[Federal Register Volume 84, Number 188 (Friday, September 27, 2019)]
[Rules and Regulations]
[Pages 51230-51308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20353]
[[Page 51229]]
Vol. 84
Friday,
No. 188
September 27, 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; Final Rule
Federal Register / Vol. 84 , No. 188 / Friday, September 27, 2019 /
Rules and Regulations
[[Page 51230]]
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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: Final rule.
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SUMMARY: The Department of Labor is updating and revising the
regulations issued under the Fair Labor Standards Act implementing the
exemptions from minimum wage and overtime pay requirements for
executive, administrative, professional, outside sales, and computer
employees.
DATES: This final rule is effective on January 1, 2020.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, 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 final rule may be obtained in alternative
formats (Large Print, Braille, Audio Tape or Disc), upon request, by
calling (202) 693-0675 (this is not a toll-free number). TTY/TDD
callers may dial toll-free 1-877-889-5627 to obtain information or
request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest 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.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Executive Summary
II. Background
A. The FLSA
B. Regulatory History
C. Overview of Existing Regulatory Requirements
D. The Department's Proposal
E. Final Rule Effective Date
III. Need for Rulemaking
IV. Final Regulatory Revisions
A. Standard Salary Level
B. Special Salary Tests
C. Inclusion of Nondiscretionary Bonuses, Incentive Payments,
and Commissions in the Salary Level Requirement
D. Highly Compensated Employees
E. 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. Final Regulatory Flexibility Analysis (FRFA)
A. Objectives of, and Need for, the Final Rule
B. The Agency's Response to Public Comments
C. Comment by the Chief Counsel for Advocacy of the Small
Business Administration
D. Description of the Number of Small Entities to Which the
Final Rule Will Apply
E. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Final Rule
F. Steps the Agency Has Taken To Minimize the Significant
Economic Impact on Small Entities
G. Identification, to the Extent Practicable, of all Relevant
Federal Rules That May Duplicate, Overlap, or Conflict With the
Final Rule
VIII. Unfunded Mandates Reform Act Analysis
A. Authorizing Legislation
B. Assessment of Costs and Benefits
C. Response to Comments
D. Least Burdensome Option or Explanation Required
IX. Executive Order 13132, Federalism
X. Executive Order 13175, Indian Tribal Governments
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 of at least 1.5
times the regular rate of pay. Section 13(a)(1) of the FLSA, commonly
referred to as the ``white collar'' or ``EAP'' exemption, exempts from
these minimum wage and overtime pay requirements ``any employee
employed in a bona fide executive, administrative, or professional
capacity.'' The statute delegates to the Secretary of Labor (Secretary)
the authority to define and delimit the terms of the exemption. Since
1940, the regulations implementing the exemption have generally
required each of the following three tests to be met: (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 of Labor (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 executive, administrative, or professional employees, and,
conversely, that nearly all bona fide executive, administrative, and
professional employees 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 inflation reduces the real value of the salary
threshold.
The Department increased the standard salary level from $455 per
week ($23,660 per year) to $913 per week ($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 because it ``makes overtime status depend predominately on a
minimum salary level, thereby supplanting an analysis of an employee's
job duties.'' Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d 795, 806
(E.D. Tex. 2017). An appeal of that decision to the U.S. Court of
Appeals for the Fifth Circuit 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 level
that was set in a final rule issued April 23, 2004 (``2004 final
rule'').
Taking into account the Nevada district court's conclusion with
respect to the salary level, public comments received in response to a
July 26, 2017 Request for Information (RFI), and feedback received at
public listening sessions, the Department has undertaken this
rulemaking to revise the part 541 regulations so that they
[[Page 51231]]
effectively distinguish between the white collar employees whom
Congress intended to be protected by the FLSA's minimum wage and
overtime provisions and bona fide executive, administrative, and
professional employees whom Congress intended to exempt from those
statutory requirements.
The Department published a Notice of Proposed Rulemaking (NPRM) on
March 22, 2019. The NPRM stated that the standard salary level needed
to exceed $455 per week to more effectively serve its purpose, but that
the 2016 final rule's increase to $913 per week was inappropriate
because it 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). Noting the
conclusions of the district court that invalidated the 2016 final rule,
the Department explained that the 2016 final rule's inappropriately
high salary level ``untethered the salary level test from its
historical justification'' of ``[s]etting a dividing line between
nonexempt and potentially exempt employees'' by screening out only
those employees who, based on their compensation level, are unlikely to
be bona fide executive, administrative, or professional employees. To
address the district court's and the Department's concern with the 2016
final rule and set a more appropriate salary level, the NPRM proposed
to rescind the 2016 final rule and update the salary level by applying
the same methodology as the 2004 final rule to current earnings data.
In 2004, the Department set the standard salary level at $455 per
week ($23,660 per year), which was approximately the 20th percentile of
full-time salaried workers in the South and in the retail industry
nationally.\1\ Accordingly, in the NPRM, the Department proposed to
update the standard salary level to the 20th percentile of full-time
salaried workers in the lowest-wage Census Region (the South) \2\ and/
or in the retail industry nationally using current data.\3\ This
methodology resulted in a proposed standard salary level of $679 per
week ($35,308 per year). Additionally, the Department proposed special
salary levels for U.S. territories and an updated base rate for
employees in the motion picture producing industry. The Department also
proposed to allow employers to count nondiscretionary bonuses and
incentive payments toward satisfying up to ten percent of the standard
salary level or any of the special salary levels applicable to U.S.
territories, so long as such bonuses are paid at least annually.
Further, the Department proposed to update the highly compensated
employee (HCE) total annual compensation level--a higher compensation
level that is paired with a reduced duties requirement to provide an
alternative basis for exemption under section 13(a)(1). The HCE level
was set at $100,000 in the 2004 final rule and increased to $134,004 in
the 2016 final rule, but the Department has continued to enforce the
$100,000 level in light of the district court's invalidation of the
2016 final rule. In the NPRM, the Department proposed to update the HCE
level by setting it equal to the annualized value of the 90th
percentile of weekly earnings of full-time salaried workers nationally,
resulting in a level of $147,414 per year. The Department proposed to
project both the standard salary level and HCE total annual
compensation level to January 2020, the final rule's anticipated
effective date. Finally, the Department explained its commitment to
update the standard salary level and HCE total compensation levels more
frequently in the future using notice-and-comment rulemaking every four
years. The Department proposed no changes to the standard duties tests.
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\1\ 69 FR 22171.
\2\ The South Census Region comprises the following: Alabama,
Arkansas, Delaware, District of Columbia, Florida, Georgia,
Kentucky, Louisiana, Maryland, Mississippi, North Carolina,
Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West
Virginia.
\3\ In 2004, the Department looked to the 20th percentile of
full-time salaried workers in the South and in the retail industry
nationally to validate the standard salary level set in the final
rule. In this final rule, the Department set 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. Accordingly, the use of
``and/or'' when describing the salary level methodology in this
final rule reflects that this data set includes full-time salaried
workers who work: (1) In the South but not in the retail industry;
(2) in the retail industry but not in the South; and (3) in the
South in the retail industry.
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The 60-day comment period on the NPRM ended on May 21, 2019, and
the Department received more than 116,000 comments. The vast majority
of these comments, including tens of thousands of duplicate or similar
submissions, were campaign comments using similar template language.\4\
After considering the comments, the Department has decided in this
final rule to maintain the proposed methodology for updating the part
541 standard salary level, but not to inflate the salary level to
January 2020. The Department is also finalizing the special salary
levels for certain U.S. territories as proposed, and updating the base
rate for employees in the motion picture producing industry.
Additionally, the Department is finalizing its proposal to permit
employers to count nondiscretionary bonuses, incentives, and
commissions toward up to 10 percent of the standard salary level or the
special salary levels applicable to the U.S. territories, so long as
employers pay those amounts at least annually. The Department has also
decided to set the HCE total annual compensation threshold equal to the
80th percentile of earnings of full-time salaried workers nationally,
without inflating the threshold to January 2020. When applied to
updated data, these methodologies result in a standard salary level of
$684 per week ($35,568 per year) and an HCE total annual compensation
level of $107,432. Finally, the Department intends to update these
thresholds more regularly in the future.
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\4\ Specifically, one organization submitted spreadsheets
containing over 56,000 comments from individuals. Of the comments
contained in this submission, more than 34,000 were duplicates of
comments that were submitted separately by these individuals.
Additionally, numerous individual comments associated with this
campaign were submitted multiple times. Together, these comments
make up the vast majority of the comments received.
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The Department estimates that in 2020, 1.2 million currently exempt
employees who earn at least $455 per week but less than the standard
salary level of $684 per week will, without some intervening action by
their employers, gain overtime eligibility. The Department also
estimates that an additional 2.2 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 $684 per week,
will have their overtime-eligible status strengthened in 2020 because
these employees will now fail both the salary level and duties tests.
Lastly, an estimated 101,800 employees who are currently exempt under
the HCE test will be affected by the increase in the HCE total annual
compensation level. The Department has not made any changes to the
duties tests in this final rule.
This rule is considered 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 rule is $534.8
million with 7 percent discounting.
Because the Department is currently enforcing the 2004 salary
level, much of the economic analysis uses the 2004 rule as the baseline
for calculating costs and transfers. The economic analysis
[[Page 51232]]
quantifies the direct costs resulting from the rule: (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 $173.3
million with 7 percent discounting, including $543.0 million in Year 1
and $99.1 million in Year 10. This rulemaking will also give employees
higher earnings in the form of transfers of income from employers to
employees. Annualized transfers are estimated to be $298.8 million over
the first ten years, with 7 percent discounting, including $396.4
million in Year 1.
II. Background
A. The FLSA
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\
However, there are a number of exemptions from the FLSA's minimum wage
and overtime requirements. Section 13(a)(1) of the FLSA, codified at 29
U.S.C. 213(a)(1), exempts from both minimum wage and overtime
protection ``any employee employed in a bona fide executive,
administrative, or professional capacity . . . or in the capacity of
outside salesman (as such terms are defined and delimited from time to
time by regulations of the Secretary, subject to the provisions of [the
Administrative Procedure Act] . . .).'' The FLSA does not define the
terms ``executive,'' ``administrative,'' ``professional,'' or ``outside
salesman.'' Pursuant to Congress's grant of rulemaking authority, since
1938 the Department has issued regulations at 29 CFR part 541 defining
the scope of the section 13(a)(1) exemptions. Because Congress
explicitly delegated to the Secretary the power to define and delimit
the specific terms of the exemptions through notice and comment
rulemaking, the regulations so issued have the binding effect of law.
See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).
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\5\ 29 U.S.C. 201, et seq.
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Employees who meet the requirements of part 541 are not subject to
the FLSA's minimum wage and overtime pay requirements. Some state laws
have stricter exemption standards than federal law. The FLSA does not
preempt any such stricter state standards. If a State establishes a
higher standard than the provisions of the FLSA, the higher standard
applies in that State. See 29 U.S.C. 218(a); 29 CFR 541.4.
B. Regulatory History
The Department has consistently used its rulemaking authority to
define and clarify the section 13(a)(1) exemptions. The implementing
regulations have generally required each of three tests to be met for
the exemptions to apply: (1) The salary basis test; (2) the salary
level test; and (3) the duties test.
The first version of part 541, establishing the criteria for exempt
status under section 13(a)(1), was promulgated in October 1938.\6\ The
Department revised its regulations in 1940,\7\ 1949,\8\ 1954, 1958,\9\
1961, 1963, 1967, 1970, 1973, and 1975.\10\ A final rule increasing the
salary levels was published on January 13, 1981, but was stayed
indefinitely on February 12, 1981.\11\ In 1985, the Department
published an Advance Notice of Proposed Rulemaking that was never
finalized.\12\ 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.\13\ The Department then
implemented the 1990 law exempting employees in certain computer-
related occupations.\14\
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\6\ 3 FR 2518 (Oct. 20, 1938).
\7\ 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'').
\8\ 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'').
\9\ 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'').
\10\ 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).
\11\ 46 FR 3010 (Jan. 13, 1981); 46 FR 11972 (Feb. 12, 1981).
\12\ 50 FR 47696 (Nov. 19, 1985).
\13\ 57 FR 37677 (Aug. 19, 1992).
\14\ 57 FR 46742 (Oct. 9, 1992); see Sec. 2, Pub. L. 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, which replaced the
``long'' and ``short'' test system for determining exemption status
with a single ``standard'' salary level paired with a ``standard''
duties test.\15\ The Department set the standard salary level at $455
per week, and made other changes, some of which are discussed below. In
the 2004 final rule, the Department also created the HCE test for
exemption, which paired a reduced duties requirement with a higher
compensation level ($100,000 per year).
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\15\ 69 FR 22122 (Apr. 23, 2004).
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On May 23, 2016, the Department issued another final rule, which
raised the standard salary level to the 40th percentile of earnings of
full-time salaried workers in the lowest-wage Census Region, resulting
in a salary level of $913 per week. Additionally, the Department set
the HCE total annual compensation level equal to the 90th percentile of
earnings of full-time salaried workers nationally ($134,004 annually).
The Department also included in the final rule a mechanism to
automatically update (every three years) the salary and compensation
thresholds, and for the first time permitted nondiscretionary bonuses,
incentives, and commissions paid at least quarterly to count toward up
to 10 percent of the required salary level.
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.\16\ On August 31, 2017, the district court
granted summary judgment against the Department.\17\ The court held
that the 2016 final rule's salary level exceeded the Department's
authority and that the entire final rule was therefore invalid. The
court determined that a salary level that ``supplant[s] an analysis of
an employee's job duties'' conflicts with Congress's command to exempt
bona fide executive, administrative, and professional employees.\18\ As
a result of these rulings, the Department has continued to enforce the
salary level set in 2004.
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\16\ See Nevada v. U.S. Dep't of Labor, 218 F. Supp. 3d 520
(E.D. Tex. 2016).
\17\ See 275 F. Supp. 3d 795.
\18\ Id. at 806.
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On July 26, 2017, the Department published an RFI asking for public
input
[[Page 51233]]
on what changes the Department should propose in a new NPRM on the EAP
exemption.\19\ The Department received over 200,000 comments on the
RFI. Between September 7 and October 17, 2018, the Department held
listening sessions in all five Wage and Hour regions throughout the
country, and in Washington, DC, to supplement feedback received as part
of the RFI.\20\
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\19\ 82 FR 34616 (July 26, 2017).
\20\ Listening Session transcripts may be viewed at
www.regulations.gov, docket ID WHD-2017-0002.
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On October 30, 2017, the Government appealed the Nevada 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 set a new salary level.
On March 22, 2019, the Department issued its NPRM, proposing to
update and revise the EAP regulations.
C. Overview of Existing Regulatory Requirements
The regulations in 29 CFR 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.\21\ Job titles, job descriptions, or the
payment of a salary instead of an hourly rate are insufficient,
standing alone, to confer exempt status on an employee.
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\21\ 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 \22\ and generally must be paid on a salary
basis at least the amount specified in the regulations.\23\ Some
employees, such as business owners, doctors, lawyers, teachers, and
outside sales employees, are not subject to salary tests.\24\ Others,
such as academic administrative personnel and computer employees, are
subject to special, contingent earnings thresholds.\25\ In 2004, the
standard salary level for EAP employees was set at $455 per week
(equivalent to $23,660 per year for a full-year worker), and the total
annual compensation level for highly compensated employees was set at
$100,000.\26\ Due to the district court's decision invalidating the
2016 final rule, these are the salary levels the Department is
currently enforcing.\27\
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\22\ See Sec. Sec. [thinsp]541.100 (executive employees);
541.200 (administrative employees); 541.300-.303 (teachers and
professional employees); 541.400 (computer employees); 541.500
(outside sales employees).
\23\ 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. 541.605.
\24\ See Sec. Sec. 541.101;[thinsp]541.303(d); 541.304(d);
541.500(c); 541.600(e). Such employees are also not subject to a
fee-basis test.
\25\ See Sec. 541.600(c)-(d).
\26\ 69 FR 22123.
\27\ 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 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 final rule references the 2004 standard
salary and total annual compensation levels.
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The 2004 final rule created the 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.\28\ The HCE test applies only to employees whose
primary duty includes performing office or non-manual work.\29\ Non-
management production line workers and employees who perform work
involving repetitive operations with their hands, physical skill, and
energy cannot be exempt under this section.\30\
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\28\ Sec. [thinsp]541.601.
\29\ Sec. [thinsp]541.601(d).
\30\ Id.
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D. The Department's Proposal
On March 22, 2019, the Department issued its proposal to update and
revise the regulations issued under section 13(a)(1) of the FLSA.\31\
The Department proposed to update the standard salary level by applying
to current data the same method as in the 2004 final rule--i.e., by
looking at the 20th percentile of earnings of full-time salaried
workers in the lowest-wage Census Region (then and now the South) and/
or in the retail industry nationwide. The Department also proposed to
update the HCE total annual compensation level using the same method
used in the 2016 final rule, setting it equivalent to the 90th
percentile earnings of full-time salaried workers nationally. The
Department proposed to project both levels to January 2020, the
anticipated effective date of a final rule. Additionally, the
Department proposed a special salary level of $380 per week for
American Samoa, a special salary level of $455 per week for Puerto
Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the
Northern Mariana Islands, and a special ``base rate'' threshold of
$1,036 for employees in the motion picture producing industry. The
Department also proposed to permit employers to use nondiscretionary
bonuses and incentive payments to satisfy up to 10 percent of the
standard or special salary levels as long as such payments are made at
least annually. As to future updates, the Department reaffirmed its
commitment to evaluating the part 541 earnings thresholds more
frequently, and stated its intent to propose updates to these levels
quadrennially. The Department did not propose any changes to the duties
tests.
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\31\ 84 FR 10900.
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The Department received more than 116,000 timely comments on the
NPRM during the 60-day comment period that ended on May 21, 2019. The
Department received comments from a broad array of constituencies,
including small business owners, employer and industry associations,
individual workers, worker advocacy groups, unions, non-profit
organizations, law firms (representing both employers and employees),
educational organizations and representatives, religious organizations,
economists, Members of Congress, state and local governments,
professional associations, and other interested members of the public.
All timely received comments may be viewed on the http://www.regulations.gov website, docket ID WHD-2019-0001.
Some of the comments the Department received were general
statements of support or opposition, and the Department also received
many identical or nearly identical ``campaign'' comments sent in
response to organized comment initiatives. Nearly all commenters
favored some change to the currently enforced regulations, and
commenters expressed a wide variety of views on the merits of
particular aspects of the Department's proposal. Some commenters,
including tens of thousands who submitted similar comments as part of a
comment
[[Page 51234]]
campaign (``Campaign Comments''),\32\ requested that the Department
reject the proposal and defend the 2016 final rule. The Department has
carefully considered the timely submitted comments addressing the
proposed changes.
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\32\ See supra note 4.
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Significant issues raised in the comments are discussed below,
along with the Department's responses to those comments. Some
commenters appear to have mistakenly filed comments intended for this
rulemaking into the dockets for the Department's rulemakings concerning
the regular rate (docket ID WHD-2019-0002) or joint employer status
(docket ID WHD-2019-0003) under the FLSA. The Department did not
consider these misfiled comments in this rulemaking.
The Department received a number of comments that are beyond the
scope of this rulemaking. These include, for example, a request that
the Department reconsider the scope of the exemption at 29 U.S.C.
207(i) for certain employees of retail and service establishments, and
a request for tax write-offs for businesses that pass an annual audit
by the Department. In addition, some non-profit organizations asked the
Department to work with other federal agencies to create a mechanism
that non-profits with government grants and contracts could use to
adjust reimbursement rates to cover unanticipated increased costs, such
as labor costs due to this rule. For example, in a joint comment, the
National Council of Nonprofits and others recommended addressing this
issue through changes to the relevant Federal Acquisition Regulations.
The Department does not address such issues in this final rule.
Some commenters raised miscellaneous issues that more directly
relate to other parts of the Department's regulations. For example, one
commenter urged the Department to amend its regular rate regulations to
allow the exclusion of any payments that do not count toward the salary
level test; one commenter requested that private colleges and
universities be permitted to use compensatory time off instead of cash
payments for overtime hours; two commenters requested a safe harbor
from joint-employment liability for franchisors who help their
franchisees implement this rule; and one commenter asked the Department
to permit hourly paid employees (beyond just computer employees) to
qualify for the exemption. Some commenters requested that the
Department make changes to the duties test, either as an alternative to
raising the salary level more significantly or regardless of what
salary level applies. The Department did not propose any of these
changes in the NPRM, and declines to make such changes in this final
rule.
A number of commenters asked the Department to provide guidance on
how the FLSA applies to non-profit organizations. See, e.g., Colorado
Nonprofit Association; Independent Sector; National Council of
Nonprofits. The Department notes that the FLSA does not provide special
rules for non-profit organizations or their employees, nor does this
final rule.\33\
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\33\ The Department has issued specific guidance on the
application of the FLSA to non-profit entities. See Fact Sheet #14A:
Non-Profit Organizations and the Fair Labor Standards Act (FLSA),
available at: https://www.dol.gov/whd/regs/compliance/whdfs14a.pdf.
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E. Final Rule Effective Date
In the NPRM, the Department referenced an anticipated effective
date of January 2020 for purposes of projecting forward the proposed
standard salary level and proposed HCE total annual compensation level.
Many commenters, while not expressly referencing the effective date,
conveyed their view that updates to these regulations are ``long
overdue.'' See, e.g., Legal Aid at Work; Public Housing Authorities
Directors Association; Washington State Budget and Policy Center.
Similarly, a few commenters encouraged the Department to increase the
standard salary threshold, or to promulgate a final rule, ``as soon as
possible.'' See, e.g., International Foodservice Distributors
Association; Sergeants Benevolent Association.
Other commenters did specifically address the final rule's
effective date. Nearly all of these commenters conveyed the need for
employers to have sufficient time to adjust to and implement the rule,
but they disagreed on how much time the Department should provide. The
National Association of Landscape Professionals favored a period of 90
to 120 days between the rule's publication and its effective date,
while several other commenters favored a minimum of 120 days, which was
the applicable period of time in the 2004 final rule. See, e.g.,
Seyfarth Shaw LLP (Seyfarth Shaw); Society for Human Resource
Management (SHRM). SHRM thought the effective date should be at least
120 days from the date of publication of the final rule, but
acknowledged that the proposed regulations are far more familiar to
employers than the changes made in 2004. Other commenters favored a
longer period, ranging from six to eighteen months from publication.
The U.S. Public Interest Research Group suggested a two-year delay for
public interest advocacy groups. Several employer representatives who
opposed the proposed HCE level stated that adjusting to the new level
would be particularly burdensome. For example, the National Association
of Manufacturers stated that the proposed increase would require
employers to spend significant time determining whether employees who
previously met the HCE test satisfy the standard duties test (and thus
remain exempt), and requested that if the Department were to finalize
that increase as proposed, it should set a future compliance date that
provides sufficient time for employers to adjust to the new HCE level.
Relatedly, multiple commenters requested that the Department
``phase in'' any new salary/compensation levels over a period of time.
Suggested phase-in periods varied widely. Independent Sector and the
National Council of Young Men's Christian Associations of the United
States of America (YMCA) favored a two-year phase-in period. An
individual employee commenter proposed a 3- to 5-year phase-in period
for non-profit organizations. Some commenters who requested a phase-in
period did not specify a particular timeframe. Many commenters who
supported a phase-in cited the importance of providing sufficient time
for employers to adapt to and implement the new levels. See, e.g.,
Lutheran Services in America; National Grocers Association (NGA).
The Department has set an effective date of January 1, 2020, for
the final rule. The Department agrees with the commenters who expressed
the view that this update to the regulations is ``long overdue,'' and
with those who encouraged the Department to increase the salary level
as soon as possible. The time between this rule's publication and
effective date exceeds the 30-day minimum required under the
Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days
mandated for a ``major rule'' under the Congressional Review Act, 5
U.S.C. 801(a)(3)(A). While the 2004 rule provided for 120 days between
the rule's publication and effective date,\34\ the Department agrees
with commenters who acknowledged that this final rule will be far more
familiar to employers than the substantial changes provided in the 2004
final rule.\35\
[[Page 51235]]
Additionally, while the 2016 rule provided 192 days from the rule's
publication until its effective date, the salary level increase in this
rule is more modest, and affects fewer workers--two factors that favor
a shorter period. Moreover, given that the Department is currently
enforcing the 2004 standard salary level, which an overwhelming
majority of commenters agreed needs to be updated, the Department
concludes that a lengthier delayed effective date would be imprudent.
Additionally, a January 1 date may be convenient for those employers
who use the calendar year as their fiscal year, or who use budgets,
software systems, or other practices on a calendar-year basis. The
Department is also declining to delay the effective date, or create a
phase-in, specifically for non-profits. As discussed in more detail in
the standard salary level discussion below, consistent with past
practice, the Department is declining to create special rules for the
application of the part 541 exemptions to non-profits.
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\34\ See 79 FR 22126.
\35\ The 2004 final rule included several significant changes,
including: (1) A significant percentage increase in the salary
threshold; (2) a significant reorganization of the part 541
regulations; (3) the elimination of the short and long test
structure that had been in place for more than 50 years and the
creation of a single standard test; and (4) the creation of a new
test for highly compensated employees. In contrast, here the
Department is not changing the standard duties test or reorganizing
the regulations, and so this rule will be much less complicated for
employers to implement.
---------------------------------------------------------------------------
While some employer representatives expressed concern that the
proposed HCE level increase would pose unique challenges for employers
compared to the change to the standard salary level, given the change
in methodology for setting the HCE threshold in the final rule,
discussed in further detail below, the Department does not believe a
delayed effective date for this provision is necessary. The Department
believes that the January 1, 2020 effective date will provide employers
adequate time to make any changes that are necessary to comply with the
final regulations, and for similar reasons concludes that a phase-in of
the new thresholds is not warranted. The Department will also provide
significant outreach and compliance assistance, and will issue a number
of guidance documents in connection with the publication of this final
rule.
III. Need for Rulemaking
The primary goal of this rulemaking is to update the standard
salary level that helps define and delimit the EAP exemption. This will
ensure that the level works effectively with the standard duties test
to distinguish potentially exempt EAP employees from overtime-protected
white collar workers. Due to the Nevada district court's decision
invalidating the 2016 final rule, the Department has been enforcing the
standard salary level of $455 a week. The Department recognizes that
this level should be updated to reflect current earnings. In the NPRM,
the Department proposed using the methodology from the 2004 final rule
to calculate the salary threshold using current data. The Department
explained that this method would keep the standard salary level aligned
with the intervening years' growth in earnings. It further stated that
the 2004 approach has withstood the test of time, would restore the
salary level to its traditional purpose of serving as a dividing line
between nonexempt and potentially exempt employees, would address
concerns that led to the 2016 rule's invalidation, and would ensure
that the FLSA's intended overtime protections are fully implemented.
The Department is also updating the total annual compensation
requirement for the HCE test for exemption to ensure that this
threshold remains a meaningful and appropriate standard when paired
with the more-lenient HCE duties test. In an effort to modernize the
part 541 regulations to account for changing methods of workplace
compensation, the Department also proposed allowing nondiscretionary
bonuses and incentive payments (including commissions) to count toward
up to 10 percent of the standard or special salary levels. Finally, in
its proposal the Department explained the importance of updating the
salary thresholds more frequently. Regular updates promote greater
stability, avoid the disruptive salary level increases that can result
from lengthy gaps between updates, and provide appropriate wage
protection for those under the threshold. With these goals in mind, in
the NPRM, the Department affirmed its intention to issue a proposal to
update the earnings thresholds every four years, unless the Secretary
determines that economic or other factors warrant forestalling such an
update.
IV. Final Regulatory Revisions
The Department is formally rescinding the 2016 final rule and is
replacing it with a new rule that updates the part 541 earnings
thresholds. The Department is setting the standard salary level by
applying the methodology from the 2004 final rule to current data,
resulting in a new standard salary level of $684 per week. In addition,
the Department is setting a special salary level of $455 per week for
Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the
Northern Mariana Islands; a special salary level of $380 per week for
American Samoa; and an updated weekly ``base rate'' of $1,043 per week
for the motion picture producing industry. 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 or the special salary levels applicable to the U.S.
territories. The Department is also setting the HCE annual compensation
amount at the 80th percentile of full-time salaried workers nationally,
resulting in a new HCE level of $107,432. These revisions are discussed
in further detail below.
A. Standard Salary Level
i. History of the Standard Salary Level
Congress enacted the FLSA on June 25, 1938, and the first version
of part 541, which the Department issued in October 1938, set a salary
level of $30 per week for executive and administrative employees.\36\
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.\37\ Taking into account salaries paid in
numerous industries and the percentage of employees earning below these
amounts, the Department set the salary level for each exemption
slightly below the average salary dividing exempt and nonexempt
employees.
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\36\ 3 FR 2518.
\37\ Stein Report at 9, 20-21, 30-31.
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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.\38\ The Department also looked at data showing
increases in exempt employee salaries since 1940,
[[Page 51236]]
and supplemented it with nonexempt employee earnings data to
approximate the ``prevailing minimum salaries of exempt employees.''
\39\ 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 a ``figure slightly lower than might be indicated by the
data'' to protect small businesses.\40\ 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, while the short duties test did not
include a specific limit on nonexempt work.\41\
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\38\ Weiss Report at 10, 14-17, 19-20.
\39\ Id. at 12.
\40\ 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.
\41\ 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.\42\ 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.'' \43\ 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.
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\42\ Kantor Report at 6.
\43\ Id. at 6-7.
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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.\44\ 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.\45\ 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.\46\ The Department
noted that these salary levels approximated the same percentages used
to update the salary level in 1958.\47\
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\44\ 28 FR 7002 (July 9, 1963).
\45\ Id. at 7004.
\46\ Id.
\47\ See id.
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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.\48\ The Department also increased
the long test salary levels for administrative and professional
employees to $125 and $140 per week, respectively.
---------------------------------------------------------------------------
\48\ 35 FR 884-85.
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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.''
\49\ 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.\50\ 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.'' \51\ 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.
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\49\ 40 FR 7091.
\50\ Id. at 7092. Each time the short test was increased between
1949 and 1975, it was set significantly higher than the long test
salary levels.
\51\ Id. at 7091.
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.\52\ The Department estimated that 1.3 million workers
earning between $155 and $455 per week would become nonexempt under the
new standard salary level.\53\
---------------------------------------------------------------------------
\52\ 69 FR 22126.
\53\ Id. at 22123.
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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 of $455 per week, which at the time was 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 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.\54\ 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.
---------------------------------------------------------------------------
\54\ Id. at 22167.
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[[Page 51237]]
The Department published a final rule updating the salary level
twelve years later, in 2016.\55\ 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).\56\ 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.\57\ 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 is being 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.
---------------------------------------------------------------------------
\55\ 81 FR 32391 (May 23, 2016).
\56\ Id. at 32408.
\57\ Id. at 32393.
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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 . . .).'' \58\ The Department has long used a salary level
test as part of its method for defining and delimiting that exemption.
---------------------------------------------------------------------------
\58\ 29 U.S.C. 213(a)-(a)(1).
---------------------------------------------------------------------------
In 1949, the Department summarized the role of the salary level
tests over the preceding decade, explaining:
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.\59\
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\59\ 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.'' \60\ The 2003-2004 rulemaking also referenced these
principles.\61\ Likewise, this final rule updates the standard salary
level in light of increased employee earnings, so that it maintains its
usefulness in ``screening out the obviously nonexempt employees.''
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\60\ 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 (``[T]he power to define is the power
to exclude.'').
\61\ See 69 FR 22165; 68 FR 15560, 15570 (Mar. 31, 2003).
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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. These include, for instance, a statement 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.' '' \62\ The Stein Report also stated 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.'' \63\
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\62\ 81 FR 32413 (quoting Stein Report at 42); see also 69 FR
22165 (quoting Stein Report at 42).
\63\ Stein Report at 19; see also id. at 5 (``[T] he 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 (``[S]alary 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 subprofessional
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.
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As explained in the NPRM, the Nevada 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 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.'' \64\
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.'' \65\ The court
then explained that in contrast to these acceptable past practices, the
2016 standard salary level of $913 per week was unlawful because it
would exclude from exemption ``so many employees who perform exempt
duties.'' \66\ 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 who meet the duties
test becoming nonexempt.\67\ 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
[[Page 51238]]
consideration of whether an employee performs `bona fide executive,
administrative, or professional capacity' duties.'' \68\ 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.'' \69\
---------------------------------------------------------------------------
\64\ 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).
\65\ Id. at 806 (emphasis in original).
\66\ Id. at 807.
\67\ Id. at 806.
\68\ Id. at 807 (quoting 29 U.S.C. 213(a)(1)).
\69\ Id. at 806 (quoting 29 U.S.C. 213(a)(1)).
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By excluding from exemption, without regard to their duties, 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, the 2016 final rule was in tension with the Act and with
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.\70\ 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.
---------------------------------------------------------------------------
\70\ Kantor Report at 5. 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. See 81 FR 32504
(Table 32).
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The Department has therefore reexamined the 2016 final rule in
light of the district court's decision and the salary level's
historical purpose. The district court's decision underscores that
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 instructed. The salary level test's primary and modest purpose
is to identify potentially exempt employees by screening out obviously
nonexempt employees.
In light of these considerations, as noted in the NPRM, the
Department has concluded that, while an increase in the standard salary
level from $455 per week is warranted, the increase to $913 per week in
the 2016 final rule was inappropriate. The Department has therefore
engaged 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.
iii. Standard Salary Level Proposal
In its NPRM, the Department proposed to rescind formally the 2016
final rule and to update the salary level by setting the salary level
equal to the 20th percentile of earnings of full-time salaried workers
in the lowest-wage region (the South) and/or in the retail industry
nationally. The Department applied this method to pooled CPS MORG data
for 2015 to 2017, adjusted to 2017, producing a level of $641 per week.
