent of total potentially Percent of all
(millions) (millions) \a\ (millions) \b\ affected (%) affected workers workers in
in region region
--------------------------------------------------------------------------------------------------------------------------------------------------------
All......................................... 135.9 24.3 1.271 100 5.2 0.9
Northeast................................... 25.0 5.1 0.226 17.7 4.4 0.9
Midwest..................................... 30.1 5.0 0.251 19.7 5.0 0.8
South....................................... 49.4 8.5 0.544 42.8 6.4 1.1
West........................................ 31.5 5.6 0.251 19.7 4.5 0.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not
in a named occupation.
\b\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their
weekly earnings do not increase to the new salary levels).
Total transfers in the first year were estimated to be $526.9
million (Table 22). As expected, the transfers in the South would be
the largest portion because the largest number of affected workers
would be in the South; however, transfers per affected worker would be
the lowest in the South. Annual transfers per worker would be $336 in
the South, but $437 to $511 in other regions.
Table 22--Transfers by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Total change in
Region earnings Percent of total Per affected
(millions) (%) worker
----------------------------------------------------------------------------------------------------------------
All....................................................... $526.9 100 $414.44
Northeast................................................. 115.3 21.9 511.25
Midwest................................................... 109.6 20.8 437.34
South..................................................... 182.7 34.7 335.63
West...................................................... 119.3 22.6 475.47
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
Direct employer costs are composed of regulatory familiarization
costs, adjustment costs, and managerial costs. Total first year direct
employer costs would be $464.2 million (Table 23). Total direct
employer costs would be the highest in the South ($172.2 million) and
lowest in the Northeast ($87.0 million). While the three components of
direct employer costs vary as a percent of these total costs by region,
the percentage of total direct costs in each region would be fairly
consistent with the share of all workers in a region. Direct employer
costs in each region as a percentage of the total direct costs would
range from 18.7 percent in the Northeast, to 37.1 percent in the South.
Once again, these proportions are almost the same as the proportions of
the total workforce in each region: 18.4 percent in the Northeast and
36.3 percent in the South.
Table 23--Direct Employer Costs by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Regulatory Total direct
Region familiarization Adjustment Managerial costs
----------------------------------------------------------------------------------------------------------------
Costs (Millions)
----------------------------------------------------------------------------------------------------------------
All............................................ $324.9 $66.6 $72.7 $464.2
Northeast...................................... 62.7 11.8 12.5 87.0
Midwest........................................ 71.4 13.1 16.4 100.9
South.......................................... 114.2 28.5 29.5 172.2
West........................................... 76.7 13.1 14.3 104.2
----------------------------------------------------------------------------------------------------------------
Percent of Total Costs by Region
----------------------------------------------------------------------------------------------------------------
All............................................ 100.0 100.0 100.0 100.0
Northeast...................................... 19.3 17.7 17.2 18.7
Midwest........................................ 22.0 19.7 22.5 21.7
South.......................................... 35.1 42.8 40.6 37.1
West........................................... 23.6 19.7 19.7 22.4
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
[[Page 10947]]
Another way to compare the relative effects of this proposed rule
by region is to consider the transfers and costs as a proportion of
current payroll and current revenues (Table 24). Nationally, employer
costs and transfers would be approximately 0.013 percent of payroll. By
region, direct employer costs and transfers as a percent of payroll
would be also approximately the same (between 0.012 and 0.014 percent
of payroll). Employer costs and transfers as a percent of revenue would
be 0.002 percent nationally and in each region.
Table 24--Annual Transfers and Costs as Percent of Payroll and of Revenue by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Costs and transfers
Payroll Revenue -------------------------------
Region (billions) (billions) As percent of As percent of
payroll revenue
----------------------------------------------------------------------------------------------------------------
All............................................. $7,461 $42,832 0.0133 0.0023
Northeast....................................... 1,646 8,614 0.0122 0.0023
Midwest......................................... 1,589 9,766 0.0132 0.0022
South........................................... 2,483 15,308 0.0143 0.0023
West............................................ 1,743 9,145 0.0128 0.0024
----------------------------------------------------------------------------------------------------------------
Notes: Pooled data for 2015-2017 adjusted to reflect 2017. Payroll, revenue, costs, and transfers all exclude
the federal government.
Sources: Private sector payroll and revenue data from 2012 SUSB. State and local payroll data from State and
Local Government Finances Summary: FY2015.
In order to gauge the effect of the proposed rule on industries,
the Department compared estimates of combined direct costs and
transfers as a percent of payroll, profit, and revenue for the 13 major
industry groups (Table 25).\248\ This provides a common method of
assessing the relative effects of the rule on different industries, and
the magnitude of adjustments the rule may require on the part of
enterprises in each industry. The relative costs and transfers
expressed as a percentage of payroll are particularly useful measures
of the relative size of adjustment faced by organizations in an
industry because they benchmark against the cost category directly
associated with the labor force. Measured in these terms, costs and
transfers as a percent of payroll would be highest in agriculture,
forestry, fishing, and hunting; leisure and hospitality; and other
services. However, the overall magnitude of the relative shares would
be small, representing less than 0.1 percent of overall payroll costs
across industries.
---------------------------------------------------------------------------
\248\ Note that the totals in this table for transfers and
direct costs do not match the totals in other sections due to the
exclusion of transfers to federal workers and costs to federal
entities. Federal costs and transfers are excluded to be consistent
with payroll and revenue which exclude the federal government.
---------------------------------------------------------------------------
The Department also estimated transfers and costs as a percent of
profits.\249\ Benchmarking against profits is potentially helpful in
the sense that it provides a measure of the proposed rule's effect
against returns on investment. However, this metric must be interpreted
carefully as it does not account for differences across industries in
risk-adjusted rates of return, which are not readily available for this
analysis. The ratio of costs and transfers to profits also does not
reflect differences in the firm-level adjustment to changes in profits
reflecting cross-industry variation in market structure.\250\
Nonetheless, the overall magnitude of costs and transfers as a
percentage of profits would be small, representing in less than 0.3
percent of overall profits in every industry. The range of values of
total costs and transfers would vary among industries as a percent of
profits ranging from a low of 0.02 percent (financial activities) to a
high of 0.28 percent (agriculture, forestry, fishing, and hunting).
However, because the share is less than 0.3 percent, even for the
industry with the largest impact, we believe this proposed rule would
not disproportionately affect any industries.
---------------------------------------------------------------------------
\249\ Internal Revenue Service. (2013). Corporation Income Tax
Returns. Available at: https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report. Table 5 of the IRS report provides
information on total receipts, net income, and deficits. The
Department calculated the ratio of net income (column (7)) less any
deficit (column (8)) to total receipts (column (3)) for all firms by
major industry categories. Costs and transfers as a percent of
revenues were divided by the profit to receipts ratios to calculate
the costs and transfers as a percent of profit.
\250\ In particular, a basic model of competitive product
markets would predict that highly competitive industries with lower
rates of return would adjust to increases in the marginal cost of
labor arising from the rule through an overall, industry-level
increase in prices and a reduction in quantity demanded based on the
relative elasticities of supply and demand. Alternatively, more
concentrated markets with higher rates of return would be more
likely to adjust through some combination of price increases and
profit reductions based on elasticities as well as interfirm pricing
responses.
---------------------------------------------------------------------------
Finally, the Department's estimates of transfers and costs as a
percent of revenue by industry also indicated very small effects (Table
25) of less than 0.02 percent of revenues in any industry. The
industries with the largest costs and transfers as a percent of revenue
would be agriculture, forestry, fishing, and hunting; and leisure and
hospitality. However, the difference between the agriculture, forestry,
fishing, and hunting industry, the industry with the highest costs and
transfers as a percent of revenue, and the industry with the lowest
costs and transfers as a percent of revenue (public administration),
would be only 0.011 percentage points. Table 25 illustrates that the
actual differences in costs relative to revenues would be quite small
across industry groupings.
Table 25--Annual Transfers, Total Costs, and Transfers and Costs as Percent of Payroll, Revenue, and Profit by
Industry, Year 1
----------------------------------------------------------------------------------------------------------------
Costs and transfers
Transfers Direct costs -----------------------------------------------
Industry (millions) (millions) As percent of As percent of As percent of
payroll revenue profit \a\
----------------------------------------------------------------------------------------------------------------
All............................. $525.7 $454.2 0.013 0.002 0.04
Agriculture, forestry, fishing, 3.0 1.1 0.066 0.012 0.28
& hunting......................
[[Page 10948]]
Mining.......................... 8.5 2.1 0.016 0.002 0.05
Construction.................... 13.7 31.7 0.015 0.003 0.09
Manufacturing................... 75.8 25.3 0.016 0.002 0.03
Wholesale & retail trade........ 103.6 84.5 0.024 0.001 0.05
Transportation & utilities...... 21.0 14.6 0.014 0.003 0.10
Information..................... 23.3 11.3 0.013 0.003 0.03
Financial activities............ 53.3 51.2 0.016 0.002 0.02
Professional & business services 71.0 75.0 0.011 0.006 0.06
Education & health services..... 67.6 68.4 0.014 0.005 0.10
Leisure & hospitality........... 51.6 43.7 0.033 0.010 0.19
Other services.................. 14.8 36.1 0.032 0.008 0.20
Public administration........... 18.58 9.1 0.003 0.001 \b\
----------------------------------------------------------------------------------------------------------------
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll and revenue
data from State and Local Government Finances Summary: FY2015 are used for the Public Administration industry.
Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns.
\a\ Profit data based on corporations only.
\b\ Profit is not applicable for public administration.
Although labor market conditions vary by Census Region and
industry, the effects from updating the standard salary level and the
HCE compensation level would not unduly affect any of the regions or
industries. The proportion of total costs and transfers in each region
would be fairly consistent with the proportion of total workers in each
region. Additionally, although the shares will be larger for some firms
and smaller for others, the average estimated costs and transfers from
this proposed rule are very small relative to current payroll or
current revenue--generally less than a tenth of a percent of payroll
and less than two-hundredths of a percent of revenue in each region and
in each industry.
vii. Regulatory Alternatives
As mentioned earlier, the Department considered a range of
alternatives before selecting the 2004 methodology for updating the
standard salary level and the 2016 methodology for updating the HCE
compensation level (see section VI.C.i). As seen in Table 26, the
Department has calculated 2017 salary levels, the number of affected
workers, and the associated costs and transfers for the alternative
methods that the Department considered. Regulatory familiarization
costs were not included because they do not vary over the alternatives.
As with the regulatory analysis for the proposed levels, we use 2017
salary levels and 2017 earnings data to estimate the effect of January
2020 salary levels and 2020 earnings.
Table 26--Updated Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs, and
Transfers, Year 1
----------------------------------------------------------------------------------------------------------------
Year 1 effects (millions)
Affected EAP -------------------------------
Alternative 2017 salary workers Adj. &
level \a\ (1,000s) managerial Transfers
costs \b\
----------------------------------------------------------------------------------------------------------------
Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Alt. #0: Maintain average minimum wage $503 242 $21.5 $35.7
protection since 2004 [c]......................
Alt. #1: Inflate 2004 level using PCEPI......... 597 786 77.9 155.2
Alt. #2: Inflate 2004 level using Chained CPI... 599 787 78.0 158.3
Alt. #3: Inflate 2004 level using CPI-U......... 620 924 94.1 207.5
Alt. #4: Inflate 2004 level using ECI civilan... 639 1,069 110.6 250.1
Proposed rule: 2004 method...................... 641 1,070 111.4 252.5
Alt. #5: Inflate 2004 level using ECI private... 643 1,072 111.8 255.0
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change.......................... 100,000 0 .............. ..............
HCE alt. #2: Inflate 2004 level using PCEPI..... 131,189 186 24.4 226.4
HCE alt. #3: Inflate 2004 level using Chained 131,750 186 24.5 229.0
CPI............................................
HCE alt. #4: Inflate 2004 level using CPI-U..... 136,253 198 26.2 257.1
Proposed rule: 90th percentile of full-time 139,464 201 27.9 274.3
salaried workers...............................
HCE alt. #5: Inflate 2004 level using ECI 140,480 204 28.1 277.8
civilian.......................................
HCE alt. #6: Inflate 2004 level using ECI 141,337 204 28.3 280.3
private........................................
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ These salary levels reflect estimated values for 2017 to approximate Year 1 effects.
