[Federal Register Volume 89, Number 82 (Friday, April 26, 2024)]
[Rules and Regulations]
[Pages 32842-32973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08038]



[[Page 32841]]

Vol. 89

Friday,

No. 82

April 26, 2024

Part IV





Department of Labor





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





Wage and Hour Division





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





29 CFR Part 541





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

  Federal Register / Vol. 89, No. 82 / Friday, April 26, 2024 / Rules 
and Regulations  

[[Page 32842]]


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

DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1235-AA39


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.

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

SUMMARY: The Department of Labor (Department) 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. Significant revisions include increasing the standard salary 
level, increasing the highly compensated employee total annual 
compensation threshold, and adding to the regulations a mechanism that 
will allow for the timely and efficient updating of the salary and 
compensation thresholds, including an initial update on July 1, 2024, 
to reflect earnings growth. The Department is not finalizing in this 
rule its proposal to apply the standard salary level to the U.S. 
territories subject to the Federal minimum wage and to update the 
special salary levels for American Samoa and the motion picture 
industry.

DATES: The effective date for this final rule is July 1, 2024. Sections 
541.600(a)(2) and 541.601(a)(2) are applicable beginning January 1, 
2025.

FOR FURTHER INFORMATION CONTACT: Daniel Navarrete, Acting 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). Alternative formats are available upon request by 
calling 1-866-487-9243. If you are deaf, hard of hearing, or have a 
speech disability, please dial 7-1-1 to access telecommunications relay 
services.
    Questions of interpretation or enforcement of the agency's existing 
regulations may be directed to the nearest Wage and Hour Division (WHD) 
district office. Locate the nearest office by calling the WHD's toll-
free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 
p.m. in your local time zone, or log onto WHD's website at https://www.dol.gov/agencies/whd/contact/local-offices for a nationwide listing 
of WHD district and area offices.

SUPPLEMENTARY INFORMATION: 

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 employee's regular rate of pay. Section 13(a)(1) of the FLSA, 
which was included in the original Act in 1938, exempts from the 
minimum wage and overtime pay requirements ``any employee employed in a 
bona fide executive, administrative, or professional capacity[.]'' \1\ 
The exemption is commonly referred to as the ``white-collar'' or 
executive, administrative, or professional (EAP) exemption. The statute 
expressly gives the Secretary of Labor (Secretary) authority to define 
and delimit the terms of the exemption. Since 1940, the regulations 
implementing the EAP exemption have generally required that each of the 
following three tests must 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 employer bears the burden of establishing the applicability of the 
exemption.\2\ Job titles and job descriptions do not determine EAP 
exemption status, nor does merely paying an employee a salary.
---------------------------------------------------------------------------

    \1\ 29 U.S.C. 213(a)(1).
    \2\ 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).
---------------------------------------------------------------------------

    Consistent with its broad authority under the Act, in this final 
rule the Department is setting compensation thresholds for the standard 
test and the highly compensated employee test that will work 
effectively with the respective duties tests to better identify who is 
employed in a bona fide EAP capacity for purposes of determining 
exemption status under the Act. Specifically, the Department is setting 
the standard salary level at the 35th percentile of weekly earnings of 
full-time salaried workers in the lowest-wage Census Region ($1,128 per 
week or $58,656 annually for a full-year worker) \3\ and the highly 
compensated employee total annual compensation threshold at the 
annualized weekly earnings of the 85th percentile of full-time salaried 
workers nationally ($151,164). These compensation thresholds are firmly 
grounded in the authority that the FLSA grants to the Secretary to 
define and delimit the EAP exemption, a power the Secretary has 
exercised for 85 years.
---------------------------------------------------------------------------

    \3\ In determining earnings percentiles in its part 541 
rulemakings since 2004, the Department has consistently looked at 
nonhourly earnings for full-time workers from the Current Population 
Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by 
the U.S. Bureau of Labor Statistics (BLS). As explained in section 
VII.B.5.i, the Department considers data representing compensation 
paid to nonhourly workers to be an appropriate proxy for 
compensation paid to salaried workers, although for simplicity the 
Department uses the terms salaried and nonhourly interchangeably in 
this rule. The Department relied on CPS MORG data for calendar year 
2022 to develop the NPRM, including to determine the proposed salary 
level. The Department is using the most recent full-year data 
available for this final rule, which is CPS MORG data for calendar 
year 2023. The new standard salary level of $1,128 per week is $12 
to $30 less than the Department estimated in the NPRM. 88 FR 62152, 
62152-53 n.3 (Sept. 8, 2023).
---------------------------------------------------------------------------

    The increase in the standard salary level to the 35th percentile of 
weekly earnings of full-time salaried workers in the lowest-wage Census 
Region better fulfills the Department's obligation under the statute to 
define and delimit who is employed in a bona fide EAP capacity. Upon 
reflection, the Department has determined that its rulemakings over the 
past 20 years, since the Department simplified the test for the EAP 
exemption in 2004 by replacing the historic two-test system for 
determining exemption status with the single standard test, have 
vacillated between two distinct approaches: One used in rules in 2004 
\4\ and 2019,\5\ that exempted lower-paid workers who historically had 
been entitled to overtime because they did not meet the more detailed 
duties requirements of the test that was in place from 1949 to 2004; 
and one used in a rule in 2016,\6\ that restored overtime protection to 
lower-paid white-collar workers who performed significant amounts of 
nonexempt work but also removed from the exemption other lower-paid 
workers who historically were exempt because they met the prior more 
detailed duties test, an approach that received unfavorable treatment 
in litigation.\7\ Having grappled with these different approaches to 
setting the standard salary level, this final rule retains the 
simplified standard test, the benefits of

[[Page 32843]]

which were recognized in the Department's 2004, 2016, and 2019 
rulemakings,\8\ while, through a revised methodology, fully restoring 
the salary level's screening function and accounting for the switch 
from a two-test to a one-test system for defining the EAP exemption, 
and also separately updating the standard salary level to account for 
earnings growth since the 2019 rule.
---------------------------------------------------------------------------

    \4\ 69 FR 22122 (April 23, 2004).
    \5\ 84 FR 51230 (Sept. 27, 2019).
    \6\ 81 FR 32391 (May 23, 2016).
    \7\ The Department never enforced the 2016 rule because it was 
invalidated by the U.S. District Court for the Eastern District of 
Texas. See Nevada v. U.S. Department of Labor, 275 F.Supp.3d 795 
(E.D. Tex. 2017).
    \8\ See 84 FR 51243-45; 81 FR 32414, 32444-45; 69 FR 22126-28.
---------------------------------------------------------------------------

    The new standard salary level will, in combination with the 
standard duties test, better define and delimit which employees are 
employed in a bona fide EAP capacity. By setting a salary level above 
what the methodology used in 2004 and 2019 would produce using current 
data, the new standard salary level will ensure that, consistent with 
the Department's historical approach to the exemption, fewer lower-paid 
white-collar employees who perform significant amounts of nonexempt 
work are included in the exemption. At the same time, by setting the 
salary level below what the methodology used in 2016 would produce 
using current data, the new standard salary level will allow employers 
to continue to use the exemption for many lower-paid white-collar 
employees who were made exempt under the 2004 standard duties test. The 
combined result will be a more effective test for determining who is 
employed in a bona fide EAP capacity. The applicability date of the new 
standard salary level will be January 1, 2025. The Department is not 
finalizing its proposal to apply the standard salary level to the U.S. 
territories subject to the federal minimum wage and to update the 
special salary levels for American Samoa and the motion picture 
industry.\9\
---------------------------------------------------------------------------

    \9\ The Department proposed in sections IV.B.1 and B.2 of the 
NPRM to apply the updated standard salary level to the four U.S. 
territories that are subject to the federal minimum wage--Puerto 
Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the 
Northern Mariana Islands (CNMI)--and to update the special salary 
levels for American Samoa and the motion picture industry in 
relation to the new standard salary level. The Department will 
address these aspects of its proposal in a future final rule.
---------------------------------------------------------------------------

    The Department is also increasing the earnings threshold for the 
highly compensated employee (HCE) exemption, which was added to the 
regulations in 2004 and applies to certain highly compensated employees 
and combines a much higher annual compensation requirement with a 
minimal duties test. The HCE test's primary purpose is to serve as a 
streamlined alternative for very highly compensated employees because a 
very high level of compensation is a strong indicator of an employee's 
exempt status, thus eliminating the need for a detailed duties 
analysis.\10\ The Department is increasing the HCE total annual 
compensation threshold to the annualized weekly earnings amount of the 
85th percentile of full-time salaried workers nationally ($151,164). 
The new HCE threshold is high enough to reserve the test for those 
employees who are ``at the very top of [the] economic ladder'' \11\ and 
will guard against the unintended exemption of workers who are not bona 
fide EAP employees, including those in high-income regions and 
industries. The applicability date of the new HCE total annual 
compensation threshold will be January 1, 2025.
---------------------------------------------------------------------------

    \10\ See 69 FR 22172-73.
    \11\ Id. at 22174.
---------------------------------------------------------------------------

    In each of its part 541 rulemakings since 2004, the Department 
recognized the need to regularly update the earnings thresholds to 
ensure that they remain effective in helping differentiate between 
exempt and nonexempt employees. As the Department observed in these 
rulemakings, even a well-calibrated salary level that is not kept up to 
date becomes obsolete as wages for nonexempt workers increase over 
time.\12\ Long intervals between rulemakings have resulted in eroded 
earnings thresholds based on outdated earnings data that were ill-
equipped to help identify bona fide EAP employees.
---------------------------------------------------------------------------

    \12\ 84 FR 51250-51; 81 FR 32430; see also 69 FR 22164.
---------------------------------------------------------------------------

    To address this problem, in the 2004 and 2019 rules the Department 
expressed its commitment to regularly updating the salary levels.\13\ 
In the 2016 rule, it included a regulatory provision to automatically 
update the salary levels.\14\ Based on its long experience with 
updating the salary levels, the Department has determined that adopting 
a regulatory provision for updating the salary levels to reflect 
current earnings data, with an exception for pausing future updates 
under certain conditions, is the most viable and efficient way to 
ensure the EAP exemption earnings thresholds keep pace with changes in 
employee pay and thus remain effective in helping determine exemption 
status. This rule establishes a new updating mechanism. The initial 
update to the standard salary level and the HCE total annual 
compensation threshold will take place on July 1, 2024, and will use 
the methodologies in place at that time (i.e., the 2019 rule 
methodologies), resulting in a $844 per week standard salary level and 
a $132,964 HCE total annual compensation threshold. Future updates to 
the standard salary level and HCE total annual compensation threshold 
with current earnings data will begin 3 years after the date of the 
initial update (July 1, 2027), and every 3 years thereafter, using the 
methodologies in place at the time of the updates. The Department 
anticipates that, by the time the first triennial update under the 
updating mechanism occurs, assuming the Department has not engaged in 
further rulemaking, the new methodologies for the standard salary level 
and HCE total annual compensation requirement established by this final 
rule will have become effective and the triennial update will employ 
these new methodologies. The new updating mechanism will allow for the 
timely, predictable, and efficient updating of the earnings thresholds.
---------------------------------------------------------------------------

    \13\ 69 FR 22171; 84 FR 51251-52.
    \14\ 81 FR 32430.
---------------------------------------------------------------------------

    The Department estimates that in Year 1, approximately 1 million 
employees who earn at least $684 per week but less than $844 per week 
will be impacted by the initial update applying current wage data to 
the standard salary level methodology from the 2019 rule, and 
approximately 3 million employees who earn at least $844 per week but 
less than the new standard salary level of $1,128 per week will be 
impacted by the subsequent application of the new standard salary 
level. See Table 25. As explained in section V.B.4.ii, for 1.8 million 
of the affected employees (including the 1 million impacted by the 
initial update), this rule will restore overtime protections that they 
would have been entitled to under every rule prior to the 2019 rule. 
The Department also estimates that 292,900 employees who are currently 
exempt under the HCE test, but do not meet the standard test for 
exemption, will be affected by the proposed increase in the HCE total 
annual compensation level. Absent an employer increasing these 
employees' pay to at or above the new HCE level, the exemption status 
of these employees will turn on the standard duties test (which these 
employees do not meet) rather than the minimal duties test that applies 
to employees earning at or above the HCE threshold. The economic 
analysis quantifies the direct costs resulting from this rule: (1) 
regulatory familiarization costs; (2) adjustment costs; and (3) 
managerial costs. The Department estimates that total annualized direct 
employer costs over the first 10 years will be $803 million with a 7 
percent discount rate. This rule will also give employees higher 
earnings in the form of transfers of income from employers to 
employees. The

[[Page 32844]]

Department estimates annualized transfers will be $1.5 billion, with a 
7 percent discount rate.

II. Background

A. The FLSA

    The FLSA generally requires covered employers to pay employees at 
least the federal minimum wage (currently $7.25 an hour) for all hours 
worked and overtime premium pay of at least one and one-half times the 
employee's regular rate of pay for all hours worked over 40 in a 
workweek.\15\ However, section 13(a)(1) of the FLSA, codified at 29 
U.S.C. 213(a)(1), provides an exemption from both minimum wage and 
overtime pay for ``any employee employed in a bona fide executive, 
administrative, or professional capacity . . . or in the capacity of 
[an] outside salesman (as such terms are defined and delimited from 
time to time by regulations of the Secretary [of Labor], subject to the 
provisions of [the Administrative Procedure Act] . . .).'' The FLSA 
does not define the terms ``executive,'' ``administrative,'' 
``professional,'' or ``outside salesman,'' but rather directs the 
Secretary to define those terms through rulemaking. Pursuant to 
Congress's grant of rulemaking authority, since 1938 the Department has 
issued regulations at 29 CFR part 541 to define and delimit the scope 
of the section 13(a)(1) exemption.\16\ Because Congress explicitly gave 
the Secretary authority to define and delimit the specific terms of the 
exemption, the regulations so issued have the binding effect of 
law.\17\
---------------------------------------------------------------------------

    \15\ See 29 U.S.C. 206(a), 207(a).
    \16\ See Helix Energy Solutions Group, Inc. v. Hewitt, 143 S.Ct. 
677, 682 (2023) (``Under [section 13(a)(1)], the Secretary sets out 
a standard for determining when an employee is a `bona fide 
executive.''').
    \17\ See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).
---------------------------------------------------------------------------

    The exemption for executive, administrative, or professional 
employees was included in the original FLSA legislation passed in 
1938.\18\ It was modeled after similar provisions contained in the 
earlier National Industrial Recovery Act of 1933 and state law 
precedents.\19\ As the Department has explained in prior rules, the EAP 
exemption is premised on two policy considerations. First, the type of 
work exempt employees perform is difficult to standardize to any time 
frame and cannot be easily spread to other workers after 40 hours in a 
week, making enforcement of the overtime provisions difficult and 
generally precluding the potential job expansion intended by the FLSA's 
time-and-a-half overtime premium.\20\ Second, exempt workers typically 
earn salaries well above the minimum wage and are presumed to enjoy 
other privileges to compensate them for their long hours of work. These 
include, for example, above-average fringe benefits and better 
opportunities for advancement, setting them apart from nonexempt 
workers entitled to overtime pay.\21\
---------------------------------------------------------------------------

    \18\ See Fair Labor Standards Act of 1938, Pub. L. 75-718, 
13(a)(1), 52 Stat. 1060, 1067 (June 25, 1938).
    \19\ See National Industrial Recovery Act, Pub. L. 73-67, ch. 
90, title II, 206(2), 48 Stat 195, 204-5 (June 16, 1933).
    \20\ See Report of the Minimum Wage Study Commission, Volume IV, 
pp. 236 and 240 (June 1981).
    \21\ See id.
---------------------------------------------------------------------------

    Section 13(a)(1) exempts covered EAP employees from both the FLSA's 
minimum wage and overtime requirements. However, because of their long 
hours of work, its most significant impact is its exemption of these 
employees from the Act's overtime protections, as discussed in section 
VII.C.4. An employer may employ such exempt employees for any number of 
hours in the workweek without paying an overtime premium. Some state 
laws have stricter standards to be exempt from state minimum wage and 
overtime protections than those which exist under federal law, such as 
higher salary levels or more stringent duties tests. The FLSA does not 
preempt any such stricter state standards.\22\ If a state establishes a 
higher standard than the provisions of the FLSA, the higher standard 
applies in that state.
---------------------------------------------------------------------------

    \22\ See 29 U.S.C. 218(a).
---------------------------------------------------------------------------

B. Regulatory History

    The Department's part 541 regulations have consistently looked to 
the duties performed by the employee and the salary paid by the 
employer in determining whether an individual is employed in a bona 
fide executive, administrative, or professional capacity. Since 1940, 
the Department's implementing regulations have generally required each 
of the following three prongs to be satisfied for the exemption to 
apply: (1) the employee must be paid a predetermined and fixed salary 
that is not subject to reduction because of variations in the quality 
or quantity of work performed (the salary basis test); (2) the amount 
of salary paid must meet a minimum specified amount (the salary level 
test); and (3) the employee's job duties must primarily involve 
executive, administrative, or professional duties as defined by the 
regulations (the duties test).
1. The Part 541 Regulations From 1938 to 2004
    The Department's part 541 regulations have always included earnings 
criteria. From the first Part 541 regulations, there has been ``wide 
agreement'' that the amount paid to an employee is ``a valuable and 
easily applied index to the `bona fide' character of the employment for 
which [the] exemption is claimed[.]'' \23\ Because EAP employees ``are 
denied the protection of the [A]ct[,]'' they are ``assumed [to] enjoy 
compensatory privileges'' which distinguish them from nonexempt 
employees, including substantially higher pay.\24\ Additionally, the 
Department has long recognized that the salary level test is a useful 
criterion for helping identify bona fide EAP employees and provides a 
practical guide for employers and employees, thus tending to reduce 
litigation and ensure that nonexempt employees receive the overtime 
protection to which they are entitled.\25\ These benefits accrue to 
employees and employers alike, which is why, despite disagreement over 
the appropriate magnitude of the part 541 earnings thresholds, an 
``overwhelming majority'' of stakeholders have supported the retention 
of such thresholds in prior part 541 rulemakings.\26\
---------------------------------------------------------------------------

    \23\ ``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) at 19.
    \24\ Id.; see Report of the Minimum Wage Study Commission, 
Volume IV, p. 236 (``Higher base pay, greater fringe benefits, 
improved promotion potential and greater job security have 
traditionally been considered as normal compensatory benefits 
received by EAP employees, which set them apart from non-EAP 
employees.'').
    \25\ See 84 FR 51237; see also 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) at 8.
    \26\ 84 FR 51235; see also Stein Report at 5, 19; Weiss Report 
at 9.
---------------------------------------------------------------------------

    The Department issued the first version of the part 541 regulations 
in October 1938.\27\ The Department's initial regulations included a 
$30 per week compensation requirement for executive and administrative 
employees. It also included a duties test that prohibited employers 
from claiming the EAP exemption for employees who performed ``[a] 
substantial amount of work of the same nature as that performed by 
nonexempt employees of the employer.'' \28\
---------------------------------------------------------------------------

    \27\ 3 FR 2518 (Oct. 20, 1938).
    \28\ Id.

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

[[Page 32845]]

    The Department issued the first update to its part 541 regulations 
in October 1940,\29\ following extensive public hearings.\30\ Among 
other changes, the 1940 update newly applied the salary level 
requirement to professional employees; added the salary basis 
requirement to the tests for executive, administrative, and 
professional employees; and introduced a 20 percent cap on the amount 
of nonexempt work that executive and professional employees could 
perform each workweek, replacing language which prohibited the 
performance of a ``substantial amount'' of nonexempt work.\31\
---------------------------------------------------------------------------

    \29\ 5 FR 4077 (Oct. 15, 1940).
    \30\ See Stein Report.
    \31\ 5 FR 4077.
---------------------------------------------------------------------------

    The Department conducted further hearings on the part 541 
regulations in 1947 \32\ and issued revised regulations in December 
1949.\33\ The 1949 rulemaking updated the salary levels set in 1940 and 
introduced a second, less stringent duties test for higher paid 
executive, administrative, and professional employees.\34\ Thus, 
beginning in 1949, the part 541 regulations contained two tests for the 
EAP exemption. These tests became known as the ``long'' test and the 
``short'' test. The long test paired a lower earnings threshold with a 
more rigorous duties test that generally limited the performance of 
nonexempt work to no more than 20 percent of an employee's hours worked 
in a workweek. The short test paired a higher salary level and a less 
rigorous duties test, with no specified limit on the performance of 
nonexempt work. From 1958 until 2004, the regulations in place 
generally set the long test salary level at a level designed to exclude 
from exemption approximately the lowest-paid 10 percent of salaried 
white-collar employees who performed EAP duties in lower-wage areas and 
industries and set the short test salary level significantly 
higher.\35\ The salary and duties components of each test complemented 
each other, and the two tests worked in combination to determine 
whether an individual was employed in a bona fide EAP capacity. Lower-
paid employees who met the long test salary level but did not meet the 
higher short test salary level were subject to the long duties test 
which ensured that these employees were employed in an EAP capacity by 
limiting the amount of time they could spend on nonexempt work. 
Employees who met the higher short test salary level were considered to 
be more likely to meet the requirements of the long duties test and 
thus were subject to a short-cut duties test for determining exemption 
status.
---------------------------------------------------------------------------

    \32\ See Weiss Report.
    \33\ See 14 FR 7705 (Dec. 24, 1949).
    \34\ Id. at 7706.
    \35\ 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) at 6-7. Under the 
two-test system, the ratio of the short test salary level to the 
long test salary levels ranged from approximately 130 percent to 180 
percent. See 81 FR 32403.
---------------------------------------------------------------------------

    Additional changes to the regulations, including salary level 
updates, were made in 1954,\36\ 1958,\37\ 1961,\38\ 1963,\39\ 1967,\40\ 
1970,\41\ 1973,\42\ and 1975.\43\ The Department revised the part 541 
regulations twice in 1992 but did not update the salary thresholds at 
that time.\44\ None of these updates changed the basic structure of the 
long and short tests.
---------------------------------------------------------------------------

    \36\ 19 FR 4405 (July 17, 1954).
    \37\ 23 FR 8962 (Nov. 18, 1958).
    \38\ 26 FR 8635 (Sept. 15, 1961).
    \39\ 28 FR 9505 (Aug. 30, 1963).
    \40\ 32 FR 7823 (May 30, 1967).
    \41\ 35 FR 883 (Jan. 22, 1970).
    \42\ 38 FR 11390 (May 7, 1973).
    \43\ 40 FR 7091 (Feb. 19, 1975).
    \44\ The Department first created a limited exception from the 
salary basis test for public employees. 57 FR 37677 (Aug. 19, 1992). 
The Department also implemented a 1990 law requiring it to 
promulgate regulations permitting employees in certain computer-
related occupations to qualify as exempt under section 13(a)(1) of 
the FLSA. 57 FR 46744 (Oct. 9, 1992); see Pub. L. 101-583, sec. 2, 
104 Stat. 2871 (Nov. 15, 1990).
---------------------------------------------------------------------------

    The Department described the salary levels adopted in the 1975 rule 
as ``interim rates,'' intended to ``be in effect for an interim period 
pending the completion of a study [of worker earnings] by the Bureau of 
Labor Statistics . . . in 1975.'' \45\ However, those salary levels 
remained in effect until 2004. The utility of the salary levels in 
helping to define the EAP exemption decreased as wages rose during this 
period. In 1991, the federal minimum wage rose to $4.25 per hour,\46\ 
which for a 40-hour workweek exceeded the lower long test salary level 
of $155 per week for executive and administrative employees and equaled 
the long test salary level of $170 per week for professional employees. 
In 1997, the federal minimum wage rose to $5.15 per hour,\47\ which for 
a 40-hour workweek not only exceeded the long test salary levels, but 
also was close to the higher short test salary level of $250 per week.
---------------------------------------------------------------------------

    \45\ 40 FR 7091.
    \46\ See Pub. L. 101-157, sec. 2, 103 Stat. 938 (Nov. 17, 1989).
    \47\ See Pub. L. 104-188, sec. 2104(b), 110 Stat 1755 (Aug. 20, 
1996).
---------------------------------------------------------------------------

2. Part 541 Regulations From 2004 to 2019
    The Department published a final rule in April 2004 (the 2004 rule) 
\48\ that updated the part 541 salary levels for the first time since 
1975 and made several significant changes to the regulations. Most 
significantly, the Department eliminated the separate long and short 
tests and replaced them with a single standard test. The Department set 
the standard salary level at $455 per week, which was equivalent to the 
20th percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region (the South) and in the retail industry 
nationally. The Department paired the new standard salary level test 
with a new standard duties test for executive, administrative, and 
professional employees, respectively, which was substantially 
equivalent to the short duties test used in the two-test system.\49\
---------------------------------------------------------------------------

    \48\ 69 FR 22122.
    \49\ See id. at 22192-93 (acknowledging ``de minimis differences 
in the standard duties tests compared to the . . . short duties 
tests'').
---------------------------------------------------------------------------

    In the 2004 rule, the Department acknowledged that the switch to 
the single standard test for exemption was a significant change in the 
regulatory structure,\50\ and noted that the shift to setting the 
salary level based on ``the lowest 20 percent of salaried employees in 
the South, rather than the lowest 10 percent'' of EAP employees was 
made, in part, ``because of the proposed change from the `short' and 
`long' test structure[.]'' \51\ The Department asserted that 
elimination of the long duties test was warranted because ``the 
relatively small number of employees currently earning from $155 to 
$250 per week, and thus tested for exemption under the `long' duties 
test, will gain stronger protections under the increased minimum salary 
level which . . . guarantees overtime protection for all employees 
earning less than $455 per week[.]'' \52\ The Department acknowledged, 
however, that the new standard salary level was comparable to the lower 
long test salary level used in the two-test system (i.e., if the 
Department's long test salary level methodology had been applied to 
contemporaneous data).\53\ Thus,

[[Page 32846]]

employees who would have been subject to the long duties test with its 
limit on the amount of time spent on nonexempt work if the two-test 
system had been updated were subject to the equivalent of the short 
duties test under the new standard test. For example, under the 2004 
rule's standard test, an employee who earned just over the rule's 
standard salary threshold of $455 in weekly salary, and who met the 
standard duties test, was exempt even if they would not have met the 
previous long duties test because they spent more than 20 percent of 
their time performing nonexempt work. If the Department had instead 
retained the two-test system and updated the long test salary level to 
$455, that same employee would have been nonexempt because they would 
have been subject to the long test's more rigorous duties analysis due 
to their lower salary.
---------------------------------------------------------------------------

    \50\ See id. at 22126-28.
    \51\ Id. at 22167.
    \52\ Id. at 22126.
    \53\ Id. at 22171. The Department last set the long and short 
test salary levels in 1975. Throughout this preamble, when the 
Department refers to the relationship of salary levels set in this 
rule and the 2004, 2016, and 2019 rules to equivalent long or short 
test salary levels, it is referring to salary levels based on 
contemporaneous (at the relevant point in time) data that, in the 
case of the long test salary level, would exclude the lowest-paid 10 
percent of exempt EAP employees in low-wage industries and areas 
and, in the case of the short test salary level, would be 149 
percent of a contemporaneous long test salary level. The short test 
salary ratio of 149 percent is the simple average of the 15 
historical ratios of the short test salary level to the long test 
salary level. See 81 FR 32467 & n.149.
---------------------------------------------------------------------------

    In the 2004 rule, the Department also created a new test for 
exemption for certain highly compensated employees.\54\ The HCE test 
paired a minimal duties requirement--customarily and regularly 
performing at least one of the exempt duties or responsibilities of an 
EAP employee--with a high total annual compensation requirement of 
$100,000, a threshold that exceeded the annual earnings of 
approximately 93.7 percent of salaried workers nationwide.\55\ The 
Department also ended the use of special salary levels for Puerto Rico 
and the U.S. Virgin Islands, as they had become subject to the federal 
minimum wage since the Department last updated the part 541 salary 
levels in 1975, and set a special salary level only for American Samoa, 
which remained not subject to the federal minimum wage.\56\ The 
Department also expressed its intent ``in the future to update the 
salary levels on a more regular basis, as it did prior to 1975.'' \57\
---------------------------------------------------------------------------

    \54\ 69 FR 22172.
    \55\ See id. at 22169 (Table 3).
    \56\ Id. at 22172.
    \57\ Id. at 22171.
---------------------------------------------------------------------------

    In May 2016, the Department issued a final rule (the 2016 rule) 
that retained the single-test system introduced in 2004 but increased 
the standard salary level and provided for regular updating. 
Specifically, the 2016 rule (1) increased the standard salary level 
from the 2004 salary level of $455 to $913 per week, the 40th 
percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region (the South); \58\ (2) increased the HCE test 
total annual compensation amount from $100,000 to $134,004 per year; 
\59\ (3) increased the special salary level for EAP workers in American 
Samoa; \60\ (4) allowed employers, for the first time, to credit 
nondiscretionary bonuses, incentive payments, and commissions paid at 
least quarterly towards up to 10 percent of the standard salary level; 
\61\ and (5) added a mechanism to automatically update the part 541 
earnings thresholds every 3 years.\62\ The Department did not change 
any of the standard duties test criteria in the 2016 rule,\63\ opting 
instead to adopt a standard salary level set at the low end of the 
historical range of short test salary levels used in the pre-2004 two-
test system.\64\ The 2016 rule was scheduled to take effect on December 
1, 2016.
---------------------------------------------------------------------------

    \58\ 81 FR 32404-05.
    \59\ Id. at 32428.
    \60\ Id. at 32422.
    \61\ See id. at 32425-26.
    \62\ See id. at 32430.
    \63\ Id. at 32444.
    \64\ In the 2016 rule, the Department estimated the historical 
range of short test salary levels as from $889 to $1,231 (based on 
contemporaneous earnings data). Id. at 32405.
---------------------------------------------------------------------------

    On November 22, 2016, the U.S. District Court for the Eastern 
District of Texas issued an order preliminarily enjoining the 
Department from implementing and enforcing the 2016 rule.\65\ On August 
31, 2017, the district court granted summary judgment to the plaintiff 
challengers, holding that the 2016 rule's salary level exceeded the 
Department's authority and invalidating the rule.\66\ On October 30, 
2017, the Department of Justice appealed to the U.S. Court of Appeals 
for the Fifth Circuit, which subsequently granted the Department's 
motion to hold that appeal in abeyance while the Department undertook 
further rulemaking. Following an NPRM published on March 22, 2019,\67\ 
the Department published a final rule on September 27, 2019 (the 2019 
rule),\68\ which formally rescinded and replaced the 2016 rule.
---------------------------------------------------------------------------

    \65\ See Nevada v. U.S. Department of Labor, 218 F. Supp. 3d 520 
(E.D. Tex. 2016).
    \66\ See Nevada, 275 F.Supp.3d 795.
    \67\ See 84 FR 10900 (March 22, 2019).
    \68\ See 84 FR 51230.
---------------------------------------------------------------------------

    The 2019 rule (1) raised the standard salary level from the 2004 
salary level of $455 to $684 per week, the equivalent of the 20th 
percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region (the South) and/or in the retail industry 
nationally; (2) increased the HCE total annual compensation threshold 
from $100,000 to $107,432, the equivalent of the 80th percentile of 
annual earnings of full-time salaried workers nationwide; (3) allowed 
employers to credit nondiscretionary bonuses and incentive payments 
(including commissions) paid at least annually to satisfy up to 10 
percent of the standard salary level; and (4) established special 
salary levels for all U.S. territories.\69\ The 2019 rule did not make 
changes to the standard duties test.\70\ While using the same 
methodology used in the 2004 rule to set the salary threshold, the 
Department did not assert that this methodology constituted the outer 
limit for defining and delimiting the salary threshold. Rather, the 
Department reasoned the 2004 methodology was well-established, 
reasonable, would minimize uncertainty and potential legal challenge, 
and would address the concerns of the district court that the 2016 rule 
over-emphasized the salary level.\71\ The Department acknowledged that 
the new standard salary level was, unlike the salary level set in the 
2004 rule, below the long test salary level used in the pre-2004 two-
test system.\72\ As in its 2004 rule, the Department ``reaffirm[ed] its 
intent to update the standard salary level and HCE total annual 
compensation threshold more regularly in the future using notice-and-
comment rulemaking.'' \73\ The 2019 rule took effect on January 1, 
2020.\74\
---------------------------------------------------------------------------

    \69\ The Department established special salary levels of $455 
per week for Puerto Rico, Guam, the U.S. Virgin Islands, and the 
CNMI (effectively continuing the 2004 salary level); it also 
maintained the 2004 rule's $380 per week special salary level for 
employees in American Samoa. Id. at 51246.
    \70\ See id. at 51241-43.
    \71\ See id. at 51242.
    \72\ Id. at 51244.
    \73\ Id. at 51251.
    \74\ A lawsuit challenging the 2019 rule was filed in August 
2022. The district court upheld the rule and an appeal of that 
decision was pending at the time the Department issued this final 
rule. See Mayfield v. U.S. Department of Labor, 2023 WL 6168251 
(W.D. Tex. Sept. 20, 2023), appeal docketed, No. 23-50724 (5th Cir. 
Oct. 11, 2023).
---------------------------------------------------------------------------

C. Overview of Existing Regulatory Requirements

    The part 541 regulations contain specific criteria that define each 
category of exemption provided for in 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 exempt computer employees under sections 
13(a)(1) and 13(a)(17). The employer bears the burden of establishing 
the applicability of any exemption.\75\ Job titles and job descriptions 
do not determine

[[Page 32847]]

exemption status, nor does merely paying an employee a salary rather 
than an hourly rate.
---------------------------------------------------------------------------

    \75\ See, e.g., Idaho Sheet Metal Works, 383 U.S. at 209; 
Walling, 330 U.S. at 547-48.
---------------------------------------------------------------------------

    As previously indicated, to satisfy the EAP exemption, employees 
must meet certain tests regarding their job duties \76\ and generally 
must be paid on a salary basis at least the amount specified in the 
regulations.\77\ Some employees, such as doctors, lawyers, teachers, 
and outside sales employees, are not subject to salary tests.\78\ 
Others, such as academic administrative personnel and computer 
employees, are subject to special, contingent earning thresholds.\79\ 
The standard salary level for the EAP exemption is currently $684 per 
week (equivalent to $35,568 per year), and the total annual 
compensation level for highly compensated employees under the HCE test 
is currently $107,432.\80\ A special salary level of $455 per week 
currently applies to employees in Puerto Rico, Guam, the U.S. Virgin 
Islands, and the CNMI; \81\ a special salary level of $380 per week 
applies to employees in American Samoa; \82\ and employers can pay a 
special weekly ``base rate'' of $1,043 per week to employees in the 
motion picture producing industry.\83\ 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 
or special salary levels.\84\
---------------------------------------------------------------------------

    \76\ For a description of the duties that are required to be 
performed under the EAP exemption, see Sec. Sec.  541.100 (executive 
employees); 541.200 (administrative employees); 541.300, 
541.303-.304 (teachers and professional employees); 541.400 
(computer employees); 541.500 (outside sales employees).
    \77\ 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.
    \78\ See Sec. Sec.  541.303(d); 541.304(d); 541.500(c); 
541.600(e). Such employees are also not subject to a fee basis test.
    \79\ See Sec.  541.600(c)-(d).
    \80\ See Sec. Sec.  541.600(a); 541.601(a)(1).
    \81\ See Sec. Sec.  541.100; 541.200; 541.300.
    \82\ See Sec. Sec.  541.100; 541.200; 541.300.
    \83\ See Sec.  541.709.
    \84\ Sec.  541.602(a)(3).
---------------------------------------------------------------------------

    Under the HCE test, employees who currently receive at least 
$107,432 in total annual compensation 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.\85\ The HCE test applies only to employees whose 
primary duty includes performing office or non-manual work.\86\ 
Employees considered exempt under the HCE test must currently receive 
at least the $684 per week standard salary portion of their pay on a 
salary or fee basis without regard to the payment of nondiscretionary 
bonuses and incentive payments.\87\
---------------------------------------------------------------------------

    \85\ Sec.  541.601.
    \86\ Sec.  541.601(d).
    \87\ See Sec.  541.601(b)(1); see also 84 FR 51249.
---------------------------------------------------------------------------

D. The Department's Proposal

    On September 8, 2023, consistent with its statutory authority to 
define and delimit the EAP exemption, the Department published a Notice 
of Proposed Rulemaking (NPRM) to revise the part 541 regulations.\88\ 
The Department proposed to increase the standard salary level to the 
35th percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region (currently the South), equivalent to $1,059 
per week based on earnings data used in the NPRM.\89\ The Department 
also proposed to apply this updated standard salary level to the four 
U.S. territories that are subject to the federal minimum wage--Puerto 
Rico, Guam, the U.S. Virgin Islands, and the CNMI--and to update the 
special salary levels for American Samoa and the motion picture 
industry in relation to the new standard salary level.\90\ The 
Department additionally proposed raising the HCE test's total annual 
compensation requirement to the annual equivalent of the 85th 
percentile of weekly earnings of full-time salaried workers nationally, 
equivalent to $143,988 per year based on earnings data used in the 
NPRM. Finally, the Department proposed a new mechanism to update the 
standard salary level and the HCE total annual compensation threshold 
every 3 years to ensure that they remain effective tests for exemption.
---------------------------------------------------------------------------

    \88\ See 88 FR 62152.
    \89\ The Department noted that the final rule would use the most 
recent earnings data available to set the standard salary level, 
which would change the dollar amount of the resulting threshold. See 
88 FR 62152-53 n. 3.
    \90\ In this final rule the Department is not finalizing its 
proposal in section IV.B.1 and B.2 of the NPRM to apply the standard 
salary level to the U.S. territories subject to the federal minimum 
wage and to update the special salary levels for American Samoa and 
the motion picture industry. The Department will address these 
aspects of its proposal in a future final rule. While the Department 
is not finalizing its proposal, it is making nonsubstantive changes 
in provisions addressing the territories as a result of other 
changes in this final rule.
---------------------------------------------------------------------------

    The public comment period for the NPRM concluded on November 7, 
2023. The Department received approximately 33,300 comments in response 
to the NPRM during the 60-day comment period.\91\ Comments came from a 
diverse array of stakeholders, including employees, employers, trade 
associations, small business owners, labor unions, advocacy groups, 
nonprofit organizations, law firms, academics, educational 
organizations and representatives, religious organizations, economists, 
members of Congress, state and local government officials, tribal 
representatives, and other interested members of the public. All timely 
received comments may be viewed on the https://www.regulations.gov 
website, docket ID WHD-2023-0001.
---------------------------------------------------------------------------

    \91\ In regulations.gov, the number of comments received is 
listed as 33,310 and the number of posted comments is 26,280. This 
difference is because one commenter, WorkMoney, attached thousands 
of comments to their one submission.
---------------------------------------------------------------------------

    Commenter views on the merits of the NPRM varied widely. Some of 
the comments the Department received were general statements of support 
or opposition, while many others addressed the Department's proposal in 
considerable detail. As with previous part 541 rulemakings, a majority 
of the total comments came from comment campaigns using similar or 
identical template language. Such campaign comments expressed support 
or opposition to the proposed salary level, and sometimes addressed 
other issues including applying the salary level to teachers,\92\ and 
concerns from nonprofit agencies. However, the Department also received 
thousands of unique comments. Significant issues raised in the comments 
are discussed in this final rule. Comments germane to the need for this 
rulemaking are discussed in section III, comments about the NPRM's 
proposals are discussed in section V, and comments about the potential 
costs, benefits, and other impacts of this rulemaking are discussed in 
section VII. The Department has carefully considered the timely 
submitted comments about the Department's proposal.
---------------------------------------------------------------------------

    \92\ As noted above, teachers are among the employees for whom 
there is no salary level requirement under the part 541 regulations. 
See Sec.  541.303(d).
---------------------------------------------------------------------------

    The Department received a number of comments on topics that are 
beyond the scope of this rulemaking. A significant number of commenters 
(including a large comment campaign) urged the Department to newly 
apply the part 541 salary criteria to teachers. The Department did not 
solicit comment about the exemption criteria for teachers in the NPRM 
and, as many commenters on this issue recognized, addressing this issue 
would require a separate rulemaking. Other topics outside the

[[Page 32848]]

scope of this rulemaking include, for example, a request that the 
Department extend the right to overtime pay to medical residents, 
create exemptions from the salary level test, allow employers to credit 
the value of board and lodging towards the salary level, clarify issues 
related to the fluctuating workweek method of calculating overtime pay, 
or create a ``safe harbor'' provision for restaurant franchisors. The 
Department is not addressing these issues in its final rule.
    Several stakeholders such as Catholic Charities USA and the 
National Council of Nonprofits expressed concern about funding and 
reimbursement rates to meet potential new overtime expenses. The 
Department appreciates the concerns conveyed in these comments and the 
challenges of adjusting public funding. As discussed in section 
V.B.4.iv, however, the Department's EAP regulations have never had 
special rules for nonprofit or charitable organizations and employees 
of these organizations are subject to the EAP exemption if they satisfy 
the same salary level, salary basis, and duties tests as other 
employees.

III. Need for Rulemaking

    The goal of this rulemaking is to set effective earnings thresholds 
to help define and delimit the FLSA's EAP exemption. To achieve this 
goal, the Department is not only updating the single standard salary 
level to account for earnings growth since the 2019 rule, but also to 
build on the lessons learned in its most recent rulemakings to more 
effectively define and delimit employees employed in a bona fide EAP 
capacity. To this end, the Department is finalizing its proposed 
changes to the standard salary level and the HCE test's total annual 
compensation requirement methodologies. Additionally, to maintain the 
effectiveness of these tests, the Department is finalizing an updating 
mechanism that will update these earnings thresholds to reflect current 
wage data, initially on July 1, 2024 and every 3 years thereafter. The 
Department's response to commenter feedback on the specific proposals 
included in the NPRM is provided in section V. This section explains 
the need for the Department to update the part 541 earnings thresholds 
and addresses commenter feedback on whether the earnings thresholds 
established in the 2019 rule should be increased.
    As the Department explained in the NPRM, there is a need for the 
Department to update the salary level to fully restore the salary 
level's screening function and to account for the shift to a one-test 
system in the 2004 rule, which broadened the exemption by placing the 
entire burden of this shift on employees who historically were entitled 
to the FLSA's overtime protection because they performed substantial 
amounts of nonexempt work and earned between the long and short test 
salary levels, but became exempt because they passed the more lenient 
standard duties test. Since switching from a two-test to a one-test 
system for defining and delimiting the EAP exemption in 2004, the 
Department has followed different approaches to set the standard salary 
level. In 2004, the Department used a methodology that produced a 
salary level amount that was equivalent to the lower long test salary 
level under the two-test system.\93\ This approach continued to perform 
the historical screening function of the long salary test--providing 
overtime protection to employees who earned less than the long test 
salary level. But it broadened the exemption to include employees 
earning between the long and short test salary levels who historically 
had not met the long duties test (and therefore were not considered 
bona fide EAP employees) and now became exempt if they met the less 
rigorous standard duties test.\94\ The Department followed this same 
methodology to set the standard salary level in 2019, but applying the 
2004 rule's methodology to contemporaneous data in 2019 resulted in a 
salary level that was lower than what would have been the equivalent of 
the long test salary level and thus did not fulfill the historical 
screening function for low-paid employees.\95\ This broadened the EAP 
exemption even further by, for the first time, exempting a group of 
white-collar employees earning below the equivalent of the long test 
salary level.
---------------------------------------------------------------------------

    \93\ See 69 FR 22168-69.
    \94\ Id. at 22214.
    \95\ See 84 FR 51260 (Table 4) (showing that the salary level 
derived from the Department's long test methodology would have been 
$724 per week rather than the finalized $684 per week amount).
---------------------------------------------------------------------------

    To address the concern that the 2004 rule did not provide overtime 
compensation for lower-salaried white-collar employees performing large 
amounts of nonexempt work, in 2016 the Department set the standard 
salary level using a methodology that produced a salary at the low end 
of the historical range of short test salary levels.\96\ This approach 
restored overtime protection to lower-salaried white-collar employees 
who performed substantial amounts of nonexempt work, but it also made 
nonexempt some employees paid below the new salary level who performed 
only a limited amount of nonexempt work and would have been exempt 
under the long duties test.\97\ In the challenge to the 2016 rule, the 
district court expressed concern that the 2016 rule conferred overtime 
eligibility based on salary level alone to a substantial number of 
employees who would otherwise be exempt.\98\
---------------------------------------------------------------------------

    \96\ 81 FR 32405.
    \97\ See 84 FR 10908; 84 FR 51242.
    \98\ See Nevada, 275 F.Supp.3d. at 806.
---------------------------------------------------------------------------

    As explained in greater detail in section V.B, setting the standard 
salary level at the 35th percentile of weekly earnings of full-time 
salaried workers in the lowest-wage Census Region ($1,128 per week, 
$58,656 annually), which is below the midpoint between the long and 
short tests, will work effectively with the standard duties test to 
better define and delimit the EAP exemption, in part by more 
effectively accounting for the switch from a two-test to a one-test 
system, and will reasonably distribute the impact of the shift by 
ensuring overtime protection for some lower-salaried employees without 
excluding from exemption too many white-collar employees solely based 
on their salary level.\99\ The new standard salary level will also 
account for earnings growth since the 2019 rule and fully restore the 
historical screening function of the salary level test. At the same 
time, the duties test will continue to determine exemption status for a 
large majority of all salaried white-collar employees subject to the 
part 541 regulations.
---------------------------------------------------------------------------

    \99\ See section V.A.3.
---------------------------------------------------------------------------

    As the Department has explained,\100\ earnings thresholds in the 
part 541 regulations gradually lose their effectiveness as the salaries 
paid to nonexempt employees rise over time. These impacts grow in the 
absence of increases to the salary threshold that keep pace with wage 
growth. Moreover, the longer it takes for the Department to implement 
such increases, the larger the increases must be to restore earning 
thresholds to maintain their effectiveness. More than 4 years have 
passed since the 2019 final rule established the current earnings 
thresholds. In the intervening years, salaried workers in the U.S. 
economy have experienced a rapid growth in their nominal wages, such 
that the current $684 per week salary level now corresponds to 
approximately the 12th percentile of earnings of full-time salaried 
workers in the lowest-wage Census Region and retail nationally. The 
longer the Department waits to update these earnings thresholds, the 
less effective they become in helping define

[[Page 32849]]

and delimit the EAP exemption. For example, applying the 2019 standard 
salary level methodology to current earnings data will result in a new 
threshold of $844 per week--a 23 percent ($160 per week) increase over 
the current $684 salary level. Earnings for full-time wage and salary 
workers nationally have increased even more rapidly, rising by 24 
percent during this period.\101\
---------------------------------------------------------------------------

    \100\ See, e.g., 84 FR 51250-51.
    \101\ Estimate based on the change in median usual weekly 
earnings of full-time wage and salary workers from Q3 2019 to Q4 
2023. BLS, Median usual weekly earnings of full-time wage and salary 
workers by sex, quarterly averages, seasonally adjusted. https://www.bls.gov/news.release/wkyeng.t01.htm.
---------------------------------------------------------------------------

    The Department is also increasing the HCE total annual compensation 
threshold to the annualized weekly earnings amount of the 85th 
percentile of full-time salaried workers nationally ($151,164). Similar 
to the standard salary level, nominal wage growth among higher-wage 
workers has eroded the effectiveness of the HCE threshold; data shows 
that the $107,432 threshold now corresponds to the 70th percentile of 
annual earnings of full-time salaried workers nationwide. Reapplying 
the 2019 methodology (annualized weekly earnings of the 80th percentile 
of full-time salaried workers nationally) to current earnings data 
would result in a threshold of $132,964 per year--a 24 percent increase 
over the current threshold of $107,432. Increasing the HCE test's total 
annual compensation threshold equivalent to the 85th percentile of 
salaried worker earnings nationwide will result in an HCE threshold 
reserved for employees at the top of today's economic ladder and, 
unlike a lower threshold, not risk the unintended exemption of large 
numbers of employees in high-wage regions.
    Finally, the Department is adopting a mechanism to regularly update 
the thresholds for earnings growth, which will ensure that the 
thresholds continue to work effectively to help identify EAP employees. 
As noted above, the history of the part 541 regulations shows multiple, 
significant gaps during which the salary levels were not updated and 
their effectiveness in helping to define the EAP exemption decreased as 
wages increased. While the Department has generally increased its part 
541 earnings thresholds every 5 to 9 years in the 37 years between 1938 
and 1975, more recent decades have included long periods without 
raising the salary level, resulting in significant erosion of the real 
value of the threshold levels followed by unpredictable increases. 
Routine updates of the earnings thresholds to reflect wage growth will 
bring certainty and stability to employers and employees alike.
    The Department received many comments addressing the adequacy of 
the current salary and compensation thresholds set in the 2019 rule and 
the need for this rulemaking. Generally, employees and affiliated 
commenters, including labor unions, worker advocacy groups, plaintiff-
side law firms, and others, supported the rulemaking as an overdue 
effort to restore FLSA protections that have eroded in recent decades, 
though a number of commenters urged the Department to adopt higher 
threshold increases than those proposed in the NPRM. By contrast, most 
employers and affiliated stakeholders opposed the main aspects of the 
proposal, with many urging the Department to withdraw the NPRM 
altogether. Some employers supported the proposal, or stated that they 
would support, or not oppose, some change to the current thresholds.
    Many commenters agreed with the Department's assessment that the 
current salary level is too low.\102\ See, e.g., Coalition of Gender 
Justice and Civil Rights Organizations; Coalition of State Attorneys 
General; Economic Policy Institute (EPI); Schuck Law LLC; Texas 
RioGrande Legal Aid; United Steel, Paper and Forestry, Rubber, 
Manufacturing, Energy, Allied Industrial and Service Workers 
International Union (United Steelworkers). Several commenters asserted 
that the current standard salary level ``fails to provide a true 
incentive for employers to balance the additional hours they ask of 
their workers with the costs of . . . overtime pay[,]'' which they 
stated in turn undermines the FLSA's policy goals of providing ``extra 
pay for extra work . . . [and] spreading employment.'' See, e.g., 
Center for Law and Social Policy (CLASP); Caring Across Generations; 
Family Values @Work; Jobs to Move America; North Carolina Justice 
Center; Workplace Justice Project. Opining that the standard salary 
level ``has been increased too infrequently--and by too little[,]'' 
Business for a Fair Minimum Wage asserted that the ``current outdated 
overtime threshold is ripe for abuse and fosters unfair pay, worker 
burnout, poorer health and safety, and increased employee turnover.'' 
American Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO) asserted that the $684 per week salary level is ``so low that 
it risks becoming irrelevant[.]''
---------------------------------------------------------------------------