To reflect employees' anticipated compensation at the time the rule
would become effective, the Department then inflated this level to
January 2020 using the compound annual growth rate in earnings since
the 2004 rule. This methodology resulted in a proposed salary level of
$679 per week ($35,308 per year). The Department estimated that at this
level, 1.1 million employees who earn at least $455 per week but less
than $679 per week would, without some intervening action by their
employers, gain overtime eligibility.
The Department also stated that applying the 2004 final rule's
methodology to set the salary level would ensure that overtime-eligible
workers continue to receive the protections Congress intended, while
avoiding the concerns that led to the invalidation of the 2016 rule. 84
FR 10903. The Department explained that adhering to the 2004 final
rule's methodology was reasonable and appropriate, noting that it 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 test. Id. at 10909. The Department stated that applying
this well-established method would also promote familiarity and
stability in the workplace, without causing significant hardship or
disruption to the economy. Id. The Department also noted that the 2004
final rule has never been challenged, and so applying the 2004 salary
level methodology would minimize the uncertainty and potential legal
vulnerabilities that could accompany a novel and untested approach. Id.
iv. Standard Salary Level Final Rule
In the final rule, the Department adopts its proposed methodology
for setting the standard salary level, with one minor modification. The
Department will set the salary level equal to the 20th percentile of
earnings of full-time salaried workers in the lowest-wage region (the
South) and/or in the retail industry nationally. To calculate the
salary level, the Department used updated CPS earnings data that BLS
has compiled since the Department drafted its proposal. Specifically,
the Department applied the adopted methodology to pooled CPS MORG data
for July 2016 to June 2019, adjusted to reflect 2018/2019. As discussed
below, rather than projecting the salary level to January 2020, as
proposed in the NPRM, the Department has instead used the most recent
data available at the time the Department drafted this final rule. This
results in a salary level of $684 per week.
The Department believes that this method will set an appropriate
dividing line between nonexempt and potentially exempt employees by
screening out from exemption employees who, based on their
compensation, are unlikely to be bona fide executive, administrative,
or professional employees. In addition, the use of earnings data from
the South and the retail industry will ensure that the salary level is
suitable for employees in low-wage regions and industries. This
approach will also maintain the prominence of the duties test by
ensuring that the salary level alone does not disqualify from exemption
a substantial number of employees who meet the duties test. This is
consistent with the duties test's historical function, and will
alleviate a major concern--overemphasis on the salary level test--that
led to the 2016 rule's invalidation.
Once this rule is effective, white collar employees who are subject
to the salary level test and earn less than $684 per week will not
qualify for the EAP exemption, and therefore will be entitled to
overtime pay. Employees earning this amount or more on a salary or fee
basis will be exempt if they meet the standard duties test. As a result
of this updated salary level, 1.2 million currently exempt employees
who earn at least $455 but less than the updated standard salary level
of $684 per week will, without some intervening action by their
employers, gain overtime eligibility. In addition, 2.2 million white
collar workers earning within this salary range who are currently
nonexempt because they do not meet the standard duties test will have
their overtime-eligible status strengthened because their exemption
status will be clear based on their salary alone.
v. Discussion of Comments
1. Threshold Issues
As was the case in the responses to the July 26, 2017 RFI and in
feedback received at the public listening sessions, commenters to the
NPRM overwhelmingly agreed that the salary
[[Page 51239]]
level should be increased from the currently enforced level of $455 per
week, which was set in 2004. Only a few commenters asserted that the
salary level should not be updated; these commenters generally
expressed concern that it would be difficult for employers to absorb
any increase to the salary level. See Home Care Association of America;
South Butler Community Library. Fisher & Phillips LLP and the National
Federation of Independent Business (NFIB), however, questioned whether
the Department has authority to set a salary level at all.
The vast majority of commenters also agreed that the Department
should continue to set the salary level on a nationwide basis rather
than having different salary levels that vary by region, industry, or
some other factor. See, e.g., Associated General Contractors of America
(AGC); National Council of Nonprofits; National Employment Law Project
(NELP); National Propane Gas Association; Partnership to Protect
Workplace Opportunity (PPWO). A few commenters suggested that the
Department set multiple salary levels, such as by region or state or
for urban and rural areas. See Council for Christian Colleges and
Universities; Idaho Division of Human Resources; Lutheran Services in
America. A few other commenters advocated for industry-specific salary
levels, see National Newspaper Association, or exemptions from the
salary level test for specific industries, see Family Focused Treatment
Association, or for ``seasonal'' employers, see Corps Network. Special
Olympics sought a special salary level for non-profits, while the
National Council of Nonprofits opposed such a carve-out.
The Department maintains that the FLSA's delegation of authority to
the Secretary to ``define[ ] and delimit[ ]'' the terms of the section
13(a)(1) exemption includes the authority to set a salary level. While
the language of section 13(a)(1) precludes the Department from adopting
a salary-only test because salary ``is not 'capacity' in and of
itself,'' 84 FR 10907; see also 81 FR 32429; 69 FR 22173, the
Department's broad authority to ``define and delimit'' the terms of the
EAP exemption permits it to use a salary level test as one criterion
for identifying bona fide executive, administrative, and professional
employees. The Department has used such a test for over 75 years, and
its authority to establish a salary level is well-established. See,
e.g., Wirtz v. Miss. Publishers Corp., 364 F.2d 603, 608 (5th Cir.
1966); Fanelli v. U.S. Gypsum Co., 141 F.2d 216, 218 (2d Cir. 1944);
Walling v. Yeakley, 140 F.2d 830, 832-33 (10th Cir. 1944). As noted in
the NPRM, ``[a] salary level is helpful to determine who is not an
executive, administrative or professional employee'' because it ``is a
helpful indicator of the capacity in which an employee is employed,
especially among lower-paid employees.'' 84 FR 10907.
The Department agrees with the vast majority of commenters who
supported increasing the salary level. The currently enforced level of
$455 was set a decade and a half ago in 2004. Like all previous salary
levels, its effectiveness as a dividing line between nonexempt and
potentially exempt employees has diminished over time, and the level
should therefore be updated to align with growth in earnings in the
intervening years. While the Department is sensitive to the views of
commenters who contended that any increase would be challenging for
businesses, historical experience has shown that incremental,
reasonable salary level increases such as the one in this final rule
are feasible and do not have significant adverse economic consequences.
Additionally, as discussed below, the salary level set in this final
rule takes these commenters' concerns into account by using wages in
the South and the retail industry.
As in the past, the Department chooses to set a nationwide salary
level and declines to establish multiple salary levels based on region,
industry, employer size, or any other factor. Having multiple salary
levels would make the regulations more complicated; for example,
regional variations would introduce unnecessary complexity,
particularly for employers and employees who operate or work across
state lines. As the Department has explained when previously rejecting
regional salary thresholds, adopting multiple different salary levels
would, at minimum, create significant administrative difficulties
``because of the large number of different salary levels this would
require.'' 69 FR 22171; 81 FR 32411. Likewise, the Department declines
to set any additional industry-specific salary levels. The Department
has rarely created such levels.\71\ Instead, as the Department has
previously noted, the 2004 methodology ``addresses the concerns'' of
commenters advocating for multiple salary levels ``by looking toward
the lower end of the salary levels and considering salaries in the
South and in the retail industry.'' 69 FR 22171. This approach avoids
the new compliance burdens that multiple salary levels would entail,
while ensuring that the salary level is low enough that it exempts bona
fide EAP employees in those regions and industries.\72\
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\71\ A special level for the motion picture producing industry
has been in place for over six decades due to the ``peculiar
employment conditions existing in the industry.'' 18 FR 2881.
Academic administrative employees meet the compensation requirement
if they are paid on a salary basis ``at a rate at least equal to the
entrance salary for teachers in the educational establishment by
which the employee is employed.'' 29 CFR 541.600(c). The Department
has otherwise refrained from setting industry-specific salary
levels.
\72\ Some commenters asked the Department to permit employers to
prorate the salary level for part-time employees. See, e.g., College
and University Professional Association for Human Resources (CUPA-
HR); Council for Christian Colleges and Universities; Idaho Division
of Human Resources. The Department has never prorated the salary
level for part-time positions, and it specifically considered and
rejected similar requests in its 2004 and 2016 final rules. See 81
FR 23422; 69 FR 22171. As the Department has previously explained,
employees hired to work part time, by most definitions, do not work
in excess of 40 hours in a workweek, and overtime pay is not at
issue for these employees. An employer may pay a nonexempt employee
a salary to work part time without violating the FLSA, so long as
the salary equals at least the minimum wage when divided by the
actual number of hours (40 or fewer) the employee worked. See
FLSA2008-1NA (Feb. 14, 2008). To the extent that commenters are
concerned about the exemption status of seasonal employees, the
Department notes that ``[e]xempt employees need not be paid for any
workweek in which they perform no work.'' 29 CFR 541.602(a)(1).
---------------------------------------------------------------------------
2. The New Salary Level
Commenters diverged regarding the appropriate level at which to set
the new salary level. As a general matter, with some exceptions,
employer representatives supported the Department's proposal, while
employee representatives opposed it and favored a level at least as
high as the one set in the 2016 final rule.
The vast majority of employer representatives supported the
Department's proposal to use the 2004 methodology to update the salary
level. See, e.g., HR Policy Association; National Association of Home
Builders (NAHB); Small Business Legislative Council; PPWO; Wage and
Hour Defense Institute. Employer representatives who supported the
proposed level generally agreed with the Department's assessment that
the 2004 methodology was faithful to the salary level's purpose of
screening out only those employees who are obviously nonexempt, while
avoiding a de facto salary-only test that would impermissibly replace
the role of the duties test. See, e.g., Bloomin' Brands; Job Creators
Network; National Retail Federation (NRF); PPWO; Seyfarth Shaw.
Commenters who supported the proposal also stated that unlike the
2016 final rule, the proposal was suitable and manageable for low-wage
regions and
[[Page 51240]]
industries, and for small businesses. See, e.g., American Hotel and
Lodging Association (AHLA); American Society of Travel Advisors (ASTA);
CUPA-HR; LeadingAge; Society of Independent Gasoline Marketers of
America (SIGMA); YMCA. Many also conveyed that the proposed level would
not produce the same negative effects--e.g., increased employer burdens
and diminished workplace flexibility--as the 2016 final rule. See,
e.g., National Association of Landscape Professionals; Seyfarth Shaw.
Some also noted that the 2004 rule has withstood the test of time for
the past 15 years and has never been challenged in court. See, e.g.,
Job Creators Network; SIGMA. Additionally, many of these commenters
agreed with the Department that the proposed rule was responsive to the
district court's concerns that led to the invalidation of the 2016
final rule. See, e.g., Ogletree, Deakins, Nash, Smoak & Stewart, P.C.;
SHRM.
Many employer representatives maintained that the proposed rule's
salary level resulted in a more appropriate number of employees who
would become newly nonexempt--1.1 million in the first year--compared
to the 2016 final rule, which would have resulted in 4.2 million such
workers in the first year. They noted that the smaller number of newly
nonexempt employees would make it easier for employers to absorb the
costs of compliance, see U.S. Small Business Administration Office of
Advocacy (SBA Advocacy), would lessen the legal risk associated with
the rule, see National Restaurant Association (NRA); Wage and Hour
Defense Institute, and would ensure that the salary level maintains its
historic screening function, see AGC; Chamber of Commerce of the United
States of America (Chamber); NRF.
A few commenters, while generally supportive of the Department's
approach in the NRPM, advocated for a salary level lower than the one
proposed. These stakeholders maintained that to ensure that the salary
level could accommodate low-wage regions and industries, the Department
should exclude higher-wage states from the earnings data used to set
the salary level. For example, some commenters urged the Department to
include only the East South Central and West South Central Census
Divisions, which include the lower-wage states of Kentucky, Tennessee,
Alabama, Mississippi, Louisiana, Arkansas, Oklahoma, and Texas, see
Chamber; Food Marketing Institute (FMI); International Franchise
Association (IFA); NRA, while AHLA recommended excluding Maryland,
Virginia, and the District of Columbia from the data set. Others
suggested generally that the Department use a narrower geographic area
than the entire South, using the East South Central Census Division
(Alabama, Kentucky, Mississippi, and Tennessee) as an example. See
Kentucky Retail Federation; SBA Advocacy.
Employee representatives, conversely, generally stated that the
salary level should be raised significantly above the level proposed in
the NPRM or that the duties test should be significantly strengthened.
See, e.g., National Women's Law Center (NWLC); Public Justice Center;
UnidosUS. Many commenters supported the level in the 2016 final rule or
something similar to it. See, e.g., American Association of Retired
Persons (AARP); American Federation of State, County, and Municipal
Employees (AFSCME); Campaign Comments; International Union, United
Automobile, Aerospace & Agricultural Implement Workers of America
(UAW). A few advocated that the salary level be set even higher, at
$1,176 per week ($61,152 per year), using median earnings data. See
National Employment Lawyers Association (NELA); Nichols Kaster, PLLP
(Nichols Kaster); Rudy, Exelrod, Zieff & Lowe, LLP (Rudy Exelrod);
Texas Employment Lawyers Association (TELA).
Many employee representatives maintained that the salary level
proposed in the NPRM is inconsistent with the purpose of the FLSA and
the EAP exemption. In general, these commenters contended that the
proposed salary level was too low to adequately distinguish between
bona fide EAP employees and those who were intended to be eligible for
overtime, and that the rule would result in the exemption of lower-wage
workers with limited bargaining power, whom the statute was designed to
protect. See, e.g., NELP; NELA; Texas RioGrande Legal Aid; Washington
State Budget and Policy Center. Several commenters stated that the
proposal would inappropriately exempt employees who perform significant
amounts of nonexempt work. See, e.g., National Council of Jewish Women;
Women Employed. The American Federation of Labor and Congress of
Industrial Organizations (AFL-CIO) disagreed that the salary level
test's primary purpose is to screen out obviously nonexempt employees,
contending that statements to that effect in the Weiss and Stein
reports were ``not proposals for setting the long duties salary
threshold'' but ``defending the salary tests against criticism,'' and
that the salary levels described in those reports as having
``screening'' functions were accompanied by the more rigorous long
duties test.
Commenters also noted that according to the Department's own
estimates, 84 FR 10951, the proposed rule would result in 2.8 million
fewer workers newly entitled to overtime pay in the first year than the
2016 final rule. See Joint Comment from 77 Members of Congress;
National Partnership for Women and Families; Nichols Kaster. Many of
these commenters also cited estimates by EPI, which projected that the
proposed rule, compared to the 2016 final rule, would result in $1.2
billion fewer dollars in earnings transfers to employees and would
affect 8.2 million fewer workers, including 3.1 million workers who
would have gained the right to overtime pay and 5.1 million workers who
are already overtime-eligible but would have had their overtime
protections strengthened by the 2016 final rule's higher salary level
because of a reduced risk of misclassification. These commenters stated
that the narrowed scope of the proposed rule would be detrimental to
these employees, who include millions of women, people of color, and
parents of children under 18. See EPI; National Partnership for Women
and Families. Some maintained, for example, that a higher salary level
that would affect more workers would provide such workers with more
income, improve upward mobility, and/or provide workers with more time
to spend with their families. See AARP; Campaign Comments. Several
commenters highlighted the lower number of affected employees (compared
to the 2016 final rule) in their particular states. See, e.g., Maryland
Center on Economic Policy; Washington State Budget and Policy Center.
Some commenters also asserted that the proposed salary level would
result in a higher risk of misclassification relative to the 2016 final
rule, as well as more litigation, because more employees' exempt status
would turn on the duties test rather than the salary level test. See
NELA; Winebrake & Santillo LLC. A group of 14 state attorneys general
and the Attorney General for the District of Columbia (State AGs)
stated that these misclassification consequences would extend to state
wage-and-hour laws that contain EAP exemptions that track the federal
standard.
Commenters who opposed the proposed rule also criticized the
Department's reliance on the reasoning of the Nevada district court's
decision.
[[Page 51241]]
See AFL-CIO; EPI; NELP; NWLC; State AGs. These commenters took issue
with the district court's conclusion that the 2016 final rule's salary
level was too high because it classified as nonexempt over 4 million
previously exempt workers based on their salaries alone, and as a
result impermissibly displaced the role of the duties test. AFL-CIO and
EPI asserted that the raw number of newly nonexempt workers under a new
salary test should not determine the test's appropriateness since that
number depends on several factors, such as the amount of time since the
previous update and whether the methodology used in the last update was
sound. Relatedly, the AFL-CIO stated that it is unclear why the 2016
final rule's salary level, which would have resulted in 4.2 million
newly nonexempt employees, was impermissibly high, but the proposed
rule's salary level, which would result in 1.1 million (the
Department's estimate) to 1.4 million (EPI's estimate) newly nonexempt
employees, is not. The AFL-CIO also asserted that the Department
preemptively responded to the district court's views in the 2016 final
rule, while it and other employee representatives contended that the
rationale that the Department put forth in support of the 2016 final
rule was more persuasive than the district court decision that
invalidated it. See AFL-CIO; EPI; NELP; NWLC.
Many employee commenters asserted that if the Department did not
substantially raise the salary level above the proposed level, it
should establish a more rigorous duties test such as the former long
test, which set specific limits on the performance of nonexempt work.
See, e.g., AARP; House and Senate Democratic Caucuses of the Michigan
Legislature; National Council of Jewish Women; Women Employed. Some
commenters recommended instituting a more rigorous duties test
regardless of the salary level the Department adopts. See AFL-CIO;
State of Wisconsin Department of Workforce Development.
Finally, several employee representatives also asserted that by
adopting the 2004 methodology in the NPRM, the Department perpetuated a
methodological error that the 2016 final rule characterized as a
``mismatch.'' See AFL-CIO; Economic Policy Institute (EPI); NELP; NWLC;
81 FR 34400. According to this view, while the Department had
historically used two 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 less rigorous duties test with a higher salary level--in
2004, the Department instead paired a less rigorous duties test with a
lower salary level, resulting in historically nonexempt workers being
instead classified as exempt. These commenters stated that the 2004
methodology failed to adjust for changes from the long/short test
structure, and that a significantly higher salary level is necessary to
account for the absence of the long duties test, which restricted the
amount of nonexempt work lower-wage white collar employees could
perform while still being classified as exempt. Some of these
commenters contended that, as a result, the 2004 methodology results in
a salary level that exempts certain historically nonexempt employees
because employees who traditionally passed the long salary test and
failed the long duties test became exempt under the 2004 final rule's
standard salary level and duties tests. See, e.g., NELA; Nichols
Kaster; Senator Patty Murray. Some commented that the Department
unreasonably relied on the functional dormancy of the long test to
justify its adoption of the standard test in 2004, given that the
Department did not update the short and long test thresholds between
1975 and 2004. One commenter, EPI, noted that the Department did not
include the methodology for the Kantor long test, which used the lowest
10 percent of exempt salaried employees in low-wage regions and
industries, as an alternative in the NPRM or elsewhere in the proposal.
Conversely, employer representatives disagreed with the
``mismatch'' rationale. They stated, for example, that the standard
duties test is not identical to the short duties test, and that in
2004, the Department accounted for its change in the structure and data
set used for the EAP exemption by adjusting the percentile used for
determining the salary level. See Chamber; NRA. More generally, nearly
all employer representatives opposed any changes to the standard duties
test. See, e.g., Bowling Proprietors Association of America; NGA; PPWO.
The Department appreciates the thoughtful comments it received
regarding the salary level. After considering these comments, the
Department has decided to retain the approach from the proposed rule
with one small change. As proposed, the Department is using CPS
earnings data to set the salary level equal to the 20th percentile of
full-time salaried workers in the lowest-wage Census Region (the South)
and/or the retail industry nationwide. To set the salary level, the
Department applied this methodology to pooled CPS MORG data for July
2016 to June 2019, adjusted to reflect 2018/2019. This results in a
final rule salary level of $684 per week ($35,568 for a full-year
worker). For the reasons discussed below, the Department is not
inflating the salary level forward to January 2020 as was proposed in
the NPRM, but instead has used the most recent available actual wage
data.
As an initial matter, the Department believes that the proposed
salary level is consistent with, and faithful to, the FLSA's purpose.
As noted in the NPRM, the FLSA explicitly directs that bona fide
executive, administrative, and professional employees ``shall not'' be
subject to the statute's minimum wage and overtime requirements. 29
U.S.C. 213(a)(1); 84 FR 10903. As such, when defining the contours of
the EAP exemption, while the Department must, of course, ensure that
employees who are subject to the Act's coverage receive its benefits,
it must also ensure that employees whom Congress has directed ``shall''
be exempt from coverage are, in fact, exempt. The 2016 final rule was
in tension with this purpose, as it would have newly disqualified 4.2
million workers from exemption simply because of their salaries,
regardless of their duties.
The Department believes that this final rule strikes the
appropriate balance by using the salary level, in line with its
historical purpose, to screen out obviously nonexempt employees. As
explained above, the Department articulated this purpose in the Weiss
Report in 1949, when it explained that the salary level tests
``prevent[ed] the misclassification by employers of obviously nonexempt
employees, thus tending to reduce litigation'' and ``simplified
enforcement by providing a ready method of screening out the obviously
nonexempt employees'' who, ``[i]n an overwhelming majority of cases . .
. would also not qualify under other sections of the regulations as the
Divisions and the courts have interpreted them.'' Weiss Report at 8.
Likewise, in the Kantor Report, the Department stated 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.'' Kantor Report at 2-3. The Department referenced the
screening function again in the 2004 final rule. See 69 FR 22165. This
principle has been at the heart of the Department's interpretation of
the EAP exemption for over 75 years.
The Department disagrees with the proposition advanced by some
employee representatives that this
[[Page 51242]]
articulation of the salary level's modest purpose misreads the Weiss
and Kantor reports, or that it applies only when paired with the long
duties test. Both reports explicitly characterize the minimum salary
level as ``simplif[ying] enforcement by providing a ready method of
screening out the obviously exempt employees.'' Kantor Report at 3;
Weiss Report at 8. And both confirm that under an appropriate salary
level test, employees earning below the salary level generally would
not meet the requirements of the duties test.\73\ While these reports
were written while a more rigorous duties test was in effect, they
nonetheless affirm that a minimum salary level's purpose is to serve as
a ``screening'' mechanism.
---------------------------------------------------------------------------
\73\ See Kantor Report at 3 (``Employees who do not meet the
salary test are generally also found not to meet the other
requirements of the regulations.''); Weiss Report at 8 (``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.'').
---------------------------------------------------------------------------
Conversely, as explained in the NPRM, the 2016 final rule went
beyond this purpose, and instead suggested that the salary level had a
much greater role to play in determining exempt status. For example, in
the 2016 final rule the Department took the position that, in light of
the single standard duties test that is less rigorous than the long
duties test, ``the salary threshold must play a greater role in
protecting overtime-eligible employees,'' and that ``it [was] 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.'' 81 FR 32412, 32465-66.\74\
---------------------------------------------------------------------------
\74\ As noted in the NRPM, 84 FR 10908 n.76, the Department
explained in the 2016 final rule that at the time of its 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. As the
Department noted, however, it ``has never compared the number of
employees who are nonexempt based exclusively on the salary or
duties test, respectively, to determine the effectiveness of the
salary level.'' 84 FR 10908.
---------------------------------------------------------------------------
As a result, the $913 per week salary level newly excluded 4.2
million salaried workers from exemption regardless of the duties they
performed. The district court concluded that this would exclude from
exemption ``so many employees who perform exempt duties,'' and in fact
excluded ``entire categories of previously exempt employees who perform
`bona fide executive, administrative, or professional capacity'
duties[.]'' 275 F. Supp. 3d at 806-7. Accordingly, it invalidated the
rule.
In sum, as explained in the NPRM, the Department believes that the
2016 final rule ``untethered the salary level test from its historical
justification[,]'' 84 FR 10901, and that this resulted in its
invalidation by the district court. For this reason, the Department
declines to return to the 2016 methodology or to set an even higher
salary level. In contrast, as noted in the NPRM, the methodology in the
2004 final rule, which the Department is applying in this rule, ``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.'' Id. at
10903.
The Department also believes that the number of workers affected by
the salary level set in this final rule confirms that the level is
appropriate. The Department estimates that the final rule will result
in 1.2 million workers who will be newly overtime-eligible in the first
year as a result of the increased salary level. The number of affected
workers is very similar to the 1.3 million workers affected by the 2004
rule's salary level increase. Id. at 10911 (citing 69 FR 22213, 22253).
This similarity to the 2004 rule, which has never been challenged in
court, is consistent with the Department's view that the salary level
set in this final rule is reasonable and legally sound.
Moreover, as the Department explained in the NPRM, because the 2016
final rule set the salary level ``at the low end of the historical
salary range of short test salary levels,'' 81 FR 32414, it failed to
account for the absence of a long test that historically exempted white
collar workers with lower salaries but whose duties confirmed they were
bona fide EAP employees. Thus, the impact of the 2016 final rule would
have been the inverse of the ``mismatch'' the Department sought to
correct. It would have resulted in employees who, due to the nature of
their duties, have historically been classified as exempt suddenly
becoming nonexempt simply because of their salaries.
As a result, the 2016 final rule was in tension with the salary
level's limited role in defining the EAP exemption, as it conflicted
with the Department's longtime practice of setting a salary level that
did not ``disqualify[ ] any substantial number of'' bona fide
executive, administrative, and professional employees from exemption,
Kantor Report at 5, leading directly to the district court's
invalidation of the rule. While the Department has long recognized that
it is inevitable that some employees will be incorrectly excluded from
exemption since the salary level is ``a dividing line [that] cannot be
drawn with great precision but can at best be only approximate[,]''
Weiss Report at 11, the Department may not disregard Congress's express
directive to exempt bona fide EAP employees. Conversely, the 1.2
million lower-income workers who will become nonexempt as a result of
this rule's increase to the standard salary level will not include a
substantial number of workers whose duties have historically qualified
them as bona fide EAP employees.
Thus, while employee representatives criticized the narrower scope
of this rule compared to the 2016 final rule, the fact that this final
rule affects considerably fewer employees than the 2016 final rule
confirms, rather than undermines, its appropriateness. Given that the
2016 final rule was invalidated due to its overbreadth, that rule is
not a reasonable benchmark for concluding that the number of affected
employees under this rule is too low.
As noted above, employee commenters also objected to the
Department's reliance on the Nevada district court's decision
invalidating the 2016 final rule. The Department believes that its
reliance on the reasoning of the district court is well-founded.
Such reliance is reasonable and prudent as it reduces the
vulnerability of new rules to legal challenges or injunctions, and
maximizes the likelihood that a new rule can be implemented
immediately. Notably, it has been over three years since the 2016 rule
was published, and nearly three years since its stated effective date.
Because of the rule's invalidation, however, the currently enforced
salary level remains at $455 per week, which the Department and nearly
all commenters agree must be updated. Adoption of a salary level that
reduces, to the extent possible, the likelihood that the rule will be
enjoined is the best way to ensure that workers can reap the rule's
benefits as soon as possible rather than waiting for the outcome of
potentially lengthy litigation. The Department believes that the salary
level in this final rule accomplishes that objective, particularly
given the district court's implicit endorsement of the 2004
methodology. See 275 F. Supp. 3d at
[[Page 51243]]
807 n.6 (noting the court's earlier observation that an updated 2004
salary level likely would have not prompted the litigation that
invalidated the 2016 final rule because it ``would still be operating .
. . as more of a floor'') (internal quotation marks and citation
omitted).
Additionally, the Department is mindful of the concerns the
district court cited. As articulated in the NPRM and above, the 2016
final rule was, at minimum, in tension with the FLSA because it
resulted in 4.2 million employees, including employees who were
historically exempt under the long test, becoming nonexempt based on
their salaries alone, even though the Act directs that the EAP
exemption be based on ``capacity.'' This threatened to make ``salary
rather than an employee's duties determinative'' of an employee's
status under the EAP exemption.\75\ While the 2016 final rule naturally
contains language disagreeing with these propositions, for the reasons
explained above, the Department has reexamined the 2016 final rule in
light of the district court's decision and the public comments it has
received in response to the RFI and the NPRM, and ultimately finds that
the concerns voiced by the district court and by many public commenters
warrant adopting a lower salary level.
---------------------------------------------------------------------------
\75\ 275 F. Supp. 3d at 807.
---------------------------------------------------------------------------
The Department disagrees with the employee commenters who asserted
that the 2004 methodology created a ``mismatch'' that must be corrected
by a salary level comparable to the one from the 2016 final rule or a
restoration of the long duties test. See, e.g., EPI (``The methodology
for setting the standard salary threshold in the 2004 rule was
fundamentally flawed.''); NELP. The 2004 final rule explained that it
was difficult to coherently apply the long duties test's requirement
that an EAP employee perform no more than 20 percent nonexempt
work.\76\ Consequently, the Department switched from the long and short
duties tests to a single duties test that, like the previous short
duties test, did not include a quantitative limit on the percentage of
time performing nonexempt work. And the Department set a standard
salary level that was similar to that of the long test.
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\76\ 69 FR 22127 (``When employers, employees, as well as Wage
and Hour Division investigators applied the `long' test exemption
criteria in the past, distinguishing which specific activities were
inherently a part of an employee's exempt work proved to be a
subjective and difficult evaluative task that prompted contentious
disputes.'').
---------------------------------------------------------------------------
The commenters relying on the ``mismatch'' theory appear to assert
that the 2004 final rule should have paired the single duties test with
a higher salary threshold such as the short test because the Department
was obligated to preserve the previous structure of pairing a more
rigorous duties test with a lower salary level test, or a less rigorous
duties test with a higher salary level. See, e.g., AFL-CIO, EPI. But
the previous structure had been created by the Department as one among
many permissible policy choices. It was not required by the statutory
text. Indeed, the statutory text does not require the Department to
determine any salary level. As such, the Department was under no legal
obligation to preserve the previous salary/duties structure in the 2004
final rule.
Moreover, the Department believes it would have been inappropriate
to adopt the higher short test salary level after removing the long
duties test in the 2004 final rule. See 84 FR 10908. The long duties
test ensured that white collar employees would not become nonexempt
simply because their salaries fell below the short test's higher
threshold, if their duties clearly indicated bona fide EAP status. If
the 2004 final rule had adopted the short test's higher salary
threshold after eliminating the long duties test, such employees would
have been reclassified as nonexempt solely because of their salary
level. This approach would have departed from the historical role of
using the salary level to screen out only obviously nonexempt
employees, and would have risked violating the statutory requirement to
base EAP status on the ``capacity'' in which the employee is employed.
29 U.S.C. 213(a)(1). Therefore, the Department believes that its'
decision in 2004 not to pair the higher short test salary level with
the standard duties test was a necessary measure to maintain policy
consistency and follow statutory requirements.
Indeed, the 2016 final rule's attempt to correct the ``mismatch''
by setting the salary level ``at the low end of the historical range of
short test salary levels,'' 81 FR 32409, created the precise legal
risks that the 2004 final rule attempted to avoid. While the Department
previously relied on the mismatch theory in defending the 2016 final
rule in litigation, the district court, in declaring the 2016 final
rule invalid for the reasons set forth above, implicitly rejected
application of the mismatch theory in reaching its conclusion. As
explained above, the district court found that the salary level set by
the 2016 final rule improperly substituted employee salaries for an
analysis of employees' duties.\77\ 275 F. Supp. 3d at 806. In contrast,
the 2004 methodology has never even been challenged in court--let alone
invalidated--during the 15 years it has been enforced by the
Department.
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\77\ Some commenters contend that the district court's decision
was flawed because it did not address the ``mismatch'' theory in its
opinion, even though it was the central theory behind the 2016 final
rule. See AFL-CIO; NELP. However, as noted above, the district court
implicitly rejected the mismatch theory.
---------------------------------------------------------------------------
Additionally, as noted in the NPRM, the mismatch rationale failed
to account for the substantial number of years during which the long
duties test was effectively dormant. 84 FR 10908-09; see also 69 FR
22126 (explaining that ``the `long' duties test [had], as a practical
matter, become effectively dormant'' due to outdated salary levels, and
quoting commenters who described the long duties test as
``inoperative,'' ``rarely, if ever, used,'' ``largely . . . dormant,''
and ``lack[ing] current relevance''). The long test salary levels set
in 1975 were equaled or surpassed by the minimum wage in 1991.\78\
Thus, since at least 1991, the short duties test and salary level
determined whether workers qualified for the EAP exemption. Employers
and employees alike have effectively operated for 28 years under a
single-test system. Thus, although, as noted above, some employee
commenters asserted that the 2004 methodology exempts certain
historically nonexempt employees (i.e., those who had passed the long
salary test and failed the long duties test), any of these employees
who were nonexempt in the years leading up to 2004 were nonexempt
because their salaries fell below the short test's salary threshold. It
therefore appears that these commenters are requesting that the
Department set the salary threshold at the historical short test level.
The Department attempted to do this in the 2016 final rule, but as
explained above, this approach created legal risks, as evidenced by the
district court's conclusion.
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\78\ 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).
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The Department continues to believe that the post-1991 landscape is
``highly relevant'' to its approach here, 84 FR 10909, and disagrees
with the employee representatives contending otherwise. The one-test
system effectively in place for the nearly three decades has created
significant reliance interests and
[[Page 51244]]
understandings in the workplace under which employees and employers
alike recognize certain positions as exempt. As the Nevada district
court recognized, a salary level that deviates substantially from
recent practice would result in ``entire categories of previously
exempt employees who perform `bona fide executive, administrative, or
professional capacity' duties'' becoming nonexempt. 275 F. Supp. 3d at
806 (quoting 29 U.S.C. 213(a)(1)). Numerous employers indicated that
they anticipated significant adverse effects from the 2016 final rule
as a result of this widespread reclassification, including not only
increased compliance costs but decreased employee flexibility, reduced
morale, and increased employee turnover. See Independent Electrical
Contractors; National Association of Truck Stop Operators; National
Multifamily Housing Council and the National Apartment Association;
PPWO; SBA Advocacy; Seyfarth Shaw.