\b\ Regulatory familiarization costs are excluded because they do not vary based on the selected values of the
salary levels.
[[Page 10949]]
\c\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
threshold was equivalent to the earnings of an employee working 72.2 hours at the minimum wage (including time-
and-a-half for hours beyond the fortieth in a week). That amount fell with increases in the minimum wage and
is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is
59.6 hours, and a threshold that would provide 59.6 hours of $7.25 minimum wage protection and overtime pay
for hours over 40 would be $503.
viii. Projections
1. Methodology
The Department projected affected workers, costs, and transfers
forward for ten years. This involved several steps.
First, the Department calculated workers' projected earnings in
future years. The wage growth rate is calculated as the compound annual
growth rate in median wages using the historical CPS MORG data for
occupation-industry categories from 2007 to 2016.\251\ This is the
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. 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 BLS' Occupational Employment Statistics
(OES).\252\ 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 all industries and
occupations. For projecting costs, we similarly projected wage rates
for the human resource and managerial workers whose time is spent on
these tasks.
---------------------------------------------------------------------------
\251\ To increase the number of observations, three years of
data were pooled for each of the endpoint years. Specifically, data
from 2006, 2007, and 2008 (converted to 2007 dollars) were used to
calculate the 2007 median wage and data from 2015, 2016, and 2017
(converted to 2016 dollars) were used to calculate the 2016 median
wage.
\252\ To lessen small sample bias, this rate was only calculated
using CPS MORG data when these data contained at least 30
observations in each period.
---------------------------------------------------------------------------
Second, the Department compared workers' counter-factual earnings
(i.e., absent any rulemakings) to the earnings levels. If the counter-
factual earnings are below the relevant level (i.e., standard or HCE)
then the worker is considered affected. In other words, in each year
affected EAP workers were identified as those who would be exempt in
Year 1 absent any change to the current regulations but have projected
earnings in the future year that are less than the relevant salary
level.
Third, sampling weights were adjusted to reflect employment growth.
The employment growth rate is the compound annual growth rate based on
the ten-year employment projection from BLS' National Employment Matrix
(NEM) for 2016 to 2026 within an occupation-industry category.
Adjusted hours for workers affected in Year 1 were re-estimated in
Year 2 using a long-run elasticity of labor demand of -0.4.\253\ For
workers newly affected in Year 2 through Year 10, employers' wage and
hour adjustments are estimated in that year, as described in section
VI.D.iv, except the long-run elasticity of labor demand of -0.4 is
used. Employer adjustments are made in the first year the worker is
affected and then applied to all future years in which the worker
continues to be affected (unless the worker switches to a Type 4
worker). Workers' earnings in predicted years are earnings post
employer adjustments, with overtime pay, and with ongoing wage growth
based on historical growth rates (as described above).
---------------------------------------------------------------------------
\253\ 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
The Department estimated that the proposed rule would affect 1.3
million EAP workers in Year 1 and 1.1 million workers in Year 10 (Table
27). The projected number of affected workers includes workers who were
not EAP exempt in the base year but would have become exempt in the
absence of this proposed rule in Years 2 through 10. For example, a
worker who passes the standard duties test may earn less than $455 in
Year 1 but between $455 and the new salary level in subsequent years;
such a worker would be counted as an affected worker.
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 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
regulations and the regulations as modified by the proposed rule is
essentially zero. Therefore, projected regulatory familiarization costs
for new entrants over the next nine years would be zero.
Adjustment costs would occur in any year in which workers are newly
affected. After Year 1, these costs would be relatively small since the
majority of workers would be affected in Year 1. Management costs would
recur each year for all affected EAP workers whose hours are adjusted.
However, managerial costs generally decrease over time as the number of
affected EAP workers decreases. The Department estimated that Year 1
managerial costs would be $72.7 million; by Year 10 these costs decline
to $64.2 million.
The Department projected two types of transfers from employers to
employees associated with workers affected by the regulation. Transfers
due to the minimum wage provision would be $57.0 million in Year 1 and
would fall to $17.6 million in Year 10 as increased earnings over time
move workers' implicit rate of pay above the minimum wage.\254\
Transfers due to overtime pay decline over time because the number of
affected workers decreases. Thus, transfers due to the overtime pay
provision would decrease from $469.9 million in Year 1 to $429.5
million in Year 10.\255\
---------------------------------------------------------------------------
\254\ Increases in minimum wages were not projected. If state or
federal minimum wages increase during the projected timeframe, as
anticipated, then projected minimum wage transfers may be
underestimated.
\255\ If earnings levels were in fact updated quadrennially as
the Department intends, which remains a matter within the
Secretary's sole discretion, then the potential projected costs and
transfers would be higher in the Department's estimation than those
shown here, based on the Department's estimates on future outcomes
many years into the future. Because those potential costs and
transfers would be the result of any future rulemakings and
therefore included in the economic analyses of those rulemakings,
they have not been incorporated into this analysis. The Department
has estimated these potential costs and transfers, however. With
updates in Years 6 and 10, the ten-year annualized costs, based on
the Department's estimates and subject to change given that it
relies on future projections and the Secretary's discretionary
actions, would increase from $120.5 million to $135.9 million.
Annualized transfers would increase from $429.4 million to $510.0
million.
---------------------------------------------------------------------------
Projected costs and transfers were deflated to 2017 dollars using
the Congressional Budget Office's projections for the CPI-U.\256\
---------------------------------------------------------------------------
\256\ Congressional Budget Office. 2018. The Budget and Economic
Outlook: 2018 To 2028. See https://www.cbo.gov/publication/53651.
[[Page 10950]]
Table 27--Projected Costs and Transfers, Standard and HCE Salary Levels
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Affected EAP Costs Transfers
Year (year #) workers ---------------------------------------------------------------------------------------------------------------
(millions) Reg. Fam. Adjustment \a\ Managerial Total Due to MW Due to OT Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
.............. (Millions 2017$)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Year: .............. .............. .............. .............. .............. .............. .............. ..............
Year 1...................................................... 1.3 $324.9 $66.6 $72.7 $464.2 $57.0 $469.9 $526.9
Year 2...................................................... 1.2 0.0 1.5 72.7 74.2 30.4 390.9 421.3
Year 3...................................................... 1.2 0.0 1.7 68.5 70.2 28.0 374.9 402.8
Year 4...................................................... 1.1 0.0 2.2 66.5 68.7 25.4 378.0 403.4
Year 5...................................................... 1.1 0.0 2.9 63.0 65.9 25.8 380.5 406.3
Year 6...................................................... 1.0 0.0 3.4 62.5 65.9 25.2 375.5 400.7
Year 7...................................................... 1.0 0.0 3.2 60.3 63.6 21.9 387.2 409.1
Year 8...................................................... 1.0 0.0 3.3 60.8 64.1 19.2 401.9 421.1
Year 9...................................................... 1.0 0.0 3.4 61.8 65.1 18.5 413.4 431.9
Year 10..................................................... 1.1 0.0 3.6 64.2 67.8 17.6 429.5 447.1
Annualized value:
3% real discount rate....................................... .............. 37.0 10.0 65.6 112.6 27.7 400.3 428.0
7% real discount rate....................................... .............. 43.2 11.2 66.0 120.5 28.6 400.7 429.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in years without updated salary levels because some workers' projected earnings are
estimated using negative earnings growth.
Table 27 also summarizes annualized costs and transfers over the
ten-year projection period, using 3 percent and 7 percent real discount
rates. The Department estimated that total direct employer costs have
an annualized value of $120.5 million per year over ten years when
using a 7 percent real discount rate. The annualized value of total
transfers was estimated to equal $429.4 million.
ix. Alternative Regulatory Baseline, Including Calculation of Cost
Savings Under Executive Order 13771
Other portions of this regulatory impact analysis contain estimates
of the impacts of this proposed rule relative to the 2004 final rule,
which is the policy that the Department is currently enforcing.
However, Circular A-4 states that multiple regulatory baselines may be
analytically relevant. In this case, a second informative baseline is
the 2016 final rule, which is currently in the Code of Federal
Regulations (CFR).\257\ Moreover, for purposes of determining whether
this proposed rule is deregulatory under E.O. 13771, the economic
impacts should be compared to what is currently published in the CFR.
As such, most of this section presents an estimate of the cost savings
of this proposed rule relative to the 2016 rule, and in addition to
estimating annualized cost savings for the proposed rule using a 10-
year time horizon, we also estimated annualized costs savings in
perpetuity in accordance with E.O. 13771 accounting standards. Later in
this section, the Department presents transfer and benefits estimates
from the analysis accompanying the 2016 final rule--values that are
also relevant to this second regulatory baseline.
---------------------------------------------------------------------------
\257\ 29 CFR part 541
---------------------------------------------------------------------------
To ensure the estimated costs of the 2016 final rule can be
directly and appropriately compared with the costs estimated for this
proposed rule, the Department started with the analytic model for this
proposed rule and replaced the proposed salary and compensation
thresholds with the thresholds set in the 2016 final rule. The
Department assumed that initial regulatory familiarization costs would
be identical under adoption of either the proposed rule or the 2016
final rule, because the same number of employers would be potentially
affected in Year 1. In addition, the Department added the updated
thresholds from the planned triennial updates in years 4, 7 and 10 from
the 2016 final rule. Therefore, the only differences in estimated costs
presented here between the 2016 final rule and this proposed rule are
attributable to the initial difference in earnings thresholds and the
effects of the 2016 final rule's automatic updating mechanism, which
updates the thresholds every three years.
Table 28--Weekly Earnings Thresholds Used in Comparison of 2016 Final Rule and 2018 Proposed Rule
----------------------------------------------------------------------------------------------------------------
2016 Final Rule 2018 Proposed Rule
---------------------------------------------------------------
Year Standard HCE Standard HCE
salary compensation salary compensation
threshold threshold threshold threshold
----------------------------------------------------------------------------------------------------------------
Year 1.......................................... $913 $2,577 $641 $2,682
Year 4.......................................... 984 2,837 641 2,682
Year 7.......................................... 1,049 3,080 641 2,682
Year 10......................................... 1,118 3,345 641 2,682
----------------------------------------------------------------------------------------------------------------
Note: Year 1 impacts are calculated using 2017 pooled CPS MORG data (the most recently available data);
therefore, the earnings thresholds in Year 1 must correspond to the levels that would have been in effect
under each rule had the rule been promulgated in 2017. These figures are the Department's best approximation
for impacts starting in 2020, the earliest year the Department expects the proposed earnings levels to be
implemented.
However, this approach means that the estimated costs presented
here for the 2016 final rule are not directly comparable to those
published in the Federal Register (81 FR 32391). The differences
between the previously
[[Page 10951]]
published 2016 cost estimates and those presented here are primarily
due to: An increase in the number of establishments that would incur
regulatory familiarization costs to account for economic growth between
2012 (estimates for the 2016 final rule were based on 2012 SUSB data)
and 2015 (this proposed rule is based on 2015 SUSB data); the use of
more recent CPS MORG data (the 2016 final rule used pooled CPS data for
2013 through 2015 inflated to represent FY 2017); an increase in the
wage rates used to value staff time spent on regulatory
familiarization, adjustment, and monitoring; incorporating a 17 percent
overhead rate in those wage rates; and minor improvements to the
model.\258\
---------------------------------------------------------------------------
\258\ As previously discussed, one such improvement is the
Department's application of conditional probabilities to estimate
the number of HCE workers. See supra note 193.
---------------------------------------------------------------------------
Table 29 presents the estimated number of affected EAP workers, and
direct regulatory, adjustment, and managerial costs for the 2016 final
rule calculated using the 2018 analytic model.
Table 29--Adjusted 2016 Final Rule Projected Costs and Transfers, Standard Salary and HCE Compensation Levels
----------------------------------------------------------------------------------------------------------------
Affected EAP Costs
Year workers ---------------------------------------------------------------
(millions) Reg. Fam. Adjustment \a\ Managerial Total
----------------------------------------------------------------------------------------------------------------
.............. (Millions FY2017$)
---------------------------------------------------------------
Year:
Year 1...................... 4.1 $324.9 $215.2 $241.2 $781.3
Year 2...................... 4.0 0.0 1.5 231.6 233.1
Year 3...................... 3.8 0.0 1.7 221.8 223.5
Year 4...................... 4.5 27.6 14.3 262.3 304.2
Year 5...................... 4.4 0.0 2.9 253.7 256.6
Year 6...................... 4.3 0.0 3.5 247.5 251.0
Year 7...................... 4.9 28.2 9.4 279.1 316.6
Year 8...................... 4.8 0.0 3.3 270.5 273.7
Year 9...................... 4.7 0.0 3.4 267.9 271.2
Year 10..................... 5.4 28.8 13.7 303.2 345.6
Annualized value:
3% real rate................ .............. 45.1 29.7 256.2 331.0
7% real rate................ .............. 50.8 33.5 254.2 338.6
----------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers, including years when the salary
level is not updated. Adjustment costs may occur in years without updated salary levels because some workers'
projected earnings are estimated using negative earnings growth.