    \102\ Commenter views on the adequacy of the current HCE 
threshold are addressed in section V.C.
---------------------------------------------------------------------------

    Finally, some supportive commenters provided reasons why, in their 
opinion, this rulemaking is timely. A joint comment submitted by 10 
Democratic members of the House of Representatives asserted that 
``[o]vertime standards are long overdue for a meaningful update.'' See 
also AFL-CIO (asserting that setting the salary level below the long 
test level in the 2019 rule ``led to the faster irrelevance of the 
current level''). The Coalition of State AGs commented that 
``[r]egardless of whether [the $684 per week standard salary] level was 
appropriate in 2019, economic trends in the intervening years have 
rendered that level obsolete . . . [as] $684 in January 2020 has the 
same buying power as $816.90 in September 2023.'' Sanford Heisler Sharp 
LLP (Sanford Heisler Sharp) invoked ``the explosion of remote work 
since 2020'' as support for the rulemaking, asserting that the 
significant increase in telework since 2020 has meant that employers 
are ``no longer constrained by the practical limitation of the worker 
leaving the workplace.''
    Many employer trade associations that were neutral or opposed to 
the NPRM's specific proposals for increasing the compensation levels 
expressed openness or support for a rulemaking to change the existing 
part 541 earnings thresholds. See, e.g., Alliance for Chemical 
Distribution; Growmark Comment Campaign (GROWMARK); National Cotton 
Ginners Association; National Golf Course Owners Association. Reporting 
on the results of a survey taken of its members, Society for Human 
Resource Management (SHRM) stated that its members ``support a 
reasonable increase to the rule's minimum salary threshold . . . as 
only 4% of the total number of respondents indicated that they would 
not support any increase.'' Independent Sector remarked that ``a 
healthy and equitable nonprofit workforce requires an increase in the 
salary threshold beyond $35,568.'' See also North Carolina Center for 
Nonprofits (``The Center recognizes that a higher salary level 
threshold would benefit people served by nonprofits and many nonprofit 
employees, and we encourage the Department to move forward with a final 
rule that increases the [current] salary level threshold[.]''). 
National Association of Convenience Stores commented that it 
``acknowledges that the minimum salary level should be revisited 
occasionally, and it support[s] USDOL's approach in 2019 of doing so 
approximately every four years[.]'' See also Retail Industry Leaders 
Association

[[Page 32850]]

(RILA) (``We recognize that the DOL committed itself in 2019 to engage 
in more regular reviews of the salary threshold level for the [EAP] 
exemptions and that the DOL now is following up on that commitment.'').
    Other employer stakeholders disputed the need for this rulemaking. 
Many of these commenters, including the American Bus Association, 
Americans for Prosperity Foundation, Construction Industry Round Table, 
and National Restaurant Association, asserted that increases to the 
part 541 earnings thresholds were unnecessary at this time because the 
last update took effect on January 1, 2020. A number of commenters 
stated that prior salary level updates have occurred less frequently. 
See, e.g., National Association of Manufacturers (NAM) (never less than 
5 years); National Demolition Association (on average every 9 to 10 
years); National Association of Wholesale Distributors (NAW) 
(historically 7 to 9 years). National Retail Federation (NRF) commented 
that ``[t]here has been no increase of the federal minimum wage since 
2019, and therefore, there is no need to adjust the minimum salary 
threshold.'' NRF further asserted that there was no need to increase 
the part 541 earnings thresholds because ``market forces have already 
increased the compensation of lower-level exempt employees'' since 
2019, echoing the sentiment from several individual employers that 
markets should determine employee wages rather than government 
regulation. See also, e.g., Casa Del Mar Beachfront Suites (opposing 
changes to the regulations and stating that the wages it pays ``are 
based on free enterprise and competitive business plans''); Individual 
Small Business Commenter (asking the Department to ``let the market 
take care of the situation''). Numerous commenters also asserted that 
the Department should refrain from amending the part 541 regulations at 
this time due to current conditions in specific industries or the 
broader economy. See, e.g., Asian American Hotel Owners Association, 
Inc.; American Hotel and Lodging Association (AHLA); College and 
University Professional Association for Human Resources (CUPA-HR); Food 
Marketing Institute (FMI); Indiana Chamber of Commerce; National 
Association of Home Builders (NAHB).
    Finally, a small number of commenters opposed this rulemaking on 
the grounds that the Department lacks the legal authority to use any 
salary criteria to define and delimit the EAP exemption. See, e.g., 
America First Policy Institute (AFPI); National Federation of 
Independent Business (NFIB); Pacific Legal Foundation.\103\ However, 
the overwhelming majority of commenters did not oppose the use of 
salary criteria in the part 541 regulations or address the Department's 
authority, and a number of employer representatives expressed general 
support for the use of earnings thresholds. See, e.g., AHLA (``[M]oving 
to a duties-only test would undoubtedly result in a more rigid duties 
test . . . [and] likely result in excessive burdens on the hospitality 
industry, including new and onerous recordkeeping requirements and 
increased litigation costs.''); National Restaurant Association 
(``[S]alary levels save investigators and employers time by giving them 
a quick, short-hand test[.]''); Transportation Intermediaries 
Association (``Implementing a duties-only test without considering 
salary would be overly complex[.]''). This sentiment is consistent with 
stakeholder feedback provided in earlier part 541 rulemakings.\104\
---------------------------------------------------------------------------

    \103\ See discussion in section V.A.
    \104\ See supra note 23.
---------------------------------------------------------------------------

    Having reviewed the comments received, the Department remains of 
the view that the earnings criteria in the part 541 regulations must be 
increased and disagrees with commenters that urged the Department to 
withdraw its proposal. In addition to updating the salary level to 
account for wage growth since 2019, an update is needed in part because 
the current standard salary level is too low to fully perform its 
screening role, as it is now significantly below the contemporary 
equivalent of the historical long test salary level ($942 per 
week).\105\ Moreover, as the Department explained in the NPRM, there is 
a need for the Department to update the salary level to account for the 
shift to a one-test system in the 2004 rule, which broadened the 
exemption by placing the entire burden of this shift on employees who 
historically were entitled to the FLSA's overtime protection because 
they performed substantial amounts of nonexempt work and earned between 
the long and short test salary levels, but are now exempt because they 
pass the more lenient standard duties test. This effect would continue 
to grow over time in the absence of an increase to the current $684 per 
week standard salary level.
---------------------------------------------------------------------------

    \105\ See sections V.B. and VII.C.8.
---------------------------------------------------------------------------

    The Department disagrees with the criticism from some commenters 
that this rulemaking is premature due to the relative recency of the 
2019 rule. In that rule, the Department ``reaffirm[ed] its intent to 
update the standard salary level and HCE total annual compensation 
threshold more regularly in the future'' than it has in the past, 
noting that ``long periods without updates . . . diminish the 
usefulness of the salary level test and cause future increases to be 
larger and more challenging for businesses to absorb.'' \106\ Notably, 
the Department initially proposed in the 2019 NPRM to codify a 
commitment to update the part 541 earnings thresholds on a quadrennial 
basis (i.e., once every 4 years) through notice and comment 
rulemaking.\107\ While that proposed commitment was not adopted in the 
2019 final rule, the Department reaffirmed the importance of, and its 
commitment to, regular updates in its 2019 final rule. The Department's 
2019 final rule in no way suggested that increases to the part 541 
earnings thresholds should occur only after some longer period of time.
---------------------------------------------------------------------------

    \106\ 84 FR 51251-52.
    \107\ 84 FR 10914-15.
---------------------------------------------------------------------------

    Relatedly, the fact that employee salaries have grown substantially 
since 2019 underscores the need for this rulemaking. Commenter 
assertions to the contrary, including that the federal minimum wage has 
not increased since the salary level was last updated, misunderstand 
the purpose of the part 541 earnings thresholds, which are intended to 
assist in the identification of EAP employees based on the wages 
employees presently receive.\108\ To the extent that employers have 
already been providing raises to exempt EAP workers since January 1, 
2020 (the effective date of the 2019 final rule), as some commenters 
contended, those increases should be appropriately reflected in the 
earnings thresholds to ensure their effectiveness.
---------------------------------------------------------------------------

    \108\ The Department ``is not authorized to set wages or 
salaries for executive, administrative, and professional employees . 
. . [and] improving the conditions of such employees is not the 
objective of the [part 541] regulations.'' Weiss Report at 11.
---------------------------------------------------------------------------

    The Department is sensitive to commenter concerns about the 
potential impact of this rulemaking on affected employers. However, as 
discussed in greater detail in the regulatory impact analysis in 
section VII, the costs of this rule, while significant, are a necessary 
byproduct of ensuring a salary level that works effectively with the 
duties tests both now and in the future.

IV. Effective Date

    The Department proposed that all aspects of the proposed rule would 
become effective 60 days after publication of the final rule. This 
proposed effective date was consistent

[[Page 32851]]

with the 60 days mandated for a ``major rule'' under the Congressional 
Review Act and exceeded the 30-day minimum required under the 
Administrative Procedure Act (APA).\109\ The Department recognized that 
the 60-day proposed effective date was shorter than the effective dates 
for the 2004, 2016, and 2019 rules, which were between approximately 90 
and 180 days. The Department stated that a 60-day effective date was 
appropriate, however, in part because employers and employees are 
familiar with the procedures in the current regulations from the 2019 
rulemaking and changed economic circumstances have caused a strong need 
to update the standard salary level. The Department also sought 
comments on whether to apply different effective dates to different 
provisions of the proposed rule. The Department is finalizing an 
effective date of July 1, 2024. The change to the standard salary level 
methodology and the change to the HCE total annual compensation 
methodology will have a delayed applicability date of January 1, 
2025.\110\ Accordingly, the standard salary level and HCE total annual 
compensation requirement will increase at the initial update on the 
effective date July 1, 2024 (to $844 and $132,964, respectively), again 
on the applicability date for the new methodologies on January 1, 2025 
(to $1,128 and $151,164, respectively), and then every 3 years after 
the initial update on July 1 (using the methodology in effect at the 
time of each update).
---------------------------------------------------------------------------

    \109\ See 5 U.S.C. 801(a)(3)(A); 5 U.S.C. 553(d).
    \110\ The January 1, 2025 applicability date is six months after 
the effective date of the rule.
---------------------------------------------------------------------------

    The Department specifically asked for comments on whether the 
effective date for the increase of the standard salary level should be 
60 days after publication as proposed or instead if the increase should 
be made effective at a later date, such as 6 months or 1 year after 
publication of the final rule. If the effective date were longer than 
60 days, the Department sought comments on ``whether it should 
initially adjust the salary level to reflect recent wage growth (for 
example, making an initial adjustment for wage growth 60 days after 
publication of a final rule and having the final rule standard salary 
level be effective 6 months or a year after publication).'' \111\ Were 
it to follow such an approach, the Department sought comments on the 
methodology it should use for an initial update, specifically ``whether 
to implement an initial update to the standard salary level, effective 
60 days after publication of a final rule, that uses the current salary 
level methodology (the 20th percentile of weekly earnings of full-time 
nonhourly workers in the lowest-wage Census Region and retail 
nationally) and applies it to the most recent data available[.]'' \112\
---------------------------------------------------------------------------

    \111\ 88 FR 62180.
    \112\ Id. Commenters generally did not address the Department's 
suggestion that a delay in the effective date for the proposed 
standard salary level increase be combined with an initial update to 
the existing salary level to reflect wage growth. An individual 
commenter acknowledged the Department's suggestion but ``defer[ed] 
to the economists and statisticians to comment as to whether, if the 
effective date is later than 60 days, the Department should 
initially adjust the salary level to reflect recent wage growth, and 
if so, the methodology for doing so.'' See also Ho-Chunk, Inc., a 
subsidiary of the Winnebago Tribe of Nebraska.
---------------------------------------------------------------------------

    The Department did not specifically request comment on delaying the 
effective date of the proposed HCE compensation threshold beyond 60 
days or on making an initial update using current data and the existing 
HCE compensation methodology if it were to delay the effective date of 
the new total annual compensation threshold. The Department stated that 
it believed a 60-day effective date was appropriate for the proposed 
increase to the HCE compensation threshold because only a relatively 
small number of employees earning between the current and proposed HCE 
compensation thresholds would not meet the standard duties test and be 
affected by the proposed change. The Department sought comment on the 
proposed effective date for the HCE compensation threshold.
    Lastly, the Department proposed that the first automatic update to 
the new compensation levels be effective 3 years after the proposed 60-
day effective date. The Department sought comments on whether the date 
for the first automatic update should be adjusted if it were to make an 
initial adjustment to any of the compensation levels.
    Many commenters that objected to the proposed rule also objected to 
the proposed 60-day effective date should the Department go forward 
with a final rule. Commenters addressed their comments to the single 
60-day effective date and generally did not suggest different effective 
dates for different provisions. Several commenters suggested effective 
dates between 90 and 180 days, which the NPRM noted was the range for 
recent rules. See, e.g., HR Policy Association (minimum of 90 days); 
International Foodservice Distributors Association (IFDA) (minimum of 
90 days); American Society of Travel Advisors (ASTA) (90 to 180 days); 
RILA (at least 120 days); NAIS/NBOA (at least 120 days). Several 
commenters suggested a 180-day effective date. See, e.g., AASA/AESA/
ASBO; CUPA-HR; LeadingAge; NRF. The National Council of Young Men's 
Christian Associations of the United States of America (YMCA) suggested 
an effective date of at least 6 to 9 months. The United States Chamber 
of Commerce (Chamber), National Association of Convenience Stores, and 
NAFCU suggested an effective date of 12 months. Commenters including 
the U.S. Small Business Administration Office of Advocacy (SBA 
Advocacy), National Automobile Dealers Association, and Partnership to 
Protect Workplace Opportunity (PPWO) suggested an effective date of 12 
to 18 months. Commenters including Seyfarth Shaw LLP (Seyfarth Shaw) 
and Credit Union National Association (CUNA) suggested an effective 
date of 150 days to align with the proposed notice period for future 
update amounts. A number of commenters suggested tying the effective 
date to the beginning of the next calendar year (January 1, 2025). See, 
e.g., Seyfarth Shaw; SHRM; RILA; YMCA. Some commenters suggested a 
longer time period between the publication and effective date of the 
final rule for specific industries or types of employers. See, e.g., 
Boy Scouts of America (requesting at least 12 months of lead time for 
nonprofit employers); Small Business Majority (180 days for small 
businesses with fewer than 50 employees). A few commenters linked the 
need for a longer effective date with what they asserted was 
uncertainty as to the final salary amount caused by the Department's 
projections in footnote 3 of the NPRM, with NRF asserting that ``[t]he 
brevity of the implementation period is particularly problematic given 
the Department's . . . lack of clarity about the dollar value of the 
proposed threshold.'' See also HR Policy Association; RILA.
    Several commenters suggested phasing in any increase in the salary 
level, often in addition to an initial extension of the proposed 
effective date. Commenters advocating for a phase-in suggested a range 
of steps or timeframes. See, e.g., ASTA (not less than 3 years); 
Chamber (3 years in even or incrementally larger steps); North Carolina 
Center for Nonprofits (``multiple years''); National Council of 
Nonprofits (two or more steps); PPWO (a period of years), Safe Journeys 
(6 years); Washington Farm Labor Association (``multi-year''); YMCA 
(proportional increases over 5 years).
    Most commenters supporting the Department's proposal did not 
specifically address the effective date for the Department's proposed 
changes. Commenters including American Federation of Teachers (AFT), 
National

[[Page 32852]]

Partnership for Women & Families (National Partnership), and National 
Women's Law Center (NWLC) urged the Department to finalize the rule 
``without delay.'' American Federation of State, County, and Municipal 
Employees (AFSCME) specifically supported the 60-day effective date as 
proposed. A number of commenters in the home and community-based health 
services sector, that were generally supportive of the Department's 
intent but expressed concerns with its proposal, advocated for a longer 
effective date. ANCOR suggested a 2-year delayed effective date 
followed by a 3-to-5-year phase-in of the new salary level. See also 
Advancing States (18-month to 2-year effective date); National 
Association of State Directors of Developmental Disabilities Services 
(NASDDDS) (18- to 24-month effective date for providers of services to 
individuals with intellectual and developmental disabilities); United 
Cerebral Palsy (phase-in or transition period for the Department to 
work with the Centers for Medicare and Medicaid Services and the 
Administration for Community Living to minimize impact on access to 
services). BrightSpring Health Services urged the Department to delay 
the effective date for 2 years and to consider an enforcement delay for 
the sector as it did in 2016.
    As discussed below, the Department believes it is important to 
update the standard salary level in part to account for substantial 
earnings growth since the Department last updated the salary level in 
the 2019 rule. It has been more than 4 years since the Department 
updated the salary level, and economic conditions have changed 
significantly since then as evidenced by the salary increase that would 
result by applying current data to the 2019 salary level methodology 
($844 per week, an increase of $160 per week over the existing salary 
level). These economic conditions have also impacted employees subject 
to the HCE exemption. Applying current data to the 2019 HCE 
compensation methodology would result in an annual compensation 
threshold of $132,964 (an increase of $25,551 over the existing 
compensation threshold).
    At the same time, the Department is also mindful of the desire 
expressed by multiple commenters to extend the effective date of the 
new standard salary and annual compensation methodologies from the 
proposed 60-day period to 6-to-12 months (or more). A longer effective 
date for the new standard salary level and HCE compensation 
methodologies would provide employers with more time to make 
adjustments after they are informed of the exact levels of the 
thresholds set in this final rule.
    After considering the comments, the Department has determined that 
the final rule will be effective on July 1, 2024, but the new standard 
salary level methodology and the new HCE total annual compensation 
methodology will not be applicable until January 1, 2025. The 
Department is setting the effective date on July 1, 2024 rather than a 
set number of days after publication in the Federal Register because it 
will further administrability for employers to have the effective date 
coincide with the first of a month and some employers' budget years 
also begin on that date.\113\ While the rule will be effective on July 
1, 2024, the Department is extending by an additional 6 months the time 
for employers to comply with the new standard salary level methodology 
and the HCE total annual compensation methodology. Accordingly, the 
applicability date for Sec.  541.600(a)(2), which sets out the new 
standard salary level of the 35th percentile of weekly earnings of 
full-time nonhourly workers in the lowest-wage Census Region, and Sec.  
541.601(a)(2), which sets out the new HCE total annual compensation 
level of the annualized earnings amount of the 85th percentile of full-
time nonhourly workers nationally, will be January 1, 2025. The 
Department decided to delay application of the new HCE total annual 
compensation methodology so that the new methodologies for both the 
standard salary level and the HCE compensation level take effect at the 
same time. The delayed applicability date will allow employers 6 
additional months beyond the proposed 60-day effective date in which to 
evaluate employees who will be affected by the new standard salary 
level methodology and the new HCE compensation level methodology and 
make any adjustments.
---------------------------------------------------------------------------

    \113\ Future updates will occur every three years on July 1.
---------------------------------------------------------------------------

    New Sec.  541.607, Regular updates to amounts of salary and 
compensation required, will be applicable on the effective date July 1, 
2024. Because the current standard salary and HCE annual compensation 
levels have not been updated in more than 4 years, and economic 
conditions have changed markedly during that time, the first update 
will occur on that same date (Sec.  541.607(a)). Subsequent updates 
will occur every 3 years after this date starting on July 1, 2027 
(Sec.  541.607(b)). As discussed in section V.A, regular updating of 
the standard salary and HCE annual compensation levels to reflect 
current wage data is imperative to ensure that they continue to work 
effectively in combination with the duties tests in defining bona fide 
EAP employees. In light of the approximately 8-month delay in 
applicability of the new standard salary and HCE total compensation 
methodologies, the initial update will use the current methodologies 
from the 2019 rule, which result in a salary level of $844 per week and 
an HCE total annual compensation threshold of $132,964. Accordingly, 
the requirement that an exempt employee be compensated on a salary 
basis at a salary level of at least $844 per week, set forth in Sec.  
541.600(a)(1), and that an employee receive total annual compensation 
of at least $132,964 per year to qualify for the HCE exemption, set 
forth in Sec.  541.601(a)(1), will apply on July 1, 2024. The 
Department believes that this date for the initial update is 
appropriate because it will use methodologies that employers are 
familiar with. Subsequent triennial updates will apply the most recent 
four quarters of data to the standard salary and HCE total annual 
compensation levels in effect at the time of the updates. The 
Department anticipates that at the time of the first triennial update, 
the salary and compensation methodologies that are in effect will be 
the methodologies described in Sec. Sec.  541.600(a)(2) and 
541.601(a)(2) of this final rule. The Department notes that the 
standard salary and HCE compensation levels need to be updated 
regularly based on up-to-date earnings data to ensure that they 
continue to function effectively regardless of the methodology used to 
set the levels.
    Except for the specific provisions discussed in this section that 
will become applicable on January 1, 2025, all other provisions of this 
final rule will be applicable on the effective date on July 1, 2024.

V. Discussion of Final Regulatory Revisions

    Consistent with its statutory duty to define and delimit the EAP 
exemption, the Department is making several changes to the earnings 
thresholds provided in the part 541 regulations. As explained in 
greater detail below, the Department is setting the standard salary 
level at the 35th percentile of weekly earnings of full-time salaried 
workers in the lowest-wage Census Region (currently the South). The 
Department additionally is raising the HCE test's total annual 
compensation requirement to the annualized equivalent of the 85th 
percentile of weekly earnings of full-time salaried workers nationally. 
Finally, the

[[Page 32853]]

Department is adopting a new mechanism to update the standard salary 
level and the HCE total annual compensation threshold, initially on 
July 1, 2024 and every 3 years thereafter to ensure that they remain 
effective tests for exemption. The Department is not making substantive 
changes to any provisions related to the salary basis or job duties 
tests.
    The primary changes to the existing regulations are in Sec. Sec.  
541.5, 541.600, 541.601, and newly added Sec.  541.607. In addition, 
the Department is making conforming changes throughout part 541 to 
update references to the applicable salary level requirements.\114\ The 
discussion below begins with the new updating provision (Sec.  
541.607), which will make an initial update to the salary and 
compensation thresholds on July 1, 2024, followed by discussion of 
changes to the standard salary level methodology (Sec.  541.600(a)(2)) 
and HCE total annual compensation threshold methodology (Sec.  
541.601(a)(2)), which will become applicable on January 1, 2025. As 
noted in these sections, the Department intends for the changes in this 
final rule to be severable. Severability is addressed more fully at the 
end of the discussion of final revisions with a discussion of the new 
severability provision (Sec.  541.5).
---------------------------------------------------------------------------

    \114\ The Department is also revising Sec. Sec.  541.100, 
541.200, and 541.300 to reflect that an executive, administrative, 
or professional employee must be compensated on a salary or fee 
basis at not less than the level set forth in Sec.  541.600 (rather 
than referencing a specific salary level amount). Similarly, it is 
revising Sec.  541.204 and Sec.  541.400 to reflect that an employee 
employed in a bona fide administrative capacity and a computer 
employee may qualify for the section 13(a)(1) exemption if they are 
compensated on a salary or fee basis at not less than the level set 
forth in Sec.  541.600 (rather than referencing a specific salary 
level amount). The Department is also updating cross-references to 
Sec.  541.600(a) in Sec. Sec.  541.602 and 541.605 to reference 
Sec.  541.600(a)-(c). Finally, the Department is revising Sec.  
541.604, which explains the circumstances under which an employer 
may provide an exempt employee with additional compensation without 
violating the salary basis requirement, and Sec.  541.605, which 
sets forth the conditions under which an administrative or 
professional employee may be compensated on a fee basis, with 
examples that reflect the new standard salary level amount of $1,128 
per week.
---------------------------------------------------------------------------

A. Updating the Standard Salary Level and Total Annual Compensation 
Threshold

    As the Department stated in the NPRM, it has long recognized the 
need to regularly update the earnings thresholds to ensure that they 
remain useful in helping differentiate between exempt and nonexempt 
white-collar employees. In each of its part 541 rulemakings since 2004, 
the Department has observed that a salary level that is not kept up to 
date becomes obsolete as wages for nonexempt workers increase over 
time.\115\ Long intervals between rulemakings have resulted in eroded 
earnings thresholds based on outdated earnings data that were ill-
equipped to help identify bona fide executive, administrative, and 
professional employees. This problem was most clearly illustrated by 
the stagnant salary levels in the regulations from 1975 to 2004, during 
which period increases in the federal minimum wage meant that by 1991, 
earnings of a worker paid the federal minimum wage exceeded the long 
test salary level for a 40-hour workweek and came close to equaling the 
short test salary level.\116\
---------------------------------------------------------------------------

    \115\ 84 FR 51250-51; 81 FR 32430; 69 FR 22164. See also, 88 FR 
62176.
    \116\ See section II.B.1.
---------------------------------------------------------------------------

    The Department proposed in the NPRM a mechanism to regularly update 
the earnings thresholds to maintain their effectiveness. In a new Sec.  
[thinsp]541.607(a)(1) and (b)(1), the Department proposed to update the 
standard salary level and the HCE total annual compensation requirement 
every 3 years to reflect current earnings data. The Department proposed 
in Sec.  541.607(a)(2) and (b)(2) to make the triennial updates using 
the methodologies proposed to set the thresholds in the NPRM--i.e., the 
35th percentile of weekly earnings of full-time nonhourly workers in 
the lowest-wage Census Region (currently the South) for the standard 
salary level and the annualized weekly earnings of the 85th percentile 
of full-time nonhourly workers nationally for the HCE total annual 
compensation requirement.\117\ The NPRM also outlined in proposed Sec.  
541.607(c) the manner in which the Department would publish advance 
notice of the updated thresholds and included a pause mechanism in 
proposed Sec.  541.607(d) that could be triggered to delay a scheduled 
update under certain circumstances.
---------------------------------------------------------------------------

    \117\ Observing that the proposed special salary level for 
American Samoa and the base rate for the motion picture industry are 
set in relation to the standard salary level, the Department also 
proposed that those earnings thresholds reset at the time the 
standard salary level was updated. The Department is not finalizing 
its proposal to apply the standard salary level to the U.S. 
territories subject to the federal minimum wage and to update the 
special salary levels for American Samoa and the motion picture 
industry. See supra note 9. Therefore, the updating mechanism 
finalized in this rule will not apply to the special salary levels 
at this time.
---------------------------------------------------------------------------

    The Department proposed to make the first update under its proposed 
updating mechanism 3 years after the effective date of the final rule. 
The effective date of the final rule was in turn proposed to be 60 days 
after publication and to apply to all aspects of the proposed rule, 
including the proposed methodologies for the standard salary level and 
the HCE total annual compensation threshold. As discussed in section 
IV, the Department specifically sought comments on whether the 
effective date for the proposed change to the standard salary level 
methodology (to the 35th percentile of weekly earnings of full-time 
salaried workers in the lowest-wage Census Region) should be 60 days 
after publication as proposed or if the change should be made effective 
at some later date, such as 6 months or 1 year after publication of the 
final rule.\118\ If the effective date were longer than 60 days, the 
Department sought comments on ``whether it should initially adjust the 
salary level to reflect recent wage growth (for example, making an 
initial adjustment for wage growth 60 days after publication of a final 
rule and having the final rule standard salary level be effective 6 
months or a year after publication).'' \119\ The Department also sought 
comments on what methodology to use for the initial update, were it to 
follow such an approach. In particular, the Department invited comments 
on ``whether to implement an initial update to the standard salary 
level, effective 60 days after publication of a final rule, that uses 
the current salary level methodology (the 20th percentile of weekly 
earnings of full-time nonhourly workers in the lowest-wage Census 
Region and retail nationally) and applies it to the most recent data 
available ($822 per week based on current data).'' \120\
---------------------------------------------------------------------------

    \118\ 88 FR 62180
    \119\ Id.
    \120\ Id.
---------------------------------------------------------------------------

    The Department received numerous comments on its proposed updating 
mechanism. Many organizations representing employee interests as well 
as some employers generally supported the updating mechanism, while 
most organizations representing employer interests opposed it. Many of 
the commenters opposing the proposed updating mechanism asserted that 
the Department lacked the authority to institute such a mechanism. 
After considering the comments received, the Department is finalizing 
the updating mechanism, with some modifications as discussed below, to 
keep the salary and compensation thresholds up to date with current 
data and maintain their effectiveness.
    The first update under new Sec.  541.607 will occur on July 1, 
2024. As discussed in section IV, the new standard salary level and HCE 
total annual compensation threshold methodologies will not be 
applicable until January 1, 2025 (a total of approximately 8 months

[[Page 32854]]

after publication of this final rule). Accordingly, Sec.  541.607(a) 
establishes an initial update on July 1, 2024 to the standard salary 
level and the HCE total annual compensation threshold using the 
methodologies in place at that time (i.e., the 2019 rule 
methodologies), which results in a $844 per week standard salary level 
and a $132,964 HCE total annual compensation threshold. Section 
541.607(b) further establishes future updates to the standard salary 
level and HCE total annual compensation threshold with current earnings 
data beginning 3 years after the date of the initial update, and every 
3 years thereafter, using the methodologies in place at the time of the 
updates. The Department anticipates that by the time the first 
triennial update under the updating mechanism occurs on July 1, 2027, 
assuming the Department has not engaged in further rulemaking, the new 
methodologies for the standard salary level and HCE total annual 
compensation requirement established by this final rule will be 
effective and the triennial update would employ these new 
methodologies. In response to commenter concerns, the Department is 
also adding clarifying language from the NPRM preamble to the final 
regulatory text of the delay provision.
1. The Department's Authority To Adopt a Salary Level Test
    The updating mechanism in new Sec.  541.607 will maintain the 
effectiveness of the salary and compensation thresholds set in 
Sec. Sec.  541.600 and 541.601 by adjusting them regularly to reflect 
current economic data. At the outset, a small number of commenters 
contended the Department lacked authority under section 13(a)(1) to 
even include a salary level test in the regulations, advocating for the 
Department to withdraw this rulemaking. See, e.g., AFPI; Job Creators 
Network Foundation; NFIB; Pacific Legal Foundation. These commenters 
asserted that the express terms of section 13(a)(1) do not permit the 
Department to include any compensation-based requirements.
    The Department maintains its longstanding position that the 
Secretary's express authority to ``define[ ]'' and ``delimit[ ]'' the 
terms of the EAP exemption includes the authority to use a salary level 
test as one criterion for identifying employees who are employed in a 
``bona fide executive, administrative, or professional capacity.'' The 
Department has used a salary level test since the first part 541 
regulations in 1938. From the FLSA's earliest days, stakeholders have 
generally favored the use of a salary test,\121\ and the Department's 
authority to use a salary test has been repeatedly upheld,\122\ 
including recently in Mayfield v. U.S. Dept. of Labor.\123\ Despite 
numerous amendments to the FLSA over the past 85 years, Congress has 
not restricted the Department's use of the salary level tests in the 
regulations. Significant regulatory changes involving the salary 
requirements since 1938 include adding a separate salary level for 
professional employees in 1940, adopting a two-test system with 
separate short and long test salary levels in 1949, and creating a 
single standard salary level test and establishing a new HCE exemption 
test in 2004. These changes were all made through regulations issued 
pursuant to the Secretary's authority to define and delimit the 
exemption. Despite having amended the FLSA numerous times over the 
years, Congress has not amended section 13(a)(1) to alter these 
regulatory compensation requirements.
---------------------------------------------------------------------------

    \121\ See Stein Report at 5, 19. As discussed in section 
V.B.4.i, the vast majority of employer commenters in this 
rulemaking, whether favoring no increase or a smaller increase, 
presumed the salary level test's continued existence and utility, 
with some, such as the National Restaurant Association, expressly 
referencing their support for the 2019 rule's salary level increase. 
Many commenters acknowledged the salary level's longstanding 
function of screening obviously nonexempt employees from the 
exemption. See section V.B.4.ii. Other commenters that opposed the 
proposal nonetheless cited benefits of having a salary level test, 
including helping to ensure that the EAP exemption is not abused, 
see, e.g., AASA/AESA/ASBO, Bellevue University, and ``sav[ing] 
investigators and employers time by giving them a quick, short-hand 
test[.]'' See National Restaurant Association.
    \122\ 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).
    \123\ 2023 WL 6168251 (W.D. Tex. Sept. 20, 2023), appeal 
docketed, No. 23-50724 (5th Cir. Oct. 11, 2023).
---------------------------------------------------------------------------

    The FLSA gives the Secretary power to ``define[]'' and 
``delimit[]'' the terms ``bona fide executive, administrative, or 
professional capacity'' through regulation. Congress thus ``provided 
that employees should be exempt who fell within certain general 
classifications''--those employed in a bona fide executive, 
administrative, or professional capacity--and authorized the Secretary 
``to define and delimit those classifications by reasonable and 
rational specific criteria.'' \124\ Therefore, the Department ``is 
responsible not only for determining which employees are entitled to 
the exemption, but also for drawing the line beyond which the exemption 
is not applicable.'' \125\
---------------------------------------------------------------------------

    \124\ Walling, 140 F.2d at 831-32; see Ellis v. J.R.'s Country 
Stores, Inc., 779 F.3d 1184, 1199 (10th Cir. 2015) (approvingly 
quoting Walling); see also Auer v. Robins, 519 U.S. 452, 456 (1997) 
(``The FLSA grants the Secretary broad authority to `defin[e] and 
delimi[t]' the scope of the exemption for executive, administrative, 
and professional employees.'').
    \125\ Stein Report at 2.
---------------------------------------------------------------------------

2. Initial Update to the Standard Salary Level and Total Annual 
Compensation Threshold To Reflect the Change in Earnings Since the 2019 
Rule
    The Department received many comments regarding its proposed 
regulatory mechanism for updating the standard salary level and the HCE 
total annual compensation requirement to maintain their effectiveness. 
While commenters disagreed on how and when the salary and total annual 
compensation thresholds should be updated, commenters generally did not 
dispute that the earnings thresholds need to be periodically updated to 
reflect current economic conditions. Many commenters that opposed the 
proposed updating mechanism nonetheless agreed that the thresholds in 
the regulations need to be periodically updated. See, e.g., ASTA; FMI; 
SBA Advocacy; SHRM; TechServe Alliance; World Floor Covering 
Association (WFCA).
    In the context of addressing the Department's proposed standard 
salary level methodology, several commenters generally expressed 
support for--or in opposing the salary level suggested in the 
alternative--an increase to the salary level using the 2019 
methodology. See, e.g., Bellevue University; Center for Workplace 
Compliance (CWC); RILA; YMCA. CWC noted that the 2019 methodology is 
well-established and already familiar to employees and employers, and 
Bellevue University similarly stated that this methodology ``has been 
previously field-tested on the U.S. economy[.]'' As noted in section 
IV, commenters generally did not address applying the 2019 methodology 
through the updating mechanism.
    The Department remains convinced that effective salary and 
compensation thresholds must use up-to-date earnings data. This 
position is long-standing. When the Department updated its salary level 
tests in 1949, for example, it explained that the ``relative 
ineffectiveness of these tests in recent years is the result of changed 
economic conditions rather than any inherent weakness in the tests[,]'' 
and that the ``increase in wage rates and salary levels gradually 
weakened the effectiveness of the present salary tests as a dividing 
line between exempt and nonexempt employees.'' \126\ The principle that 
effective tests for exemption must use

[[Page 32855]]

up-to-date earnings data remains as true today as it was 75 years ago.
---------------------------------------------------------------------------

    \126\ Weiss Report at 8.
---------------------------------------------------------------------------

    The Department's need to update the standard salary level and HCE 
total annual compensation requirement for current data in this 
rulemaking is distinct from its decision to establish new methodologies 
for setting those thresholds. The current salary and compensation 
levels have been in place for more than 4 years and need to be updated 
to reflect current wage data to maintain their effectiveness.\127\ 
Since the Department's last rulemaking in 2019, there has been 
significant change in salaried worker earnings.\128\ The $684 standard 
salary level is far below what constitutes the 20th percentile of 
weekly earnings of full-time salaried workers in the South and/or in 
the retail industry nationally using current data, which greatly 
undermines the utility of the threshold as a means of helping 
distinguish exempt from nonexempt employees. The same is true for the 
HCE total annual compensation threshold. Updating the existing 
thresholds to reflect current earnings data is consistent with the 
intent the Department has expressed repeatedly in its past part 541 
rulemakings, including in the 2019 rule, to periodically update the 
thresholds.
---------------------------------------------------------------------------

    \127\ The standard salary level and HCE total annual 
compensation threshold in the 2019 rule were set using pooled data 
for July 2016 to June 2019, adjusted to reflect 2018/2019. 84 FR 
51250.
    \128\ See section VII.
---------------------------------------------------------------------------

    For these reasons, the Department is revising final Sec.  
541.607(a) to provide for an initial update to the standard salary 
level and HCE total annual compensation requirement with current 
earnings data on July 1, 2024. Specifically, the standard salary level 
will be updated to the 20th percentile of weekly earnings of full-time 
salaried workers in the South and/or in the retail industry nationally 
using the most recent data, resulting in a standard salary level of 
$844 per week. The HCE total annual compensation threshold will be 
updated to the 80th percentile of full-time salaried worker earnings 
nationwide using the most recent data, resulting in an annual 
compensation threshold of $132,964. The Department believes that the 
July 1, 2024 effective date provides sufficient time for employers to 
adjust to this initial update because the methodology used for the 
initial update to the standard salary level has been used since 2004 
and is familiar to the regulated community. The size of the initial 
increase to the standard salary level, which is $160 per week, is also 
less (in nominal terms) than the $229 per week change that resulted 
from the 2019 rule.\129\
---------------------------------------------------------------------------

    \129\ Consistent with the 2019 rule, the Department used pooled 
data for the most recent 3 years (2021, 2022, 2023), adjusting them 
to reflect 2023, for the initial updates to both the standard salary 
level and HCE total annual compensation threshold. See 84 FR 51250.
---------------------------------------------------------------------------

    The initial update on July 1, 2024 and the change in the standard 
salary level and HCE total annual compensation methodologies on January 
1, 2025 will result in two increases in the compensation thresholds 
within a 12-month period. The Department recognizes that for some 
employers both changes to the compensation thresholds may occur in the 
same budget year. Because both the amount of the initial update and the 
subsequent increase to the thresholds are set forth in this final rule, 
some employers may choose to make a single adjustment at the first date 
that encompasses both the initial update and the impending change to 
the standard salary level and the HCE total annual compensation 
threshold.\130\
---------------------------------------------------------------------------

    \130\ Although the Department's approach is not a phase-in, the 
effect of increasing the salary level twice in 8 months is, from a 
timing perspective, not altogether different from the request from 
some commenters to phase in the salary level in more than one step. 
See, e.g., Argentum & ASHA; Associated General Contractors; SBA 
Advocacy.
---------------------------------------------------------------------------

    The Department intends for the initial update of the standard 
salary level and the HCE total annual compensation requirement, using 
current earnings data applied to the 2019 rule methodologies, to be 
severable from future triennial updates to the thresholds under Sec.  
541.607(b), as well as from the revision to the methodologies for the 
standard salary level and the HCE total annual compensation threshold 
discussed in section V.B and section V.C. In implementing the initial 
update, the Department intends to account for changes in earnings since 
the 2019 rule. In changing the methodology for the standard salary 
level, the Department further intends to fully restore the salary 
level's historic screening function and account for the shift in the 
2004 rule from a two-test to a one-test system for defining and 
delimiting the EAP exemption.\131\ Lastly, in changing the methodology 
for the HCE total annual compensation threshold, the Department intends 
to ensure the HCE threshold's role as a streamlined alternative for 
those employees most likely to meet the standard duties test by 
excluding all but those employees ``at the very top of [the] economic 
ladder[.]'' \132\ These are independent objectives of this rulemaking 
and the provisions implementing them can each stand alone. Therefore, 
the Department intends for the initial update to remain in force even 
if the methodologies for the standard salary level and/or the HCE total 
annual compensation threshold established by this final rule are stayed 
or do not take effect. Similarly, the Department intends for the 
initial update to remain in effect even if future triennial updates 
under Sec.  541.607(b) are stayed or do not take effect.
---------------------------------------------------------------------------

    \131\ See section V.B.
    \132\ See section V.C.
---------------------------------------------------------------------------

    The initial update will take effect approximately 60 days after the 
publication of the final rule, immediately coming out of this notice 
and comment rulemaking. As such, the notice procedures set forth in 
Sec.  541.607(b)(3) will not apply. As discussed below, future 
triennial updates will be preceded by advance publication of a notice 
of the updated salary level and HCE total annual compensation threshold 
in the Federal Register. For the initial update, this final rule 
provides notice of the updated salary and compensation levels.\133\
---------------------------------------------------------------------------

    \133\ The NPRM included updating the 2019 rule standard salary 
level and HCE annual compensation threshold using 2022 data as a 
regulatory alternative, stating that applying the methodologies 
would result in a standard salary level of $822 per week and a HCE 
annual compensation threshold of $125,268. See 88 FR 62218.
---------------------------------------------------------------------------

3. Future Triennial Updates To Keep the Standard Salary Level and Total 
Annual Compensation Threshold Up to Date
    As the Department previously explained, the earnings thresholds are 
only an effective indicator of exempt status if they are kept up to 
date. Left unchanged, the thresholds become substantially less 
effective in helping identify exempt EAP employees as wages for workers 
increase over time. To that end, the Department proposed to triennially 
update the standard salary level and HCE total annual compensation 
threshold by applying the most recent earnings data to the 
methodologies set forth in proposed Sec.  541.600(a)(1) and Sec.  
541.601(a)(1), while any change to the methodologies used to set the 
standard salary level and HCE annual compensation threshold would be 
effectuated through future rulemaking.
    The Department received many comments on its proposed triennial 
updating mechanism for keeping the thresholds up to date in the future, 
which are addressed below. The comments were sharply divided on this 
aspect of the NPRM. After considering the comments received, the 
Department concludes that establishing a mechanism for resetting the 
standard salary level and HCE total annual compensation requirement 
based on

[[Page 32856]]

current earnings data, and on a regular 3-year schedule, will ensure 
that the thresholds remain effective into the future and thus better 
serve to help define and delimit the EAP exemption.
i. The Department's Authority To Update the Standard Salary Level and 
Total Annual Compensation Threshold With Current Data in the Future
    The Department received many comments regarding its authority to 
update the earnings thresholds through the proposed triennial updating 
mechanism. A majority of the commenters opposing the updating mechanism 
challenged the Department's authority to adopt such a provision. Most 
commenters that supported the updating mechanism did not specifically 
discuss the Department's authority to institute such a mechanism. As to 
commenters supporting the proposed triennial updating mechanism that 
addressed the issue, they supported the Department's authority.
    Commenters favoring automatic updating, such as AFL-CIO and EPI, 
agreed with the Department that just as the Department has authority to 
set salary thresholds for the EAP exemption, it also has authority to 
provide for regular updates to ensure the thresholds do not erode over 
time. Some supportive commenters further emphasized that future updates 
would make no change to the standard (i.e., methodology) by which the 
Department implements the FLSA, but rather merely ensure that the 
standard accounts for current economic conditions. See, e.g., 
Administrative Law Professors; Democracy Forward Foundation; EPI. The 
Administrative Law Professors similarly asserted that automatic 
adjustments to the earnings thresholds fall within the Secretary's 
authority to define and delimit ``what it means to function in a `bona 
fide executive, administrative, or professional capacity[.]' '' 
Observing that even a so-called ``static'' salary threshold expressed 
in ``non-indexed dollar terms'' is constantly changing as a matter of 
economic value, the Administrative Law Professors asserted that ``if a 
non-indexed salary threshold is lawful, as nobody seriously questions, 
so too is a standard pegged to income percentile.'' The Administrative 
Law Professors observed ``it is arguably more rational'' for the 
Department to ``proffer a regulation that expressly accounts for the 
inevitably dynamic nature of every salary threshold . . . rather than 
to permit arbitrarily fluid macroeconomic conditions to dictate the 
threshold's true economic worth.''
    On the other hand, many commenters opposing the proposed updating 
mechanism asserted that the Department lacks statutory authority to 
update the thresholds in this manner. Some of these commenters 
contended that since the FLSA does not expressly authorize the 
Department to index the earnings thresholds unlike, for example, the 
Social Security Act or the Patient Protection and Affordable Care Act, 
it follows that the FLSA does not authorize the Department to 
automatically update the thresholds.\134\ See, e.g., CUPA-HR; 
International Dairy Foods Association (IDFA); PPWO; RILA; Seyfarth 
Shaw. Several commenters pointed out that Congress did not provide for 
automatic updating of any of the earnings requirements under the FLSA, 
such as the minimum wage under section 6, the tip credit wage under 
section 3(m), or the hourly wage for exempt computer employees under 
section 13(a)(17). See, e.g., AFPI; FMI. Commenters including National 
Restaurant Association and PPWO further asserted that Congress never 
amended the FLSA to grant the Department explicit authority to index 
the salary level despite knowing that the Department has updated the 
salary level on an irregular schedule.
---------------------------------------------------------------------------

    \134\ In contrast, the Administrative Law Professors highlighted 
that ``[a]utomatic updating is a common feature of regulations 
pegged to monetary values, even when the relevant authorizing 
statutes make no specific reference to indexing or automatic 
adjustment.'' Some of the examples cited by the Administrative Law 
Professors to illustrate this point include: 79 FR 63317 (2014) 
(establishing automatic inflationary adjustments to the minimum 
amount set by the regulation to define ``adverse credit history''); 
76 FR 23110 (2011) (establishing automatic adjustments to the amount 
of ``Denied Boarding Compensation'' airlines must pay affected 
passengers); 88 FR 35150 (2023) (adopting once-every-five year 
inflation adjustments to the revenue threshold for defining a 
``small business''); and Amusement & Music Operators Ass'n v. 
Copyright Royalty Tribunal, 676 F.2d 1144 (7th Cir. 1982), cert. 
denied, 103 S. Ct. 210 (1982) (upholding a rule promulgated by the 
Copyright Royalty Tribunal establishing a $50 compulsory royalty fee 
to be paid by jukebox operators, and which would be subject to 
future inflationary adjustments).
---------------------------------------------------------------------------

    As the Department stated in the NPRM, the Department's authority to 
update the salary level tests for the EAP exemption by regularly 
resetting them based on existing methodologies is grounded in section 
13(a)(1), which expressly gives the Secretary broad authority to define 
and delimit the scope of the exemption. Using this broad authority, the 
Department established the first salary level tests by regulation in 
1938. Despite numerous amendments to the FLSA over the past 85 years, 
Congress has not restricted the Department's use of the salary level 
tests. As just discussed, significant changes involving the salary 
requirements made through regulations issued pursuant to the 
Secretary's authority to define and delimit the exemption include 
adding a separate salary level for professional employees in 1940, 
adopting the two-test system in 1949, and switching to the single 
standard test and adding the new HCE test in 2004. Despite having 
amended the FLSA numerous times over the years, Congress has not 
amended section 13(a)(1) to alter these regulatory salary requirements.
    Unlike the statutes some of the commenters referenced explicitly 
providing for indexing, or the statutory FLSA wage rates--i.e., the 
minimum wage under section 6, the tip credit wage under section 3(m), 
or the hourly wage for exempt computer employees under section 
13(a)(17)--the part 541 earnings thresholds are established in the 
regulations. Therefore, it is not surprising that the FLSA contains no 
specific reference to the indexing or automatic adjustments of these 
thresholds. The Department agrees with the Administrative Law 
Professors and other commenters that stated that the Department has the 
authority to establish a mechanism to automatically adjust the earnings 
thresholds to ensure their continued effectiveness, using a process 
established through notice and comment rulemaking, just as it has the 
authority to initially set them. The Department believes the updating 
mechanism in this final rule fulfills its statutory obligation to 
define and delimit the EAP exemptions by preventing the thresholds from 
becoming obsolete and providing predictability and clarity for the 
regulated community.
    Many of the commenters opposed to the updating mechanism also 
asserted that automatically updating the earnings thresholds would 
violate the APA's rulemaking requirements expressly incorporated by 
reference in section 13(a)(1). See, e.g., AFPI; FMI; National Club 
Association; and Wage and Hour Defense Institute. These and other 
commenters claimed that the Department cannot lawfully update the 
salary level without engaging in notice and comment rulemaking for each 
update. See, e.g., AASA/AESA/ASBO; Competitive Enterprise Institute; 
CWC; RILA. IFDA, for example, asserted that notice and comment 
rulemaking needs to precede each future update so that stakeholders 
have the opportunity to comment on and adequately prepare for any 
changes that will affect them. AHLA commented that the proposal to 
update the thresholds triennially without a preceding opportunity for 
comment is

[[Page 32857]]

``drastic and troublesome'' and that ``notice and comment will help 
ensure that the knowledge, expertise, and vital input of interested 
stakeholders will be considered before moving forward with increases.''
    Relatedly, AFPI, NRF, and SBA Advocacy asserted that automatic 
updating would violate the directive under section 13(a)(1) that the 
Department define and delimit the EAP exemption ``from time to time'' 
by regulations. NRF, for example, noted that Congress asked the 
Department to revisit the EAP exemptions from time to time ``expecting 
the Department to use its deep knowledge of the U.S. economy in 
general, and labor market in particular, to establish appropriate 
parameters for the exemptions'' and contended that by implementing 
automatic updates the Department evades that decision-making process. 
AFPI similarly asserted that the ``directive, `from time to time,' does 
not allow the Department to set it and forget it.''
    The Department disagrees with the assertion that triennial updates 
using the compensation methodologies adopted in the regulations 
improperly bypass the APA's--and section 13(a)(1) by reference--
requirements for notice and comment rulemaking. The Department is 
adopting an updating mechanism in this rulemaking after publishing a 
notice of the proposed rule and providing opportunity for stakeholders 
to comment in accordance with the APA's notice and comment 
requirements. The Department has received and considered numerous 
comments on the proposed updating mechanism. Future updates under the 
triennial updating mechanism would simply reset the thresholds by 
applying current data to a standard already established by notice and 
comment regulation, providing clarity for the regulated community as to 
future changes in the thresholds. Therefore, the Department disagrees 
with commenters that claimed that notice and comment rulemaking must 
precede each future update made through the updating mechanism even 
where the methodology for setting the compensation levels and the 
mechanism for updating those levels would remain unchanged.\135\ The 
updating mechanism will not alter the Department's ability to engage in 
future rulemaking to change the updating mechanism or any other aspect 
of the part 541 regulations at any point.
---------------------------------------------------------------------------