Regarding EPI's request that the Department ``include the value of
the Kantor long test in the final rule,'' as explained below and as
described in more detail in the economic analysis, the Department has
considered the Kantor long test methodology as an alternative. But as
the 2004 final rule explained, the Kantor method, which uses the lowest
10 percent of exempt salaried employees in low-wage regions and
industries, requires ``uncertain assumptions regarding which employees
are actually exempt[.]'' 69 FR 22167. It is also more complex to model
and thus is less accessible and transparent. And it presents a
circularity problem: The Kantor method would determine the population
of exempt salaried employees, while being determined by the make-up of
that population. The 2004 methodology of setting the minimum salary
level based on the lowest 20 percent of all salaried employees in the
South and retail industry avoids these problems. See id. Additionally,
as discussed in the economic analysis below, upon consideration of the
Kantor method, the Department found that it would result in a salary
threshold that differs from the level set in this final rule by $40 per
week. EPI similarly estimated that the Kantor method would result in a
salary threshold that deviates from the level proposed in the NPRM by
$33 per week. The Department does not believe this fairly small
difference justifies reverting back to the Kantor method, particularly
because the 2004 methodology is familiar to employers and employees,
does not require uncertain and circular assumptions, and has never been
challenged in court.
The Department also disagrees with commenters who stated that a
significantly higher salary level is justified in order to reduce
further the risk of employee misclassification. The Department
recognizes that, in addition to conferring minimum wage and overtime
protections on newly nonexempt employees, an updated salary level
clarifies and strengthens the nonexempt status of employees who fail
the duties test and earn between the previous salary level and the new
one (i.e., those who are and will remain nonexempt), and thereby
reduces the risk that those employees will be misclassified as exempt.
Indeed, this final rule clarifies and strengthens the nonexempt status
of 2.2 million salaried white collar workers and 1.9 million salaried
blue collar workers earning between $455 and $684 per week. See infra
Sec. Sec. VI.A.iii, VI.D.iii.3.
But the laudable goal of reducing misclassification cannot overtake
the statutory text, which grounds an analysis of exemption status in
the ``capacity'' in which someone is employed--i.e., that employee's
duties. Accordingly, the salary level test's limited purpose is to
screen out only those employees who are not performing bona fide EAP
duties. See Weiss Report at 8 (noting that the salary levels ``have
amply proved their effectiveness in preventing the misclassification by
employers of obviously nonexempt employees'') (emphasis added). As
explained at length above, if the salary level is too high, as was the
case in the 2016 final rule, it results in a substantial number of
historically exempt bona fide EAP employees being classified as
nonexempt without any examination of their duties. Such action is
inconsistent with the section 13(a)(1) exemption. The Department
believes that potential misclassification of nonexempt employees as
exempt is most appropriately addressed through compliance assistance
and, if necessary, enforcement by the Department or private parties,
rather than through an artificial increase to the salary level.\79\
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\79\ Regarding the view of the state attorneys general that the
new salary level does not do enough to prevent misclassification
under their states' wage-and-hour laws that track FLSA exemptions,
nothing in this rule prevents any state from enacting a higher
salary level, or a more restrictive duties test, than the FLSA if it
believes it is necessary to prevent misclassification under state
law.
---------------------------------------------------------------------------
The Department also declines to adopt a lower salary level than the
one proposed in the NPRM, as some employer representatives suggested.
As explained above, by setting the salary level at the low end--the
20th percentile--of the earnings of full-time salaried employees in the
South and/or retail industry, the Department, consistent with its
historical practice, has tailored the salary level to the needs of the
lowest-wage regions and industries. While some employer representatives
stated that the Department could use an even narrower subset of data by
eliminating from consideration higher-wage states, the Department
believes that using the entire South--the lowest-wage Census Region--in
addition to the retail industry nationwide strikes the appropriate
balance by setting a salary level that is based on low-wage areas but
can still serve as a meaningful dividing line in higher-wage areas as
well.\80\
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\80\ The Chamber stated that the 2004 rule and the Department's
application of that rule (in the NPRM) used different groups of
states, and that the 2004 rule used only a subset of states in the
South Census Region. The Chamber's characterization of the data set
used in the 2004 rule is incorrect, as both this rule and the 2004
final rule used the entire South Census Region in setting the salary
level.
---------------------------------------------------------------------------
In sum, after considering the comments received, the Department has
decided to update the salary level by applying the 2004 methodology to
current data. As noted in the NPRM, using this methodology ``promotes
familiarity and stability for the workplace, ensures workers the
important wage protections contained in the Act, . . . minimizes the
uncertainty and potential legal vulnerabilities that could accompany a
novel and untested approach,'' ``avoids new regulatory burdens,'' and
sets a salary level that ``accounts for nationwide differences in
employee earnings and . . . work[s] appropriately with the standard
duties test.'' 84 FR 10909.
The Department declines to make any changes to the duties test,
such as adopting a duties test similar to the long duties test, which
some employee representatives advocated as an alternative or complement
to a higher salary level. As explained above, the standard duties test
has been in effect for 15 years, and the short duties test, to which it
is similar, was functionally the predominant test in use for the
preceding 13 years. This approach has never been challenged. As a
result, both employees and employers are accustomed to these tests.
Moreover, a large body of jurisprudence interprets these duties tests,
and so changing these tests could increase regulatory uncertainty and
result in costly litigation. The Department also remains
[[Page 51245]]
mindful of employer concerns that reinstating the long test's cap on
nonexempt work could introduce new compliance burdens. See, e.g.,
National Association of Truck Stop Operators; NRF; see also 81 FR
32446; 69 FR 22127. Finally, the Department did not propose any changes
to the duties test in the NPRM and does not believe that it would be
appropriate to institute such a significant change to the part 541
exemptions in this final rule.
Accordingly, the Department declines to return to the more
complicated long duties test. The Department believes that the standard
duties test, which focuses on whether an employee's ``primary duty''
consists of EAP tasks, can appropriately distinguish bona fide EAP
employees from nonexempt workers.
The Department considered a number of alternatives to the salary
level in this final rule.\81\ First, the Department considered not
changing the salary level from the currently enforced level of $455 per
week. The Department rejected this option because, as discussed above,
the Department concluded that the $455 salary level set fifteen years
ago no longer reflects current earnings and must be updated to serve as
a meaningful dividing line between nonexempt and potentially exempt
employees. The Department also considered maintaining the average
minimum wage protection in place since 2004 by using the weighted
average of hours at minimum wage and overtime pay represented by the
minimum salary level (i.e., the $455 weekly threshold represented 72.2
hours at minimum wage and overtime pay at the minimum wage in 2004;
currently, that salary level represents 55.2 hours at minimum wage and
overtime pay; the weighted average is 59.5 hours, which yields a salary
of $502 per week). The Department rejected this option because it would
not adequately address wage growth since 2004.
---------------------------------------------------------------------------
\81\ The salary levels that would result from each of the
alternatives are set forth in section VI.C.
---------------------------------------------------------------------------
In light of comments from some employer representatives, the
Department also considered using the 2004 methodology but eliminating
the District of Columbia, Maryland, and Virginia from the data set used
to determine the salary level due to their higher levels of employee
earnings. However, as discussed above, the Department believes that
using the entire South and the retail industry nationwide results in an
appropriate nationwide salary level that is based on low-wage regions
but can still serve as a meaningful dividing line in higher-wage
regions. Using the entire South is also consistent with the methodology
used in the 2004 final rule.
In response to a comment from EPI, the Department also considered
adopting the methodology that was used to derive the long test salary
level prior to 2004 (the Kantor long test method), which used the
lowest 10 percent of exempt salaried employees in low-wage regions and
industries. However, as explained in greater detail above, the
Department declined to do so because while the Kantor methodology
produces a salary level that differs from the level set in this final
rule by less than 6 percent, it depends on uncertain and circular
assumptions, and is more complex to model and thus less accessible and
transparent.
Finally, the Department considered using the methodology from the
2016 final rule to set the salary level, as suggested by many employee
representatives. However, as explained at length above, the Department
believes that methodology was inappropriate because it resulted in too
many employees being newly classified as nonexempt based on their
salaries alone, thus supplanting the role of the duties test. Moreover,
the district court invalidated the 2016 final rule. Therefore, the
Department has chosen to use the 2004 methodology, which, as noted
above, screens out obviously nonexempt workers, works well with the
standard duties test, and has never been challenged during the fifteen
years in which it has been enforced by the Department.
3. Proposed Inflation to January 2020
The Department proposed to inflate the salary level to reflect
anticipated wage growth to January 2020, the final rule's estimated
effective date. Most commenters did not address this aspect of the
proposal, but some employer representatives opposed it. A few stated
that the proposed approach was inconsistent with the Department's past
practice of setting the salary level using the most recent available
data on actual salaries paid to employees, rather than inflationary
metrics. See, e.g., Center for Workplace Compliance; Chamber; FMI.
In the final rule, instead of projecting the salary level to
January 2020, the Department has set the salary level using the most
recent data available at the time the Department has drafted the final
rule. The Department is using pooled CPS MORG data from July 2016 to
June 2019, adjusted to reflect 2018/2019. As some commenters noted,
using recent actual wage data is consistent with the approach the
Department has taken in prior rulemakings. See 81 FR 32403 (noting
regulatory history reveals that in most prior rulemakings ``the
Department examined a broad set of data on actual wages paid to
salaried employees'' to set the salary level), id. at 32051 (``In
keeping with our practice, the Department relies on the most up-to-date
data available to derive the final salary level[.]'').
It is also consistent with the Department's historical practice
(with only one exception, in 1975) of declining to use inflation to
adjust the salary level for the part 541 exemption. See 69 FR 12167
(noting the Department's ``long-standing tradition of avoiding the use
of inflation indicators for automatic adjustments to these salary
requirements''). Additionally, the gap between the latest month covered
by the data set--June 2019--and the rule's effective date--January
2020--is only six months. This is a shorter gap than was the case in
the 2016 rule, which had an effective date of December 1, 2016 and
relied on salary data from the fourth quarter of 2015, and a
significantly shorter gap than the 2004 rule, which had an effective
date of August 23, 2004 and relied on 2002 CPS data. 81 FR 32391,
32405; 69 FR 22122, 22168. Using a data set that includes such recent
earnings data enables the Department to avoid the uncertainty and
speculation that would accompany projecting earnings data.
4. Rescission of the 2016 Final Rule
Many employer representatives who commented on the issue supported
the NPRM's independent proposal to rescind the 2016 final rule. See,
e.g., ASTA; Center for Workplace Compliance; NAHB; NFIB; Wage and Hour
Defense Institute; Worldwide Cleaning Industry Association. These
employers generally maintained that the 2016 final rule, unlike the
proposed rule, was inconsistent with how the Department has previously
set the salary level, and some highlighted that the 2016 final rule
excluded many workers performing EAP duties. As noted above, employer
representatives also asserted that the 2016 final rule salary level
would have a number of adverse effects, including reductions in
staffing levels, hours, and employee benefits; less flexibility in
scheduling; and decreased employee morale. In contrast, other
commenters, including the tens of thousands who submitted comments as
part of a campaign, maintained that the 2016 final rule was appropriate
and would have benefited more employees than the salary level proposed
in the NPRM, and urged the Department to defend the 2016 final rule in
the
[[Page 51246]]
currently stayed litigation. See, e.g., AFL-CIO; Campaign Comments;
Senator Patty Murray; The Leadership Conference on Civil and Human
Rights.
The Department is finalizing the formal rescission of the 2016
final rule as proposed. Thus, in addition to replacing the 2016 final
rule functionally by revising the part 541 regulatory text in the Code
of Federal Regulations, this final rule also formally rescinds the 2016
final rule. This rescission operates independently of the new content
in this final rule, as the Department intends it to be severable from
the substantive rule for revising part 541. Thus, even if the
substantive provisions of this final rule revising part 541 are
invalidated, enjoined, or otherwise not put into effect, the Department
intends the 2004 final rule to remain operative, not the enjoined 2016
final rule that it is rescinding.
Particularly given the recent history of litigation in this area,
the rescission of the 2016 final rule is necessary to provide certainty
and clarity to employees and employers about what salary level will be
effective if this final rule were to be invalidated, enjoined, or
otherwise not put into effect. As explained at length above, the
Department believes that the salary level set in the 2016 final rule
was inappropriate. Moreover, given the district court's invalidation of
the 2016 final rule, the 2004 final rule, which has never been
challenged in court, is the logical framework to take the place of this
rule if this rule were to be struck down.
B. Special Salary Tests
i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the
Northern Mariana Islands \82\
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\82\ The special salary tests do 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, or American
Samoa.
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The Department has applied the standard salary level to Puerto Rico
since 2004.\83\ In 2016, Congress passed the Puerto Rico Oversight,
Management, and Economic Stability Act (PROMESA).\84\ 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.'' \85\
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\83\ See 69 FR 22172.
\84\ See Public Law 114-187, 130 Stat. 549 (June 30, 2016).
\85\ 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.
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It is the Department's belief that PROMESA does not apply to this
final rule as it is a new rulemaking, and thus not ``related to'' the
2015 overtime rule NPRM within the meaning of PROMESA. Section 404,
however, reflected Congress's apprehension with increasing the salary
level in Puerto Rico, and given the current economic climate there, the
Department proposed to set a special salary level in Puerto Rico of
$455 per week--the level that currently applies under PROMESA.
The Department also currently applies the standard salary level to
the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana
Islands (CNMI).\86\ 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 proposed setting a special salary level of
$455 per week for the Virgin Islands, Guam, and the CNMI.
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\86\ 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.
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Few commenters addressed this issue, but those who did all
supported the Department's proposal. The Saipan Chamber of Commerce,
for example, stated that ``U.S. territories face economic challenges
not experienced by businesses and employers on the U.S. mainland,'' and
the World Floor Covering Association (WFCA) similarly cited the
``unique economies'' in these territories. The Hotel Association of the
Northern Mariana Islands referenced several CNMI-specific concerns,
including that ``[w]ages across all industries in the CNMI, including
the hospitality industry, have been historically lower than their
stateside counterparts.'' The CNMI chapter of SHRM expressed similar
concerns.
After reviewing the comments received, the Department is finalizing
this aspect of the NPRM as proposed. As such, in this final rule the
Department will set a special salary level of $455 per week for Puerto
Rico, the Virgin Islands, Guam, and the CNMI.
ii. American Samoa
As discussed in the NPRM, 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.\87\ The Fair Minimum Wage Act of 2007, as amended, provides that
industry-specific minimum wage rates in American Samoa will increase
every three years until each equals the federal minimum wage.\88\ The
disparity with the federal minimum wage is expected to remain for the
foreseeable future.
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\87\ See 69 FR 22172.
\88\ 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.\89\ The Department proposed 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 level of $380 per week. The Department
proposed a special salary level of $380 per week in American Samoa. It
explained that this approach would not only maintain the special salary
level that the Department is currently enforcing in American Samoa, but
would also ensure that American Samoa, which has a lower minimum wage
than the other U.S. territories, would not have a higher special salary
level.\90\
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\89\ See, e.g., 69 FR 22172.
\90\ See 84 FR 10912.
---------------------------------------------------------------------------
The Department received no comments on this proposal and will adopt
the methodology set forth in the NPRM. Accordingly, in this final rule
the Department will set a special salary level of $380 per week for
employees in American Samoa.
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.\91\ This exception from the
[[Page 51247]]
``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.\92\ Consistent with its practice since the 2004 final rule, the
Department proposed to increase the required base rate proportionally
to the proposed increase in the standard salary level test, resulting
in a proposed base rate of $1,036 per week.
---------------------------------------------------------------------------
\91\ See Sec. 541.709.
\92\ 18 FR 2881 (May 19, 1953).
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The Department did not receive any comments on the proposed base
rate for motion picture employees. The final rule adopts the
methodology set forth in our proposal, which using the new standard
salary level ($684 per week) results in a base rate of $1,043 per week
(or a proportionate amount based on the number of days worked).\93\
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\93\ The Department calculated this figure by dividing the
weekly salary level ($684) 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 produced a new base rate of $1,043
(per week), when rounded to the nearest whole dollar.
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C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and
Commissions in the Salary Level Requirement
In the 2016 final rule, the Department for the first time allowed
employers to count nondiscretionary bonuses and incentive payments
toward the standard or special salary levels.\94\ Under that rule, such
bonuses must be paid quarterly or more frequently and may satisfy up to
10 percent of the standard or special salary level. In the NPRM, the
Department again proposed to permit nondiscretionary bonuses and
incentive payments (including commissions) to satisfy up to 10 percent
of the standard or special salary level tests for the EAP exemption.
However, unlike the 2016 final rule's requirement that such payments
must be paid on a quarterly or more frequent basis, the Department
proposed to allow the crediting of payments made on an annual or more
frequent basis. Additionally, the Department proposed 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
compensation up to the required level. See 84 FR 10912-13.
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\94\ Although a federal district court subsequently invalidated
the 2016 final rule, the court's summary judgment decision did not
address the bonuses provision. 275 F. Supp. 3d 795.
---------------------------------------------------------------------------
Most commenters representing employers supported allowing
nondiscretionary bonuses and incentive payments to count towards the
standard salary level requirement. Employer representatives supporting
the bonuses proposal (or an expanded version of it) asserted that
nondiscretionary bonuses and incentive payments constitute a large and
important part of the total compensation package for many exempt
employees. Several commenters, including the Chamber, FMI, IFA, and
NRA, noted that, in light of commenter feedback, the Department has
previously acknowledged this point in the NPRM and in the 2016 final
rule. See 81 FR 32423-24; 84 FR 10912. The Chamber additionally cited a
survey from 2018 showing that 80 percent of non-profit and government
employers surveyed use some type of ``short-term incentive plan.'' The
National Association of Truck Stop Operators and PPWO asserted that the
majority of employees who receive bonuses and incentive payments
otherwise qualify for exempt status, while SIGMA and WFCA asserted that
bonuses and incentive payments tied to an employer's success ``foster a
sense of ownership'' among the managerial employees who receive them.
Many employer representatives specifically approved of the Department's
proposal to allow the crediting of nondiscretionary bonuses and
incentive payments paid on an annual basis (rather than quarterly, as
provided by the 2016 final rule), agreeing that annual bonuses are a
common form of compensation for many EAP employees. See PPWO; SIGMA.
Although several employer representatives supported the proposal
without reservation, a larger number objected to the proposal's
restriction that nondiscretionary bonuses and incentive payments could
only satisfy up to 10 percent of the standard salary level. Some of
these commenters urged the Department to allow bonuses to satisfy more
than 10 percent of the standard salary level, but declined to specify
an exact amount. See Center for Workplace Compliance; National
Association of Federally-Insured Credit Unions; NGA. Others
specifically proposed a higher percentage limit, including: WFCA
(suggesting 20 percent); Small Business Legislative Council and
TechServe Alliance (25 percent); ASTA (30 percent); National
Independent Automobile Dealers Association (30 or 40 percent); and HR
Policy Association and the Kentucky Retail Federation (50 percent).
Finally, many employer representatives urged the Department not to
impose any limit. See, e.g., American Network of Community Options and
Resources; American Staffing Association; IFA; Mortgage Bankers
Association; NRF; PPWO; Seyfarth Shaw.
Some commenters critical of the proposed 10 percent limit asserted
that it is not reflective of the compensation practices in their
industry, where bonuses and incentive payments often exceed 10 percent
of an employee's fixed salary. See, e.g., ASTA; NGA; WFCA. Others
contended that to ``harmonize'' the respective regulations, any non-
hourly payments that count toward an employee's ``regular rate of pay''
when calculating overtime pay, see 29 CFR 778.211(c), should count
towards the salary threshold as well. See, e.g., AGC; HR Policy
Association; PPWO; Worldwide Cleaning Industry Association.\95\ The
Chamber, IFA, and the National Lumber and Building Material Dealers
Association criticized the NPRM's rationale that the 10 percent limit
was necessary to help maintain parity between sectors that use such pay
methods and those that traditionally have not done so,\96\ while ASTA
and TechServe Alliance asserted that the 10 percent limit would have a
negative impact on employers in industries that rely on incentive pay.
---------------------------------------------------------------------------
\95\ For the same reason, some commenters specifically requested
the Department allow employers to credit the value of board and
lodging towards the standard salary level. See AHLA (``If an
employer must include a non-hourly payment in the regular rate, that
payment should likewise count towards the salary threshold.''); see
also CUPA-HR; PPWO; Seyfarth Shaw. AHLA and CUPA-HR asserted that
board and lodging benefits are especially common for exempt
employees in hospitality and higher education, respectively.
\96\ The Chamber stated that such a consideration is ``beyond
the Department's proper purview.'' The Chamber and IFA additionally
stated that government and non-profit employers do not typically
compete with for-profit employers over the same employee, and that
the proposal would not alter any existing competitive imbalance in
any event.
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Although few organizations representing employees commented on the
bonuses proposal, those who did were unanimous in voicing their
opposition. NELA, Nichols Kaster, Rudy Exelrod, and Smith Summerset &
Associates LLC (Smith Summerset) asserted that allowing annual bonuses
and incentive payments to satisfy any portion of the salary level test
would undermine the premise that only workers with a minimum level of
dependable and predictable pay should be exempt from the FLSA's
overtime protections. Relatedly, the AFL-CIO expressed concern that the
proposal would ``provide a means for employers to manipulate employees'
salaries to
[[Page 51248]]
avoid paying overtime[.]'' See also NELA. Given these concerns, some
employee representatives asserted that the proposal would be
particularly inappropriately paired with a salary level substantially
lower than the figure adopted in the 2016 final rule. See, e.g., NELA;
Smith Summerset.
Several commenters disputed that nondiscretionary bonuses and
incentive payments are indicative of exempt status. For example, NELA
and TELA emphasized that such payments do not convey ownership
interests in the business, and asserted that their members ``have
represented many categories of employees who receive various
nondiscretionary bonuses, including middle management and lower level
employees[.]'' By contrast, Smith Summerset asserted that
nondiscretionary bonuses and incentive payments ``are not an important
pay component for the relatively lowly paid employees who would be
affected by the [proposal],'' who the firm described as ``most in need
of the certainty and regularity of a salary'' (emphasis in original).
Finally, employee representatives worried that the proposal would
undermine the clarity and effectiveness of the salary level test. For
example, AFL-CIO stated that ``[i]ncluding bonuses in the calculation
could create confusion as to whether employees meet the salary
threshold test and are overtime eligible.'' See also Nichols Kaster.
Several commenters, including NELA, Rudy Exelrod, and TELA, asserted
that the proposal would increase monitoring and compliance costs. Smith
Summerset asserted that employers would have to keep new payroll and
timekeeping records for their exempt staff, including for some
individuals no longer employed by the company who might be awaiting a
deferred compensation payment. Several employee representatives
predicted that the proposal would result in increased litigation,
particularly over the distinction between discretionary and
nondiscretionary bonuses.\97\ Smith Summerset emphasized that the back
wage claims in such disputes would be substantial, and could pose ``a
surprising and unexpected liability to those unsophisticated employers
who might stumble into the violation simply by reason of administrative
oversight.''
---------------------------------------------------------------------------
\97\ NELA and other commenters asserted that ``[d]etermining
whether bonuses are discretionary or nondiscretionary already
generates considerable litigation in the context of whether certain
kinds of bonuses must be included in the regular rate for purposes
of calculating the overtime rate.'' See also Nichols Kaster; Rudy
Exelrod; TELA.
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After carefully considering commenter feedback, the Department has
decided to adopt the proposal without modification--i.e., allowing
employers to satisfy up to 10 percent of the standard or special salary
levels \98\ with nondiscretionary bonuses and incentive payments
(including commissions), provided that such payments are paid no less
frequently than on an annual basis.\99\ This provision appropriately
modernizes the regulations to account for EAP compensation practices in
a growing number of workplaces, while at the same time preserving the
important role of the salary basis and salary level tests in
identifying EAP employees, simplifying compliance, and preventing
abuse.
Feedback from employer representatives responding to the NPRM has
reinforced the Department's view in the previous rulemaking that the
provision of nondiscretionary bonus and incentive payments has become
sufficiently correlated with EAP status. At the same time, the
Department acknowledges that nonexempt employees may receive
nondiscretionary bonuses and incentive payments, and that the part 541
regulations have historically looked only to payments made on a salary
or fee basis to satisfy the minimum salary level. The Department
believes that allowing employers to credit nondiscretionary bonuses
towards up to 10 percent of the standard or special salary levels
strikes an appropriate balance between accommodating legitimate pay
practices for a growing number of bona fide EAP employees, while not
undermining the salary basis requirement.
---------------------------------------------------------------------------
\98\ Specifically, this rule permits employers to use
nondiscretionary bonuses and incentive payments to satisfy up to 10
percent of the standard salary level or any of the special salary
levels applicable to U.S. territories. As discussed in greater
detail below, however, HCEs must receive at least the standard
salary amount each pay period on a salary or fee basis without
regard to the payment of nondiscretionary bonuses and incentive
payments.
\99\ 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 has decided against raising or eliminating the
proposal's 10 percent limitation. The Department continues to believe
in the basic logic of the salary requirement. Capping the crediting of
nondiscretionary bonuses and incentive payments at 10 percent of the
standard salary level ensures that the salary level test remains
predominantly a test of salaried earnings, requiring that EAP employees
subject to the salary criteria must earn at least 90 percent of the
standard salary level on a salaried basis. Additionally, while several
employer commenters asserted that nondiscretionary bonuses and
incentive pay often comprise more than 10 percent of the total
compensation paid to EAP employees, few specifically asserted that any
significant number of EAP employees earn salaries of less than 90
percent of the proposed salary threshold (i.e., $614.70 per week, or
$31,964.40 per year). Thus, the Department disagrees that the
cumulative effect of raising the standard salary level while limiting
the amount that can be satisfied through nondiscretionary bonuses and
incentive pay will result in a significant reduction in such payments.
The regulations do not limit the amount of bonuses EAP employees may
earn; it only limits the amount that can count toward the standard
salary level.
For similar reasons, the Department has decided against expanding
the proposal to allow additional kinds of payments to count towards the
standard salary level, such as discretionary bonuses, employer benefit
contributions, or the value of board, lodging, and facilities. The
Department has never allowed such payments to count towards any of the
earning thresholds required for the EAP exemption, including under the
HCE test created in 2004. See 541.601(b)(1). The Department did not
propose to allow such payments to count towards the salary level test,
and declines commenter suggestions to do so in this final rule.
NELA, Smith Summerset, and other commenters questioned how the
proposed rule would treat employees affected by the proposal whose
employment ends before the end of a 52-week period. Here, consistent
with the treatment of employees under the existing HCE test, see Sec.
541.601(b)(3), the Department has amended the proposed regulatory text
at Sec. 541.602(a)(3) to clarify that employers may pay employees a
prorated amount for a designated 52-week period where an employee does
not work for the entire period, because the employee either is newly
hired after the period's start or ends employment before the period's
end. Determining an employer's payment obligation to such employees to
maintain their exempt status depends on the number of workweeks that
the employee works within the 52-week period. Where employment ends
before the end of the 52-week period, employers must ensure that the
employee receives enough in pay to satisfy the standard salary level by
the end of the next pay period
[[Page 51249]]
following the employee's end of employment.
The final rule permits employers to meet the salary level
requirement by making a catch-up payment within one pay period of the
end of the 52-week period.\100\ In plain terms, each pay period an
employer must pay the EAP employee on a salary basis at least 90
percent of the standard salary level and, if at the end of the 52-week
period the sum of the salary paid plus the nondiscretionary bonuses and
incentive payments (including commissions) paid does not equal the
standard salary level for the 52-week period, the employer has one pay
period to make up for the shortfall (up to 10 percent of the required
salary level). Any such catch-up payment will count only toward the
previous 52-week period's salary amount and not toward the salary
amount in the 52-week period in which it was paid.
---------------------------------------------------------------------------
\100\ FMI, IFA, and other employer representatives requested
giving employers more than one pay period to make any necessary
catch-up payments, pointing out that the HCE test permits employers
to make catch-up payments within one month after the end of the 52-
week period used for that test. See 29 CFR 541.601(b)(2). The
Department declines this request because this new provision
specifically affects the standard salary level requirement, not
additional income received on top of that threshold by highly
compensated employees.
---------------------------------------------------------------------------
The Department is sensitive to concerns raised by employee
representatives and some employer commenters that the bonuses provision
may increase compliance costs and litigation. These effects, however,
are mitigated by the fact that crediting nondiscretionary bonuses and
incentive pay towards the standard salary level is purely optional.
Employers, who would predominantly bear the cost of compliance and
litigation expenses, are presumably best positioned to evaluate whether
the potential costs of such crediting would outweigh the potential
benefits. While the AFL-CIO contends that the bonuses proposal could
theoretically ``lead to anomalous results, where employees working side
by side performing the same job would be exempt and nonexempt, simply
because inclusion of the bonus would raise one employee over the salary
threshold[,]'' this has always been true of the salary level test,
given that employees performing identical job duties may receive
different salaries.
The Department emphasizes that this rulemaking does not change the
requirement in Sec. 541.601(b)(1) that highly compensated employees
must receive at least the standard salary amount each pay period on a
salary or fee basis without regard to the payment of nondiscretionary
bonuses and incentive payments. While nondiscretionary bonuses and
incentive payments (including commissions) may be counted toward the
HCE total annual compensation requirement, the HCE test does not allow
employers to credit these types of payments toward the standard salary
requirement. The Department continues to believe that permitting
employers to use nondiscretionary bonuses and incentive payments to
satisfy the standard salary portion of the HCE test is not appropriate
because employers are already permitted to fulfill more than three
quarters of the HCE total annual compensation requirement with
commissions, nondiscretionary bonuses, and other forms of
nondiscretionary deferred compensation (paid at least annually). Thus,
when conducting the HCE analysis, employers must remain mindful that
HCEs must receive the full standard salary amount each pay period on a
salary or fee basis.
Finally, nothing adopted in this final rule alters the Department's
longstanding position that employers may pay their exempt EAP employees
additional compensation of any form beyond the minimum amount needed to
satisfy the salary basis and salary level tests. See Sec. 541.604(a).
Similarly, the Department emphasizes that nonexempt employees may
continue to receive bonuses and incentive payments. 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.
D. Highly Compensated Employees
As noted in the NPRM, the Department's 2004 final rule created a
new test under the EAP exemption, known as the highly compensated
employee (HCE) test, based on the rationale that it is unnecessary to
apply the standard duties test in its entirety 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.'' \101\ The HCE test
combines a high compensation requirement with a less-stringent duties
test.
---------------------------------------------------------------------------
\101\ 69 FR 22174 (quoting Weiss Report at 22).
---------------------------------------------------------------------------
To meet the HCE test, an employee must earn at least the amount
specified in the regulation 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.\102\ This test applies ``only to employees whose primary duty
includes performing office or non-manual work.'' \103\ Such an employee
must receive at least the standard salary level each pay period 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.\104\ An employee 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.\105\ If an employee
works for less than a full year, either because the employee is newly
hired after the beginning of the 52-week period or ends the employment
before the end of this period, 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.\106\
---------------------------------------------------------------------------
\102\ Sec. 541.601(a).
\103\ Sec. 541.601(d).
\104\ Sec. 541.601(b)(1). However, total annual compensation
does not include board, lodging, and other facilities, or payments
for medical insurance, life insurance, retirement plans, or other
fringe benefits. Id.
\105\ Sec. 541.601(b)(2).
\106\ Sec. 541.601(b)(3).
---------------------------------------------------------------------------
The Department stated in the NPRM that it continues to believe that
the HCE test is a useful alternative to the standard salary level and
duties tests for highly compensated employees.\107\ At the time this
level was initially set in 2004 at $100,000, the Department concluded
that ``white collar'' employees who earn above this threshold would
nearly always satisfy any duties test.\108\ The Department proposed
updating the HCE threshold to ensure that it remains a meaningful and
appropriate standard when paired with the more-lenient HCE duties test.
Specifically, the Department proposed setting the HCE threshold at the
90th percentile of all full-time salaried workers nationally using 2017
CPS data, then inflated to January 2020, resulting
[[Page 51250]]
in a proposed HCE threshold of $147,414, of which $679 would have to be
paid weekly on a salary or fee basis.\109\
---------------------------------------------------------------------------
\107\ 84 FR 10913.
\108\ Id. The Department concluded that ``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.'' 69 FR
22174 (quoting Weiss Report at 22-23).
\109\ 84 FR 10913-14. Consistent with the 2016 final rule, the
Department's proposal did not permit employers to use
nondiscretionary bonuses to satisfy the weekly standard salary level
requirement for HCE workers. Id. at 10914 n.129. As previously
stated, the Department believes that permitting employers to use
nondiscretionary bonuses and incentive payments to satisfy the
standard salary portion of the HCE test is not appropriate because
employers are already permitted to fulfill the majority of the HCE
total annual compensation requirement with commissions,
nondiscretionary bonuses, and other forms of nondiscretionary
deferred compensation (paid at least annually).
---------------------------------------------------------------------------
The Department received fewer comments addressing the HCE proposal
than on many other issues in the NPRM, and those who addressed the HCE
proposal often did not provide detailed feedback. Nearly all the
commenters on the HCE proposal were employer representatives, most of
whom opposed the Department's proposal to increase the HCE compensation
level to a level equal to the 90th percentile of all full-time salaried
workers ($147,414). These commenters instead supported keeping the HCE
level at $100,000, see, e.g., HR Policy Association; National
Association of Manufacturers; NRF, or increasing the HCE level but by a
lower amount (resulting in a threshold between $100,000 and $147,414),
see, e.g., Chamber; National Lumber and Building Material Dealers
Association; WFCA. For example, some commenters suggested lowering the
percentile from 90 percent to 80 percent of full-time salaried
employees nationwide. See, e.g., Center for Workplace Compliance;
WorldatWork. A few employer representatives noted that they did not
object to the proposed HCE salary level. See ASTA; Credit Human Federal
Credit Union. By and large, employee representatives did not
specifically address the HCE proposal.\110\
---------------------------------------------------------------------------
\110\ At least one individual commenter supported the proposed
increase in the HCE compensation level.