The Department then subtracted direct regulatory costs expected to
have been incurred under the 2016 final rule from the direct costs
estimated under this proposed rule (see Table 27). As shown in Table
30, direct employer costs of the proposed rule are estimated to be, on
average, $224.0 million lower per year in perpetuity than the 2016
final rule (using a 7 percent discount rate).
Table 30--Difference in Costs between 2016 Final Rule and this Proposed Rule
----------------------------------------------------------------------------------------------------------------
Reduction in Reduction in costs
affected EAP ---------------------------------------------------------------
Year workers
(millions) Reg. Fam. Adjustment \a\ Managerial Total
----------------------------------------------------------------------------------------------------------------
.............. (Millions FY2017$)
---------------------------------------------------------------
Year:
Year 1...................... 2.8 $0.0 $148.6 $168.5 $317.1
Year 2...................... 2.7 0.0 0.0 158.9 158.9
Year 3...................... 2.6 0.0 0.0 153.3 153.3
Year 4...................... 3.4 27.6 12.1 195.8 235.5
Year 5...................... 3.3 0.0 0.0 190.7 190.7
Year 6...................... 3.2 0.0 0.1 185.1 185.1
Year 7...................... 3.9 28.2 6.1 218.7 253.1
Year 8...................... 3.8 0.0 0.0 209.6 209.6
Year 9...................... 3.6 0.0 0.0 206.1 206.1
Year 10..................... 4.3 28.8 10.1 238.9 277.8
----------------------------------------------------------------------------------------------------------------
Annualized Value: 10-Year Time Horizon
----------------------------------------------------------------------------------------------------------------
3% real discount rate........... .............. $8.1 $19.6 $190.6 $218.4
7% real discount rate........... .............. 7.6 22.4 188.2 218.2
----------------------------------------------------------------------------------------------------------------
Annualized Value: Perpetual Time Horizon
----------------------------------------------------------------------------------------------------------------
3% real discount rate........... .............. $9.0 $7.5 $210.9 $227.4
[[Page 10952]]
7% real discount rate........... .............. 8.3 12.6 203.1 224.0
----------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers, including years when the salary
level is not updated. Adjustment costs may occur in years without updated salary levels because some workers'
projected earnings are estimated using negative earnings growth.
The cost savings from the proposed rule are primarily attributable
to two factors. First, a lower standard salary level will result in
fewer affected workers in any given year. If fewer workers are
affected, then management must consider and make earnings adjustments
for fewer employees, and must monitor hours worked for fewer employees.
Second, this analysis does not incorporate automatic updating whereas
the 2016 final rule incorporated a triennial automatic updating
mechanism. Therefore, regulatory familiarization costs are now only
incurred in Year 1 and adjustment costs are primarily incurred in Year
1. Additionally, managerial costs now gradually decrease over time
rather than increasing every three years.
In the 2016 final rule, the Department estimated average annualized
transfers of $1,189.1 million over a ten-year period using a discount
rate of 7 percent. The Department also estimated that avoided
litigation costs resulting from the rule could total approximately
$31.2 million per year.\259\ The Department includes these values here
for reference.
---------------------------------------------------------------------------
\259\ In this proposed rule, the Department has revised how it
calculates avoided litigation costs so the number referenced here
for the 2016 final rule is not directly comparable to the
calculation of reduced litigation costs for this proposal.
---------------------------------------------------------------------------
VII. 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 that an agency
prepare an initial regulatory flexibility analysis (IRFA) when
proposing, and a final regulatory flexibility analysis (FRFA) when
issuing, regulations that will have a significant economic impact on a
substantial number of small entities. The agency is also required to
respond to public comment on the NPRM.\260\ The Chief Counsel for
Advocacy of the Small Business Administration was notified of this
proposed rule upon submission of the rule to OMB under Executive Order
12866. The Department invites commenters to provide input on data
analysis and/or methodology used throughout this IRFA.
---------------------------------------------------------------------------
\260\ See 5 U.S.C. 604.
---------------------------------------------------------------------------
A. Reasons Why Action by the Agency Is Being Considered
The standard salary level and HCE total compensation levels have
not been updated since 2004 \261\ and, as described in detail in
section VI.A.ii., the standard salary level has declined considerably
in real terms relative to the 2004 value. As a result, the standard
salary level's usefulness in identifying nonexempt workers has eroded
over time. 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. Additionally, the Department's
2016 final rule updating the standard salary level and the HCE annual
compensation requirement was declared invalid because the rule would
make nonexempt too many employees whose exemption status should have
been determined by their duties. Therefore, the Department believes
that rulemaking is necessary in order to correct the deficiencies in
the 2016 final rule and restore the effectiveness of the salary levels.
---------------------------------------------------------------------------
\261\ The Department revised the EAP salary levels in 2004. In
2016, the Department also issued a final rule revising the EAP
salary levels, however, on August 31, 2017, the U.S. District Court
for Eastern District of Texas held that the 2016 final rule's
standard salary level exceeded the Department's authority and was
therefore invalid. See Nevada v. U.S. Dep't of Labor, 275 F. Supp.
3d 795 (E.D. Tex. 2017). Until the Department issues a new final
rule, it is enforcing the part 541 regulations in effect on November
30, 2016, including the $455 per week standard salary level set in
the 2004 final rule.
---------------------------------------------------------------------------
B. Statement of Objectives and Legal Basis for the Proposed Rule
Section 13(a)(1) creates a minimum wage and overtime pay exemption
for bona fide executive, administrative, professional, and 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 premise behind the standard salary
level is to be an appropriate dividing-line between employees who are
nonexempt from employees who may be performing exempt duties. The
threshold essentially screens out obviously nonexempt employees whom
Congress intended to be protected by the FLSA's minimum wage and
overtime provisions. If left unchanged, the effectiveness of the salary
level test as a means of determining exempt status diminishes as
nonexempt employee wages increase over time.
Given that the 2016 final rule was invalidated, the Department last
updated the salary levels in the 2004 final rule, which set 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.\262\
---------------------------------------------------------------------------
\262\ 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
[[Page 10953]]
standards. If a state law establishes a higher standard than the
provisions of the FLSA, the higher standard applies as a matter of
state law in that specific state.\263\
---------------------------------------------------------------------------
\263\ See 29 U.S.C. 218
---------------------------------------------------------------------------
To restore the function of the standard salary level and the HCE
total compensation requirements as appropriate bright-line tests
between overtime-protected employees and those who may be bona fide EAP
employees, the Department proposes to increase the minimum salary level
necessary for exemption from the FLSA minimum wage and overtime
requirements as an EAP employee from $455 to $679 a week for the
standard salary test, and from $100,000 to $147,414 per year for the
HCE test. To ensure that these levels continue to function
appropriately in the future, the Department intends to update these
levels every four years.
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,
in effect as of October 1, 2017, to classify entities as small.\264\
SBA establishes separate standards for individual 6-digit NAICS
industry codes, and standard cutoffs are typically based on either the
average number of employees, or the average annual receipts. For
example, small businesses are generally defined as having fewer than
500, 1,000, or 1,250 employees in manufacturing industries and less
than $7.5 million in average annual receipts for nonmanufacturing
industries. 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
defined as less than $550 million in 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 populations of less than 50,000
people.\265\
---------------------------------------------------------------------------
\264\ See https://www.sba.gov/sites/default/files/files/Size_Standards_Table_2017.pdf.
\265\ See http://www.sba.gov/advocacy/regulatory-flexibility-act
for details.
---------------------------------------------------------------------------
Parameters that are used in the small business cost analysis, and a
summary of the effects, are provided in Table 31.
Table 31--Overview of Parameters Used for Costs to Small Businesses
------------------------------------------------------------------------
Small business costs Cost
------------------------------------------------------------------------
Direct and Payroll Costs
------------------------------------------------------------------------
Average total cost per affected entity a..... $4,053.
Range of total costs per affected entity a... $1,146-$100,536.
Average percent of revenue per affected 0.18%.
entity a.
Average percent of payroll per affected 0.97%.
entity a.
Average percent of small business profit..... 0.06%.
------------------------------------------------------------------------
Direct Costs
------------------------------------------------------------------------
Regulatory familiarization:
Time (first year)........................ 1 hour per establishment.
Hourly wage.............................. $41.91.
Adjustment:
Time (first year affected)............... 75 minutes per newly
affected worker.
Hourly wage.............................. $41.91.
Managerial:
Time (weekly)............................ 5 minutes per affected
worker.
------------------------------------------------------------------------
Hourly wage.............................. $48.72.
------------------------------------------------------------------------
Payroll Increases
------------------------------------------------------------------------
Average payroll increase per affected entity $3,187.
a.
Range of payroll increases per affected $0-$92,869.
entity a.
------------------------------------------------------------------------
a Using the methodology where all employees at an affected small firm
are affected. This assumption generates upper-end estimates. Lower-end
cost estimates are significantly smaller.
ii. Data Sources and Methods
The Department obtained data from several sources to determine the
number of small entities and employment in these entities for each
industry. However, the Statistics of U.S. Businesses (SUSB, 2012) was
used for most industries. Industries for which the Department used
alternative sources include credit unions,\266\ commercial banks and
savings institutions,\267\ agriculture,\268\ and public
administration.\269\ The Department used the latest available data in
each case, so data years differ between sources.
---------------------------------------------------------------------------
\266\ National Credit Union Association. (2012). 2012 Year End
Statistics for Federally Insured Credit Unions. https://www.ncua.gov/analysis/Pages/call-report-data/reports/chart-pack/chart-pack-2018-q1.pdf.
\267\ Federal Depository Insurance Corporation. (2018).
Statistics on Depository Institutions--Compare Banks. Available at:
https://www5.fdic.gov/SDI/index.asp. Data are from 3/31/18 for
employment and data are from 6/30/2017 for share of firms and
establishments that are ``small''.
\268\ United States Department of Agriculture. (2014). 2012
Census of Agriculture: United States Summary and State Data: Volume
1, Geographic Area Series, Part 51. Available at: http://www.agcensus.usda.gov/Publications/2012/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
\269\ Hogue, C. (2012). Government Organization Summary Report:
2012. Available at: http://www2.census.gov/govs/cog/g12_org.pdf.
---------------------------------------------------------------------------
For each industry, the SUSB data tabulates total employment,
establishment, and firm counts by both enterprise employment size
(e.g., 0-4 employees, 5-9 employees) and receipt size (e.g., less than
$100,000, $100,000-
[[Page 10954]]
$499,999).\270\ The Department combined these categories with the SBA
size standards to estimate the proportion of establishments and
employees in each industry that are considered small or employed by a
small entity, respectively. The general methodological approach was to
classify all establishments or employees in categories below the SBA
cutoff as in ``small entity'' employment.\271\ If a cutoff fell in the
middle of a defined category, a uniform distribution of employees
across that bracket was assumed to determine what proportion should be
classified as small. The Department assumed that the small entity share
of credit card issuing and other depository credit intermediation
institutions (which were not separately represented in FDIC asset
data), is similar to that of commercial banking and savings
institutions. The estimated share of employment in small entities was
applied to the CPS data to estimate the number of affected workers in
small entities.
---------------------------------------------------------------------------
\270\ The SUSB defines employment as of March 12th.
\271\ The Department's estimates of the numbers of affected
small entities and affected workers who are employees of small
entities are likely overestimates as the Department had no credible
way to estimate which enterprises with annual revenues below
$500,000 also did not engage in interstate commerce.