    \135\ Some commenters, such as Independent Electrical 
Contractors, RILA, and U-Haul, further asserted that automatic 
updates improperly bypass the requirements of the Regulatory 
Flexibility Act (``RFA'') and executive orders requiring the 
Department to undertake a detailed economic and cost analysis. The 
Department disagrees. Pursuant to the RFA, the Department has 
included in this final rule as well as in the NPRM detailed 
estimates for the future costs of updates under the updating 
mechanism. See section VII and VIII; 88 FR 62224. Similarly, as 
relevant here, Executive Order 13563 directs agencies to take 
certain steps when promulgating regulations, including using the 
``best available techniques to quantify anticipated present and 
future benefits and costs as accurately as possible'' and adopting 
regulations ``through a process that involves public 
participation.'' 76 FR 3821 (Jan. 18, 2011). The current rulemaking 
fully satisfies all aspects of Executive Order 13563. See section 
VII; 88 FR 62182. The RFA and Executive Order 13563 do not require 
notice and comment rulemaking to precede future triennial updates 
made through the updating mechanism established in this rulemaking.
---------------------------------------------------------------------------

    The Department also disagrees with commenters that claimed section 
13(a)(1)'s ``time to time'' language precludes the Department from 
adopting an updating mechanism. The updating mechanism would only 
ensure the standard salary level and total annual compensation 
threshold remain at the percentiles established through rulemaking. 
This does not preclude the Department from engaging in future 
rulemaking ``from time to time'' if it determines that there is a need 
to change the underlying methodologies for setting the standard salary 
level or HCE total annual compensation threshold, the updating 
mechanism, or any other substantive change to part 541, as the 
Department did, for instance, in 1940, 1949, 1958 1975, 2004, 2016, and 
2019.
    Many commenters opposing the updating mechanism referenced the 
Department's prior statements to further support their assertion that 
the Department lacks authority to implement automatic updating. In 
particular, commenters pointed to the Department's decision not to 
institute an automatic updating mechanism in the 2004 rule and its 
statement that ``the Department finds nothing in the legislative or 
regulatory history that would support indexing or automatic 
increases.'' See, e.g., NAM; NFIB; SBA Advocacy. Others, like PPWO, 
further asserted that automatic updates are contrary to the 
Department's statement in the 2004 rule that ``[t]he salary levels 
should be adjusted when wage survey data and other policy concerns 
support such a change.''
    As stated in the NPRM, the Department's decision not to institute 
an automatic updating mechanism in the 2004 and 2019 rulemakings in no 
way suggests that it lacks the authority to do so. In its 2004 rule, 
the Department stated that it found nothing in the legislative or 
regulatory history that would support indexing or automatic 
increases.\136\ As the Department elaborated in its 2016 rulemaking, 
there was likewise no such authority prohibiting automatic 
updating.\137\ The 2004 rule did not discuss the Department's statutory 
authority to promulgate an updating mechanism through notice and 
comment rulemaking or explore in detail whether automatic updates to 
the salary levels posed a viable solution to problems created by lapses 
between rulemakings. As the Department explained in the 2016 rule, the 
Department's reference in the 2004 rule to automatic updating simply 
reflected the Department's conclusion at that time that an inflation-
based updating mechanism, such as one based on changes in the prices of 
consumer goods, that unduly impacts low-wage regions and industries, 
would be inappropriate. Such concerns are not implicated here, where 
the mechanism will update the salary level to keep it at the same 
percentile of earnings of full-time salaried workers. As for concerns 
that the salary level should be updated only when wage data warrants 
it, the updating mechanism does just that--as the earnings thresholds 
will change only to the extent earnings data in the relevant data sets 
have changed, whether upward or downward as conditions dictate.
---------------------------------------------------------------------------

    \136\ 69 FR 22171.
    \137\ See 81 FR 32432-33 (noting that ``instituting an automatic 
updating mechanism . . . is an appropriate modernization and within 
the Department's authority.'').
---------------------------------------------------------------------------

    Similarly, the Department declined to adopt automatic updating in 
the 2019 rule because it ``believe[d] that it is important to preserve 
the Department's flexibility to adapt to different types of 
circumstances,'' \138\ and not because it lacked authority to do so. 
While the Department decided not to institute an updating mechanism in 
its 2019 rule, it never said that it lacked the statutory authority to 
do so. Upon further consideration, the Department concludes that the 
best way to ensure the standard salary level and HCE total compensation 
threshold remain up to date is a triennial updating mechanism that 
maintains the Department's flexibility to adapt to different 
circumstances and change course as necessary.
---------------------------------------------------------------------------

    \138\ 84 FR 51252.
---------------------------------------------------------------------------

ii. Rationale for Continuing To Update the Standard Salary Level and 
Total Annual Compensation Threshold With Current Data in the Future
    The Department explained in the NPRM that its proposed updating

[[Page 32858]]

mechanism would allow for regular and more predictable updates to the 
earnings thresholds, which would benefit both employers and employees 
and would better fulfill the Department's statutory duty to define and 
delimit the EAP exemption by preventing the erosion of those levels 
over time. The Department noted that its regulatory history, marked in 
many instances by lengthy gaps between rulemakings, underscored the 
difficulty with updating the earnings thresholds as quickly and 
regularly as necessary to keep pace with changing employee earnings and 
to maintain the full effectiveness of the thresholds. Through the 
proposed updating mechanism, the Department explained it would be able 
to timely and efficiently update the standard salary level and the HCE 
total annual compensation requirement by using the same methodologies 
as initially proposed and adopted through notice and comment rulemaking 
to set the thresholds. The Department noted that updating the 
thresholds in this manner would prevent the more drastic and 
unpredictable increases associated with less frequent updates and 
ensure that future salary level increases occur at a known interval and 
in more gradual increments. The Department received many comments on 
the rationale for implementing the proposed triennial updating 
mechanism.
    Several organizations representing employee interests as well as a 
handful of employers agreed with the Department that an updating 
mechanism would ensure the thresholds keep pace with wages and retain 
their usefulness. See, e.g., Coalition of Gender Justice and Civil 
Rights Organizations; National Partnership; National Education 
Association (NEA); National Employment Lawyers Association (NELA); 
National Employment Law Project (NELP); Uncommon Goods; W.S. Badger 
Company. Nichols Kaster, PLLP (Nichols Kaster) noted the updating 
mechanism protects the thresholds from becoming outdated and 
irrelevant, although it believed that annual updates would better 
reflect the economy. NELA commented that ``indexing represents the only 
simple and accurate'' way to preserve the real value of the standard 
salary level and the HCE total compensation threshold through time, 
although they contended that the proposed methodologies should be 
higher earnings percentiles.
    Many commenters supportive of the updating mechanism also asserted 
that regular updates would provide greater predictability for employers 
and employees alike. See, e.g., AFL-CIO; Center for WorkLife Law at 
University of California Law and Partner Organizations (Family 
Caregiving Coalition); Justice at Work; NEA. Small Business Majority 
expressed support for the proposed updating mechanism noting that 
smaller, predictable increases that are known well in advance--as 
opposed to ``large and sudden'' increases--would allow small business 
owners to be better prepared for any staffing or compensation changes 
they need to make. Nineteen Democratic Senators commented that an 
updating mechanism is the most effective way to provide consistency and 
stability for both workers and businesses. See also, e.g., EPI; 
Washington State Department of Labor and Industries. CLASP similarly 
noted the proposed updating provision would enable employers to know 
exactly what to expect and when to expect it.
    In contrast, many organizations representing employer interests 
disagreed with the Department's rationale for the proposed updating 
mechanism. Several of these commenters criticized the Department for 
stating that the updating mechanism is a more ``viable and efficient'' 
means of updating the thresholds by asserting that the Department is 
trying to avoid its obligation to engage in notice and comment 
rulemaking simply because such rulemaking is resource-intensive. See, 
e.g., IDFA; National Restaurant Association; PPWO. The Chamber 
similarly commented that the Department's history of long gaps in 
rulemaking is not an adequate justification for adopting what it 
characterized as ``a historically unprecedented change.''
    Commenters including AHLA, FMI, the National Beer Wholesalers 
Association, and Seyfarth Shaw, asserted automatic updating would lead 
to uncertainty that would pose administrative and compliance burdens on 
employers. Some commenters, such as HR Policy Association and PPWO, 
asserted the proposed mechanism would make it difficult to ascertain 
exactly what the threshold will be every 3 years. Other commenters, 
including CUPA-HR, FMI, IDFA, and SHRM, asserted triennial updates 
would have a significant financial impact on employers as they would 
need to account for the cost of salaries or potential overtime as well 
as the cost of conducting reclassification analysis and implementing 
the necessary changes every 3 years. Some nonprofit organizations and 
providers of home and community-based health services expressed concern 
that future updates would be difficult for the nonprofit sector because 
of their funding sources. See, e.g., Allegheny Children's Initiative; 
ANCOR.
    Some commenters opposing the updating mechanism claimed automatic 
updates would hinder the Department from considering economic 
circumstances when making updates. Ten Republican Senators asserted 
automatic updates ``blind the administration to critical considerations 
about the state of the economy and the workforce, including the 
unemployment rate, inflation, job vacancies, or whether employers are 
in a position to adjust to the increases without shedding jobs.'' Some 
commenters, including Illinois College, ISSA, and the Society of 
Independent Gasoline Marketers of America, expressed concern that the 
proposed mechanism could lead to updates happening at a time of 
economic downturn or a recession and could further exacerbate those 
economic conditions. Others expressed concern that the updating 
mechanism would hinder future rulemaking to change the earnings 
thresholds. See, e.g., Chamber; National Association of Convenience 
Stores.
    The Department continues to believe that the updating mechanism 
will ensure the earnings thresholds keep pace with changes in earnings 
and remain useful in the future in helping to delineate EAP employees 
from non-EAP employees. Whereas a fixed salary level threshold becomes 
less effective over time as the data used to set it grows outdated, a 
fixed methodology remains relevant if applied to contemporaneous data. 
The Department agrees with the commenters that stated that the updating 
mechanism's triennial updates would provide greater certainty and 
predictability for the regulated community. Unlike irregular updates to 
the earnings thresholds, which may result in drastic changes to the 
thresholds, regular updates on a pre-determined interval and using an 
established methodology will produce more predictable and incremental 
changes. For this reason, the Department disagrees with the assertion 
by some commenters that regular updates will lead to unpredictable 
adjustments and ongoing uncertainty. The Department also disagrees with 
commenters like HR Policy Association that claimed the proposed 
mechanism will make it difficult to ascertain what exactly the 
threshold will be every 3 years. Through the updating mechanism, the 
Department will reset the standard salary level and total annual 
compensation threshold using the most recent, publicly available, U.S. 
Bureau of Labor Statistics (BLS) data on earnings for salaried workers. 
Therefore,

[[Page 32859]]

stakeholders will be able to track where the thresholds would fall on a 
quarterly basis by looking at the BLS data \139\ and can estimate the 
changes in the thresholds even before the Department publishes the 
notice with the adjusted thresholds in the Federal Register. The 
Department believes that, compared to the irregular updates of the 
past, stakeholders will be better positioned to anticipate and prepare 
for future updates under the updating mechanism.
---------------------------------------------------------------------------

    \139\ See https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm.
---------------------------------------------------------------------------

    Moreover, the Department does not agree with the assertion that 
routine updates would lead to undue increases at a time of economic 
downturn or recession. If anything, the Department's new updating 
mechanism will ensure that the thresholds match the earnings data as 
they exist at the time of the update, whether by increasing or 
decreasing the earnings thresholds as warranted by the data. As 
discussed below, the Department's decision to deviate from the 2016 
rule by adopting a mechanism for pausing future updates further guards 
against such concerns. Similarly, nothing about the updating mechanism 
precludes the Department from revisiting the standard salary level and 
HCE total annual compensation methodologies in the future when 
conditions warrant. Having considered the comments received, the 
Department remains convinced that an updating mechanism providing for 
regular updates on a triennial basis is the best means of ensuring that 
the salary and compensation tests continue to provide an effective 
means, in tandem with the duties tests, to distinguish between EAP and 
non-EAP employees.
iii. Specific Features of the Updating Mechanism
    The Department received many comments regarding the various aspects 
of the proposed updating mechanism, including the updating frequency, 
methodology, notice period, and pause mechanism. The Department 
proposed in Sec.  541.607(a) and (b) to update the earnings thresholds 
every 3 years by using the same methodology used in the regulations to 
set the thresholds. Specifically, proposed Sec.  541.607(a)(2) and 
(b)(2) stated that the methodologies for setting the standard salary 
level and HCE annual compensation threshold in the NPRM would be used 
for future updates.
    Many commenters that supported the proposed updating mechanism 
expressed a preference for more frequent updates. See, e.g., Coalition 
of State AGs; Jobs to Move America; NEA; NELP. Commenters including 
AFL-CIO, National Partnership, and Nichols Kaster asserted annual 
updates, compared to triennial updates, offered better predictability 
and would ensure that the salary threshold keeps pace with the changes 
in wages. EPI similarly observed that annual updates would ensure that 
the salary threshold more closely adheres to the chosen percentile 
``rather than slipping further and further behind in between triennial 
updates[.]''
    Most commenters that opposed updating did not separately comment on 
the updating frequency, but some addressed it in the context of 
discussing the impact of the updating mechanism on employers. Many of 
these commenters claimed triennial updates would impose substantial 
financial and compliance burdens on employers as they would need to 
engage in reclassification analysis and implement necessary changes to 
adjust to the updated thresholds every 3 years. See, e.g., ABC; CUPA-
HR; HR Policy Association; NAM. Most of the commenters opposing the 
updating mechanism did not suggest an alternative updating frequency. 
Notwithstanding their objection to automatic updating, however, a few 
commenters, including AHLA, ASTA, WFCA, and YMCA, suggested a longer 
updating frequency ranging from 4 to 6 years.
    The Department agrees with the commenters that stated annual 
updates would keep the salary level more up to date given that employee 
earnings are constantly changing. However, as stated in the NPRM, the 
Department is also mindful of the potential burden that possible 
changes to the tests for exemption on an annual basis would impose on 
employers, including costs associated with evaluating the exemption 
status of employees on an annual basis. Conversely, the Department is 
not convinced by commenter claims that triennial updates would impose 
an undue financial and compliance burden on employers. Many of these 
commenters did not address the fact that the alternative to automatic 
updating is not a permanent fixed earnings threshold, but instead 
larger changes to the threshold that could occur during irregular 
future updates. Since the updating mechanism will change the thresholds 
regularly and incrementally, and based on actual earnings of salaried 
workers, the Department predicts that employers will be in a better 
position to be able to adjust to the changes resulting from triennial 
updates. The Department remains persuaded that triennial updates are 
frequent enough to ensure that the part 541 earnings thresholds are 
kept up to date--and continue to serve the purpose of helping to 
identify exempt employees--while not being overly burdensome for 
employers. The final rule, therefore, adopts an updating frequency of 3 
years as proposed.
    The comments regarding the method through which the Department's 
proposed updating mechanism would reset the salary and compensation 
thresholds were also divided. Commenters favoring routine updates also 
supported the proposal to update the thresholds using the fixed 
percentile approach--to keep the thresholds at the same percentile of 
earnings of full-time salaried worker as established by the 
regulations. NELA, for example, asserted that updating the thresholds 
using a fixed percentile of earnings ``is the fairest way to maintain 
consistency in workers' FLSA eligibility in light of inevitable 
economic change.'' EPI similarly noted updating the thresholds through 
the proposed methodology ensures that the standard under the 
Department's rule ``is simply preserved--neither strengthened nor 
weakened.''
    Commenters that opposed automatic updating opposed the proposed 
updating methodology. Several of these commenters reiterated an 
assertion from comments on the 2016 rulemaking that the proposed 
updating mechanism--tied to a fixed percentile--would result in the 
salary level being ``ratcheted'' upward over time due to the resulting 
actions of employers. See, e.g., Chamber; NAM; NRF (including a report 
by Oxford Economics); SBA Advocacy. The commenters contended that in 
response to each automatic update, most employers would either 
reclassify employees earning below the new salary level to hourly 
status or raise the salaries of those employees to keep their exempt 
status. These responses, the commenters claimed, would skew the 
relevant data for future updates in favor of substantial increases 
because those employees who were reclassified as hourly would fall out 
of the data pool causing the data pool to be smaller and skew towards 
higher-paid workers. See, e.g., Chamber; National Association of 
Convenience Stores; National Restaurant Association; NRF. While 
expressing a strong preference that automatic updates be abandoned 
altogether, some of the commenters concerned about this possible effect 
suggested that the Department adopt an updating mechanism tied to an 
inflation-related index. See Seyfarth Shaw; SHRM.
    The Department notes that very similar comments concerning an 
alleged

[[Page 32860]]

``ratcheting'' effect were received during the 2016 rulemaking, which 
also proposed an updating mechanism based on earnings percentiles. In 
response to those comments, the Department examined historical data to 
determine the impact of its previous salary increase.\140\ 
Specifically, the Department looked at the share of full-time white-
collar workers paid on an hourly basis before and after the 2004 rule 
(January-March 2004; January-March 2005) both below and above the 
standard salary level. The Department found that following the 2004 
rule, the share of full-time white-collar workers being paid hourly 
actually decreased marginally in the group below the standard salary 
level and increased slightly in the group above the standard salary 
level.\141\
---------------------------------------------------------------------------

    \140\ 81 FR 32441.
    \141\ See id. at 32441, 32507-08.
---------------------------------------------------------------------------

    The Department finds the claim that updating with a fixed 
percentile methodology would lead to the ``ratcheting'' upward of the 
thresholds to be unsubstantiated. The ``ratcheting'' claim is almost 
entirely based on the assumption that employers will respond to an 
automatically updated salary level by converting all or a large number 
of newly nonexempt workers to hourly status, thus removing them from 
the data set of full-time salaried workers. Yet none of the commenters 
advancing this claim presented any tangible data or evidence to support 
their assumption. Even those few commenters that provided economic 
analyses rested their views on the same unsubstantiated assumption that 
employers will generally reclassify newly nonexempt employees as 
hourly. See, e.g., NRF (including a report by Oxford Economics); PPWO 
(quoting a study by Edgeworth Economics).\142\ The results of the 
Department's close examination of the impact of the 2004 salary level 
increase provide no evidence that salary level increases due to regular 
triennial updating will result in employers converting significant 
numbers of affected EAP workers to hourly pay status and thus raising 
potential concerns about skewing future updates. Although many 
commenters made nearly identical ratcheting claims in this rulemaking, 
none of the commenters addressed the Department's analysis in response 
to those same claims in the 2016 rule.
---------------------------------------------------------------------------

    \142\ The Edgeworth Economic study that was quoted by PPWO and a 
few other commenters seemed to assume, without any support, that all 
affected workers or newly nonexempt workers who earn between $684 
and $1,059 per week will be reclassified as hourly employees.
---------------------------------------------------------------------------

    Having found no merit in the ``ratcheting'' claim, the Department 
declines to adopt the alternative methodologies suggested such as an 
updating mechanism tied to an inflation-related index. As noted in the 
NPRM, the fixed percentile approach, as opposed to other methods such 
as indexing the thresholds for inflation, eliminates the risk that 
future levels will deviate from the underlying salary setting 
methodology established through rulemaking. During the 2016 rule, the 
Department extensively considered whether to update the thresholds 
based on changes in the Consumer Price Index for All Urban Consumers 
(CPI-U)--a commonly used economic indicator for measuring 
inflation.\143\ The Department chose to update the thresholds using the 
same methodology used to initially set them in that rulemaking (i.e., a 
fixed percentile of weekly earnings of full-time salaried workers in 
the lowest-wage Census Region), observing that the objectives that 
justify setting the salary level using a fixed percentile methodology 
also supported updating the thresholds using the same methodology.\144\ 
The Department is persuaded that updating the earnings thresholds by 
applying the same methodology used to originally set the levels instead 
of indexing them for inflation best ensures that the earnings 
thresholds continue to fulfill their objective of helping effectively 
differentiate between bona fide EAP employees and those who are 
entitled to overtime pay and work appropriately with the duties test.
---------------------------------------------------------------------------

    \143\ See 81 FR 32438-41.
    \144\ See id. at 32440.
---------------------------------------------------------------------------

    New Sec.  541.607 therefore establishes triennial updates of the 
standard salary level and the HCE total compensation threshold using 
the same methodologies used to set those thresholds. Assuming the 
Department has not engaged in further rulemaking, the Department 
anticipates the second update under the updating mechanism--which will 
occur 3 years after the date of the initial update discussed in section 
V.A--will use the methodologies established by this final rule as those 
will become effective before the second update. Accordingly, the second 
update will reset the standard salary level to the 35th percentile of 
weekly earnings of full-time workers in the lowest-wage Census Region 
and will reset the HCE total annual compensation threshold to the 
annualized weekly earnings of the 85th percentile of full-time salaried 
workers nationally based on contemporaneous data at that time.
    The Department further proposed to publish in the Federal Register 
a notice with the adjusted standard salary level and the HCE total 
annual compensation threshold at least 150 days before the date the 
adjusted thresholds are set to take effect and to publish the updated 
thresholds on WHD's website no later than their effective date. The 
Department proposed to update both thresholds using the most recent 
available 4 quarters of data, as published by BLS, preceding the 
publication of the Department's notice with the adjusted levels. The 
Department received fewer comments regarding these aspects of the 
proposal than on the updating mechanism itself.
    Most commenters supporting the proposed updating mechanism did not 
separately comment on the 150-day notice period. Some commenters 
opposing automatic updates asserted that the 150-day notice period 
would not be adequate time to prepare for compliance with the new 
updated thresholds. See, e.g., Association of Public and Land-grant 
Universities (APLU) (suggesting 180-day advance notice); Chamber 
(suggesting at least 1 year notice); National Association of 
Convenience Stores (same); The American Association of Advertising 
Agencies (The 4As) (same). Regarding the data set, EPI suggested the 
Department use the most recent quarter of data asserting that the 
salary threshold would be ``suppressed'' for 2 out of every 3 years if 
the Department adopts triennial updates. On the other hand, the 
National Association of Convenience Stores, while opposing automatic 
updating, recommended the Department use the most recent 6 quarters of 
data, or those quarters minus the 2 most recent, to account for changes 
it claimed employers may make preemptively to adjust to an upcoming 
update for budgetary reasons.
    After considering the comments received, the Department is 
persuaded that a notice period of not less than 150 days provides 
sufficient time for employers to make the necessary adjustments to 
comply with the updated thresholds. This is especially true given that 
employers will be able to access the data set that will be used to make 
the adjustments as published by BLS and anticipate the extent of the 
adjustment even before the Department publishes the notice. A period 
substantially longer than 150 days would hinder the Department's 
ability to ensure that the thresholds that take effect are based on the 
most up-to-date data. Similarly, the Department believes that using the 
most recent available 4 quarters of data will account for the 
Department's goal that

[[Page 32861]]

the thresholds reflect prevailing economic conditions while balancing 
the concerns of commenters that wanted a longer or shorter period for 
the data set. Therefore, the final rule establishes that for future 
updates under the updating mechanism, the Department will publish in 
the Federal Register a notice with the adjusted thresholds not fewer 
than 150 days before the date the new adjusted thresholds are set to 
take effect and will publish the updated thresholds on the WHD website 
no later than their effective date. The updates will be based on the 
most recent available 4 quarters of data as published by BLS.
    Lastly, the Department's proposal included a provision providing 
for the delay of a scheduled update under the updating mechanism while 
the Department engages in notice and comment rulemaking to change the 
earnings requirements and/or updating mechanism, where economic or 
other conditions merit. The Department explained that the delay would 
be triggered if the Department publishes an NPRM proposing to change 
the salary level methodology and/or modify the updating mechanism by 
the date on which it publishes the notice of the revised salary and 
compensation thresholds. In that instance, the notice with the adjusted 
thresholds must state that the scheduled update will be paused for 120 
days from the day the update was set to occur while the Department 
engages in rulemaking, and that the pause will be lifted on the 121st 
day unless the Department finalizes a rule changing the salary level 
methodology and/or automatic updating mechanism by that time. In the 
event the Department does not issue a final rule by the prescribed 
deadline, the pause on the scheduled update will be lifted and the new 
thresholds will take effect on the 121st day after they were originally 
scheduled to take effect. The Department also explained the 120-day 
pause would not affect the date for the next scheduled triennial update 
given the relative shortness of the delay and so as not to disrupt the 
updating schedule. The next update, therefore, would occur 3 years from 
the date on which the delayed update would have originally been 
effective.
    The Department received somewhat mixed comments regarding its 
proposed pausing mechanism. For example, notwithstanding their 
objection to automatic updating (and in some cases, certain aspects of 
the pause mechanism), some employer organizations such as CUNA, AHLA, 
and the National Association of Professional Insurance Agents commended 
the Department for recognizing that there may be circumstances that may 
require temporarily delaying a scheduled update. Some commenters that 
supported the updating proposal agreed. For example, the Coalition of 
State AGs described the delay provision as ``a fail-safe mechanism'' 
that would provide the Department flexibility to adjust to changed 
circumstances as necessary. On the other hand, Sanford Heisler Sharp, 
while otherwise favoring the updating mechanism, objected to the pause 
feature asserting that it would ``inject uncertainty into the 
administration of the threshold, undermining the stated purpose of the 
NPRM to simplify enforcement of overtime and minimum wage 
protections.''
    Some commenters took issue with the phrase ``unforeseen economic or 
other conditions'' in the NPRM's preamble which generally described the 
circumstances in which the Department may trigger the pause mechanism. 
AHLA, CUNA, and NAIS/NBOA asserted it is not clear what circumstances 
would constitute ``unforeseen economic or other conditions.'' AFPI 
similarly pointed out the phrase was found only in the preamble and not 
in the proposed Sec.  541.607. American Council of Engineering 
Companies expressed concern that the proposed pause mechanism does not 
provide sufficient flexibility for the Department to respond to 
unexpected economic conditions and recommended that the provision be 
modified to allow the Secretary ``to suspend automatic updates if 
economic conditions warrant.'' RILA asserted the pause feature is an 
inflexible process asserting that if a catastrophic event were to occur 
within 150 days of the date of a scheduled update, the Department would 
have no flexibility or ability to delay or stop the update. A few 
commenters claimed that the 120-day pause period is not sufficient time 
to provide the Department the flexibility it needs to adjust to 
unforeseen circumstances or complete a rulemaking. See, e.g., National 
Association of Convenience Stores; NRF.
    Most of the comments objecting to or otherwise criticizing the 
pause mechanism seem to assume the only way the Department can alter a 
scheduled update or change any other aspect of the rule is through the 
updating mechanism's pause provision. That is not correct. Nothing in 
the proposed updating mechanism limits the Department's ability to 
engage in future rulemaking to change any aspect of the part 541 
regulations at any time. The pause mechanism offers the Department 
added flexibility--in addition to its ability to engage in rulemaking 
at any time to change the rule--by allowing it the ability to delay a 
scheduled update as it engages in rulemaking. As the Department noted 
in the NPRM, the pause mechanism offers the Department 270 days--150 
days before, and 120 days after, the effective date for the scheduled 
update--to complete the rulemaking process. The Department can still 
engage in rulemaking outside of this period and through that rulemaking 
can stop or delay a scheduled update or change any other aspect of the 
part 541 regulations. This is true regardless of whether the Department 
adopts the delay provision. The Department believes that the pause 
provision will provide additional flexibility in the context of the 
triennial updates and will not impact the Department's normal 
rulemaking powers.
    The Department recognizes that the phrase ``unforeseen economic or 
other conditions'' was not in proposed Sec.  541.607 and agrees that 
the lack of this language in the regulatory text creates ambiguity 
about the standard for pausing a triennial update. Therefore, the 
Department is revising Sec.  541.607(d) to include similar language. 
The Department believes this revision clarifies the standard for when 
the pause mechanism may be triggered but does not impinge on the 
Department's normal authority to engage in rulemaking for other 
reasons. The Department is disinclined to further define what 
circumstances would trigger the pause mechanism, as some commenters 
suggested. In proposing the pause mechanism, the Department was mindful 
of previous statements from stakeholders, and the Department's own 
prior statements, about the need to preserve flexibility to adapt to 
unanticipated circumstances. As an example, the Department referenced 
the COVID pandemic and its widespread impact on workplaces. However, it 
is not feasible for the Department to outline every possible 
circumstance that could warrant a delay of a scheduled update. Doing so 
would unduly limit the Department's flexibility to adjust to truly 
unanticipated circumstances.
    For these reasons, the Department has concluded that the proposed 
pause mechanism, with the modification noted above, provides the 
Department sufficient flexibility to adopt to unforeseen circumstances 
where necessary. Therefore, the new Sec.  541.607(b)(4) establishes 
that the Department can trigger the pause, where unforeseen economic or 
other

[[Page 32862]]

conditions warrant, by issuing an NPRM proposing to change the salary 
level methodology and/or modify the updating mechanism by the date on 
which it publishes the notice with the adjusted salary and compensation 
thresholds. Section 541.607(b)(4) further clarifies that the notice 
with the adjusted thresholds must state that the scheduled update will 
be paused for 120 days from the day the update was set to occur while 
the Department engages in rulemaking, and that the pause will be lifted 
on the 121st day unless the Department finalizes a rule changing the 
salary level methodology and/or automatic updating mechanism by that 
time.
    Lastly, as discussed in more detail in section V.D, the Department 
intends for the triennial updates of the standard salary level and the 
HCE total annual compensation threshold using current earnings data to 
be severable from the revision to those methodologies discussed in 
section V.B and section V.C. In implementing routine triennial updates, 
the Department intends to ensure that the salary and compensation 
thresholds set in the regulations reflect changes in earnings data and 
continue to function effectively in helping identify exempt white-
collar employees. As already noted, the Department has different 
objectives for changing the methodologies for setting the standard 
salary level and HCE total annual compensation threshold. Specifically, 
in changing the methodology for the standard salary level, the 
Department intends to fully restore the salary level's historic 
screening function and account for the shift in the 2004 rule from a 
two-test to a one-test system for defining and delimiting the EAP 
exemption.\145\ In changing the methodology for the HCE total annual 
compensation threshold, the Department intends to ensure the HCE 
threshold's role as a streamlined alternative for those employees most 
likely to meet the standard duties test by excluding all but those 
employees ``at the very top of [the] economic ladder[.]'' \146\ These 
are independent objectives of this rulemaking and the provisions 
implementing them can each stand alone. Therefore, the Department 
intends for the triennial updates to remain in force even if the 
methodologies for the standard salary level and the HCE total annual 
compensation threshold established by this final rule are stayed or do 
not take effect. Similarly, the Department intends for the triennial 
updates under Sec.  541.607(b) to remain in force even if the initial 
update for wage growth in Sec.  541.607(a) is stayed or does not take 
effect.
---------------------------------------------------------------------------

    \145\ See section V.B.
    \146\ See section V.C.
---------------------------------------------------------------------------

B. Standard Salary Level

    In its NPRM, the Department proposed to update the salary level by 
setting it equal to the 35th percentile of earnings of full-time 
salaried workers in the lowest-wage Census Region (the South), 
resulting in a proposed salary level of $1,059 per week ($55,068 for a 
full-year worker). The proposed salary level methodology built on 
lessons learned in the Department's most recent rulemakings to more 
effectively define and delimit employees employed in a bona fide EAP 
capacity. Specifically, the Department's intent in the NPRM was to 
fully restore the salary level's screening function and account for the 
switch in the 2004 rule from a two-test system to a one-test system for 
defining the EAP exemption, while also updating the standard salary 
level for earnings growth since the 2019 rule.
    The Department is finalizing the proposed standard salary level 
methodology and applying it to the most recent available earnings data, 
resulting in a salary level of $1,128 per week ($58,656 for a full-year 
worker). Setting the standard salary level at the 35th percentile of 
weekly earnings of full-time salaried workers in the lowest-wage Census 
Region will, in combination with the standard duties test, better 
define and delimit which employees are employed in a bona fide EAP 
capacity in a one-test system. Because the salary level is above the 
equivalent of the long test salary level, the final rule will (unlike 
the 2004 and 2019 rules) ensure that lower-paid white-collar employees 
who perform significant amounts of nonexempt work, and were 
historically considered by the Department not to be employed in a bona 
fide EAP capacity because they failed the long duties test, are not all 
included in the exemption. At the same time, by setting the salary 
level well below the equivalent of the short test salary level, the 
final rule will address potential concerns that the salary level test 
should not be determinative of EAP exemption status for too many white-
collar employees. The combined result will be a more effective test for 
exemption. The final salary level will also reasonably distribute 
between employees and their employers what the Department now 
understands to be the impact of the 2004 shift from a two-test to a 
one-test system on employees earning between the long and short test 
salary levels.
1. History of the Salary Level
    The FLSA became law in 1938 and the first version of the part 541 
regulations, issued later that year, set a minimum compensation 
requirement of $30 per week for executive and administrative 
employees.\147\ Since then, the Department has increased the salary 
levels eight times--in 1940, 1949, 1958, 1963, 1970, 1975, 2004, and 
2019.
---------------------------------------------------------------------------

    \147\ 3 FR 2518.
---------------------------------------------------------------------------

    In 1940, the Department maintained the $30 per week salary level 
for executive employees but established a higher $200 per month salary 
level test for administrative and professional employees. In selecting 
these thresholds, the Department used salary surveys from Federal and 
state government agencies, experience gained under the National 
Industrial Recovery Act, and Federal government salaries to determine 
the salary level that was a reasonable ``dividing line'' between 
employees performing exempt and nonexempt work.\148\
---------------------------------------------------------------------------

    \148\ See Stein Report at 20-21, 31-32.
---------------------------------------------------------------------------

    In 1949, recognizing that the ``increase in wage rates and salary 
levels'' since 1940 had ``gradually weakened the effectiveness of the 
present salary tests as a dividing line between exempt and nonexempt 
employees,'' the Department calculated the percentage increase in 
weekly earnings from 1940 to 1949, and then adopted new salary levels 
at a ``figure slightly lower than might be indicated by the data'' to 
protect small businesses.\149\ In 1949, the Department also established 
a short test for exemption, which paired a higher salary level with a 
less rigorous duties test. The justification for this short test was 
that employees who met the higher salary level were more likely to meet 
all the requirements of the exemption (including the 20 percent limit 
on nonexempt work), and thus a ``short-cut test of exemption . . . 
would facilitate the administration of the regulations without 
defeating the purposes of section 13(a)(1).'' \150\ Employees who met 
only the lower long test salary level, and not the higher short test 
salary level, were required to satisfy the long duties test, which 
included a limit on the amount of nonexempt work that an exempt 
employee could perform. The two-test system remained part of the 
Department's regulations until 2004. In 1958, the Department reiterated 
that salary is a ``mark of [the] status'' of an exempt employee and 
reinforced the importance of salary as an enforcement tool, adding that 
the Department had

[[Page 32863]]

``found no satisfactory substitute for the salary tests.'' \151\ To set 
the salary levels, the Department considered data collected during 1955 
WHD investigations on the ``actual salaries paid'' to employees who 
``qualified for exemption'' (i.e., met the applicable salary and duties 
tests in place at the time) and set the salary levels at $80 per week 
for executives and $95 per week for administrative and professional 
employees.\152\ The Department set the long test salary levels so that 
only a limited number of employees performing EAP duties (about 10 
percent) in the lowest-wage regions and industries would fail to meet 
the new salary level and therefore become entitled to overtime 
pay.\153\ In laying out this methodology, often referred to as the 
``Kantor'' methodology and generally referenced in this rule as the 
``long test'' methodology, the Department echoed its prior comments 
stating that the salary tests ``simplify enforcement by providing a 
ready method of screening out the obviously nonexempt employees.'' 
\154\
---------------------------------------------------------------------------

    \149\ Weiss Report at 8, 14.
    \150\ Id. at 22-23.
    \151\ Kantor Report at 2-3.
    \152\ Id. at 6, 9.
    \153\ Id. at 6-7.
    \154\ Id. at 2-3; see Weiss Report at 8.
---------------------------------------------------------------------------

    The Department followed a similar methodology when determining the 
appropriate long test salary level in 1963, using data regarding 
salaries paid to exempt workers collected in a 1961 WHD survey.\155\ 
The salary level for executive and administrative employees was 
increased to $100 per week, and the professional exemption salary level 
was increased to $115 per week.\156\ The Department noted that these 
salary levels approximated the methodology used in 1958 to set the long 
test salary levels.\157\
---------------------------------------------------------------------------

    \155\ 28 FR 7002 (July 9, 1963).
    \156\ Id. at 7004.
    \157\ Id.
---------------------------------------------------------------------------

    The Department continued to use a similar methodology when it 
updated the salary levels in 1970. After examining data from 1968 WHD 
investigations, 1969 BLS wage data, and information provided in a 
report issued by the Department in 1969 that included salary data for 
executive, administrative, and professional employees,\158\ the 
Department increased the long test salary level for executive and 
administrative employees to $125 per week and increased the long test 
salary level for professional employees to $140 per week.\159\
---------------------------------------------------------------------------

    \158\ See 34 FR 9934, 9935 (June 24, 1969).
    \159\ 35 FR 885.
---------------------------------------------------------------------------

    In 1975, instead of following the previous long test methodology, 
the Department set the long test salary levels ``slightly below'' the 
amount suggested by adjusting the 1970 salary levels for inflation 
based on increases in the Consumer Price Index.\160\ The long test 
salary level for executive and administrative employees was set at 
$155, while the professional level was set at $170. The salary levels 
adopted were intended to be interim levels ``pending the completion and 
analysis of a study by [BLS] covering a six-month period in 1975[,]'' 
and were not meant to set a precedent for future salary level 
increases.\161\ The envisioned process was never completed, however, 
and the ``interim'' salary levels remained unchanged for the next 29 
years.
---------------------------------------------------------------------------

    \160\ 40 FR 7091.
    \161\ Id. at 7091-92.
---------------------------------------------------------------------------

    The short test salary level increased in tandem with the long test 
level throughout the various rulemakings between 1949 and 2004. Because 
the short test was designed to capture only those white-collar 
employees whose salary was high enough to indicate a stronger 
likelihood of being employed in a bona fide EAP capacity and thus 
warrant a less stringent duties requirement, the short test salary 
level was always set significantly higher than the long test salary 
level (approximately 130 percent to 180 percent of the long test 
level).
    When the Department updated the part 541 regulations in 2004, it 
created a single standard test for exemption instead of retaining the 
two-test system from prior rulemakings. The Department set the new 
standard salary level at $455 per week and paired it with a duties test 
that was substantially equivalent to the less rigorous short duties 
test. The Department set a salary level that would exclude from 
exemption roughly the bottom 20 percent of full-time salaried employees 
in each of two subpopulations: (1) the South and (2) the retail 
industry nationally. In setting the salary level the Department looked 
to earnings data for all white-collar workers--exempt and nonexempt--
and looked to a higher percentile than the long test methodology (10th 
percentile of exempt workers in low-wage industries and areas). The 
Department acknowledged, however, that the salary arrived at by this 
method was, at the time, equivalent to the salary derived from the long 
test method using contemporaneous data.\162\
---------------------------------------------------------------------------

    \162\ See 69 FR 22168. The 2004 rule looked to the 20th 
percentile of a data set of all full-time salaried workers and the 
long test methodology looked to the lowest paid 10 percent of exempt 
salaried workers. The two methodologies resulted in equivalent 
salary levels because exempt salaried workers generally have higher 
earnings than nonexempt salaried workers.
---------------------------------------------------------------------------

    In the 2016 rule, the Department set the standard salary level 
equal to the 40th percentile of weekly earnings of full-time salaried 
workers in the lowest-wage Census Region (the South). This resulted in 
a standard salary level of $913 per week, which was at the low end of 
the historic range of short test salary levels. The Department 
explained that the increase in the standard salary level was needed 
because, in moving from a two-test to a one-test system, the 2004 rule 
exempted lower-salaried employees performing large amounts of nonexempt 
work who had historically been, and should continue to be, covered by 
the overtime compensation requirement.\163\ Since the standard duties 
test was equivalent to the short duties test, the Department asserted 
that a salary level in the short test salary range--traditionally 130 
to 180 percent of the long test salary level--was necessary to address 
this effect of the 2004 rule. As explained earlier, the U.S. District 
Court for the Eastern District of Texas held the 2016 rule invalid.
---------------------------------------------------------------------------

    \163\ 81 FR 32405.
---------------------------------------------------------------------------

    In the 2019 rule, the Department reapplied the methodology for 
setting the standard salary threshold from the 2004 rule, setting the 
salary level equal to the 20th percentile of weekly earnings of full-
time salaried workers in the South and/or in the retail sector 
nationwide.\164\ This methodology addressed concerns that had been 
raised that the 2016 methodology excluded too many employees from the 
exemption based on their salary alone and produced the current standard 
salary level of $684 per week (equivalent to $35,568 per year).\165\ 
Unlike in 2004, however, where the 20th percentile of weekly earnings 
of full-time salaried workers in the South and retail nationally was 
essentially the same as the long test, in 2019 this methodology now 
produced a salary level amount that was lower than the equivalent of 
the long test salary level using contemporaneous data ($724 per week, 
$37,648 per year). Put another way, the salary level set in the 2019 
rule was $40 per week below the long test level (used to validate the 
salary level in the 2004 rule) and $292 per week below the low end of 
the short test range (used to set the salary level in the 2016 rule).
---------------------------------------------------------------------------

    \164\ See 84 FR 51260 (Table 4).
    \165\ Id. at 51238.
---------------------------------------------------------------------------

2. Standard Salary Level Proposal
    In its NPRM, the Department proposed to update the salary level by 
setting it equal to the 35th percentile of earnings of full-time 
salaried workers in the lowest-wage Census Region (the

[[Page 32864]]

South), resulting in a proposed salary level of $1,059 per week 
($55,068 for a full-year worker). The Department's proposal explained 
that fully restoring the salary level's screening function required 
setting a salary level at least equal to the long test salary level. 
The Department elaborated that prior to the 2019 rule (when the 
Department set the salary level $40 per week below the long test 
level), employees who earned below the long test salary level were 
screened from the EAP exemption by virtue of their pay--either by the 
long test salary level itself or, in the case of the 2004 rule, a 
standard salary level set equal to the long test salary level. The 
Department stated that the long test salary level provided what it 
believed should be the lowest boundary of the new salary level 
methodology because it would ensure the salary level's historic 
screening function was restored.
    In selecting the proposed salary level methodology, the Department 
also considered the impact of its switch in 2004 to a one-test system 
for determining exemption status. The Department explained that a 
single-test system cannot fully replicate both the two-test system's 
heightened protection for employees performing substantial amounts of 
nonexempt work and its increased efficiency for determining exemption 
status for employees who are highly likely to perform EAP duties. 
Rather than reinstate the long duties test with its limitation on 
nonexempt work, the Department examined earnings ventiles that would 
produce a salary level between the long and short test salary levels 
(which were, respectively, equivalent to between the 26th and 27th 
percentiles, and the 53rd percentile, of full-time salaried worker 
earnings in the lowest-wage Census Region). The Department explained 
that the long and short tests had served as the foundation for nearly 
all the Department's prior rulemakings, either directly under the two-
test system, or indirectly as a means of evaluating the Department's 
salary level methodology under the one-test system, and therefore were 
useful parameters. The Department concluded that setting the salary 
level equal to the 35th percentile would, in combination with the 
standard duties test, more effectively identify in a one-test system 
who is employed in a bona fide EAP capacity in a manner that reasonably 
distributes among employees earning between the long and short test 
salary levels and their employers the impact of the Department's move 
to a one-test system.
    After reviewing the comments received, the Department is finalizing 
its proposal to set the standard salary level equal to the 35th 
percentile of full-time salaried worker earnings in the lowest-wage 
Census Region (the South), which is below the midpoint of the long and 
short test salary levels. Applying this methodology to data for 
calendar year 2023 results in a salary level of $1,128 per week 
($58,656 annually for a full-year worker). This approach will fully 
restore the salary level's function of screening obviously nonexempt 
workers from the EAP exemption, and account for the switch in the 2004 
rule to a one-test system in a way that reasonably distributes the 
impact of this shift among employees earning between the long and short 
test salary levels and their employers. The resulting salary level will 
work effectively with the standard duties test to better define who is 
employed in a bona fide EAP capacity.
3. Salary Level Test Function and Effects
    For 85 years, the Department's regulations have consistently looked 
at both the duties performed by the employee and the salary paid by the 
employer in defining and delimiting who is a bona fide executive, 
administrative, or professional employee exempt from the FLSA's minimum 
wage and overtime protections. From 1949 to 2004, the Department 
determined EAP exemption status using a two-test system comprised of a 
long test (a lower salary level paired with a more rigorous duties test 
that limited performance of nonexempt work to no more than 20 percent 
for most employees) and a short test (a higher salary level paired with 
a less rigorous duties test that looked to the employee's primary duty 
and did not have a numerical limit on the amount of nonexempt work). 
The two-test system facilitated the determination of whether white-
collar workers across the income spectrum were employed in a bona fide 
EAP capacity, and employees who met either test could be classified as 
EAP exempt.
    In a two-test system, the long test salary level screens from the 
exemption the lowest-paid white-collar employees, thereby ensuring 
their right to overtime compensation. The Department has often referred 
to many of the employees who are screened from the exemption by virtue 
of their earning below the lower long test salary level as ```obviously 
nonexempt employees[.]' '' \166\ The long test salary level helped 
distinguish employees who were not employed in a bona fide EAP capacity 
because the Department found that employees who were screened from 
exemption by the long test salary level generally did not meet the 
other requirements for exemption.\167\ Since 1958, the long test salary 
level was generally set to exclude from exemption approximately the 
lowest-paid 10 percent of salaried white-collar employees who performed 
EAP duties in the lowest-wage regions and industries.\168\ The long 
test salary level also served as a line delimiting the population of 
white-collar employees for whom the duties test determined their 
exemption status. In the two-test system, this duties analysis included 
an examination of the amount of nonexempt work performed by lower-
salaried employees, which ensured that these employees were employed in 
an EAP capacity by limiting the amount of time they could spend on 
nonexempt work. The duties and salary level tests worked in tandem to 
properly define and delimit the exemption: lower-paid workers had to 
satisfy a more rigorous duties test with strict limits on nonexempt 
work, and higher-paid employees were subject to a less rigorous duties 
test because they were more likely to satisfy all the requirements of 
the exemption (including the limit on nonexempt work).\169\
---------------------------------------------------------------------------

    \166\ See id. at 51237 (quoting Kantor Report at 2-3).
    \167\ See Kantor Report at 2-3; 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[.]'').
    \168\ See 84 FR 51236.
    \169\ Weiss Report at 22-23.
---------------------------------------------------------------------------

    Because employees who met the short test salary level were paid 
well above the long test salary level, the short test salary level did 
not perform the same function as the long test salary level of 
screening obviously nonexempt employees. Instead, the short test salary 
level was used to determine whether the full duties test or the short-
cut duties test would be applied to determine EAP exemption status. The 
exemption status of employees paid more than the long and less than the 
short test salary levels was determined by applying the more rigorous 
long duties test that ensured overtime protections for employees who 
performed substantial amounts of nonexempt work. The exemption status 
of employees paid at or above the higher short test salary level was 
determined by the less rigorous short duties test that looked to the 
employee's primary duty and did not cap the amount of nonexempt work an 
employee could perform. The short test thus provided a faster and more 
efficient duties test based on the Department's experience

[[Page 32865]]

that employees paid at the higher short test salary level ``almost 
invariably'' met the more rigorous long duties test, including its 20 
percent limit on nonexempt work, and therefore a shortened analysis of 
duties was a more efficient test for exemption status.\170\
---------------------------------------------------------------------------

    \170\ Id.
---------------------------------------------------------------------------

    In 2004, rather than updating the two-test system, the Department 
chose to establish a new, single-test system for determining exemption 
status. The new single standard test for exemption used a duties test 
that was substantially equivalent to the less rigorous short duties 
test in the two-test system.\171\ Since the creation of the standard 
test, the Department has taken two different approaches to set the 
standard salary level that pairs with the standard duties test.
---------------------------------------------------------------------------

    \171\ 69 FR 22214.
---------------------------------------------------------------------------

    In 2004, as noted above, the Department set the new salary level 
roughly equivalent to the 20th percentile of weekly earnings of full-
time salaried workers in the South and in the retail industry 
nationwide.\172\ The Department acknowledged that the salary level 
($455 per week) was, in fact, equivalent to the lower long test salary 
level amount under the two-test system using contemporaneous data.\173\ 
Because it was equivalent to the long test salary level, the standard 
salary test continued to perform the same initial screening function as 
the long test salary level: employees who historically were entitled to 
overtime compensation because they earned below the long test salary 
level remained nonexempt under the new standard test.
---------------------------------------------------------------------------

    \172\ See id. at 22168-69.
    \173\ See id.
---------------------------------------------------------------------------