---------------------------------------------------------------------------
Commenters who favored keeping the HCE threshold at $100,000 or
increasing it by a lower amount expressed concern that the proposed
level was so high as to put the HCE test for the EAP exemption out of
reach for employers in lower-wage regions and industries. For example,
the Chamber stated that such employers would not be able to access the
HCE test ``on equal terms,'' because ``[w]hether an employee qualifies
for exemption under the highly compensated test would depend more on
where the employee works than how much the employer values the
employee's duties.'' Some of these commenters suggested that the
Department should calculate the HCE threshold using data from a lower-
wage region of the country, such as the South Census Region or a subset
thereof, which would result in a lower threshold than using a national
data set. See, e.g., Chamber; NRA. Others suggested that the Department
should continue to use national data, but should lower the threshold by
pegging the HCE threshold at the 80th percentile of full-time salaried
workers, rather than the 90th percentile proposed in the NPRM. See
Center for Workforce Opportunity; WorldatWork. WorldatWork asserted
that this approach would ``result in a far more workable standard,
given the fluctuation in weekly earnings in different parts of the
country and in different industries'' and would still ``identify[ ]
those individuals who should be eligible for a more relaxed duties
test.''
Other commenters objected to the Department's proposed HCE
threshold on the ground that it would require employers to reassess the
exempt status of many employees using the standard duties test, rather
than the simpler HCE test. The HR Policy Association and PPWO explained
that ``[a] significant amount of administrative effort will be needed
to determine that an employee who had been classified as exempt through
application of the HCE test remains exempt under application of the
standard duties test.'' The National Association of Manufacturers
explained that this process ``is certain to be lengthy'' as ``employers
will need to survey managers, conduct follow-up interviews, hold new
budget discussions, and plan and implement changes to each individual
employee's duties or status.''
The Department has considered the comments regarding the HCE test
for exemption and decided to lower the percentile at which to set the
HCE threshold from that proposed in the NPRM. The Department agrees
with commenters that increasing the HCE threshold so dramatically would
result in significant administrative burdens and compliance costs,
including costs associated with reassessing the exempt status of many
highly paid white collar workers under the standard duties test. Yet
while employers would incur these burdens and costs, the vast majority
of currently exempt HCE employees would remain exempt (under the
standard test).\111\ In short, the Department would be imposing
significant administrative costs on employers for a limited effect.
Additionally, the Department agrees with commenters that the proposed
level was so high that it would have excluded employees who should be
exempt under the provision, particularly those in lower-wage regions
and industries. However, the Department disagrees with commenters who
oppose any increase in the HCE threshold beyond the currently enforced
level. The number of full-time salaried workers who earn above $100,000
per year has increased significantly.\112\ The Department believes that
some increase to the HCE threshold is necessary to ensure that the HCE
threshold continues to provide a meaningful and appropriate complement
to the more lenient HCE duties test.
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\111\ In the economic analysis below in section VI.B.v, the
Department estimated that, under the baseline scenario in which the
HCE threshold remains at $100,000, approximately 9.3 million workers
will pass both the standard and HCE tests and 343,000 will pass only
the HCE test. Stated differently, of those workers who will earn at
least $100,000, approximately 96.4 percent would pass the standard
duties test.
\112\ 84 FR 10913 n.123.
---------------------------------------------------------------------------
Accordingly, the Department is setting the HCE total annual
compensation level at the 80th percentile of full-time salaried workers
nationally using pooled 2018/2019 CPS data.\113\ This results in a
level of $107,432, of which $684 must be paid weekly on a salary or fee
basis.\114\ The Department believes this threshold is sufficiently high
to ensure that it provides a meaningful and appropriate complement to
the more lenient HCE duties test, and that nearly all of the highly-
paid white collar workers earning above this threshold ``would satisfy
any duties test.'' Additionally, to be consistent with the methodology
for setting the standard salary level, the Department now uses three-
year pooled data to estimate the HCE compensation level. The Department
further believes that this straightforward approach will lower
administrative costs, as compared to the initial proposal, while still
ensuring that nearly all of the highly paid white collar workers
earning above this threshold ``would satisfy any duties test.'' \115\
---------------------------------------------------------------------------
\113\ In the NPRM, the Department used 2017 CPS data to set the
HCE compensation level. See id. at 10913. To be consistent with the
methodology for setting the standard salary level, in the final rule
the Department is setting the HCE compensation level using pooled
CPS data for July 2016 to June 2019, adjusted to reflect 2018/2019.
\114\ The Department notes that no regional adjustment has been
made to the HCE threshold in this final rule, just as this was not
part of the determination of the HCE threshold in either the 2004 or
2016 final rules.
\115\ 84 FR 10914 (internal citation omitted).
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E. Future Updates to the Earnings Thresholds
As the Department noted in the NPRM, even a well-calibrated salary
[[Page 51251]]
level that is fixed becomes obsolete as wages for nonexempt workers
increase over time. Long lapses between rulemakings have resulted in
EAP salary levels based on outdated salary data. Such levels are ill-
equipped to help employers assess which employees are unlikely to meet
the duties tests for the part 541 exemptions. 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.'' 69 FR 22212.
Throughout the years, various stakeholders have submitted comments
asking the Department to establish a mechanism to update the thresholds
automatically. The Department has twice declined such requests, once in
1970, when it concluded that ``such a proposal [would] require further
study,'' 35 FR 884, and once in 2004, 69 FR 22171-72. However, in the
2016 final rule, the Department for the first time 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. 81 FR 32430. 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.'' \116\
---------------------------------------------------------------------------
\116\ 275 F. Supp. 3d at 808.
---------------------------------------------------------------------------
In the NPRM, the Department expressed its intent to evaluate the
part 541 earnings thresholds more frequently through rulemaking. 84 FR
10914-15. Specifically, the Department stated in the NPRM that it
intended to propose updates to the standard salary level and HCE total
compensation threshold on a quadrennial basis (i.e., once every four
years) through notice-and-comment rulemaking, and that each proposal
would use the same methodology as the most recently published final
rule. The Secretary, however, could forestall proposed updates if
economic or other factors so indicated. The Department also described
how it could revise the part 541 regulations if it were to codify this
intention in a final rule. Id. at 10915 n.140.
Some commenters supported the Department's proposal to propose
updates to the earnings thresholds every four years unless unwarranted
due to economic or other factors. See National Association of
Convenience Stores; National Association of Landscape Professionals;
NGA; National Multifamily Housing Council and the National Apartment
Association; SBA Advocacy. These commenters generally agreed that the
Department's proposal would help the salary level keep pace with
earnings growth, thus preventing dramatic increases after long gaps
between updates. See, e.g., Credit Union National Association; Joint
Comment from Golf Industry Representatives. Many of these commenters
specifically expressed support for the Department's proposal to use
notice-and-comment rulemaking to set future salary thresholds; such as
NAHB, which commented that ``[b]y continuing its current practice of
engaging the regulated community . . . DOL will receive timely and
important information as it moves forward with proposed updates in the
future.'' Commenters who supported the Department's proposal generally
characterized this reliance on notice-and-comment rulemaking as
preferable to the 2016 final rule's automatic updating provision, see,
e.g., Job Creators Network; Joint Comment of 5 Senators, with some
asserting that automatic updating, without notice-and-comment
rulemaking, would be unlawful, see, e.g., Joint Comment by
International Public Management Association for Human Resources and
others; SIGMA.
Other commenters did not support the Department's commitment to
evaluate the thresholds regularly. Many commenters felt that there was
no need to adhere to a fixed schedule, with some asserting that doing
so could deprive the Department of flexibility to adapt to
unanticipated circumstances. These commenters advocated for the
Department to continue its practice of updating the salary whenever it
deems such updates appropriate. See, e.g., AGC; Argentum and American
Seniors Housing Association; HR Policy Association; Independent Bakers
Association. A few commenters questioned the Department's authority to
bind itself to conducting regular evaluations of the salary level. See
AHLA; PPWO. Others felt that the proposed updating framework could
expose the Department to legal risk because parties might challenge a
decision by the Department not to engage in the anticipated rulemaking.
See Associated Builders and Contractors; FMI. Some commenters who
opposed the updating proposal asserted that it was unnecessary since
the Department can engage in rulemaking at any time. See Associated
Builders and Contractors, FMI, NRA.
Other commenters, including employee representatives, took the
opposite tack, requesting that the Department automatically update the
salary thresholds. See, e.g., Center for Popular Democracy; Demos;
Oxfam America. Some of these commenters asserted that past experience,
including the long gaps between the most recent updates, has
demonstrated that in the absence of regular updates, the salary level
becomes obsolete, and that an announced intent to propose updates does
not sufficiently ensure that the levels will, in fact, be updated. See,
e.g., AARP; Joint Comment from 77 Members of Congress; Nichols Kaster.
Many commenters who favored automatic updating specifically supported
the updating provision that was included in the 2016 final rule. See
AARP; NELA; NELP; NWLC; State AGs; The Leadership Conference on Civil
and Human Rights. Some maintained that the lack of automatic updating
would result in decreased earnings for workers, citing EPI's estimates
that the gap in projected earnings transfers to workers between the
2016 final rule and the proposal would increase from $1.2 billion to
$1.6 billion due to the lack of automatic updates. See, e.g., EPI;
NELP; UAW. NELP further stated that ``[i]ndexing would ensure
predictability for workers and employers alike and eliminate the need
for time-consuming federal regulations.''
A number of commenters generally supported regular updates to the
earnings thresholds, but suggested a frequency other than every four
years. For instance, ASTA suggested that a six-year gap ``would strike
a better balance in recognizing [its] and [its] member employers'
legitimate concerns . . . than the four-year interval included in the
NPRM.'' The Pennsylvania Credit Union Association wrote in support of
updating the thresholds no less frequently than every three years,
while Representative Daniel Lipinski ``urge[d] the Department to review
the [standard salary] threshold more frequently than once every four
years.'' AFSCME supported annual updates.
In this final rule, the Department reaffirms its intent to update
the standard salary level and HCE total annual compensation threshold
more regularly in the future using notice-and-comment rulemaking. The
Department agrees with those commenters who stated that long periods
without updates serve neither employee nor employer interests, since
they diminish the usefulness of the salary level test and cause future
increases to be larger and
[[Page 51252]]
more challenging for businesses to absorb. Regular updates, on the
other hand, ensure that the salary level test is based on the best
available data (and thus remains a meaningful, bright-line test),
produce more predictable and incremental changes in the salary level,
and therefore provide certainty to employers and promote government
efficiency.
After reviewing the comments received on this issue, however, the
Department declines to finalize its proposal to propose updates to the
part 541 regulations quadrennially. The Department agrees with
commenters who stated that this commitment could deprive the Department
of flexibility to adapt to unanticipated circumstances, and believes
that prevailing economic conditions, rather than fixed timelines,
should drive future updates. While some commenters supported the
Department's updating proposal, the reasons often underlying that
support--e.g., the benefits of notice-and-comment rulemaking and of
salary levels that keep pace with earnings growth--are not necessarily
tied to updates occurring on a predetermined schedule, and would be met
by the Department updating the salary thresholds more regularly. In
addition, that many commenters who supported regular updates
nonetheless disagreed on the optimal updating frequency reaffirms the
Department's approach, as does the fact that few, if any, commenters
supported the Department codifying its intent to propose updates
quadrennially.
The Department's intention to update the part 541 regulations more
regularly using notice-and-comment rulemaking will also ensure ample
opportunity for public input, and provide the Department with the
flexibility to update the earnings thresholds in a manner that is
tailored to wages and economic conditions at the time of the update.
Because the Department believes that it is important to preserve the
Department's flexibility to adapt to different types of circumstances,
the Department declines the suggestions by employee representatives to
adopt an automatic updating mechanism as in the 2016 final rule.
Lastly, while the Department understands commenter concerns regarding
the lengthy time periods between recent rulemakings, in this final rule
the Department is reaffirming its commitment to better implement
Congress's instruction to define and delimit the EAP exemptions ``from
time to time'' \117\ through regulations. Regular updates ensure that
the salary level test continues to screen from exemption obviously
nonexempt employees who are unlikely to be performing the duties of
bona fide executive, administrative, or professional employees.
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\117\ 29 U.S.C. 213(a)(1).
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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 that the
Department consider the impact of paperwork and other information
collection burdens imposed on the public. Under the PRA an agency may
not collect or sponsor the collection of information, nor may it impose
an information collection requirement, unless it displays a currently
valid Office of Management and Budget (OMB) control number. See 5 CFR
1320.8(b)(3)(vi). OMB has assigned control number 1235-0018 to the Fair
Labor Standards Act (FLSA) information collections. OMB has assigned
control number 1235-0021 to Employment Information Form collections,
which the Department uses to obtain information from complainants
regarding FLSA violations.
In accordance with the PRA, the Department solicited comments on
the FLSA information collections and the Employment Information Form
collections in the NPRM published March 22, 2019, see 84 FR 10900, as
the NPRM was expected to impact these collections. 44 U.S.C.
3506(c)(2). The Department also submitted a contemporaneous request for
OMB review of the proposed revisions to the FLSA information
collections, in accordance with 44 U.S.C. 3507(d). On May 20, 2019, OMB
issued a notice for each collection (1235-0018 and 1235-0021) that
continued the previous approval of the FLSA information collections and
the Employment Information Form collections under the existing terms of
clearance. OMB asked the Department to resubmit the information
collection request upon promulgation of the final rule and after
considering public comments on the proposed rule.
Circumstances Necessitating Collection: The FLSA, 29 U.S.C. 201 et
seq., sets the federal minimum wage, overtime pay, recordkeeping, and
youth employment standards of most general application. Section 11(c)
of the FLSA requires all employers covered by the FLSA to make, keep,
and preserve records of employees and of wages, hours, and other
conditions and practices of employment. An FLSA covered employer must
maintain the records for such period of time and make such reports as
prescribed by regulations issued by the Secretary of Labor. The
Department has promulgated regulations at part 516 to establish the
basic FLSA recordkeeping requirements, which are approved under OMB
control number 1235-0018.
FLSA section 11(a) provides that the Secretary of Labor may
investigate and gather data regarding the wages, hours, or other
conditions and practices of employment in any industry subject to the
FLSA, and may enter and inspect such places and such records (and make
such transcriptions thereof), question such employees, and investigate
such facts, conditions, practices, or matters deemed necessary or
appropriate to determine whether any person has violated any provision
of the FLSA. 29 U.S.C. 211(a). The information collection approved
under OMB control number 1235-0021 provides a method for the Wage and
Hour Division of the U.S. Department of Labor to obtain information
from complainants regarding alleged violations of the labor standards
the agency administers and enforces. This final rule revises the
existing information collections previously approved under OMB control
number 1235-0018 (Records to be Kept by Employers--Fair Labor Standards
Act) and OMB control number 1235-0021 (Employment Information Form).
This final rule does not impose new information collection
requirements; rather, burdens under existing requirements are expected
to increase as more employees receive minimum wage and overtime
protections due to the proposed increase in the salary level
requirement. More specifically, the changes adopted in this final rule
may cause an increase in burden on the regulated community because
employers will have additional employees to whom certain long-
established recordkeeping requirements apply (e.g., maintaining daily
records of hours worked by employees who are not exempt from both the
minimum wage and overtime provisions). Additionally, the changes
adopted in this final rule may cause an initial increase in burden if
more employees file complaints with WHD to collect back wages under the
overtime pay requirements.
Public Comments: The Department sought public comments regarding
the burdens imposed by information collections contained in the
proposed rule. The Department received few comments relevant to the
PRA. A few commenters stated that employers would need to maintain
records of hours worked for more employees as a result of an increase
to the salary level.
[[Page 51253]]
See, International Bancshares Corporation; Washington Nonprofits. A few
individual commenters expressed concerns surrounding costs associated
with additional recordkeeping. A CEO of a professional placement firm
indicated that tracking of hours would produce increased human
resources paperwork and technology costs. Smith Summerset commented
that those employers who take advantage of the allowance for up to ten
percent of nondiscretionary bonuses and incentive payments to meet the
standard salary level will have to maintain records documenting the
applicable annual periods and detailing earnings and all payments
(including catch-up payments) for each affected worker, including
records such employers were not previously required to maintain.
In response to these comments, the Department notes that most
employers currently have both exempt and nonexempt workers and
therefore have systems already in place for employers to track hours.
The Department also notes that commenters did not offer alternatives
for estimates or make suggestions regarding the methodology for
calculating the PRA burdens. The actual recordkeeping requirements are
not changing in the final rule. However, the pool of workers for whom
employers will be required to make and maintain records has increased
under the final rule, and as a result the burden hours have increased.
Included in this PRA section are the regulatory familiarization costs
for this final rule. We note, however, that this is a duplication of
the regulatory familiarization costs contained in the economic impact
analysis, see section VI.
An agency may not conduct an information collection unless it has a
currently valid OMB approval, and the Department has submitted the
identified information collection contained in the proposed rule to OMB
for review under the PRA under the Control Numbers 1235-0018 and 1235-
0021. See 44 U.S.C. 3507(d); 5 CFR 1320.11. The Department has
resubmitted the revised FLSA information collections to OMB for
approval, and intends to publish a notice announcing OMB's decision
regarding this information collection request. A copy of the
information collection request can be obtained at http://www.Reginfo.gov or by contacting the Wage and Hour Division as shown in
the FOR FURTHER INFORMATION CONTACT section of this preamble.
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: 5,621,961 (2,616,667 by this
rulemaking).
Estimated Number of Responses: 46,959,856 (2,616,667 added by this
rulemaking).
Estimated Burden Hours: 3,625,986 hours (2,616,667 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: 36,278 (651 added by this rulemaking).
Estimated Number of Responses: 36,278 (651 added by this
rulemaking).
Estimated Burden Hours: 12,155 (217 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,
reducing costs, harmonizing rules, and promoting flexibility.
Under Executive Order 12866, the Office of Management and Budget
(OMB) determines whether a regulatory action is a ``significant
regulatory action,'' which includes an economically significant action
that has an annual effect of $100 million or more on the economy.
Significant regulatory actions are subject to review by OMB. As
described below, this final rule is economically significant.
When the Department uses a perpetual time horizon to allow for cost
comparisons under Executive Order 13771,\118\ the annualized cost
savings of the final rule is $534.8 million with 7 percent discounting.
This final rule is accordingly expected to be an Executive Order 13771
deregulatory action.
---------------------------------------------------------------------------
\118\ 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.
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. 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.\119\ The Department's regulations implementing these
``white collar'' exemptions are codified at 29 CFR part 541.
---------------------------------------------------------------------------
\119\ 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 section 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.
ii. Need for Rulemaking
The Department has updated the salary level test many times since
its implementation in 1938. Table 1 presents the weekly salary levels
[[Page 51254]]
associated with the EAP exemptions since 1938, organized by exemption
and long/short/standard duties tests.\120\ In the 37 years between 1938
and 1975, the Department increased salary test levels approximately
every five to nine years. In subsequent years, the Department revised
the levels less frequently, and it is currently enforcing the levels
set in 2004.\121\
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\120\ 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. The standard duties test
is 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.
\121\ In 2016, the Department 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
Executive Administrative Professional (all)
----------------------------------------------------------------------------------------------------------------
1938........................................ $30 $30 ............... ...............
1940........................................ 30 50 $50 ...............
1949........................................ 55 75 75 $100
1958........................................ 80 95 95 125
1963........................................ 100 100 115 150
1970........................................ 125 125 140 200
1975........................................ 155 155 170 250
----------------------------------------------------------------------------------------------------------------
Standard test
----------------------------------------------------------------------------------------------------------------
2004........................................ $455
----------------------------------------------------------------------------------------------------------------
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 is updating the standard salary level by
applying the 2004 methodology to current Current Population Survey
(CPS) data.\122\ Using pooled CPS Merged Outgoing Rotation Group (MORG)
\123\ data to represent the July 2018 through June 2019 period
(hereafter referred to as 2019), the salary level of $684 ($35,568
annually) set in this final rule corresponds to the 20th percentile of
earnings for full-time salaried workers in the South Census Region and/
or in the retail industry.\124\ \125\ Similarly, the Department used
the pooled 2018/19 CPS MORG data to set the updated HCE total annual
compensation requirement at $107,432, which is the earnings for the
80th percentile of all full-time salaried workers nationally.
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\122\ The Department also notes that the terms employee and
worker are used interchangeably throughout this analysis.
\123\ The Merged Outgoing Rotation Group is a supplement to the
CPS and is conducted on approximately one-fourth of the CPS sample
monthly to obtain information on weekly hours worked and earnings.
\124\ Excluding workers who are not subject to the FLSA, not
subject to the salary level test, or in agriculture or
transportation.
\125\ As previously explained, in the 2004 final rule, the
Department looked to the 20th percentile of full-time salaried
workers in the South and in the retail industry nationally to
validate the standard salary level set in the final rule. In this
final rule, the Department set 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. Accordingly, the use of ``and/or'' when
describing the salary level methodology in this final rule reflects
that this data set includes full-time salaried workers who work: (1)
In the South but not in the retail industry; (2) in the retail
industry but not in the South; and (3) in the south in the retail
industry.
---------------------------------------------------------------------------
iii. Summary of Affected Workers, Costs, Benefits, and Transfers
The Department estimated the number of affected workers and
quantified costs and transfer payments associated with this final rule,
using the currently-enforced 2004 salary level as the baseline. To
produce these estimates, the Department used pooled CPS MORG data. See
section VI.B.ii. Most critically, the Department estimates that 1.2
million workers who would otherwise be exempt under the currently-
enforced standard salary level of $455 per week will either become
eligible for overtime or have their salary increased to at least $684
per week, and that 4.1 million employees paid between $455 and $684 per
week who fail the standard duties test (i.e., that are and will remain
nonexempt) will have their overtime eligibility made clearer because
their salary will fall below the specified threshold (Table 2).\126\
Additionally, an estimated 101,800 workers will be affected by the
increase in the HCE compensation test from $100,000 per year to
$107,432 per year using the pooled 2018/19 CPS MORG data. By Year 10,
the Department estimates that 723,000 workers will be affected by the
change in the standard salary level test and 154,000 workers will 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.\127\
---------------------------------------------------------------------------
\126\ 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
totals or the calculations shown due to rounding of components.
\127\ 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 final 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 annual
compensation level (these will be disaggregated in section VI.D.iii).
Total annualized direct employer costs over the first 10 years
[[Page 51255]]
were estimated to be $173.3 million, assuming a 7 percent discount rate
(Table 2).\128\
---------------------------------------------------------------------------
\128\ 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 rule will also
transfer income from employers to employees in the form of wages. The
Department estimated annualized transfers will be $298.8 million. The
majority of these transfers will be attributable to the FLSA's overtime
provision; a smaller share will be attributable to the FLSA's minimum
wage requirement. Transfers also include salary increases for some
affected EAP workers \129\ 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. Potential benefits
of this rule could not be quantified due to data limitations, requiring
the Department to discuss such benefits qualitatively. See Sec.
VI.D.v.
---------------------------------------------------------------------------
\129\ The term affected EAP workers refers to the population of
potentially affected EAP workers who either pass the standard duties
test and earn at least $455 but less than the new salary level of
$684, or pass only the HCE duties test and earn at least $100,000
but less than the new HCE compensation level of $107,432. This was
estimated to be 1.3 million workers.
Table 2--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
[Millions in 2019$]
----------------------------------------------------------------------------------------------------------------
Future years \a\ Annualized value
---------------------------------------------------------------
Impact Year 1 3% real 7% real
Year 2 Year 10 discount rate discount rate
----------------------------------------------------------------------------------------------------------------
Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard........................ 1,156 1,069 723 .............. ..............
HCE............................. 101.8 114 154 .............. ..............
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Total....................... 1,257 1,183 877
----------------------------------------------------------------------------------------------------------------
Costs and Transfers (Millions in 2019$) \b\
----------------------------------------------------------------------------------------------------------------
Direct employer costs........... $543.0 $134.3 $99.1 $164.0 $173.3
Transfersthnsp;\c\.............. 396.4 307.7 247.4 295.0 298.8
----------------------------------------------------------------------------------------------------------------
\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.
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 final rule, as in the 2004
final rule, the Department estimated the number of EAP exempt workers
because there is no data source that identifies workers as EAP exempt.
Employers are not required to report EAP exempt workers to any central
agency or as part of any employee or establishment survey.\130\ The
methodology described here is largely based on the approach the
Department used in the 2004 and 2016 final rules.\131\
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\130\ 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.
\131\ 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
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.\132\ 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.
---------------------------------------------------------------------------
\132\ 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 (July 2016 through June 2019) to
represent the single year from July 2018 through June 2019. Earnings
for each observation from the last six months of 2016, 2017, and the
first six months of 2018 were inflated to 2018/19 dollars using the
Consumer Price Index for All Urban Consumers (CPI-U). For ease of
presentation and because inflation is low enough for this to be
trivial, these will be referred to as 2019 dollars throughout this
analysis. 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 July 2018 through June 2019 CPS
MORG. Thus, the pooled CPS MORG sample uses roughly three times as many
observations to represent the same total number of workers in 2018/19.
The additional observations allow the Department to better characterize
certain attributes of the potentially affected labor force. This pooled
dataset
[[Page 51256]]
is used to estimate all impacts of the final rulemaking.\133\
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\133\ A few commenters commented on the Department's use of CPS
data to calculate the salary level. EPI and NELP asked the
Department to set the salary thresholds using a data series that BLS
publishes on a regular basis, while the Chamber asked the Department
to publish the data sets used to set the salary thresholds. The
Department calculated the standard salary level and the HCE total
annual compensation level using publicly-available CPS microdata
(compiled by the U.S. Census Bureau). The Department has frequently
set the salary level using its own enforcement data and/or data that
is not publicly available, and believes that using publicly
available CPS data to calculate the salary level in this final rule
is appropriate.
---------------------------------------------------------------------------
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 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).\134\ 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.\135\
---------------------------------------------------------------------------
\134\ 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.
\135\ 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 5.0 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.
---------------------------------------------------------------------------
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. Excluded 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.\136\ Exceptions exist for U.S. Postal Service
employees, Tennessee Valley Authority employees, and Library of
Congress employees.\137\ The analysis identified and included these
covered federal workers using occupation and/or industry codes.\138\
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 there is no data set that would adequately inform an
estimate of 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.
---------------------------------------------------------------------------
\136\ See 29 U.S.C. 204(f). Federal workers are identified in
the CPS MORG with the class of worker variable PEIO1COW.
\137\ See id.
\138\ 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
---------------------------------------------------------------------------
The Department estimated that in Year 1 there will be 164.5 million
wage and salary workers in the United States (Figure 1). Of these,
139.4 million will be covered by the FLSA and subject to the
Department's regulations (84.7 percent). The remaining 25.1 million
workers will 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 51257]]
[GRAPHIC] [TIFF OMITTED] TR27SE19.000
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 final 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 91.9 million workers from the
analysis for one or more of these reasons, which often overlapped
(e.g., many blue collar workers are also paid hourly). The Department
estimated that in 2018/19 there were 50.0 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 \139\ 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 81.9 million workers were paid
on an hourly basis in 2018/19.\140\
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\139\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41, https://www.gao.gov/assets/230/228036.pdf.
\140\ 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 5.0 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,\141\ 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 1.1
million agricultural workers and 2.1 million transportation workers
from the analysis. In addition, the Department excluded another 1.9
million workers who fall within one or more other FLSA minimum wage and
overtime
[[Page 51258]]
exemptions. The criteria for determining exempt status for agricultural
and transportation workers are detailed in Appendix A. However, of
these 1.9 million workers, all but 20,000 are either blue collar or
hourly, and thus the effect of excluding these workers is negligible.
---------------------------------------------------------------------------
\141\ 69 FR 22197.
---------------------------------------------------------------------------
v. Number of Potentially Affected EAP Workers
After excluding workers not subject to the Department's FLSA
regulations and workers who are unlikely to be affected by this final
rule (i.e., blue collar workers, workers paid hourly, workers who are
subject to another (non-EAP) overtime exemption), the Department
estimated there will be 47.6 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); \142\
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\142\ 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 final 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 final 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).
---------------------------------------------------------------------------
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). The Department imputed earnings for topcoded workers in the CPS
data to adequately estimate the cost savings of this rule in comparison
to the 2016 final rule under E.O. 13771.143 144
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\143\ 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).
\144\ As a result of the 2016 final rule's automatic updating
provision, the HCE compensation level in Year 7 following the 2016
final rule would exceed $150,000. Imputing earnings improves the
impact estimates and consequently the estimates of cost savings of
this final rule.
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Salary Basis
The Department included only nonhourly workers in the analysis
based on CPS data.\145\ 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.\146\
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\145\ The CPS variable PEERNHRY identifies workers as either
hourly or nonhourly.
\146\ See 69 FR 22197.
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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.\147\ 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 final 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.\148\
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\147\ The CPS MORG variable PRERNWA, which measures weekly
earnings, is used to identify weekly salary.
\148\ 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 \149\ and
the Department's 2004 regulatory impact analysis.\150\
---------------------------------------------------------------------------
\149\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, supra note 139, at 40-41.
\150\ See 69 FR 22198.
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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 51259]]
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 its 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 more lenient
HCE duties test.\151\
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\151\ The HCE duties test is 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.
---------------------------------------------------------------------------
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
final 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 2016 through 2019 data.\152\ 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.
---------------------------------------------------------------------------
\152\ 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.\153\
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\153\ 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.\154\ 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.\155\ 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).
---------------------------------------------------------------------------
\154\ 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).
\155\ 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 \156\ 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.\157\
---------------------------------------------------------------------------
\156\ The O*NET database contains hundreds of standardized and
occupation-specific descriptions. See http://www.onetcenter.org.
\157\ 81 FR 32459.
---------------------------------------------------------------------------
Potentially Affected Exempt EAP Workers
The Department estimated that of the 47.6 million salaried white
collar workers considered in the analysis, 33.4 million qualified for
the EAP exemption under the currently-enforced regulations. Some of
these workers were
[[Page 51260]]
excluded from further analysis because the final rule will not affect
them. This excluded group contains workers in named occupations who are
not required to pass the salary requirements (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 33.4 million workers
who were EAP exempt, 7.8 million, or 23.4 percent, were expected to be
in named occupations. Thus, changes in the standard salary level and
HCE compensation tests will not affect these workers. The 25.6 million
EAP exempt workers remaining in the analysis are referred to in this
final 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 take effect, of the 25.6
million potentially affected EAP workers, approximately 16.0 million
will pass only the standard EAP test, 9.3 million will pass both the
standard and the HCE tests, and approximately 343,000 will pass only
the HCE test.
C. Determining the Revised Salary and Compensation Levels
For the reasons discussed in section IV.A, the Department has
decided to update the 2004 standard salary level by reapplying the 2004
methodology. Using pooled 2018/19 CPS MORG data, the 20th percentile of
earnings for full-time salaried workers in the South Census region and/
or in the retail industry nationally roughly corresponds to a standard
salary level of $684. For the HCE compensation level, the Department
used the 80th percentile of all full-time salaried workers nationwide,
calculated using the 2018/19 CPS MORG. This results in an HCE annual
compensation level of $107,432.
i. The Policy Methodologies Chosen
This final rule uses 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 industry nationally.
After considering public comments pertaining to the HCE total annual
compensation requirement, as discussed in section IV.D, the Department
has set this threshold so as to be equivalent to the earnings of the
80th percentile of all full-time salaried workers nationally, as
opposed to the 90th percentile as proposed in the NPRM. Additionally,
to be consistent with the methodology for setting the standard salary
level, the Department now uses three-year pooled data to estimate the
HCE compensation level. Lastly, the Department has chosen not to
project the earnings levels to January 2020 as proposed in the NPRM.
ii. Alternative Methods for Setting the Standard Salary Level
For this final rule, the Department also considered several
alternatives for setting the standard salary level. Table 4 presents
alternative standard salary levels calculated using pooled 2018/19 CPS
data for each alternative approach considered.
Alternative 1: No change (i.e., keep the salary level at
the currently-enforced level of $455 per week).
Alternative 2: Maintain the average minimum wage
protection in place since 2004 by using the weighted average of hours
at minimum wage and overtime pay represented by the minimum salary
level.
Alternative 3: Use the 2004 method but exclude the
relatively high-wage areas from the South Census Region (Washington,
DC, Maryland, and Virginia).
Alternative 4: Use the Kantor method to determine the long
test salary level, and set the salary level at that level. The Kantor
method calculates a long test salary level by selecting the 10th
percentile of earnings of likely exempt workers.
Alternative 5: Use the 2016 method (i.e., the 40th
percentile of earnings of nonhourly full-time workers in the South
Census Region).
Section VI.D details the transfers, costs, and benefits of the new
salary level and the above alternatives.
Table 4--Standard Salary Level and Alternatives in 2018/19
----------------------------------------------------------------------------------------------------------------
Total increase \a\
Alternative Salary level -------------------------------
(weekly/annually) $ %
----------------------------------------------------------------------------------------------------------------
Alt. #1: No change......................................... $455/$23,660 $0 0.0
Alt. #2: Maintain average minimum wage protection since 502/26,082 47 10.3
2004 \b\..................................................
Alt. #3: 2004 Method, South (excluding Washington D.C., MD 673/34,996 218 47.9
& VA) or Retail \c\.......................................