---------------------------------------------------------------------------
The Department also estimated the number of small establishments by
employer type (nonprofit, for-profit, government). The calculation of
the number of establishments by employer type is similar to the
calculation of the number of establishments by industry. However,
instead of using SUSB data by industry, the Department used SUSB data
by Legal Form of Organization for nonprofit and for-profit
establishments, and data from the 2012 Census of Governments for small
governments. The 2012 Census of Governments report includes a breakdown
of state and local governments by the population of their underlying
jurisdiction, allowing us to estimate the number of governments that
are small. The Department welcomes comments on the data sets used in
the analysis and alternative sources of data.
iii. Number of Small Entities Affected by the Proposed Rule
Table 32 presents the estimated number of establishments and small
establishments in the U.S. (hereafter, the terms ``establishment'' and
``entity'' are used interchangeably and are considered equivalent for
the purposes of this IRFA).\272\ Based on the methodology described
above, the Department found that of the 7.8 million establishments
relevant to this analysis, more than 80 percent (6.3 million) are small
by SBA standards. These small establishments employ about 51.5 million
workers, about 37 percent of workers employed by all establishments
(excluding self-employed, unpaid workers, and members of the armed
forces), and account for roughly 36 percent of total payroll ($2.6
trillion of $7.4 trillion).\273\
---------------------------------------------------------------------------
\272\ SUSB reports data by ``enterprise'' size designations (a
business organization consisting of one or more domestic
establishments that were specified under common ownership or
control). However, the number of enterprises is not reported for the
size designations. Instead, SUSB reports the number of
``establishments'' (individual plants, regardless of ownership) and
``firms'' (a collection of establishments with a single owner within
a given state and industry) associated with enterprises size
categories. Therefore, numbers in this analysis are for the number
of establishments associated with small enterprises, which may
exceed the number of small enterprises. We based the analysis on the
number of establishments rather than firms for a more conservative
estimate (potential overestimate) of the number of small businesses.
\273\ Since information is not available on employer size in the
CPS MORG, respondents were randomly assigned as working in a small
business based on the SUSB probability of employment in a small
business by detailed Census industry. Annual payroll was estimated
based on the CPS weekly earnings of workers by industry size.
Table 32--Number of Establishments and Employees by SBA Size Standards, by Industry and Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Establishments (1,000s) Workers (1,000s) \a\ Annual payroll (billions)
-----------------------------------------------------------------------------------------------
Industry/employer type Small business
Total Small Total employed Total ($) Small ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... 7,754.0 6,270.4 139,636.5 51,542.2 7,359.5 2,621.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture............................................. 9.2 8.5 (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap................... 13.1 12.8 (\c\) (\c\) (\c\) (\c\)
Mining.................................................. 29.2 23.6 (\c\) (\c\) (\c\) (\c\)
Construction............................................ 682.4 663.0 7,955.8 5,153.8 421.2 271.5
Nonmetallic mineral prod. manuf......................... 14.7 11.3 (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod........................ 59.3 55.7 1,636.3 992.3 87.3 50.8
Machinery manufacturing................................. 23.8 21.7 1,267.0 678.3 78.1 41.7
Computer and elect. prod. manuf......................... 12.7 11.3 1,211.3 562.2 107.2 50.3
Electrical equip., appliance manuf...................... 5.7 4.9 (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf............................. 11.9 10.2 2,522.2 711.3 165.9 43.9
Wood products........................................... 14.1 12.9 (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf............................ 15.1 14.7 (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf............................... 26.6 25.6 1,464.6 861.7 86.3 49.8
Food manufacturing...................................... 26.8 23.6 1,761.2 834.6 75.1 34.2
Beverage and tobacco products........................... 8.0 7.1 (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf........................ 16.7 16.2 590.2 391.1 25.5 17.0
Paper and printing...................................... 29.9 27.8 883.7 475.9 47.8 24.2
Petroleum and coal prod. manuf.......................... 2.1 1.2 (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.................................. 13.2 10.5 1,377.9 545.5 109.4 41.6
Plastics and rubber products............................ 12.3 10.3 (\c\) (\c\) (\c\) (\c\)
Wholesale trade......................................... 413.4 329.1 3,453.2 1,617.5 208.4 96.5
Retail trade............................................ 1,070.2 689.6 15,784.9 5,357.8 582.8 221.6
Transport. and warehousing.............................. 228.4 181.7 6,019.2 1,580.3 301.8 74.2
[[Page 10955]]
Utilities............................................... 18.0 7.7 (\c\) (\c\) (\c\) (\c\)
Publishing ind. (ex. internet).......................... 26.9 20.7 484.9 208.8 35.4 14.3
Motion picture and sound recording...................... 25.5 22.3 (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).......................... 8.4 4.7 577.5 136.8 39.9 8.5
Internet publishing and broadcasting.................... 7.8 6.6 (\c\) (\c\) (\c\) (\c\)
Telecommunications...................................... 53.0 11.9 885.4 177.7 66.9 13.1
Internet serv. providers and data....................... 13.6 9.0 (\c\) (\c\) (\c\) (\c\)
Other information services.............................. 4.3 3.7 (\c\) (\c\) (\c\) (\c\)
Finance................................................. 291.4 128.0 4,446.7 818.7 347.4 65.0
Insurance............................................... 178.7 139.5 2,702.7 711.2 184.0 49.0
Real estate............................................. 324.4 275.8 2,015.4 1,208.9 112.5 66.5
Rental and leasing services............................. 53.2 26.5 (\c\) (\c\) (\c\) (\c\)
Professional and technical services..................... 896.0 812.3 9,445.1 4,433.7 790.6 360.7
Management of companies and enterprises................. 53.9 33.2 (\c\) (\c\) (\c\) (\c\)
Admin. and support services............................. 380.4 325.0 5,029.6 2,285.4 196.3 82.6
Waste manag. and remed. services........................ 23.9 17.9 (\c\) (\c\) (\c\) (\c\)
Educational services.................................... 102.0 89.3 13,911.5 2,916.7 737.2 145.7
Hospitals............................................... 7.0 1.6 7,158.8 327.9 436.3 19.4
Health care services, except hospitals.................. 690.2 567.3 9,760.5 4,673.4 457.1 218.4
Social assistance....................................... 178.9 145.8 2,937.6 1,643.5 104.0 54.4
Arts, entertainment, and recreation..................... 133.6 123.0 2,680.8 1,360.4 99.7 49.7
Accommodation........................................... 66.0 55.2 1,558.4 600.6 56.6 21.1
Food services and drinking places....................... 621.6 488.8 8,766.3 2,399.7 217.4 59.5
Repair and maintenance.................................. 213.5 198.6 1,584.2 1,181.1 67.1 49.2
Personal and laundry services........................... 225.6 197.5 1,651.7 1,209.7 50.1 36.1
Membership associations & organizations................. 307.0 296.2 2,083.4 1,534.2 104.6 75.3
Private households...................................... (\d\) (\d\) (\c\) (\c\) (\c\) (\c\)
Public administration (\e\)............................. 90.1 72.8 7,269.7 687.0 467.3 38.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private...................................... 579.1 500.4 10,019.23 4,123.0 541.2 200.5
For profit, private..................................... 7,084.8 5,682.7 107,980.07 45,149.1 5,579.2 2,303.6
Government (state and local)............................ 90.1 72.8 17,811.69 2,270.1 960.8 117.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Establishment data are from the Survey of U.S. Businesses 2015; worker and payroll data from CPS MORG using pooled data for 2015-2017 adjusted to
reflect 2017.
\a\ Excludes the self-employed and unpaid workers.
\b\ Summation across industries may not add to the totals reported due to suppressed values and some establishments not reporting an industry.
\c\ Data not displayed because sample size of affected workers in small establishments is less than 10 due to reliability concerns.
\d\ SUSB does not provide information on private households.
\e\ Establishment number represents the total number of governments, including state and local.
Data from Government Organization Summary Report: 2012.
As discussed in VI.B.iii, estimates of workers subject to the FLSA
do not exclude workers employed by enterprises that do not meet the
enterprise coverage requirements because there is no reliable way of
identifying this population. Although not excluding such workers would
only affect a small percentage of workers generally, it may have a
larger effect (and result in a larger overestimate) for non-profits,
because revenue from charitable activities is not included when
determining enterprise coverage.
iv. Number of Affected Small Entities and Employees
To estimate the probability that an exempt EAP worker in the CPS
data is employed by a small establishment, the Department assumed this
probability is equal to the proportion of all workers employed by small
establishments in the corresponding industry. That is, if 50 percent of
workers in an industry are employed in small entities, then on average
small entities are expected to employ 1 out of every 2 exempt EAP
workers in this industry.\274\ The Department applied these
probabilities to the population of exempt EAP workers to find the
number of workers (total exempt EAP workers and total affected by the
rule) that small entities employ. No data are available to determine
whether small businesses (or small businesses in specific industries)
are more or less likely than non-small businesses to employ exempt EAP
[[Page 10956]]
workers or affected EAP workers. Therefore, the best assumption
available is to assign the same rates to all small and non-small
businesses.\275\ \276\
---------------------------------------------------------------------------
\274\ The Department used CPS microdata to estimate the number
of affected workers. This was done individually for each observation
in the relevant sample by randomly assigning them a small business
status based on the best available estimate of the probability of a
worker to be employed in a small business in their respective
industry (3-digit Census codes). While aggregation to the 262 3-
digit Census codes is certainly possible, many of these industry
codes contain too few observations to be reliable.
\275\ There is a strand of literature that indicates that small
establishments tend to pay lower wages than larger establishments.
This may imply that workers in small businesses are more likely to
be affected than workers in large businesses; however, the
literature does not make clear what the appropriate alternative rate
for small businesses should be.
\276\ Workers are designated as employed in a small business
based on their industry of employment. The share of workers
considered small in nonprofit, for profit, and government entities
is therefore the weighted average of the shares for the industries
that compose these categories.
---------------------------------------------------------------------------
The Department estimated that small entities employ 483,400 of the
1.3 million affected workers (38.0 percent) (Table 33). This composes
less than 1.0 percent of the 51.5 million workers that small entities
employ. The sectors with the highest total number of affected workers
employed by small establishments are: Professional and technical
services (67,500); health care services, except hospitals (53,000); and
retail trade (46,300). The sectors with the largest percent of small
business workers who are affected include: Telecommunications (2.9
percent); insurance (2.3 percent); and broadcasting (except internet)
(2.0 percent).