    Without a higher salary short test, however, all employees who met 
the standard salary level were subject to the same duties test. Since 
the single standard duties test was equivalent to the short duties 
test, some employees who previously did not meet the long duties test 
met the standard duties test. As a result, the shift from a two-test to 
a one-test system significantly broadened the EAP exemption because 
employees who historically had not been considered bona fide EAP 
employees were now defined as falling within the exemption and would 
not be eligible for overtime compensation. This broadening specifically 
impacted lower-paid, salaried white-collar employees who earned between 
the long and short test salary levels and performed substantial amounts 
of nonexempt work. Under the two-test system, these employees had been 
entitled to overtime compensation if their nonexempt duties exceeded 
the long test's strict 20 percent limit on such work. Under the 2004 
standard test, these employees became exempt because they met both the 
low standard salary level and the less rigorous standard duties test, 
which does not have a numerical limit on the amount of nonexempt work.
    The Department's discussion of the elimination of the long duties 
test in the 2004 rule focused primarily on the minimal role played by 
the long test at that time due to the erosion of the long salary level, 
and on the difficulties employers would face if they were again 
required to track time spent on nonexempt work when the dormancy of the 
long duties test meant that they had generally not been performing such 
tracking for many years.\174\ While asserting that employees who were 
then subject to the long test would be better protected under the 
higher salary level of the new standard test, the Department in the 
2004 rule did not compare the protection lower salaried employees would 
receive under the standard test with the protection they would have 
received under an updated long test with a salary level based on 
contemporaneous data and the existing long duties test.
---------------------------------------------------------------------------

    \174\ See 69 FR 22126-27.
---------------------------------------------------------------------------

    To address the concern that lower-salaried employees performing 
large amounts of nonexempt work historically were not considered bona 
fide EAP employees and thus should be entitled to overtime 
compensation, in 2016 the Department set the standard salary level at 
the 40th percentile of weekly earnings of full-time salaried workers in 
the lowest-wage Census Region (the South). This methodology produced a 
salary level ($913 per week) that was at the low end of the historical 
range of short test salary levels, which had traditionally been paired 
with the short duties test, and above the midpoint between the long and 
short test salary levels.\175\ This approach restored overtime 
protection for employees performing substantial amounts of nonexempt 
work who earned between the long and short test salary levels, as they 
failed the new salary level test. However, this approach generated 
potential concerns that the salary level test should not be 
determinative of exemption status for too many individuals. 
Specifically, the 2016 rule's narrowing of the exemption prevented 
employers from using the exemption for employees who earned between the 
long test salary level and the low end of the short test salary range 
and would have met the more rigorous long duties test. Prior to 2004, 
employers could use the long test to exempt these employees, and under 
the 2004 rule these employees remained exempt under the one-test 
system. Thus, while the 2016 rule accounted for the absence of the long 
duties test by restoring overtime protections to employees earning 
between the long test salary level and the low end of the short test 
salary range who perform significant amounts of nonexempt work, it also 
made a group of employees who had been exempt under the two-test system 
newly nonexempt under the one-test system: employees earning between 
the long test level and the short test salary range who perform only 
limited nonexempt work.
---------------------------------------------------------------------------

    \175\ 81 FR 32405, 32467.
---------------------------------------------------------------------------

    In its 2019 rule, the Department determined that the 2016 rule had 
not sufficiently considered the impact of the increased standard salary 
level on employers' ability to use the exemption for this group of 
lower-paid employees who performed only limited amounts of nonexempt 
work.\176\ The Department emphasized that ``[f]or most . . . employees 
the exemption should turn on an analysis of their actual functions, not 
their salaries,'' and that the 2016 rule's effect of making nonexempt 
lower-paid, white-collar employees who traditionally were exempt under 
the long test ``deviated from the Department's longstanding policy of 
setting a salary level that does not `disqualify[] any substantial 
number of' bona fide executive, administrative, and professional 
employees from exemption.'' \177\ To address these concerns, the 
Department simply returned to the 2004 rule's methodology for setting 
the salary threshold. Applying the 2004 method to the earnings data 
available in 2019 produced a standard salary level of $684 per week, 
which was below the equivalent of what the long test salary level would 
have been using contemporaneous data ($724 per week).\178\ The 2019 
rule was the first time the Department paired the standard duties test 
with a salary level that was not at least equivalent to the long test 
level.
---------------------------------------------------------------------------

    \176\ 84 FR 10908.
    \177\ Id. (quoting Kantor Report at 5).
    \178\ 84 FR 51260.
---------------------------------------------------------------------------

    The 2019 rule, like the 2004 rule, exempted all employees who 
earned between the long and short test salary levels and performed too 
much nonexempt work to meet the long duties test, but passed the 
standard duties test (equivalent to the short duties test). The 2019 
rule also for the first time permitted the exemption of a group of low-
paid white-collar employees (those

[[Page 32866]]

earning between $684 and $724 per week) who had always been protected 
by the salary level test's initial screening function--either under the 
long test or under the 2004 rule salary level that was equivalent to 
the long test salary level. The Department stated that the standard 
salary level's ``fairly small difference'' from the long test level did 
not justify using the long test methodology to set the salary level and 
emphasized that its approach preserved the salary level's principal 
function as a tool for screening from exemption obviously nonexempt 
employees.\179\ In response to commenter concerns about the 2019 rule 
exempting employees who traditionally earned between the long and short 
test salary levels and received overtime compensation because they did 
not meet the long duties test, the Department cited the legal risks 
posed by the 2016 methodology (drawing on the district court's 
decisions as evidence) and explained that such employees were already 
exempt in the years leading up to 2004 because the Department's 
outdated salary levels had rendered the long test with its more 
rigorous duties requirement largely dormant.\180\ As in the 2004 rule, 
the Department did not address the protection such lower salaried 
employees would have received had the Department updated the long test 
using contemporary data.
---------------------------------------------------------------------------

    \179\ Id. at 51244.
    \180\ Id. at 51243.
---------------------------------------------------------------------------

    As explained in the NPRM, the Department's experience with a one-
test system shows that it is less nuanced than the two-test system, 
which allowed for finer calibration in defining and delimiting the EAP 
exemption. In a two-test system, there are four variables (two salary 
levels and two duties tests) that can be adjusted to define and delimit 
the exemption. In a one-test system, there are only two variables (one 
salary level and one duties test) that can be adjusted, necessarily 
yielding less nuanced results. The loss in precision does not impact 
the lowest-paid white-collar employees, who were screened from 
exemption by the long test salary level, because they maintain their 
right to overtime pay so long as the standard salary level is set at 
least equivalent to the lower long test salary level--a condition that 
was met by the 2004 rule's salary level but not by the 2019 rule's 
salary level. Instead, the Department's experience shows that the shift 
from a two-test system to a one-test system impacts employees earning 
between the long and short test salary levels and, in turn, employers' 
ability to use the exemption for these employees.
    In the two-test system, employees who earned between the long and 
short test salary levels and performed large amounts of nonexempt work 
were protected by the long duties test, while bona fide EAP employees 
in that earnings range who performed only limited amounts of nonexempt 
work were exempt. Meanwhile, the short test provided a time-saving 
short-cut test for higher-earning employees who would almost invariably 
pass the more rigorous, and thus more time consuming, long duties test. 
But the more rigorous long duties test, with its limitation on the 
amount of nonexempt work that could be performed, was always core to 
the two-test system, with the higher short test salary level and less 
rigorous short duties test serving as a time-saving mechanism for 
employees who would likely have met the more rigorous long duties 
test.\181\
---------------------------------------------------------------------------

    \181\ Numerous employer organizations supported the Department's 
decision in 2004 to move to a one-test system. See 69 FR 22126-27. 
Commenters likewise opposed returning to the two-test structure in 
the 2016 and 2019 rulemakings. See 84 FR 10905; 81 FR 32444.
---------------------------------------------------------------------------

    As explained in the NPRM, one way in a one-test system to ensure 
appropriate overtime protection to lower-salaried employees earning 
between the long and short test salary levels who were historically 
entitled to overtime compensation under the long test would be to 
reinstate the long duties test with its limitation on nonexempt work. A 
one-test system with a more rigorous duties test would appropriately 
emphasize the important role of duties in determining exemption status. 
However, the Department did not propose in this rulemaking to replace 
the standard duties test with the long duties test or to return to a 
two-test system with the long duties test. The Department has not had a 
one-test system with a limit on nonexempt work other than from 1940 to 
1949,\182\ when the Department replaced this approach with its two-test 
system, and the two-test system was replaced 20 years ago. Returning to 
the two-test system would eliminate the benefits of the current duties 
test, including having a single test with which employers and employees 
are familiar.
---------------------------------------------------------------------------

    \182\ See 5 FR 4077.
---------------------------------------------------------------------------

    In light of these considerations, the Department's goal in this 
rulemaking is not only to update the single standard salary level to 
account for earnings growth since the 2019 rule through the use of the 
updating mechanism, but also to build on the lessons learned in its 
most recent rulemakings to more effectively define and delimit 
employees employed in a bona fide EAP capacity. Consistent with its 
broad authority under section 13(a)(1), the Department's aim is to have 
a single salary level test that will work effectively with the standard 
duties test to better define who is employed in a bona fide EAP 
capacity and will both fully perform the salary level's initial 
screening function and account for the change to a single-test system.
4. Discussion of Comments and Final Standard Salary Level
i. Overall Commenter Feedback
    The Department received a significant number of comments in 
response to its proposal to set the standard salary level equal to the 
35th percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region. Numerous commenters supported the 
Department's proposed salary level. Supporters included thousands of 
individual employees, writing separately or as part of comment 
campaigns, and many groups representing employees or employee 
interests. See, e.g., American Association of Retired Persons (AARP); 
AFSCME; AFT; NEA; Restaurant Opportunities Center United; United Auto 
Workers Region 6; United Steelworkers; WorkMoney. Many other 
commenters, including advocacy groups, academics, and State officials 
also supported the Department's proposal. See, e.g., Administrative Law 
Professors; CLASP; Coalition of Gender Justice and Civil Rights 
Organizations; Coalition of State AGs; Common Good Iowa; EPI; The 
Leadership Conference on Civil and Human Rights; National Partnership; 
NWLC. A number of supportive commenters urged the Department to set a 
higher salary level than the one it proposed. See, e.g., AFL-CIO; 
Demos; Nichols Kaster; Sanford Heisler Sharp; SEIU; Winebrake & 
Santillo, LLC (Winebrake & Santillo). A minority of employers, 
including most notably a campaign of small business commenters, also 
supported the proposed salary level. See, e.g., Business for a Fair 
Minimum Wage; Dr. Bronners; Firespring; Small Business Majority. Some 
members of Congress also commented in support of the proposed salary 
level. See 19 Democratic Senators; 10 Democratic Representatives; U.S. 
Representative Maxwell Frost (D-FL).
    Commenters that supported increasing the salary level often 
emphasized that the FLSA's minimum wage and overtime requirements are 
fundamental employee protections, intended to spread employment to more 
workers and provide extra

[[Page 32867]]

compensation (above the statutory minimum) to employees who work more 
than 40 hours in a week. See, e.g., AARP; AFL-CIO; Coalition of State 
AGs; NELA; NELP; Nichols Kaster; United Steelworkers. Some supportive 
commenters, including Sanford Heisler Sharp, Texas RioGrande Legal Aid, 
and Washington State Department of Labor and Industries, stressed that 
the EAP exemption was premised in part on the expectation that exempt 
employees received high salaries and other privileges to compensate for 
their long hours of work and lack of FLSA protections. Other commenters 
similarly stressed that the exemption is intended for employees who, 
based on the nature of their work and their compensation, have 
sufficient bargaining power not to need the Act's protections. See, 
e.g., Business for a Fair Minimum Wage; CLASP; NELP; NWLC.
    Supportive commenters often also emphasized that the salary level 
test has an important and longstanding role in helping define which 
employees are employed in a bona fide executive, administrative, or 
professional capacity. Some commenters, including AARP and NELA, 
stressed that the salary level provides an important ``bright line'' 
test for helping determine exemption status, and NWLC similarly stated 
that the salary level provides a ``clear, objective, and 
straightforward'' test that is ``easy for employers to apply and for 
employees to understand[.]'' NELP, quoting testimony from EPI at a 2015 
Congressional hearing on this issue, stated that salary level tests 
have been used since the Department's earliest part 541 regulations 
because the `` `final and most effective check on the validity of the 
claim for exemption is the payment of a salary commensurate with the 
importance supposedly accorded the duties in question.' '' The 
Coalition of State AGs stated that a salary level that is too low ``no 
longer accurately delimits the boundaries of who is an EAP'' employee.
    The vast majority of employers and commenters supporting employer 
interests opposed the proposed salary level. As discussed in section 
III, many employer representatives opposed any salary level increase 
and urged the Department to withdraw its proposal. See, e.g., AHLA; 
Americans for Prosperity; Chamber; CUPA-HR; FMI; NAM; National 
Restaurant Association; Oregon Restaurant and Lodging Association; 
PPWO; Wisconsin Bankers Association. Some Members of Congress also 
opposed the proposed salary level and urged that the proposal be 
withdrawn. See 10 Republican Senators; 16 Republican Representatives; 
U.S. Senator Mike Braun (R-IN). Some commenters opposed to the 
proposal, writing separately or as part of comment campaigns, expressed 
general opposition to the rule but did not specifically address what, 
if any, salary level increase they would support in a final rule. See, 
e.g., American Dental Association; Humane Society of Manatee County; 
National Sporting Goods Association. Others that opposed or questioned 
any salary level change stated, in the alternative, what method they 
preferred if the Department updated the salary level in the final rule. 
Most such commenters favored applying the methodology that the 
Department used to set the salary level in its 2004 and 2019 
rulemakings (the 20th percentile of earnings of full-time salaried 
workers in the South and in the retail industry nationally) or updating 
for inflation the current salary level, which was set using that 
methodology. See, e.g., ABC; CWC; NAM; National Restaurant Association. 
A handful of employer commenters supported, or stated that they did not 
oppose, an increase based on the 2004/2019 methodology (resulting in a 
salary level of $822 per week based on data used in the NPRM), citing, 
for example, that this approach promoted predictability, see RILA, and 
accounted for regional and industry-specific differences, see YMCA. See 
also, e.g., SHRM; WFCA. Others supported or suggested a salary level 
that was higher, but below the Department's proposed level. See, e.g., 
American Society of Association Executives; Ho-Chunk, Inc.; University 
System of Maryland.
    Commenters that opposed the Department's proposal almost always 
objected to the size and/or timing of the proposed salary level 
increase rather than to the existence of the salary test itself. Most 
employer commenters, whether favoring no increase or a smaller 
increase, presumed the salary level test's continued existence and 
lawfulness, with some, such as National Restaurant Association, 
expressly referencing their support for the 2019 rule's salary level 
increase. As discussed in detail below, many commenters acknowledged 
the salary level's longstanding function of screening obviously 
nonexempt employees from the exemption. See section V.B.4.ii. Other 
commenters that opposed the proposal nonetheless cited benefits of 
having a salary level test, including helping to ensure that the EAP 
exemption is not abused, see, e.g., AASA/AESA/ASBO, Bellevue 
University, and ``sav[ing] investigators and employers time by giving 
them a quick, short-hand test[.]'' See National Restaurant Association. 
APLU recognized ``DOL's mission and responsibility to update the Fair 
Labor Standards Act overtime regulations and ensure a baseline of 
protections for our nation's workers, including periodic updates to the 
minimum salary threshold for overtime exemptions.'' In rather stark 
contrast, AFPI asserted that employee ``[c]ompensation is no more 
helpful than would be a dress code test'' in determining exemption 
status. AFPI was one of only a small number of commenters, as 
previously discussed in section V.A.1, that asserted the Department 
lacks authority under section 13(a)(1) to adopt a salary level test. 
See, e.g., Job Creators Network Foundation; NFIB; Pacific Legal 
Foundation.
    As the Department stated in its 2019 rule, an employee's salary 
level ``is a helpful indicator of the capacity in which an employee is 
employed, especially among lower-paid employees.'' \183\ The amount an 
employee is paid is also a ``valuable and easily applied index to the 
`bona fide' character of employment for which exemption is claimed,'' 
as well as the principal ``delimiting requirement . . . prevent[ing] 
abuse'' of the exemption.\184\ As the Department has explained, if an 
employee ``is of sufficient importance . . . to be classified'' as a 
bona fide executive employee, for example, 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 [it] pays for them.'' \185\ Employee compensation is a relevant 
indicator of exemption status given that, as many commenters observed, 
the EAP exemption is premised on the understanding that individuals who 
are employed in a bona fide executive, administrative, or professional 
capacity typically earn higher salaries and enjoy other privileges to 
compensate them for their long hours of work, setting them apart from 
nonexempt employees entitled to overtime pay.\186\

[[Page 32868]]

Accordingly, the Department agrees with the overwhelming majority of 
commenters that, explicitly or implicitly, supported the salary level 
continuing to have a role in helping determine whether employees are 
employed in a bona fide executive, administrative, or professional 
capacity.\187\
---------------------------------------------------------------------------

    \183\ 84 FR 51239 (internal quotation marks omitted).
    \184\ Stein Report at 19, 24; see also 81 FR 32422.
    \185\ Stein Report at 19; see also id. at 26 (``[A] salary 
criterion constitutes the best and most easily applied test of the 
employer's good faith in claiming that the person whose exemption is 
desired is actually of such importance to the firm that he is 
properly describable as an employee employed in a bona fide 
administrative capacity.'').
    \186\ See Report of the Minimum Wage Study Commission, Vol. IV, 
at 236, 240; see also, e.g., Stein Report at 19 (explaining that the 
``term `executive' implies a certain prestige, status, and 
importance'' denoted by pay ``substantially higher than'' the 
federal minimum wage).
    \187\ Consistent with its longstanding practice, the Department 
declines requests from commenters, including Defiance College, 
International Bancshares Corporation, Rachel Greszler, and WFCA, 
that suggested the Department adopt multiple salary level tests for 
different regions, industries, and/or small businesses, rather than 
a single salary level that applies to all entities nationwide. See 
84 FR 51239; 81 FR 32411; 69 FR 22171.
---------------------------------------------------------------------------

    The Department nonetheless recognizes that commenters had a wide 
range of views about the salary level test and that no salary level 
methodology can satisfy all stakeholders. As discussed below, competing 
commenter views were often grounded in differing opinions about the 
salary level test's role in defining the EAP exemption. Broadly 
speaking, commenters that opposed the proposal generally favored a far 
more limited role for the salary level test and emphasized perceived 
negative effects on employers of the proposed increase, while 
commenters that supported the proposal or urged the Department to set a 
higher salary level often deemed the proposal modest by historical 
standards and emphasized perceived positive effects on employees of the 
proposed increase. Against this backdrop, the Department has reviewed 
the comments received on its proposed methodology, with particular 
focus on feedback on the NPRM's rationale that the proposed methodology 
will better define and delimit the EAP exemption by fully restoring the 
salary level's screening function and accounting for the switch from a 
two-test to a one-test system.
ii. Fully Restoring the Salary Level's Screening Function
    Some employer advocates that opposed the Department's proposal 
emphasized the salary level's limited function of screening obviously 
nonexempt employees from the EAP exemption. See, e.g., Independent 
Community Bankers of America; IFDA; National Council of Farmer 
Cooperatives (NCFC); SHRM. Many employer representatives stated that 
the proposed salary level exceeded this purpose by excluding from the 
exemption too many employees who pass the duties test, particularly in 
low-wage regions and industries. See, e.g., Chamber; NAW; PPWO; RILA; 
Seyfarth Shaw. AFPI quoted the statement in the Department's 2019 rule 
that any salary level increase must ``have as its primary objective the 
drawing of a line separating exempt from nonexempt'' employees, and the 
Chamber asserted that to the extent employee ``protection or fairness'' 
concerns motivated the proposed increase, such considerations exceed 
the Department's statutory authority.
    Employer representatives that focused on the salary level's 
screening function often contrasted the Department's proposal with 
prior rules that they stated met this objective. CWC referenced the 
Department's 1958 and 2004 rules as such examples, while AHLA stated 
more broadly that the Department historically set a salary level that 
was ``intentionally low'' to screen out nonexempt employees, and that 
the Department's proposed methodology ``is objectively not the low end 
of the salary range as that has been understood since 2004[.]'' Other 
commenters similarly cited the 2004 and 2019 rules as fulfilling the 
salary level test's screening function, with National Restaurant 
Association, for example, emphasizing the salary level's screening 
function when explaining that the ``2004 methodology's chief virtue is 
its consistency with historical practice.'' See also, e.g., Bellevue 
University. Some commenters, including NCFC and PPWO, stated that the 
proposed salary level would change the salary level from a ``screening 
device'' to a ``de facto sole test'' for exemption, while others 
cautioned that the salary level set in the 2016 rule was declared 
invalid for exceeding this screening function. See also, e.g., Argentum 
& ASHA; NAM.
    Though some employee representatives addressed the salary level's 
screening function, they generally emphasized other considerations that 
they believed justified setting a salary level equal to or higher than 
what the Department proposed. A number of commenters stated that, along 
with the duties test, the salary level ``is intended to set a guardrail 
so that employers do not incorrectly classify lower-paid salaried 
employees as'' exempt. See, e.g., AFSCME; Family Values @ Work; North 
Carolina Justice Center; United Steelworkers; Yezbak Law Offices. 
Similarly alluding to the salary level's screening function, AFL-CIO 
emphasized that until 2019 the Department had never set the salary 
level below the long test level and that as a result more than half of 
the employees affected by the proposed salary level would have been 
nonexempt under every prior rule (because they earned below the long 
test or long test-equivalent salary level). EPI similarly stated that 
the 2019 rule set a salary level ``that was even lower than what the 
long-test methodology would have yielded.'' See also Coalition of State 
AGs (referencing the salary level's screening function).
    The Department has considered commenter feedback about the salary 
level test's screening function. The Department agrees with all 
commenters that emphasized the salary level test's function of 
screening obviously nonexempt employees from the exemption, a principle 
that, as the Department observed in the 2019 rule and in the NPRM, 
``has been at the heart of the Department's interpretation of the EAP 
exemption for over 75 years.'' \188\ Fully effectuating the salary 
level's screening function is a key part of ensuring that the salary 
level sets an appropriate dividing line separating exempt and nonexempt 
employees. In response to the Chamber's concern about the motivations 
underlying the proposed salary level, the Department notes that while 
its proposal protects employees and promotes fairness (by helping 
ensure that only employees employed in a bona fide executive, 
administrative, or professional capacity are deprived of the FLSA's 
minimum wage and overtime protections), these beneficial effects are a 
byproduct of any higher salary level, not a basis for the proposed 
salary level.
---------------------------------------------------------------------------

    \188\ 88 FR 62165 (citing 84 FR 51241).
---------------------------------------------------------------------------

    As the Department explained in its NPRM, the concept of the salary 
level's screening function dates back to the two-test system, when the 
lower long test salary level provided ``a ready method of screening out 
the obviously nonexempt employees, making an analysis of duties in such 
cases unnecessary.'' \189\ When the Department updated the long test in 
1958, it reaffirmed the long test salary's function as a screening 
tool.\190\ When the Department moved to a one-test system in 2004, the 
standard salary test had to perform the initial screening function that 
the long test salary level performed in the two-test system. In the 
2004 rule, the Department reaffirmed its historical statements 
emphasizing the salary level's critical screening function and, most 
significantly, used the long test salary level methodology to validate 
its new salary level of $455 per week.\191\ The Department stressed in 
its final rule that both the 2004 rule standard salary level 
methodology and the long test salary level methodology ``are capable of

[[Page 32869]]

reaching exactly the same endpoint'' and demonstrated that the two 
methods, in fact, produced equivalent salary levels using 
contemporaneous data.\192\ By setting a salary level equivalent to the 
long test level, the Department ensured that employees earning at 
levels that would have entitled them to overtime compensation under the 
two-test system because they earned below the long test salary level 
remained screened from the exemption by the new standard salary test, 
regardless of whether they met the less rigorous standard duties test. 
The Department rejected requests from commenters that supported a 
salary level that was $30 to $95 lower than the level the Department 
ultimately adopted,\193\ thus maintaining the historic screening 
function by declining to set a salary level lower than the long test 
level.
---------------------------------------------------------------------------

    \189\ Weiss Report at 8.
    \190\ Kantor Report at 2-3.
    \191\ 69 FR 22165-22166.
    \192\ See id. at 22167-71 (showing that for all full-time 
salaried employees, $455 in weekly earnings corresponded to just 
over the 20th percentile in the South and the 20th percentile in 
retail, and that for employees performing EAP duties, $455 in weekly 
earnings corresponded to just over the 8th percentile in the South 
and the 10th percentile in retail). AFPI commented that in the 2003 
NPRM the Department ``acknowledged that `equivalency to either the 
current long or short test salary levels is not appropriate' because 
of the switch to a one-test system.'' (quoting 68 FR 15560, 11570 
(Mar. 31, 2003)). However, the Department shifted in its final rule 
and validated its chosen methodology using the long test salary 
level.
    \193\ See 69 FR 22164.
---------------------------------------------------------------------------

    In its 2019 rule, the Department reemphasized the salary level's 
screening function.\194\ The Department distinguished the 2016 rule, 
which was invalidated because it `` `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.'' \195\ In contrast, the Department explained, reapplying 
the 2004 methodology to contemporaneous data was likely to pass muster 
because the district court that invalidated the 2016 rule ``endorsed 
the Department's historical approach to setting the salary level'' and 
``explained that setting `the minimum salary level as a floor to 
screen[ ] out the obviously nonexempt employees' is `consistent with 
Congress's intent.' '' \196\
---------------------------------------------------------------------------

    \194\ 84 FR 51237.
    \195\ Id. at 51231 (quoting 84 FR 10901).
    \196\ Id. at 51241 (quoting 275 F. Supp.3d at 806).
---------------------------------------------------------------------------

    In its NPRM, the Department explained that it needed to set a 
salary level at least equal to the long test--$925 per week, equating 
to between the 26th and 27th percentiles of weekly earnings of full-
time salaried workers in the South--to fully restore the salary level's 
screening function. As noted above, employer commenters that emphasized 
the salary level's screening function generally viewed this function 
(which they often construed narrowly) as a justification for limiting 
the size of any potential salary increase. However, such commenters did 
not directly address the NPRM's explanation of the long test salary 
level's key role in the salary level's screening function or the 
relationship between the 2004/2019 methodology and the long test. Other 
commenters that endorsed the screening function as embodied in the 2004 
rule did not grapple with the fact that in the 2019 rule, that 
methodology did not fully fulfill that function because it no longer 
arrived at the same endpoint as prior rules (i.e., a long test or long-
test equivalent salary level).
    The Department's position remains that a core function of the 
salary level test is to screen from the EAP exemption employees who, 
based on their low pay, should receive the FLSA's overtime protections. 
For decades under the Department's two-test system, the long test 
salary level performed this screening function. In the 2004 rule, the 
Department used a different approach to reach the same outcome--setting 
a single salary level test that was equivalent to, and thus set the 
same line of demarcation as, the long test salary level. The Department 
deviated from this approach in 2019, setting a salary level that was 
$40 per week below the level produced using the long test 
methodology.\197\ In doing so, the Department for the first time 
expanded the exemption to include employees who were paid below the 
equivalent of the long test salary level.
---------------------------------------------------------------------------

    \197\ Id. at 51244.
---------------------------------------------------------------------------

    The Department reaffirms its position stated in the NPRM that the 
salary level test must equal at least the long test salary level in 
order to fulfill its historical screening function. From 1938 to 2019, 
all salaried white-collar employees paid below the long test salary 
level were entitled to the FLSA's protections, regardless of the duties 
they performed. This was true from 1938 to 1949 under the salary level 
test that became the long test; \198\ from 1949 to 2004 under the long 
test; and from 2004 to 2019 under the standard salary level test that 
was set equivalent to the long test level--a key fact that commenters 
that opposed the Department's proposal generally did not address. 
Setting the salary level below the long test level as was done in the 
2019 rule--because the 2004 methodology no longer matched the long test 
salary level based on contemporaneous data--departed from this history 
by enlarging the exemption to newly include employees who earned less 
than the long test salary level. As an initial step, the new salary 
level methodology must fully restore the salary level's screening 
function by ensuring that employees who were nonexempt because they 
earned less than the long test or long test-equivalent salary level are 
also nonexempt under the standard test. Achieving this objective 
requires a standard salary level amount at least equal to the long test 
level ($942 per week using current data, which equates to approximately 
the 25th percentile of full-time salaried worker earnings in the 
South).
---------------------------------------------------------------------------

    \198\ During this period the Department used a one-test system 
that paired a lower salary level with a more rigorous duties test. 
See, e.g., 5 FR 4077.
---------------------------------------------------------------------------

    As discussed in section V.B.5.iii, fully restoring the salary 
level's screening function would affect 1.8 million employees. These 
are currently exempt employees who earn between $684 (the current 
salary level) and $942 per week (the long test level calculated using 
current data) and would become nonexempt absent intervening action by 
their employers. In every rule prior to 2019, employees who earned 
below the long test or long-test equivalent salary level have always 
been excluded from the exemption based on their salary alone--even if 
they passed the standard duties test or (prior to 2004) the more 
rigorous long duties test. The Department's approach does not, as 
commenters asserted, create an impermissible ``de facto'' salary-only 
test or make nonexempt too many employees who pass the duties test, and 
is compatible with the district court decision's emphasis on the salary 
level test's historic screening function.\199\
---------------------------------------------------------------------------

    \199\ The district court was principally concerned with the 2016 
rule exceeding the salary level's screening function and making too 
many employees nonexempt based on salary alone. See Nevada 275 
F.Supp.3d at 806 & n.6.
---------------------------------------------------------------------------

iii. Accounting for the Shift to a One-Test System
    In addition to fully restoring the salary level test's screening 
function, the Department's proposed salary level methodology also 
accounted for the shift from a two-test to a one-test system for 
determining who is employed in a bona fide executive, administrative, 
or professional capacity. Commenters that supported the proposed salary 
level and specifically addressed this rationale agreed with it. A group 
of Administrative Law Professors stated that the Department's move to a 
one-test system in 2004 ``significantly expanded the number of 
relatively low-income

[[Page 32870]]

workers who might fall within the exemption . . . despite engaging in 
substantial nonexempt work[,]'' and concluded that the Department's 
proposal was ``reasonably geared'' to restoring nonexempt status to 
this class of workers. The Coalition of State AGs similarly stated that 
the proposal ``does more to take into account the shift to a one-test 
system in 2004 and establishes more of a middle ground between . . . 
the previous short- and long-test methodologies.'' They elaborated that 
``the balance struck is a more appropriate one'' because most salaried 
white-collar employees paid less than the proposed standard salary 
level do not meet the duties test, whereas a substantial majority of 
salaried white-collar employees earning above the proposed standard 
salary level meet the duties test. Some commenters asserted that this 
aspect of the Department's rationale supported setting a salary level 
higher than proposed. For example, AFL-CIO stated that the proposed 
salary level captures only ``a portion of workers who have been wrongly 
excluded from nonexempt status since the 2004 elimination of the long 
and short test in favor of a single test,'' and Sanford Heisler Sharp 
stated that the proposal ``does not go far enough towards meeting [the] 
goal'' of ```ensur[ing] that fewer white-collar employees who perform 
significant amounts of nonexempt work and earn between the long and 
short test salary levels are included in the exemption.' '' \200\ NELA 
similarly urged the Department to adopt its 2016 methodology to more 
fully account for the shift to a one-test system.
---------------------------------------------------------------------------

    \200\ Quoting 88 FR at 62158.
---------------------------------------------------------------------------

    Employer commenters that directly addressed the shift to a one-test 
system generally rejected the premise that any adjustment for this 
change was warranted or appropriate. Some commenters emphasized that 
the long test's limit on nonexempt work became inoperative in 1991 and/
or that the Department fully accounted for the move to the standard 
duties test in its 2004 rule. See Bellevue University; Chamber; NAM; 
RILA. The National Association of Convenience Stores, which likewise 
emphasized that the short and long tests have not existed since 2004, 
stated that to ``the extent the two-test system still has any limited 
relevancy to the current inquiry, it is that the salary level should be 
closer to what the pre-2004 long test would have produced'' rather than 
``to what the pre-2004 `short' test would have produced'' today. AFPI 
asserted that ``[a]ny salary level that excludes employees who are not 
`obviously nonexempt' is invalid[,]'' that the long test salary level 
is a ``made-up concept[,]'' and that the `` `long test' and the `short 
test' are terms [that have not been] considered since the Department's 
regulatory changes in 2004 . . . [and] should have no place in 
determining an appropriate increase to the minimum salary level for 
exemption today.'' \201\
---------------------------------------------------------------------------

    \201\ NRF included an Oxford Economics report that questioned 
the Department's long test figure ($925 per week), and, observing 
that the long test methodology varied over time, stated that a 
``more reasonable'' approach for replicating the long test would be 
to adjust the 1975 long test level for inflation (which it concluded 
would result in a salary level of $843 per week in 2022 dollars).
---------------------------------------------------------------------------

    The Department agrees with commenters that supported the NPRM's 
objective of updating the salary level in part to account for the move 
to a one-test system. As previously explained in detail in the NPRM and 
in section V.B.3 of this preamble, the Department traditionally 
considered employees earning between the long and short test salary 
levels to be employed in a bona fide EAP capacity only if they were not 
performing substantial amounts of nonexempt work. With the adoption of 
a duties test based on the less rigorous short duties test, the shift 
to a single-test system significantly decreased the examination of the 
amount of nonexempt work employees performed. Following this shift, the 
Department has taken two approaches to setting the salary level to pair 
with the standard duties test. The approach taken in the 2004 rule 
permitted the exemption of all employees earning above the long test 
salary level who met the standard duties test--including many employees 
who performed substantial amounts of nonexempt work and traditionally 
were protected by the long duties test. The approach taken in the 2016 
rule was challenged and criticized as making employees earning between 
the long test salary level and the low end of the short test salary 
range nonexempt--including employees who performed very little 
nonexempt work and would have been exempt under the long duties test.
    The Department recognizes that a single-test system cannot fully 
replicate both the two-test system's heightened protection for 
employees performing substantial amounts of nonexempt work and its 
increased efficiency for determining exemption status for employees who 
are highly likely to perform EAP duties. Inevitably, any attempt to 
pair a single salary level with the current duties test will result in 
some employees who perform substantial amounts of nonexempt work being 
exempt, and some employees who perform almost exclusively exempt work 
being nonexempt.\202\ But such a result is inherent in setting any 
salary level. The Department continues to believe that it can better 
identify which employees are employed in a bona fide EAP capacity by, 
in combination with the current duties test, using a salary level 
methodology that accounts for the shift to a one-test system, and that 
doing so will both restore overtime eligibility for many individuals 
who perform substantial amounts of nonexempt work and historically 
would have been protected by the long duties test, and address 
potential concerns that the salary level test should not be 
determinative of exemption status for too many individuals. Such a 
salary level will also more reasonably distribute between employees and 
their employers what the Department now understands to be the impact of 
the shift to a one-test system on employees earning between the long 
and short test salary levels.
---------------------------------------------------------------------------

    \202\ See Stein Report at 6 (``In some instances the rate 
selected will inevitably deny exemption to a few employees who might 
not unreasonably be exempted, but, conversely, in other instances it 
will undoubtedly permit the exemption of some persons who should 
properly be entitled to benefits of the act.'').
---------------------------------------------------------------------------

    The Department disagrees with commenters that disputed this aspect 
of the NPRM based on their view that the only valid salary level 
function is to screen from exemption obviously nonexempt employees. 
Section 13(a)(1)'s broad grant of statutory authority for the 
Department to define and delimit the EAP exemption provides the 
Department a degree of latitude in determining an appropriate salary 
level for identifying individuals who are employed in a bona fide EAP 
capacity. As discussed in section V.B.3, for decades, the short test 
salary level did not perform a screening function, but rather was used 
to determine whether the full duties test or the short-cut duties test 
would be applied to determine EAP exemption status. In a one-test 
system, the Department can change the duties test, the salary level, or 
both, to ensure that the test for exemption appropriately distinguishes 
bona fide EAP employees from nonexempt workers. As discussed at length 
in the NPRM,\203\ while acknowledging that it could lessen the salary 
level test's role by returning to a duties test that explicitly limited 
the amount of nonexempt work that could be performed, the Department 
ultimately declined to propose changes

[[Page 32871]]

to the duties test in this rulemaking. Given that decision, it is 
appropriate for the Department to choose to better define the EAP 
exemption by accounting for the shift to a one-test system, and to 
select a salary level methodology that excludes from exemption some 
employees who historically were nonexempt because of the more rigorous 
long duties test. The 2004 and 2019 rules' significant broadening of 
the statutory exemption (a fact employer commenters generally did not 
address) to permit all salaried employees earning between the long and 
short tests who passed the standard duties test to be exempt was not 
unlawful, but it leaves room for refinement. Section 13(a)(1) does not 
require the Department to forever maintain the regulatory choice it 
made 20 years ago to pair the current duties test with a salary level 
that places the entire burden of the move to a one-test system on 
employees who historically were entitled to the FLSA's overtime 
protection because they performed substantial amounts of nonexempt work 
and earned between the long and short test salary levels.
---------------------------------------------------------------------------

    \203\ 88 FR 62164-65. Although some commenters addressed changes 
to the duties test, see, e.g., AFL-CIO, AHLA, NELA, FMI, such 
changes are beyond the scope of the current rulemaking.
---------------------------------------------------------------------------

    The Department continues to believe that the long and short tests 
provide useful parameters for determining the new salary level test 
methodology in this rulemaking. The Department disagrees with AFPI that 
variations in the long test methodology render it a ``made-up concept'' 
or that the long and short tests have ``no place'' in determining the 
new salary level. The long test salary level has played a crucial role 
in defining the EAP exemption for the better part of a century, either 
directly under the two-test system or indirectly under the one-test 
system. As the Department explained in detail in its 2004 rule, the 
long test salary level ``regulatory history reveals a common 
methodology used, with some variations, to determine appropriate salary 
levels[,]'' and (with the exception of the 1975 rule) beginning in 1958 
``the Department set the [long test] salary levels to exclude 
approximately the lowest-paid 10 percent of exempt salaried employees'' 
in low-wage areas and industries.\204\ The Department ``[u]se[d] this 
regulatory history as guidance'' in its 2003 NPRM and, most 
importantly, validated its chosen methodology in the 2004 rule by 
showing that it produced the same salary level as the long test 
methodology--a critical fact employer representatives generally did not 
address in their comments.\205\ While the Department agrees with AFPI 
and the Oxford Economics report that the data set used to set the long 
test salary level was not exactly the same in each regulatory update, 
just as in 2004, minor historical variations do not deprive the long 
test of its usefulness in helping determine an appropriate salary level 
now. The Oxford Economics report's suggestion to calculate the long 
test by updating the 1975 long test salary level for inflation would 
not faithfully replicate the long test because it would produce a 
salary level below the 10th percentile of exempt workers in low-wage 
regions and industries and would conflict with the Department's 
historical practice of avoiding the use of inflation indicators in 
updating the salary level.\206\
---------------------------------------------------------------------------

    \204\ 69 FR 22166.
    \205\ See id. at 22166-70; see also section V.B.3.
    \206\ See, e.g., 84 FR 51245; 69 FR 22167.
---------------------------------------------------------------------------

    The Department also disagrees with commenters who asserted that no 
adjustment is needed to account for the shift to a one-test system 
because the long test became largely dormant in 1991. In the 2004 rule, 
the Department acknowledged this dormancy resulting from its outdated 
salary levels and asserted that employees who were then subject to the 
long test would be better protected under the higher salary level of 
the new standard test.\207\ But as previously explained, section V.B.3, 
in the 2004 rule the Department did not compare the overtime protection 
lower-salaried employees would receive under the standard test with the 
protection they would have received had the Department updated the long 
test with a salary level based on contemporaneous data and kept the 
existing long duties test. Instead, the Department's discussion of the 
elimination of the long duties test in the 2004 rule focused primarily 
on the minimal role played by the long test at that time due to the 
erosion of the long salary level, and on the difficulties employers 
would face if they were again required to track time spent on nonexempt 
work when the dormancy of the long duties test meant that they had 
generally not been performing such tracking for many years.\208\
---------------------------------------------------------------------------

    \207\ See 69 FR 22126.
    \208\ See id. at 22126-27.
---------------------------------------------------------------------------

    The Department also disagrees with commenters that asserted that 
the 2004 rule fully accounted for the move to the standard duties test. 
Because the 2004 rule did not fully account for the lessened overtime 
protection for employees who would have been nonexempt under an updated 
long test (as just described), it created a group of employees with 
lessened protection under the standard test--those who earned between 
the long and short test salary levels. These employees were 
traditionally nonexempt because they failed the long duties test, but 
were exempt under the 2004 rule because they passed the more lenient 
standard duties test.\209\ By setting the standard salary level 
equivalent to the long test salary, the 2004 rule in effect created a 
group of employees who bore the impact of the change from the two-test 
to the one-test system.
---------------------------------------------------------------------------

    \209\ The Chamber asserted that the Department's decision to 
adjust the salary level to account for the shift to a one-test 
system ``fails to appreciate the continued importance of the 
`primary duty' principles, the application of which includes an 
analysis of non-exempt work performed and its relation to the 
employee's exempt work.'' Although the Chamber is correct that the 
standard duties test accounts for nonexempt work, it does so in a 
less rigorous manner than the long duties test, resulting in some 
lower-paid white-collar employees who pass the standard duties test 
but (due to their nonexempt work) would have failed the long duties 
test.
---------------------------------------------------------------------------

iv. Selecting the Salary Level Methodology
    In its NPRM, the Department explained that fully restoring the 
salary level's screening function and accounting for the move to a one-
test system supported setting the salary level at the 35th percentile 
of full-time salaried worker earnings in the lowest-wage Census Region 
(the South)--resulting in a proposed salary level of $1,059 per week. 
Commenters provided competing views on this proposed increase. 
Employers and employer representatives that opposed the proposed salary 
level often characterized it as ``too much, too soon''--stating that an 
increase of 54.8 percent (or 69.3 percent, based on the $60,209 
projected salary level figure included in footnote 3 of the NPRM) \210\ 
less than 4 years after the most recent increase was unnecessary and 
unprecedented. See, e.g., Air Conditioning Contractors of America; 
Americans for Prosperity; Joint Comment from Argentum and American 
Seniors Housing Association; CUPA-HR; International Sign Association; 
NRF. Some commenters, including American Association of Community 
Colleges and Associated Builders and Contractors, observed that, by 
contrast, prior salary level updates have ranged from 5 to 50 percent, 
and others commented that the proposed increase greatly exceeded the 
rate of inflation since the 2019 rule, see Independent Community 
Bankers of America, Ohio

[[Page 32872]]

Township Association. Many employer organizations asserted that the 
Department was trying to resurrect a methodology akin to the 
invalidated 2016 rule and that, like that rule, the proposed salary 
level (which many stressed is a higher dollar figure than the level set 
in the 2016 rule) would unlawfully supplant the duties test. See, e.g., 
Americans for Prosperity; National Restaurant Association; PPWO.
---------------------------------------------------------------------------

    \210\ Several commenters criticized the Department for providing 
projected salary level figures in footnote 3. See, e.g., PPWO; NRF. 
NAM stated that footnote 3 was ``inconsistent'' with the 
Administrative Procedure Act.
---------------------------------------------------------------------------

    Commenters that opposed the proposed salary level were particularly 
concerned about the impact of this change on specific industries and on 
businesses in low-wage regions. Some commenters, such as the American 
Outdoors Association, CUPA-HR, NAHB, and SHRM, provided information 
from internal surveys to support how the proposal would negatively 
affect their members. SBA Advocacy similarly summarized concerns 
received from small businesses. See also, e.g., NFIB. Some commenters 
emphasized the proposal's impact on particular occupations in their 
industries, including first-line supervisors, see, e.g., AHLA, NAHB, 
and entry-level managers, see, e.g., NAM, NRF. Emphasizing the proposed 
salary level's geographic impact, National Restaurant Association and 
PPWO warned that the proposal would exclude from exemption a high 
percentage of employees who pass the duties test in lower-wage regions, 
and could result in employees in the same job classification being 
treated differently based on where they live. A number of educational 
institutions opposed the proposed increase due to cost-related concerns 
specific to the educational sector. See, e.g., American Association of 
Community Colleges; Association of Independent Colleges and 
Universities of Ohio; National Association of Independent Colleges and 
Universities. The National Association of Counties raised similar 
concerns about the impact of the increased salary level on local 
governments. Nonprofit sector feedback was more mixed, with the 
National Council of Nonprofits characterizing the industry response as 
one of ``moral support'' and ``operational anxiety.'' Some nonprofit 
organizations opposed the proposal, see, e.g., Children's Alliance of 
Kentucky, U.S. Public Interest Research Group (U.S. PIRG), some 
supported it, see, e.g., CLASP, Justice at Work, and some agreed with 
the Department's intent but raised cost and other concerns, see, e.g., 
Catholic Charities, Open Roads Bike Program.
    Commenters had different suggestions for how the Department should 
account for such regional and industry-specific differences. For 
example, RILA urged the Department to include the retail industry in 
its data set, AFPI suggested setting the salary level equal to the 20th 
percentile of non-hourly employee earnings in the ten lowest-wage 
states, and Seyfarth Shaw recommended using the East South Central 
Census Division. The Chamber asked the Department to focus on data from 
the lowest-wage types of entities (such as small businesses, small 
nonprofits or small public employers), in the lowest-wage industries, 
in rural areas, in the lowest-wage Census Region. The Chamber and 
National Association of Convenience Stores favored excluding nonexempt 
workers from the data set (and using a lower earnings percentile) and 
questioned the Department's use of Current Population Survey (CPS) 
Merged Outgoing Rotation Group (MORG) data for nonhourly earnings for 
full-time workers as a proxy for salaried worker earnings.
    Commenters that supported increasing the salary level viewed the 
Department's proposal very differently than employer representatives. 
Whereas many employer representatives focused on specific regions or 
industries to assert that the proposed salary level was too high, 
supportive commenters focused on the national impact to assert that the 
salary level was appropriate or too low. Many supportive commenters 
considered it ``modest.'' See, e.g., AFSCME; CLASP; Family Caregiving 
Coalition; National Partnership. Others stated that the salary level 
``could have reasonably been significantly higher and still within 
historical precedent.'' See, e.g., Common Good Iowa; Jobs to Move 
America; Louisiana Budget Project; Maine Center for Economic Policy; 
North Carolina Justice Center. The statistic most often cited to 
support that the proposal was conservative by historical standards was 
that whereas 62.8 percent of full-time salaried workers earned less 
than the short test salary level in 1975, 28.2 percent of full-time 
salaried workers earned less than the proposed standard salary level 
(and several of these commenters noted that only approximately 9 
percent earned less than the current salary level). See, e.g., EPI; 
National Center for Law and Economic Justice; Worker Justice Center of 
New York; Workplace Justice Project. AFL-CIO and others highlighted 
that the proposed salary level was 19 percent lower than the inflation-
adjusted value of the 1975 short test salary level, and EPI stated 
that, on average, the proposed salary level was 16 percent lower than 
inflation-adjusted short test salary levels set from 1949 and 1975. 
Some supportive commenters stressed that a significant salary level 
increase was needed in part to account for the 2004 rule's elimination 
of the long duties test, see, e.g., EPI, NELP, while NWLC stated that 
the proposed methodology would ``not eclipse the role of the duties 
test'' and instead would ``restore[] a reasonable balance between the 
strength of the duties test and the height of the salary threshold.''
    Some commenters advocated for a much higher salary level than the 
Department proposed, and a number of commenters specifically proposed 
alternate methodologies for the Department to adopt in the final rule. 
For example, NELA stated that the proposed level was ``too low from a 
historical perspective'' and, favoring ``[b]older federal action[,]'' 
asked the Department to (like in the 2016 rule) set the salary level 
equal to the 40th percentile of weekly earnings of full-time salaried 
workers in the lowest-wage Census Region (which would produce a salary 
level of $1,196 per week based on the data used in this final rule). 
Winebrake & Santillo similarly favored a return to that methodology. 
AFL-CIO supported setting the salary level higher--at the historical 
average short test salary level (which would result in a salary level 
of $1,404 per week based on current data). Other commenters sought a 
salary level that they stated would exclude from exemption the same 
proportion of full-time salaried workers as under the 1975 salary level 
test. For example, Demos urged the Department to set the salary level 
at the 55th percentile of weekly earnings of full-time salaried workers 
nationwide to meet this ``high-water'' mark, and Nick Hanauer supported 
a salary level of at least $83,000 to ``restore the overtime 
threshold'' to a time ``when the American middle class was 
strongest[.]'' Commenters that sought a higher salary level than the 
Department proposed often expressed their disagreement with the 
district court's decision invalidating the 2016 rule. See, e.g., NELA; 
Sanford Heisler Sharp; Winebrake & Santillo.
    After considering the comments received, the Department is 
finalizing the salary level methodology as proposed, setting it equal 
to the 35th percentile of full-time salaried worker earnings in the 
lowest-wage Census Region (the South)--which produces a salary level of 
$1,128 per week using calendar year 2023 data. Consistent with the 
Department's responsibility to ``not only . . . determin[e] which 
employees are entitled to the exemption, but also [to] draw[] the line 
beyond which the

[[Page 32873]]

exemption is not applicable[,]'' \211\ this salary level will, in 
combination with the standard duties test, effectively calibrate the 
scope of the exemption for bona fide EAP employees and do so in a way 
that distributes across the population of white-collar employees 
earning between the long and short test salary levels the impact of the 
shift to a one-test system. As previously discussed, updating the 
salary level for wage growth since the 2019 rule produces a salary 
level of $844 per week, and fully restoring the salary level's historic 
screening function would result in a salary level of $942 per week, 
equivalent to the 25th percentile of full-time salaried worker earning 
in the South (i.e., the long test level). Accordingly, the increase 
from the 25th percentile to the 35th percentile is to account for the 
shift to a one-test system.\212\ The Department set the standard salary 
level at (or below) the long test level in the 2004 and 2019 rules and 
set it at the low end of the historic range of short test salary levels 
in the 2016 rule. Setting the salary level at either the long test 
salary level or equivalent to a short test salary level in a one-test 
system with the standard duties test, however, results in either 
denying overtime protection to lower-paid employees who are performing 
large amounts of nonexempt work, and thus, would have been exempt under 
the Department's historical view of the EAP exemption, or in raising 
concerns that the salary level is determining the exemption status of 
too many employees. In contrast, an appropriately calibrated salary 
level between the long and short test salary levels better defines and 
delimits which employees are employed in a bona fide EAP capacity, and 
thus better fulfills the Department's duty to define and delimit the 
EAP exemption.
---------------------------------------------------------------------------