Final rule: 2004 method \c\................................ 684/35,568 229 50.3
Alt. #4: Kantor long test \d\.............................. 724/37,648 269 59.1
Alt. #5: 2016 Method \e\................................... 976/50,752 521 114.5
----------------------------------------------------------------------------------------------------------------
\a\ Change between salary level or alternative and the salary level set in 2004 ($455 per week).
\b\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
threshold equated to minimum wage and overtime pay at time and one-half for hours over 40 for an employee
working no more than 72.2 hours. 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 59.5 hours, and a
threshold that would provide 59.5 hours of $7.25 minimum wage and overtime pay would be $502.
\c\ Full-time salaried workers with various industry/region exclusions (excludes workers not subject to the
FLSA, not subject to the salary level test, and in some workers in agriculture or transportation). Pooled CPS
data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\d\ 10th percentile of likely exempt workers. Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\e\ 40th percentile earnings of nonhourly full-time workers in the South Census region, provided by BLS. The
salary level reflects the first automatic update that would have taken place under the 2016 final rule.
iii. Alternative Methods for Setting the HCE Total Annual Compensation
Level
As described above, the Department is updating the HCE compensation
level using earnings for the 80th percentile of all full-time salaried
workers nationally, $107,432 per year. The Department also evaluated
the following alternative HCE compensation levels:
HCE alternative 1: No change (i.e., leave the HCE
compensation level at the
[[Page 51261]]
currently-enforced level of $100,000 per year).
HCE alternative 2: Use the methodology proposed in the
NPRM (i.e., use the 90th percentile earnings of full-time salaried
workers nationally).\158\
---------------------------------------------------------------------------
\158\ Because in the final rule the Department is using pooled
CPS MORG data to set the HCE compensation level, it used the same
data set to calculate this alternative compensation level. Thus,
this method differs slightly from that proposed in the NPRM, which
was calculated using the most recent year of data provided by BLS.
---------------------------------------------------------------------------
Table 5 presents possible 2018/19 HCE levels as calculated using
each alternative approach considered. Section VI.D details the
transfers, costs, and benefits of the new HCE compensation level and
the two alternatives.
Table 5--HCE Compensation Levels and Alternatives in 2018/19
----------------------------------------------------------------------------------------------------------------
Total increase \a\
Alternative Salary level -------------------------------
(weekly/annually) $ %
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change..................................... $1,923/$100,000 $0 0.0
Final rule: 80th percentile of full-time salaried workers 2,066/107,432 7,432 7.4
\b\.......................................................
HCE alt. #2: 90th percentile of full-time salaried workers 2,807/145,964 45,964 46.0
\b\.......................................................
----------------------------------------------------------------------------------------------------------------
\a\ Change between updated/alternative compensation level and the compensation level set in 2004 ($100,000
annually).
\b\ Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
The Department believes that HCE alternative 1 is inappropriate
because some increase to the HCE threshold is necessary to ensure that
the HCE threshold continues to appropriately complement the more
lenient HCE duties test. However, as explained in section IV.D, the
Department does not believe the significantly higher threshold equal to
the 90th percentile of full-time salaried workers nationally is
necessary. Further, setting the HCE threshold at such a high level will
result in significant administrative burdens, including the costs
associated with the need to reassess, under the standard duties test,
the exempt status of highly paid white collar workers, many of whom
would remain exempt under that test. Accordingly, the Department
rejected the second alternative because it believes that the HCE
threshold set in this final rule is sufficiently high to ensure that
those who meet that threshold will almost invariably pass the standard
duties test.
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 the final rule.
The Department has derived the standard salary level using the 2004
methodology, and has set the HCE compensation level at the 80th
percentile of all full-time salaried workers nationwide. In both cases
we used pooled 2018/19 CPS data to calculate the levels. Given that at
the time this analysis was performed data was available through June
2019, the Department believes that using current data to estimate the
economic effects of the rule taking effect in January 2020 is
appropriate.
Table 6 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
final rule will total $543.0 million in the first year, with 10-year
annualized direct costs of $164.0 million per year using a 3 percent
real discount rate and $173.3 million per year using a 7 percent real
rate.
In addition to these direct costs, this final rule will transfer
income from employers to employees. Estimated Year 1 transfers will
equal $396.4 million, with annualized transfers estimated at $295.0
million and $298.8 million per year using the 3-percent and 7-percent
real discount rates, respectively. Potential employer costs due to
reduced profits and additional hiring were not quantified but are
discussed in section VI.D.iii.5.
Table 6--Summary of Affected Workers and Regulatory Costs and Transfers, Standard and HCE Earnings Thresholds
----------------------------------------------------------------------------------------------------------------
Future years b Annualized value
---------------------------------------------------------------
Impact a Year 1 3% Real 7% Real
Year 2 Year 10 discount rate discount rate
----------------------------------------------------------------------------------------------------------------
Affected Workers (1000s)
----------------------------------------------------------------------------------------------------------------
Standard........................ 1,156 1,069 723 .............. ..............
HCE............................. 102 114 154 .............. ..............
-------------------------------------------------------------------------------
Total....................... 1,257 1,183 877 .............. ..............
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions in 2019$)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization...... $340.4 $0.0 $0.0 $38.7 $45.3
Adjustment c.................... 68.2 2.0 4.6 10.5 11.7
Managerial...................... 134.4 132.3 94.5 114.8 116.3
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[[Page 51262]]
Total direct costs d........ 543.0 134.3 99.1 164.0 173.3
----------------------------------------------------------------------------------------------------------------
Transfers from Employers to Workers (Millions in 2019) e
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............. 75.4 42.8 26.1 36.9 38.1
Due to overtime pay............. 321.0 264.9 221.3 258.1 260.6
-------------------------------------------------------------------------------
Total transfers d........... 396.4 307.7 247.4 295.0 298.8
----------------------------------------------------------------------------------------------------------------
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.
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.
ii. Affected EAP Workers
1. Overview
The Department estimated there are 25.6 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 method described above, the Department estimated that the
increase in the standard salary level from $455 per week to $684 per
week will affect 1.2 million exempt workers in Year 1, while the
increase in the HCE annual compensation level from $100,000 to $107,432
will impact 101,800 workers (Figure 2).159 160 In total, the
Department expects that 1.3 million workers will be affected in Year 1
by the final rule earnings threshold increases, composing about 4.9
percent of the pool of potentially affected EAP workers.
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\159\ 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.
\160\ 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 final rule
applies conditional probabilities to determine the number of
affected HCE workers.
[GRAPHIC] [TIFF OMITTED] TR27SE19.001
Table 7 presents the number of affected EAP workers, the mean
number of overtime hours they work per week, and their average weekly
earnings. The 1.2 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 $581 per week.\161\ 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 11.7
hours of overtime per week. The 101,800 EAP workers affected by the
change in the HCE compensation level average 4.2 hours of overtime per
week and earn an average of $1,989 per week ($103,450 per year). About
65 percent of these workers work zero usual hours of overtime while the
35 percent who work usual hours of overtime average 11.9 hours of
overtime per week.
---------------------------------------------------------------------------
\161\ 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
[[Page 51263]]
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.\162\ 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' salaries 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.
---------------------------------------------------------------------------
\162\ A small proportion (1.9 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).
Table 7--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, Year 1
----------------------------------------------------------------------------------------------------------------
Affected EAP workers a
Type of affected EAP worker ---------------------------------------- Mean overtime Mean usual weekly
Number (1,000s) % of Total hours earnings
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........ 1,156............. 100%.............. 1.6............... $581
Earn less than the minimum wage 22................ 1.9............... 21.4.............. 524
b.
Regularly work overtime......... 158............... 13.7.............. 11.7.............. 582
CPS occasionally work overtime c 42................ 3.7............... 8.3............... 581
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........ 102............... 100............... 4.2............... 1,989
Earn less than the minimum wage .................. .................. .................. ..................
b.
Regularly work overtime......... 36................ 35.1.............. 11.9.............. 1,968
CPS occasionally work overtime c 4................. 3.5............... 9.7............... 1,995
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
a Estimated number of workers exempt under the EAP exemptions who will 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.\163\ 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.
---------------------------------------------------------------------------
\163\ 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 45,900
occasional overtime workers (3.7 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
affected EAP workers. Table 8 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 is
education and health services (288,000), while the industry with the
highest percentage of affected EAP workers is leisure and hospitality
(about 10 percent). The occupation category with the most affected EAP
workers is management, business, and financial (506,000), while the
occupation category with the highest percentage of affected EAP workers
is services (about 15 percent).
Finally, 6.1 percent of potentially affected workers in private
nonprofits are affected compared with 4.6 percent in private for-profit
firms. However, as discussed in section VI.B.iii, the estimates of
workers subject to the FLSA include workers employed by enterprises
that do not meet the enterprise coverage requirements because there is
no data set that would adequately inform an estimate of the size of
this worker 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
[[Page 51264]]
revenue derived from business operations, not charitable activities, is
included.
Table 8--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........................... 139.43 25.59 24.33 1.26 4.9
----------------------------------------------------------------------------------------------------------------
By Industry d
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, 1.33 0.04 0.04 0.00 5.4
& hunting......................
Mining.......................... 0.73 0.19 0.18 0.00 2.6
Construction.................... 8.49 1.02 0.97 0.05 5.0
Manufacturing................... 15.56 3.61 3.52 0.09 2.5
Wholesale & retail trade........ 19.08 2.60 2.44 0.17 6.4
Transportation & utilities...... 7.65 0.92 0.88 0.04 4.1
Information..................... 2.73 1.01 0.97 0.04 4.2
Financial activities............ 9.66 3.81 3.64 0.17 4.3
Professional & business services 15.80 5.75 5.53 0.21 3.7
Education & health services..... 34.24 4.15 3.86 0.288 6.9
Leisure & hospitality........... 13.13 0.92 0.83 0.09 9.8
Other services.................. 5.62 0.64 0.59 0.05 8.3
Public administration........... 5.40 0.93 0.88 0.05 5.5
----------------------------------------------------------------------------------------------------------------
By Occupation d
----------------------------------------------------------------------------------------------------------------
Management, business, & 21.12 12.76 12.25 0.51 4.0
financial......................
Professional & related.......... 32.96 9.02 8.61 0.41 4.6
Services........................ 24.16 0.22 0.18 0.03 14.6
Sales and related............... 13.78 2.44 2.26 0.18 7.6
Office & administrative support. 17.64 0.95 0.84 0.11 11.7
Farming, fishing, & forestry.... 1.01 0.00 0.00 0.00 0.0
Construction & extraction....... 6.75 0.02 0.02 0.00 3.2
Installation, maintenance, & 4.59 0.04 0.04 0.00 3.9
repair.........................
Production...................... 8.48 0.11 0.10 0.00 3.9
Transportation & material moving 8.93 0.03 0.03 0.00 9.1
----------------------------------------------------------------------------------------------------------------
By Nonprofit and Government Status
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 9.65 2.04 1.91 0.12 6.1
For profit, private............. 111.04 21.52 20.52 1.00 4.6
Government (state, local, and 18.73 2.03 1.90 0.13 6.5
federal).......................
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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 will 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 9 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 will be the South
(544,000), but the South's percentage of potentially affected workers
who are affected is still small (6.1 percent). Although 90 percent of
affected EAP workers will reside in MSAs (1.13 of 1.26 million), so do
a corresponding 88 percent of all workers subject to the FLSA.\164\
---------------------------------------------------------------------------
\164\ Identified with CPS MORG variable GTMETSTA.
---------------------------------------------------------------------------
Employers in low-wage industries, regions, and in 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 final 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 South
Region. Effects by region and industry are considered in section
VI.D.vi.
[[Page 51265]]
Table 9--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....................... 139.43 25.59 24.33 1.26 4.9
----------------------------------------------------------------------------------------------------------------
By Region/Division
----------------------------------------------------------------------------------------------------------------
Northeast....................... 25.38 5.30 5.07 0.23 4.4
New England................. 7.03 1.56 1.50 0.06 3.7
Middle Atlantic............. 18.35 3.74 3.57 0.17 4.6
Midwest......................... 30.59 5.23 5.01 0.23 4.4
East North Central.......... 20.77 3.56 3.40 0.16 4.4
West North Central.......... 9.82 1.67 1.60 0.07 4.4
South........................... 50.90 8.93 8.39 0.54 6.1
South Atlantic.............. 26.77 5.01 4.72 0.30 5.9
East South Central.......... 7.59 1.09 1.01 0.08 7.7
West South Central.......... 16.55 2.83 2.67 0.16 5.7
West............................ 32.56 6.12 5.87 0.25 4.1
Mountain.................... 10.30 1.74 1.66 0.08 4.7
Pacific..................... 22.26 4.38 4.21 0.17 3.9
----------------------------------------------------------------------------------------------------------------
By Metropolitan Status
----------------------------------------------------------------------------------------------------------------
Metropolitan.................... 122.63 23.98 22.84 1.13 4.7
Non-metropolitan................ 15.85 1.51 1.39 0.12 7.7
Not identified.................. 0.95 0.10 0.10 0.01 6.0
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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 will be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
3. NPRM Comments on Affected Worker Calculation
EPI and a few other commenters asserted that the Department's use
of pooled 2015-2017 data to calculate the number of affected workers
``leads to an underestimate because it doesn't account for employment
growth and other changes in the three years between 2017 and 2020.''
The Department is using pooled CPS MORG data for July 2016 through June
2019, adjusted to reflect 2018/2019, in this final rule. The Department
is not modeling employment growth between 2018/19 and the final rule's
effective date because of uncertainty in the appropriate growth rates
to project earnings and employment, and because of the relatively short
period of time separating June 2019--the most recent CPS MORG data
available at the time this impact analysis was developed--and January
1, 2020--the effective date of the final rule. However, as a
sensitivity analysis undertaken in response to these comments, the
Department used the BLS National Employment Matrix (NEM) for 2016 to
2026 to calculate growth rates for each occupation-industry category.
Using these rates to adjust the number of affected employees in 2018/19
for one and a half years of employment growth increased the estimated
number of affected workers by less than 1.8 percent.
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 that in Year 1
(2020), regulatory familiarization costs will be $340.4 million,
adjustment costs will be $68.2 million, and managerial costs will be
$134.4 million (Table 10). Total direct employer costs in Year 1 will
be $543.0 million.
Table 10--Summary of Year 1 Direct Employer Costs
[Millions]
----------------------------------------------------------------------------------------------------------------
HCE
Direct employer costs Standard compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\.................................. .............. .............. $340.4
Adjustment...................................................... $62.7 $5.5 68.2
Managerial...................................................... 121.5 12.9 134.4
-----------------------------------------------
Total direct costs.......................................... 184.1 18.4 543.0
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the
HCE compensation level.
[[Page 51266]]
Adjustment costs and managerial 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
This rule 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 final
rule was drafted are from the 2016 Statistics of U.S. Businesses
(SUSB), which reports 7.76 million establishments with paid
employees.\165\ Additionally, there were an estimated 90,126 state and
local governments in 2017, the most recent data available.\166\ The
Department thus estimated 7.85 million establishments altogether (for
ease, the Department uses the term ``establishments'' to refer to the
total of establishments and government entities) might incur regulatory
familiarization costs.
---------------------------------------------------------------------------
\165\ Statistics of U.S. Businesses 2016, https://www.census.gov/programs-surveys/susb.html.
\166\ 2017 Census of Governments. Table 1, https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
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
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 in this rulemaking is setting a new
standard salary level for exempt workers, and the 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's analysis assumed that mid-level human resource workers
with a median wage of $26.56 per hour will review the final rule.\167\
The Department also assumed that benefits are paid at a rate of 46
percent of the base wage \168\ and overhead costs are paid at a rate of
17 percent of the base wage,\169\ resulting in an hourly rate of
$43.38. The Department thus estimates regulatory familiarization costs
in Year 1 will be $340.4 million ($43.38 per hour x 1 hour x 7.85
million establishments).\170\
---------------------------------------------------------------------------
\167\ The median wage in the pooled 2018/19 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.
\168\ The benefits-earnings ratio is derived from 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.
\169\ 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.
\170\ 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 $262.2 million in Year 1.
---------------------------------------------------------------------------
Some commenters asserted these cost estimates are too low. For
example, SBA Office of Advocacy (SBA Advocacy) wrote: ``we spoke to a
small retail business in Alabama, who retained the services of an
attorney for 10-15 hours to review the 2016 final rule.'' International
Bancshares Corporation described the necessary hours for regulatory
familiarization and adjustment costs as ``countless.'' An individual
commenter stated that the Department's estimated costs are too low but
did not provide any information on what costs should be.
The Department continues to believe that an average of one hour per
establishment is appropriate. The EAP exemptions have been in existence
in one form or another since 1938, and a final rule was published as
recently as 2016. Furthermore, employers who use the exemptions must
apply them every time they hire an employee whom they seek to classify
as exempt. Thus, employers should be familiar with the exemptions. The
most significant change promulgated in this rulemaking is setting new
earnings thresholds for exempt workers. The Department believes that,
on average, one hour is sufficient to time to read and understand, for
example, the changes to these thresholds, and we note that the
regulatory text changes comprise only a few pages. Additionally, the
estimated one hour for regulatory familiarization represents an average
for all establishments in the U.S., even those without any affected or
exempt workers, which are unlikely to spend much time reviewing the
rule. Some businesses, of course, will spend more than one hour, and
some will spend less, but for the reasons stated above, the Department
believes that an average of one hour is an appropriate estimate.
3. Adjustment Costs
This rule will 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.\171\ 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 will be $43.38 per hour (as
explained above).
The Department estimated that it will take establishments an
average of 75
[[Page 51267]]
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.\172\ Therefore, in the NPRM
the Department used the estimate of 1.25 hours from the 2016 final rule
after reviewing public comments on the 2015 NPRM, and it is again using
this estimate in this final rule. The estimated number of affected EAP
workers in Year 1 is 1.3 million (as discussed in section VI.D.ii).
Therefore, total estimated Year 1 adjustment costs will be $68.2
million ($43.38 x 1.25 hours x 1.3 million workers).
---------------------------------------------------------------------------
\171\ 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) such that additional costs
associated with the rule should be relatively small in the short
run.
\172\ 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.
---------------------------------------------------------------------------
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.
However, when the rule takes effect, firms will no longer be required
to apply the potentially time-consuming duties test to employees
earning less than the new standard salary level. This will be a clear
cost savings to employers for the approximately 4.1 million salaried
employees (2.2 million in white collar occupations and 1.9 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.
A few commenters expressed concern that the time estimate is too
low. For example, as noted above, International Bancshares Corporation
described the necessary hours for regulatory familiarization and
adjustment costs as ``countless.'' SBA Advocacy wrote: ``Small
businesses have told Advocacy that it may take them many hours and
several weeks to understand and implement this rule for their small
businesses.'' Two commenters, the National Association of Manufacturers
and the HR Policy Association, expressed particular concern with
adjustment costs stemming from the proposed increase in the HCE
compensation level, noting that for each worker earning between
$100,000 and the new HCE compensation level, the employee's job duties
will need to be reassessed to determine whether the worker remains
exempt under the standard salary level exemption. The National
Association of Manufacturers elaborated that ``across the manufacturing
sector, the change in HCE threshold [proposed in the NPRM] may be even
more difficult and consequential than updating the standard salary
threshold.''
The Department is retaining its estimate of adjustment costs as 75
minutes per affected worker in the final rule. The Department notes
that the vast majority of commenters, including employer
representatives, did not contest this estimate. Additionally, this
estimate is drawn from the 2016 final rule, and represents a 25 percent
increase, in response to concerns from employer representatives, over
the Department's original estimate of one hour per worker in the 2015
NPRM.\173\ Moreover, SBA Advocacy's numbers are not necessarily
inconsistent with the Department's estimates. For example, if a small
business has 15 affected employees, then the Department estimated it
will (on average) take 19.75 hours to make the appropriate adjustments,
an amount of time that some small businesses might consider ``many
hours'' and that could take place over ``several weeks.''
---------------------------------------------------------------------------
\173\ 81 FR at 32475.
---------------------------------------------------------------------------
The Department also believes that the 75-minute-per-worker average
time estimate appropriately takes into account adjustment time for HCE-
affected workers (those passing only the HCE duties test and not the
standard duties test). This estimate assumes that the average is
concentrated in the subset of employees requiring more analysis to make
a decision. For example, employers are likely to incur relatively low
adjustment costs for some workers, such as those who work no overtime
(described below as Type 1 workers). This leaves more time for
employers to spend on adjustment costs for other workers, such as
affected HCE employees who become newly subject to the more rigorous
standard duties test. The Department further notes that in this final
rule, the number of affected HCE employees has declined from the NPRM
as a result of the Department's decision to decrease the HCE threshold
from the proposed amount of $147,414 to $107,432. This adjustment also
addresses concerns about the burdens that would have been associated,
under the NPRM, with applying the standard duties test to a large
number of formerly HCE exempt employees, many of whom would have
remained exempt under the standard duties test. Thus, although some
employers may spend more time adjusting for HCE-affected workers than
for other workers, HCE workers will now comprise a smaller portion of
the of the total number of affected workers, further affirming the
Department belief that its estimate of 75 minutes per worker on average
is appropriate.
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. 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 predictable basis--an estimated
304,500 workers (see Table 13 and accompanying explanation). The
Department estimated these costs assuming that management spends an
additional ten 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 will be 50,751 hours ((10 minutes/60
minutes) x 304,500 workers).
The median hourly wage in 2018/19 for a manager was $31.18 and
benefits were estimated to be paid at a rate of 46 percent of the base
wage.\174\ Together
[[Page 51268]]
with the 17 percent overhead costs used for this analysis, this totals
$50.92 per hour. Thus, the estimated Year 1 managerial costs total
$134.4 million (50,751 hours/week x 52 weeks x $50.92/hour). Although
the exact magnitude will vary with the number of affected EAP workers
each year, the Department anticipates that employers will incur
managerial costs annually.
---------------------------------------------------------------------------
\174\ Calculated as the median wage in the pooled 2018/19 CPS
MORG data for workers in management occupations (excluding chief
executives). The adjustment ratio is derived from BLS' Employer
Costs for Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------
There was little precedent or data to aid in evaluating managerial
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.
Thus, in the NPRM, the Department used the same methodology as the 2016
final rule, which the Department adopted after considering comments on
the 2015 NPRM. However, for this final rule, the Department has
increased the time estimate from 5 minutes to 10 minutes.
A few commenters generally expressed concern about the managerial
costs for businesses. For example, one commenter noted: ``There is no
easy way to track hours for salaried folks easily, in most businesses.
As a result, companies will be forced to begin this practice, adding
more costs in administrative ways.'' Another individual wrote that the
proposed rule ``would create a challenge by placing a burden on the
employers to exaustively [sic] track these newly nonexempt employees'
hours to ensure compliance with overtime pay and other requirements.
This tracking of hours would also produce increased human resources
paperwork and technology costs to our company.'' The Kentucky Retail
Federation wrote: ``Reclassifying managers to hourly workers will
require hours spent scheduling work hours to avoid overtime costs.''
SBA Advocacy, asserting that the Department underestimated compliance
costs, wrote: ``Employers reclassifying managers to hourly staff may
spend many hours a week scheduling and keeping track of employee work
to avoid these extra overtime costs.''
The Department acknowledges that firms may incur costs monitoring
and managing the hours of formerly exempt staff. In addition, the
Department acknowledges that to the extent workers who lose their
exempt status as a result of the change in the standard salary level
telecommute, but hourly and other nonexempt salaried workers do not
telecommute, it may be necessary to develop ways of tracking such work
by newly nonexempt workers. However, the Department does not expect
that such firms will spend ``many hours a week'' on such tasks, and
believes an estimate of 10 minutes per worker per week is appropriate.
First, the Department notes that EAP exempt employees account for less
than 20 percent of the U.S. labor force; as such, the Department
expects that the vast majority of employers of EAP exempt workers also
employ nonexempt workers. Such employers already have in place
recordkeeping systems and standard operating procedures for ensuring
employees work overtime under only employer-prescribed circumstances.
Thus, such systems generally do not need to be invented for managing
formerly-exempt EAP employees. Second, the Department also notes that
under the FLSA recordkeeping regulations in part 516, employers
determine how to make and keep an accurate record of hours worked by
employees; for example, employers may tell their workers to write their
own time records and any timekeeping plan is acceptable as long as it
is complete and accurate. Additionally, if the nonexempt employee works
a fixed schedule, e.g., 9:00 a.m.-5:30 p.m. Monday-Friday, the employer
may keep a record showing the exact schedule of daily and weekly hours
and merely indicate exceptions to that schedule. See Fact Sheet #21:
Recordkeeping Requirements under the Fair Labor Standards Act (https://www.dol.gov/whd/regs/compliance/whdfs21.pdf). However, as previously
noted, in response to concerns raised by commenters the Department has
doubled the amount of time attributed to managerial costs.
5. Other Potential Costs
In addition to the costs discussed above, the final 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 workers face a tradeoff in the labor market
between cash wages and the nonpecuniary aspects of jobs.\175\
---------------------------------------------------------------------------
\175\ 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 final 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 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 who become nonexempt as a result of the final
rule and whose pay is 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,\176\ and are
more satisfied with their benefits.\177\ 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.\178\ 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.
---------------------------------------------------------------------------
\176\ 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.
\177\ Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of
Employee Benefits Satisfaction. Journal of Business and Psychology,
7(3), 323-339.
\178\ 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, reclassification could reduce
workers' benefits. But the Department notes that this rule does not
require such reclassification. These newly nonexempt 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
[[Page 51269]]
premium on that base wage for any overtime hours each week.\179\
Similarly, employers may continue to provide these workers with the
same level of benefits as previously, whether paid on an hourly or
salary basis.
---------------------------------------------------------------------------
\179\ Sec. Sec. 778.113-.114.
---------------------------------------------------------------------------
Quality of Public 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, is 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 final 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 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).
International Bancshares Corporation commented that the increased
salary level could lead to increased prices, if ``anticipated wage
gains do not result in productivity increases.'' As noted above,
however, costs and transfers make up less than 0.02 percent of payroll;
furthermore, payroll comprises only a fraction of the costs of
producing goods and services in the U.S. economy. Therefore, the
Department concludes the final rule will add little upward pressure to
prices. To the extent that EAP-exempt employees are concentrated in
some industries more than others, and thus specific industries might
experience more pressure on wages, the Department notes that even in
the industry where costs and transfers compose the highest percentage
of payroll (agriculture, forestry, fishing, and hunting), that
percentage is only 0.038 percent.
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 final 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. To the extent that the final rule reduces profits at
some 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 could 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
final rule would be minimal.
Hiring Costs
To the extent that firms respond to an update to the salary level
test by reducing overtime hours, they may do so by spreading hours to
other workers, including current workers employed for less than 40
hours per week by that employer, current workers who retain their
exempt status, and newly hired workers. If new workers are hired to
absorb these transferred hours, then the associated hiring costs are a
cost of this final rule.
Other Costs Raised by Commenters
Some commenters asserted that the proposed rule would entail
additional costs not detailed above. A few believe that the rule will
result in increased employee turnover. SBA Advocacy wrote: ``Small
businesses that reclassified their salaried staff to hourly staff as a
result of the 2016 final rule reported that their employee turnover
increased by up to 50 percent,'' forcing them to incur costs to hire
and train new workers. According to SBA Advocacy, small businesses
attributed this turnover to previously-exempt managers feeling
``demoralized'' by having to ``clock in'' due to their changed status,
and suggested that this rule may have similar effects. Similarly,
International Bancshares Corporation predicted that the proposed rule
would result in layoffs, asserting that costs associated with
``reviewing the final regulations and building a software system to
implement and monitor their compliance with the regulations'' would
make it ``extremely difficult for community and regional banks to . . .
[avoid] laying off employees or curtailing their operations.''
The Department believes these concerns are overstated. First, this
final rule's increases to the earnings thresholds are much more modest
than the 2016 final rule's, and the associated impacts are
correspondingly more moderate. Thus, the Department believes that any
adverse effects, such as increased turnover, will be minimal.
Therefore, the Department has not quantified the potential costs
associated with increased turnover. Likewise, the Department does not
believe that this final rule will cause a significant number of
layoffs. As explained above, the vast majority of firms employ both
exempt and nonexempt workers and therefore have systems in place for
managing nonexempt employees, and affected employees comprise less than
4 percent of EAP exempt employees. As such, the Department does not
believe that the increased earnings thresholds in this final rule will
cause layoffs to any significant extent, and has not quantified such
costs.
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 will result from the final rule: (1) Transfers to
ensure compliance with the FLSA minimum wage provision; and (2)
transfers to ensure compliance with the FLSA
[[Page 51270]]
overtime pay provision. Transfers in Year 1 due to the minimum wage
provision were estimated to be $75.4 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. The Department estimates that transfers due to the overtime pay
provision will be $321.0 million: $220.7 million from the increased
standard salary level and $100.3 million from the increased HCE
compensation level. Total Year 1 transfers are estimated at $396.4
million (Table 11).
Table 11--Summary of Year 1 Regulatory Transfers
[Millions]
----------------------------------------------------------------------------------------------------------------
HCE
Transfer from employers to workers Standard compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............................................. $75.4 $0.0 $75.4
Due to overtime pay............................................. 220.7 100.3 321.0
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Total transfers............................................. 296.1 100.3 396.4
----------------------------------------------------------------------------------------------------------------
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 most state minimum wages, 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).\180\ The applicable
minimum wage is the higher of the federal minimum wage and the state
minimum wage as of July 1, 2018. Most affected EAP workers already
receive at least the minimum wage; only an estimated 1.8 percent of
them (22,200 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.\181\
---------------------------------------------------------------------------
\180\ Workers in states with minimum wages higher than the
federal minimum wage could earn less than the state minimum wage
working fewer hours.
\181\ Because these workers' hourly wages will be set at the
minimum wage after this final 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. For
the first year, 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 (years 2-10
use a long run elasticity of -0.4) 182 183
---------------------------------------------------------------------------
\182\ Labor demand elasticity is the percentage change in labor
hours demanded in response to a one percent change in wages.
\183\ 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
22,200 affected EAP workers will, on average, see an hourly wage
increase of $1.39, work 2.4 fewer hours per week, and receive an
increase in weekly earnings of $65.29 as a result of coverage by the
minimum wage provisions (Table 12). The total change in weekly earnings
due to the payment of the minimum wage was estimated to be $1.4 million
per week ($65.29 x 22,200) or $75.4 million in Year 1.
Table 12--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 Final Rule............................... $8.75 61.4 $524.37 ..............
After Final Rule................................ 10.14 59.0 589.66 ..............
Change.......................................... 1.39 -2.4 65.29 1,450
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 7/2016-6/2018 adjusted to reflect 2018/2019.
\a\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.
[[Page 51271]]
3. Transfers Due to the Overtime Pay Provision
Introduction
The final 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.\184\ These models make
different assumptions about the demand for overtime hours and the
structure of the employment agreement, which result in different
implications for predicting employer responses. The 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 nonexempt 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.
---------------------------------------------------------------------------
\184\ 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.
---------------------------------------------------------------------------
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 nonexempt 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
nonexempt would have different 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 who 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.\185\
---------------------------------------------------------------------------
\185\ 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 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.\186\
---------------------------------------------------------------------------
\186\ 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).\187\ 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.\188\ Barkume found that how much wages and hours worked
adjusted in response to the overtime pay requirement
[[Page 51272]]
depended on what overtime pay would be in absence of regulation.
---------------------------------------------------------------------------
\187\ Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
\188\ 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 Britain. Unlike the United
States, Britain 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.\189\ 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).\190\
---------------------------------------------------------------------------
\189\ 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.
\190\ Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an
Overtime Premium? IZA Discussion Paper No. 163.
---------------------------------------------------------------------------
Finally, Kuroda and Yamamoto (2009) examined ``name only managers''
in Japanese labor markets and found essentially 100 percent adjustment
of implicit hourly wages to offset the overtime pay
requirement.191 192 This study suggests that these affected
workers are all employed under the pure fixed-job model, so the
implicit wage adjusted so that workers received no additional pay, and
had essentially no change to hours worked. If applied to this
rulemaking, transfers from employers to employees would occur only in
cases in which the implicit hourly rate is less than the minimum wage.
The Department estimates transfers would be about $193.4 million in
Year 1 with 100 percent adjustment to the fixed-job model (compared
with the Department's estimate of $396.4 million using the substantial,
but incomplete fixed-job model, described in further detail below).
---------------------------------------------------------------------------
\191\ Kuroda, S. and Yamamoto, I. (2009). How Are Hours Worked
and Wages Affected by Labor Regulations?: The White-Collar Exemption
and `Name-Only Managers' in Japan. University of Tokyo Institute of
Social Science. Discussion Paper Series No. F-147.
\192\ The implicit hourly wage is calculated by dividing
reported weekly earnings by reported hours worked.
---------------------------------------------------------------------------
However, there are some challenges in generalizing Kuroda and
Yamamoto's results to U.S. labor markets. First, ``name-only-managers
would not be exempt in the U.S. because they do not meet the duties
test for exemption. ``Name-only-managers'' are essentially identical to
their peers, have no managerial responsibilities, and are distinguished
only by their job title. This is not directly analogous to the case of
EAP exempt employees, who do have managerial responsibilities, and must
pass the duties test while other similar (but nonexempt) employees do
not. Second, Kuroda also found that the pure fixed-job model results
may not hold under all conditions. For example, in a following paper he
found that during a recession, the labor market for ``name-only-
managers'' behaved more like the fixed-wage model than the fixed-job
model.\193\ Third, some commenters on the NPRM provided survey results
supporting that, among other responses, employers planned to respond to
this rule (or responded or planned to respond to the 2016 final rule)
by increasing salaries of some exempt employees to maintain their
exempt status (see section VI.D.iv.5). This is inconsistent with Kuroda
and Yamamoto's findings.
---------------------------------------------------------------------------
\193\ Kuroda, S. and Yamamoto, I. (2012). Impact of Overtime
Regulations on Wages and Work Hours, Journal of the Japanese and
International Economies, 26(2), 249-262.