Table 33--Number of Affected Workers Employed by Small Establishments, by Industry and Employer Type
----------------------------------------------------------------------------------------------------------------
Workers (1,000s) Affected workers (1,000s) \a\
---------------------------------------------------------------
Industry Small business Small business
Total employed Total employed
----------------------------------------------------------------------------------------------------------------
Total........................................... 139,636.5 51,542.2 1,271.3 483.4
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................................... (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap........... (\c\) (\c\) (\c\) (\c\)
Mining.......................................... (\c\) (\c\) (\c\) (\c\)
Construction.................................... 7,955.8 5,153.8 38.1 27.4
Nonmetallic mineral prod. manuf................. (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod................ 1,636.3 992.3 7.9 3.8
Machinery manufacturing......................... 1,267.0 678.3 10.2 4.2
Computer and elect. prod. manuf................. 1,211.3 562.2 11.8 3.6
Electrical equip., appliance manuf.............. (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf..................... 2,522.2 711.3 13.3 4.2
Wood products................................... (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf.................... (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf....................... 1,464.6 861.7 10.4 4.7
Food manufacturing.............................. 1,761.2 834.6 8.2 3.6
Beverage and tobacco products................... (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf................ 590.2 391.1 4.5 3.9
Paper and printing.............................. 883.7 475.9 8.4 5.1
Petroleum and coal prod. manuf.................. (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.......................... 1,377.9 545.5 10.8 4.9
Plastics and rubber products.................... (\c\) (\c\) (\c\) (\c\)
Wholesale trade................................. 3,453.2 1,617.5 44.0 21.6
Retail trade.................................... 15,784.9 5,357.8 132.9 46.3
Transport. and warehousing...................... 6,019.2 1,580.3 34.7 7.8
Utilities....................................... (\c\) (\c\) (\c\) (\c\)
Publishing ind. (ex. internet).................. 484.9 208.8 9.9 4.1
Motion picture and sound recording.............. (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).................. 577.5 136.8 10.2 2.7
Internet publishing and broadcasting............ (\c\) (\c\) (\c\) (\c\)
Telecommunications.............................. 885.4 177.7 14.9 5.2
Internet serv. providers and data............... (\c\) (\c\) (\c\) (\c\)
Other information services...................... (\c\) (\c\) (\c\) (\c\)
Finance......................................... 4,446.7 818.7 80.7 15.9
Insurance....................................... 2,702.7 711.2 61.6 16.2
Real estate..................................... 2,015.4 1,208.9 24.3 14.1
Rental and leasing services..................... (\c\) (\c\) (\c\) (\c\)
Professional and technical services............. 9,445.1 4,433.7 149.4 67.5
Management of companies & enterprises........... (\c\) (\c\) (\c\) (\c\)
Admin. and support services..................... 5,029.6 2,285.4 38.1 15.3
Waste manag. and remed. services................ (\c\) (\c\) (\c\) (\c\)
Educational services............................ 13,911.5 2,916.7 71.9 13.9
Hospitals....................................... 7,158.8 327.9 67.6 2.9
Health care services, except hospitals.......... 9,760.5 4,673.4 106.2 53.0
Social assistance............................... 2,937.6 1,643.5 47.8 26.1
Arts, entertainment, and recreation............. 2,680.8 1,360.4 48.3 24.1
Accommodation................................... 1,558.4 600.6 8.0 3.9
Food services and drinking places............... 8,766.3 2,399.7 25.6 7.2
Repair and maintenance.......................... 1,584.2 1,181.1 8.9 4.9
Personal and laundry services................... 1,651.7 1,209.7 7.6 5.3
[[Page 10957]]
Membership associations & organizations......... 2,083.4 1,534.2 35.4 25.5
Private households.............................. (\c\) (\c\) (\c\) (\c\)
Public administration \b\....................... 7,269.7 687.0 54.6 6.5
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............................. 10,019.2 4,123.0 126.5 60.3
For profit, private............................. 107,980.1 45,149.1 1,012.3 408.1
Government (state and local).................... 17,811.7 2,270.1 132.5 15.1
----------------------------------------------------------------------------------------------------------------
Note: Worker data are from CPS MORG using pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Estimation of affected workers employed by small establishments was done at the Census 4-digit occupational
code and industry level. Therefore, at the more aggregated 51 industry level shown in this table, the ratio of
small business employed to total employed does not equal to the ratio of affected small business employed to
total affected for each industry, nor does it equal the ratio for the national total because relative industry
size, employment, and small business employment differs from industry to industry.
\b\ Establishment number represents the total number of state and local governments. Data from Government
Organization Summary Report: 2012.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
less than 10.
Because no information is available on how affected workers are
distributed among small establishments that employ affected workers,
the Department estimated a range for effects. At one end of this range,
the Department assumed that each small establishment employs no more
than one affected worker, meaning that at most 483,400 of the 6.3
million small establishments will employ an affected worker. Thus,
these assumptions provide an upper bound estimate of the number of
affected small establishments (although it provides a lower bound
estimate of the effect per small establishment because costs are spread
over a larger number of establishments). The impacts experienced by an
establishment would increase as the share of its workers that are
affected increases. Establishments that employ only affected workers
are most likely to experience the most severe effects. Therefore, to
estimate a lower-end estimate for the number of affected establishments
(which generates an upper-end estimate for impacts per establishment)
the Department assumed that all workers employed by an affected
establishment are affected.
For the purposes of estimating this lower-range number of affected
small establishments, the Department used the average size of a small
establishment as the typical size of an affected small
establishment.\277\ The average number of employees in a small
establishment is the number of workers that small establishments employ
divided by the total number of small establishments in that industry
(SUSB 2012). Thus, the number of affected small establishments in an
industry, if all employees of an affected establishment are affected,
equals the number of affected small establishment employees divided by
the average number of employees per small establishment.
---------------------------------------------------------------------------
\277\ This is not the true lower bound estimate of the number of
affected establishments. Strictly speaking, a true lower bound
estimate of the number of affected small establishments would be
calculated by assuming all employees in the largest small
establishments are affected. For example, if the SBA standard is
that establishments with 500 employees are ``small,'' and 1,350
affected workers are employed by small establishments in that
industry, then the smallest number of establishments that could be
affected in that industry (the true lower bound) would be three.
However, because such an outcome appears implausible, the Department
determined a more reasonable lower estimate would be based on
average establishment size.
---------------------------------------------------------------------------
Table 34 summarizes the estimated number of affected workers that
small establishments employ and the expected range for the number of
affected small establishments by industry. The Department estimated
that the rule will affect 483,400 workers who are employed by somewhere
between 64,100 and 483,400 small establishments; this composes from 1.0
percent to 7.7 percent of all small establishments. It also means that
from 5.8 million to 6.2 million small establishments incur no more than
minimal regulatory familiarization costs (i.e., 6.3 million minus
483,400 equals 5.8 million; 6.3 million minus 64,100 equals 6.2
million, using rounded values). The table also presents the average
number of affected employees per establishment using the method in
which all employees at the establishment are affected. For the other
method, by definition, there is always one affected employee per
establishment. Also displayed is the average payroll per small
establishment by industry (based on both affected and non-affected
small establishments), calculated by dividing total payroll of small
businesses by the number of small businesses (Table 32) (applicable to
both methods).
[[Page 10958]]
Table 34--Number of Small Affected Establishments and Employees by Industry and Employer Type
----------------------------------------------------------------------------------------------------------------
Number of small affected Per establishment
Affected establishments (1,000s) \a\ -------------------------------
workers in --------------------------------
Industry small entities One affected All employees Affected Average annual
(1,000s) employee per at estab. employees \a\ payroll
estab. \b\ affected \c\ ($1,000s)
----------------------------------------------------------------------------------------------------------------
Total........................... 483.4 483.4 64.1 7.5 418.1
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................... (\d\) (\d\) (\d\) (\d\) (\d\)
Forest., log., fish., hunt., and (\d\) (\d\) (\d\) (\d\) (\d\)
trap...........................
Mining.......................... (\d\) (\d\) (\d\) (\d\) (\d\)
Construction.................... 27.4 27.4 3.5 7.8 409.5
Nonmetallic mineral prod. manuf. (\d\) (\d\) (\d\) (\d\) (\d\)
Prim. metals and fab. metal prod 3.8 3.8 0.2 17.8 913.1
Machinery manufacturing......... 4.2 4.2 0.1 31.2 1,919.0
Computer and elect. prod. manuf. 3.6 3.6 0.1 49.8 4,454.5
Electrical equip., appliance (\d\) (\d\) (\d\) (\d\) (\d\)
manuf..........................
Transportation equip. manuf..... 4.2 4.2 0.1 69.6 4,297.1
Wood products................... (\d\) (\d\) (\d\) (\d\) (\d\)
Furniture and fixtures manuf.... (\d\) (\d\) (\d\) (\d\) (\d\)
Misc. and not spec. manuf....... 4.7 4.7 0.1 33.7 1,943.5
Food manufacturing.............. 3.6 3.6 0.1 35.4 1,448.9
Beverage and tobacco products... (\d\) (\d\) (\d\) (\d\) (\d\)
Textile, app., and leather manuf 3.9 3.9 0.2 24.1 1,046.6
Paper and printing.............. 5.1 5.1 0.3 17.1 870.6
Petroleum and coal prod. manuf.. (\d\) (\d\) (\d\) (\d\) (\d\)
Chemical manufacturing.......... 4.9 4.9 0.1 52.1 3,973.8
Plastics and rubber products.... (\d\) (\d\) (\d\) (\d\) (\d\)
Wholesale trade................. 21.6 21.6 4.4 4.9 293.3
Retail trade.................... 46.3 46.3 6.0 7.8 321.3
Transport. and warehousing...... 7.8 7.8 0.9 8.7 408.2
Utilities....................... (\d\) (\d\) (\d\) (\d\) (\d\)
Publishing ind. (ex. internet).. 4.1 4.1 0.4 10.1 690.8
Motion picture and sound (\d\) (\d\) (\d\) (\d\) (\d\)
recording......................
Broadcasting (except internet).. 2.7 2.7 0.1 29.2 1,803.8
Internet publishing and (\d\) (\d\) (\d\) (\d\) (\d\)
broadcasting...................
Telecommunications.............. 5.2 5.2 0.4 14.9 1,096.7
Internet serv. providers and (\d\) (\d\) (\d\) (\d\) (\d\)
data...........................
Other information services...... (\d\) (\d\) (\d\) (\d\) (\d\)
Finance......................... 15.9 15.9 2.5 6.4 507.9
Insurance....................... 16.2 16.2 3.2 5.1 351.6
Real estate..................... 14.1 14.1 3.2 4.4 240.9
Rental and leasing services..... (\d\) (\d\) (\d\) (\d\) (\d\)
Professional and technical 67.5 67.5 12.4 5.5 444.1
services.......................
Management of companies and (\d\) (\d\) (\d\) (\d\) (\d\)
enterprises....................
Admin. and support services..... 15.3 15.3 2.2 7.0 254.3
Waste manag. and remed. services (\d\) (\d\) (\d\) (\d\) (\d\)
Educational services............ 13.9 13.9 0.4 32.6 1,630.5
Hospitals....................... 2.9 \e\ 1.2 0.0 200.9 11,892.0
Health care services, except 53.0 53.0 6.4 8.2 384.9
hospitals......................
Social assistance............... 26.1 26.1 2.3 11.3 373.0
Arts, entertainment, and 24.1 24.1 2.2 11.1 404.4
recreation.....................
Accommodation................... 3.9 3.9 0.4 10.9 381.9
Food services and drinking 7.2 7.2 1.5 4.9 121.8
places.........................
Repair and maintenance.......... 4.9 4.9 0.8 5.9 248.0
Personal and laundry services... 5.3 5.3 0.9 6.1 183.0
Membership associations & 25.5 25.5 4.9 5.2 254.4
organizations..................
Private households.............. (\d\) (\d\) (\d\) (\d\) (\d\)
Public administration \f\....... 6.5 6.5 0.7 9.4 526.1
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 60.3 60.3 7.3 8.2 400.6
For profit, private............. 408.1 408.1 51.4 7.9 405.4
Government (state and local).... 15.1 15.1 0.5 31.2 1,615.2
----------------------------------------------------------------------------------------------------------------
Note: Establishment data are from the Survey of U.S. Businesses 2012; worker and payroll data from CPS MORG
using pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Estimation of both affected small establishment employees and affected small establishments was done at the
most detailed industry level available. Therefore, the ratio of affected small establishment employees to
total small establishment employees for each industry may not match the ratio of small affected establishments
to total small establishments at more aggregated industry level presented in the table, nor will it equal the
ratio at the national level because relative industry size, employment, and small business employment differs
from industry to industry.
[[Page 10959]]
\b\ This method may overestimate the number of affected establishments and therefore the ratio of affected
workers to affected establishments may be greater than 1-to-1. However, we addressed this issue by also
calculating effects based on the assumption that 100 percent of workers at an establishment are affected.
\c\ For example, on average, a small establishment in the construction industry employs 7.8 workers (5.2 million
employees divided by 663,000 small establishments). This method assumes if an establishment is affected then
all 7.8 workers are affected. Therefore, in the construction industry this method estimates there are 3,500
small affected establishments (27,400 affected small workers divided by 7.8).
\d\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
less than 10.
\e\ Number of establishments is smaller than number of affected employees; thus, total number of establishments
reported.
\f\ Establishment number represents the total number of state and local governments.
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. The recordkeeping requirements are not new
requirements; however, employers would need to keep some additional
records for additional affected employees if the NPRM became final
without change. As indicated in this analysis, the NPRM would expand
minimum wage and overtime pay coverage to 1.3 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 V) 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
For small entities, the Department projected various types of
effects, including regulatory familiarization costs, adjustment costs,
managerial costs, and payroll increases to employees. The Department
estimated a range for the number of small affected establishments and
the impacts they incur. However, few establishments are likely to incur
the effects at the upper end of this range because it seems unlikely
that the proposed rule would affect all employees at a small firm.
While the upper and lower bounds are likely over- and under-estimates,
respectively, of effects per small establishment, the Department
believes that this range of costs and payroll increases provides the
most accurate characterization of the effects of the rule on small
employers.\278\ Furthermore, the smaller estimate of the number of
affected establishments (i.e., where all employees are assumed to be
affected) will result in the largest costs and payroll increases per
entity as a percent of establishment payroll and revenue, and the
Department expects that many, if not most, entities will incur smaller
costs, payroll increases, and effects relative to establishment size.