    \211\ Stein Report at 2.
    \212\ AFPI mistakenly asserts that the increase from the 20th 
percentile to the 35th percentile ``is based entirely on the switch 
to a one-test system in 2004.'' The majority of the salary level 
increase (from $684 to $942) is to update the salary level for wage 
growth and fully restore the salary level's historic screening 
function, with less than half (the increase from the $942 to $1,128) 
made to account for the shift from the two-test system.
---------------------------------------------------------------------------

    The Department's methodology established in this final rule uses 
the second-to-lowest of the earnings ventiles between the long test 
salary level (the 25th percentile of full-time salaried worker earnings 
in the lowest-wage Census Region) and the short test salary level 
(approximately the 51stth percentile of this data set). These ventiles 
are the 30th, 35th, 40th, 45th, and 50th percentiles of full-time 
salaried worker earnings in the lowest-wage Census Region. The 
Department continues to believe that its methodology produces a salary 
level high enough above the long test salary level to ensure overtime 
protection for some lower-paid employees who were traditionally 
entitled to overtime compensation under the two-test system by virtue 
of their performing large amounts of nonexempt work, and also low 
enough, as compared with higher salary levels, to significantly shrink 
the group of employees performing EAP duties who are excluded from the 
exemption by virtue of their salary alone. Whereas the 2004 and 2019 
rules permitted the exemption of employees earning between the long and 
short test salary levels even if they performed significant amounts of 
nonexempt work, and the 2016 rule prevented employers from using the 
exemption for such employees earning below the short test salary range 
even if they performed EAP duties, the methodology adopted in this 
final rule falls between these two methodologies and thus, as 
commenters including the Administrative Law Professors and Coalition of 
State AGs agreed, reasonably balances the effect of the switch to a 
one-test system in a way that better differentiates between those who 
are and are not employed in a bona fide EAP capacity. Of the 10.8 
million salaried white-collar employees earning between the equivalent 
of the long and short test salary levels, approximately 40 percent earn 
between $942 (the equivalent of the long test salary level) and $1,128 
(the new salary level) and would receive overtime protection by virtue 
of their salary, while approximately 60 percent earn between $1,128 and 
$1,404 (the equivalent of the short test salary level) and would have 
their exemption status turn on whether they meet the duties test. These 
and other statistics, discussed in section V.B.5.iii, demonstrate that 
the salary level will not ``essentially eliminate[ ] the role of the 
duties test'' as National Restaurant Association and others contended. 
See also, e.g., AHLA; CWC.
    Even though the Department's decision to select a salary level 
below the midpoint between the long and short tests means that the 
effect of the salary level on employees earning within this range and 
their employers is not exactly equal, a higher salary level could 
disrupt the reliance interests of employers who (due in part to the 
Department's failure to update the salary level tests between 1975 and 
2004), have been able to use a lower salary level and more lenient 
duties test to determine exemption status since 1991. However, a 
significantly lower salary level akin to the long test salary level 
would avoid disrupting such reliance interests only by continuing to 
place the burden of the move to a one-test system entirely on employees 
who historically were entitled to the FLSA's overtime protections 
because they perform substantial amounts of nonexempt work. The 
Department believes that employer reliance interests should inform 
where the salary level is set between the long and short test levels, 
and that its approach appropriately balances the impact of the move to 
a one-test system between employees' right to receive overtime 
compensation and employers' ability to use the exemption. Such 
balancing is fully in line with the Department's authority under the 
FLSA to ``mak[e] certain by specific definition and delimitation'' the 
``general phrases'' ``bona fide executive, administrative, or 
professional capacity.'' \213\ This grant of authority confers 
discretion upon the Department to determine the boundaries of these 
general categories; any such line-drawing, as courts have recognized, 
will ``necessarily'' leave out some employees ``who might fall within'' 
these categories.\214\
---------------------------------------------------------------------------

    \213\ See Walling, 140 F.2d at 831-32.
    \214\ Id. at 832.
---------------------------------------------------------------------------

    The Department recognizes the tension between the methodology 
adopted in this final rule and some statements made in its 2016 and 
2019 rules. The Department stated in its 2016 rule that the current 
duties test could not be effectively paired with a salary level below 
the short test salary range, and for this reason expressly rejected 
setting the salary level at the 35th percentile of weekly earnings of 
full-time salaried workers in the South.\215\ But that rule, which 
would have prevented employers from using the EAP exemption for some 
employees who were considered exempt under the prior two-test system, 
was challenged in court, and a return to it would result in significant 
legal uncertainty for both workers and the regulated community. In the 
2019 rule, the Department expressly rejected setting the salary level 
equal to the long test or higher.\216\ However, as noted above, the 
Department did not fully address in that rule the implications of the 
switch from a two-test to a single-test system. Having now grappled 
with those implications, the Department concludes that not only can it 
pair the current duties test with a salary between the long and short 
test salary levels, but that doing so

[[Page 32874]]

appropriately recalibrates the salary level in a one-test system to 
ensure that it effectively identifies bona fide EAP employees.
---------------------------------------------------------------------------

    \215\ 81 FR 32410.
    \216\ See 84 FR 51244.
---------------------------------------------------------------------------

    In setting the salary level, the Department continues to believe 
that it is important to use a methodology that is transparent and 
easily understood. As in its prior rulemakings, the Department is 
setting the salary level using earnings data from a lower-salary 
regional data set (as opposed to nationwide data) to accommodate 
businesses for which salaries generally are lower due to geographic or 
industry-specific reasons.\217\ Specifically, the Department is setting 
the salary level using the data set of full-time nonhourly \218\ 
workers in the lowest-wage Census Region (the South). This approach 
promotes transparency because BLS routinely compiles this data. It also 
promotes regulatory simplification because the data set is not limited 
to exempt EAP employees and thus does not require the Department to 
model which employees pass the duties test.\219\ In keeping with the 
Department's past practice, it is relying on up-to-date data to 
determine the salary level.\220\ In the NPRM, the Department used 2022 
salary data for estimating the salary level resulting from the proposed 
methodology, which was current at the time the Department developed its 
proposal. In this final rule, the Department is relying on calendar 
year 2023 salary data, as published by BLS, to set the salary 
level.\221\
---------------------------------------------------------------------------

    \217\ See id. at 51238; 81 FR 32404.
    \218\ Consistent with recent rulemakings and the NPRM, see 88 FR 
62188, 84 FR 51258, in determining earnings percentiles the 
Department looked at nonhourly earnings for full-time workers from 
the CPS MORG data collected by BLS.
    \219\ As discussed in the economic analysis, see section VII, 
this modeling is done using the Department's probability codes. See 
84 FR 51244; 69 FR 22167.
    \220\ See 84 FR 51245; 81 FR 32405; 69 FR 22168.
    \221\ BLS currently publishes this data at https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm.
---------------------------------------------------------------------------

    Given the strong views expressed by commenters, including those 
opposing the proposal or favoring a higher salary level, the Department 
did not arrive lightly at its decision to finalize the salary level 
methodology as proposed. Commenter feedback often reflected competing 
vantage points for assessing the Department's proposal. Commenters that 
supported the Department's proposal or a higher salary level (most 
often, the 2016 rule methodology) often compared the proposed salary to 
short test salary levels, while commenters that opposed the proposed 
increase often stressed the size of the change from the current salary 
level. The Department agrees with supportive commenters that past 
salary levels should inform the current update, and agrees that 
statistics such as the percentage of salaried white-collar workers who 
earn below the salary level or statistics comparing the new salary 
level to inflation-adjusted prior levels, reinforce the reasonableness 
of the Department's approach. However, the Department is wary of 
comments urging a return to the 2016 rule methodology that do not 
account for subsequent court decisions and the Department's 2019 
rulemaking. The Department also recognizes concerns from some 
commenters about the size of the salary level increase. But this metric 
is influenced by many factors and thus does not, in and of itself, 
establish whether a salary level sets an appropriate dividing line for 
determining whether an employee is employed in a bona fide EAP 
capacity. For example, the size of the current increase is influenced 
by factors including significant wage growth since the 2019 rule 
(simply adjusting the current salary level methodology for wage growth 
would result in a roughly 23 percent increase); the Department for the 
first time updating a salary level that was set below the long test; 
and the Department adjusting the salary level to account for the move 
to a one-test system. While the 65 percent increase is greater in 
percentage terms than most prior updates, the Department does not 
consider this factor dispositive.\222\
---------------------------------------------------------------------------

    \222\ As discussed in section IV, in part to provide employers 
more time to adjust, the new methodology will not be applicable 
until January 1, 2025.
---------------------------------------------------------------------------

    The salary level methodology adopted in this final rule ($1,128 per 
week; $58,656 annually) produces a salary level that is lower than the 
two salary level estimates provided in footnote 3 of the NPRM ($59,284 
and $60,209), which were based on a quarter of data. The Department 
disagrees with commenters that criticized the Department for providing 
projected salary level figures in its NPRM. These comments overlook 
that the NPRM proposed a methodology for updating the salary level 
test, not just a salary level figure. Providing commenters an estimate 
of the salary level that the proposed methodology could produce in a 
final rule based on updated data promoted rulemaking transparency and 
the opportunity for fully informed commenter feedback. That many 
commenters used the figures in footnote 3 in their comments, and the 
final salary level based on calendar year 2023 data is between the 
proposed salary level and the two estimates in the footnote, reinforces 
that footnote 3 in no way deprived commenters of the opportunity to 
meaningfully comment on the NPRM.
    As previously discussed, most employer commenters that opposed the 
proposed salary level opposed any increase or at most supported a 
return to the 2004/2019 methodology, and so they did not address the 
NPRM's analysis examining where to set the salary level between the 
long and short test salary levels. The Department does not find these 
comments persuasive because they in effect sought a salary level below 
the long test level, which would not even fully restore the salary 
level's screening function, let alone account at all for the move to a 
one-test system. As for commenter concerns about the salary level's 
impact on low-wage regions and industries, the Department accounts for 
these concerns by setting the salary level using the lowest-wage Census 
Region. This aspect of the rulemaking differs from the 2016 rulemaking, 
where the Department proposed to set the salary level using a national 
data set and then, in response to commenters concerns, shifted to the 
lowest-wage Census Region in the final rule to account for low-wage 
regions and industries.\223\ The Department used this past experience 
to account for the impact on low-wage regions and industries in 
developing the NPRM and, having done so, is again basing the salary 
level on the earnings of workers in the lowest-wage Census Region in 
this final rule.
---------------------------------------------------------------------------

    \223\ See 81 FR 32408.
---------------------------------------------------------------------------

    The Department declines requests from some commenters to change the 
data set it used to set the salary level. Some asked the Department to 
add earnings data from a specific industry to the CPS earnings data. 
The Department is not altering the data set in this way because it 
believes that using earnings data from the lowest-wage Census Region 
produces a salary level that accounts for differences across industries 
and regional labor markets. The Department also is not altering the 
Census region data set so that it excludes all states with higher 
earnings, nor is the Department creating a new data set that includes 
only States with the lowest earnings. The Department's chosen approach 
is consistent with its practice since the 2004 rule of using the South, 
rather than a narrower geographic region, when setting the salary 
level. Restricting the data set to the ten lowest-wage states or to the 
East South Central Region (made up of just four states, Alabama, 
Kentucky, Mississippi, and Tennessee) would give undue weight to low-
wage areas and

[[Page 32875]]

skew the salary level. The Chamber's suggestion to restrict the data 
set even further (by focusing on low-wage entities within low-wage 
industries within rural areas within the South) would even further 
compound this concern.
    The purpose of the data set is not simply to produce the lowest 
possible salary level. The Department's approach directly accounts for 
low-wage areas while producing a salary level that is appropriate to 
apply nationwide. The Department also declines requests to limit its 
data set to exempt workers, instead continuing to set the salary level 
using earnings data for exempt and nonexempt workers--as it has done in 
every one of its rulemakings under the one-test system. As explained in 
the 2004 rule, the Department's chosen approach is preferable in part 
because restricting the data set to exempt employees requires 
``uncertain assumptions regarding which employees are actually 
exempt[.]'' \224\ The Department is also continuing to use data on 
nonhourly worker earnings as a proxy for compensation paid to salaried 
workers. Although some commenters challenged this approach, the 
Department is not aware of, and commenters did not provide, any 
statistically robust data source that more closely reflects salary as 
defined in the Department's regulations. Also, as discussed in section 
VII, the Department believes that relatively few nonhourly workers were 
paid by methods other than salaried.
---------------------------------------------------------------------------

    \224\ 69 FR 22167.
---------------------------------------------------------------------------

    In response to commenter opposition to the proposed salary level 
and the concerns described above, the Department considered setting the 
salary level equal to the 30th percentile of earnings of full-time 
salaried workers in the lowest-wage Census Region. The Department 
ultimately decided not to adopt this approach, however, because it 
would less effectively account for the shift to a one-test system. This 
methodology would set the salary level based on the lowest earnings 
ventile between the short and long test salary levels and produce a 
salary level that is only $77 above the long test level. As a result, 
for the population of white-collar workers earning between the long and 
short tests, only 18 percent would earn below the salary level (whereas 
40 percent of this population earn below the new salary level). This 
approach thus would not sufficiently address the problem inherent in 
the 2004 methodology of including in the exemption employees who 
perform significant amounts of nonexempt work, including those earning 
salaries close to the long test salary level--where the Department 
would expect a higher proportion of workers to perform more nonexempt 
work.\225\ In contrast, the Department's approach addresses these 
concerns in a manner that more reasonably distributes among employees 
earning between the long and short test salary levels and their 
employers the impact of the Department's move to a one-test system.
---------------------------------------------------------------------------

    \225\ The Department has repeatedly recognized that increasing 
salary level tends to correlate with the performance of bona fide 
EAP duties. See section V.B.1 (discussing role of long test and 
short test salary levels); section V.C (discussing the role of the 
HCE total annual compensation threshold). Thus, increasing overtime 
protection specifically for workers earning at the lower end of the 
range between the long test salary level and short test salary 
level--but not those earning at the higher end of that range--is an 
especially appropriate approach to balancing these concerns.
---------------------------------------------------------------------------

    The Department disagrees with commenters that stated that the 
chosen methodology simply resurrects the 2016 methodology--which set 
the salary level equal to the 40th percentile of full-time salaried 
worker earnings in the lowest-wage Census Region. The fact that the new 
salary level is higher in nominal dollars than the level set in the 
2016 rule ($913 per week) is irrelevant because that level was 
calculated using 2015 data.\226\ Applying the 2016 methodology to 
current data produces a salary level of $1,196 per week. Whereas under 
this rule an employee's salary level will be determinative of exemption 
status for 40 percent of the 10.8 million employees earning between the 
long and short test levels, under the 2016 methodology salary would be 
determinative for 55 percent of such employees. A salary level 
equivalent to the 40th percentile in the South would also result in 5.0 
million affected workers. Although some of these workers earn below the 
long test level and would be nonexempt under either approach, this 
alternative approach would result in 949,000 more affected workers than 
the Department's chosen methodology. The Department's decision to 
deviate from the 2016 methodology is significant, as underscored by the 
fact that (as discussed in more detail below) a number of employee 
representatives urged the Department to adopt that methodology or a 
higher percentile.
---------------------------------------------------------------------------

    \226\ See 81 FR 32393.
---------------------------------------------------------------------------

    The Department recognizes that many commenters found the proposed 
methodology conservative, or overly conservative, with some commenters 
urging the Department to select a methodology that produces a higher 
salary level. Repeating the 2016 rule methodology, as some commenters 
requested, by setting the salary level at the 40th percentile of weekly 
earnings of full-time salaried workers in the lowest-wage Census Region 
would further reduce the impact of the move to a one-test system on 
lower-paid white-collar employees who perform significant amounts of 
nonexempt work. As discussed above, commenters that supported the 2016 
rule methodology provided statistics demonstrating that this approach 
yields a salary level within historical norms. The 40th percentile 
would produce a salary level ($1,196 per week) that is above the 
midpoint between the long and short test salary levels. As noted above, 
of the approximately 10.8 million salaried white-collar employees who 
earn between the long and short test salary levels, approximately 55 
percent earn between the long test salary level and $1,196 and would 
receive overtime protection by virtue of their salary, while 
approximately 45 percent earn between $1,196 and the short test salary 
level and would have their exemption status turn on whether they meet 
the duties test.
    The Department believes this rule appropriately distributes the 
burden of the change from a two-test to one-test system between 
employees and employers. By contrast, the Department remains concerned 
that courts could find that adopting the 2016 rule methodology would 
make the salary level test determinative of overtime eligibility for 
too many employees. Setting the salary level equal to a higher 
percentile of weekly earnings (such as the 55th percentile as Demos 
recommended), would further amplify this concern. Setting the salary 
level based on a lower percentile of earnings will (compared to such 
higher levels) increase the number of employees for whom duties is 
determinative of exemption status, and in turn increase the ability of 
employers to use the exemption for more lower-paid employees who meet 
the EAP duties requirements. This outcome is consistent with the 
important role of the duties test in identifying bona fide EAP 
employees. EPI did not find the number of workers affected by a salary 
level increase to be an informative metric for assessing whether a 
threshold is appropriate and the Department agrees that this statistic 
has significant limitations. In particular, it is notable that although 
the standard salary level changes will result in 4.0 million affected 
workers (1.0 million from the initial update and 3.0 million from 
applying the new standard salary

[[Page 32876]]

level),\227\ only 2.2 million of these workers are due to the increase 
from the long test to the new methodology, while 1.8 million affected 
workers (or 45 percent) are a result of restoring the historic 
screening function of the long test salary level. By comparison, 
updating the salary level using the 2016 methodology and current data 
would result in 5.0 million affected workers. Although the number of 
affected workers for this rule is above the number of affected workers 
in the 2019 rule, the difference is necessary to fully restore the 
salary level's screening function and account for the shift to a one-
test system, and the overall impact of this change on the workforce is 
relatively small (see section V.B), such that the new salary level is a 
proper exercise of the Department's authority to define and delimit the 
scope of the EAP exemption.
---------------------------------------------------------------------------

    \227\ See Table 25.
---------------------------------------------------------------------------

    In declining to adopt the 2016 rule methodology, the Department is 
also responding to concerns that setting the salary level equal to the 
40th percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region would foreclose employers from exempting any 
white-collar employees who earn less than that amount ($1,196 per week 
based on the data used in this final rule) and perform EAP duties, 
including those who were exempt under the long test and remained exempt 
when the Department established the one-test system in 2004 and set the 
salary level equivalent to the long test level.\228\ Litigants 
challenging the 2016 rule emphasized this consequence of setting a 
salary level above the long test in a one-test system, and those 
arguments have contributed to the Department more fully attempting to 
account for the impact of the shift to a one-test system. Although some 
commenters favored a salary level equivalent to the short test level, 
such an approach would result in employers being unable to use the 
exemption for any employees who earn between the long and short test 
and have previously been exempt, either under the long test, or under 
the standard test set equal to the long test. In contrast, the 
methodology in this final rule produces a salary level that is not only 
below any short test level, but also lower than the midpoint between 
the long and short test salary levels. This approach appropriately 
balances the goal of ensuring that employees earning above the long 
test salary level who perform substantial amounts of nonexempt work are 
not exempt with the goal of enabling employers to use the exemption for 
employees who do not perform substantial amounts of nonexempt work.
---------------------------------------------------------------------------

    \228\ See 84 FR 51242.
---------------------------------------------------------------------------

v. Salary Level Effects
    In selecting the salary level methodology, the Department also 
considered commenter views that the proposed salary level would 
generate a range of repercussions. Many commenters that opposed the 
proposed salary level stated that it would cause widespread 
reclassification of currently exempt employees to nonexempt status and 
a corresponding decrease in flexible work arrangements, including 
remote work opportunities. See, e.g., FMI; IFDA; National Lumber and 
Building Material Dealers Association; NRF. Others stated that 
employers would convert newly nonexempt employees from salaried to 
hourly status, which they contended would harm employee morale, see, 
e.g., Independent Electrical Contractors, National Small Business 
Association, and create an undesirable ``punch the clock'' mentality, 
see, e.g., North Carolina Center for Nonprofits, The 4A's. Some 
commenters that opposed the proposal stated that the rule would ``harm 
the very workers the Department says it is trying to benefit,'' 
asserting, for example, that the proposal would result in reduced 
employee benefits and career advancement opportunities, and increased 
turnover. See Americans for Prosperity; see also PPWO. Other commenters 
expressed concern that the proposed increase would decrease employee 
productivity, see, e.g., John. C. Campbell Folk School, decrease social 
services, see, e.g., Social Current, increase employer costs, prices, 
and inflation, see, e.g., Chamber, and/or cause salary compression 
issues, see, e.g., Seyfarth Shaw.
    Commenters that supported the Department's proposed salary level or 
a higher salary level than proposed often highlighted what they viewed 
as positive effects of the proposed increase. Many emphasized that the 
updated salary level would make it more difficult to exempt lower-paid 
employees who they believed should be nonexempt, particularly low-level 
managers with many duties equivalent to non-managerial employees. See, 
e.g., Coalition of Gender Justice and Civil Rights Organizations; NELP; 
Winebrake & Santillo. Restaurant Opportunities Center United stated 
that the current ``low salary threshold discourages restaurant 
employees from taking managerial and supervisory positions, thereby 
gaining skills and experience that would enable them to advance their 
careers[.]'' Sanford Heisler Sharp stated that the ``need for 
monitoring and protecting white-collar workers' hours is critical 
today'' because the significant increase in telework since 2020 has 
meant that employers are ``no longer constrained by the practical 
limitation of the worker leaving the workplace.'' Other employee 
representatives explained that the rule would produce positive societal 
benefits such as increased economic security, see, e.g., NELP, improved 
worker health due to decreased work hours, see, e.g., SEIU, decreased 
poverty, see, e.g., NEA, and disproportionate benefits for women, 
people of color, and workers with disabilities, see, e.g., National 
Partnership.
    Taken together, the above comments do not provide a compelling 
justification for deviating from the Department's proposed salary level 
methodology. The Department agrees that the salary level increase will 
result in some currently exempt employees becoming nonexempt and 
therefore receiving minimum wage and overtime protections. Employee 
reclassification is a consequence of any salary level increase, and the 
number of reclassified employees will depend on how employers choose to 
respond to this rule for their employees who earn between the current 
and new salary levels. Moreover, there is no prohibition on paying 
nonexempt employees a salary as long as any overtime hours are 
appropriately compensated, and employers may therefore choose to 
continue to pay a salary to affected workers. Employers likewise have 
latitude to determine what flexible work arrangements to provide 
employees and, more broadly, need not structure their pay plans in a 
manner that results in the potentially adverse effects (such as 
decreased employee benefits) that some employers identified. 
Significantly, employees and employee representatives did not share 
employer commenter concerns about potential adverse consequences of the 
proposed salary level, let alone view them as a justification for 
deviating from the proposed salary level. This includes comments from 
individual employees. For example, an exempt manager for a small 
nonprofit organization stated that they ``would love the opportunity to 
be reclassified to nonexempt and be compensated for time worked beyond 
40 hours, or alternatively be given a raise if that level of 
flexibility is deemed necessary by my employer.'' As to potential 
consequences of the updated salary level on the economy more broadly, 
such implications are speculative and in dispute (as discussed

[[Page 32877]]

in some detail in section VII), and do not provide a basis for a 
different salary level methodology.
iv. Other Issues
    The Department also addresses some other issues stakeholders raised 
in their comments.
    Many nonprofit organizations worried that the proposed salary level 
would disproportionately affect them, raising concerns related to, for 
example, their reliance on government grants, see, e.g., Asclepius 
Initiative, Catholic Charities, National Council of Nonprofits, and 
their inability to raise prices, see, e.g., Advancing States, 
Independent Sector, YMCA. Some commenters asked the Department to 
exempt at least certain nonprofit organizations from the salary level 
test. See, e.g., Oklahoma Wesleyan University; U.S. PIRG. Many 
nonprofit organization commenters opposed this idea. See, e.g., A 
Second Chance; Delaware Alliance for Nonprofit Advancement; National 
Council for Nonprofits; North Carolina Center for Nonprofits. The 
Department recognizes and values the enormous contributions that 
nonprofit organizations make to the country. Nonprofit organizations 
provide services and programs that benefit many vulnerable individuals 
in a variety of facets of life, including services that benefit the 
vulnerable workers who the Department also works to protect by ensuring 
that their workplaces are fair, safe, and secure. However, the 
Department's EAP exemption regulations have never had special rules for 
nonprofit organizations; the employees of nonprofits have been subject 
to the EAP exemption if they satisfied the same salary level, salary 
basis, and duties tests as other employees.\229\ Consistent with this 
history, the Department declines to exempt nonprofit organizations from 
the salary level test. As with other industries, as discussed above, 
the Department accounts for nonprofit industry concerns by setting the 
salary level using the lowest-wage Census Region.
---------------------------------------------------------------------------

    \229\ See 81 FR 32398, 32421; see also 84 FR 51234.
---------------------------------------------------------------------------

    A number of community-based service providers for people with 
intellectual and developmental disabilities urged the Department to 
work closely with other government agencies, including the Centers for 
Medicare and Medicaid Services (CMS) and the Administration for 
Community Living (ACL), to implement the Department's proposed changes 
in the context of Medicaid home and community-based services (HCBS). 
See, e.g., ANCOR; BrightSpring Health Services; NASDDDS; United 
Cerebral Palsy Association. Some commenters specifically referenced a 
policy that was adopted by the Department related to the enforcement of 
the 2016 regulation for providers of Medicaid-funded services for 
individual with intellectual or developmental disabilities in 
residential homes or facilities with 15 or fewer beds.\230\ See, e.g., 
Chimes; The Arc of the United States. Consistent with its approach in 
the 2019 rule, the Department is not adopting a similar policy in this 
rulemaking. The Department believes following this approach is 
appropriate given that the initial update (to $844 per week) is less 
than salary level increase in the 2019 rule, and service providers will 
have approximately 8 months from publication of this rule to comply 
with the new salary level ($1,128 per week). Additionally, the 
Department intends (as many commenters requested) to issue technical 
assistance to help employers comply with the FLSA and will continue to 
coordinate (as other commenters requested) with ACL and CMS on 
supporting Medicaid-funded service providers impacted by this rule.
---------------------------------------------------------------------------

    \230\ See 81 FR 32390 (May 23, 2016).
---------------------------------------------------------------------------

    Some commenters asked the Department to permit employers to prorate 
the salary level for part-time employees. See, e.g., NCFC; PPWO; 
Seyfarth Shaw; University System of Maryland. The Department has never 
prorated the salary level for part-time positions; considered and 
rejected similar requests in its 2004, 2016, and 2019 rules; and 
declines to establish a prorated salary level for part-time positions 
in this rule.\231\ As the Department has previously explained, 
employees hired to work part time generally 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.\232\
---------------------------------------------------------------------------

    \231\ 84 FR 51239; 81 FR 32422; 69 FR 22171.
    \232\ See FLSA2008-1NA (Feb. 14, 2008).
---------------------------------------------------------------------------

    The Chamber objected to the Department's proposed change to the 
example provided in Sec.  541.604(b), a salary basis test regulation 
establishing that an exempt employee may be paid on an hourly, daily, 
or shift basis if the employment arrangement ``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 Department did not propose any 
substantive change to this regulation and only proposed to update the 
dollar amounts in light of the proposed increase in the standard salary 
level. The Department has again updated the figures in the regulation 
to account for the salary level change from the NPRM to the final rule. 
The updated numbers in this final rule produce the same ratios between 
actual and guaranteed earnings as example in the current regulations. 
The Department declines the Chamber's suggestion to change the numbers, 
which would change the ratio.
    Some commenters urged the Department to increase the percentage of 
the salary level that employers could satisfy using nondiscretionary 
bonuses and incentive payments (including commissions). See, e.g., FMI; 
National Automobile Dealers Association; National Golf Course Owners 
Association; TechServe Alliance. The Department did not propose any 
changes to how bonuses are counted toward the salary level 
requirement,\233\ and declines to make any such changes in this final 
rule. Consistent with the current regulations, employers can satisfy up 
to 10 percent of the new salary level ($112.80 per week under this 
final rule) through the payment of nondiscretionary bonuses and 
incentive payments (including commissions) paid annually or more 
frequently.
---------------------------------------------------------------------------

    \233\ See 88 FR 62169.
---------------------------------------------------------------------------

5. Assessing the Impact of the Salary Level
i. The Department's Assessment of the Impact of the Proposed Salary 
Level
    As stated in the NPRM, the Department sought to achieve three 
objectives in proposing to set the standard salary level at the 35th 
percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region: preserve the primary role that the duties 
test plays in determining EAP exemption status; fully restore the 
initial screening function of the salary level; and more effectively 
identify in a one-test system who is employed in a bona fide EAP 
capacity in a manner that reasonably distributes among employees 
earning between the long and short test salary levels and their 
employers the impact of the Department's move from a two-test to a one-
test system.
    In assessing whether the proposal met these objectives, the 
Department first considered the impact of its proposed

[[Page 32878]]

salary level on salaried white-collar workers across the income 
spectrum. The Department noted that almost three-quarters of salaried 
white-collar workers earned above the proposed salary level, and 
therefore duties, rather than salary, would remain determinative of 
exemption status for a significant majority of white-collar workers. 
The Department also concluded that a minority of the smaller share of 
salaried white-collar workers who earn less than the proposed standard 
salary level would meet the duties test, whereas approximately three-
quarters of the far-larger share of salaried white-collar workers who 
earn at least the proposed standard salary level would meet the duties 
test. The Department noted that this supported that the proposed salary 
level would be an effective indicator of the capacity in which salaried 
white-collar workers are employed. The Department also examined the 
impact of the proposed salary level on currently exempt EAP workers--
salaried white-collar employees who meet the standard duties test and 
earn at least $684 per week. The Department found that 1.8 million of 
the workers who would be affected by the proposed salary level earned 
less than the long test salary level and therefore would have been 
screened from the exemption under every prior rule issued by the 
Department except for the 2019 rule, thus confirming that the proposed 
standard salary level would play a relatively modest role in 
determining EAP exemption status.
ii. Comments Received
    The Department received relatively few comments directly addressing 
its estimates of the impact of the proposed salary level or the metrics 
it identified to assess those impacts. As previously discussed, some 
commenters representing employer interests stated that the proposal 
would exclude too many workers from the exemption based on their 
earnings. See, e.g., Chamber; PPWO; Seyfarth Shaw. However, commenters 
that expressed such views generally did not challenge the Department's 
analysis of the impact of its proposed salary level on all salaried 
white-collar workers,\234\ nor did they generally address the 
Department's conclusion that under the proposed standard salary level, 
duties would be determinative of exemption status for a large majority 
of full-time salaried white-collar workers.\235\ As noted in section 
V.B, employer advocates that opposed the Department's proposed salary 
level instead often emphasized the salary level's function of screening 
obviously nonexempt employees from the exemption, albeit asserting that 
the proposed salary level would exceed its screening function, see, 
e.g., PPWO, RILA, SHRM, whereas worker advocates often favored a 
greater role for the salary level than employer representatives, see, 
e.g., AFSCME, EPI, Family Values @Work.
---------------------------------------------------------------------------

    \234\ Some commenters asserted that the proposed salary level 
would make nonexempt too many workers in lower-wage regions and 
industries. See, e.g., AHLA; CUPA-HR; NAHB; National Restaurant 
Association. As discussed above, the Department has accounted for 
low-wage industries and regions by using earnings data from the 
lowest-wage Census Region to set the salary level.
    \235\ AFPI objected to the Department's use of nonhourly 
workers' earnings to estimate the impact of the proposed salary 
level on salaried workers. See also Chamber; National Association of 
Convenience Stores. The Department disagrees with the suggestion 
that data on compensation paid to full-time nonhourly workers is not 
representative of the earnings of full-time salaried workers. The 
Department used the same approach in the 2004, 2016, and 2019 rules. 
See 84 FR 51258; 81 FR 32414; 69 FR 22197. As explained in greater 
detail below, see section VII, while the CPS MORG data on full-time 
nonhourly workers on which the Department has relied includes 
workers paid on a salary basis along with workers paid on other 
bases, such as on a piece-rate or day-rate basis, the Department's 
analysis of data from the Panel Study of Income Dynamics (PSID) 
shows that relatively few nonhourly workers were paid by methods 
other than salaried.
---------------------------------------------------------------------------

    AFPI challenged the Department's estimate of the number of workers 
who earn between the proposed salary level and the long test salary 
level, which it claimed is a ``made-up number.'' \236\ Some commenters 
representing employer interests stated that the Department 
underestimated the number of currently exempt workers who would be 
impacted by its proposed salary level. See, e.g., AFPI; NAM; NRF 
(including a report by Oxford Economics); Rachel Greszler; Seyfarth 
Shaw. The Oxford Economics report claimed that up to 7.2 million 
workers could be affected by the proposed salary level; AFPI asserted 
that approximately ``7.5 million employees would be non-exempt for the 
first time based on salary alone''; and Rachel Greszler stated that the 
correct figure is as high as 12.3 million workers. NAM stated that the 
Department ``underestimated the impact,'' though it did not elaborate. 
Some of these commenters also challenged the probability codes the 
Department used to estimate the number of workers who meet the duties 
test. See, e.g., AFPI; Rachel Greszler.
---------------------------------------------------------------------------

    \236\ NRF included a report from Oxford Economics which stated 
that a more reasonable methodology for modeling the long test salary 
level would be to update the 1975 long test level for inflation. As 
discussed in section V.B, the Department disagrees with Oxford 
Economics' suggestion, which would conflict with the Department's 
historical practice of avoiding the use of inflation indicators in 
updating the salary level.
---------------------------------------------------------------------------

    On the other hand, AFL-CIO, the Coalition of State AGs, and EPI 
relied on the Department's estimates in their comments. For instance, 
the Coalition of State AGs observed that `` `most salaried white-collar 
employees paid less than the proposed standard salary level do not meet 
the duties test, whereas a substantial majority of salaried white-
collar employees earning above the proposed standard salary level meet 
the duties test,' '' quoting the NPRM, in opining that the proposed 
salary level struck a more appropriate balance between the long and 
short test salary levels than the 2004 and 2019 rules. In asserting 
that the proposed salary level, although ``too low[,]'' would restore 
overtime protections to lower-paid workers ``who were wrongly 
classified as exempt[,]'' AFL-CIO referenced the Department's estimate 
that the proposed salary level would be ``restorative for more than 
half of the workers it affects'' since ``these employees would have 
been entitled to overtime in every rule prior to the 2019 rule.'' EPI 
noted that the 3.4 million workers that the Department estimated would 
be affected by the proposed salary level, plus the approximately 
248,000 workers who would be affected by the proposed change in the 
total compensation threshold for the HCE test, discussed below, 
together constituted ``just 2.6% of workers subject to [the] FLSA . . . 
and just 2.3% of all workers.'' As discussed in section V.B, numerous 
commenters representing workers also pointed to additional data points 
which, they stated, show that the Department's proposed salary level 
would fulfill a relatively limited role in determining exemption 
status, particularly by historical standards. For instance, multiple 
commenters stated that approximately 28.2 percent of all full-time 
salaried workers earn below the proposed salary level, whereas in 1975 
approximately 62.8 percent of full-time salaried workers earned below 
the short test salary level. See, e.g., AFL-CIO; EPI; NELP; NWLC.
iii. Assessing the Impact of the New Salary Level
    As discussed in section V.B, the Department is finalizing its 
proposal to set the standard salary level equal to the 35th percentile 
of earnings of full-time salaried workers in the lowest-wage Census 
Region, which, based on the most recent earnings data, produces a 
salary level of $1,128 per week. The Department has analyzed the impact 
of the new salary level, applying generally the same metrics that it 
applied in the

[[Page 32879]]

NPRM. Upon consideration of the comments received, the Department 
concludes that this salary level meets the objectives it sought to 
achieve in undertaking this rulemaking: preserving the primary role of 
an analysis of employee duties in determining EAP exemption status; 
fully restoring the initial screening function of the salary level; and 
more effectively identifying in a one-test system who is employed in a 
bona fide EAP capacity in a manner that reasonably distributes among 
employees earning between the long and short test salary levels and 
their employers the impact of the Department's move from a two-test to 
a one-test system.
    The Department intentionally chose a salary level methodology that 
will ensure that EAP exemption status for the great majority of white-
collar employees will continue to depend on their duties. Consistent 
with the NPRM, the Department thus began by analyzing the impact of the 
new salary level on all full-time white-collar salaried workers. The 
Department continues to believe that an analysis of how the new salary 
level will impact all full-time salaried white-collar workers is 
necessary to put the salary level and its relation to an examination of 
duties in the appropriate context, as this is the universe of workers 
who could potentially be impacted by an increase in the standard salary 
level. As noted above, commenters representing employers did not 
directly challenge this aspect of the Department's analysis. And many 
commenters representing workers effectively endorsed this approach in 
stating that the proportion of full-time salaried workers who earn less 
than the proposed salary level shows the relatively modest impact of 
the proposed salary level in determining EAP exempt status, in 
comparison to an examination of duties. See, e.g., AFL-CIO; EPI; NELP; 
NWLC.\237\
---------------------------------------------------------------------------

    \237\ As discussed further below, the Department does not 
believe, as some commenters representing workers suggested, that the 
proportion of full-time salaried workers who earned below the short 
test salary level in 1975 is the most appropriate comparator for the 
population of workers who earn below the new salary level.
---------------------------------------------------------------------------

    The Department's analysis confirms that the number of full-time 
salaried white-collar workers who will be excluded from the EAP 
exemption due to the Department's salary level is greatly exceeded by 
the far-larger population of full-time salaried white-collar workers 
for whom duties will continue to determine their exemption status. As 
illustrated in Figure A below, of the approximately 45.4 million full-
time salaried white-collar workers in the United States subject to the 
FLSA,\238\ about 12.7 million earn below the new salary level of $1,128 
per week, and about 32.7 million earn above the salary level.\239\ 
Thus, approximately 28 percent of full-time salaried white-collar 
workers (most of whom, as discussed below, do not perform EAP duties) 
earn below the new salary level, whereas approximately 72 percent of 
full-time salaried white-collar workers earn above the salary level and 
would have their exemption status turn on their job duties.
---------------------------------------------------------------------------

    \238\ Excluded from this number are workers in named occupations 
and those exempt under another non-EAP overtime exemption. The 
exemption status of these groups will not be impacted by a change in 
the standard salary level. Commenters did not address the 
Department's exclusion of these workers from its analysis of the 
impact of the proposed salary level.
    \239\ This estimate is conservative, as it excludes 8.1 million 
white-collar workers employed as teachers, attorneys, and 
physicians, for whom there is no salary level requirement under the 
part 541 regulations and whose exemption status is therefore always 
determined by their duties. If these workers in ``named 
occupations'' are included, the percentage of salaried full-time 
white-collar employees for whom exemption status would depend on 
duties, rather than salary, increases to 76 percent. See Sec. Sec.  
541.303-304.
---------------------------------------------------------------------------

Figure A--Distribution of Full-Time Salaried White-Collar Workers by 
Weekly Earnings
[GRAPHIC] [TIFF OMITTED] TR26AP24.140

    Scrutinizing these figures more closely reinforces the continued 
importance of the duties test under the final rule. Of the 
approximately 12.7 million full-time salaried white-collar workers who 
earn below the new salary level of $1,128 per week, about 8.3 million 
earn below the long test salary level of $942 per week. With the 
exception of the 2019 rule when the Department set the salary level 
slightly lower, the Department has always set salary levels that 
screened from exemption workers earning below the long test salary 
level. As discussed in section V.B, the long test salary level is a key 
parameter for determining an appropriate salary level.\240\ The number 
of full-time salaried white-collar workers for whom salary would be 
determinative of their nonexempt status and who earn at least the long 
test salary level--4.3 million--is over seven times smaller than the 
number of full-time salaried white-collar workers for whom job duties 
would continue to be determinative of their exemption status because 
they earn at least the new salary level--32.7 million.
---------------------------------------------------------------------------

    \240\ The Department calculated the value of the long test 
salary level using the same methodology it used in the NPRM, updated 
for current earnings data: the 10th percentile of earnings of likely 
exempt workers in low-wage industries and regions. As explained in 
section V.B, any minor historical variations in the long test 
methodology do not deprive it of its usefulness in helping determine 
an appropriate salary level now.
---------------------------------------------------------------------------

    In analyzing how the Department's new salary level will impact all 
salaried white-collar workers, the Department also considered the 
extent to which full-time salaried white-collar workers across the 
income distribution perform EAP duties. As the Department stated in

[[Page 32880]]

the NPRM and the 2019 rule, the salary level has historically served as 
``a helpful indicator of the capacity in which an employee is employed, 
especially among lower-paid employees; however, the salary level should 
not eclipse the duties test.\241\ In considering the extent to which 
full-time salaried white-collar workers perform EAP duties, the 
Department uses probability estimates of passing the standard duties 
test, as it did in the NPRM.\242\
---------------------------------------------------------------------------

    \241\ 88 FR 62171;84 FR 51239, 51237.
    \242\ See section VII.
---------------------------------------------------------------------------

    The Department's analysis shows that the new salary level is a 
helpful indicator of whether salaried workers perform EAP duties, since 
a minority of full-time salaried white-collar workers who earn less 
than the salary level meet the standard duties test, whereas a large 
majority of such workers who earn more than the salary level meet the 
standard duties test. As illustrated in Figure B, of the 12.7 million 
full-time salaried white-collar workers who earn less than $1,128 per 
week, the Department estimates that only 38 percent--about 4.8 million 
workers--meet the standard duties test. In contrast, of the 32.7 
million full-time salaried white-collar workers who earn at least 
$1,128 per week, a large majority--77 percent, or about 25.3 million 
workers--meet the standard duties test.\243\ The number of full-time 
salaried white-collar workers who meet the standard duties test and 
earn below the salary level is thus over five times smaller than the 
number of full-time salaried white-collar workers who meet the standard 
duties test and earn at least the salary level amount.\244\ And 84 
percent of all full-time salaried white-collar workers who meet the 
standard duties test--25.3 million out of a total of approximately 30.0 
million--earn at least the new salary level.\245\
---------------------------------------------------------------------------

    \243\ While a significant majority of full-time salaried white-
collar workers who earn above the new salary level meet the duties 
test, helping confirm its appropriateness as an indicator of the 
capacity in which individuals are employed, a large number of full-
time salaried white-collar workers who earn above the salary level--
7.4 million--do not meet the duties test. A comparable number of 
salaried white-collar workers who earned above the proposed salary 
level did not meet the duties test, as EPI and AFI-CIO noted in 
their comments. PPWO's statement that ``[t]he Department seem[ed] to 
be setting the salary level at a point at which all employees above 
the line would be exempt'' is thus incorrect. The Department agrees 
with EPI that the fact that a large number of salaried white-collar 
workers who earn above the salary level will be nonexempt because 
they do not meet the duties test underscores the importance of an 
examination of duties under this rule. These 7.4 million workers 
will continue to be entitled to overtime because of their duties, 
not their salaries. Notably, this population is significantly larger 
than the population of workers who will become nonexempt under the 
new salary level. Rather than indicating that the salary level must 
be set higher, as AFL-CIO suggested, this fact indicates that this 
rule meets the Department's objective of preserving a primary role 
for an examination of duties.
    \244\ As noted above, see supra note 239, these figures exclude 
salaried white-collar workers who are not subject to the part 541 
salary criteria.
    \245\ Note that these numbers refer only to salaried white-
collar workers at all salary levels who meet the standard duties 
test, including workers who are nonexempt because they earn below 
the current standard salary level.
---------------------------------------------------------------------------

Figure B--Salaried White-Collar Workers Earning Above and Below the 
Standard Salary Level Who Meet or Do Not Meet the Standard Duties Test
[GRAPHIC] [TIFF OMITTED] TR26AP24.141

    The Department disagrees with commenters that challenged its use of 
its probability codes to determine whether a worker meets the duties 
test in light of changes in occupational codes and the duties test 
since the

[[Page 32881]]

probability codes were first developed. The Department has used the 
probability codes to estimate the number of workers who meet the duties 
test in its last three EAP rules.\246\ As noted in section VII, 
although the probability codes were developed 25 years ago, the 
standard duties test is not substantively different from the former 
short duties tests reflected in the probability codes,\247\ and the 
Department used occupational crosswalks to map the occupational codes 
on which the probability codes were originally based onto the 2018 
Census occupational codes, which are used in the most recent CPS MORG 
data.\248\ Additionally, the Department verified the continued 
appropriateness of the probability codes in 2016 through a review of 
the O*NET database,\249\ which confirmed that the probability codes 
reflected current occupational duties.\250\ The Department's 
probability codes remain reliable and appropriate indicators for 
evaluating whether workers meet the standard duties test.
---------------------------------------------------------------------------

    \246\ See 84 FR 51258-59; 81 FR 32458; 69 FR 22198.
    \247\ See 69 FR 22214.
    \248\ See section VII.
    \249\ The O*NET database contains hundreds of standardized and 
occupation-specific descriptors. See https://www.onetcenter.org.
    \250\ See 81 FR 32459.
---------------------------------------------------------------------------

    Consistent with the NRPM, the Department next examined how the new 
salary level will impact salaried white-collar workers earning between 
the historic long and short test thresholds. As discussed in section 
V.B, the long and short test salary levels are important parameters for 
assessing the appropriateness of the salary level. Under the final 
rule, duties will continue to be determinative of exemption status for 
a majority of white-collar workers earning between these thresholds. As 
illustrated in Figure C, of the approximately 10.8 million salaried 
white-collar workers who earn between the long test salary level of 
$942 per week and the short test salary level of $1,404 per week, about 
40 percent (4.3 million) earn below the new salary level, and about 60 
percent (6.5 million) earn at or above the new salary level. Moreover, 
of the 4.3 million workers earning between the long test and the new 
standard salary level, almost half do not meet the standard duties 
test.\251\
---------------------------------------------------------------------------

    \251\ As discussed further below, about 2.1 million of the 
approximately 4.3 million salaried white-collar workers who earn 
between the long test salary threshold and the Department's new 
salary level (about 48 percent of these workers) do not meet the 
standard duties test. Thus, in effect, only 21 percent of salaried 
white-collar workers who earn between the long and short test salary 
levels--2.2 million out of a total of 10.8 million--have their 
exemption status determined solely by the new standard salary level.
---------------------------------------------------------------------------

Figure C--Salaried White-Collar Workers Between the Long and Short Test 
Salary Levels Who Meet or Do Not Meet the Standard Duties Test
[GRAPHIC] [TIFF OMITTED] TR26AP24.142

    Commenters representing workers pointed to the proportion of full-
time salaried workers who earned below the short test salary level in 
1975, as compared to the proportion of full-time salaried workers who 
earned below the proposed salary level, in stating that the Department 
could or should set the salary level higher than the proposed salary 
level. See, e.g., AFL-CIO; EPI; NELP; NWLC. As emphasized above, the 
Department agrees that the short test and long test salary levels are 
key parameters for assessing the appropriateness of a salary level in a 
one-test system. It is also useful to put any salary level in 
historical context.
    However, the Department notes that under the two-test system, 
employers could also use the long test, which paired a lower salary 
level with a more rigorous duties test. Accordingly, a segment of the 
workers who earned below the short test salary level in 1975--those who 
earned between the short and long test salary levels and

[[Page 32882]]

performed limited amounts of nonexempt work--were still exempt from 
overtime under the long test even though they earned below the short 
test salary level. As explained in section V.B.4, the Department has 
elected to set the salary level well below the short test salary level 
in part because setting it in the short test salary range would prevent 
employers from using the EAP exemption for this entire population of 
historically exempt workers.
    Lastly, the Department also looked at the impact of the new salary 
level on currently exempt employees--those salaried white-collar 
workers who meet the standard duties test and earn at least $684 per 
week. As with every prior rulemaking to increase the part 541 salary 
levels, a relatively small percentage of currently exempt workers will 
become nonexempt. Of the approximately 45.4 million salaried white-
collar workers in the United States, approximately 29.3 million 
currently qualify for the EAP exemption.\252\ Of these 29.3 million 
presently exempt workers, just 4.0 million earn at or above the current 
$684 per week standard salary level but less than $1,128 per week and 
will, without some intervening action by their employers, become 
entitled to overtime protection as a result of the combined effect of 
the initial update and the subsequent application of the new standard 
salary level in this rule. A test for exemption that includes a salary 
level component will necessarily result in a number of workers who 
earned at or above the prior salary level and pass the duties test 
becoming nonexempt when the salary level is increased. As the 
Department has consistently found since 1938, salary is an important 
indicator of whether an individual is employed in a bona fide EAP 
capacity and therefore a key element in defining the exemption.
---------------------------------------------------------------------------

    \252\ Note that the 29.3 million worker figure only refers to 
workers who meet the standard EAP exemption and thus differs from 
the population of potentially affected EAP workers identified in the 
economic analysis (29.7 million), which includes workers who qualify 
only for the HCE exemption. As noted above, this is a conservative 
estimate because there are also 8.1 million workers in the ``named 
occupations'' who, under the Department's regulations, are exempt 
based on their duties alone.
---------------------------------------------------------------------------

    As the Department explained in its analysis of the impact of the 
proposed salary level, the new salary level will impact the exemption 
status of two distinct and important, but relatively small, groups of 
lower-paid EAP workers. First, the new salary level will restore 
overtime protections to 1.8 million currently exempt workers who meet 
the standard duties test but earn less than the equivalent of the long 
test salary level ($942 per week). Such employees were excluded from 
the EAP exemption under every rule prior to 2019, either by the long 
test salary level itself, or under the 2004 rule standard salary level, 
which was set equivalent to the long test salary level. Fully restoring 
the salary level's initial screening function requires a salary level 
that will ensure all employees who earn below the long test level are 
excluded from the exemption.
    Second, the new salary level will result in overtime protections 
for an additional 2.2 million currently exempt workers who meet the 
standard duties test and earn between the long test salary level ($942 
per week) and the final salary level. As explained earlier, the 
Department is setting the standard salary level above the long test 
level to account for the shift to a one-test system in a manner that 
reasonably distributes the impact of this switch. The final rule will 
limit the number of affected workers by setting a standard salary level 
below the midpoint between the long and short test salary levels and by 
using earnings data from the lowest-wage Census Region (the South).
    Even among the 4.0 million workers affected by the combination of 
the initial update and the subsequent application of the new standard 
salary level in this rule, the fact that a large share of these workers 
earn below the long test level underscores the modest role of the final 
salary level. Beyond the 1.8 million workers earning less than the long 
test salary level--to whom the final rule will simply restore overtime 
protections that they had under every rule prior to 2019--the increase 
in the salary level will affect the exemption status of 2.2 million 
workers. This group makes up about 8 percent of all currently exempt, 
salaried white-collar workers and just under 5 percent of all salaried 
white-collar workers.\253\ The salary level methodology adopted in this 
rule will thus maintain the ``useful, but limited, role'' of the salary 
level in defining and delimiting the EAP exemption.\254\
---------------------------------------------------------------------------

    \253\ The 4.0 million workers affected by the new salary level 
represent only 13.8 percent of the 29.3 million salaried white-
collar workers who currently qualify for the standard EAP exemption.
    \254\ See 88 FR 62173; 84 FR 51238.
---------------------------------------------------------------------------

    Finally, the Department does not agree with commenters that stated 
that it underestimated the number of affected workers in the NPRM. 
Commenters that asserted the number of affected workers could be much 
higher generally referenced estimates of the number of workers earning 
between the current salary level and the proposed salary level, 
regardless of whether they passed the duties test, and then posited 
that up to that many workers (e.g., 7.2 million, 7.5 million, or 12.3 
million) could be affected. See AFPI; NRF; Rachel Greszler. The 
position that all workers earning below the new salary level, 
regardless of their duties, will be affected by the new salary level 
fails to account for the fact that that millions of these workers are 
already nonexempt because they fail the duties test. The exemption 
status of workers who fail the duties test will not be affected by this 
rule.
    Determining the workers who will be affected by a change in the 
salary level requires an examination of workers' earnings and their 
duties. Consistent with the NPRM, the Department determined the 
populations of currently exempt workers who will be affected by the 
salary level by applying its probability codes. For the reasons 
discussed earlier in this section and in section VII below, the 
Department's probability codes are reliable and appropriate indicators 
of whether an employee meets the standard duties test. The Department 
has consistently applied this methodology in all its recent part 541 
rules.\255\ Though some commenters criticized the Department's method 
for calculating the affected worker figure, they did not offer an 
alternate methodology for determining which workers pass the current 
duties test, let alone one as robust and proven as the Department's 
probability codes.
---------------------------------------------------------------------------

    \255\ See 84 FR 51258-59; 81 FR 32458; 69 FR 22198.
---------------------------------------------------------------------------

C. Highly Compensated Employees

    In the 2004 rule, the Department created the HCE test for certain 
highly compensated employees. Combining a much higher compensation 
requirement with a minimal duties test, the HCE test is based on the 
rationale that employees who earn at least a certain amount annually--
an amount substantially higher than the annual equivalent of the weekly 
standard salary level--will almost invariably pass the standard duties 
test.\256\ The HCE test's primary purpose is therefore to serve as a 
streamlined alternative for very highly compensated employees because a 
very high level of compensation is a strong indicator of an employee's 
exempt status, thus eliminating the need for a detailed duties 
analysis.\257\
---------------------------------------------------------------------------

    \256\ 84 FR 51249; see also Sec.  541.601(c) (``A high level of 
compensation is a strong indicator of an employee's exempt status, 
thus eliminating the need for a detailed analysis of the employee's 
job duties.'').
    \257\ See 69 FR 22173-74.