---------------------------------------------------------------------------
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 nonexempt 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 nonexempt. 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 might, especially in the short run, be 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 Department
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.\194\ 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.\195\ 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.\196\ If
the Department were to use only Barkume's assumptions and results to
model employer adjustment to the overtime wage premium requirement for
affected workers, estimated Year 1 transfers would total $247.9
million; further estimates derived from Barkume's findings will be
presented later in the analysis. However, in the sections that
[[Page 51273]]
immediately follow, the Department uses both papers to model transfers.
---------------------------------------------------------------------------
\194\ 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.
\195\ Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
\196\ 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.
---------------------------------------------------------------------------
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.
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 $8.49 ($50.92 per hour x (10 minutes/60 minutes)).\197\ 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.\198\ 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.
---------------------------------------------------------------------------
\197\ See supra Sec. VI.D.iii.4 (managerial costs).
\198\ 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 130.
---------------------------------------------------------------------------
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. When
modeling employer responses with respect to the adjustment to the
regular rate of pay, the Department used the incomplete fixed-job
model.
In this portion of the analysis, the Department presents an
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.\199\ 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).
---------------------------------------------------------------------------
\199\ 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.\200\
---------------------------------------------------------------------------
\200\ 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 final
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
[[Page 51274]]
model).\201\ 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 work overtime but
did not do so in the CPS reference week.\202\
---------------------------------------------------------------------------
\201\ 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.
\202\ 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.\203\
---------------------------------------------------------------------------
\203\ 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.\204\
---------------------------------------------------------------------------
\204\ 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 51275]]
[GRAPHIC] [TIFF OMITTED] TR27SE19.002
[[Page 51276]]
[GRAPHIC] [TIFF OMITTED] TR27SE19.003
Estimated Number of and Effects on Affected EAP Workers
The Department estimated the final rule will affect 1.3 million
workers (Table 13), of which 762,200 were Type 1 workers (60.6 percent
of all affected EAP workers), 300,900 were estimated to be Type 2
workers (23.9 percent of all affected EAP workers), 154,000 were Type 3
workers (12.3 percent of all affected EAP workers), and 40,100 were
estimated to be Type 4 workers (3.2 percent of all affected workers).
All Type 3 workers and half of Type 2 employees (304,500) are assumed
to work predictable overtime.
Table 13--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........... 1,155.6 700.3 296.8 126.8 31.7
HCE compensation level.......... 101.8 62.0 4.1 27.2 8.5
-------------------------------------------------------------------------------
Total....................... 1,257.3 762.2 300.9 154.0 40.1
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
* 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 final rule will affect some affected workers' hourly wages,
hours, and weekly earnings. Predicted changes in implicit wage rates
are outlined in Table 14, changes in hours in Table 15, and changes in
weekly earnings in Table 16. How these will change depends on the type
of worker, but on average the Department projects that weekly earnings
will be unchanged or increase while hours worked will be unchanged or
decrease.
Type 1 workers will have no change in wages, hours, or
earnings.\205\ 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 will see
a decrease in their average regular hourly wage; however, because these
workers will now receive a 50 percent premium on their regular hourly
wage for each hour worked in excess of 40 hours per week, average
weekly earnings for Type 2 workers will increase.\206\
---------------------------------------------------------------------------
\205\ It is possible that these workers may experience an
increase in hours and weekly earnings because of transfers of hours
from other newly nonexempt workers who do usually work overtime. 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.
\206\ 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 will 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 will now be
eligible for the overtime premium. Type 4 workers' implicit hourly
rates of pay will increase to meet the updated standard salary level or
HCE annual compensation level.
[[Page 51277]]
Table 14--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 Final Rule............... $15.85 $16.71 $16.15 $11.39 $11.91
After Final Rule................ $15.81 $16.71 $16.09 $10.97 $12.51
Change ($)...................... -$0.04 $0.00 -$0.06 -$0.42 $0.60
Change (%)...................... -0.3% 0.0% -0.4% -3.7% 5.1%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before Final Rule............... $46.94 $51.63 $49.81 $38.80 $37.46
After Final Rule................ $46.32 $51.63 $47.53 $36.55 $38.27
Change ($)...................... -$0.63 $0.00 -$2.29 -$2.26 $0.81
Change (%)...................... -1.3% 0.0% -4.6% -5.8% 2.2%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
* 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 will not change. Similarly, hours will not
change for the half of Type 2 workers who work irregular overtime. Half
of Type 2 and all Type 3 workers will 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 15). Type 4 workers' hours may increase, but due to lack of
data, the Department assumed hours would not change.
Table 15--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 Final Rule............... 39.9 37.5 39.2 50.4 56.6
After Final Rule................ 39.8 37.5 39.1 49.8 56.6
Change (hours).................. -0.1 0.0 0.0 -0.6 0.0
Change (%)...................... -0.2% 0.0% -0.1% -1.2% 0.0%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule............... 44.2 39.4 48.4 51.0 54.9
After Final Rule................ 44.1 39.4 48.2 50.7 54.9
Change (hours).................. -0.1 0.0 -0.3 -0.3 0.0
Change (%)...................... -0.2% 0.0% -0.5% -0.7% 0.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
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 most Type 1 workers will not experience a change in their
regular rate of pay or hours, they will have no change in earnings due
to the final rule (Table 16).\207\ Although Type 2 and Type 3 workers
will, on average, experience a decrease in both their regular rate of
pay and hours worked, their weekly earnings will 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 will increase to the new standard salary level
or the HCE compensation level.
---------------------------------------------------------------------------
\207\ The small increase in average weekly earnings for Type 1
workers is due to increasing the weekly earnings in the District of
Columbia to the minimum wage ($13.25 per hour).
[[Page 51278]]
Table 16--Average Weekly Earnings for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
-------------------------------
Total No overtime Occasional Newly
(T1) overtime (T2) nonexempt Remain exempt
(T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule............... $581.42 $575.71 $594.52 $566.67 $643.94
After Final Rule................ $586.34 $575.72 $599.48 $589.91 $684.00
Change ($)...................... $4.93 $0.01 $4.96 $23.24 $40.06
Change (%)...................... 0.8% 0.0% 0.8% 4.1% 6.2%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule............... $1,989.41 $1,973.57 $2,415.63 $1,950.93 $2,021.82
After Final Rule................ $2,008.37 $1,973.57 $2,467.78 $2,000.16 $2,066.00
Change ($)...................... $18.96 $0.00 $52.15 $49.24 $44.18
Change (%)...................... 1.0% 0.0% 2.2% 2.5% 2.2%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
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
affected workers will increase $4.93 (0.8 percent), from $581.42 to
$586.34. Multiplying the average change of $4.93 by the 1.2 million EAP
workers affected by the change in the standard salary level and 52
weeks equals an increase in earnings of $296.1 million in the first
year (Table 17). For workers affected by the change in the HCE
compensation level, average weekly earnings will increase by $18.96.
When multiplied by 101,800 affected workers and 52 weeks, the national
increase will be $100.3 million in the first year. Thus, total Year 1
transfer payments attributable to this final rule will total $396.4
million.
Table 17--Total Change in Weekly and Annual Earnings for Affected EAP
Workers by Provision, Year 1
------------------------------------------------------------------------
Annual change
Provision in earnings
(1,000s)
------------------------------------------------------------------------
Total................................................... $396,424
Standard salary level:
Total............................................... 296,078
Minimum wage only................................... 75,376
Overtime pay only a................................. 220,702
HCE compensation level:
Total............................................... 100,345
Minimum wage only................................... ..............
Overtime pay only a................................. 100,345
------------------------------------------------------------------------
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.\208\ 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 will increase by $4.93 and hours will
decrease by 0.1 hours.
---------------------------------------------------------------------------
\208\ Rohwedder and Wenger, supra note 130.
---------------------------------------------------------------------------
4. Potential Transfers Not Quantified
There may be additional transfers attributable to this final rule;
however, the magnitude of these other transfers could not be quantified
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 final rule.
Additional Work for Some Workers
Affected workers who remain exempt will 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.
Several commenters stated that in order to pay for the higher
payroll costs, they would decrease employee benefits. These comments
were mostly general statements, often included in a list of changes the
employer intends to make in response to the increased salary threshold.
Others stated that employees would lose benefits due to being
reclassified as hourly workers. However, as the Department previously
noted, this regulation does not require that workers who become
nonexempt must be
[[Page 51279]]
reclassified as hourly nor does it require that hourly workers receive
fewer benefits than salaried workers. Additionally, some commenters
stated that these employees would have reductions in their ability to
earn commissions, bonuses, or other types of incentive payments, but
these commenters generally did not discuss the net impact on these
employees' earnings. These comments did not provide information that
would allow the Department to estimate the purported impact of the
final rule on employee benefits.
5. NPRM Comments on Transfer Calculations
In response to the NPRM, the Department's RFI, and at 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. In comments
on the NPRM, Capital Associated Industries submitted the results from a
survey of their members, which conveyed that employers plan to respond
in different ways such as increasing salaries of exempt employees so
that they remain exempt, or decreasing the hours or hourly rates of
newly nonexempt employees. A survey of members of the International
Public Management Association for Human Resources found ``an almost
even split between those who would increase salaries of exempt
employees to the new threshold and those who would shift currently
exempt employees to nonexempt status'' in response to the proposed
standard salary level.
In responses to the Department's RFI, commenters representing
employer interests indicated that employers would respond to a new
salary level by making a variety of adjustments to wages, hours worked,
or both. Some commenters' feedback supports adoption of an incomplete
fixed-job model. For example, Littler Mendelson and the U.S. Chamber of
Commerce reported that, among surveyed employers with exempt employees
who would become nonexempt under the 2016 final rule, 28.7 percent
reported that they planned to ``allow [newly nonexempt employees] to
work the same number of hours and earn overtime compensation without
restriction,'' compared to just 18.6 percent who planned to reduce
effective hourly rates ``so that their total pay remained the same.''
The Chamber's survey did not ask whether employers planned to adopt a
combination of those two responses (i.e., paying overtime premiums
while partially reducing effective hourly rates).
In this final rule, the Department estimated that some workers will
see their earnings increase to the new earnings levels and remain
exempt. There is some evidence that employers will respond in this
manner. For example, in response to the RFI, the Chamber reported that,
of surveyed employers who had implemented or made plans to implement
changes to comply with the 2016 final rule, 76.4 percent reported that
they had increased or planned to increase the salaries of some exempt
employees to retain their exempt status. Similarly, the American Hotel
and Lodging Association reported that 43 percent of their members
raised the salaries of at least one worker to a figure above the 2016
final rule's salary threshold. It is possible that employers will
increase the salaries paid to some ``occasional'' overtime workers to
maintain the exemption for those workers, but the Department has no way
of identifying these workers.
Regarding the proposed transfer calculations, SBA Advocacy took
issue with the Department's estimates that affected small business
establishments would have, on average, $422 to $3,187 in additional
payroll costs in the first year of the proposed rule. Rather, SBA
Advocacy stated that ``[s]mall businesses have told Advocacy that their
[additional] payroll costs will be in the thousands of dollars.'' This
comment, however, does not explain what methodological approach the
Department should use to estimate transfers; what error(s), if any, the
Department's method contains; or how much, if at all, the Department's
approach underestimated such transfers. Therefore, the Department has
not made any changes to the methodology in response to this comment.
The National Association of Manufacturers (NAM), in its comment
opposing the proposed rule's HCE total annual compensation threshold of
$147,414, stated that such a threshold would impact many manufacturers
who currently employ numerous exempt HCE employees. It contended that
``[i]n the representative case of one large manufacturer, approximately
1,200 individuals--nearly 11% of the company's workforce--are exempt
employees earning between $100,000 and $147,414 annually. For this
manufacturer, the difference between `exempt' and `almost exempt' is
estimated to be between $8 million and $20 million in potential
overtime exposure per year.'' Using the upper end of NAM's transfer
cost range, this equates to $16,667 per affected worker. This single
anecdote, however, does not provide a sufficient basis for the
Department to change the methodology used to calculate transfers.
Moreover, NAM's concerns are mitigated by the Department's decision to
set the HCE total annual compensation level to $107,432 instead of to
$147,414.
The Department further notes that its estimates of transfers are
informed by its projection that employers will respond to the final
rule in a number of ways. If, for example, an employer simply pays each
affected employee the overtime premium for each hour worked in excess
of 40 hours per week, without making any adjustments to wages, hours or
duties, such an approach would maximize transfers from employers to
employees. However, as discussed above, the Department believes that
employers will respond to the final rule by adjusting wages, hours, and
duties to minimize the cost of the rule. The Department's approach is
supported by both the literature the Department reviewed examining
employers' response to overtime premium pay requirements, as well as
survey data and anecdotal evidence provided in response to the NPRM and
RFI regarding employers' responses to the 2016 final rule and planned
responses to this rulemaking. Accordingly, the actual amount of
transfers will fall well short of the transfers that would result if
employers simply paid each affected employee overtime premiums without
adjusting wages, hours, or duties.
v. Benefits and Cost Savings
Potential Benefits and Effects Not Discussed Elsewhere
The Department has determined that the final rule will 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 a weekly salary of at least $455 but less than $684,
and fail the duties test. Because only workers who work overtime may
receive overtime pay, when determining the share of workers who are
misclassified
[[Page 51280]]
the sample was limited to those who usually work overtime. Workers were
considered misclassified if they did not receive overtime pay.\209\ 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 $684, the Department estimated that there are
approximately 206,900 white collar salaried workers who are overtime-
eligible but whose employers do not recognize them as such.\210\ These
employees' entitlement to overtime pay will now be abundantly evident.
---------------------------------------------------------------------------
\209\ 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).
\210\ 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 \211\ found that ``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 255,400 salaried workers earning between $455 and
$684 per week who fail the standard duties test are currently
misclassified as exempt.\212\ By raising the salary level the final
rule will increase the likelihood that these workers will be correctly
classified as nonexempt.
---------------------------------------------------------------------------
\211\ Rohwedder and Wenger, supra note 130.
\212\ 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 15 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,\213\ much of which has involved cases regarding whether workers
who satisfy the salary level test also meet the duties test for
exemption.
---------------------------------------------------------------------------
\213\ See Lydia DePillis, Why wage and hour litigation is
skyrocketing, Washington Post (Nov. 25, 2015), https://www.washingtonpost.com/news/wonk/wp/2015/11/25/people-are-suing-more-than-ever-over-wages-and-hours; Uptick in FLSA Litigation
Expected to Continue in 2016, BNA Daily Labor Report (Nov. 25,
2015), https://bnanews.bna.com/daily-labor-report/uptick-in-flsa-litigation-expected-to-continue-in-2016.
---------------------------------------------------------------------------
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. Increasing
the standard salary level from $455 per week to the level set in this
final rule of $684 per week will increase the number of white collar
workers for whom the standard salary level test is determinative of
their nonexempt status, and employers will no longer have to perform a
duties analysis for these employees. This final rule's update to the
standard salary level will 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 salary and earnings
thresholds but below the levels set in this final rule 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
benefit 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 final 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 data gathered during the 2016 rulemaking. As explained in that
rule, to determine the potential number of cases that will likely be
affected by the final rule, the Department obtained a list of all FLSA
cases closed in 2014 from PACER (8,256 cases).\214\ 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 exemptions. 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.
---------------------------------------------------------------------------
\214\ See 81 FR 32501.
---------------------------------------------------------------------------
The Department estimated the share of EAP cases that may be avoided
due to the final rule by using data on the salaried earnings
distribution from the 2018/19 CPS MORG to determine the share of EAP
cases in which workers earn at least $455 but less than $684 per week
or at least $100,000 but less than $107,432 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 13.5 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 1.6 percent of FLSA cases, or about 133
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 final
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
[[Page 51281]]
to the potentially avoided EAP cases.\215\ 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.\216\ According to this analysis,
the average litigation cost for FLSA cases concluded between 2012 and
2015 was $654,182.\217\ Applying this figure to the approximately 133
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 $87.0 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.
---------------------------------------------------------------------------
\215\ 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.
\216\ 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.
\217\ The median cost was $111,835 per lawsuit.
---------------------------------------------------------------------------
The Department did not receive any comments on the methodology it
used to estimate potential reduced litigation costs.
3. NPRM Comments on Benefits
Some commenters contended that the proposed salary level would not
yield the benefits that a higher salary level would. They asserted that
raising the salary level higher than the proposed level would result in
less misclassification and less litigation. The law firm Winebrake &
Santillo, LLC estimated that ``if the executive exemption carried a
$50,000/year salary threshold, over 75% of the [lawsuits the firm
litigated involving alleged misclassification under the executive
exemption] would never have been filed.'' NELA provided an example of a
misclassification case involving managers at a fast food chain earning
$32,000-$40,000 whom a jury found had been misclassified, and stated
that such litigation would have been unnecessary under a higher salary
level such as the one in the 2016 final rule. EPI, a group of 14 State
attorneys general and the Attorney General for the District of
Columbia, and other commenters similarly stated that a higher salary
level was necessary to further reduce the risk of employee
misclassification and the costs of litigation.
While a higher salary level would likely result in fewer workers
being misclassified as exempt, and potentially less litigation as a
result, as explained above, the aim of reducing misclassification
cannot be prioritized over the statutory text, which grounds an
analysis of exemption status in the ``capacity'' in which someone is
employed--i.e., that employee's duties. The salary level test's limited
purpose is therefore to screen out only those employees who are clearly
nonexempt because they are not performing bona fide EAP duties.
Likewise, many commenters expressed concern that the proposed
salary level is too low and thus does not do enough to address income
inequality. Other commenters asserted that a higher salary level would
create jobs and/or stimulate the economy. As explained in greater
detail above, however, the Department declined to set a higher salary
level because it believes that the salary level set in this final rule
appropriately screens out obviously nonexempt workers and distinguishes
between nonexempt and potentially exempt employees, without threatening
to supplant the role of the duties test. Accordingly, the Department
declines to change the salary level methodology in response to these
comments.
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 reactions
to the final 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 will receive the full overtime premium (i.e., such
workers will work the same number of hours but be paid 1.5 times their
implicit initial hourly wage for all overtime hours) (Table 18). 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 will 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 only 50 percent of
occasional overtime workers and no regular overtime workers will
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.\218\ 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).
---------------------------------------------------------------------------
\218\ 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.
[[Page 51282]]
Table 18--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 19. 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.\219\ Depending on how employers adjust the
implicit regular hourly wage, estimated transfers may range from $233.7
million to $644.8 million, with the preferred estimate equal to $396.4
million.
---------------------------------------------------------------------------
\219\ In the lower transfer estimate, managerial costs are for
employees whose hours change because their hourly rate increased to
the minimum wage.
Table 19--Bounds on Year 1 Cost and Transfer Payment Estimates, Year 1
[Millions]
----------------------------------------------------------------------------------------------------------------
Lower Upper
Cost/transfer transfer Preferred transfer
estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Direct employer costs........................................... $413.5 $476.6 $422.9
Reg. familiarization........................................ 340.4 340.4 340.4
Adjustment costs............................................ 68.2 68.2 68.2
Managerial costs............................................ 9.8 134.4 27.7
Transfers....................................................... 233.7 396.4 644.8
----------------------------------------------------------------------------------------------------------------
Note 1: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
2. Effects by Regions and Industries
This section presents estimates of the effects of this final rule
by region and by industry. The Department compared the number of
affected workers, costs, and transfers across the four Census Regions.
The region with the largest number of affected workers will be the
South (544,000). As a share of potentially affected workers in the
region, the South has somewhat more affected workers relative to other
regions (6.1 percent are affected compared with 4.1 to 4.4 percent in
other regions). However, as a share of all workers in the region, the
South will not be particularly affected relative to other regions (1.1
percent are affected compared with 0.7 to 0.9 percent in other
regions).
Table 20--Potentially Affected and Affected Workers, by Region, Year 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected workers
---------------------------------------------------------------
Workers Potentially Affected
subject to affected Percent of workers as a Affected
Region FLSA workers Number total percent of workers as a
(millions) (millions) a (millions) b affected potentially percent of
workers affected all workers
workers
--------------------------------------------------------------------------------------------------------------------------------------------------------
All..................................................... 139.4 25.6 1.257 100 4.9 0.9
Northeast............................................... 25.4 5.3 0.231 18.4 4.4 0.9
Midwest................................................. 30.6 5.2 0.229 18.2 4.4 0.7
South................................................... 50.9 8.9 0.544 43.2 6.1 1.1
West.................................................... 32.6 6.1 0.253 20.2 4.1 0.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
a EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
[[Page 51283]]
b Currently EAP exempt workers who will be entitled to overtime protection under the updated earnings levels or whose weekly earnings will increase to
the new earnings levels to remain exempt.
Total transfers in the first year were estimated to be $396.4
million (Table 21). As expected, the transfers in the South will be the
largest portion because the largest number of affected workers will be
in the South; however, transfers per affected worker will be the lowest
in the South. Annual transfers per worker will be $255 in the South,
and $317 to $436 in other regions.
Table 21--Transfers by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Total change
Region in earnings Percent of Per affected
(millions) total worker
----------------------------------------------------------------------------------------------------------------
All............................................................. $396.4 100 $315.29
Northeast....................................................... 73.3 18.5 317.35
Midwest......................................................... 73.8 18.6 321.60
South........................................................... 138.8 35.0 255.39
West............................................................ 110.6 27.9 436.18
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
Direct employer costs are composed of regulatory familiarization
costs, adjustment costs, and managerial costs. The Department estimates
that total direct employer costs will be the highest in the South
($208.3 million) and lowest in the Northeast ($100.4 million) (Table
22). Direct employer costs in each region, as a percentage of the total
direct costs, will range from 18.5 percent in the Northeast to 38.4
percent in the South. These proportions are almost the same as the
proportions of the total workforce in each region: 18.2 percent in the
Northeast and 36.5 percent in the South.
Table 22--Direct Employer Costs by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Regulatory Total direct
Region familiarization Adjustment Managerial costs
----------------------------------------------------------------------------------------------------------------
Costs (Millions)
----------------------------------------------------------------------------------------------------------------
All......................................... $340.4 $68.2 $134.4 $543.0
----------------------------------------------------------------------------------------------------------------
Northeast................................... 65.7 12.5 22.2 100.4
Midwest..................................... 74.8 12.4 27.7 114.9
South....................................... 119.6 29.5 59.2 208.3
West........................................ 80.3 13.7 25.3 119.4
----------------------------------------------------------------------------------------------------------------
Percent of Total Costs by Region
----------------------------------------------------------------------------------------------------------------
All......................................... 100.0 100.0 100.0 100.0
Northeast................................... 19.3 18.4 16.5 18.5
Midwest..................................... 22.0 18.2 20.6 21.2
South....................................... 35.1 43.2 44.0 38.4
West........................................ 23.6 20.2 18.9 22.0
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
Another way to compare the relative effects of this final rule by
region is to consider the transfers and costs as a proportion of
payroll and revenues (Table 23). Nationally, employer costs and
transfers will be approximately 0.012 percent of payroll. By region,
direct employer costs and transfers as a percent of payroll will be
approximately the same (between 0.010 and 0.013 percent of payroll).
Employer costs and transfers as a percent of revenue will be 0.002
percent nationally and in each region.
Table 23--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............................................. $7,867 $45,023 0.012 0.002
Northeast....................................... 1,733 9,048 0.010 0.002
Midwest......................................... 1,673 10,251 0.011 0.002
South........................................... 2,618 16,109 0.013 0.002
[[Page 51284]]
West............................................ 1,843 9,616 0.012 0.002
----------------------------------------------------------------------------------------------------------------
Notes: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019. Payroll, revenue, costs, and transfers
all exclude the federal government.
Sources: Private sector payroll and revenue data from 2012 SUSB. State and local payroll and revenue data from
State and Local Government Finances Summary: FY2016. Inflated to 2018$ using GDP deflator.
In order to gauge the effect of the final 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 24).\220\ 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
will be highest in agriculture, forestry, fishing, and hunting; leisure
and hospitality; and other services. However, the magnitude of the
relative shares will be small, representing less than 0.04 percent of
payroll costs in all industries.
---------------------------------------------------------------------------
\220\ Note that the totals in this table 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.\221\ Benchmarking against profits is potentially helpful in
the sense that it provides a measure of the final 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.\222\
Nonetheless, the magnitude of costs and transfers as a percentage of
profits will be small, with total costs and transfers as a percent of
profits will vary among industries, ranging from a low of 0.01 percent
(financial activities and manufacturing) to a high of 0.18 percent
(other services). However, because the share is not more than 0.2
percent, even for the industry with the largest impact, we believe this
final rule will not disproportionately affect any industries.
---------------------------------------------------------------------------
\221\ 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.
\222\ 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
24) of less than 0.01 percent of revenues in any industry. The industry
with the largest costs and transfers as a percent of revenue will be
leisure and hospitality. However, the difference between this industry
and the industry with the lowest costs and transfers as a percent of
revenue (public administration) is only 0.008 percentage points. Table
24 illustrates that the differences in costs relative to revenues will
be quite small across industry groupings.
Table 24--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............................. $396.3 $528.6 0.012 0.002 0.03
Agriculture, forestry, fishing, 1.5 1.4 0.038 0.007 0.16
& hunting......................
Mining.......................... 2.0 2.1 0.005 0.001 0.02
Construction.................... 20.1 37.4 0.017 0.003 0.10
Manufacturing................... 36.0 27.5 0.008 0.001 0.01
Wholesale & retail trade........ 64.5 97.2 0.017 0.001 0.04
Transportation & utilities...... 9.7 16.4 0.008 0.002 0.06
Information..................... 22.8 13.5 0.011 0.002 0.03
Financial activities............ 38.6 60.4 0.013 0.002 0.01
Professional & business services 73.5 90.9 0.010 0.005 0.06
Education & health services..... 57.3 81.4 0.012 0.005 0.09
Leisure & hospitality........... 47.6 49.7 0.029 0.008 0.16
Other services.................. 12.5 40.2 0.028 0.007 0.18
[[Page 51285]]
Public administration........... 10.2 10.6 0.002 0.001 (b)
----------------------------------------------------------------------------------------------------------------
Notes: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019. Payroll, revenue, costs, and transfers
all exclude the federal government.
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll and revenue
data from State and Local Government Finances Summary: FY2016 are used for the Public Administration industry.
Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns.
Inflated to 2018$ using GDP deflator.
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 will not unduly affect any of the regions or
industries. The proportion of total costs and transfers in each region
will 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 final rule are very small relative to current payroll or current
revenue--less than a tenth of a percent of payroll and less than one-
hundredth 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 its methods for updating the standard
salary level and the HCE compensation level (see Sec. VI.C). As seen
in Table 25, the Department has calculated the salary levels, the
number of affected workers, and the associated costs and transfers for
the alternative methods that the Department considered.
Table 25--Updated Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs, and
Transfers, Year 1
----------------------------------------------------------------------------------------------------------------
Year 1 effects (millions)
Affected EAP -------------------------------
Alternative Salary level workers Adj. &
a (1,000s) managerial Transfers
costs b
----------------------------------------------------------------------------------------------------------------
Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Alt. #1: No change.............................. $455 0 .............. ..............
Alt. #2: Maintain average minimum wage 502 218 27.1 29.6
protection since 2004 b........................
Alt. #3: 2004 Method, South (excluding 673 1,043 169.4 276.7
Washington D.C., MD & VA) or Retail c..........
Final rule: 2004 method c....................... 684 1,156 184.1 296.1
Alt. #4: Kantor long test d..................... 724 1,552 247.4 406.1
Alt. #5: 2016 method e.......................... 976 4,345 732.9 1,325.8
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change.......................... 100,000 0 .............. ..............
Final rule: 80th percentile of full-time 107,432 102 18.4 100.3
salaried workers...............................
HCE alt. #2: 90th percentile of full-time 145,964 246 53.3 301.7
salaried workers...............................
----------------------------------------------------------------------------------------------------------------
Note: Impacts estimated using pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\a\ Regulatory familiarization costs are excluded because they do not vary significantly based on the selected
values of the salary levels.
\b\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
threshold equated to minimum wage and overtime pay at time-and-one-half for hours over 40 for an employee
working no more than 72.2 hours. 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 59.5 hours, and a
threshold that would provide 59.5 hours of $7.25 minimum wage and overtime pay would be $502.
\c\ Full-time salaried workers with various industry/region exclusions (excludes workers not subject to the
FLSA, not subject to the salary level test, and in some workers in agriculture or transportation). Pooled CPS
data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\d \ 10th percentile of likely exempt workers. Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\e\ 40th percentile earnings of nonhourly full-time workers in the South Census region, provided by BLS. The
salary level reflects the first automatic update that would have taken place under the 2016 final rule.
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 2017.\223\ This is the
annual
[[Page 51286]]
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).\224\ 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.
---------------------------------------------------------------------------
\223\ 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 2016, 2017, and 2018
(converted to 2017 dollars) were used to calculate the 2017 median
wage.
\224\ 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 this final rule) 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.\225\ 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).
---------------------------------------------------------------------------
\225\ 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 final rule will affect 1.3
million EAP workers in Year 1 and 0.9 million workers in Year 10 (Table
26). 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 final 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 will 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 final rule is
essentially zero. Therefore, projected regulatory familiarization costs
for new entrants over the next nine years are zero.
Adjustment costs will occur in any year in which workers are newly
affected. After Year 1, these costs will be relatively small since the
majority of workers will be affected in Year 1. Management costs will
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 will be $134.4 million; by Year 10 these costs decline
to $94.5 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 will be $75.4 million in Year 1 and
will fall to $26.1 million in Year 10 as increased earnings over time
move workers' implicit rate of pay above the minimum wage.\226\
Transfers due to overtime pay also decrease because wage growth raises
workers' earnings above the earnings thresholds over time thus
decreasing the number of affected workers. Thus, transfers due to the
overtime pay provision are estimated to decrease from $321.0 million in
Year 1 to $221.3 million in Year 10. Projected costs and transfers were
deflated to 2019 dollars using the Congressional Budget Office's
projections for the CPI-U.\227\
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\226\ Increases in minimum wages were not projected. If state or
federal minimum wages increase during the projected timeframe then
projected minimum wage transfers may be underestimated.
\227\ Congressional Budget Office. 2018. The Budget and Economic
Outlook: 2018 To 2028. See https://www.cbo.gov/publication/53651.
Table 26--Projected Costs and Transfers, Standard and HCE Salary Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected EAP Costs Transfers
Year (year #) workers ---------------------------------------------------------------------------------------------
(millions) Reg. fam. Adjustment \a\ Managerial Total Due to MW Due to OT Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
(Millions 2019$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:
Year 1................................ 1.3 $340.4 $68.2 $134.4 $543.0 $75.4 $321.0 $396.4
Year 2................................ 1.2 0.0 2.0 132.3 134.3 42.8 264.9 307.7
Year 3................................ 1.1 0.0 1.9 126.7 128.5 37.4 266.5 303.9
Year 4................................ 1.1 0.0 2.7 121.4 124.1 33.2 248.7 281.9
Year 5................................ 1.1 0.0 3.1 116.8 119.9 31.2 269.0 300.1
Year 6................................ 1.0 0.0 2.9 110.7 113.6 29.5 257.3 286.8
Year 7................................ 1.0 0.0 3.2 103.9 107.1 29.5 236.9 266.5
Year 8................................ 0.9 0.0 3.8 99.8 103.6 28.0 241.8 269.7
Year 9................................ 0.9 0.0 4.1 95.3 99.4 26.4 235.0 261.4
Year 10............................... 0.9 0.0 4.6 94.5 99.1 26.1 221.3 247.4
Annualized value:
[[Page 51287]]
3% real discount rate................. .............. 38.7 10.5 114.8 164.0 36.9 258.1 295.0
7% real discount rate................. .............. 45.3 11.7 116.3 173.3 38.1 260.6 298.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers.
Table 26 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 $173.3 million per year over ten years when
using a 7 percent real discount rate. The annualized value of total
transfers was estimated to equal $298.8 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 final rule relative to the 2004 final rule,
which is the rule that the Department is currently enforcing. However,
OMB 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).\228\ Moreover, for purposes of determining whether
this 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 final
rule relative to the 2016 rule, and in addition to estimating
annualized cost savings for the final rule using a 10-year time
horizon, we also estimated annualized cost savings in perpetuity in
accordance with E.O. 13771 accounting standards. This perpetual time
horizon makes it especially important to avoid overemphasizing short-
run compensation stickiness in the estimation approach; as such, the
quantitative estimates will incorporate a relatively high compensation
adjustment, the 80 percent derived from Barkume (2010), which assumes
an initial overtime premium is paid, rather than the adjustment
reflected in the estimates that are elsewhere identified as
primary.\229\ 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.
---------------------------------------------------------------------------
\228\ 29 CFR part 541.
\229\ As noted previously, even Barkume's result was estimated
for a population that included hourly workers. The fixed-job model
is probably more likely to hold for salaried workers than for hourly
workers because salaried workers directly observe their weekly total
earnings, not their implicit equivalent hourly wage; therefore,
applying the partial adjustment to the fixed-job model as estimated
by these studies may overestimate the transfers between employers
and salaried workers and other associated impacts.
---------------------------------------------------------------------------
To ensure that the estimated costs of the 2016 final rule can be
directly and appropriately compared with the costs estimated for this
final rule, the Department started with the analytic model for this
final rule and replaced this final rule's salary and compensation
thresholds with the thresholds that would be required by the 2016 final
rule, including that rule's provision to automatically update the
salary level on a triennial basis. The Department assumed that initial
regulatory familiarization costs would be identical under adoption of
either this final rule or the 2016 final rule, because the same number
of employers would be potentially affected in Year 1. In addition,
implementation of the 2016 rule would have resulted in the first
automatic update occurring in 2020, and therefore the Department used
that value to represent Year 1 of the 2016 rule for 2020. Similarly,
automatic updates in Years 7 and 10 from the 2016 final rule become the
second and third automatic updates in the comparison. Finally, the
Department projected earnings levels for year 13 of the 2016 rule to
use as the final automatic update in the comparison. Therefore, the
only differences in estimated costs presented here between the 2016
final rule and this final rule are attributable to the difference in
earnings thresholds and the effects of the 2016 final rule's automatic
updating mechanism.