The Department seeks comments on the estimates for regulatory
familiarization, adjustment costs, managerial costs, and transfers, as
discussed below.
---------------------------------------------------------------------------
\278\ As noted previously, these are not the true lower and
upper bounds. The values presented are the highest and lowest
estimates the Department believes are plausible.
---------------------------------------------------------------------------
The Department expects total direct employer costs will range from
$55.5 million to $72.0 million for affected small establishments (Table
35) in the first year after the proposed rule is finalized. Small
establishments that do not employ affected workers will incur an
additional $242.5 million to $260.1 million in regulatory
familiarization costs. The three industries with the highest costs
(professional and technical services; healthcare services, except
hospitals; and retail trade) account for about 35 percent of the costs.
The hospitals industry is expected to incur the largest cost per
establishment ($22,000 using the method where all employees are
affected), although the costs are not expected to exceed 0.19 percent
of payroll. The food services and drinking places industry is expected
to experience the largest effect as a share of payroll (estimated
direct costs compose 0.48 percent of average entity payroll).
Table 35--Year 1 Small Establishment Direct Costs, Total and per Establishment, by Industry and Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cost to small entities in year 1 \a\
-----------------------------------------------------------------------------------------------
One affected employee All employees affected
Industry -----------------------------------------------------------------------------------------------
Cost per Percent of Cost per Percent of
Total affected annual payroll Total affected annual payroll
(millions) \b\ entity (%) (millions) \b\ entity (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... $72.0 $149 0.04 $55.5 $867 0.21
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture............................................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Mining.................................................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Construction............................................ 4.2 151 0.04 3.2 894 0.22
Nonmetallic mineral prod. manuf......................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod........................ 0.6 151 0.02 0.4 1,994 0.22
Machinery manufacturing................................. 0.6 151 0.01 0.5 3,461 0.18
Computer and elect. prod. manuf......................... 0.5 151 0.00 0.4 5,499 0.12
Electrical equip., appliance manuf...................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
[[Page 10960]]
Transportation equip. manuf............................. 0.6 151 0.00 0.5 7,667 0.18
Wood products........................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf............................ (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf............................... 0.7 151 0.01 0.5 3,730 0.19
Food manufacturing...................................... 0.5 151 0.01 0.4 3,917 0.27
Beverage and tobacco products........................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf........................ 0.6 151 0.01 0.4 2,685 0.26
Paper and printing...................................... 0.8 151 0.02 0.6 1,915 0.22
Petroleum and coal prod. manuf.......................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.................................. 0.7 151 0.00 0.5 5,754 0.14
Plastics and rubber products............................ (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Wholesale trade......................................... 3.3 151 0.05 2.5 580 0.20
Retail trade............................................ 7.0 1.51 0.05 5.3 893 0.28
Transport. and warehousing.............................. 1.2 151 0.04 0.9 995 0.24
Utilities............................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Publishing ind. (ex. internet).......................... 0.6 151 0.02 0.5 1,146 0.17
Motion picture and sound recording...................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).......................... 0.4 151 0.01 0.3 3,237 0.18
Internet publishing and broadcasting.................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Telecommunications...................................... 0.8 151 0.01 0.6 1,672 0.15
Internet serv. providers and data....................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Other information services.............................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Finance................................................. 2.4 151 0.03 1.8 743 0.15
Insurance............................................... 2.5 151 0.04 1.9 600 0.17
Real estate............................................. 2.1 151 0.06 1.7 522 0.22
Rental and leasing services............................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Professional and technical services..................... 10.2 151 0.03 7.9 640 0.14
Management of companies and enterprises................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Admin. and support services............................. 2.3 151 0.06 1.8 812 0.32
Waste manag. and remed. services........................ (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Educational services.................................... 2.1 151 0.01 1.5 3,619 0.22
Hospitals............................................... 0.4 151 0.00 0.3 22,051 0.19
Health care services, except hospitals.................. 8.0 151 0.04 6.1 944 0.25
Social assistance....................................... 4.0 151 0.04 3.0 1,277 0.34
Arts, entertainment, and recreation..................... 3.7 151 0.04 2.7 1,254 0.31
Accommodation........................................... 0.6 151 0.04 0.4 1,235 0.32
Food services and drinking places....................... 1.1 151 0.12 0.9 580 0.48
Repair and maintenance.................................. 0.7 151 0.06 0.6 694 0.28
Personal and laundry services........................... 0.8 151 0.08 0.6 713 0.39
Membership associations & organizations................. 3.9 151 0.06 3.0 609 0.24
Private households...................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Public administration................................... 1.0 151 0.03 0.7 1,076 0.20
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private...................................... 8.8 146 0.04 6.6 898 0.22
For profit, private..................................... 63.0 154 0.04 48.0 935 0.23
Government (state and local)............................ 2.2 148 0.01 1.6 3,339 0.21
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\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.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10.
It is possible that the costs of the proposed rule may be
disproportionately large for small entities, especially because small
entities often have limited or no human resources personnel on staff.
However, the Department expects that small entities will rely upon
compliance assistance materials provided by the Department or industry
associations to become familiar with the proposed rule. Additionally,
the Department notes that the proposed rule is quite limited in scope
as it primarily makes changes to the salary component of the part 541
[[Page 10961]]
regulations. Finally, the Department believes that most entities have
at least some nonexempt employees and, therefore, already have policies
and systems in place for monitoring and recording their hours. The
Department believes that applying those same policies and systems to
the workers whose exemption status changes will not be an unreasonable
burden on small businesses.
Average weekly earnings for affected EAP workers in small
establishments are expected to increase by about $8.12 per week per
affected worker, using the incomplete fixed-job model \279\ described
in section VI.D.iv.\280\ This would lead to $204.1 million in
additional annual wage payments to employees in small entities (less
than 0.8 percent of aggregate affected establishment payroll; Table
36). The largest payroll increases per establishment are expected in
the sectors of transportation equipment manufacturing (up to $92,900
per entity); computer and electronic product manufacturing (up to
$44,400 per entity); and chemical manufacturing (up to $39,800 per
entity). However, average payroll increases per establishment exceed 2
percent of average annual payroll in only three sectors: Food services
and drinking places (4.7 percent), primary metals and fabricated metal
products (2.3 percent), and transportation equipment manufacturing (2.2
percent).
---------------------------------------------------------------------------
\279\ As explained in section VI.D.iv., the incomplete fixed-job
model reflects the Department's determination that an appropriate
estimate of the impact on the implicit hourly rate of pay for
regular overtime workers, if the NPRM is finalized as proposed,
should be determined using the average of Barkume's and Trejo's two
estimates of the incomplete fixed-job model adjustments: A wage
change that is 40 percent of the adjustment toward the amount
predicted by the fixed-job model, assuming an initial zero overtime
pay premium, and a wage change that is 80 percent of the adjustment
assuming an initial 28 percent overtime pay premium.
\280\ This is an average increase for all affected workers (both
EAP and HCE), and reconciles to the weighted average of individual
salary changes discussed in the Transfers section.
Table 36--Year 1 Small Establishment Payroll Increases, Total and per Establishment, by Industry and Employer
Type
----------------------------------------------------------------------------------------------------------------
Increased payroll for small entities in year 1 \a\
-------------------------------------------------------------------------------
One affected employee All employees affected
Industry ---------------------------------------------------------------
Total Percent of Percent of
(millions) Per estab. annual payroll Per estab. annual payroll
(%) (%)
----------------------------------------------------------------------------------------------------------------
Total........................... $204.1 $422 0.10 $3,187 0.76
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................... (\b\) (\b\) (\b\) (\b\) (\b\)
Forest., log., fish., hunt., and (\b\) (\b\) (\b\) (\b\) (\b\)
trap...........................
Mining.......................... (\b\) (\b\) (\b\) (\b\) (\b\)
Construction.................... 9.8 356 0.09 2,768 0.68
Nonmetallic mineral prod. manuf. (\b\) (\b\) (\b\) (\b\) (\b\)
Prim. metals and fab. metal prod 4.4 1,172 0.13 20,889 2.29
Machinery manufacturing......... 4.5 1,054 0.05 32,885 1.71
Computer and elect. prod. manuf. 3.2 892 0.02 44,405 1.00
Electrical equip., appliance (\b\) (\b\) (\b\) (\b\) (\b\)
manuf..........................
Transportation equip. manuf..... 5.6 1,334 0.03 92,869 2.16
Wood products................... (\b\) (\b\) (\b\) (\b\) (\b\)
Furniture and fixtures manuf.... (\b\) (\b\) (\b\) (\b\) (\b\)
Misc. and not spec. manuf....... 5.0 1,066 0.05 35,874 1.85
Food manufacturing.............. 1.6 448 0.03 15,837 1.09
Beverage and tobacco products... (\b\) (\b\) (\b\) (\b\) (\b\)
Textile, app., and leather manuf 1.7 429 0.04 10,355 0.99
Paper and printing.............. 0.5 91 0.01 1,556 0.18
Petroleum and coal prod. manuf.. (\b\) (\b\) (\b\) (\b\) (\b\)
Chemical manufacturing.......... 3.8 764 0.02 39,839 1.00
Plastics and rubber products.... (\b\) (\b\) (\b\) (\b\) (\b\)
Wholesale trade................. 20.6 957 0.33 4,705 1.60
Retail trade.................... 29.4 635 0.20 4,935 1.54
Transport. and warehousing...... 1.9 242 0.06 2,104 0.52
Utilities....................... (\b\) (\b\) (\b\) (\b\) (\b\)
Publishing ind. (ex. internet).. .............. 0 .............. 0 ..............
Motion picture and sound (\b\) (\b\) (\b\) (\b\) (\b\)
recording......................
Broadcasting (except internet).. 0.0 6 0.00 167 0.01
Internet publishing and (\b\) (\b\) (\b\) (\b\) (\b\)
broadcasting...................
Telecommunications.............. 3.1 604 0.06 8,986 0.82
Internet serv. providers and (\b\) (\b\) (\b\) (\b\) (\b\)
data...........................
Other information services...... (\b\) (\b\) (\b\) (\b\) (\b\)
Finance......................... 7.0 442 0.09 2,829 0.56
Insurance....................... 3.2 196 0.06 1,000 0.28
Real estate..................... 5.4 386 0.16 1,692 0.70
Rental and leasing services..... (\b\) (\b\) (\b\) (\b\) (\b\)
Professional and technical 22.6 335 0.08 1,826 0.41
services.......................
Management of companies and (\b\) (\b\) (\b\) (\b\) (\b\)
enterprises....................
Admin. and support services..... 3.7 245 0.10 1,720 0.68
Waste manag. and remed. services (\b\) (\b\) (\b\) (\b\) (\b\)
Educational services............ 8.2 591 0.04 19,278 1.18
[[Page 10962]]
Hospitals....................... .............. $0 .............. $0 ..............
Health care services, except 8.7 165 .04 1,358 0.35
hospitals......................
Social assistance............... 2.8 109 0.03 1,228 0.33
Arts, entertainment, and 11.5 475 0.12 5,259 1.30
recreation.....................
Accommodation................... 1.3 331 0.09 3,602 0.94
Food services and drinking 8.4 1,168 0.96 5,736 4.71
places.........................
Repair and maintenance.......... 1.4 293 0.12 1,742 0.70
Personal and laundry services... 0.8 150 0.08 921 0.50
Membership associations & 6.4 252 0.10 1,307 0.51
organizations..................
Private households.............. (\b\) (\b\) (\b\) (\b\) (\b\)
Public administration........... 2.4 363 0.07 3,426 0.65
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 21.3 353 0.09 2,911 0.73
For profit, private............. 177.2 434 0.11 3,449 0.85
Government (state and local).... 5.7 376 0.02 11,710 0.72
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Aggregate change in total annual payroll experienced by small entities under the updated salary levels after
labor market adjustments. This amount represents the total amount of (wage) transfers from employers to
employees.
\b\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
less than 10.
Table 37 presents estimated first year direct costs and payroll
increases combined per establishment and the costs and payroll
increases as a percent of average establishment payroll. The Department
presents only the results for the upper bound scenario where all
workers employed by the establishment are affected. Combined costs and
payroll increases per establishment range from $1,150 in publishing
industries (except internet) to $100,500 in the transportation
equipment manufacturing sector.\281\ Combined costs and payroll
increases compose more than 2 percent of average annual establishment
payroll in four sectors: Food services and drinking places (5.2
percent), primary metals and fabricated metal products (2.5 percent),
transportation equipment manufacturing (2.3 percent), and miscellaneous
and not specified manufacturing (2.0 percent). In all other sectors,
they range from 0.2 percent to 1.9 percent of payroll.