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

[[Page 32883]]

    As outlined in Sec.  [thinsp]541.601, to be exempt under the HCE 
test, an employee must earn at least the amount specified in the 
regulations in total annual compensation--presently $107,432 per 
year.\258\ Of this HCE threshold amount, no less than the full standard 
salary level amount must be paid on a salary or fee basis.\259\ 
Finally, the employee must ``customarily and regularly perform[ ] any 
one or more of the exempt duties or responsibilities of an executive, 
administrative, or professional employee[.]'' \260\ The HCE test 
applies only to employees whose primary duty includes performing office 
or non-manual work.\261\
---------------------------------------------------------------------------

    \258\ Sec.  541.601(a)(1).
    \259\ Sec.  541.601(b)(1). Although Sec.  541.602(a)(3) allows 
employers to use nondiscretionary bonuses, incentives, and 
commissions to satisfy up to 10 percent of the weekly standard 
salary level when applying the standard salary and duties tests, the 
Department's regulation at Sec.  [thinsp]541.601(b)(1) does not 
permit employers to use such payments to satisfy the weekly standard 
salary level requirement for HCE workers. See 84 FR 51249.
    \260\ Sec.  541.601(c).
    \261\ Sec.  541.601(d).
---------------------------------------------------------------------------

    Employees qualifying for exemption under the HCE test must receive 
at least the standard salary level per week on a salary or fee basis, 
while the remainder of the employee's total annual compensation may 
include commissions, nondiscretionary bonuses, and other 
nondiscretionary compensation.\262\ Total annual compensation does not 
include board, lodging, or other facilities, and does not include 
payments for medical insurance, life insurance, retirement plans, or 
other fringe benefits. An employer is permitted to make a final 
``catch-up'' payment during the last pay period or within 1 month after 
the end of the 52-week period to bring an employee's compensation up to 
the required level.
---------------------------------------------------------------------------

    \262\ Sec.  541.601(b)(1). The criteria for determining if an 
employee is paid on a ``salary basis'' are identical under the 
standard exemption criteria and the HCE test. See Helix Energy 
Solutions, 143 S.Ct. at 683.
---------------------------------------------------------------------------

    As stated in the NPRM, the Department continues to believe that the 
HCE test is a useful alternative to the standard salary level and 
duties tests for highly compensated employees. However, as with the 
standard salary level, the HCE total annual compensation level must be 
updated to ensure that it remains a meaningful and appropriate standard 
to pair with the minimal HCE duties test. To maintain the HCE test's 
role as a streamlined alternative for those employees most likely to 
meet the standard duties test, the HCE total annual compensation level 
must be high enough to exclude all but those employees ``at the very 
top of [the] economic ladder[.]'' \263\ The proposal noted that when it 
was created in 2004, the HCE test featured a $100,000 threshold that 
exceeded the annual earnings of approximately 93.7 percent of salaried 
workers nationwide.\264\ More recently in the 2019 rule, the Department 
set the HCE test threshold so it would be equivalent to the annual 
earnings of the 80th percentile of full-time salaried workers 
nationwide. At the time of the NPRM, however, the $107,432 per year HCE 
threshold covered only 72 percent of full-time salaried workers 
nationwide.\265\
---------------------------------------------------------------------------

    \263\ 69 FR 22174.
    \264\ See 88 FR 62159.
    \265\ Id.
---------------------------------------------------------------------------

    The Department proposed to update the HCE test by setting the total 
compensation amount equal to the annualized weekly earnings of the 85th 
percentile of full-time salaried workers nationwide. Based on earnings 
data used in the NPRM, this proposed methodology resulted in a proposed 
HCE threshold of $143,988, of which at least $1,059 per week (the 
proposed standard salary level) would have to be paid on a salary or 
fee basis.\266\ The Department noted that its proposed methodology 
would produce an HCE threshold that was higher than under the 
methodology adopted in the 2019 final rule (which set the HCE threshold 
equal to the annualized weekly earnings of the 80th percentile of full-
time salaried workers nationwide),\267\ but lower than under the 2004 
rule (which covered 93.7 percent of salaried workers nationwide) and 
the method adopted in the 2016 rule (which would have covered 90 
percent of salaried workers nationwide).\268\ In justifying the 
proposed HCE threshold, the Department explained in the NPRM that it 
was concerned that repeating the 2019 rule's methodology now would not 
produce a threshold high enough to reserve the HCE test for employees 
at the top of today's economic ladder and could risk the unintended 
exemption of large numbers of employees in high-wage regions.\269\
---------------------------------------------------------------------------

    \266\ It is the Department's intent that the increase in the HCE 
total annual compensation threshold is independent of, and severable 
from, the increase in the standard salary level to the 35th 
percentile of weekly earnings of full-time salaried employees in the 
lowest-wage Census Region (the South) and the updating provision, 
pursuant to which the HCE total annual compensation threshold will 
be regularly updated to reflect current earnings.
    \267\ See 84 FR 51250.
    \268\ See 69 FR 22169-70 (Tables 3 and 4); 81 FR 32429.
    \269\ 88 FR 62176.
---------------------------------------------------------------------------

    The Department is finalizing its proposal to increase the HCE total 
compensation threshold to the 85th percentile of annualized weekly 
earnings of full-time salaried workers nationwide. Applying this 
methodology to calendar year 2023 earnings data results in a total 
compensation threshold of $151,164 per year. This approach will guard 
against the unintended exemption of workers who are not bona fide 
executive, administrative, or professional employees, including those 
in higher-income regions and industries.
    As in prior rulemakings, the Department received significantly less 
feedback from commenters on the proposed increase to the HCE threshold 
than on the proposed increase to the standard salary level. Most 
commenters did not address the issue. Among the comments that addressed 
the proposed HCE threshold, stakeholder sentiment was split; employee 
representatives generally supported the proposed increase or asked for 
a higher increase, while most employer representatives favored a 
smaller increase or no increase at all.
    A number of commenters expressed support for the proposed increase 
to the HCE threshold. See, e.g., AFT; AFL-CIO; Coalition of State AGs. 
For example, the Coalition of State AGs asserted that ``[s]ignificant 
inflation since the 2019 rule became effective in January 2020 has 
eroded the purchasing power of the HCE salary level'' and remarked that 
the HCE threshold ``could arguably be made even higher than the 
proposed level, particularly for high-cost, high-wage states[.]'' The 
National Partnership described the proposed HCE threshold as ``in line 
with historic and economic precedent,'' while the AFT commented that 
the proposed HCE threshold ``will ensure [that] workers in the health 
care sector, and workers who provide a wide range of services and 
expertise for state and local governments, are not completely excluded 
from possibly qualifying for overtime.''
    A handful of commenters advocated for the adoption of a higher HCE 
threshold than proposed. Noting that the HCE threshold originally 
exceeded the earnings of 93.7 percent of all salaried employees 
nationwide when it was introduced in 2004, Sanford Heisler Sharp 
asserted that the Department's proposal to set the HCE threshold at the 
85th percentile ``introduces a substantial risk of harming employees 
who truly need overtime protections.'' NELA and Nichols Kaster urged 
the Department to repeat the approach it took in the 2016 rule, which 
set the HCE threshold equal to the 90th percentile of salaried earnings 
nationwide. Invoking

[[Page 32884]]

the FLSA's policy goal of spreading employment, NELA also opined that 
``an overly permissive HCE [test] will result in fewer `highly 
compensated' jobs available for workers aspiring to climb the economic 
ladder to benefit themselves and their families.''
    Employer stakeholders that addressed the HCE threshold opposed the 
Department's proposed increase, with many commenters disputing that the 
current HCE threshold should be increased at all. See, e.g., ABC; AHLA; 
Argentum & ASHA; NAW; Visiting Angels. A number of commenters that 
opposed the proposed HCE threshold asserted that it would be 
administratively burdensome to reevaluate the exemption status of 
employees who earn between the current and proposed HCE thresholds. 
See, e.g., HR Policy Association; NAM; NCFC. PPWO commented that 
``[e]mployers will be faced with the task of reviewing the basis on 
which each employee was accorded exempt status, including employees for 
whom the exempt status decision was made a decade ago and who may be 
among the most highly paid employees in the company.''
    Other employer-side stakeholders opposed the proposed HCE threshold 
but indicated (either in the alternative or outright) that they would 
be open to a smaller increase. Several commenters stated an increase to 
the HCE threshold using the 80th percentile methodology applied in the 
2019 rule would be preferable. See, e.g., CWC; LeadingAge; RILA; see 
also Chamber (asserting that the NPRM ``does not address whatsoever why 
the 80th percentile [methodology] would be insufficient''). National 
Restaurant Association asserted that if the Department changes the HCE 
threshold, it ``should calculate any new HCE highly compensated level 
by using data from the South Census Region, rather than on a nationwide 
basis, to ensure that the HCE exemption is at least within reach of 
some employers in the lowest-wage regions in the country.'' WFCA 
similarly recommended that the Department set the HCE threshold at the 
85th percentile of salaried earnings in lowest-wage Census Region or, 
alternatively, use the 80th percentile of national data for full-time 
salaried workers (i.e., the 2019 rule's approach).
    Having considered the comments received, the Department is 
finalizing its proposal to increase the HCE threshold to the 85th 
percentile of annualized weekly earnings of full-time salaried earnings 
nationwide. This results in a new HCE threshold of $151,164 per year, 
using calendar year 2023 earnings data, of which at least $1,128 per 
week (the standard salary level) must be paid on a salary or fee 
basis.\270\
---------------------------------------------------------------------------

    \270\ As discussed in section IV, the increase in the HCE 
threshold and the standard salary level using the new methodologies 
will be applicable on January 1, 2025.
---------------------------------------------------------------------------

    As an initial matter, the Department maintains that the current HCE 
threshold must be increased. In nominal terms, the current $107,432 HCE 
threshold is only 7 percent higher than the $100,000 HCE threshold that 
was introduced in 2004 and, as multiple commenters noted, it has failed 
to keep up with wage growth over the last 20 years. According to 2023 
earnings data, the current HCE threshold ($107,432) now covers just 70 
percent of full-time salaried workers nationwide, less than the 80 
percent of such workers that it covered when it was set in 2019. This 
coverage would continue to decrease in the absence of an increase, 
which is needed to reserve the HCE test for employees ``at the very top 
of today's economic ladder,'' \271\ as the Department originally 
intended. Inaction could risk the unintended exemption of employees in 
higher-income regions and industries who clearly are outside of the 
scope of the exemption.\272\
---------------------------------------------------------------------------

    \271\ 69 FR 22174.
    \272\ Id.
---------------------------------------------------------------------------

    The Department concludes that increasing the HCE threshold to the 
85th percentile of annualized weekly earnings of full-time salaried 
workers nationwide will ensure that the threshold is sufficiently high 
to provide a meaningful and appropriate complement to the minimal HCE 
duties test, and that nearly all of the highly paid white-collar 
workers earning above this threshold ``would satisfy any duties test.'' 
\273\ The Department considered keeping the 2019 rule's methodology for 
the HCE threshold (i.e., the 80th percentile of earnings of full-time 
salaried employees nationwide) and applying it to current earnings 
data. However, the Department reaffirms its determination from the NPRM 
that this methodology is not appropriate because it does not produce a 
threshold high enough to reserve the HCE test for employees who would 
almost invariably pass the standard duties test. The Department agrees 
with commenters that stated that setting the HCE threshold at the 
annualized weekly earnings of the 85th percentile of full-time salaried 
workers nationwide will guard against the unintended exemption of 
workers who are not bona fide executive, administrative, or 
professional employees, including those in higher-income regions and 
industries.
---------------------------------------------------------------------------

    \273\ 84 FR 51250 (internal citation omitted).
---------------------------------------------------------------------------

    The Department disagrees that the new HCE threshold is too high. 
Adjusting for wage growth, the proposed HCE threshold is significantly 
lower than the original HCE threshold that was introduced in 2004 
(which surpassed the earnings of 93.7 percent of full-time salaried 
workers). Going forward, employers with employees affected by the 
increased HCE threshold can still use the standard exemption criteria 
to take advantage of the EAP exemption. The HCE test is a streamlined 
alternative to the standard exemption criteria for a select class of 
employees who are so highly paid that they will almost invariably pass 
the standard duties test.\274\ By design, the HCE test is reserved for 
employees ``at the very top of today's economic ladder'' who would 
satisfy ``any duties test'' in ``virtually every'' case.\275\ This 
exclusivity is necessary because of the risk that the HCE test poses to 
salaried employees in high-income regions and industries who are not 
bona fide EAP employees, which the Department acknowledged when the HCE 
test was created in 2004.\276\
---------------------------------------------------------------------------

    \274\ See Sec.  541.601(c) (``A high level of compensation is a 
strong indicator of an employee's exempt status, thus eliminating 
the need for a detailed analysis of the employee's job duties.''); 
see also 84 FR 51249.
    \275\ 69 FR 22174.
    \276\ See id. (explaining the need to avoid the unintended 
exemption of employees ``such as secretaries in New York City or Los 
Angeles . . . who clearly are outside the scope of the exemptions 
and are entitled to the FLSA's minimum wage and overtime pay 
protections.'').
---------------------------------------------------------------------------

    Although the Department has previously acknowledged that the HCE 
test may exempt some employees who fail the standard duties test and 
would otherwise be entitled to overtime pay, such outcomes should be 
``rare,'' involving employees whose pay is high enough that their 
exemption ``would not defeat the objectives of section 13(a)(1) of the 
Act.'' \277\ The only way to ensure that the HCE test serves its 
intended purpose--i.e., serving as an efficient, streamlined test for 
employees who would ``almost invariably'' meet the standard duties 
test--is for the test to include an earnings threshold high enough to 
exclude nearly all employees whose EAP status may be questionable. The 
exemption status of such employees should be determined by the standard 
exemption criteria.
---------------------------------------------------------------------------

    \277\ See 84 FR 51249.
---------------------------------------------------------------------------

    The Department acknowledges that some commenters requested the 
adoption of a higher HCE threshold, closer in magnitude to the original 
$100,000 HCE threshold that was

[[Page 32885]]

adopted in 2004. As noted above, the original HCE threshold exceeded 
the earnings of over 93 percent of salaried white-collar workers when 
it was adopted. Germane to these comments, the Department considered 
repeating the approach it took in the 2016 final rule and proposed in 
the 2019 NPRM of setting the HCE threshold at the annualized weekly 
earnings of the 90th percentile of full-time salaried workers 
nationwide, which would result in a threshold of $179,972 per year. As 
noted in the NPRM, however, the Department is concerned that an HCE 
threshold set at $179,972 could unduly restrict the use of the HCE test 
for employers in lower-wage regions and industries.\278\ While the new 
HCE threshold does not exclude from the HCE test as high a percentage 
of full-time salaried employees as the HCE threshold initially adopted 
in 2004, it excludes a sufficiently large percentage (i.e., 85 percent 
of full-time salaried employees nationwide) to guard against the 
unintended exemption of employees in higher-income regions and 
industries who are not bona fide EAP employees.
---------------------------------------------------------------------------

    \278\ See 88 FR 62176; see also 84 FR 51250.
---------------------------------------------------------------------------

    For all of the reasons provided above, the Department adopts its 
proposal to set the HCE threshold equal to the annualized weekly 
earnings of the 85th percentile of full-time salaried workers 
($151,164). This new level will be applicable on January 1, 2025.

D. Severability

1. The Department's Proposal
    The Department proposed to add a severability provision to its part 
541 regulations at Sec.  541.5. Proposed Sec.  541.5 stated that if any 
provision of this part is held to be invalid or unenforceable by its 
terms, or as applied to any person or circumstance, or stayed pending 
further agency action, the Department intended that the provision be 
given the fullest effect permitted by law, unless the provision is held 
to be completely invalid or unenforceable, in which case, the 
Department intended the provision to be severable and not to affect the 
remaining provisions.
    The Department illustrated the intended effect of proposed Sec.  
541.5 with some examples. The Department noted that it was its intent 
that the proposed updating mechanism be effective even if the proposed 
increase in the standard salary level were invalidated. It was also the 
Department's intent that the proposed increase in the HCE total annual 
compensation threshold be effective even if the increase in the 
standard salary level were invalidated. And it was the Department's 
intent that the proposed increases in the standard salary level and HCE 
annual total compensation requirement apply even if the updating 
mechanism was determined to be invalid.\279\
---------------------------------------------------------------------------

    \279\ The Department also stated that it was the Department's 
intent that its proposal to apply the standard salary level to the 
U.S territories subject to the Federal minimum wage remain in effect 
even if the proposed change to the standard salary level were 
invalidated. As discussed above, see supra note 9, at this time the 
Department is not finalizing in this final rule its proposal to 
apply the standard salary level to the U.S. territories subject to 
the Federal minimum wage and to update the special salary levels for 
American Samoa and the motion picture producing industry.
---------------------------------------------------------------------------

    The Department is finalizing Sec.  541.5, Severability, as 
proposed, with that addition of clarifying language as discussed below.
2. Discussion of Comments and Final Rule
    Most commenters did not address proposed Sec.  541.5. Of the few 
commenters that did address the Department's severability proposal, the 
Administrative Law Professors and NELP supported the inclusion of a 
severability provision in the final rule.
    In expressing their support, the Administrative Law Professors 
provided the most in-depth discussion of the Department's proposed 
severability provision. The Administrative Law Professors explained 
that a provision of a rule is severable where the agency intends for 
the remainder of the rule to be effective, even if the provision is 
invalidated, and the rule would be workable absent the provision, 
citing precedent from the U.S. Supreme Court and the U.S. Court of 
Appeals for the District of Columbia Circuit.\280\ The professors noted 
that the Department ``clearly state[d] [its] intention'' in proposed 
Sec.  541.5 that the updating mechanism in proposed Sec.  541.607 ``be 
effective even if the proposed increase in the standard salary level is 
invalidated.'' They further noted that the Department ``expresse[d] the 
same intention with regard to the implementation of the HCE total 
annual compensation requirement whether or not the standard salary 
level is invalidated'' and ``the application of the Department's 
proposed 2023 earnings thresholds, whether or not automatic updating is 
upheld.''
---------------------------------------------------------------------------

    \280\ See K-Mart Corp. v. Cartier, 486 U.S. 281, 294 (1988); 
Davis Cnty. Solid Waste Mgmt. v. EPA, 108 F.3d 1454, 1459-60 (D.C. 
Cir. 1997).
---------------------------------------------------------------------------

    The Administrative Law Professors observed that the Department's 
inclusion of a severability provision in the NPRM was consistent with 
guidance from the Administrative Conference of the United States 
(ACUS), which advised agencies in a 2018 report \281\ to address 
severability in the text and preamble of both the NPRM and the final 
rule where the agency intends the provisions of a rule to be severable 
and anticipates that the rule may be challenged in court. The 
professors suggested that the Department further explain in the final 
rule how the rule ``would remain workable'' if any of its provisions 
were declared invalid. As an example, the professors suggested stating 
explicitly that invalidation of the updating provision ``would have no 
bearing on the rationality or administrability of the standard salary 
and HCE salary thresholds'' as set in the rule. They further noted that 
in the event of the invalidation of either the standard salary level or 
the HCE compensation threshold, the updating provision could function 
independently because ``updating would simply take as the 2023 baseline 
the thresholds left in place from the 2019 rule.'' The Administrative 
Law Professors made clear that expanding the explanation of ``the 
independent workability of any of the rule's provisions'' should not be 
seen as an indication of legal vulnerability but instead as merely an 
acknowledgement of the possibility of legal challenge.
---------------------------------------------------------------------------

    \281\ See Admin. Conf. of the U.S., Recommendation 2018-2, 
Severability in Agency Rulemaking, 83 FR 30683, 30685 (June 29, 
2018).
---------------------------------------------------------------------------

    NELP also supported the proposed severability provision, noting the 
``vital importance'' of the proposed rule to millions of workers. 
Specifically, NELP stated that if any provision of the rule ``is deemed 
legally questionable, only that provision should be stayed while 
litigation proceeds.''
    A small number of commenters representing employer interests 
specifically opposed the proposed severability provision or criticized 
the Department's severability proposal. Indiana Chamber of Commerce and 
U-Haul Holding Company (U-Haul) stated that the proposed severability 
provision was an acknowledgement of the legal vulnerability of the 
Department's proposed updating section. The YMCA stated that the 
Department failed to explain the need for, or appropriateness of, the 
proposed severability provision, and RILA asserted that the Department 
failed to explain how the proposed rule would function if any of its 
provisions were declared invalid. The Chamber and the National 
Association of Convenience Stores asserted that the Department should 
withdraw the severability provision.
    The Chamber further asserted that, pursuant to the district court 
decision

[[Page 32886]]

invalidating the 2016 rule, ``the automatic increase provision in the 
Proposed Rule cannot survive if the increase to the minimum salary 
level is struck down.'' The Department does not read the court's 
decision as substantively examining the validity of the 2016 rule's 
automatic updating provision or analyzing whether that provision was 
severable from the remainder of the rule. And importantly, the 2016 
rule did not contain a severability provision or discuss the 
Department's intent regarding severability of the provisions of that 
rule. In contrast, the Department's current NPRM included a 
severability provision and a detailed discussion of the Department's 
intent that specifically addressed severability of the updating 
provision. As the Administrative Law Professors noted, as proposed, the 
updating provision was not dependent on the proposed increases to the 
standard salary level and the HCE compensation threshold. If either of 
the new thresholds were vacated, the updating provision would simply 
use the existing methodologies set in the 2019 rule as the baseline for 
the update (i.e., the Department would apply those methodologies 
triennially to update the earnings thresholds as established in Sec.  
541.607). This is a significant change from the 2016 updating 
provision, which would have updated the standard salary level and HCE 
total compensation requirement based on the specific methodologies set 
in that rule and facially could not function if those methodologies 
were invalidated.\282\
---------------------------------------------------------------------------

    \282\ See 81 FR 32251.
---------------------------------------------------------------------------

    Upon consideration of the comments received, the Department is 
finalizing the severability provision in Sec.  541.5 as proposed, with 
an additional sentence to further clarify its intent. The Department 
intends that each of this rule's provisions be considered separate and 
severable and operate independently from one another. The Department is 
revising Sec.  541.5 to state this explicitly. In this regard, the 
Department intends that if any application of a provision is stayed, 
enjoined, or invalidated, the provision be construed to continue to 
give the maximum effect to the provision permitted by law. In the event 
any provision within a section of the rule is stayed, enjoined, or 
invalidated, the Department intends that all remaining provisions 
within that section, plus all other sections, remain effective and 
operative. And in the event any whole section of the rule is stayed, 
enjoined, or invalidated, the Department intends that all remaining 
sections remain effective and operative.
    It is the Department's position that the provisions and sections of 
the rule can function sensibly in the event that any specific 
provisions, sections, or applications are invalidated, enjoined, or 
stayed. To begin, the new standard salary level set forth in Sec.  
541.600(a)(2) of $1,128 per week--the 35th percentile of weekly 
nonhourly earnings in the lowest-wage Census Region--can function 
sensibly, even if, for instance, the rule's new updating section or the 
revision to the HCE total compensation requirement are stayed, 
enjoined, or invalidated. The revision to the standard salary level 
under the new methodology operates independently of and does not depend 
on either the new updating section or the revision to the HCE total 
compensation requirement. If, for instance, the triennial updating of 
the standard salary level were invalidated, the new salary level of 
$1,128 would still go into effect, and it would remain $1,128 per week 
until the Department conducts further rulemaking. The new standard 
salary level of $1,128 per week would also still take effect if the 
initial update to the standard salary level were invalidated.\283\ And 
the new standard salary level would still go into effect and function 
sensibly if the revision to the HCE total compensation requirement were 
invalidated as well. Notably, in such an event, the total annual 
compensation an employee would need to receive to qualify for the HCE 
test would remain at the existing level; \284\ however, the employee's 
total annual compensation would need to include at least $1,128 per 
week paid on a salary or fee basis. As discussed in section V.B, the 
revised standard salary level will work effectively with the standard 
duties test to better define who is employed in a bona fide EAP 
capacity by restoring the initial screening function that the salary 
level long fulfilled and adjusting the salary level to account for the 
change to a single-test system. Finalizing the new standard salary 
level will thus accomplish several of the key objectives the Department 
is seeking to achieve in undertaking this rulemaking, even if all or 
part of the updating section or the revisions to the HCE total 
compensation requirement do not also go into effect.
---------------------------------------------------------------------------

    \283\ As noted in section IV, the initial update to the standard 
salary level and HCE total annual compensation requirement are 
applicable July 1, 2024, whereas the new standard salary level and 
HCE total annual compensation requirement are applicable 6 months 
later on January 1, 2025.
    \284\ Under these circumstances, the HCE total annual 
compensation requirement would be $132,964 per year or, if the 
initial update to the earnings thresholds under this rule did not go 
into effect, the current HCE total annual compensation requirement 
of $107,432 per year.
---------------------------------------------------------------------------

    The revised HCE total compensation requirement of $151,164 per year 
set forth in Sec.  541.601(a)(1)--the 85th percentile of annualized 
weekly earnings of full-time nonhourly workers nationally--can also 
function sensibly, even if the other provisions of this final rule are 
stayed, enjoined, or invalidated. The revision to the HCE total 
compensation requirement under the new methodology operates 
independently of, and does not depend on, either the new updating 
provision or the revision to the standard salary level. Accordingly, 
if, for instance, the triennial updating of the HCE total compensation 
requirement were invalidated, the new HCE total compensation 
requirement of $151,164 per year would still become effective, and the 
HCE total compensation requirement would remain at that amount until 
the Department undertakes further rulemaking. If the initial update to 
the HCE total compensation requirement were invalidated, the revised 
HCE total compensation requirement would still go into effect, too. And 
the revised HCE total compensation requirement would still go into 
effect and function sensibly if the revision to the standard salary 
level were invalidated. In such an event, an employee would need to be 
paid the new total annual compensation amount of $151,164 per year to 
qualify as exempt under the HCE test, though the total annual 
compensation would need to include only the existing standard salary 
level \285\ per week paid on a salary or fee basis. As noted in section 
V.C, the HCE test was intended to be limited to those highly paid 
employees who would almost invariably meet the standard duties test. 
The revision to the HCE total compensation requirement would restore it 
to a level that is high enough to avoid the unintended exemption of 
large numbers of employees in high-wage regions but not so high as to 
unduly restrict the use of the HCE test in lower-wage regions and 
industries, even if the revisions to the standard salary level and all 
or part of the updating provision do not go into effect.
---------------------------------------------------------------------------

    \285\ Under these circumstances, the standard salary level would 
be $844 per week or, if the initial update to the earnings 
thresholds under this rule did not go into effect, the current 
standard salary level of $684 per week.
---------------------------------------------------------------------------

    The new updating section can also function sensibly, independent of 
the other provisions of this final rule. As explained in section V, the 
updating section provides in Sec.  541.607(a) and (b) that the 
Department will update the

[[Page 32887]]

standard salary level and HCE total compensation requirement, 
respectively, initially on July 1, 2024 and every 3 years thereafter, 
to reflect current earnings data, in accordance with the methodology 
used to set each threshold. Both the triennial updating of the earnings 
thresholds for exemption and the initial update to these thresholds can 
function sensibly on their own.
    The triennial updating of the earnings thresholds for exemption can 
function sensibly, even if the new standard salary level and new HCE 
total compensation requirement are stayed, enjoined, or invalidated, as 
the triennial updates are based on the methodology used to set each 
threshold that is in place at the time of the update. If all the 
provisions of this rule do go into effect (and assuming the Department 
has not engaged in further rulemaking), as discussed in section V.A, 
the triennial updates to the standard salary level and HCE total 
compensation threshold will be based on the new methodologies 
established in this rule: the 35th percentile of weekly nonhourly 
earnings in the lowest-wage Census Region and the 85th percentile of 
annualized weekly earnings of full-time nonhourly workers nationally, 
respectively. However, the updating provision does not depend on the 
revisions to the standard salary level and HCE methodologies also going 
into effect. If, for instance, both the new standard salary level and 
HCE total compensation requirement were invalidated, the updating 
provision would, as the Administrative Law Professors noted, use the 
existing methodologies set in the 2019 rule as the baseline for the 
each triennial update: the 20th percentile of weekly earnings of full-
time nonhourly workers in the lowest-wage Census Region and/or retail 
nationally, in the case of the standard salary level, and the 80th 
percentile of annualized weekly earnings of full-time nonhourly workers 
nationally, in the case of the HCE test. The updating section thus 
ensures that the standard salary level and HCE total compensation 
requirement continue to reflect current earnings--among the key 
objectives the Department is seeking to achieve in undertaking this 
rulemaking, see section V.A--even if the new methodologies for setting 
these earnings thresholds do not go into effect.
    The initial update of the earnings thresholds for exemption can 
function sensibly as well, even if this rule's other revisions do not 
go into effect, as the baseline for the initial update to each 
threshold is the current methodology established in 2019. Accordingly, 
if, for instance, the new standard salary level, new HCE total 
compensation requirement, and the triennial updating provision were 
invalidated, the standard salary level and HCE total compensation 
requirement would still be updated on July 1, 2024 to $844 per week and 
$132,964 per year, respectively. In undertaking this rulemaking, the 
Department sought (among other objectives) to account for the 
considerable earnings growth that has taken place since it last updated 
the earnings thresholds for exemption.\286\ The initial updating of the 
standard salary level and HCE total compensation requirement ensures 
these thresholds reflect earnings growth since the Department's 2019 
rule, even if the new methodologies for setting the standard salary 
level and the HCE total compensation requirement and the future 
triennial updates to these earnings thresholds do not go into effect.
---------------------------------------------------------------------------

    \286\ See section V.A.2.
---------------------------------------------------------------------------

    In sum, the Department has taken care to draft this final rule such 
that its provisions function independently and is including a 
severability section, Sec.  541.5, to make clear that all the rule's 
provisions are separate and severable and should be given the fullest 
possible effect. As the Administrative Law Professors observed, this 
discussion of severability is not an acknowledgement of the legal 
vulnerability of any particular provision. However, since some 
commenters have indicated that they may challenge all or part of this 
rule, see e.g., AFPI, Chamber, NFIB, and the 2016 and 2019 rules were 
both subject to legal challenge, the Department, consistent with ACUS 
guidance, makes explicit in the regulatory text that it considers the 
provisions of this rule to be severable and explains here how the 
various provisions of the rule can operate sensibly in the event 
another provision of the rule is stayed, enjoined, or declared invalid.

VI. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
and its attendant regulations, 5 CFR part 1320, require the Department 
to consider the agency's need for its information collections, the 
information collections' practical utility, the impact of paperwork and 
other information collection burdens imposed on the public, and how to 
minimize those burdens. Under the PRA, an agency may not collect or 
sponsor an information collection requirement unless it displays a 
currently valid Office of Management and Budget (OMB) control 
number.\287\
---------------------------------------------------------------------------

    \287\ See 5 CFR 1320.8(b)(3)(vi).
---------------------------------------------------------------------------

    OMB has assigned control number 1235-0021 to the information 
collection that gathers information from complainants alleging 
violations of the labor standards that WHD administers and enforces, 
and OMB has assigned control number 1235-0018 to the information 
collection, Records to be kept by Employers--Fair Labor Standards Act. 
In accordance with the PRA, the Department solicited public comments on 
the proposed burden changes to the information collection under control 
number 1235-0021 and the proposed burden changes to the information 
collection under OMB control number 1235-0018.\288\ Because OMB control 
number 1235-0021 was encumbered by a different rulemaking at the time 
of submission of the NPRM to OMB, the Department at that time created a 
duplicate ICR of 1235-0021 under OMB control number 1235-0NEW to allow 
the public to comment on the proposed estimates. The Department 
submitted a contemporaneous request for OMB review of the proposed 
revisions to the existing information collection and the duplicate ICR 
in accordance with 44 U.S.C. 3507(d). On October 12, 2023, OMB issued a 
notice that assigned the duplicate information collection control 
number 1235-0035 and indicated the Department should address comments 
received during the NPRM comment period and resubmit for approval at 
the time of the final rule. Also on October 12, 2023, OMB issued a 
notice that continued the previous approval of the information 
collection under 1235-0018 under the existing terms of clearance and 
advised the Department to address any comments received during the NPRM 
comment period and resubmit at the time of the final rule.
---------------------------------------------------------------------------

    \288\ See 88 FR 62181.
---------------------------------------------------------------------------

    Circumstances Necessitating this Collection: This rulemaking 
revises 29 CFR part 541 and affects provisions that could be considered 
to entail collections of information including (1) the complaint 
process under which employees may file a complaint with the Department 
to investigate potential violations of the laws administered by the 
Department, including the FLSA; and (2) disclosure and recordkeeping 
requirements for covered employers under the FLSA. This rulemaking does 
not impose new information collection requirements. Rather, burdens 
under the existing requirements would increase due to the changes in 
the universe of employees for whom employers are

[[Page 32888]]

required to maintain records. The changes adopted in this rulemaking 
may also cause an initial increase in burden if more employees file 
complaints with WHD to collect back wages under the overtime pay 
requirements.
    Information and technology: There is no particular order or form of 
records prescribed by the regulations. A respondent may meet the 
requirements of this final rule using paper or electronic means. WHD, 
to reduce burden caused by the filing of complaints that are not 
actionable by the agency, uses a complaint filing process in which 
complainants discuss their concerns with WHD professional staff. This 
process allows agency staff to refer complainants raising concerns that 
are not actionable under federal wage and hour laws and regulations to 
an agency that may be able to assist.
    Public comments: The Department invited public comment on its 
analysis that the rule would create a slight increase in the paperwork 
burden associated with the complaint ICR 1235-0021 (submitted as a 
duplicate ICR at the NPRM stage under control number 1235-0NEW and 
later assigned by OMB as 1235-0035) and on the burden associated with 
ICR 1235-0018, Records to be kept by employers--Fair Labor Standards 
Act. The Department did not receive comments on the ICRs themselves or 
any comments submitted regarding the PRA analysis in particular, 
including the methodology. No comments were received with respect to 
the complaint ICR (1235-0021). However, commenters addressed aspects of 
the information collections while commenting on the text of the 
proposed rule as it relates the records ICR (1235-0018).
    For example, Horizon Health Services commented that ``[r]equiring 
supervisors to record their hours worked and request overtime, as 
needed, would [be] a disruption to business operations by adding a 
significant administrative burden.'' The University of Dayton agreed 
that a change would require additional administrative burden stating, 
``new training and systems would need to be put in place for newly 
nonexempt employees to record their time and for their supervisors to 
track and approve their time. They would have to become accustomed to 
tracking their hours, being sure not to work unbudgeted hours and 
overtime unless approved, and so forth.'' Others, like Argentum & ASHA 
and Oklahoma Wesleyan University, similarly expressed concerns about 
the costs associated with having newly nonexempt employees record their 
time. SBA Advocacy stated that ``DOL should consider'' that ``small 
entities face vast administrative and operational costs to schedule and 
track employee hours to minimize overtime costs.'' In addition, some 
commenters expressed concern that the Department's cost estimates 
related to recordkeeping were too low, given among other things that 
employers would need to adjust their recordkeeping and payroll systems 
for newly overtime-eligible employees. See, e.g., NFIB; PPWO; Seyfarth 
Shaw. The National Roofing Contractors Association stated that it ``is 
concerned the proposed regulation would result in dramatically 
increased labor costs and additional paperwork burdens for employers, 
while also reducing workplace flexibility and compensation for many 
workers.''
    In response to these comments, the Department observes that most 
employers currently have both exempt and nonexempt workers and 
therefore have systems already in place for employers to track hours. 
Additionally, 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. However, this is a duplication of the regulatory familiarization 
costs contained in section VII, economic impact analysis.
    The Department plans to submit these ICR's to OMB upon publication 
of the final rule. The agency will publish a notice in the Federal 
Register to inform the public of OMB's decision.
    Total burden for the subject information collections, including the 
burdens that will be unaffected by this final rule and any changes, is 
summarized as follows:
    Type of review: Revision to currently approved information 
collections.
    Agency: Wage and Hour Division, Department of Labor.
    Title: Employment Information Form.
    OMB Control Number: 1235-0021.
    Affected public: Private sector, businesses or other for-profits 
and Individuals or Households.
    Estimated number of respondents: 29,160 (2,150 from this 
rulemaking).
    Estimated number of responses: 29,160 (2,150 from this rulemaking).
    Frequency of response: On occasion.
    Estimated annual burden hours: 9,720 (717 burden hours due to this 
rulemaking).
    Capital/Start-up costs: $0 ($0 from this rulemaking).
    Title: Records to be kept by Employers--Fair Labor Standards Act.
    Type of review: Revision to currently approved information 
collections.
    Agency: Wage and Hour Division, Department of Labor.
    OMB Control Number: 1235-0018.
    Affected public: Private sector, businesses or other for-profits 
and Individuals or Households.
    Estimated number of respondents: 4,068,419 (0 from this 
rulemaking).
    Estimated number of responses: 42,725,207 (10,320,000 from this 
rulemaking).
    Frequency of response: On occasion.
    Estimated annual burden hours: 1,157,993 (344,000 from this 
rulemaking).
    Capital/Start-up costs: $0 ($0 from this rulemaking).

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

    Under Executive Order 12866, OMB's Office of Information and 
Regulatory Affairs (OIRA) determines whether a regulatory action is 
significant and, therefore, subject to the requirements of the 
Executive Order and OMB review. As amended by Executive Order 14094, 
section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as a regulatory action that is likely to result in 
a rule that may: (1) have an annual effect on the economy of $200 
million or more; or adversely affect in a material way the economy, a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, territorial, or 
tribal governments or communities; (2) create a serious inconsistency 
or otherwise interfere with an action taken or planned by another 
agency; (3) materially alter the budgetary impact of entitlements, 
grants, user fees or loan programs or the rights and obligations of 
recipients thereof; or (4) raise legal or policy issues for which 
centralized review would meaningfully further the President's 
priorities or the principles set forth in the Executive Order. OIRA has 
determined that this rule is a ``significant regulatory action'' within 
the scope of section 3(f)(1) of Executive Order 12866.
    Executive Order 13563 directs agencies to, among other things, 
propose or adopt a regulation only upon a reasoned determination that 
its benefits justify its costs; that it is tailored to impose the least 
burden on society, consistent with obtaining the regulatory

[[Page 32889]]

objectives; and that, in choosing among alternative regulatory 
approaches, the agency has selected those approaches that maximize net 
benefits. Executive Order 13563 recognizes that some costs and benefits 
are difficult to quantify and provides that, when appropriate and 
permitted by law, agencies may consider and discuss qualitatively 
values that are difficult or impossible to quantify, including equity, 
human dignity, fairness, and distributive impacts. The analysis below 
outlines the impacts that the Department of Labor (Department) 
anticipates may result from this rule and was prepared pursuant to the 
above-mentioned executive orders.

A. Introduction

1. Background
    The Fair Labor Standards Act (FLSA or Act) requires covered 
employers to (1) pay employees who are covered and not exempt from the 
Act's requirements not less than the Federal minimum wage for all hours 
worked and overtime premium pay at a rate of not less than one and one-
half times the employee's regular rate of pay for all hours worked over 
40 in a workweek, and (2) make, keep, and preserve records of 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, as those terms are ``defined 
and delimited'' by the Department.\289\ The Department's regulations 
implementing these ``white-collar'' exemptions are codified at 29 CFR 
part 541. 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).
---------------------------------------------------------------------------

    \289\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

    The Department has updated the salary level test many times since 
its implementation in 1938. Table 1 presents the weekly salary levels 
associated with the EAP exemptions since 1938, organized by exemption 
and long/short/standard duties tests. From 1949 to 2004, the Department 
determined exemption status using a two-test system comprised of a long 
test (a lower salary level paired with a more rigorous duties test that 
limited performance of nonexempt work to no more than 20 percent for 
most employees) and a short test (a higher salary level paired with a 
less rigorous primary duties requirement that did not have a numerical 
limit on the amount of nonexempt work). In 2004, rather than update the 
two-test system, the Department chose to establish a new single-test 
system for determining exemption status, setting the standard salary 
level test at $455 a week, which was equivalent to the long test salary 
level, and pairing it with a standard duties test that was 
substantially equivalent to the more lenient short duties test. Because 
the single standard duties test was equivalent to the short duties 
test, employees who met the long test salary level and previously 
passed either the more rigorous long, or less rigorous short, duties 
test passed the standard duties test. The Department also added a new 
highly compensated employee (HCE) test, which used a very minimal 
duties test and a very high total compensation test set at $100,000 per 
year (see section II.B.2 for further discussion). In 2016, to address 
the concern that the standard test exempted lower-paid salaried 
employees performing large amounts of nonexempt work who had previously 
been protected by the more rigorous long duties test, the Department 
published a final rule setting the standard salary level at $913 per 
week, which was equivalent to the low end of the historic range of 
short test salary levels, and the HCE annual compensation level at 
$134,004. This approach restored overtime protection for employees 
performing substantial amounts of nonexempt work who earned between the 
long test salary level and the low end of the short test salary range, 
as they failed the new standard salary level test. As previously 
discussed, the U.S. District Court for Eastern District of Texas held 
the 2016 rule invalid. In 2019, in part to address the concern raised 
in the litigation that the approach taken in the 2016 rulemaking would 
have prevented employers from using the exemption for employees who 
earned between the long test salary level and the low end of the short 
test salary range and met the more rigorous long duties test, the 
Department returned to the methodology used in the 2004 rule and set 
the salary level at the 20th percentile of weekly earnings of full-time 
salaried workers in the South and in the retail industry nationally. 
Applying this method to the earnings data available in 2019 produced a 
standard salary level that was below the long test salary level. The 
current earnings thresholds, as published in 2019, are $684 a week for 
the standard salary test and $107,432 per year for the HCE test.

[[Page 32890]]

Table 1--Historical Weekly Salary Levels for the EAP Exemptions
[GRAPHIC] [TIFF OMITTED] TR26AP24.143

2. Need for Rulemaking
    The goal of this rulemaking is to set effective earnings thresholds 
to help define and delimit the FLSA's EAP exemption. To this end, the 
Department is finalizing its proposed change to the standard salary 
level. Specifically, the Department is adjusting the standard salary 
level by setting it equal to the 35th percentile of weekly earnings of 
full-time salaried workers in the lowest-wage Census Region (currently 
the South), based on the most recent year of Current Population Survey 
(CPS) data at the time of drafting.\290\ Using the Bureau of Labor 
Statistics (BLS) 2023 data on percentiles of usual weekly earnings of 
nonhourly full-time workers, the standard salary level will be set at 
$1,128 per week.\291\ Additionally, to maintain the effectiveness of 
this test, the Department is finalizing an updating mechanism that will 
update the earnings thresholds to reflect current wage data initially 
on July 1, 2024 and every 3 years thereafter.
---------------------------------------------------------------------------

    \290\ The Department uses the terms salaried and nonhourly 
interchangeably in this rule because, consistent with its 2004, 
2016, and 2019 rules, the Department considered data representing 
compensation paid to nonhourly workers to be an appropriate proxy 
for compensation paid to salaried workers. The Department also notes 
that the terms employee and worker are used interchangeably 
throughout this analysis.
    \291\ BLS publishes quarterly and annual estimates of percentile 
earnings values beginning with 2022 data at https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm.
---------------------------------------------------------------------------

    The Department's new standard salary level will, in combination 
with the standard duties test, better define and delimit which 
employees are employed in a bona fide EAP capacity in a one-test 
system. As explained in greater detail in sections III and V.B, setting 
the standard salary level at or below the long test salary level, as 
the 2004 and 2019 rules did, results in the exemption of lower-salaried 
employees who traditionally were entitled to overtime protection under 
the long test either because of their low salary or because they 
perform large amounts of nonexempt work, in effect significantly 
broadening the exemption compared to the two-test system. Setting the 
salary level at the low end of the historic range of short test salary 
levels, as the 2016 rule did, would have restored overtime protections 
to those employees who perform substantial amounts of nonexempt work 
and earned between the long test salary level and the low end of the 
short test salary range. However, it also would have resulted in 
denying employers the use of the exemption for lower-salaried employees 
who traditionally were not entitled to overtime compensation under the 
long test, which raised concerns that the Department was in effect 
narrowing the exemption. By setting a salary level above the equivalent 
of the long test salary level (using current data), the final rule will 
restore the right to overtime pay for salaried white-collar employees 
who prior to the 2019 rule were always considered nonexempt if they 
earned below the long test (or long test-equivalent) salary level. And 
it will ensure that fewer lower paid white-collar employees who perform 
significant amounts of nonexempt work are included in the exemption. At 
the same time, by setting it well below the equivalent of the short 
test salary level (using current data), the rule will allow employers 
to continue to use the exemption for many lower paid white-collar 
employees who were made exempt under the 2004 standard duties test. The 
new salary level will also more reasonably distribute between employees 
and their employers what the Department now understands to be the 
impact of the shift from a two-test to a one-test system on employees 
earning between the long and short test salary levels.
    As the Department has previously noted, the amount paid to an 
employee is ``a valuable and easily applied index to the `bona fide' 
character of the employment for which exemption is claimed, as well as 
the ``principal[ ]'' ``delimiting requirement . . . prevent[ing] 
abuse'' of the exemption.\292\ Additionally, the salary level test 
facilitates application of the exemption by saving employees and 
employers from having to apply the more time-consuming duties analysis 
to a large group of employees who will not pass it. For these reasons, 
the salary level test has been a key part of how the Department defines 
and delimits the EAP exemption since the beginning of its rulemaking on 
the EAP exemption.\293\ At the same time, the salary test's role in 
defining and delimiting the scope of the EAP exemption must allow for 
appropriate examination of employee duties.\294\ Under the final rule, 
duties will continue to determine the exemption status for most 
salaried white-collar employees.
---------------------------------------------------------------------------

    \292\ Stein Report at 19, 24; see also 81 FR 32422.
    \293\ See 84 FR 51237.
    \294\ See 84 FR 51238.
---------------------------------------------------------------------------

    The Department also will adjust the HCE total annual compensation 
requirement to the annualized weekly earnings of the 85th percentile of 
full-

[[Page 32891]]

time salaried workers nationally ($151,164 using 2023 data). Though not 
as high a percentile as the HCE threshold initially adopted in 2004, 
which covered 93.7 percent of all full-time salaried workers,\295\ the 
Department's new HCE threshold will ensure it continues to serve its 
intended function, because the HCE total annual compensation level will 
be high enough to exclude all but those employees at the very top of 
the economic ladder.
---------------------------------------------------------------------------

    \295\ See 69 FR 22169 (Table 3).
---------------------------------------------------------------------------

    In this final rule, the Department is not finalizing its proposal 
in section IV.B.1 and B.2 of the NPRM to apply the standard salary 
level to the U.S. territories subject to the federal minimum wage and 
to update the special salary levels for American Samoa and the motion 
picture industry.\296\
---------------------------------------------------------------------------

    \296\ The Department will address these aspects of its proposal 
in a future final rule. While the Department is not finalizing its 
proposal, it is making nonsubstantive changes in provisions 
addressing the territories as a result of other changes in this 
final rule.
---------------------------------------------------------------------------

    In its three most recent part 541 rulemakings, the Department has 
expressed its commitment to keeping the earnings thresholds up to date 
to ensure that they remain effective in helping differentiate between 
exempt and nonexempt employees. Long intervals between rulemakings have 
resulted in eroded earnings thresholds based on outdated earnings data 
that were ill-equipped to help identify bona fide EAP employees. In 
contrast, routine updates of the earnings thresholds to reflect wage 
growth will bring certainty and stability to employers and employees 
alike. Based on its long experience with updating the salary levels, 
the Department has determined that adopting a regulatory provision for 
regularly updating the salary levels, with an exception for pausing 
future updates under certain conditions, is the most viable and 
efficient way to ensure the EAP exemption earnings thresholds keep pace 
with changes in employee pay and thus remain effective in helping 
determine exemption status. Accordingly, in addition to the salary 
level changes discussed above, the Department is including in this rule 
a mechanism for updating the salary and compensation levels to reflect 
current wage data initially on July 1, 2024 and every 3 years 
thereafter. As explained in greater detail in section V.A, employees 
and employers alike will benefit from the certainty and stability of 
regularly scheduled updates.
3. 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 pooled CPS Merged Outgoing Rotation Group (MORG) data. See 
section VII.B.2. The Department estimates in the first year after 
implementation, there will be 4.3 million affected workers.\297\ This 
includes 4.0 million workers (1.0 million at the first update and 3.0 
million when the new salary level is applied) who meet the standard 
duties test and earn at least $684 per week but less than $1,128 per 
week and will either become eligible for overtime or have their salary 
increased to at least $1,128 per week (Table 2).\298\ An estimated 
292,900 workers will be affected by the increase in the HCE 
compensation test from $107,432 per year to $151,164 per year. In Year 
10, with triennial updating of the standard salary and HCE thresholds, 
the Department projects that 5.0 million workers will be affected by 
the change in the standard salary level test and 1.0 million workers 
will be affected by the change in the HCE total annual compensation 
test.\299\
---------------------------------------------------------------------------

    \297\ The term ``affected workers'' refers to the population of 
potentially affected EAP workers who either pass the standard duties 
test and earn at least $684 but less than the new salary level of 
$1,128 per week or pass only the HCE duties test and earn at least 
$107,432 but less than the new HCE compensation level of $151,164 
per year.
    \298\ 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.
    \299\ In later years, earnings growth will cause some initially 
affected workers to no longer be affected because their earnings 
will exceed the new salary or compensation threshold. This occurs 
both in update years (i.e., triennially) and non-update years but 
will occur to a much greater degree in non-update years. 
Additionally, some workers will become newly affected because their 
earnings will reach at least $684 per week, and in the absence of 
this rule they would lose their overtime protections. To estimate 
the total number of affected workers over time, the Department 
accounts for both of these effects.
---------------------------------------------------------------------------

    This analysis quantifies three direct costs to employers: (1) 
regulatory familiarization costs; (2) adjustment costs; and (3) 
managerial costs (see section VII.C.3). Total annualized direct 
employer costs over the first 10 years were estimated to be $802.9 
million, assuming a 7 percent discount rate.\300\ This rule will also 
transfer income from employers to employees in the form of increased 
wages. The Department estimated annualized transfers will be $1.5 
billion. Most of these transfers will be attributable to wages paid 
under the FLSA's overtime provision; a smaller share will be 
attributable to the FLSA's minimum wage requirement. These transfers 
also account for employers who may choose to increase the salary of 
some affected workers to at least the new threshold so that they can 
continue to use the EAP exemption.
---------------------------------------------------------------------------

    \300\ Hereafter, unless otherwise specified, annualized values 
will be presented using the 7 percent real discount rate.
---------------------------------------------------------------------------

    The Department also provides a qualitative discussion of the 
potential benefits and unquantified transfers of this rule, including 
strengthened overtime protections for some workers, increased worker 
productivity, increased personal time for workers, and reduced reliance 
on social assistance programs. See section VII.C.5.