Table 27--Weekly Earnings Thresholds Used in Comparison of 2016 and 2019 Final Rules
----------------------------------------------------------------------------------------------------------------
2016 Final rule a 2019 Final rule
---------------------------------------------------------------
Year Standard HCE Standard HCE
salary compensation salary compensation
threshold threshold threshold threshold
----------------------------------------------------------------------------------------------------------------
2020 b.......................................... $984 $2,837 $684 $2,066
2023............................................ 1,049 3,080 684 2,066
2026............................................ 1,118 3,345 684 2,066
2029............................................ 1,192 3,632 684 2,066
----------------------------------------------------------------------------------------------------------------
\a\ Earnings levels in 2020, 2023, and 2026 are the projected salary levels as reported in the 2016 final rule.
The 2029 levels were calculated using the same growth rate as was used in the 2016 final rule to estimate the
projected levels in 2023 and 2026; the growth rate of the 40th percentile in the South from FY2005 to FY2015.
\b\ Standard salary threshold reflects the 2016 final rule projection for 2020. If the earnings levels were
recalculated using current data (2018Q3 through 2019Q2) they would be $976 and $2,888.
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 51288]]
published 2016 cost estimates and those presented here are primarily
due to: Earnings levels associated with 2020; 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 2016 (estimates for this final
rule are based on 2016 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); the use of the Barkume-derived 80
percent compensation adjustment estimate, rather than the estimate that
averages Barkume's findings with Trejo's; an increase in the wage rates
used to value staff time spent on regulatory familiarization,
adjustment, and monitoring; an increase in the managerial time estimate
from 5 to 10 minutes; incorporating a 17 percent overhead rate in those
wage rates; and minor improvements to the model.\230\
---------------------------------------------------------------------------
\230\ As previously discussed, one such improvement is the
Department's application of conditional probabilities to estimate
the number of HCE workers. See supra note 160.
---------------------------------------------------------------------------
The estimated total perpetual annualized costs of the 2016 rule are
$676.9 million using a 7 percent discount rate. For purposes of this
E.O. 13771 analysis, the estimated total perpetual annualized costs of
this final rule are $142.0 million using a 7 percent discount rate. The
Department then subtracted direct regulatory costs expected to have
been incurred under the 2016 final rule from the direct costs estimated
under this final rule. Direct employer costs of this final rule are
estimated to be, on average, $534.8 million lower per year in
perpetuity than the 2016 final rule (using a 7 percent discount rate).
The cost savings from this final 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.\231\ The Department includes these values here
for reference.
---------------------------------------------------------------------------
\231\ In this final rule, the Department has revised (from the
2016 rule) 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 final rule.
---------------------------------------------------------------------------
EPI compared the estimated number of affected workers under the
2016 final rule to the estimate in the proposed rule, and commented
that the Department's estimate ``that 2.8 million fewer workers will be
impacted under its proposal than under the 2016 rule . . . is a vast
underestimate.'' The alleged underestimate of affected workers resulted
in part from EPI comparing the estimated impacts of the 2016 final rule
in 2020 (i.e., Year 4 of the 2016 rule) with the 2020 impacts of this
rule (i.e., Year 1 of this final rule).\232\ Thus, EPI used the
earnings levels associated with the first automatic update (which it
calculated to be $51,053 for the standard salary level) for the 2016
rule. The Department has adjusted the calculation to use the 2016 final
rule's predicted salary levels for 2020 when calculating Year 1
impacts.\233\
---------------------------------------------------------------------------
\232\ See https://www.epi.org/files/pdf/165984.pdf, at 7.
\233\ The Department also notes there are a variety of reasons
for the discrepancy between the Department's and EPI's calculations,
including use of different data and methodological differences.
---------------------------------------------------------------------------
EPI also contended that the Department underestimated the
difference between the number of workers affected by the 2016 final
rule and the number affected by the NPRM because the Department's
analysis ``[left] out an entire group of workers who would be affected
by the rule--those who will no longer get strengthened protections.''
The majority of the difference between EPI's estimate of the number of
affected workers and the NPRM's estimate is due to EPI including
workers whose overtime protections were strengthened in the estimate of
affected workers. However, in both this rule and the 2016 final rule,
workers with strengthened overtime protections--those who fail the
standard duties test and earn at least $455 but below the new standard
salary level--are included in the description of affected workers but
not in the official calculation of affected workers. This is because
workers with strengthened protections are not directly impacted by
changes in the regulations; they only directly benefit from the
rulemaking if they are currently misclassified as exempt. Even so, the
Department notes that this final rule will strengthen overtime
protections for 4.1 million workers who currently fail the standard
duties test and now will also earn below the standard salary level.
VII. Final Regulatory Flexibility Analysis (FRFA)
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.\234\ The Chief Counsel for
Advocacy of the Small Business Administration submitted public comments
on the NPRM which are addressed below.
---------------------------------------------------------------------------
\234\ See 5 U.S.C. 604.
---------------------------------------------------------------------------
A. Objectives of, and Need for, the Final Rule
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 the persons employed by the employer and
of the wages, hours, and other conditions and practices of employment.
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. The
exemption applies to employees employed in a bona fide executive,
administrative, or professional capacity and for outside sales
employees, as those terms are ``defined and delimited'' by the
Department. 29 U.S.C. 213(a)(1). The Department's regulations
implementing these ``white collar'' exemptions are codified at 29 CFR
part 541.
For an employer to exclude an employee from minimum wage and
overtime protection pursuant to the EAP exemption, the employee
generally must
[[Page 51289]]
meet three criteria: (1) The employee must be paid a predetermined and
fixed salary that is not subject to reduction because of variations in
the quality or quantity of work performed (the ``salary basis test'');
(2) the amount of salary paid must meet a minimum specified amount (the
``salary level test''); and (3) the employee's job duties must
primarily involve executive, administrative, or professional duties as
defined by the regulations (the ``duties test''). The salary level
requirement was created to identify the dividing line distinguishing
workers who may be performing exempt duties from the nonexempt workers
whom Congress intended to be protected by the FLSA's minimum wage and
overtime provisions.
The Department has periodically updated the regulations governing
these tests since the FLSA's enactment in 1938. The Department is
currently enforcing the 2004 final rule, which, among other revisions,
created the standard duties test and paired it with a salary level test
of $455 per week. The 2004 final rule also created a new ``highly
compensated'' test for exemption. Under this test, 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.\235\
---------------------------------------------------------------------------
\235\ Sec. 541.601.
---------------------------------------------------------------------------
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 and 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 to help determine exempt status diminishes as
nonexempt employee wages increase over time.
Employees who meet the requirements of part 541 are excluded from
the Act's minimum wage and overtime pay protections. As a result,
employees may work any number of hours in the workweek and not be
subject to the FLSA's overtime pay requirements. Some state laws have
stricter exemption standards than those described above. The FLSA does
not preempt any such stricter state standards. If a state law
establishes a higher standard than the provisions of the FLSA, the
higher standard applies as a matter of state law in that specific
state.\236\
---------------------------------------------------------------------------
\236\ See 29 U.S.C. 218(a).
---------------------------------------------------------------------------
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 is increasing the minimum salary level
necessary for exemption from the FLSA's minimum wage and overtime
requirements as an EAP employee from $455 to $684 a week for the
standard salary test, and from $100,000 to $107,432 per year for the
HCE test.
B. The Agency's Response to Public Comments
Small business commenters expressed concerns with the Department's
estimates of the proposed rule's costs and other impacts. These
concerns are acknowledged and addressed in sections VI.d.iii and
VI.d.iv, which we incorporate herein.
C. Comment by the Chief Counsel for Advocacy of the Small Business
Administration
SBA's Office of Advocacy (SBA Advocacy) generally supported the
Department's proposal. SBA Advocacy's comment was based largely on
feedback received from small businesses, many of whom told SBA Advocacy
that the higher threshold in the 2016 final rule ($47,476) would have
been disruptive and costly to small businesses. In its roundtables on
the 2019 rulemaking, in contrast, SBA Advocacy heard that most small
businesses would only have a few affected employees, and could absorb
the costs from this rulemaking. SBA Advocacy listed a few
recommendations for the Department to consider. Several of these
recommendations (and related issues raised by other commenters) are
also addressed elsewhere in this final rule.
SBA Advocacy recommended an adjustment to the calculation of the
standard salary level. It indicated that some small businesses
recommended that the Department ``adopt a narrower Census definition
for areas with the lowest wages in the south when calculating and
adjusting the new minimum salary threshold.'' SBA Advocacy, along with
other commenters, specifically recommended that the Department ``focus
on [a] more narrow geographic area like the East-South Central Census
[Division] (which includes Alabama, Kentucky, Mississippi, and
Tennessee) when adjusting the national wages; or provide more
flexibility for these areas.'' The Department evaluated an alternative
that eliminates higher-wage areas (District of Columbia, Maryland, and
Virginia) from the data set used to determine the salary level (see
Sections VI.D.vii and IV.A.v.). As previously discussed, the Department
ultimately decided not to adopt this alternative, because it believes
that using the entire South Census Region and the retail industry
nationwide results in an appropriate nationwide salary level that is
based on a low-wage region but can still serve as a meaningful dividing
line in higher-wage regions. Using the entire South is also consistent
with the methodology used in the 2004 final rule.
SBA Advocacy and a few other commenters also asserted that the
Department underestimated small business compliance costs. SBA Advocacy
stated that small businesses disagreed with the Department's estimate
that, on average, establishments (including small businesses) will have
a one-hour burden for rule familiarization, a 1.25-hour burden per
affected worker in adjustment costs, and a 5-minute burden per worker
per week for scheduling and monitoring. SBA Advocacy stated that small
businesses have told them ``that it may take . . . many hours and
several weeks to understand and implement this rule,'' and that
``[m]any small businesses spend a disproportionately higher amount of
time and money on outside compliance staff.'' As discussed in more
detail above, however, the Department believes that its estimates of
time for rule familiarization and adjustment costs are appropriate,
particularly given that the final rule is limited in scope and that
most small businesses are already likely familiar with their
responsibilities under the part 541 regulations. Additionally, these
estimates represent an average of all establishments, some of which
will spend little time on these activities and some of whom will spend
more time than the average. However, the Department acknowledges that
the prior 5 minutes per newly nonexempt overtime worker may be low and
has doubled this estimate to 10 minutes.
Regarding the proposed transfer calculations, SBA Advocacy took
issue with the Department's estimates that affected small business
establishments would have, on average, $422 to $3,187
[[Page 51290]]
in additional payroll costs in the first year (based on the proposed
rule). Rather, SBA Advocacy stated that ``[s]mall businesses have told
Advocacy that their payroll costs will be in the thousands of
dollars.'' This comment, however, does not explain what methodological
approach the Department should use to estimate transfers, or how much,
if at all, the Department's approach underestimated such transfers.
Therefore, the Department concludes that this comment does not provide
a sufficient basis for changing its transfer calculation methodology.
D. Description of the Number of Small Entities to Which the Final 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.\237\
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.\238\
---------------------------------------------------------------------------
\237\ See https://www.sba.gov/sites/default/files/files/Size_Standards_Table_2017.pdf.
\238\ See http://www.sba.gov/advocacy/regulatory-flexibility-act
for details.
---------------------------------------------------------------------------
Parameters that are used in the small business cost analysis are
provided in Table 28.
Table 28--Overview of Parameters Used for Costs to Small Businesses
------------------------------------------------------------------------
Small business costs Cost
------------------------------------------------------------------------
Direct and Payroll Costs
------------------------------------------------------------------------
Average total cost per affected entity $3,656.
\a\.
Range of total costs per affected $1,678-$31,118.
entity \a\.
Average percent of revenue per affected 0.15%.
entity \a\.
Average percent of payroll per affected 0.81%.
entity \a\.
Average percent of small business 0.05%.
profit.
------------------------------------------------------------------------
Direct Costs
------------------------------------------------------------------------
Regulatory familiarization:
Time (first year).................. 1 hour per establishment.
Hourly wage........................ $43.38.
Adjustment:
Time (first year affected)......... 75 minutes per newly affected
worker.
Hourly wage........................ $43.38.
Managerial:
Time (weekly)...................... 10 minutes per affected worker.
Hourly wage........................ $50.92.
------------------------------------------------------------------------
Payroll Increases
------------------------------------------------------------------------
Average payroll increase per affected $2,393.
entity \a\.
Range of payroll increases per affected $0-$26,943.
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) was used
for most industries. Industries for which the Department used
alternative sources include credit unions,\239\ commercial banks and
savings institutions,\240\ agriculture,\241\ and public
administration.\242\ Unless otherwise noted, the Department used the
latest available data in each case, so data years differ between
sources.
---------------------------------------------------------------------------
\239\ National Credit Union Association. (2012). 2012 Year End
Statistics for Federally Insured Credit Unions. Available at:
https://www.cuna.org/uploadedFiles/Global/About_Credit_Unions/NationalProfile-M18-Bank.pdf.
\240\ 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 from 6/30/2017 for share of firms and establishments
that are ``small.''
\241\ United States Department of Agriculture. (2019). 2017
Census of Agriculture: United States Summary and State Data: Volume
1, Geographic Area Series, Part 51. Available at: https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
\242\ Census of Governments. 2017. Available at: https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
For each industry, the SUSB 2012 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-$499,999).\243\ 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
[[Page 51291]]
methodological approach was to classify all establishments or employees
in categories below the SBA cutoff as in ``small entity''
employment.\244\ 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. Similarly, the
estimated share of establishments that are small was applied to the
most recent SUSB data available (2016) to determine the number of small
entities.
---------------------------------------------------------------------------
\243\ The SUSB defines employment as of March 12th.
\244\ 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 estimated share of establishments that are small was
applied to the 2016 SUSB data available and the estimated share of
governments that are small was applied to the 2017 Census of
Governments.
iii. Number of Small Entities and Employees
Table 29 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 FRFA).\245\ Based on the methodology described
above, the Department found that of the 7.8 million establishments
relevant to this analysis, 81 percent (6.3 million) are small by SBA
standards. These small establishments employ about 53.1 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 ($2.9
trillion of $8.0 trillion).\246\
---------------------------------------------------------------------------
\245\ 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.
\246\ 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 29--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............................................... 7,847.9 6,345.4 143,184.6 53,058.6 $7,976.2 $2,868.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry b
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture............................................. 9.3 8.6 (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap................... 13.3 12.9 (\c\) (\c\) (\c\) (\c\)
Mining.................................................. 27.2 22.0 (\c\) (\c\) (\c\) (\c\)
Construction............................................ 696.7 676.9 8,525.6 5,482.7 478.8 309.5
Nonmetallic mineral prod. manuf......................... 15.0 11.5 (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod........................ 59.4 55.8 1,652.6 1,004.7 91.6 54.7
Machinery manufacturing................................. 23.5 21.5 1,240.7 673.2 79.9 44.0
Computer and elect. prod. manuf......................... 12.4 11.0 1,173.5 552.2 109.9 53.5
Electrical equip., appliance manuf...................... 5.7 4.9 (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf............................. 11.7 10.1 2,616.6 728.6 183.3 47.0
Wood products........................................... 14.3 13.1 (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf............................ 15.0 14.6 (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf............................... 26.0 25.1 1,512.1 888.6 92.9 53.8
Food manufacturing...................................... 27.1 23.9 1,809.0 829.3 81.2 35.9
Beverage and tobacco products........................... 8.5 7.6 (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf........................ 15.6 15.2 575.8 390.3 26.0 17.5
Paper and printing...................................... 29.6 27.6 871.7 464.6 49.5 25.3
Petroleum and coal prod. manuf.......................... 2.2 1.2 (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.................................. 13.5 10.7 1,423.2 553.8 121.0 45.4
Plastics and rubber products............................ 12.1 10.1 (\c\) (\c\) (\c\) (\c\)
Wholesale trade......................................... 412.5 328.3 3,440.5 1,583.3 216.4 98.3
Retail trade............................................ 1,069.1 688.8 15,694.5 5,398.1 617.8 234.8
Transport. and warehousing.............................. 231.0 183.8 6,355.2 1,740.6 329.9 84.4
Utilities............................................... 18.2 7.8 1,391.6 264.2 110.6 20.3
Publishing ind. (ex. internet).......................... 27.5 21.2 (\c\) (\c\) (\c\) (\c\)
Motion picture and sound recording...................... 25.5 22.3 (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).......................... 8.3 4.6 554.0 129.4 39.2 8.6
Internet publishing and broadcasting.................... 8.1 6.8 (\c\) (\c\) (\c\) (\c\)
Telecommunications...................................... 59.2 13.3 (\c\) (\c\) (\c\) (\c\)
[[Page 51292]]
Internet serv. providers and data....................... 13.6 9.0 (\c\) (\c\) (\c\) (\c\)
Other information services.............................. 4.2 3.6 (\c\) (\c\) (\c\) (\c\)
Finance................................................. 295.5 129.8 4,506.3 847.0 374.8 70.7
Insurance............................................... 181.5 141.7 2,746.7 722.0 197.0 51.8
Real estate............................................. 336.8 286.4 2,091.1 1,274.7 126.5 77.5
Rental and leasing services............................. 53.7 26.7 (\c\) (\c\) (\c\) (\c\)
Professional and technical services..................... 903.5 819.1 10,196.2 4,770.7 897.3 414.2
Management of companies and enterprises................. 55.4 34.1 (\c\) (\c\) (\c\) (\c\)
Admin. and support services............................. 384.9 328.8 5,080.7 2,309.8 210.7 87.7
Waste manag. and remed. Services........................ 24.6 18.4 (\c\) (\c\) (\c\) (\c\)
Educational services.................................... 103.4 90.6 14,196.6 3,089.0 793.8 162.1
Hospitals............................................... 7.1 1.7 (\c\) (\c\) (\c\) (\c\)
Health care services, except hospitals.................. 700.5 575.8 10,074.6 4,787.1 496.9 236.3
Social assistance....................................... 182.9 149.0 3,040.0 1,703.7 113.2 60.5
Arts, entertainment, and recreation..................... 137.2 126.3 2,760.6 1,394.5 108.9 54.4
Accommodation........................................... 66.8 55.8 1,475.8 566.4 55.6 21.1
Food services and drinking places....................... 636.7 500.7 8,946.1 2,422.7 240.4 65.4
Repair and maintenance.................................. 214.8 199.8 1,614.1 1,214.7 72.9 53.9
Personal and laundry services........................... 230.3 201.6 1,763.1 1,300.1 57.1 41.6
Membership associations & organizations................. 309.2 298.3 2,104.1 1,545.8 112.2 80.9
Private households...................................... (\d\) (\d\) (\c\) (\c\) (\c\) (\c\)
Public administration \e\............................... 90.1 72.8 7,527.9 685.8 499.4 40.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private...................................... 584.0 504.6 10,190.1 4,170.3 586.5 216.4
For profit, private..................................... 7,173.8 5,753.9 111,050.8 46,579.0 6,080.5 2,525.3
Government (state and local)............................ 90.1 72.9 18,078.8 2,309.4 1,020.2 126.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Establishment data are from the Survey of U.S. Businesses 2016; worker and payroll data from pooled CPS data for 7/2016-6/2019 adjusted to reflect
2018/2019.
\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 Census of Governments, 2017.
As discussed in section VI.B.iii, estimates of workers subject to
the FLSA do not exclude workers employed by enterprises that do not
meet the enterprise coverage requirements because there is no data set
that would adequately inform an estimate of the size of this worker
population. Although not excluding such workers only affects 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
---------------------------------------------------------------------------
\247\ 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.
\248\ 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.
\249\ 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.
---------------------------------------------------------------------------
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.\247\ 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
workers or affected EAP workers. Therefore, the best assumption
available is to assign the same rates to all small and non-small
businesses.248 249
[[Page 51293]]
The Department estimated that small entities employ 480,900 of the
1.3 million affected workers (38.2 percent) (Table 30). This composes
0.9 percent of the 53.1 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 (79,700);
retail trade (47,500); and health care services, except hospitals
(43,500). The sectors with the largest percent of small business
workers who are affected include: broadcasting (except internet) (2.0
percent); arts, entertainment, and recreation (1.9 percent); and
insurance (1.9 percent).
Table 30--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........................................... 143,184.6 53,058.6 1,257.3 480.9
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................................... (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap........... (\c\) (\c\) (\c\) (\c\)
Mining.......................................... (\c\) (\c\) (\c\) (\c\)
Construction.................................... 8,525.6 5,482.7 51.6 34.7
Nonmetallic mineral prod. manuf................. (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod................ 1,652.6 1,004.7 7.8 3.9
Machinery manufacturing......................... 1,240.7 673.2 7.1 4.1
Computer and elect. prod. manuf................. 1,173.5 552.2 8.4 3.9
Electrical equip., appliance manuf.............. (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf..................... 2,616.6 728.6 15.0 4.1
Wood products................................... (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf.................... (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf....................... 1,512.1 888.6 7.9 4.4
Food manufacturing.............................. 1,809.0 829.3 5.5 3.1
Beverage and tobacco products................... (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf................ 575.8 390.3 4.6 2.6
Paper and printing.............................. 871.7 464.6 7.2 4.5
Petroleum and coal prod. manuf.................. (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.......................... 1,423.2 553.8 10.6 3.7
Plastics and rubber products.................... (\c\) (\c\) (\c\) (\c\)
Wholesale trade................................. 3,440.5 1,583.3 35.8 17.7
Retail trade.................................... 15,694.5 5,398.1 129.9 47.5
Transport. and warehousing...................... 6,355.2 1,740.6 25.7 5.5
Utilities....................................... 1,391.6 264.2 12.4 3.8
Publishing ind. (ex. internet).................. (\c\) (\c\) (\c\) (\c\)
Motion picture and sound recording.............. (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).................. 554.0 129.4 8.2 2.5
Internet publishing and broadcasting............ (\c\) (\c\) (\c\) (\c\)
Telecommunications.............................. (\c\) (\c\) (\c\) (\c\)
Internet serv. providers and data............... (\c\) (\c\) (\c\) (\c\)
Other information services...................... (\c\) (\c\) (\c\) (\c\)
Finance......................................... 4,506.3 847.0 76.8 15.2
Insurance....................................... 2,746.7 722.0 60.2 13.7
Real estate..................................... 2,091.1 1,274.7 25.4 17.3
Rental and leasing services..................... (\c\) (\c\) (\c\) (\c\)
Professional and technical services............. 10,196.2 4,770.7 173.1 79.7
Management of companies & enterprises........... (\c\) (\c\) (\c\) (\c\)
Admin. and support services..................... 5,080.7 2,309.8 33.5 13.5
Waste manag. and remed. services................ (\c\) (\c\) (\c\) (\c\)
Educational services............................ 14,196.6 3,089.0 74.5 12.3
Hospitals....................................... (\c\) (\c\) (\c\) (\c\)
Health care services, except hospitals.......... 10,074.6 4,787.1 91.0 43.5
Social assistance............................... 3,040.0 1,703.7 52.8 28.3
Arts, entertainment, and recreation............. 2,760.6 1,394.5 53.0 26.7
Accommodation................................... 1,475.8 566.4 9.8 4.0
Food services and drinking places............... 8,946.1 2,422.7 27.1 8.1
Repair and maintenance.......................... 1,614.1 1,214.7 11.4 8.2
Personal and laundry services................... 1,763.1 1,300.1 6.8 5.8
Membership associations & organizations......... 2,104.1 1,545.8 35.3 25.3
Private households.............................. (\c\) (\c\) (\c\) (\c\)
Public administration \b\....................... 7,527.9 685.8 50.9 5.2
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............................. 10,190.1 4,170.3 125.0 58.4
[[Page 51294]]
For profit, private............................. 111,050.8 46,579.0 1,000.5 410.5
Government (state and local).................... 18,078.8 2,309.4 131.9 11.9
----------------------------------------------------------------------------------------------------------------
Note: Worker data are from pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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 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 Census of
Governments, 2017.
\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 480,900 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.\250\ 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.
---------------------------------------------------------------------------
\250\ 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 31 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 480,900 workers who are employed by somewhere
between 63,400 and 480,900 small establishments; this composes from 1.0
percent to 7.6 percent of all small establishments. It also means that
from 5.9 million to 6.3 million small establishments incur no more than
minimal regulatory familiarization costs (i.e., 6.3 million minus
480,900 equals 5.9 million; 6.3 million minus 63,400 equals 6.3
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 29) (applicable to
both methods).
Table 31--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........................... 480.9 480.9 63.4 7.6 $452.0
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................... (\d\) (\d\) (\d\) (\d\) (\d\)
[[Page 51295]]
Forest., log., fish., hunt., and (\d\) (\d\) (\d\) (\d\) (\d\)
trap...........................
Mining.......................... (\d\) (\d\) (\d\) (\d\) (\d\)
Construction.................... 34.7 34.7 4.3 8.1 457.2
Nonmetallic mineral prod. manuf. (\d\) (\d\) (\d\) (\d\) (\d\)
Prim. metals and fab. metal prod 3.9 3.9 0.2 18.0 980.4
Machinery manufacturing......... 4.1 4.1 0.1 31.4 2,048.1
Computer and elect. prod. manuf. 3.9 3.9 0.1 50.1 4,856.7
Electrical equip., appliance (\d\) (\d\) (\d\) (\d\) (\d\)
manuf..........................
Transportation equip. manuf..... 4.1 4.1 0.1 72.5 4,677.3
Wood products................... (\d\) (\d\) (\d\) (\d\) (\d\)
Furniture and fixtures manuf.... (\d\) (\d\) (\d\) (\d\) (\d\)
Misc. and not spec. manuf....... 4.4 4.4 0.1 35.5 2,146.1
Food manufacturing.............. 3.1 3.1 0.1 34.7 1,504.7
Beverage and tobacco products... (\d\) (\d\) (\d\) (\d\) (\d\)
Textile, app., and leather 2.6 2.6 0.1 25.6 1,151.1
manuf..........................
Paper and printing.............. 4.5 4.5 0.3 16.9 918.3
Petroleum and coal prod. manuf.. (\d\) (\d\) (\d\) (\d\) (\d\)
Chemical manufacturing.......... 3.7 3.7 0.1 51.8 4,246.9
Plastics and rubber products.... (\d\) (\d\) (\d\) (\d\) (\d\)
Wholesale trade................. 17.7 17.7 3.7 4.8 299.5
Retail trade.................... 47.5 47.5 6.1 7.8 340.9
Transport. and warehousing...... 5.5 5.5 0.6 9.5 459.4
Utilities....................... 3.8 3.8 0.1 34.0 2,612.6
Publishing ind. (ex. internet).. (\d\) (\d\) (\d\) (\d\) (\d\)
Motion picture and sound (\d\) (\d\) (\d\) (\d\) (\d\)
recording......................
Broadcasting (except internet).. 2.5 2.5 0.1 28.0 1,851.5
Internet publishing and (\d\) (\d\) (\d\) (\d\) (\d\)
broadcasting...................
Telecommunications.............. (\d\) (\d\) (\d\) (\d\) (\d\)
Internet serv. providers and (\d\) (\d\) (\d\) (\d\) (\d\)
data...........................
Other information services...... (\d\) (\d\) (\d\) (\d\) (\d\)
Finance......................... 15.2 15.2 2.3 6.5 545.0
Insurance....................... 13.7 13.7 2.7 5.1 365.7
Real estate..................... 17.3 17.3 3.9 4.5 270.4
Rental and leasing services..... (\d\) (\d\) (\d\) (\d\) (\d\)
Professional and technical 79.7 79.7 13.7 5.8 505.6
services.......................
Management of companies and (\d\) (\d\) (\d\) (\d\) (\d\)
enterprises....................
Admin. and support services..... 13.5 13.5 1.9 7.0 266.8
Waste manag. and remed. services (\d\) (\d\) (\d\) (\d\) (\d\)
Educational services............ 12.3 12.3 0.4 34.1 1,790.4
Hospitals....................... (\d\) (\d\) (\d\) (\d\) (\d\)
Health care services, except 43.5 43.5 5.2 8.3 410.4
hospitals......................
Social assistance............... 28.3 28.3 2.5 11.4 405.9
Arts, entertainment, and 26.7 26.7 2.4 11.0 430.7
recreation.....................
Accommodation................... 4.0 4.0 0.4 10.1 378.3
Food services and drinking 8.1 8.1 1.7 4.8 130.7
places.........................
Repair and maintenance.......... 8.2 8.2 1.4 6.1 269.9
Personal and laundry services... 5.8 5.8 0.9 6.4 206.4
Membership associations & 25.3 25.3 4.9 5.2 271.4
organizations..................
Private households.............. (\d\) (\d\) (\d\) (\d\) (\d\)
Public administration \f\....... 5.2 5.2 0.6 9.4 550.3
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 58.4 58.4 7.1 8.3 428.8
For profit, private............. 410.5 410.5 50.7 8.1 438.9
Government (state and local).... 11.9 11.9 0.4 31.7 1,734.0
----------------------------------------------------------------------------------------------------------------
Note: Establishment data are from the Survey of U.S. Businesses 2016; worker and payroll data from pooled CPS
data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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 the 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.
\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.
[[Page 51296]]
\c\ For example, on average, a small establishment in the construction industry employs 8.1 workers (5.5 million
employees divided by 676,900 small establishments). This method assumes if an establishment is affected then
all 8.1 workers are affected. Therefore, in the construction industry this method estimates there are 4,300
small affected establishments (34,700 affected small workers divided by 8.1).
\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.
v. Projected Impacts to Affected 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 final 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.\251\ 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.
---------------------------------------------------------------------------
\251\ 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
$80.1 million to $97.1 million for affected small establishments (Table
32) in the first year. Small establishments that do not employ affected
workers will incur an additional $254.4 million to $272.5 million in
regulatory familiarization costs. The three industries with the highest
costs (professional and technical services; retail trade; and health
care services, except hospitals) account for about 36 percent of the
costs. The transportation equipment manufacturing industry is expected
to incur the largest cost per establishment ($11,700 using the method
where all employees are affected), although the costs are not expected
to exceed 0.25 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 0.63 percent of average
entity payroll).
Table 32--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 Cost per
Total affected Percent of Total affected Percent of
(millions) \b\ entity annual payroll (millions) \b\ entity annual payroll
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... $97.1 $202 0.04% $80.1 $1,263 0.28
--------------------------------------------------------------------------------------------------------------------------------------------------------
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............................................ 7.1 204 0.04 5.8 1,348 0.29
Nonmetallic mineral prod. manuf......................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod........................ 0.8 204 0.02 0.6 2,943 0.30
Machinery manufacturing................................. 0.8 204 0.01 0.7 5,094 0.249
Computer and elect. prod. manuf......................... 0.8 204 0.00 0.6 8,116 0.17
Electrical equip., appliance manuf...................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf............................. 0.8 204 0.00 0.7 11,720 0.25
Wood products........................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf............................ (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf............................... 0.9 204 0.01 0.7 5,758 0.27
Food manufacturing...................................... 0.6 204 0.01 0.5 5,639 0.37
Beverage and tobacco products........................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf........................ 0.5 204 0.02 0.4 4,175 0.36
Paper and printing...................................... 0.9 204 0.02 0.7 2,759 0.30
Petroleum and coal prod. manuf.......................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.................................. 0.8 204 0.00 0.6 8,382 0.20
Plastics and rubber products............................ (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Wholesale trade......................................... 3.6 204 0.07 3.0 820 0.27
Retail trade............................................ 9.7 204 0.06 7.9 1,306 0.38
Transport. and warehousing.............................. 1.1 204 0.04 0.9 1,569 0.34
Utilities............................................... 0.8 204 0.01 0.6 5,527 0.21
Publishing ind. (ex. internet).......................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Motion picture and sound recording...................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).......................... 0.5 204 0.01 0.4 4,556 0.25
Internet publishing and broadcasting.................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Telecommunications...................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Internet serv. providers and data....................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Other information services.............................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Finance................................................. 3.1 204 0.04 2.5 1,095 0.20
Insurance............................................... 2.8 204 0.06 2.3 864 0.24
Real estate............................................. 3.5 204 0.08 3.0 760 0.28
[[Page 51297]]
Rental and leasing services............................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Professional and technical services..................... 16.3 204 0.04 13.4 982 0.19
Management of companies and enterprises................. (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Admin. and support services............................. 2.8 204 0.08 2.3 1,175 0.44
Waste manag. and remed. services........................ (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Educational services.................................... 2.5 204 0.01 2.0 5,539 0.31
Hospitals............................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Health care services, except hospitals.................. 8.9 204 0.05 7.2 1,383 0.34
Social assistance....................................... 5.8 204 0.05 4.7 1,885 0.46
Arts, entertainment, and recreation..................... 5.4 204 0.05 4.4 1,822 0.42
Accommodation........................................... 0.8 204 0.05 0.7 1,678 0.44
Food services and drinking places....................... 1.7 204 0.16 1.4 823 0.63
Repair and maintenance.................................. 1.7 204 0.08 1.4 1,023 0.38
Personal and laundry services........................... 1.2 204 0.10 1.0 1,082 0.52
Membership associations & organizations................. 5.2 204 0.08 4.3 878 0.32
Private households...................................... (\c\) (\c\) (\c\) (\c\) (\c\) (\c\)
Public administration................................... 1.1 204 0.04 0.9 1,561 0.28
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private...................................... 11.6 199 0.05 9.4 1,330 0.31
For profit, private..................................... 86.6 211 0.05 71.0 1,400 0.32
Government (state and local)............................ 2.4 201 0.01 1.9 5,055 0.29
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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 final 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 final rule. Additionally, the
Department notes that the final rule is quite limited in scope as it
primarily makes changes to the salary component of the part 541
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 $6.07
per week per affected worker, using the incomplete fixed-job model
\252\ described in section VI.D.iv.3.\253\ This will lead to $151.8
million in additional annual wage payments to employees in small
entities (less than 0.6 percent of aggregate affected establishment
payroll; Table 33). The largest payroll increases per establishment are
expected in the sectors of textile, apparel, and leather manufacturing
(up to $27,000 per entity); transportation equipment manufacturing (up
to $14,600 per entity); and food manufacturing (up to $14,500 per
entity). However, average payroll increases per establishment exceed 2
percent of average annual payroll in only two sectors: Food services
and drinking places (3.0 percent) and textile, apparel, and leather
manufacturing (2.3 percent).