---------------------------------------------------------------------------
\281\ When a single affected worker is employed, combined costs
and transfers by industry were estimated to range from $151 (in both
the publishing (except internet) and hospitals industries) to $1,500
(in transportation equipment manufacturing) per establishment.
---------------------------------------------------------------------------
However, comparing costs and payroll increases to payrolls
overstates the effects on establishments because payroll represents
only a fraction of the financial resources available to an
establishment. The Department approximated revenue per small affected
establishment by calculating the ratio of small business revenues to
payroll by industry from the 2012 SUSB data then multiplying that ratio
by average small entity payroll.\282\ Using this approximation of
annual revenues as a benchmark, only one sector has costs and payroll
increases amounting to more than one percent of revenues, food services
and drinking places (1.5 percent).
---------------------------------------------------------------------------
\282\ The ratio of revenues to payroll for small businesses
ranged from 2.15 (social assistance) to 43.40 (petroleum and coal
products manufacturing), with an average over all sectors of 5.35.
The Department used this estimate of revenue, instead of small
business revenue reported directly from the 2012 SUSB so revenue
aligned with payrolls in 2017.
Table 37--Year 1 Small Establishment Direct Costs and Payroll Increases, Total and per Establishment, by
Industry and Employer Type, Using All Employees in Establishment Affected Method
----------------------------------------------------------------------------------------------------------------
Costs and payroll increases for small affected establishments,
all employees affected
---------------------------------------------------------------
Industry Percent of
Total Percent of estimated
(millions) Per estab. \a\ annual payroll revenues \b\
(%) (%)
----------------------------------------------------------------------------------------------------------------
Total........................................... $259.6 $4,053 0.97 0.18
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................................... (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap........... (\c\) (\c\) (\c\) (\c\)
Mining.......................................... (\c\) (\c\) (\c\) (\c\)
Construction.................................... 12.9 3,662 0.89 0.20
[[Page 10963]]
Nonmetallic mineral prod. manuf................. (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod................ 4.8 22,883 2.51 0.49
Machinery manufacturing......................... 4.9 36,346 1.89 0.39
Computer and elect. prod. manuf................. 3.6 49,904 1.12 0.25
Electrical equip., appliance manuf.............. (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf..................... 6.1 100,536 2.34 0.34
Wood products................................... (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf.................... (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf....................... 5.5 39,603 2.04 0.48
Food manufacturing.............................. 2.0 19,753 1.36 0.12
Beverage and tobacco products................... (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf................ 2.1 13,040 1.25 0.23
Paper and printing.............................. 1.0 3,471 0.40 0.08
Petroleum and coal prod. manuf.................. (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.......................... 4.3 45,592 1.15 0.11
Plastics and rubber products.................... (\c\) (\c\) (\c\) (\c\)
Wholesale trade................................. 23.2 5,285 1.80 0.11
Retail trade.................................... 34.8 5,828 1.81 0.18
Transport. and warehousing...................... 2.8 3,098 0.76 0.17
Utilities....................................... (\c\) (\c\) (\c\) (\c\)
Publishing ind. (ex. internet).................. 0.5 1,146 0.17 0.06
Motion picture and sound recording.............. (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).................. 0.3 3,404 0.19 0.07
Internet publishing and broadcasting............ (\c\) (\c\) (\c\) (\c\)
Telecommunications.............................. 3.7 10,658 0.97 0.14
Internet serv. providers and data............... (\c\) (\c\) (\c\) (\c\)
Other information services...................... (\c\) (\c\) (\c\) (\c\)
Finance......................................... 8.9 3,572 0.70 0.25
Insurance....................................... 5.1 1,600 0.46 0.10
Real estate..................................... 7.1 2,214 0.92 0.20
Rental and leasing services..................... (\c\) (\c\) (\c\) (\c\)
Professional and technical services............. 30.5 2,466 0.56 0.22
Management of companies and enterprises......... (\c\) (\c\) (\c\) (\c\)
Admin. and support services..................... 5.5 2,532 1.00 0.45
Waste manag. and remed. services................ (\c\) (\c\) (\c\) (\c\)
Educational services............................ 9.7 22,897 1.40 0.54
Hospitals....................................... 0.3 22,051 0.19 0.08
Health care services, except hospitals.......... 14.8 2,302 0.60 0.25
Social assistance............................... 5.8 2,505 0.67 0.31
Arts, entertainment, and recreation............. 14.2 6,513 1.61 0.53
Accommodation................................... 1.7 4,836 1.27 0.32
Food services and drinking places............... 9.3 6,315 5.19 1.54
Repair and maintenance.......................... 2.0 2,436 0.98 0.28
Personal and laundry services................... 1.4 1,634 0.89 0.31
Membership associations & organizations......... 9.4 1,917 0.75 0.19
Private households.............................. (\c\) (\c\) (\c\) (\c\)
Public administration........................... 3.1 4,501 0.86 0.23
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............................. 94.40 3,570 1.00 0.30
For profit, private............................. 585.30 3,532 1.00 0.20
Government (state and local).................... 12.20 9,264 0.60 0.20
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Total direct costs and transfers for small establishments in which all employees are affected. Impacts to
small establishments in which one employee is affected will be a fraction of the impacts presented in this
table.
\b\ Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2012
SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was
calculated using revenues and payroll from the 2012 Census of Governments.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
less than 10.
[[Page 10964]]
vi. Projected Effects to Affected Small Entities in Year 2 Through Year
10
To determine how small businesses will be affected in future years,
the Department projected costs to small business for nine years after
Year 1 of the rule. Projected employment and earnings were calculated
using the same methodology described in Section VI.B.ii. Affected
employees in small firms follow a similar pattern to affected workers
in all establishments: The number decreases gradually in projected
years. There are 483,400 affected workers in small establishments in
Year 1 and 405,200 in Year 10. Table 38 reports affected workers in
selected years only.
Table 38--Projected Number of Affected Workers in Small Establishments,
by Industry
------------------------------------------------------------------------
Affected workers in small
establishments (1,000s)
Industry -------------------------------
Year 1 Year 10
------------------------------------------------------------------------
Total................................... 483.4 405.2
Agriculture............................. (\a\) (\a\)
Forest., log., fish., hunt., and trap... (\a\) (\a\)
Mining.................................. (\a\) 1.7
Construction............................ 27.4 22.3
Nonmetallic mineral prod. manuf......... (\a\) (\a\)
Prim. metals and fab. metal prod........ 3.8 3.1
Machinery manufacturing................. 4.2 4.0
Computer and elect. prod. manuf......... 3.6 4.9
Electrical equip., appliance manuf...... (\a\) (\a\)
Transportation equip. manuf............. 4.2 3.0
Wood products........................... (\a\) (\a\)
Furniture and fixtures manuf............ (\a\) (\a\)
Misc. and not spec. manuf............... 4.7 5.5
Food manufacturing...................... 3.6 (\a\)
Beverage and tobacco products........... (\a\) (\a\)
Textile, app., and leather manuf........ 3.9 (\a\)
Paper and printing...................... 5.1 (\a\)
Petroleum and coal prod. manuf.......... (\a\) (\a\)
Chemical manufacturing.................. 4.9 3.4
Plastics and rubber products............ (\a\) (\a\)
Wholesale trade......................... 21.6 21.3
Retail trade............................ 46.3 34.4
Transport. and warehousing.............. 7.8 7.3
Utilities............................... (\a\) (\a\)
Publishing ind. (ex. internet).......... 4.1 3.8
Motion picture and sound recording...... (\a\) (\a\)
Broadcasting (except internet).......... 2.7 (\a\)
Internet publishing and broadcasting.... (\a\) (\a\)
Telecommunications...................... 5.2 (\a\)
Internet serv. providers and data....... (\a\) (\a\)
Other information services.............. (\a\) (\a\)
Finance................................. 15.9 14.8
Insurance............................... 16.2 11.9
Real estate............................. 14.1 12.4
Rental and leasing services............. (\a\) (\a\)
Professional and technical services..... 67.5 65.6
Management of companies and enterprises. (\a\) (\a\)
Admin. and support services............. 15.3 10.7
Waste manag. and remed. services........ (\a\) (\a\)
Educational services.................... 13.9 14.3
Hospitals............................... 2.9 (\a\)
Health care services, except hospitals.. 53.0 44.4
Social assistance....................... 26.1 21.5
Arts, entertainment, and recreation..... 24.1 18.1
Accommodation........................... 3.9 3.1
Food services and drinking places....... 7.2 6.7
Repair and maintenance.................. 4.9 4.5
Personal and laundry services........... 5.3 4.2
Membership associations & organizations. 25.5 20.2
Private households...................... (\a\) (\a\)
Public administration................... 6.5 5.0
------------------------------------------------------------------------
Note: Worker data are from CPS MORG using pooled data for 2015-2017
adjusted to reflect 2017.
\a\ Data not displayed because sample size of affected workers in small
establishments is less than 10.
Costs to small establishments vary by year but generally decrease
from Year 1 mostly because regulatory familiarization costs are zero in
all projected years, and adjustment costs are relatively small. By Year
10, additional costs and payroll to small businesses have decreased
from $259.6 million in Year 1 to $210.2 million (Table 39). The
Department notes that, due to relatively small sample sizes, the
estimates by detailed industry are not
[[Page 10965]]
precise. This can cause some numbers in the data to vary across years
by a greater amount than they will in the future.
Table 39--Projected Direct Costs and Payroll Increases for Affected
Small Establishments, by Industry, Using All Employees in Establishment
Affected Method
------------------------------------------------------------------------
Costs and payroll increases
for small affected
establishments, all employees
Industry affected (millions 2017$)
-------------------------------
Year 1 Year 10
------------------------------------------------------------------------
Total................................... $259.6 $210.2
Agriculture............................. (a) (a)
Forest., log., fish., hunt., and trap... (a) (a)
Mining.................................. (a) 2.4
Construction............................ 12.9 12.2
Nonmetallic mineral prod. manuf......... (a) (a)
Prim. metals and fab. metal prod........ 4.8 1.8
Machinery manufacturing................. 4.9 2.5
Computer and elect. prod. manuf......... 3.6 3.0
Electrical equip., appliance manuf...... (a) (a)
Transportation equip. manuf............. 6.1 2.8
Wood products........................... (a) (a)
Furniture and fixtures manuf............ (a) (a)
Misc. and not spec. manuf............... 5.5 0.8
Food manufacturing...................... 2.0 (a)
Beverage and tobacco products........... (a) (a)
Textile, app., and leather manuf........ 2.1 (a)
Paper and printing...................... 1.0 [a]
Petroleum and coal prod. manuf.......... (a) (a)
Chemical manufacturing.................. 4.3 1.4
Plastics and rubber products............ (a) (a)
Wholesale trade......................... 23.2 14.1
Retail trade............................ 34.8 25.3
Transport. and warehousing.............. 2.8 2.4
Utilities............................... (a) (a)
Publishing ind. (ex. internet).......... 0.5 3.6
Motion picture and sound recording...... (a) (a)
Broadcasting (except internet).......... 0.3 (a)
Internet publishing and broadcasting.... (a) (a)
Telecommunications...................... 3.7 (a)
Internet serv. providers and data....... (a) (a)
Other information services.............. (a) (a)
Finance................................. 8.9 15.5
Insurance............................... 5.1 4.0
Real estate............................. 7.1 5.5
Rental and leasing services............. (a) (a)
Professional and technical services..... 30.5 30.2
Management of companies and enterprises. (a) (a)
Admin. and support services............. 5.5 2.6
Waste manag. and remed. services........ (a) (a)
Educational services.................... 9.7 7.6
Hospitals............................... 0.3 (a)
Health care services, except hospitals.. 14.8 9.7
Social assistance....................... 5.8 5.5
Arts, entertainment, and recreation..... 14.2 8.1
Accommodation........................... 1.7 0.2
Food services and drinking places....... 9.3 4.7
Repair and maintenance.................. 2.0 1.3
Personal and laundry services........... 1.4 1.0
Membership associations & organizations. 9.4 6.6
Private households...................... (a) (a)
Public administration................... 3.1 3.0
------------------------------------------------------------------------
Note: pooled data for 2015-2017 adjusted to reflect 2017.
a Data not displayed because sample size of affected workers in small
establishments is less than 10.