[[Page 32892]]

Table 2--Summary of Affected Workers, Regulatory Costs, and Transfers--
Standard and HCE Salary Levels
[GRAPHIC] [TIFF OMITTED] TR26AP24.144

B. Number of Affected EAP Workers

1. Overview
    This section explains the methodology used to estimate the number 
of workers who will be affected by the final rule. The pool of 
potentially affected workers is workers who are currently EAP exempt. 
In this final rule, as in previous rules, the Department estimated the 
current 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 data collection agency or as 
part of any employee or establishment survey. The methodology described 
in this final rule is consistent with the approach the Department used 
in the 2004, 2016, and 2019 final rules.\301\ To estimate the number of 
workers who will be affected by the rule, the new standard salary level 
and the new HCE total annual compensation threshold are applied to the 
earnings of current EAP exempt workers.
---------------------------------------------------------------------------

    \301\ See 69 FR 22196-209; 81 FR 32453-60; 84 FR 51255-60. Where 
the proposal follows the methodology used to determine affected 
workers in the 2004, 2016, and 2019 final rules, citations to these 
rules are not always included.
---------------------------------------------------------------------------

2. Data
    All estimates of numbers of workers used in this analysis were 
based on data from the CPS MORG, which is sponsored jointly by the U.S. 
Census Bureau and BLS.\302\ The CPS is a large, nationally 
representative sample. Households are surveyed for 4 months, excluded 
from the survey for 8 months, surveyed for an additional 4 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.\303\ The data in this supplement contain 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.
---------------------------------------------------------------------------

    \302\ 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 its 
regulatory impact analysis (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.
    \303\ This is the outgoing rotation group (ORG); however, this 
analysis uses the data merged over 12 months and thus it is 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 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 3 years of 
CPS MORG data (2021-2023). Earnings for each observation from 2021 and 
2022 were inflated to 2023 dollars using the Consumer Price Index for 
All Urban Consumers (CPI-U).\304\ 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 2023 CPS 
MORG. Thus, the pooled CPS MORG sample uses roughly three times as many 
observations to represent the same total

[[Page 32893]]

number of workers in 2023. The additional observations allow the 
Department to better characterize certain attributes of the potentially 
affected labor force. This pooled dataset is used to estimate all 
impacts of the final rule.
---------------------------------------------------------------------------

    \304\ Previous rulemakings also adjusted salaries in the pooled 
data using the CPI-U, but the Department recognizes that the 
relationship between wage growth and inflation between 2021 and 2023 
may not be consistent. During the pandemic, large employment losses 
in low-wage industries resulted in stronger wage growth at the 
aggregate level. In part of the 2021-2023 period, high inflation 
outpaced overall wage growth. Given these mixed effects, the 
Department decided to continue its prior practice of adjusting these 
observations using CPI-U.
---------------------------------------------------------------------------

    Some assumptions and adjustments 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 who 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).\305\ 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 vary. The Department believes that 
without more information, this is an appropriate assumption.\306\
---------------------------------------------------------------------------

    \305\ The Department also reweighted for workers reporting zero 
earnings. In addition, the Department eliminated, without 
reweighting, workers who reported both usually working zero hours 
and working zero hours in the past week.
    \306\ 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 4.4 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.
---------------------------------------------------------------------------

3. Number of Workers Subject to the FLSA and the Department's Part 541 
Regulations
    As a starting point for the analysis, based on the CPS MORG data, 
the Department estimates that there would be 167.3 million wage and 
salary workers in Year 1. Figure 1 illustrates how the Department 
analyzed the U.S. civilian workforce through successive stages to 
estimate the number of affected workers.

Figure 1--Flow Chart of FLSA Exemptions and Estimated Number of 
Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.145

    The Department first excluded workers who are unemployed, not 
subject to its regulations, or not covered by the FLSA from the overall 
total number of wage and salary workers. 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 
Department identified religious workers by their occupation codes: 
`clergy' (Census occupational

[[Page 32894]]

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.\307\ Exceptions 
exist for U.S. Postal Service employees, Tennessee Valley Authority 
employees, and Library of Congress employees.\308\ The analysis 
identified and included these covered Federal workers using occupation 
and/or industry codes and removed other Federal employees.\309\
---------------------------------------------------------------------------

    \307\ See 29 U.S.C. 204(f). Federal workers are identified in 
the CPS MORG with the class of worker variable PEIO1COW.
    \308\ See id.
    \309\ 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 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, 2016, and 2019 
final rules similarly did not adjust for these workers.
    Of the 167.3 million wage and salary workers in the United States, 
the Department estimates that 143.7 million are covered by the FLSA and 
subject to the Department's regulations (85.9 percent). The remaining 
23.7 million workers are excluded from FLSA coverage for the reasons 
described above.
4. Number of Workers Who Are White-Collar, Salaried, Not Eligible for 
Another (Non-EAP) Overtime Exemption
    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,\310\ workers paid on an hourly basis, and workers who are 
exempt under certain other (non-EAP) exemptions.
---------------------------------------------------------------------------

    \310\ ``The section 13(a)(1) exemptions and the regulations in 
[Part 541] do not apply to manual laborers or other `blue collar' 
workers who perform work involving repetitive operations with their 
hands, physical skill and energy.'' Sec.  541.3(a).
---------------------------------------------------------------------------

    The Department excluded a total of 90.2 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). For example, the 
Department estimated that there are 49.1 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 \311\ and the Department's 2004, 2016, 
and 2019 regulatory impact analyses.\312\ 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 80.3 million workers were paid on an hourly basis in 2023.\313\
---------------------------------------------------------------------------

    \311\ 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.
    \312\ See 69 FR 22240-44.
    \313\ CPS MORG variable PEERNHRY.
---------------------------------------------------------------------------

    Also excluded from further analysis were workers who are exempt 
under certain other (non-EAP) exemptions. Although some of these 
workers may also be exempt under the EAP exemptions, they would 
independently remain exempt from the FLSA's minimum wage and/or 
overtime pay provisions based on the non-EAP exemptions. The Department 
excluded an estimated 3.7 million workers, including some agricultural 
and transportation workers, from further analysis because they are 
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 other recent rulemakings. The 2004 rule 
excluded all workers in agricultural industries from the analysis,\314\ 
while more recent analyses only excluded agricultural workers from 
specified occupational-industry combinations since not all workers in 
agricultural industries qualify for the agricultural overtime pay 
exemptions. This final rule followed the more recent analyses and only 
excluded agricultural workers in certain occupation-industry 
combinations. \315\ The exclusion of transportation workers matched the 
method for the 2004, 2016, and 2019 final rules. \316\ Transportation 
workers are defined as those who are subject to the following FLSA 
exemptions: section 13(b)(1), section 13(b)(2), section 13(b)(3), 
section 13(b)(6), or section 13(b)(10). The Department excluded 1.0 
million agricultural workers and 2.1 million transportation workers 
from the analysis.
---------------------------------------------------------------------------

    \314\ 69 FR 22197.
    \315\ 84 FR 51257; 81 FR 32456, n.114.
    \316\ 84 FR 51257; 81 FR 32456-57; 69 FR 22197.
---------------------------------------------------------------------------

    In addition, the Department excluded another 22,700 workers who 
qualify for one or more other FLSA minimum wage and overtime exemptions 
(and are not either blue-collar or hourly). The criteria for 
determining exemption status for these workers are detailed in Appendix 
A.
    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 are 53.5 million salaried white-collar workers for whom 
employers might claim either the standard EAP exemption or the HCE 
exemption.
5. Number of Current EAP Exempt Workers
    To determine the number of workers for whom employers might 
currently claim the EAP exemption, the standard EAP test and HCE test 
were applied. Both tests include earnings thresholds and duties tests. 
Aside from workers in named occupations (which are not subject to an 
earnings requirement and are discussed in the next subsection), to be 
exempt under the standard EAP test, the employee generally 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); \317\
---------------------------------------------------------------------------

    \317\ 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 rule (these workers were 
similarly excluded in the 2004, 2016, and 2019 analyses). 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 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 previous 
rules).

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

[[Page 32895]]

     earn at least a designated salary amount (the standard 
salary level test, currently $684 per week); and
     primarily perform exempt work, as defined by the 
regulations (the standard duties test).
    The HCE test allows certain highly paid employees to qualify for 
exemption if they customarily and regularly perform one or more exempt 
job duties (the HCE duties test). The current HCE annual compensation 
level is $107,432, including at least $684 per week paid on a salary or 
fee basis.
i. Salary Basis
    The Department included only nonhourly workers in the analysis 
based on CPS data.\318\ For this NPRM, 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, 2016, and 2019 final rules.\319\
---------------------------------------------------------------------------

    \318\ The CPS variable PEERNHRY identifies workers as either 
hourly or nonhourly.
    \319\ See 69 FR 22197; 81 FR 32414; 84 FR 51258.
---------------------------------------------------------------------------

    The CPS population of ``nonhourly'' workers includes salaried 
workers along with those who are paid a piece rate, 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.\320\ 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.
---------------------------------------------------------------------------

    \320\ University of Michigan, Institute for Social Research. 
2019 PSID. Data available at: https://simba.isr.umich.edu/data/data.aspx.
---------------------------------------------------------------------------

ii. Salary Level
    Weekly earnings are available in the CPS MORG data, which allowed 
the Department to estimate how many nonhourly workers pass the 
compensation thresholds.\321\ However, the CPS earnings variable does 
not perfectly reflect the Department's definition of earnings. First, 
the CPS includes all nondiscretionary bonuses and commissions if they 
are part of usual weekly earnings. However, the regulation allows 
nondiscretionary bonuses and commissions to satisfy up to 10 percent of 
the standard salary level. This discrepancy between the earnings 
variable used and the regulatory definition of salary may cause a 
slight overestimation or underestimation of the number of workers 
estimated to meet the standard salary level and HCE compensation 
tests.\322\ Second, CPS earnings data include overtime pay. 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 accurately in the data. Third, the 
earnings measure includes tips and discretionary commissions which do 
not qualify towards the required salary. The Department believes tips 
are an uncommon form of payment for these white-collar workers. 
Discretionary commissions tend to be paid irregularly and hence are 
unlikely to be counted as ``usual earnings.'' Additionally, as noted 
above, most salaried workers do not receive commissions.
---------------------------------------------------------------------------

    \321\ The CPS MORG variable PRERNWA, which measures weekly 
earnings, is used to identify weekly salary.
    \322\ In some instances, this may include too much 
nondiscretionary bonuses and commissions (i.e., when it is more than 
10 percent of usual earnings). But in other instances, it may not 
include enough nondiscretionary bonuses and commissions (i.e., when 
the respondent does not count them as usual earnings).
---------------------------------------------------------------------------

    Lastly, the CPS annual earnings variable is topcoded at $150,000 
through the March 2023 data.\323\ Topcoding refers to how data sets 
handle observations at the top of the distribution and is performed to 
protect the confidentiality of data provided by CPS respondents. For 
the CPS annual earnings variable, 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 impacts.\324\
---------------------------------------------------------------------------

    \323\ Beginning in the April 2023 data, the CPS data are 
topcoded independently each month and represent the average earnings 
of the top 3 percent of earnings reported. See https://www.census.gov/content/dam/Census/programs-surveys/cps/updated-2022-cps-puf-changes.pdf for additional details.
    \324\ The Department 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).
---------------------------------------------------------------------------

iii. Duties
    The CPS MORG data do not capture information about job duties. 
Therefore, the Department used probability estimates of passing the 
duties test by occupational title to estimate the number of workers 
passing the duties test. This is the same methodology used in recent 
part 541 rulemakings, and the Department believes it continues to be 
the best available methodology. The probabilities of passing the duties 
test are from 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 originally 
published in the GAO's 1999 white-collar exemptions report.\325\
---------------------------------------------------------------------------

    \325\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, supra note 311, at 40-41.
---------------------------------------------------------------------------

    WHD examined 499 occupational codes and determined that 251 
occupational codes likely included EAP exempt workers.\326\ For each, 
WHD assigned one of four probability codes reflecting the estimated 
likelihood, expressed as ranges, that a worker in that occupation would 
perform duties required to meet the EAP duties tests (Table 3). All 
occupations and their associated probability codes are listed in 
Appendix A. Just as in the 2004, 2016, and 2019 final rules, the 
Department has supplemented this analysis to account for the HCE 
exemption. The Department modified the four probability codes to 
reflect probabilities of passing the HCE duties test based on its 
analysis of the provisions of the highly compensated test relative to 
the standard duties test. 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 (now $107,432 annually), they 
were assigned a 15 percent probability of passing the more lenient HCE 
duties test.\327\
---------------------------------------------------------------------------

    \326\ WHD excluded nine that were not relevant to the analysis 
for various reasons. For example, 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.
    \327\ The HCE duties test is used in conjunction with the HCE 
total annual compensation requirement 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.

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

[[Page 32896]]

Table 3--Probability Worker in Category Passes the Duties Tests
[GRAPHIC] [TIFF OMITTED] TR26AP24.146


[[Page 32897]]


    The occupations identified in GAO's 1999 report map to an earlier 
occupational classification scheme (the 1990 Census occupational 
codes).\328\ For this final rule, the Department used occupational 
crosswalks to map the previous occupational codes to the 2018 Census 
occupational codes, which are used in the CPS MORG 2021 through 2023 
data. 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.
---------------------------------------------------------------------------

    \328\ Census occupation codes were also updated in 2002 and 
2010. 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.
---------------------------------------------------------------------------

    These codes provide information on the likelihood that an employee 
met the duties tests, but they do not identify which workers in the CPS 
MORG met the duties test. For example, for every ten public relations 
managers, between five and nine are assumed to meet the standard duties 
test (based on probability category 2). However, it is unknown which of 
these ten workers are exempt; therefore, for the purposes of producing 
an estimate, the Department must assign a status to 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.\329\
---------------------------------------------------------------------------

    \329\ 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 rule). 
Therefore, the gamma model and the linear model would produce 
similar results for highly compensated workers. See 69 FR 22204-08, 
22215-16.
---------------------------------------------------------------------------

    The Department estimated the probability of qualifying for the 
standard exemption for each worker as a function of both earnings and 
the occupation's exempt probability category using a gamma 
distribution.\330\ 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.\331\ For details, see 
Appendix A (in the rulemaking docket).
---------------------------------------------------------------------------

    \330\ 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).
    \331\ 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.
---------------------------------------------------------------------------

    As previously discussed in section V.B.5, some commenters 
challenged the Department's use of its probability codes to determine 
whether a worker meets the duties test. The Department acknowledges 
that the probability codes used to determine the share of workers in an 
occupation who are EAP exempt are 25 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 reviewed O*NET \332\ 
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.\333\ The 
2019 final rule also used these probability codes and likewise found 
that these codes are the best available methodology to accurately 
estimate exemption status.\334\
---------------------------------------------------------------------------

    \332\ The O*NET database contains hundreds of standardized and 
occupation-specific descriptors. See https://www.onetcenter.org.
    \333\ 81 FR 32459.
    \334\ 84 FR 51259.
---------------------------------------------------------------------------

    The Department estimates that of the existing 53.5 million salaried 
white-collar workers considered in the analysis, 37.9 million currently 
qualify for the EAP exemption.
6. Potentially Affected Exempt EAP Workers
    The Department excluded some of the current EAP exempt workers from 
further analysis because the final rule will not affect them. 
Specifically, the Department excluded 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 37.9 million workers 
who were EAP exempt, 8.1 million, or 21.4 percent, were expected to be 
in named occupations.

[[Page 32898]]

Thus, the changes to the standard salary level and HCE compensation 
tests would not affect these workers. The 29.7 million EAP exempt 
workers remaining in the analysis are referred to in this final rule as 
``potentially affected'' (17.8 percent of all workers).
    Based on analysis of the occupational codes and CPS earnings data 
(described above), the Department has concluded there are 29.7 million 
potentially affected EAP workers.\335\
---------------------------------------------------------------------------

    \335\ Of these workers, approximately 16.5 million pass only the 
standard test, 12.8 million pass both the standard and the HCE 
tests, and 446,600 pass only the HCE test.
---------------------------------------------------------------------------

Figure 2--Exemption Status and Number of Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.147

    As shown in Figure 2 above, 8.1 million of the 53.5 million 
salaried white-collar workers are in named occupations and will not be 
affected by a change in the earnings requirements. The Department also 
estimates that of the remaining 45.4 million salaried white-collar 
workers, about 12.7 million earn below the Department's new standard 
salary level of $1,128 per week and about 32.7 million earn above the 
Department's new salary level. Thus, approximately 28 percent of 
salaried white-collar employees earn below the new salary level, 
whereas approximately 72 percent of salaried white-collar employees 
earn above the salary level and will have their exemption status turn 
on their job duties.
7. Number of Affected EAP Workers
    The Department estimated that the increase in the standard salary 
level from $684 per week to $1,128 per week will affect 4.0 million 
workers in Year 1 (of these 4.0 million affected employees, 1.8 million 
earn less than the long test salary level ($942)).\336\ The Department 
estimated that the increase in the HCE annual compensation level from 
$107,432 to $151,164 will impact 292,900 workers (Figure 3).\337\ In 
total, the Department expects that 4.3 million workers out of the 29.7 
million potentially affected workers will be affected in Year 1. This 
estimate of 4.3 million affected workers represents only approximately 
10 percent of all salaried white-collar workers who are not in named 
occupations (45.4 million).
---------------------------------------------------------------------------

    \336\ See section VII.C.8 (Alternative 2). As discussed in 
section V.B, such employees were always excluded from the EAP 
exemption prior to 2019, either by the long test salary level 
itself, or under the 2004 rule salary level, which was equivalent to 
the long test salary level. The remaining 2.2 million of these 
affected employees earn between the long test salary level and the 
Department's new standard salary level.
    \337\ This group includes workers who may currently be nonexempt 
under more protective state EAP laws and regulations, such as some 
workers in Alaska, California, Colorado, Maine, New York, 
Washington, and Wisconsin.
---------------------------------------------------------------------------

    As illustrated in Figure 1 above, this final rule affects a 
specific and small portion of all employed workers. In particular, the 
number of affected workers is 2.6% of total employed workers in 2023 
and represents about 8 percent of all white-collar salaried workers 
(including workers in named occupations). While Figure 1 provides a 
snapshot of the impacts of this rule in the context of the broader 
labor market of 2023, it may also be helpful to understand how the 
labor market has grown since the Department first introduced a one-test 
system in 2004. Broadly, since 2004 the size of the labor force and the 
white-collar workforce has grown considerably. Between 2004 and 2023, 
total employment grew by 21.8 million, with employment increasing by 
nearly 10 million since 2016 and 3.5

[[Page 32899]]

million since 2019.\338\ Over this period, the size of the white-collar 
workforce has also increased considerably. In 2004, the total number of 
white-collar workers who were subject to the Part 541 regulations, 
including the salary level test, was 31.7 million. By 2016 it had 
reached 37.4 million; in 2019 it was 39.8 million; and in 2023 it was 
nearly 45.4 million.
---------------------------------------------------------------------------

    \338\ Employment status of the civilian noninstitutional 
population, 1953 to date. BLS Current Population Survey. https://www.bls.gov/cps/cpsaat01.htm.
---------------------------------------------------------------------------

Figure 3--Pie Chart of Potentially Affected Employees and Their 
Affected Status
[GRAPHIC] [TIFF OMITTED] TR26AP24.148

    Several commenters stated that the Department's estimates of 
affected workers were incorrect because of the application of the 
probability codes. For example, NCFC stated that ``the Department's 
impact calculations rely on outdated and flawed data'' because the 
``Department's predictions as to the probability of employees passing 
the duties test are based on a 1999 study . . . which itself relied 
upon information provided by DOL in the 1990s--more than three decades 
ago.'' AFPI further added that since the Department's probability codes 
were developed, ``occupational codes have changed; the Part 541 duties 
tests have changed; and litigation has resulted in thousands of court 
decisions finding employees to be exempt or non-exempt.'' Similarly, 
NRF included a report by Oxford Economics stating that there have been 
numerous economics changes since 1998, ``includ[ing] increases in 
automation, virtual work, computerized scheduling, and the effects of a 
global pandemic.'' \339\ The Oxford Economics report also stated that 
``if the relationship between salaried [status] and EAP exemption 
status is tighter than the [Department] . . . assumes,'' the number of 
affected workers could be as high as 7.2 million. AFPI asserted that 
approximately ``7.5 million employees would be non-exempt for the first 
time based on salary alone[.]'' Rachel Greszler stated that the correct 
figure is as high as 12.3 million workers.
---------------------------------------------------------------------------

    \339\ The Oxford Economics report also noted that there has been 
a 6-percent rise in ``the share of salaried workers in the economy . 
. . since 1998.'' However, any increase in the number of salaried 
workers does not have any bearing on the validity of the probability 
codes, which the Department uses to estimate whether a worker passes 
the duties test. Being paid on a salary basis is one of the three 
tests for exemption, see Sec.  541.602(a), and is distinct from the 
duties test. Accordingly, the Department only applies the 
probability codes to nonhourly workers--whom, as discussed above, 
the Department considers to be an appropriate proxy for workers paid 
on a salary basis.
---------------------------------------------------------------------------

    The Department disagrees with commenters that challenged its use of 
its probability codes. The Department has used its probability codes to 
estimate the number of workers who meet the duties test in its 2004, 
2016, and 2019 rules. The Department reiterates that these codes have 
been updated and mapped onto current occupational codes, as explained 
above. As also noted above, the standard duties test is not 
substantively different from the former short duties tests reflected in 
the codes. In consequence, the probability codes remain relevant and 
are currently the most accurate way to estimate the probability of a 
worker satisfying the duties test. Furthermore, while several 
occupations have changed over time, modifications affecting specific 
occupations would only affect the validity of these probability codes 
if they systematically affected an occupation's probability of 
performing exempt tasks. In contrast, other changes, such as employees 
performing remotely the job duties they once performed in-person, do 
not affect the validity of these probabilities. Additionally, the 
probability codes can still effectively predict whether employees in 
new industries will meet the duties test insofar as these occupations 
existed in other industries. Finally, as previously noted, the 
Department used the O*NET database to confirm the appropriateness of 
the probability codes in 2016. Commenters did not provide a basis for 
concluding that the Department's 2016 evaluation is obsolete or that 
the probability codes no longer provide the most reasonable basis for 
estimating the population of affected workers.

[[Page 32900]]

    The Department also does not agree with commenters that stated that 
it underestimated the number of affected workers in the NPRM. As 
discussed above, see section V.B.5.iii, commenters that asserted the 
number of affected workers could be much higher generally referenced 
estimates of the number of workers earning between the current salary 
level and the proposed salary level, regardless of whether they passed 
the duties test, and then posited that up to that many workers (e.g., 
7.2 million, 7.5 million, or 12.3 million) could be affected. The 
position that all workers earning below the new salary level, 
regardless of their duties, will be affected by the new salary level 
fails to account for the fact that that millions of these workers are 
already nonexempt because they do not meet the duties test.

C. Effects of Revised Salary and Compensation Levels

1. Overview and Summary of Quantified Effects
    The Department is setting the standard salary level using the 35th 
percentile of earnings of full-time salaried workers in the lowest-wage 
Census region (currently the South) and setting the HCE compensation 
level at the annualized weekly earnings of the 85th percentile of full-
time salaried workers nationwide. In both cases the Department used 
2023 CPS data to calculate the levels.\340\
---------------------------------------------------------------------------

    \340\ Full-time is defined as 35 or more hours per week.
---------------------------------------------------------------------------

    Transfers both from employers to employees and between employees, 
and direct employer costs, will depend on how employers respond to this 
rulemaking. Employer response is expected to vary by the 
characteristics of the affected EAP workers. Assumptions related to 
employer responses are discussed below.
    Table 4 presents the estimated number of affected workers, costs, 
and transfers associated with increasing the standard salary and HCE 
compensation levels. The Department estimated that the direct employer 
costs of this rule will total $1.4 billion in the first year, with 10-
year annualized direct costs of $802.9 million per year using a 7 
percent discount rate.
    In addition to these direct costs, this rule will transfer income 
from employers to employees. Estimated Year 1 transfers will equal $1.5 
billion, with annualized transfers of $1.5 billion per year using the 7 
percent real discount rates and $1.6 billion using the 3 percent 
discount rate. Potential employer costs due to reduced profits and 
additional hiring were not quantified but are discussed in section 
VII.C.3.v. These estimates encompass in Year 1 both the impact of the 
initial update to the earnings thresholds and the change in those 
thresholds that will become applicable 6 months later.\341\
---------------------------------------------------------------------------

    \341\ The Department estimates the initial update to the 
standard salary level will result in 959,000 affected workers 
earning between $684 and $844 per week. The Department estimates the 
adjustment and managerial costs for this update will be $202.3 
million and transfers will be $204.3 million. For the initial update 
to the HCE total annual compensation threshold, the Department 
estimates that the update will result in 223,000 affected workers, 
$58.7 million in adjustment and managerial costs, and $164.5 million 
in transfer payments.

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

[[Page 32901]]

Table 4--Summary of Affected Workers and Regulatory Costs and Transfers
[GRAPHIC] [TIFF OMITTED] TR26AP24.149

2. Characteristics of Affected EAP Workers
    Table 5 presents the number of affected EAP workers, the mean 
number of overtime hours they work per week, and their average weekly 
earnings. The Department considered two types of overtime workers in 
this analysis: regular overtime workers and occasional overtime 
workers.\342\ 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.
---------------------------------------------------------------------------

    \342\ Regular overtime workers were identified in the CPS MORG 
with variable PEHRUSL1. Occasional overtime workers were identified 
with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------

    The 4.0 million workers affected by the combined effect of the 
initial update and the subsequent application of the new standard 
salary level work on average 1.6 usual hours of overtime per week and 
earn on average $948 per week.\343\ However, most of these workers 
(about 86 percent) usually do not work overtime. The 14 percent of 
affected workers who usually work overtime average 11.1 hours of 
overtime per week. In a representative week, roughly 135,000 (or 3.3 
percent) of the 4.0 million affected workers occasionally work 
overtime; they averaged 8.5 hours of overtime in the weeks they worked 
overtime.\344\ Finally, 20,000 (or 0.5 percent) of all workers affected 
by the increase in the standard salary level earn less than the minimum 
wage. \345\
---------------------------------------------------------------------------

    \343\ CPS defines ``usual hours'' as hours worked 50 percent or 
more of the time.
    \344\ 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 are 
representative of other weeks (even though a different group of 
workers would be identified as occasional overtime workers in a 
different week).
    \345\ A small proportion (0.5 percent) of all 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 total weekly earnings divided 
by total weekly hours worked. For example, workers earning the $684 
per week standard salary level would earn less than the Federal 
minimum wage if they work 95 or more hours in a week ($684 / 95 
hours = $7.20 per hour).

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

[[Page 32902]]

    The 292,900 workers affected by the change in the HCE compensation 
level average 2.9 hours of overtime per week and earn an average of 
$2,397 per week ($124,668 per year). About 73 percent of these workers 
do not usually work overtime, while the 27 percent who usually work 
overtime average 11.0 hours of overtime per week. Among the 2.6 percent 
who occasionally work overtime, they averaged 8.2 hours in the weeks 
that they worked overtime.
    Although most affected workers who typically do not work overtime 
will be unlikely to experience significant changes in their daily work 
routine, those who regularly work overtime may experience significant 
changes. Moreover, affected EAP workers who routinely work overtime and 
earn less than the minimum wage will be most likely to experience 
significant changes. Impacts on employee hours and earnings are 
discussed further in section VII.C.4.

Table 5--Number of Affected EAP Workers, Mean Overtime Hours, and Mean 
Weekly Earnings, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.150

    This section characterizes the population of affected workers by 
industry, occupation, employer type, location of residence, and 
demographics. The Department chose to provide as much detail as 
possible while maintaining adequate sample sizes.
    Table 6 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 professional and 
business services (827,000), while the industry with the highest 
percentage of EAP workers affected is leisure and hospitality (about 24 
percent). The occupational category with the most affected EAP workers 
is management, business, and financial (2.0 million), while the 
occupation category with the highest percentage of EAP workers affected 
is farming, fishing, and forestry (about 45 percent).
    Potentially affected workers in private-sector nonprofits are more 
likely to be affected than workers in private-sector for-profit firms 
(18.9 percent compared with 13.6 percent). However, as discussed in 
section VII.B.3, the estimates of workers subject to the FLSA include 
workers employed by enterprises that are not subject to the FLSA under 
the law's enterprise coverage requirements because there is no data set 
that would adequately inform an estimate of the size of this worker 
population in order to exclude them from these estimates. 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 FLSA enterprise coverage only 
revenue derived from business operations, not charitable activities, is 
included.

[[Page 32903]]

Table 6--Estimated Number of Workers and Whether They Will Be Affected 
by the New Earnings Thresholds, by Industry and Occupation, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.151


[[Page 32904]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.152

    Table 7 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 
(1.9 million), but the South's percentage of potentially affected 
workers who are estimated to be affected is relatively small (17.9 
percent). Although 90 percent of affected EAP workers will reside in 
MSAs (3.92 of 4.34 million), so do a corresponding 88 percent of all 
workers subject to the FLSA.\346\
---------------------------------------------------------------------------

    \346\ 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. The Department believes the salary level included in this 
rule is appropriate for these lower-wage sectors, in part because the 
methodology uses earnings data from the lowest-wage census region. 
Moreover, the duties test will continue to determine exemption status 
for the vast majority of workers in low-wage regions and industries 
under the rule. For example, as displayed in Table 7, 82.1 percent of 
potentially affected EAP workers in the South Census Region earn more 
than the new salary levels and thus will not be affected by the rule 
(8.59 / 10.46). Effects by region and industry are considered in 
section VII.C.7.

[[Page 32905]]

Table 7--Estimated Number of Workers and Whether They Will Be Affected 
by the New Earnings Thresholds, by Region, Division, and MSA Status, 
Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.153

    Table 8 presents the distribution of affected EAP workers by 
demographics. Potentially affected women, Black workers, Hispanic 
workers, young workers, and workers with less education are all more 
likely to be affected than other worker types. This is because EAP 
exempt workers with these characteristics are more likely to earn 
within the affected standard salary range than EAP exempt workers 
without these characteristics. For example, of potentially affected 
workers, women tend to have lower salaries and are therefore more 
likely to be in the affected range. Median weekly earnings for 
potentially affected women are $1,709 compared to $2,108 for men.
    Among potentially affected workers, certain demographic groups--
women, Black workers, Hispanic workers, young

[[Page 32906]]

workers, and workers with less education--have an increased likelihood 
of being affected by this rulemaking, even though workers in these 
demographic groups are less likely to be EAP exempt in the first place. 
Therefore, as a share of all workers, not just potentially affected 
workers, workers in these demographic groups may not be more likely to 
be affected. For example, when looking at potentially affected workers, 
21.7 percent of potentially affected Black workers are affected, while 
only 14.5 percent of potentially affected white workers are affected. 
However, when looking at total workers, about the same shares of total 
Black and total white workers would be affected (2.9 percent of Black 
workers and 3.0 percent of white workers).

[[Page 32907]]

Table 8--Estimated Number of Workers and Whether They Will Be Affected 
by the New Earnings Thresholds, by Demographics, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.196


[[Page 32908]]


3. Costs
i. Summary
    The Department quantified three direct costs to employers in this 
analysis: (1) regulatory familiarization costs; (2) adjustment costs; 
and (3) managerial costs. These are the same costs quantified in the 
2016 and 2019 rulemakings. The Department estimated that in Year 1, 
regulatory familiarization costs will be $451.6 million, adjustment 
costs will be $299.1 million, and managerial costs will be $685.5 
million (Table 9). Total direct employer costs in Year 1 will be $1.4 
billion. Recurring costs are projected in section VII.C.10. The 
Department discusses costs that are not quantified in section 
VII.C.3.v.

Table 9--Summary of Year 1 Direct Employer Costs (Millions)
[GRAPHIC] [TIFF OMITTED] TR26AP24.154

ii. Regulatory Familiarization Costs
    This rulemaking 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 spent 
reviewing the rule. The Department generally used the same methodology 
for calculating regulatory familiarization costs that it used in the 
NPRM and recent rulemakings.
    Regulatory familiarization costs can be calculated at an 
establishment level or at a firm level. 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 and firms at the time this 
rule was drafted are from the 2021 Statistics of U.S. Businesses 
(SUSB), which reports 8.15 million establishments with paid 
employees.\347\ Additionally, there were an estimated 90,126 state and 
local governments in 2017, the most recent data available.\348\ The 
Department thus estimated 8.24 million entities (the term ``entities'' 
is used to refer to the combination of establishments and governments).
---------------------------------------------------------------------------

    \347\ Statistics of U.S. Businesses 2021, https://www.census.gov/programs-surveys/susb.html.
    \348\ 2017 Census of Governments. Table 1, https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

    The Department assumes that all entities will incur some regulatory 
familiarization costs, even if they do not employ exempt workers, 
because all entities will need to confirm whether this rulemaking 
affects their employees. Entities with more affected EAP workers will 
likely spend more time reviewing the regulation than entities with 
fewer or no affected EAP workers (since a more careful reading of the 
regulation will probably follow the initial decision that the entity is 
affected). However, the Department did not know the distribution of 
affected EAP workers across entities, so it used an average cost per 
entity.
    The Department believes an average of 1 hour per entity is 
appropriate because the regulated community is likely to be familiar 
with the content of this rulemaking. EAP exemptions have existed in one 
form or another since 1938, and a final rule was published as recently 
as 2019. 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 changes in this rulemaking are setting a new standard 
salary level and a new HCE compensation level for exempt workers and 
establishing a mechanism for keeping these thresholds up to date. The 
changed regulatory text is only a few pages, and the Department will 
provide summaries and other compliance assistance materials that will 
help inform employers that are implementing the final rule. The 
Department thus believes, consistent with its approach in the 2016 and 
2019 rules, that 1 hour is an appropriate average estimate for the time 
each entity will spend reviewing the changes made by this rulemaking. 
Additionally, the estimated 1 hour for regulatory familiarization 
represents an assumption about the average for all entities in the 
U.S., even those without any affected or exempt workers, which are 
unlikely to spend much time reviewing the rulemaking. Some businesses, 
of course, will spend more than 1 hour, and some will spend less.
    The Department's analysis assumes that compensation, benefits, and 
job analysis specialists (SOC 13-1141) with a median wage of $32.59 per 
hour will review the rulemaking.349 350 The Department also 
assumed that benefits are paid at a rate of 45 percent of the base wage 
\351\ and overhead costs are paid at a rate of 17 percent of the base 
wage,\352\ resulting in an hourly rate of

[[Page 32909]]

$54.82 in 2023 dollars.\353\ The Department thus estimates regulatory 
familiarization costs in Year 1 would be $451.6 million ($54.82 per 
hour x 1 hour x 8.24 million entities).
---------------------------------------------------------------------------

    \349\ OEWS 2022. Available at: https://www.bls.gov/oes/current/oes131141.htm.
    \350\ Previous related rulemakings used the CPS to estimate wage 
rates. The Department is using OEWS data now to conform with 
standard practice for the Department's economic analyses.
    \351\ The benefits-earnings ratio is derived from BLS's Employer 
Costs for Employee Compensation (ECEC) data using variables 
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate 
includes some fixed costs such as health insurance. As of when this 
final rule was drafted, 2023 ECEC data were available only through 
the third quarter, so the Department continued to use the 2022 full-
year data to calculate the benefits share.
    \352\ The Department believes that the overhead costs associated 
with this rulemaking 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, the Department has included an 
overhead rate of 17 percent.
    \353\ The 2022 fully-loaded hourly wage was adjusted to 2023 
using the CPI-U.
---------------------------------------------------------------------------

    The Department also conducted a sensitivity analysis. First, 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, 6.4 
million, would result in a reduced regulatory familiarization cost 
estimate of $350.0 million in Year 1.
    Some commenters representing employer interests stated that rule 
familiarization costs are underestimated. See, e.g., ABC; IEC; Job 
Creators Network Foundation; NSBA; SBA Office of Advocacy. For 
instance, ABC commented that ``compliance with the proposal will not be 
as simple as reviewing the salary level and making a one-time 
decision'' and that ``82% of recently surveyed ABC members . . . 
responded that reviewing the final rule would take three hours or 
longer, with 47% saying it would take five hours or more.''
    While the Department acknowledges that some employers will spend 
more than an hour reviewing the rule, the estimate of 1 hour for rule 
familiarization is an assumption about the average representing all 
establishments, even those without any affected or exempt workers. 
Those establishments will likely not need to spend any time reviewing 
the rule. Employers in industries with more affected workers may spend 
more time reviewing the rule, but across all industries, the Department 
believes that 1 hour continues to be appropriate. The Department used 
the same 1 hour estimate in its 2016 and 2019 rules,\354\ and the 
Department did not receive comments with concrete data that is 
representative across all industries from which to conclude that its 
average estimate of one hour is incorrect. The Department continues to 
believe that businesses are already familiar with this rulemaking. The 
EAP exemptions have existed for a long time, and recent rules were 
published in 2016 and 2019. This rulemaking sets a new standard salary 
level and a new HCE compensation level for exempt workers and 
establishes a mechanism for keeping these thresholds up to date. 
However, this rulemaking does not fundamentally change the existing 
method for determining whether an employee qualifies for the EAP 
exemption. To the extent commenters' familiarization cost concerns 
related to time needed to comply with the rule, these costs are 
addressed separately under the Department's managerial and adjustment 
cost estimates. As for concerns relating to the hourly wage rate used 
to calculate rule familiarization costs, the Department notes that it 
relies on the standard occupation used in previous WHD and DOL 
rulemakings.
---------------------------------------------------------------------------

    \354\ 81 FR 32474; 84 FR 51266.
---------------------------------------------------------------------------

iii. Adjustment Costs
    This rulemaking will also impose direct costs on establishments 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. For each affected worker who works 
overtime, an employer will need to decide whether they will increase 
their salary, adjust their hours, or some combination of the two. 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 is 
$54.82 per hour (as explained above).
    The Department estimated that it will take establishments an 
average of 75 minutes per affected worker to make the necessary 
adjustments. This is the same time estimate as used in the 2016 and 
2019 rulemakings, as well as in the NPRM. Little applicable data were 
identified from which to estimate the amount of time required to make 
these adjustments. The estimated number of affected EAP workers in Year 
1 due to the change in the standard salary level to $1,128 per week and 
the HCE level to $151,164 per year is 4.3 million (as discussed in 
section VII.B.7). However, because the compensation thresholds will 
undergo an initial update on July 1, 2024 and then an increase using 
the new methodologies 6 months later, employers may have additional 
adjustment costs when the standard salary level is initially updated to 
$844 per week and the HCE level is initially updated to $132,964.
    Some employers may make two adjustments for affected workers--one 
at the initial update to the standard salary level and then again with 
the salary level adjustment 6 months later. To estimate the costs 
associated with multiple adjustments, the Department assumed that at 
the initial update, some employers could experience additional 
adjustment costs for the affected workers who will have their weekly 
earnings increased to $844 per week. In order to estimate the number of 
affected workers who would have their weekly earnings increased to $844 
per week, the Department looked at EAP exempt workers earning at least 
$684 per week but less than $844 per week. Using the methodology laid 
out in the transfer analysis in section VII.C.4.iii, the Department 
then estimated the share of these workers who regularly work overtime 
and would remain exempt, because it is less expensive for the employer 
to pay the updated salary level than to pay overtime (described in that 
section as Type 4 workers). The Department estimated that there would 
be 27,692 workers who earn between $684 and $844 and would have their 
earnings increased at the initial update. The Department does not have 
data to determine how many employers would increase earnings twice for 
workers earnings between $684 and $844. For these workers, unless they 
are working large numbers of overtime hours, it is likely to be more 
economically beneficial for employers to make other changes in response 
to the rule instead of increasing their salary to $1,128 a week, such 
as limiting overtime hours worked. Despite this, in case there are 
limited cases in which workers do have their earnings increased twice, 
the Department has included these additional adjustment costs in the 
total adjustment cost estimate. Therefore, total estimated Year 1 
adjustment costs would be $299.1 million ($54.82 x 1.25 hours x 
(4,337,469 + 27,692 workers)).
    The Department used a time estimate per affected worker, rather 
than per establishment, because the distribution of affected workers 
across establishments is unknown. However, it may be helpful to present 
the total time estimate per establishment based on a range of affected 
workers. If an establishment has five affected workers, the time 
estimate for adjustment costs is 6.25 hours. If an establishment has 25 
affected workers, the time estimate for adjustment costs is 31.25 
hours. And if an establishment has 50 affected workers, the time 
estimate for adjustment costs is 62.5 hours.
    A reduction in the cost to employers of determining employees' 
exemption status may partially offset adjustment costs. Currently, to 
determine whether

[[Page 32910]]

an employee is exempt, employers must apply the duties test to salaried 
workers who earn $684 or more per week. However, under the final rule, 
firms will no longer be required to apply the duties test to the 8.7 
million employees earning above the current standard salary level of 
$684 and less than the new standard salary level of $1,128. While this 
will be a clear cost savings to employers for these employees, the 
Department did not estimate the potential size of this cost savings.
    Some commenters representing employer interests stated that the 
Department underestimated adjustment costs. See, e.g., NAHB; NSBA; 
PPWO. NAHB, for instance, stated that ``the Department's economic 
analysis,'' including its estimate of ``75 minutes per affected worker 
for adjustment,'' ``dramatically understate[d] the . . . cost burden on 
employers,'' and PPWO stated that adjustment costs (and regulatory 
familiarization and managerial costs) were ``all dramatically 
understated.'' SBA Advocacy and Seyfarth Shaw asserted that the 
Department underestimated adjustment costs for small businesses, with 
both commenters stating that smaller employers would be more likely 
than larger ones to hire outside assistance to make needed adjustments. 
See also NFIB (``The NPRM underestimates compliance costs for small 
businesses[.]''). Some commenters asserted that the Department failed 
to account for adjustment costs that employers would need to incur 
beyond the first year the rule is in effect, such as costs associated 
with determining whether an employee remains exempt, reclassifying 
newly-exempt employees as hourly, and making other adjustments to time 
and attendance systems, given that the earnings thresholds for 
exemption will be updated on a triennial basis. See PPWO; The 4As. 
Additionally, some commenters expressed particular concern with 
adjustment costs stemming from the proposed increase in the HCE 
compensation level, noting that for workers who were previously exempt 
under the HCE test but earn below the proposed HCE compensation level, 
employers would need to evaluate the worker's duties to determine 
whether they remain exempt under the standard test. See, e.g., HR 
Policy Association; NAM; PPWO. NAM stated that ``[a]cross the 
manufacturing sector, the change in the HCE threshold may be as 
difficult and consequential as the proposed increases to the standard 
salary threshold.''
    The Department is retaining its estimate of adjustment costs as 75 
minutes per affected worker in the final rule. This estimate is 
consistent with the Department's estimate in the 2016 and 2019 
rules.\355\ The Department notes that the 75-minute-per-worker average 
time estimate is an assumption about the average across all workers, 
and it believes this estimate takes into account adjustment time for 
workers affected by the new standard salary level and the smaller 
portion of workers affected by the new HCE total compensation 
threshold. This estimate assumes that the time is focused on analyzing 
more complicated situations. For example, employers are likely to incur 
relatively low adjustment costs for some workers, such as the 69 
percent of affected workers who work no overtime (described below as 
Type 1 workers). This leaves more time for employers to spend on 
adjustment costs for the 31 percent of affected workers who work 
overtime either occasionally or regularly. To demonstrate, if the 
aggregate time spent on adjustments (75 min x 4.37 million workers) was 
spread out over only workers who work overtime, then the time estimate 
is 4.0 hours per worker. Lastly, the Department did not receive any 
comments with data providing a different estimate for the Department to 
rely on.
---------------------------------------------------------------------------

    \355\ See 84 FR 51267; 81 FR 32475.
---------------------------------------------------------------------------

    Contrary to commenters that stated that the Department failed to 
take into account adjustment costs beyond the first year the rule is in 
effect, the Department's estimated adjustment costs include costs in 
all years for newly affected workers. The Department limits adjustment 
costs in projected years to newly affected workers because there is no 
need to ``adjust'' for workers who are already overtime eligible (due 
to a prior adjustment of the salary level) when the salary level is 
updated again. Table 26 provides adjustment (and other) cost 
projections in future years due to the updating mechanism.
iv. Managerial Costs
    If an employee becomes nonexempt 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 paying that 
employee overtime. For example, the manager of a newly nonexempt 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) become 
nonexempt, overtime-protected and (2) either regularly work overtime or 
occasionally work overtime, but on a predictable basis--an estimated 
911,000 workers (see Table 13 and accompanying explanation). Consistent 
with its approach in its 2019 rule and the NPRM, the Department assumed 
that management would spend an additional ten minutes per week 
scheduling and monitoring each affected worker expected to become 
nonexempt, overtime-eligible as a result of this rule, and whose hours 
would be 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 
151,800 hours ((10 minutes / 60 minutes) x 911,000 workers).
    The median hourly wage in 2022 for a manager was $51.62.\356\ 
Together with a 45 percent benefits rate and a 17 percent overhead 
cost, this totals $86.82 per hour in 2023 dollars.\357\ Thus, the 
estimated Year 1 managerial costs total $685.5 million (151,835 hours 
per week x 52 weeks \358\ x $86.82/hour). Although

[[Page 32911]]

the exact magnitude will vary each year with the number of affected EAP 
workers, the Department anticipates that employers would incur 
managerial costs annually.
---------------------------------------------------------------------------