---------------------------------------------------------------------------
\252\ As explained in section VI.D.iv.3, 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 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.
\253\ 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.
[[Page 51298]]
Table 33--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 ---------------------------------------------------------------
(millions) Percent of Percent of
Per estab. annual payroll Per estab. annual payroll
----------------------------------------------------------------------------------------------------------------
Total........................... $151.8 $316 0.07 $2,393 0.53
----------------------------------------------------------------------------------------------------------------
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.................... 9.2 265 0.06 2,147 0.47
Nonmetallic mineral prod. manuf. (\b\) (\b\) (\b\) (\b\) (\b\)
Prim. metals and fab. metal 1.0 257 0.03 4,622 0.47
prod...........................
Machinery manufacturing......... 1.7 405 0.02 12,710 0.62
Computer and elect. prod. manuf. 0.3 80 0.00 4,004 0.08
Electrical equip., appliance (\b\) (\b\) (\b\) (\b\) (\b\)
manuf..........................
Transportation equip. manuf..... 0.8 200 0.00 14,528 0.31
Wood products................... (\b\) (\b\) (\b\) (\b\) (\b\)
Furniture and fixtures manuf.... (\b\) (\b\) (\b\) (\b\) (\b\)
Misc. and not spec. manuf....... 1.7 389 0.02 13,794 0.64
Food manufacturing.............. 1.3 417 0.03 14,476 0.96
Beverage and tobacco products... (\b\) (\b\) (\b\) (\b\) (\b\)
Textile, app., and leather 2.7 1,051 0.09 26,943 2.34
manuf..........................
Paper and printing.............. 1.1 233 0.03 3,931 0.43
Petroleum and coal prod. manuf.. (\b\) (\b\) (\b\) (\b\) (\b\)
Chemical manufacturing.......... 0.9 236 0.01 12,236 0.29
Plastics and rubber products.... (\b\) (\b\) (\b\) (\b\) (\b\)
Wholesale trade................. 4.7 263 0.09 1,270 0.42
Retail trade.................... 17.1 360 0.11 2,818 0.83
Transport. and warehousing...... 1.8 321 0.07 3,039 0.66
Utilities....................... .............. 0 .............. 0 ..............
Publishing ind. (ex. internet).. (\b\) (\b\) (\b\) (\b\) (\b\)
Motion picture and sound (\b\) (\b\) (\b\) (\b\) (\b\)
recording......................
Broadcasting (except internet).. 1.1 451 0.02 12,620 0.68
Internet publishing and (\b\) (\b\) (\b\) (\b\) (\b\)
broadcasting...................
Telecommunications.............. (\b\) (\b\) (\b\) (\b\) (\b\)
Internet serv. providers and (\b\) (\b\) (\b\) (\b\) (\b\)
data...........................
Other information services...... (\b\) (\b\) (\b\) (\b\) (\b\)
Finance......................... 3.6 239 0.04 1,557 0.29
Insurance....................... 2.3 169 0.05 862 0.24
Real estate..................... 8.5 489 0.18 2,175 0.80
Rental and leasing services..... (\b\) (\b\) (\b\) (\b\) (\b\)
Professional and technical 32.2 404 0.08 2,351 0.47
services.......................
Management of companies and (\b\) (\b\) (\b\) (\b\) (\b\)
enterprises....................
Admin. and support services..... 3.6 265 0.10 1,859 0.70
Waste manag. and remed. services (\b\) (\b\) (\b\) (\b\) (\b\)
Educational services............ 4.6 373 0.02 12,716 0.71
Hospitals....................... (\b\) (\b\) (\b\) (\b\) (\b\)
Health care services, except 5.8 134 0.03 1,114 0.27
hospitals......................
Social assistance............... 4.2 148 0.04 1,690 0.42
Arts, entertainment, and 15.1 567 0.13 6,260 1.45
recreation.....................
Accommodation................... .............. 0 .............. 0 ..............
Food services and drinking 6.6 818 0.63 3,960 3.03
places.........................
Repair and maintenance.......... 3.8 466 0.17 2,832 1.05
Personal and laundry services... 0.6 110 0.05 709 0.34
Membership associations & 4.1 160 0.06 831 0.31
organizations..................
Private households.............. (\b\) (\b\) (\b\) (\b\) (\b\)
Public administration........... 0.9 165 0.03 1,553 0.28
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 26.2 448 0.10 3,702 0.86
For profit, private............. 124.4 303 0.07 2,452 0.56
Government (state and local).... 1.3 108 0.01 3,422 0.20
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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.
[[Page 51299]]
Table 34 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 $1,700 in the
accommodations industry to $31,100 in textile, apparel, and leather
manufacturing. Combined costs and payroll increases compose more than 2
percent of average annual establishment payroll in two sectors: Food
services and drinking places (3.7 percent) and textile, apparel, and
leather manufacturing (2.7 percent). In all other sectors, they range
from 0.2 percent to 1.9 percent of payroll.
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.\254\ 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 (1.1 percent).
---------------------------------------------------------------------------
\254\ 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 2018.
Table 34--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 Per estab. \a\ Percent of estimated
(millions) annual payroll revenues \b\
----------------------------------------------------------------------------------------------------------------
Total........................................... $231.9 $3,656 0.81 0.15
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture..................................... (\c\) (\c\) (\c\) (\c\)
Forest., log., fish., hunt., and trap........... (\c\) (\c\) (\c\) (\c\)
Mining.......................................... (\c\) (\c\) (\c\) (\c\)
Construction.................................... 15.0 3,495 0.76 0.17
Nonmetallic mineral prod. manuf................. (\c\) (\c\) (\c\) (\c\)
Prim. metals and fab. metal prod................ 1.6 7,565 0.77 0.15
Machinery manufacturing......................... 2.3 17,804 0.87 0.18
Computer and elect. prod. manuf................. 0.9 12,119 0.25 0.05
Electrical equip., appliance manuf.............. (\c\) (\c\) (\c\) (\c\)
Transportation equip. manuf..................... 1.5 26,248 0.56 0.08
Wood products................................... (\c\) (\c\) (\c\) (\c\)
Furniture and fixtures manuf.................... (\c\) (\c\) (\c\) (\c\)
Misc. and not spec. manuf....................... 2.4 19,552 0.91 0.21
Food manufacturing.............................. 1.8 20,115 1.34 0.12
Beverage and tobacco products................... (\c\) (\c\) (\c\) (\c\)
Textile, app., and leather manuf................ 3.2 31,118 2.70 0.50
Paper and printing.............................. 1.8 6,690 0.73 0.15
Petroleum and coal prod. manuf.................. (\c\) (\c\) (\c\) (\c\)
Chemical manufacturing.......................... 1.5 20,618 0.49 0.04
Plastics and rubber products.................... (\c\) (\c\) (\c\) (\c\)
Wholesale trade................................. 7.7 2,090 0.70 0.04
Retail trade.................................... 25.0 4,123 1.21 0.12
Transport. and warehousing...................... 2.7 4,608 1.00 0.23
Utilities....................................... 0.6 5,527 0.21 0.02
Publishing ind. (ex. internet).................. (\c\) (\c\) (\c\) (\c\)
Motion picture and sound recording.............. (\c\) (\c\) (\c\) (\c\)
Broadcasting (except internet).................. 1.6 17,176 0.93 0.33
Internet publishing and broadcasting............ (\c\) (\c\) (\c\) (\c\)
Telecommunications.............................. (\c\) (\c\) (\c\) (\c\)
Internet serv. providers and data............... (\c\) (\c\) (\c\) (\c\)
Other information services...................... (\c\) (\c\) (\c\) (\c\)
Finance......................................... 6.2 2,652 0.49 0.17
Insurance....................................... 4.6 1,727 0.47 0.11
Real estate..................................... 11.4 2,936 1.09 0.24
Rental and leasing services..................... (\c\) (\c\) (\c\) (\c\)
Professional and technical services............. 45.6 3,333 0.66 0.26
Management of companies and enterprises......... (\c\) (\c\) (\c\) (\c\)
Admin. and support services..................... 5.8 3,034 1.14 0.51
Waste manag. and remed. services................ (\c\) (\c\) (\c\) (\c\)
Educational services............................ 6.6 18,255 1.02 0.39
Hospitals....................................... (\c\) (\c\) (\c\) (\c\)
Health care services, except hospitals.......... 13.1 2,497 0.61 0.26
Social assistance............................... 8.8 3,575 0.88 0.41
[[Page 51300]]
Arts, entertainment, and recreation............. 19.5 8,082 1.88 0.62
Accommodation................................... 0.7 1,678 0.44 0.11
Food services and drinking places............... 8.0 4,783 3.66 1.09
Repair and maintenance.......................... 5.2 3,855 1.43 0.40
Personal and laundry services................... 1.6 1,791 0.87 0.30
Membership associations & organizations......... 8.4 1,710 0.63 0.16
Private households.............................. (\c\) (\c\) (\c\) (\c\)
Public administration........................... 1.7 3,114 0.57 0.15
----------------------------------------------------------------------------------------------------------------
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 CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\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 2017 Census of Governments.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
less than 10.
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 businesses for nine years after
Year 1 of the rule. Projected employment and earnings were calculated
using the same methodology described in section VI.B.iii. Affected
employees in small firms follow a similar pattern to affected workers
in all establishments: the number decreases gradually in projected
years. There are 480,900 affected workers in small establishments in
Year 1 and 337,700 in Year 10. Table 35 reports affected workers in
selected years only.
Table 35--Projected Number of Affected Workers in Small Establishments,
by Industry
------------------------------------------------------------------------
Affected workers in small
establishments (1,000s)
Industry -------------------------------
Year 1 Year 10
------------------------------------------------------------------------
Total............................... 480.9 337.7
-------------------------------
Agriculture............................. (\a\) (\a\)
Forest., log., fish., hunt., and trap... (\a\) (\a\)
Mining.................................. (\a\) (\a\)
Construction............................ 34.7 20.7
Nonmetallic mineral prod. manuf......... (\a\) (\a\)
Prim. metals and fab. metal prod........ 3.9 (\a\)
Machinery manufacturing................. 4.1 4.4
Computer and elect. prod. manuf......... 3.9 (\a\)
Electrical equip., appliance manuf...... (\a\) (\a\)
Transportation equip. manuf............. 4.1 (\a\)
Wood products........................... (\a\) (\a\)
Furniture and fixtures manuf............ (\a\) (\a\)
Misc. and not spec. manuf............... 4.4 3.8
Food manufacturing...................... 3.1 (\a\)
Beverage and tobacco products........... (\a\) (\a\)
Textile, app., and leather manuf........ 2.6 (\a\)
Paper and printing...................... 4.5 (\a\)
Petroleum and coal prod. manuf.......... (\a\) (\a\)
Chemical manufacturing.................. 3.7 (\a\)
Plastics and rubber products............ (\a\) (\a\)
Wholesale trade......................... 17.7 12.7
Retail trade............................ 47.5 26.9
Transport. and warehousing.............. 5.5 3.8
Utilities............................... 3.8 (\a\)
Publishing ind. (ex. internet).......... (\a\) (\a\)
Motion picture and sound recording...... (\a\) (\a\)
Broadcasting (except internet).......... 2.5 (\a\)
[[Page 51301]]
Internet publishing and broadcasting.... (\a\) (\a\)
Telecommunications...................... (\a\) (\a\)
Internet serv. providers and data....... (\a\) (\a\)
Other information services.............. (\a\) (\a\)
Finance................................. 15.2 12.1
Insurance............................... 13.7 13.0
Real estate............................. 17.3 12.1
Rental and leasing services............. (\a\) (\a\)
Professional and technical services..... 79.7 55.7
Management of companies and enterprises. (\a\) (\a\)
Admin. and support services............. 13.5 9.3
Waste manag. and remed. services........ (\a\) (\a\)
Educational services.................... 12.3 11.1
Hospitals............................... (\a\) (\a\)
Health care services, except hospitals.. 43.5 35.3
Social assistance....................... 28.3 25.7
Arts, entertainment, and recreation..... 26.7 17.6
Accommodation........................... 4.0 (\a\)
Food services and drinking places....... 8.1 6.2
Repair and maintenance.................. 8.2 7.6
Personal and laundry services........... 5.8 3.9
Membership associations & organizations. 25.3 18.2
Private households...................... (\a\) (\a\)
Public administration................... 5.2 2.7
------------------------------------------------------------------------
Note: Worker data are from pooled CPS data for 7/2016-6/2019 adjusted to
reflect 2018/2019.
\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 for small businesses have decreased
from $231.9 million in Year 1 to $118.5 million (Table 36). The
Department notes that, due to relatively small sample sizes, the
estimates by detailed industry are not precise. This can cause some
numbers in the data to vary across years by a greater amount than they
will in the future.
Table 36--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 2019)
-------------------------------
Year 1 Year 10
------------------------------------------------------------------------
Total............................... $231.9 $118.5
-------------------------------
Agriculture............................. (\a\) (\a\)
Forest., log., fish., hunt., and trap... (\a\) (\a\)
Mining.................................. (\a\) (\a\)
Construction............................ 15.0 6.1
Nonmetallic mineral prod. manuf......... (\a\) (\a\)
Prim. metals and fab. metal prod........ 1.6 (\a\)
Machinery manufacturing................. 2.3 2.6
Computer and elect. prod. manuf......... 0.9 (\a\)
Electrical equip., appliance manuf...... (\a\) (\a\)
Transportation equip. manuf............. 1.5 (\a\)
Wood products........................... (\a\) (\a\)
Furniture and fixtures manuf............ (\a\) (\a\)
Misc. and not spec. manuf............... 2.4 1.1
Food manufacturing...................... 1.8 (\a\)
Beverage and tobacco products........... (\a\) (\a\)
Textile, app., and leather manuf........ 3.2 (\a\)
Paper and printing...................... 1.8 (\a\)
Petroleum and coal prod. manuf.......... (\a\) (\a\)
Chemical manufacturing.................. 1.5 (\a\)
Plastics and rubber products............ (\a\) (\a\)
Wholesale trade......................... 7.7 7.0
[[Page 51302]]
Retail trade............................ 25.0 14.7
Transport. and warehousing.............. 2.7 0.5
Utilities............................... 0.6 (\a\)
Publishing ind. (ex. internet).......... (\a\) (\a\)
Motion picture and sound recording...... (\a\) (\a\)
Broadcasting (except internet).......... 1.6 (\a\)
Internet publishing and broadcasting.... (\a\) (\a\)
Telecommunications...................... (\a\) (\a\)
Internet serv. providers and data....... (\a\) (\a\)
Other information services.............. (\a\) (\a\)
Finance................................. 6.2 2.1
Insurance............................... 4.6 2.6
Real estate............................. 11.4 4.7
Rental and leasing services............. (\a\) (\a\)
Professional and technical services..... 45.6 21.8
Management of companies and enterprises. (\a\) (\a\)
Admin. and support services............. 5.8 2.3
Waste manag. and remed. services........ (\a\) (\a\)
Educational services.................... 6.6 3.9
Hospitals............................... (\a\) (\a\)
Health care services, except hospitals.. 13.1 6.4
Social assistance....................... 8.8 4.9
Arts, entertainment, and recreation..... 19.5 6.0
Accommodation........................... 0.7 (\a\)
Food services and drinking places....... 8.0 3.7
Repair and maintenance.................. 5.2 3.2
Personal and laundry services........... 1.6 0.8
Membership associations & organizations. 8.4 5.9
Private households...................... (\a\) (\a\)
Public administration................... 1.7 0.3
------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\a\ Data not displayed because sample size of affected workers in small
establishments is less than 10.
E. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Final 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 will need to keep some additional
records for affected employees who become nonexempt. As indicated in
this analysis, this final rule expands minimum wage and overtime pay
coverage to 1.2 million affected EAP workers. This will result in an
increase in employer burden and was estimated in the PRA portion
(section V) of this final rule. Note that the burdens reported for the
PRA section of this rule include the entire information collection and
not merely the additional burden estimated as a result of this final
rule.
F. Steps the Agency Has Taken To Minimize the Significant Economic
Impact on Small Entities
This section discusses the description of the steps the agency has
taken to minimize the economic impact on small entities, consistent
with the stated objectives of the FLSA. It includes a statement of the
factual, policy, and legal reasons for the selected standard and HCE
levels adopted in the final rule and why alternatives were rejected.
In this final rule, the Department sets the standard salary level
equal to the 20th percentile of earnings of full-time salaried workers
in the lowest-wage Census Region (currently the South) and/or the
retail industry. Based on 2018/19 data, this results in a salary level
of 684 per week, or 35,568 annually for a full-year worker. The
Department believes that a standard salary level set at the 20th
percentile of earnings of full-time salaried workers in the lowest-wage
Census Region and/or retail industry will accomplish the goal of
setting a salary threshold that adequately distinguishes between
employees who may meet the duties requirements of the EAP exemption and
those who likely do not, without necessitating the reintroduction of a
limit on nonexempt work as existed under the long duties test. The
Department sets the HCE total annual compensation level equal to the
80th percentile of earnings of full-time salaried workers nationally
(107,432 annually based on 2018/19 data).\255\ The Department believes
that this level avoids unduly burdensome costs associated with
evaluating, under the
[[Page 51303]]
standard duties test, the exemption statuses of large numbers of
highly-paid white collar employees, many of whom would have remained
exempt even under that test, while providing a meaningful and
appropriate complement to the more lenient HCE duties test. The
Department further believes that nearly all of the highly-paid white
collar workers earning above this threshold ``would satisfy any duties
test.'' \256\
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\255\ The Department estimated this value using CPS data for
earnings of full-time (defined as at least 35 hours per week)
nonhourly paid employees. For the purpose of this rulemaking, the
Department considers data representing compensation paid to
nonhourly workers to be an appropriate proxy for compensation paid
to salaried workers.
\256\ 84 FR 10914 (internal citation omitted).
---------------------------------------------------------------------------
The Department is also revising the regulations to permit employers
to count nondiscretionary bonuses, incentives, and commissions toward
up to 10 percent of the required salary level for the standard
exemption, so long as employers pay those amounts on an annually or
more frequent basis.
i. Differing Compliance and Reporting Requirements for Small Entities
This final rule 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.
ii. 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 Objectives of, and Need for, the Final Rule. 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 1,700 (accommodation industry) to
a maximum of 31,100 (textile, apparel, and leather 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. This final 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 this
final 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, regardless of
employer size.\257\
---------------------------------------------------------------------------
\257\ See 29 U.S.C. 203(s).
---------------------------------------------------------------------------
G. Identification, to the Extent Practicable, of all Relevant Federal
Rules That May Duplicate, Overlap, or Conflict With the Final Rule
The Department is not aware of any federal rules that duplicate,
overlap, or conflict with this final rule.
VIII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA),\258\ requires
agencies to prepare a written statement for rules for which a final
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 $165
million ($100 million in 1995 dollars adjusted for inflation to 2018)
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.
---------------------------------------------------------------------------
\258\ 2 U.S.C. 1501 et seq.
---------------------------------------------------------------------------
A. Authorizing Legislation
This final 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] . . .).'' \259\ The requirements of the exemption are contained in
part 541 of the Department's regulations. Section 3(e) of the FLSA
\260\ 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 \261\ also defines public agencies to
include the government of a state or political subdivision thereof, or
any interstate governmental agency.
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\259\ 29 U.S.C. 213(a)(1).
\260\ 29 U.S.C. 203(e).
\261\ 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 $165 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 $165 million or more in any one year.
Costs to state and local governments: Based on the economic impact
analysis of this final rule, the Department determined that the final
rule will result in Year 1 costs for state and local governments
totaling $52.1 million, of which $21.7 million are direct employer
costs and $30.4 million are payroll increases (Table 37). In subsequent
years, the Department estimated that state and local governments may
experience payroll increases of as much as $49.0 million per year.
[[Page 51304]]
Costs to the private sector: The Department determined that the
final rule will result in Year 1 costs to the private sector of
approximately $887.0 million, of which $521.0 million are direct
employer costs and $366.0 million are payroll increases. In subsequent
years, the Department estimated that the private sector may experience
a payroll increase of as much as $284.2 million per year.
Table 37--Summary of Year 1 Affected EAP Workers, Regulatory Costs, and Transfers by Type of Employer
----------------------------------------------------------------------------------------------------------------
Total Private Government \a\
----------------------------------------------------------------------------------------------------------------
Affected EAP Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Number.......................................................... 1,257 1,125 128
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization...................................... $340.4 $336.5 $3.9
Adjustment...................................................... 68.2 61.0 7.0
Managerial...................................................... 134.4 123.5 10.9
-----------------------------------------------
Total direct costs.......................................... 543.0 521.0 21.7
----------------------------------------------------------------------------------------------------------------
Payroll Increases (Millions)
----------------------------------------------------------------------------------------------------------------
From employers to workers....................................... $396.4 $366.0 $30.4
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs & Transfers (Millions)
----------------------------------------------------------------------------------------------------------------
From employers.................................................. $939.4 $887.0 $52.1
----------------------------------------------------------------------------------------------------------------
\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.\262\
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 $51.2 billion to $102.5 billion
(using 2018 GDP). A regulation with a 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 final rule.
---------------------------------------------------------------------------
\262\ 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 final rule will be approximately $887.0 million for private
employers and $52.1 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 0.013 percent of
private sector payrolls nationwide.\263\ Total private sector first-
year costs compose 0.002 percent of national private sector revenues
(revenues in 2018 are projected to be $40.9 trillion).\264\ 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.
---------------------------------------------------------------------------
\263\ Private sector payroll costs nationwide are projected to
be $6.8 trillion in 2018. 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 2018
dollars using the GDP deflator.
\264\ Private sector revenues in 2012 were $32.3 trillion using
the 2012 Economic Census of the United States. This was inflated to
2018 dollars using the GDP deflator.
---------------------------------------------------------------------------
Total first-year state and local government costs compose less than
0.01 percent of state and local government payrolls.\265\ First-year
state and local government costs compose 0.001 percent of state and
local government revenues (projected 2018 revenues were estimated to be
$3.7 trillion).\266\ Effects of this magnitude will not result in
significant disruptions to typical state and local governments. The
$52.1 million in state and local government costs constitutes an
average of approximately $578 for each of the approximately 90,126
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.
---------------------------------------------------------------------------
\265\ State and local payrolls in 2016 were reported as $927.9
billion. This was inflated to 2018 payroll costs of $1,016.5 billion
using the CPI-U. State and Local Government Finances Summary:
FY2016. Available at https://www.census.gov/govs/local/.
\266\ State and local revenues in 2016 were reported as $3.4
trillion. This was inflated to 2018 dollars using the CPI-U. State
and Local Government Finances Summary: FY2016. Available at https://www.census.gov/govs/local/.
---------------------------------------------------------------------------
C. Response to Comments
i. Consultation Prior to Issuance of the NPRM
On July 26, 2017, the Department published an RFI to gather
information to aid in formulating a proposal to revise the part 541
regulations. Later, between September 7 and October 17, 2018, the
Department held listening sessions in all five Wage and Hour regions
throughout the country, and in Washington, DC, to supplement feedback
received as part of the RFI. A wide variety of state and local
government entities filed comments in response to the 2017 RFI and/or
participated in the 2018 listening sessions, and the Department took
their views into consideration in drafting the NPRM published earlier
this year. Although several tribal governments submitted comments in
response to the Department's 2015 NPRM, see 81 FR 32547-48, no tribal
governments participated in response to the 2017 RFI or 2018 listening
sessions.
[[Page 51305]]
ii. Comments Received in Response to the NPRM
The Department received comments from a variety of commenters
representing state and local governments, including from some elected
officials.\267\ These comments presented a range of views on the
proposed rule, particularly the proposed increase to the standard
salary level threshold. Some commenters, like the Public Housing
Authorities Directors Association (PHADA), supported the proposed rule,
agreeing that an update to the standard salary level is ``long
overdue'' and finding the proposed increase preferable to the higher
threshold adopted in the 2016 final rule. See also Joint Comment of the
International Public Management Association for Human Resources (IPMA-
HR), the International City/County Management Association (ICMA), and
the Government Finance Officers Association (GFOA). Other commenters,
like the Idaho Division of Human Resources (IDHR), the National
Association of Counties (NACo), and the South Butler Community Library,
expressed concern about the impact of any increase to the standard
salary level, including from the proposed increase. While IDHR and NACo
agreed that the proposed rule would be preferable to the 2016 final
rule, each criticized the Department's preference for a uniform
standard salary level that, they stated, would disproportionately
impact employers operating in lower-income states and counties. Others
representing certain state governments, however, opposed the proposed
rule on the grounds that they would prefer a significantly higher
standard salary level, such as the one adopted under the 2016 final
rule. See House and Senate Democratic Caucuses of the Michigan
Legislature; Michigan Governor Gretchen Whitmer; Pennsylvania
Department of Labor & Industry; State AGs; Washington Governor Jay
Inslee; Wisconsin Department of Workforce Development. These comments
echoed many of the same criticisms of the proposed salary level levied
by employee advocates discussed earlier in section IV.A.v, but the
State AGs made an additional point (relevant for UMRA purposes) that a
low federal threshold burdens state governments with expensive law
enforcement responsibilities to protect workers in their states from
unlawful misclassification. The State AGs asserted that state
governments are reluctant to set their own higher exemption thresholds
for fear of ``creating uneven standards for employment and [risking]
competition with neighboring states.''
---------------------------------------------------------------------------
\267\ As in response to the RFI, the Department did not receive
any comments from tribal governments or affiliated stakeholders in
response to the NPRM.
---------------------------------------------------------------------------
As explained earlier in section IV.A, the Department agrees with
the overwhelming majority of commenters that an increase to the $455
per week standard salary level currently being enforced is both
necessary and overdue. While the adoption of any nationwide earning
threshold has a disproportionate impact on employers operating in
lower-income regions and industries, the Department believes that
adopting multiple salary levels that vary by region would introduce
confusion and compliance costs for employers (or employees) operating
across different jurisdictions. By contrast, the Department concludes
that reapplying the 2004 final rule's methodology to set the standard
salary level appropriately accommodates employers operating in low-wage
regions.\268\
---------------------------------------------------------------------------
\268\ IDHR and the joint comment submitted by IPMA-HR, ICMA, and
the GFOA requested that the Department permit employers to prorate
the salary level for part-time employees. As explained earlier, see
supra n.72, the Department declines this request, emphasizing that
the standard salary level is not an annual earnings threshold and
that ``[e]xempt employees need not be paid for any workweek in which
they perform no work.'' 29 CFR 541.602(a)(1).
---------------------------------------------------------------------------
Some state and local government commenters opined on other aspects
of the proposed rule. For example, NACo endorsed the Department's
proposal to permit nondiscretionary bonuses and incentive payments
(including commissions) to satisfy up to 10 percent of the standard
salary level test; this proposal has been finalized as proposed. The
joint comment submitted by IPMA-HR, ICMA, and the GFOA objected to the
NPRM's proposed increase to the total annual compensation threshold for
highly compensated employees, asserting that the proposed threshold of
$147,414 per year ``would render the highly compensated employee
exemption almost meaningless, especially for smaller governmental
organizations in certain parts of the country.'' As explained in
section IV.D, the Department has finalized a lower increase to the HCE
threshold, to $107,432 per year, which addresses such concerns.
State and local government commenters disagreed over how the
Department should update the earnings thresholds going forward. Some
commenters urged the Department to adopt a mechanism to automatically
update the standard salary level and HCE total compensation levels,
which they viewed as critical for ensuring that the effectiveness of
the earnings thresholds does not erode over time. See House and Senate
Democratic Caucuses of the Michigan Legislature; Michigan Governor
Gretchen Whitmer; State AGs; Washington Governor Jay Insee; Wisconsin
Department of Workforce Development. By contrast, NACo, PHADA, and the
joint comment submitted by IPMA-HR, ICMA, and the GFOA supported the
Department's proposed commitment to update the earnings thresholds
using notice-and-comment rulemaking every four years. As explained in
section IV.E, in this final rule the Department reaffirms its intent to
update the standard salary level and HCE total annual compensation
threshold more regularly in the future using notice-and-comment
rulemaking.
Finally, IDHR requested a delayed effective date of at least 18
months, asserting that ``[p]ublic entities, like the State [of Idaho],
require sufficient time in the [budgeting] and legislative processes to
address appropriations or to make statutory changes to existing state
law affected by a federal law amendment.'' As explained in section
II.E, the Department has set an effective date of January 1, 2020, for
the final rule. The time between this rule's publication and effective
date exceeds the 30-day minimum required under the Administrative
Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days mandated for a
``major rule'' under the Congressional Review Act, 5 U.S.C.
801(a)(3)(A). Given that the Department is currently enforcing the 2004
standard salary level, which an overwhelming majority of commenters
agreed needs to be updated, the Department concludes that a lengthier
delayed effective date would be imprudent.
D. Least Burdensome Option or Explanation Required
This final rule has described the Department's consideration of
various options throughout the preamble and economic impact analysis
(see section VI.C). 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
[[Page 51306]]
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 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 equivalent to the earnings of the 20th percentile of full-
time salaried workers in the South and/or in the retail industry
balances the risks and costs of misclassification of exempt status.
IX. Executive Order 13132, Federalism
The Department has (1) reviewed this final rule in accordance with
Executive Order 13132 regarding federalism and (2) determined that it
does not have federalism implications.
X. Executive Order 13175, Indian Tribal Governments
This final 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 16th day of September, 2019.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
For the reasons set out in the preamble, the Department of Labor
amends 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. In Sec. 541.100, revise paragraph (a)(1) 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 $684 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. In Sec. 541.200, revise paragraph (a)(1) 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 $684 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. In Sec. 541.204, revise paragraph (a)(1) 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
$684 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. In Sec. 541.300, revise paragraph (a)(1) 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 $684 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
$684 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. [thinsp]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 $684
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. * * *
[[Page 51307]]
(b) The required amount of compensation per week may be translated
into equivalent amounts for periods longer than one week. For example,
the $684-per-week requirement will be met if the employee is
compensated biweekly on a salary basis of not less than $1,368,
semimonthly on a salary basis of not less than $1,482, or monthly on a
salary basis of not less than $2,964. However, the shortest period of
payment that will meet this compensation requirement is one week.
* * * * *
0
8. Amend Sec. [thinsp]541.601 by revising paragraphs (a) and (b) to
read as follows:
Sec. [thinsp]541.601 Highly compensated employees.
(a)(1) Beginning on January 1, 2020, an employee with total annual
compensation of at least $107,432 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.
(2) Where the annual period covers periods both prior to and after
January 1, 2020, the amount of total annual compensation due will be
determined on a proportional basis.
(b)(1) ``Total annual compensation'' must include at least $684 per
week paid on a salary or fee basis as set forth in Sec. Sec.
[thinsp]541.602 and 541.605, except that Sec. [thinsp]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. [thinsp]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 the amount specified in the applicable subsection of paragraph
(a) 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, for a 52-week period beginning January 1, 2020, an
employee may earn $90,000 in base salary, and the employer may
anticipate based upon past sales that the employee also will earn
$17,432 in commissions. However, due to poor sales in the final quarter
of the year, the employee actually only earns $12,000 in commissions.
In this situation, the employer may within one month after the end of
the year make a payment of at least $5,432 to the employee. Any such
final payment made after the end of the 52-week period may count only
toward the prior year's total annual compensation and not toward the
total annual compensation in the year it was paid. If the employer
fails to make such a payment, the employee does not qualify as a highly
compensated employee, but may still qualify as exempt under subparts B,
C, or D of this part.
* * * * *
0
9. In Sec. [thinsp]541.602, revise paragraph (a)(3) to read as
follows:
Sec. [thinsp]541.602 Salary basis.
(a) * * *
(3) Up to ten percent of the salary amount required by Sec.
[thinsp]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. This provision does not apply to highly
compensated employees under Sec. [thinsp]541.601.
(i) 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 is less than 52 times the weekly salary
amount required by Sec. [thinsp]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.
(ii) An employee who does not work a full 52-week period for the
employer, either because the employee is newly hired after the
beginning of this period or ends the employment before the end of this
period, may qualify for exemption if the employee receives a pro rata
portion of the minimum amount established in paragraph (a)(3) of this
section, based upon the number of weeks that the employee will be or
has been employed. An employer may make one final payment as under
paragraph (a)(3)(i) of this section within one pay period after the end
of employment.
* * * * *
0
10. Revise Sec. [thinsp]541.604 to read as follows:
Sec. [thinsp]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 $684 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 $684 each week paid
on a salary basis. Similarly, the exemption is not lost if an exempt
employee who is guaranteed at least $684 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 $725 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
$684-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
[[Page 51308]]
as, or even more than, the guaranteed salary.
0
11. In Sec. [thinsp]541.605, revise paragraph (b) 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.
[thinsp]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 $684 minimum salary requirement for exemption since earnings
at this rate would yield the artist $700 if 40 hours were worked.
0
12. Amend Sec. [thinsp]541.709 by revising the first sentence to read
as follows:
Sec. [thinsp]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 $1,043 per week
(exclusive of board, lodging, or other facilities). * * *
* * * * *
[FR Doc. 2019-20353 Filed 9-26-19; 8:45 am]
BILLING CODE 4510-27-P