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.
[[Page 10966]]
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. Taking no
regulatory action does not address the Department's concerns discussed
above under Need for Regulation. Pursuant to section 603(c) of the RFA,
the following alternatives are to be addressed:
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 unnecessary
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 $1,150 (publishing industries,
except internet) to a maximum of $100,500 (transportation equipment,
manufacturing), using the upper-bound estimates. 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.
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.
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, hire additional workers
or spread overtime hours to other employees, or compensate employees
for overtime hours worked. The Department makes available a variety of
resources to employers for understanding their obligations and
achieving compliance.
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 the FLSA,
which applies to all employers that satisfy the enterprise coverage
threshold or employ individually covered employees.\283\ Creating a
regulatory exemption for small businesses is 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.'' \284\
---------------------------------------------------------------------------
\283\ See 29 U.S.C. 203(s).
\284\ 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.
VIII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA),\285\ 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 $161 million ($100 million in 1995 dollars adjusted for
inflation) or more in at least 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.
---------------------------------------------------------------------------
\285\ 2 U.S.C. 1501.
---------------------------------------------------------------------------
A. Authorizing Legislation
This proposed rule is issued pursuant to section 13(a)(1) of the
Fair Labor Standards Act (FLSA or 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]. . .).'' \286\ The requirements of the
exemption are contained in part 541 of the Department's regulations.
Section 3(e) of the FLSA \287\ 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 \288\ also
defines public agencies to include the government of a state or
political subdivision thereof, or any interstate governmental agency.
---------------------------------------------------------------------------
\286\ 29 U.S.C. 213(a)(1).
\287\ 29 U.S.C. 203(e).
\288\ 29 U.S.C. 203(x).
---------------------------------------------------------------------------
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 $161 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 $161 million or more in any one year.
Costs to state and local governments: Based on the economic impact
analysis of this proposed rule, the Department determined that the
proposed rule will result in Year 1 costs for state and local
governments totaling $59.2 million, of which $17.2 million are direct
employer costs and $42.0 million are payroll increases (Table 40). In
subsequent years, the Department estimated that state and local
governments may experience payroll increases of as much as $38.3
million per year.
Costs to the private sector: The Department determined that the
proposed rule will result in Year 1 costs to the private sector of
approximately $0.9 billion, of which $446.7 million are direct employer
costs and $483.7 million are payroll increases. In subsequent years,
the Department estimated that the private sector may experience a
payroll increase of as much as $407.1 million per year.
[[Page 10967]]
Table 40--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.......................................................... 1,271 1,139 128
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization...................................... $324.9 $321.2 $3.8
Adjustment...................................................... 66.6 59.7 6.7
Managerial...................................................... 72.7 65.9 6.7
Total direct costs.............................................. 464.2 446.7 17.2
----------------------------------------------------------------------------------------------------------------
Payroll Increases (Millions)
----------------------------------------------------------------------------------------------------------------
From employers to workers....................................... $526.9 $483.7 $42.0
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs & Transfers (Millions)
----------------------------------------------------------------------------------------------------------------
From employers.................................................. $991.1 $930.4 $59.2
----------------------------------------------------------------------------------------------------------------
a Includes only state, local, and tribal governments.
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.\289\
However, OMB guidance on this requirement notes that such macro-
economic effects tend to be measurable in nationwide econometric models
only if the economic effect of the regulation reaches 0.25 percent to
0.5 percent of GDP, or in the range of $48.5 billion to $97.0 billion
(using 2017 GDP). A regulation with smaller aggregate effect is not
likely to have a measurable effect 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.
---------------------------------------------------------------------------
\289\ 2 U.S.C. 1532(a)(4).
---------------------------------------------------------------------------
The Department's RIA estimates that the total first-year costs
(direct employer costs and payroll increases from employers to workers)
of the proposed rule will be approximately $930.4 million for private
employers and $59.2 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 effect 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 0.015 percent of
private sector payrolls nationwide.\290\ Total private sector first-
year costs compose 0.002 percent of national private sector revenues
(revenues in 2017 are projected to be $38.8 trillion).\291\ The
Department concludes that effects of this magnitude are affordable and
will not result in significant disruptions to typical firms in any of
the major industry categories.
---------------------------------------------------------------------------
\290\ Private sector payroll costs nationwide are projected to
be $6.4 trillion in 2017. This projection is based on private sector
payroll costs in 2012, which were $5.3 trillion using the 2012
Economic Census of the United States. This was inflated to 2017
dollars using the CPI-U.
\291\ Private sector revenues in 2012 were $32.3 trillion using
the 2012 Economic Census of the United States. This was inflated to
2017 dollars using the CPI-U.
---------------------------------------------------------------------------
Total first-year state and local government costs compose less than
0.01 percent of state and local government payrolls.\292\ First-year
state and local government costs compose 0.002 percent of state and
local government revenues (projected 2017 revenues were estimated to be
$3.7 trillion).\293\ Effects of this magnitude will not result in
significant disruptions to typical state and local governments. The
$59.2 million in state and local government costs constitutes an
average of approximately $657 for each of the approximately 90,106
state and local entities. The Department considers effects of this
magnitude to be quite small both in absolute terms and in relation to
payrolls and revenue.
---------------------------------------------------------------------------
\292\ State and local payrolls in 2015 were reported as $900
billion. This was inflated to 2017 payroll costs of $962.9 billion
using the CPI-U. State and Local Government Finances Summary:
FY2015. Available at https://www.census.gov/govs/local/.
\293\ State and local revenues in 2015 were reported as $3.4
trillion. This was inflated to 2017 dollars using the CPI-U. State
and Local Government Finances Summary: FY2015. Available at https://www.census.gov/govs/local/.
---------------------------------------------------------------------------
C. Least Burdensome Option or Explanation Required
This NPRM has described the Department's consideration of various
options throughout the preamble and economic impact analysis (section
VI.C.i). The Department believes that it has chosen the least
burdensome but still cost-effective methodology to update the salary
level 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 updated salary level, that outcome would
not necessarily be the most cost-effective or least-burdensome
alternative for employers. A lower or outdated salary level would
result in a less effective bright-line test for separating workers who
may be exempt from those nonexempt workers intended to be within the
Act's protection. A low salary level would also increase the burden on
the employer to apply the duties test to more employees in determining
whether an employee is exempt, which would inherently 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 affects 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
[[Page 10968]]
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
determined that setting the standard salary level using the level
equivalent to the earnings of the 20th percentile of full-time salaried
workers in the South and/or in the retail sector, projected forward to
January 2020, balances the risks and costs of misclassification of
exempt status.
IX. 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.
X. 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.
List of Subjects in 29 CFR Part 541
Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.
Signed at Washington, DC this 7th day of March, 2019.
Keith E. Sonderling,
Acting 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 continues 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. 19, 2014), 79 FR 77527 (Dec. 24,
2014).
0
2. Revise paragraph (a)(1) of Sec. 541.100 to read as follows:
Sec. 541.100 General rule for executive employees.
(a) * * *
(1) Compensated on a salary basis pursuant to Sec. 541.600 at a
rate of not less than $679 per week (or $455 per week if employed in
the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or
the U.S. Virgin Islands by employers other than the Federal government,
or $380 per week if employed in American Samoa by employers other than
the Federal government), 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 pursuant to Sec. 541.600
at a rate of not less than $679 per week (or $455 per week if employed
in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico,
or the U.S. Virgin Islands by employers other than the Federal
government, or $380 per week if employed in American Samoa by employers
other than the Federal government), exclusive of board, lodging or
other facilities;
* * * * *
0
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 at a rate of not less than
$679 per week (or $455 per week if employed in the Commonwealth of the
Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands
by employers other than the Federal government, or $380 per week if
employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging, or other facilities; or on a
salary basis which is at least equal to the entrance salary for
teachers in the educational establishment by which employed; and
* * * * *
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 pursuant to Sec. 541.600
at a rate of not less than $679 per week (or $455 per week if employed
in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico,
or the U.S. Virgin Islands by employers other than the Federal
government, or $380 per week if employed in American Samoa by employers
other than the Federal government), exclusive of board, lodging or
other facilities; and
* * * * *
0
6. Amend Sec. 541.400 by removing the first two sentences of paragraph
(b) and adding one sentence in their 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 is compensated on a salary or fee basis at a rate of not less than
$679 per week (or $455 per week if employed in the Commonwealth of the
Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands
by employers other than the Federal government, or $380 per week if
employed in American Samoa by employers other than the Federal
government), exclusive of board, lodging, or other facilities. * * *
* * * * *
0
7. Amend Sec. 541.600 by:
0
a. Removing the first three sentences of paragraph (a) and adding one
sentence in their place; and
0
b. Revising paragraph (b).
The revisions and 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 at a rate of not less than $679
per week (or $455 per week if employed in the Commonwealth of the
Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands
by employers other than the Federal Government, or $380 per week if
employed in American Samoa by employers other than the Federal
Government), 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. For example,
the $679-per-week requirement will be met if the employee is
compensated biweekly on a salary basis of not less than $1,358,
semimonthly on a salary basis of not less than $1,471, or monthly on a
salary basis of not less than $2,942. However, the shortest period of
payment that will
[[Page 10969]]
meet this compensation requirement is one week.
* * * * *
0
8. Amend Sec. 541.601 by revising paragraphs (a) and (b) to read as
follows:
Sec. 541.601 Highly compensated employees.
(a) An employee with total annual compensation of at least $147,414
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 as identified in subparts B, C or D of this part.
(b) (1) ``Total annual compensation'' must include at least $679
per week paid on a salary or fee basis as set forth in Sec. Sec.
541.602 and 541.605, except that Sec. 541.602(a)(3) shall not apply to
highly compensated employees. Total annual compensation may also
include commissions, nondiscretionary bonuses and other
nondiscretionary compensation earned during a 52-week period. Total
annual compensation does not include board, lodging and other
facilities as defined in Sec. 541.606, and does not include payments
for medical insurance, payments for life insurance, contributions to
retirement plans and the cost of other fringe benefits.
(2) If an employee's total annual compensation does not total at
least $147,414 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, an employee may earn $125,000 in base
salary, and the employer may anticipate based upon past sales that the
employee also will earn $22,414 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
$12,414 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.
* * * * *
Sec. 541.602 Salary basis.
0
9. Revise paragraph (a) (3) of Sec. 541.602 to read as follows:
(a) * * *
(3) Up to ten percent of the salary amount required by Sec.
541.600(a) may be satisfied by the payment of nondiscretionary bonuses,
incentives and commissions, that are paid annually or more frequently.
The employer may utilize any 52-week period as the year, such as a
calendar year, a fiscal year, or an anniversary of hire year. If the
employer does not identify some other year period in advance, the
calendar year will apply. If by the last pay period of the 52-week
period the sum of the employee's weekly salary plus nondiscretionary
bonus, incentive, and commission payments received does not equal 52
times the weekly salary amount required by Sec. 541.600(a), the
employer may make one final payment sufficient to achieve the required
level no later than the next pay period after the end of the year. Any
such final payment made after the end of the 52-week period may count
only toward the prior year's salary amount and not toward the salary
amount in the year it was paid. This provision does not apply to highly
compensated employees under Sec. 541.601.
* * * * *
0
10. 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, an exempt employee guaranteed at least $679 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 $679 each week paid
on a salary basis. Similarly, the exemption is not lost if an exempt
employee who is guaranteed at least $679 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, an exempt
employee guaranteed compensation of at least $700 for any week in which
the employee performs any work, and who normally works four or five
shifts each week, may be paid $210 per shift without violating the
$679-per-week 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
11. 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 salary per week, as required by Sec. Sec.
541.600(a) and 541.602(a), if the employee worked 40 hours. Thus, an
artist paid $350 for a picture that took 20 hours to complete meets the
$679 minimum salary requirement for exemption since earnings at this
rate would yield the artist $700 if 40 hours were worked.
0
12. Amend Sec. 541.709 by revising the first sentence 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 at a base rate of at least $1,036 per week
(exclusive of board, lodging, or other facilities). * * *
* * * * *
[FR Doc. 2019-04514 Filed 3-21-19; 8:45 am]
BILLING CODE 4510-27-P