    \356\ OEWS 2022. Available at: https://www.bls.gov/oes/current/oes110000.htm. This may be an overestimate of the wage rate for 
managers who monitor workers' hours because (1) it includes very 
highly paid employees such as CEOs, and (2) some lower-level 
supervisors are not counted as managers in the data.
    \357\ The benefits ratio is derived from BLS' 2022 Employer 
Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D. The fully-loaded hourly 
wage rate was inflated to 2023 dollars using the BLS CPI-U.
    \358\ Fifty-two weeks may be an overestimate of the amount of 
time that an employer would incur management costs in Year 1. For 
affected workers who earn below $1,128, but at least $844, their 
employers may not incur additional managerial costs until January 1, 
2025 if they decide to wait to make changes in response to the rule. 
Therefore, these managerial costs would not occur for the full 52 
weeks of the year. Because the Department does not know when 
employers would make changes in response to the rule, this estimate 
of 52 weeks is used for the entire population.
---------------------------------------------------------------------------

    Some commenters expressed concerns that the regulation will 
increase managerial costs, with some specifically asserting that the 
Department's estimate was too low, see, e.g., PPWO, SBA Advocacy, NCFC, 
IEC. Commenter concerns with managerial costs were often tied to the 
additional costs they asserted would result from tracking the work 
hours of newly nonexempt employees. See, e.g., 16 Republication 
Representatives; APLU. Commenters specifically asserted tracking hours 
of currently exempt employees would increase human resources paperwork 
and technology costs for their companies. See, e.g., The Chamber of 
Commerce for Greater Philadelphia; John C. Campbell Folk School.
    The Department continues to believe that 10 minutes per worker per 
week is an appropriate managerial cost estimate. Currently, EAP exempt 
employees account for about 24 percent of total employment; as such, 
the Department expects that many employers of EAP exempt workers also 
employ nonexempt workers. Those employers already have in place 
recordkeeping systems and standard operating procedures for ensuring 
employees only work overtime under employer-prescribed circumstances. 
Thus, such systems generally do not need to be created or acquired for 
managing formerly exempt EAP employees. 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 if 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.\359\ The Department 
believes its estimate, which tracks the approach taken in its 2019 
rule, accurately predicts management costs, including costs firms may 
incur for monitoring and managing the hours of formerly exempt 
employees.
---------------------------------------------------------------------------

    \359\ See Fact Sheet #21: Recordkeeping Requirements under the 
Fair Labor Standards Act, available at: https://www.dol.gov/agencies/whd/fact-sheets/21-flsa-recordkeeping.
---------------------------------------------------------------------------

v. Other Potential Costs
    In addition to the costs discussed above, commenters raised other 
potential costs that could not be quantified. These potential costs are 
discussed qualitatively below.
(a) Reduced Scheduling Flexibility
    Several commenters claim that this rule would restrict employee 
workplace flexibility, such as remote work and flexible scheduling. 
See, e.g., HR Policy Association; NAM; NRF; SBA; Chamber. For example, 
the Chamber stated, ``workers will lose their ability to work from home 
and the flexibility that they have enjoyed in salaried positions, 
particularly since the COVID-19 pandemic changed the face of the 
American workplace in 2020.'' However, commenters did not provide any 
specific evidence to support this claim. The Department notes that even 
those workers that are paid on an hourly basis can still take advantage 
of workplace flexibilities such as remote work. According to the CPS 
data, of all workers who reported working at home any time in the past 
week, 74.2 percent of them were categorized as hourly workers.
    To the extent that some employers spend more time monitoring 
nonexempt workers' hours than exempt workers' hours, some employers 
could respond to this rule by limiting the ability of newly nonexempt 
workers to adjust their schedules. However, 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 and so 
monitoring their hours as newly nonexempt workers should not be unduly 
burdensome. A study by Lonnie Golden found, using data from the General 
Social Survey (GSS), that ``[i]n general, salaried workers at the lower 
(less than $50,000) income levels don't have noticeably greater levels 
of work flexibility that they would `lose' if they become more like 
their hourly counterparts.'' \360\ Because there is little data or 
literature on these potential costs, the Department did not quantify 
potential costs regarding scheduling flexibility.
---------------------------------------------------------------------------

    \360\ Golden, L. (2014). Flexibility and Overtime Among Hourly 
and Salaried Workers. Economic Policy Institute. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597174.
---------------------------------------------------------------------------

    Organizations such as the American Beverage Licensees and 
educational institutions in CUPA-HR and APLU, also asserted that the 
rule would reduce employer flexibility to allocate work hours based on 
schedules that include non-traditional work hours. The Hinton Rural 
Life Center said that the rule would make it financially unfeasible for 
nonexempt employees to attend specific activities such as ``overnight 
training sessions or marketing events.'' NCFC stated that because of 
the increased attention that must be paid to the hours worked by 
nonexempt employees, they are likely to be at a competitive 
disadvantage with exempt employees in the same role. Under this 
assumption, they asserted that ``many training opportunities'' would 
now require additional compensation if ``those opportunities would put 
the nonexempt employee into an overtime situation,'' and therefore 
``access to those opportunities may be limited'' for nonexempt 
employees. The Department notes that if an employer believes that 
training opportunities are sufficiently important, it can ensure 
employees attend the trainings during their 40-hour workweek or pay the 
overtime premium where training attendance causes the employee to work 
over 40 hours in a workweek. Given this, and because there is no data 
and literature to quantify any potential costs to workers, the 
Department did not quantify these costs.
(b) Preference for Salaried Status
    Many commenters contended that the employers of some of the workers 
who will become nonexempt as a result of the rule could change their 
pay basis to hourly status despite the employee preferring to remain 
salaried. See, e.g., AHLA; NSBA; SIGMA. Some commenters, such as SIGMA, 
stated that conversion of employees to hourly status that will 
negatively affect morale, as employees may perceive the change as a 
demotion or a loss of status because of, among other reasons, the lost 
flexibility associated with salaried status. Conversely, commenters 
such as the Coalition of State AGs and the Family Caregiving Coalition 
asserted that the proposed rule would increase employee satisfaction 
and retention, improve work-life balance, reduce stress and health 
problems, and make jobs more attractive to qualified applicants 
primarily because employees will now be compensated for hours worked 
beyond a standard workweek. Notably, a strong majority of the 
individual commenters who said they would be personally affected by the 
proposed rule expressed support for the rule.
    If a worker does prefer to be salaried rather than hourly, then the 
employer changing them from salaried to hourly may impact the worker. 
However, the Department believes that for most

[[Page 32912]]

employees their feelings of importance and worth come not from their 
FLSA exemption status, but from the increased pay, flexibility, fringe 
benefits, and job responsibilities that traditionally have accompanied 
exempt status, and that these factors are not incompatible with 
overtime eligibility. And while research has shown that salaried 
workers (who are not synonymous with exempt workers, but whose status 
is correlated with exempt status) are more likely than hourly workers 
to receive certain benefits, as discussed below, such research 
generally does not control for differences between salaried and hourly 
workers such as education, job title, or earnings.
(c) Reduction in Employer-Provided Benefits
    Several commenters stated that in response to the proposed salary 
level employers would likely decrease employee benefits. See, e.g., 
PPWO; Rachel Greszler. These and similar comments were mostly general 
statements, often listing types of benefits employees may lose. Others 
stated that employees would lose benefits due to being reclassified as 
hourly workers. See, e.g., Independent Women's Forum (IWF); NRF. Some 
commenters stated that these employees would have reductions in their 
ability to earn bonuses or other types of incentive payments, but these 
commenters generally did not discuss the net impact on these employees' 
earnings. See, e.g., NRF. These comments did not provide information 
that would allow the Department to estimate the purported impact of the 
final rule on employee benefits.
    Research has shown that salaried workers are more likely than 
hourly workers to receive benefits such as paid vacation time and 
health insurance \361\ and are more satisfied with their benefits.\362\ 
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.
---------------------------------------------------------------------------

    \361\ 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.
    \362\ Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of 
Employee Benefits Satisfaction. Journal of Business and Psychology, 
7(3), 323-339.
---------------------------------------------------------------------------

    If workers become nonexempt and the employer chooses to pay them on 
an hourly rather than salary basis, this may result in the employer 
reducing the workers' benefits. 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 premium on that 
employee's regular rate for any overtime hours each week.\363\ 
Similarly, employers may continue to provide these workers with the 
same level of benefits as before, whether paid on an hourly or salary 
basis. Lastly, the nature of the market mechanism may be such that 
employers cannot reduce benefits without risking workers leaving, 
resulting in turnover costs to employers. The Department did not 
quantify potential costs regarding reduction in workers' benefits.
---------------------------------------------------------------------------

    \363\ 29 CFR 778.113-114.
---------------------------------------------------------------------------

(d) Increased Prices
    Several commenters such as AAHOA, the Chamber, CUPA-HR, Indiana 
Chamber of Commerce, NAHB, and the National Association of Wholesaler-
Distributors stated that the regulation will result in increased prices 
due to increased employee salaries and other costs to employers. Some 
of these commenters assert that employers increasing their workers' 
salaries to maintain their exempt status would induce a general price 
increase if anticipated wage increases do not result in productivity 
increases. See, e.g., Chamber; NAW. NAHB conducted a survey among its 
members about the proposal, and 50 percent of survey respondents stated 
that finalizing the salary level as proposed would lead them to raise 
home prices, while 25 percent of respondents stated that the change 
would make some projects unprofitable.
    The Department acknowledges that, as discussed in the transfers 
section below, businesses may be able to help mitigate increased labor 
costs following this rulemaking by rebalancing the hours that employees 
are working. Businesses that are unable to rebalance these hours and do 
incur increased labor costs might pass along these increased labor 
costs to consumers through higher prices for goods and services. 
However, because costs and transfers will be, on average, small 
relative to payroll and revenues, the Department does not expect the 
rule to have a significant effect on prices. The Department estimated 
that, on average, costs and transfers make up less than 0.04 percent of 
payroll and 0.006 percent of revenues, although for specific industries 
and firms this percentage may be larger (see Table 24). Therefore, any 
potential change in prices related to costs and transfers from this 
rulemaking would be modest, and the Department notes that commenter 
predictions (such as those in the NAHB survey described above) reflect 
speculation about what will occur in the future and thus may not 
reflect actual economic responses by employers. 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).
    While economic theory suggests that an increase in labor costs in 
excess of productivity gains would lead to increases in prices, much of 
the empirical literature has found that wage inflation does not predict 
price inflation.\364\ For example, Peneva et al. (2015) explore the 
relationship between labor costs and price inflation between 1965 and 
2012, finding that the influence of labor costs on prices has decreased 
over the past several decades and have made a relatively small 
contribution to price inflation in recent years.\365\
---------------------------------------------------------------------------

    \364\ Church, J.D. and Akin, B. (2017). ``Examining price 
transmission across labor compensation costs, consumer prices, and 
finished-goods prices,'' Monthly Labor Review, U.S. Bureau of Labor 
Statistics; Emery, K. & Chang, C. (1996). Do Wages Help Predict 
Inflation?, Federal Reserve Bank of Dallas, Economic Review First 
Quarter 1996. https://www.dallasfed.org/~/media/documents/research/
er/1996/er9601a.pdf; Jonsson, M. & Palmqvist, S. (2004). Do Higher 
Wages Cause Inflation? Sveriges Riksbank Working Paper Series 159. 
http://archive.riksbank.se/Upload/WorkingPapers/WP_159.pdf.
    \365\ Pevena, E.V. and Rudd, J.B. (2015). ``The Passthrough of 
Labor Costs to Price Inflation,'' Finance and Economics Discussion 
Series 2015-042. Washington: Board of Governors of the Federal 
Reserve System. https://dx.doi.org/10.17016/FEDS.2015.042.
---------------------------------------------------------------------------

(e) Reduced Services
    Some commenters expressed concern that, by reducing the number of 
exempt employees, this rulemaking will negatively impact the amount or 
quality of services that employers can provide. See, e.g., ANCOR; Boy 
Scouts of America; Catholic Charities USA; YMCA. The National 
Association of Counties raised similar concerns with respect to county 
governments. A number of colleges, universities, and other higher-
education stakeholders, such as APLU and CUPA-HR, similarly asserted 
that the proposed rule would negatively affect support services for 
students. The Department appreciates that employers in some industries 
have

[[Page 32913]]

less flexibility than others to account for new labor costs and that 
the services provided by such employers could be negatively affected. 
However, the Department believes the effect of the rule on public 
services will be small. The Department acknowledges that some newly 
nonexempt employees who currently 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 some 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, many nonprofits are 
noncovered enterprises because when determining enterprise coverage 
only revenue derived from business operations, not charitable 
activities, is included.
(f) Reduced Profits
    Some commenters asserted that the rule would lead to decreased 
profits. See e.g., Quad Cities Chamber of Commerce, ESEI, DT-Trak 
Consulting. The Department acknowledges that the increased employer 
costs and transfer payments as a result of this 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. Because costs and transfers are, on 
average, small relative to payroll revenues, the Department does not 
expect this rulemaking to have a significant effect on profits.
(g) Hiring Costs
    To the extent that firms respond to this rule by reducing overtime 
hours, they may do so by spreading hours to other workers, including 
current workers employed for fewer than 40 hours per week by that 
employer, current workers who remain exempt, and newly hired workers. 
If new workers are hired to absorb these transferred hours, then the 
associated hiring costs would be a cost of this rule. (However, new 
employees would likely only be hired if their wages, onboarding costs, 
and training costs are less than the cost of overtime pay for the newly 
nonexempt workers.) The Department does not know how many new employees 
would be hired and thus did not estimate this cost.
(h) Hours-Related Worker Effects
    Some employer representatives highlighted the possibility that some 
workers might work more hours as a consequence of this rulemaking. For 
example, Construction Industry Roundtable commented that employers 
responding to the increased salary level might ``require the remaining 
exempt employees to absorb some of the duties of the newly non-exempt 
employees--which would be viewed as an unfair burden by the remaining 
exempt employees who are at or near capacity already.'' See also SIGMA 
(providing similar statements).
    The Department acknowledges that for some affected workers, if 
their employers respond to the rule by increasing their salary to keep 
their exemption status, the change may also be accompanied by an 
increase in assigned hours. Additionally, some employers might respond 
to this regulation by reducing the overtime hours of affected workers 
and transferring those hours to other workers who remain exempt. The 
Department believes that while some workers may see an increase in 
hours, others may see their hours decline (discussed further in the 
Benefits section below).
(i) Wage Compression
    Some commenters contended that the update to the salary threshold 
in this rule would lead to wage compression. For example, PPWO stated 
that the Department did not account for this potential cost, stating, 
``Where employees below the proposed salary minimum have their salaries 
raised to meet the new minimum, employees above the new minimum will 
likewise need to have their salaries raised to account for the relative 
value of the work being performed.'' See also, e.g., Seyfarth Shaw.
    However, as discussed in section VII.C.4.iii.f., the Department 
estimates that only 2.2 percent of affected workers will have their 
earnings increased to the updated salary level. Thus, in the 
overwhelming majority of cases wage compression concerns should not 
arise. The Department recognizes that there may be some cases in which 
employers that raise the pay of affected employees to the new salary 
level will also choose to increase the earnings of more highly paid 
employees to avoid wage compression, but the Department does not have 
data to estimate this impact.
4. Transfers
i. 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 rule: (1) transfers to ensure 
compliance with the FLSA minimum wage provision; and (2) transfers to 
ensure compliance with the FLSA overtime pay provision. Transfers in 
Year 1 due to the minimum wage provision were estimated to be $87.5 
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 applicability of the FLSA's overtime pay provision 
will be $1.4 billion: $1.2 billion from the increased standard salary 
level and $255.6 million from the increased HCE compensation level. 
Total Year 1 transfers are estimated at $1.5 billion (Table 10).

Table 10--Total Annual Change in Earnings for Affected EAP Workers by 
Provision, Year 1 (Millions)
[GRAPHIC] [TIFF OMITTED] TR26AP24.155


[[Page 32914]]


    Because the overtime premium depends on the employee's regular rate 
of pay, 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. Then, the Department estimated 
overtime payments.
ii. Transfers Due to the Minimum Wage Provision
    For 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 $684 per week must work 
94.3 hours per week to earn less than the Federal minimum wage of $7.25 
per hour ($684 / $7.25 = 94.3).\366\ The applicable minimum wage is the 
higher of the Federal minimum wage and the state minimum wage as of 
January 1, 2023. Most affected EAP workers already receive at least the 
minimum wage; only an estimated 0.5 percent (19,900 in total) earn an 
implicit hourly rate of pay less than the Federal 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.\367\
---------------------------------------------------------------------------

    \366\ The Federal minimum wage has not increased since 2009. 
Workers in states with minimum wages higher than the Federal minimum 
wage could earn less than the state minimum wage working fewer 
hours.
    \367\ Because these workers' hourly wages will be set at the 
minimum wage after this 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. In theory, since 
the quantity of labor hours demanded is inversely related to wages, a 
higher mandated wage would, all things being equal, result in fewer 
hours of labor demanded. However, the weight of the empirical evidence 
finds that increases in the minimum wage that are similar in magnitude 
to what would be caused by this regulatory provision have caused little 
or no significant job loss.\368\ Thus, in the case of this regulation, 
the Department believes that any disemployment effect due to the 
minimum wage provision will be negligible. This is partially due to the 
small number of workers affected by this provision. According to the 
Wolfson and Belman (2016) meta-analysis cited above, the consensus 
range for labor demand elasticity was -0.05 to -0.12. However for Year 
1 of this analysis, 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).369 370 The 
Department chose this labor demand elasticity because it was used in 
the 2019 final rule and is consistent with the labor demand elasticity 
estimates used when estimating other transfers further below.
---------------------------------------------------------------------------

    \368\ Wolfson, Paul J. and Belman, Dale, 15 Years of Research on 
U.S. Employment and the Minimum Wage (December 10, 2016). Tuck 
School of Business Working Paper No. 2705499. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705499. Dube, 
Arindrajit, Impacts of Minimum Wages: Review of the International 
Evidence (November 2019). https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/844350/impacts_of_minimum_wages_review_of_the_international_evidence_Arindrajit_Dube_web.pdf.
    \369\ Labor demand elasticity is the percentage change in labor 
hours demanded in response to a one percent change in wages.
    \370\ 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.
---------------------------------------------------------------------------

    At the new standard salary level, the Department estimated that 
19,900 affected EAP workers will, on average, see an hourly wage 
increase of $1.57, work 2.1 fewer hours per week and receive an 
increase in weekly earnings of $84.73 as a result of coverage by the 
minimum wage provisions (Table 11). The total change in weekly earnings 
due to the payment of the minimum wage was estimated to be $1.7 million 
per week ($84.73 x 19,900) or $87.5 million in Year 1.

Table 11--Minimum Wage Only: Mean Hourly Wages, Usual Weekly Hours and 
Weekly Earnings for Affected EAP Workers, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.197

iii. Transfers Due to the Overtime Pay Provision
(a) Introduction
    The FLSA requires covered employers to pay an overtime premium to 
nonexempt covered workers who work in excess of 40 hours per week. For 
workers who become nonexempt, the rulemaking will result in a transfer 
of income to the affected workers, increasing the marginal cost of 
labor, which employers may try to offset by adjusting the wages and/or 
hours of affected workers. The size of the transfer will depend largely 
on how employers choose to 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

[[Page 32915]]

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.
(b) Literature on Employer Adjustments
    Two conceptual models are useful for thinking about how employers 
may respond to when certain employees become eligible for overtime: (1) 
the ``fixed-wage'' or ``labor demand'' model, and (2) the ``fixed-job'' 
or ``employment contract'' model.\371\ 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.
---------------------------------------------------------------------------

    \371\ See Trejo, S.J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740, and Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
---------------------------------------------------------------------------

    The fixed-wage model assumes that the standard hourly wage is 
independent of the statutory overtime premium. Under the fixed-wage 
model, a transition 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.
    In contrast, the fixed-job model assumes that the standard hourly 
wage is affected by the statutory overtime premium. Thus, employers can 
neutralize any transition 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 transition 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. These studies are generally 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.
    As in the 2016 and 2019 rules, 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 
nonminimum-wage workers 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.\372\
---------------------------------------------------------------------------

    \372\ 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.\373\ 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.
---------------------------------------------------------------------------

    \373\ 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).\374\ 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. 
Barkume found that how much wages and hours worked adjusted in response 
to the overtime pay requirement depended on what overtime pay would be 
in absence of regulation.
---------------------------------------------------------------------------

    \374\ 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 addition, Bell and Hart (2003) examined the standard hourly 
wage, average hourly earnings (including overtime), the overtime 
premium, and overtime hours worked in Britain.\375\ 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 an 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. Their research is also 
consistent with studies showing that employers may pay overtime 
premiums either in the absence of a regulatory

[[Page 32916]]

mandate (e.g., Britain), or when the mandate exists but the 
requirements are not met (e.g., United States).\376\
---------------------------------------------------------------------------

    \375\ 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.
    \376\ Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an 
Overtime Premium? IZA Discussion Paper No. 163.
---------------------------------------------------------------------------

    On balance, consistent with its 2016 and 2019 rulemakings, the 
Department finds strong support for the fixed-job model as the best 
approximation for the likely effects of a transition 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 
transition 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 an incomplete fixed-job adjustment 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.\377\ 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.\378\ 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.\379\ In 
the sections that follow, the Department uses a method between these 
two papers to model transfers.
---------------------------------------------------------------------------

    \377\ 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.
    \378\ Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
    \379\ 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.
---------------------------------------------------------------------------

(c) Comments Regarding Transfers
    Many commenters representing employer interests indicated that 
employers would respond to the changes proposed in the NPRM by making a 
variety of adjustments to wages, hours worked, or both. Some commenters 
responded with results from surveys of their constituents. Although 
these surveys may be helpful as background information, they generally 
cannot be used in a quantitative analysis due to issues such as 
insufficient or uncertain sample sizes, missing sampling methodology, 
and missing magnitudes. For example, NAHB referenced results from a 
survey of an unknown number of its members, asserting that 38 percent 
of respondents indicated they would respond to the proposed increase in 
the salary level by ``[m]inimiz[ing] overtime hours.'' The Department 
agrees that firms may reduce the hours of some workers and has included 
this in the quantitative analysis below; however, the modeling question 
is to what degree employers will adjust hours.\380\ As discussed below, 
the Department estimates that employers will reduce hours for Type 2B 
and Type 3 workers, which together make up 21% of all affected workers. 
The Department's model is based on worker-specific adjustments and does 
not assume that a firm would respond the same way for all affected 
workers that they employ. Moreover, such surveys were often sector-
specific, making it difficult to extrapolate economy-wide trends, 
because the distribution of affected workers varies across sectors. 
Also, these surveys were often based not on actual economic responses, 
but rather on expressions of intentions. See, e.g., AHLA; ANCOR; NAIS 
and NBOA; NDA.
---------------------------------------------------------------------------

    \380\ Illustrating the limitations of commenter-provided surveys 
for this quantitative analysis, the responses to NAHB's survey have 
inconsistencies that make them hard to interpret. For example, 
concerning the 2019 rule, NAHB reported that 94 percent of 
respondents stated that the rule's increase in the salary level to 
$35,568 did not affect anyone on their payroll. Nevertheless, of the 
same respondents, 20% stated that they responded to the 2019 rule by 
minimizing overtime hours and 18% stated that they raised salaries 
above the threshold.
---------------------------------------------------------------------------

    Despite the inability to incorporate these survey results into the 
analysis, select results are presented here. For instance, according to 
AHLA, of the members it surveyed, ``70% anticipat[ed] reclassifying 
workers, 60% anticipat[ed] reducing hours and career development 
opportunities to reduce potential overtime costs, and 51% anticipat[ed] 
position consolidation.'' ANCOR found that ``approximately 61 percent 
of [its constituents] would employ a mitigation strategy of converting 
currently exempt salaried workers to hourly workers,'' ``[f]ifty-six 
percent . . . would increase the salary of full-time exempt workers to 
meet the projected threshold,'' ``49 percent . . . would prohibit or 
significantly restrict'' permitted overtime, and ``33 percent indicated 
the necessity of reducing salaried full-time employees.'' NAIS and NBOA 
stated that 13 percent of schools that responded to its survey said 
they would ``raise salaries of those exempt employees who do not meet 
the new threshold,'' 27 percent said they would ``convert employees to 
non-exempt and limit hours where possible,'' 11 percent said they would 
``convert employees to non-exempt and pay overtime if hours worked are 
over 40 in a week'' and ``47% of schools said they will enact some 
combination of the available options.'' NAHB stated that, if the 
proposed salary threshold were implemented, 38 percent of respondents 
reported they would ``[m]inimize overtime hours,'' as noted above; 24 
percent would ``[r]aise salaries above the threshold''; and 9 percent 
would ``[r]educe salaries to compensate for overtime'' (among other 
changes). And NDA stated that 66 percent of respondents ``said they 
would have to reclassify exempt employees as hourly employees and 
restructure jobs if DOL raised the minimum salary threshold'' as 
proposed in the NPRM.
    Regarding the transfer calculations in the NPRM, SBA Advocacy 
expressed concern about the Department's

[[Page 32917]]

estimates that affected small business establishments would have, on 
average, $360 to $2,683 in additional payroll costs in the first year 
of the proposed rule. SBA Advocacy stated that ``an Arkansas restaurant 
with four locations stated it would cost almost $200,000 to increase 
manager salaries to make them compliant,'' and that ``small amusement 
businesses reported estimated salary increases for their businesses'' 
ranging from $57,000 to $250,000. It also provided hypothetical 
examples of potential salary increases that restaurants in two states 
would need to make to comply with the proposed rule based on various 
assumptions, including different salaries and amounts of overtime 
performed. These anecdotal reports and hypothetical examples do not 
have any information on the actual amount of overtime work being 
performed by newly nonexempt workers at these businesses. The 
Department expects that businesses that would be faced with large 
increases in payroll costs if they were to increase salaries to the new 
threshold would instead find other responses more economically 
beneficial, such as limiting the number of overtime hours worked by 
workers who become nonexempt or paying such workers the overtime 
premium for hours in excess of 40 per week. Furthermore, this comment 
does not explain what methodological approach the Department should use 
to estimate transfers; what error(s), if any, the Department made in 
its transfer estimate in its NPRM; or how much the Department 
underestimated such transfers.
    Some commenters indicated that employers may follow the fixed-job 
model rather than the incomplete fixed-job model used by the Department 
in the NPRM. See, e.g., AFPI; Americans for Prosperity. AFPI, for 
instance, stated that ``[r]esearch shows employers primarily respond to 
expanded overtime eligibility by reducing base earnings to reflect 
expected overtime--leaving total earnings unchanged.'' Americans for 
Prosperity similarly asserted that ``[o]ver time, the natural response 
of business enterprises of all types to the higher wage costs 
occasioned by the proposed rule will be an adjustment in base pay and 
fringe benefits lower so that total compensation (base pay, benefits, 
overtime) does not rise.'' \381\
---------------------------------------------------------------------------

    \381\ In support, AFPI and Americans for Prosperity both cited 
to reports regarding the NPRM for the 2016 rule. See James Sherk, 
Salaried Overtime Requirements: Employers Will Offset Them with 
Lower Pay, Heritage Foundation Backgrounder No. 3031, July 2, 2015. 
https://thf_media.s3.amazonaws.com/2015/pdf/BG3031.pdf (cited by 
AFPI); Donald J. Boudreaux & Liya Palagashvili, An Economic Analysis 
of Overtime Pay Regulations 17-21 (Apr. 2016), available at https://www.mercatus.org/hayekprogram/research/working-papers/economic-analysis-overtime-pay-regulations (cited by Americans for 
Prosperity).
---------------------------------------------------------------------------

    The Oxford Economics report included with NRF's comment pointed to 
a study by Quach (2022),\382\ which analyzed the effects of the 
rescinded 2016 rule and the 2019 rule, along with the impact of state-
level increases to the overtime exemption threshold. According to 
Oxford Economics, ``Quach finds evidence that overtime coverage 
decreases employment and increases earnings polarization'' and ``strong 
evidence of employee reclassifications from salaried to hourly 
status[.]'' The Department notes that the revised 2024 version of the 
working paper did not find that increasing overtime exemption 
thresholds decreases employment. In fact, when summarizing his 
findings, he says, ``I estimate that expansions in overtime coverage 
actually have little effect on employment.'' He also notes, ``while the 
DOL accurately predicted that average weekly earnings would rise, they 
calculated an income effect of only 0.7%, whereas I show that earnings 
increased by nearly twice that amount for salaried workers.'' While the 
Department also reviewed the 2022 study, as discussed further below, it 
has not incorporated this study into its analysis as it has multiple 
limitations, including a reliance on a non-representative selection of 
employers, which makes it inappropriate as a model of aggregate effects 
across the economy. The Oxford Economics report also claimed that the 
Department's analysis in the NPRM demonstrated ``a tendency to assume 
that which workers are paid on a salaried basis is determined by an 
exogenous occupational structure and to ignore the role that the DOL's 
overtime regulations themselves play in determining this.''
---------------------------------------------------------------------------

    \382\ Simon Quach, The Labor Market Effects of Expanding 
Overtime Coverage. This is a working paper that was published in 
both 2022 and 2024. The 2024 version can be found linked on Simon 
Quach's website: https://raw.githubusercontent.com/SimonQuach1/Papers/main/Quach_OT.pdf?token=AH2DVMEDLJGBAWFAVXXUNMDAYGGDQ. The 
Department believes that Oxford Economics was citing to the 2022 
version of the paper, which is Quach, S. (2022). The Labor Market 
Effects of Expanding Overtime Coverage. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3608506.
---------------------------------------------------------------------------

    The Department's review of the literature cited above supports a 
result between the fixed-job model and the fixed-wage model and thus 
the results were modeled accordingly. Specifically, the Department 
believes the incomplete fixed-job model is most appropriate and 
consistent with the literature. Therefore, the analysis has not been 
changed. The Department further notes that its estimates of transfers 
are informed by its projection that employers will respond to the final 
rule in many 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. 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.
(d) 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 salary level and HCE compensation level:
     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 Type 4 workers were identified as those who 
regularly work overtime (CPS variable PEHRUSL1 greater than 40). To 
distinguish Type 3 workers from Type 4 workers, the Department first 
estimated each worker's weekly earnings if they became nonexempt, to 
which it added weekly managerial costs for each affected worker of 
$14.47 ($86.82 per hour x (10 minutes / 60 minutes)).\383\ Then, 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

[[Page 32918]]

weekly managerial costs are less than the new standard salary. 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.
---------------------------------------------------------------------------

    \383\ See section VII.C.3.iv (managerial costs).
---------------------------------------------------------------------------

    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 2021 data, the most 
recent available, the Department found that 31.3 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, 
as Type 2 workers such that a total of approximately 31.3 percent of 
affected workers were Type 2, 3, or 4. Type 2 workers are subdivided 
into Types 2A and 2B later in the analysis (Table 12).

Table 12--Types of Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.156

(e) Modeling Changes in Wages and Hours
    The incomplete fixed-job model predicts that employers will adjust 
wages of regular overtime workers but not to the full extent indicated 
by the fixed-job model, and thus some employees will receive a small 
increase in weekly earnings due to overtime pay coverage. The 
Department used the average of two estimates of the incomplete fixed-
job model adjustments to model impacts of this rule: \384\
---------------------------------------------------------------------------

    \384\ Both studies considered a population that included hourly 
workers. Evidence is not available on how the adjustment towards the 
fixed-job model differs between salaried and hourly workers. The 
fixed-job 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 fixed-job model as 
estimated by these studies may overestimate the transfers from 
employers to salaried workers.
---------------------------------------------------------------------------

     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.
    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).
    Modeling changes in hourly 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 wages, hours, or 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.\385\
---------------------------------------------------------------------------

    \385\ 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 rule 
may differ accordingly. Employers are more likely to adjust hours 
worked and wages for regular overtime workers because their hours are 
predictable. Conversely, 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.

[[Page 32919]]

    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 unexpected overtime hours (Type 2A) and the other 50 percent 
worked expected overtime (Type 2B). Workers were randomly assigned to 
these two groups. Workers with expected occasional overtime hours were 
treated like Type 3 affected workers (incomplete fixed-job model 
adjustments). Workers with unexpected occasional overtime hours were 
assumed to receive a 50 percent pay premium for the overtime hours 
worked and receive no change in base wage or hours (full overtime 
premium model).\386\ 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.\387\ 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 a 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.\388\
---------------------------------------------------------------------------

    \386\ The Department uses 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.
    \387\ As explained in the previous section, to estimate the 
population of Type 2 workers, the Department supplemented workers 
who report working overtime in the CPS reference week with some 
workers who do not work overtime in the reference week to reflect 
the fact that different workers work occasional overtime in 
different weeks.
    \388\ If a different week was chosen as the survey week, then 
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 will 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. 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. 
These elasticity estimates are based on the Department's analysis of 
Lichter et al. (2014).389 390 Brown and Hamermesh (2019) 
estimated the elasticity of overtime hours for EAP-exempt workers.\391\ 
This estimate is based on a difference-in-differences in hours for two 
groups of workers between two time periods. However, some groups of 
workers are incorrectly defined, so the Department has not used these 
estimates.\392\
---------------------------------------------------------------------------

    \389\ Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP 
No. 7958.
    \390\ Some researchers have estimated larger impacts on the 
number of overtime hours worked. For example, Hamermesh and Trejo 
(2000) conclude the price elasticity of demand for overtime hours is 
at least -0.5. The Department decided to use a general measure of 
elasticity applied to the average change in wages since the increase 
in the overtime wage is somewhat offset by a decrease in the non-
overtime wage as indicated in the fixed-job model. 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.
    \391\ Brown, Charles C., and Daniel S. Hamermesh. (2019). 
``Wages and Hours Laws: What Do We Know? What Can Be Done?'' RSF: 
The Russell Sage Foundation Journal of the Social Sciences 5(5): 68-
87. DOI: 10.7758/RSF.2019.5.5.04.
    \392\ For example, the authors defined the ``non-exempt 1987-
1989'' group as workers earning above $223 but below $455 during 
this period. Because the salary level for the long test was $155 or 
$170 and was $250 for the short test, see section VII.A.1 (Table 1), 
some of these workers would be exempt.
---------------------------------------------------------------------------

    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.\393\ 
Figure 4 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.
---------------------------------------------------------------------------

    \393\ 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.

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

[[Page 32920]]

Figure 4--Flow Chart of the Rule's Effect on Earnings and Hours Worked
[GRAPHIC] [TIFF OMITTED] TR26AP24.198


[[Page 32921]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.199

(f) Estimated Number of and Effects on Affected EAP Workers
    The Department estimated the rule will affect 4.3 million workers 
(Table 13), of which 3.0 million are Type 1 workers (68.7 percent of 
all affected EAP workers), 704,000 were estimated to be Type 2 workers 
(16.2 percent), 558,800 were Type 3 workers (12.9 percent), and 94,100 
were estimated to be Type 4 workers (2.2 percent).

Table 13--Affected EAP Workers by Type (1,000s), Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.158

    The 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 due 
to the overtime pay provision because these workers do not work 
overtime.\394\
---------------------------------------------------------------------------

    \394\ 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.

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

[[Page 32922]]

    For Type 2A workers, the Department assumed employers will be 
unable to adjust the hours or regular rate of pay for these occasional 
overtime workers whose overtime is irregularly scheduled and 
unpredictable. These workers will receive a 50 percent premium on their 
regular hourly wage for each hour worked in excess of 40 hours per 
week, and so average weekly earnings would increase.\395\
---------------------------------------------------------------------------

    \395\ Type 2 workers will not see increases in regular earnings 
to the new salary or compensation levels (as Type 4 workers do) even 
if their new earnings in this week exceed those new levels. This is 
because the estimated new earnings only reflect their earnings in 
those weeks when overtime is worked; their earnings in typical weeks 
when they do not work overtime do not exceed the salary or 
compensation level.
---------------------------------------------------------------------------

    For Type 3 workers and Type 2B workers (the 50 percent of Type 2 
workers who regularly work occasional overtime, an estimated 969,100 
workers), the Department used the incomplete fixed-job model to 
estimate changes in the regular rate of pay. These workers will see a 
decrease in their average regular hourly wage and a small decrease in 
hours. However, because these workers will receive a 50 percent premium 
on their regular hourly wage for each hour worked in excess of 40 hours 
per week, their average weekly earnings will increase. The reduction in 
hours is relatively small and is due to a decrease in labor demand from 
the increase in the average hourly wage as predicted by the incomplete 
fixed-job model (Table 15).
    Type 4 workers' implicit hourly rates of pay and weekly earnings 
will increase to meet the updated standard salary level or HCE annual 
compensation level. Type 4 workers' hours may increase to offset the 
additional earnings, but due to lack of data, the Department assumed 
hours would not change.

Table 14--Average Regular Rate of Pay by Type of Affected EAP Worker, 
Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.159


[[Page 32923]]



Table 15--Average Weekly Hours by Type of Affected EAP Worker, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.160


[[Page 32924]]



Table 16--Average Weekly Earnings by Type of Affected EAP Worker, Year 
1
[GRAPHIC] [TIFF OMITTED] TR26AP24.161

    At the new standard salary level, the average weekly earnings of 
affected workers will increase $5.96 (0.6 percent), from $947.71 to 
$953.67. Multiplying the average change of $5.96 by the 4.0 million EAP 
workers affected by the combination of the initial update and the 
subsequent application of the new standard salary level and 52 weeks 
equals an increase in earnings of $1.3 billion in the first year. For 
workers affected by the change in the HCE compensation level, average 
weekly earnings will increase by $16.79. When multiplied by 292,900 
affected workers and 52 weeks, the national increase will be $255.6 
million in the first year. Thus, total Year 1 transfer payments 
attributable to this rule will equal $1.5 billion.
    The Department is only aware of one paper that modeled the impacts 
of the 2019 rule's increases in the salary and compensation levels. 
Quach (2024) \396\ used administrative payroll data from May 2008 to 
July 2021 to estimate the impacts of the rescinded 2016 rule and the 
2019 rule on employment, earnings, and salary status.\397\ The paper 
has not been published in a peer-reviewed journal and has significant 
limitations, including that its use of administrative payroll data from 
ADP means that the findings are not representative as ADP customers do 
not represent a random sample of the workplace.
---------------------------------------------------------------------------

    \396\ Quach, S. (2024). The Labor Market Effects of Expanding 
Overtime Coverage. https://raw.githubusercontent.com/SimonQuach1/Papers/main/Quach_OT.pdf?token=AH2DVMEDLJGBAWFAVXXUNMDAYGGDQ.
    \397\ The Department notes that the effective date of the 2019 
final rule was in January 2020, so using data from this month may 
not fully capture the effects of the 2019 rule.
---------------------------------------------------------------------------

    In terms of its findings, concerning employment, the author found 
that expansions in overtime coverage actually had little effect on 
employment. He also found that average weekly earnings rose by about 
1.4% for salaried workers, and found no evidence that firms reduced 
base pays in response to changes in the overtime threshold. Concerning 
salary status, he found that approximately 2.6% of affected workers are 
re-classified from salaried to hourly status. The Department has not 
adjusted its methodology in response to this paper given the concerns 
listed above.
    Additionally, it can be informative to look at papers which predict 
the impact of rulemakings. For example, Rohwedder and Wenger (2015) 
analyzed the effects of increasing the standard salary level from the 
then baseline level of $455 per week.\398\ 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 the 
Department's 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.
---------------------------------------------------------------------------

    \398\ 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.

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

[[Page 32925]]

iv. Potential Transfers Not Quantified
    This rule could lead to additional transfers that the Department is 
unable to quantify. For example, in response to this rule, some 
employers may decrease the hours of newly nonexempt workers who usually 
work overtime. These hours may be transferred to other workers, such as 
non-overtime workers and exempt workers who are not affected by the 
rule. Depending on how these hours are transferred, it could lead to 
either a reduction or increase in earnings for other workers. Employers 
may also offset increased labor costs by reducing bonuses or benefits 
instead of reducing base wages or hours worked. If this occurs, an 
employee's overall compensation may not be affected.
    The rule could also reduce reliance on social assistance programs 
for some workers who may receive a transfer of income resulting from 
this rule. For low-income workers, this transfer could result in a 
reduced need for social assistance programs such as Medicaid, the 
Earned Income Tax Credit (EITC), the Supplemental Nutrition Assistance 
Program (SNAP), the Temporary Assistance for Needy Families (TANF) 
program, the Special Supplemental Nutrition Program for Women, Infants, 
and Children (WIC), and free or reduced-priced school meals. A worker 
earning the current salary level of $684 per week earns $35,568 
annually, which is roughly equivalent to the Federal poverty level for 
a family of five and makes the family eligible for multiple social 
assistance programs.\399\ Thus, transferring income to these workers 
could reduce eligibility for government social assistance programs. 
This could lead to an increase or a reduction in a family's total 
resources, depending on the relative size of the increase in earnings 
and the value of the decrease in assistance. Regardless, reduced 
eligibility for social assistance programs would reduce government 
expenditures at the Federal, State, and/or local level.
---------------------------------------------------------------------------

    \399\ Department of Health and Human Services (2023). Federal 
Poverty Level. https://www.healthcare.gov/glossary/Federal-poverty-level-fpl/.
---------------------------------------------------------------------------

5. Benefits and Cost Savings
    The Department expects that this rule could lead to multiple 
benefits, which were discussed qualitatively in the NPRM. These 
potential benefits and commenter feedback about them are addressed 
below.
    The revised salary level will strengthen the overtime protection of 
salaried, white-collar employees who do not pass the standard duties 
test and who earn between the current salary standard salary level and 
the new standard salary level. These employees are nonexempt but, 
because they satisfy the current salary level threshold, employers must 
apply the duties test to determine their exemption status. At the new 
salary level, the number of white-collar salaried employees who earn 
between the current and the new salary levels and fail the duties test 
would decrease by 4.7 million. Because these nonexempt employees no 
longer meet the salary level, employers will be able to determine their 
exemption status based solely on the salary test. If any of these 
employers previously spent significant time evaluating the duties of 
these workers to determine exemption status, the change to determining 
exemption status based on the salary level could lead to some cost 
savings. Also, as many commenters observed, the new salary level will 
strengthen the right to overtime pay for nonexempt workers who earn 
between the current and new standard salary levels. See, e.g., 
Coalition of State AGs; Coalition of Gender Justice and Civil Rights 
Organizations; Washington Dept. of Labor & Industries. Similarly, to 
the extent that some of these 4.7 million employees are currently 
misclassified as exempt, the new salary level will make it more clear 
for workers and employers that such workers are not EAP exempt.\400\ 
Thus, this aspect of the rule is responsive to commenter concerns that 
the current salary level is too low to prevent the misclassification of 
salaried employees who fail the duties test. See e.g., AFSCME; EPI; 
NELP; Sanford Heisler Sharp.
---------------------------------------------------------------------------

    \400\ See 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. RAND 
conducted a survey to identify the number of workers who may have 
failed the standards duties test and yet are classified as EAP 
exempt. The survey, a special module to the American Life Panel, 
asked 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, Rohwedder 
and Wenger 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.'' This survey was conducted when the 
salary level was $455. The exact percentage may no longer be 
applicable, but the concern that in some instances the duties test 
may be misapplied remains.
---------------------------------------------------------------------------

    Commenters disagreed over whether the proposed rule would improve 
or hinder the productivity of affected workers. Some commenters, such 
as the AFL-CIO, agreed with the analysis provided in the NPRM that this 
rulemaking could increase productivity ``by reducing turnover, 
incentivizing workers to work harder, and increasing marginal 
productivity as fewer hours are worked.'' In contrast, a number of 
employer representatives asserted that the rule would hinder worker 
productivity. For example, PPWO asserted that affected workers who 
become nonexempt ``will now need to account for their time in a way 
they have not had to previously, and in a way that their exempt co-
workers do not.'' See also, e.g., AFPI.
    The Department continues to believe that the rule could potentially 
lead to increased worker productivity if workers receive an increase in 
compensation. Increased productivity could occur through numerous 
channels, such as employee retention and level of effort. A strand of 
economic research, commonly referred to as ``efficiency wage'' theory, 
considers how an increase in compensation may be met with greater 
productivity.\401\ Efficiency wages may elicit greater effort on the 
part of workers, making them more effective on the job.\402\ Other 
research on increases in the minimum wage have demonstrated a positive 
relationship between increased compensation and worker productivity. 
For example, Kim and Jang (2019) showed that wage raises increase 
productivity for up to two years after the wage increase.\403\ They 
found that in both full and limited-service restaurants productivity 
increased due to improved worker morale after a wage increase. 
Additionally, research demonstrates a correlation between increased 
earnings and reduced employee turnover.404 405 Reducing 
turnover, in turn, may increase productivity because longer-tenured 
employees have more firm-specific skills and knowledge and thus could 
be more productive and require less

[[Page 32926]]

supervision and training.\406\ Reduced turnover could also reduce 
firms' hiring and training costs. As a result, even though marginal 
labor costs rise, they may rise by less than the amount of the wage 
change because the higher wages may be offset by increased productivity 
and reduced hiring costs for firms.
---------------------------------------------------------------------------

    \401\ Akerlof, G.A. (1982). Labor Contracts as Partial Gift 
Exchange. The Quarterly Journal of Economics, 97(4), 543-569.
    \402\ Another model of efficiency wages, which is less 
applicable here, is the adverse selection model in which higher 
wages raise the quality of the pool of applicants.
    \403\ Kim, H.S., & Jang, S. (2019). Minimum Wage Increase and 
Firm Productivity: Evidence from the Restaurant Industry. Tourism 
Management 71, 378-388. https://doi.org/10.1016/j.tourman.2018.10.029.
    \404\ Howes, Candace. (2005). Living Wages and Retention of 
Homecare Workers in San Francisco. Industrial Relations, 44(1), 139-
163. Dube, A., Lester, T.W., & Reich, M.. (2014). Minimum Wage 
Shocks, Employment Flows and Labor Market Frictions. IRLE Working 
Paper #149-13.
    \405\ This literature tends to focus on changes in earnings for 
a specific sector or subset of the labor force. The impact on 
turnover when earnings increase across sectors (as would be the case 
with this regulation) may be smaller.
    \406\ Argote, L., Insko, C. A., Yovetich, N., & Romero, A. A. 
(1995). Group Learning Curves: The Effects of Turnover and Task 
Complexity on Group Performance. Journal of Applied Social 
Psychology, 25(6), 512-529. Shaw, J. D. (2011). Turnover Rates and 
Organizational Performance: Review, Critique, and Research Agenda. 
Organizational Psychology Review, 1(3), 187-213.
---------------------------------------------------------------------------

    This rulemaking could also result in an increase in personal time 
for some affected workers. Worker advocacy organizations and individual 
commenters asserted that employees would generally enjoy more personal 
time as a consequence of the rule. For example, SEIU commented that 
``[w]hen workers are exempted from overtime pay protections, it 
disincentivizes employers from being efficient with [employees'] 
time.'' Due to the increase in marginal cost for overtime hours for 
newly overtime-eligible workers, employers could demand fewer hours 
from some of the workers affected by this rulemaking. If these workers' 
pay remains the same, they could benefit from increased personal time 
and improved work-life balance. Empirical evidence shows that workers 
in the United States typically work more than workers in other 
comparatively wealthy countries.\407\ Workers in executive, 
administrative, and professional occupations tend to work longer 
hours.\408\ They also have the highest percentage of workers who would 
prefer to work fewer hours compared to other occupational 
categories.\409\ Therefore, the Department believes that this rule may 
result in reduced time spent working overtime for a group of workers, 
some of whom may prefer such an outcome.
---------------------------------------------------------------------------

    \407\ For more information, see OECD series, average annual 
hours actually worked per worker, available at: https://stats.oecd.org/index.aspx?DataSetCode=ANHRS.
    \408\ Boushey, H. and Ansel, B. (2016). Overworked America, The 
economic causes and consequences of long work hours. Washington 
Center for Equitable Growth. https://equitablegrowth.org/research-paper/overworked-america/?longform=true.
    \409\ Hamermesh, D.S., Kawaguchi, D., Lee, J. (2014). Does Labor 
Legislation Benefit Workers? Well-Being after an Hours Reduction. 
IZA DP No. 8077.
    Golden, L., & Gebreselassie, T. (2007). Overemployment 
Mismatches: The Preference for Fewer Work Hours. Monthly Labor 
Review, 130(4), 18-37.
    Hamermesh, D.S. (2014). Not Enough Time? American Economist, 
59(2).
---------------------------------------------------------------------------

6. Sensitivity Analysis of Transfer Payments
    Because the Department cannot predict employers' precise reactions 
to the rule, the Department calculated bounds on the size of the 
estimated transfers from employers to workers, relative to the primary 
estimates in this RIA. For the upper bound, the Department assumed that 
the full overtime premium model is more likely to occur than in the 
primary model. For the lower bound, the Department assumed that the 
complete fixed-job model is more likely to occur than in the primary 
model. Based on these assumptions, estimated transfers may range from 
$631.1 million to $2.9 billion, with the primary estimate equal to $1.5 
billion.
    For a reasonable upper bound on transfer payments, the Department 
assumed that all occasional overtime workers and half of regular 
overtime workers would receive the full overtime premium (i.e., such 
workers will work the same number of hours but be paid 1.5 times their 
implicit initial hourly wage for all overtime hours) (Table 17). The 
full overtime premium model is a special case of the fixed-wage model 
where there is no change in hours. For the other half of regular 
overtime workers, the Department assumed in the upper-bound method that 
they would have their implicit hourly wage adjusted as predicted by the 
incomplete fixed-job model (wage rates fall and hours are reduced but 
total earnings continue to increase, as in the primary method). In the 
primary model, the Department assumed that only 50 percent of 
occasional overtime workers and no regular overtime workers would 
receive the full overtime premium.
    The plausible lower bound on transfer payments 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 assumed the employees' wages would 
fully adjust as predicted by the fixed-job model.\410\ For the other 
half of employees with occasional overtime hours, the lower bound 
assumes they would be paid one and one-half times their implicit hourly 
wage for overtime hours worked (full overtime premium).
---------------------------------------------------------------------------

    \410\ 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 32927]]

Table 17--Summary of the Assumptions Used to Calculate the Lower 
Estimate, Primary Estimate, and Upper Estimate of Transfers
[GRAPHIC] [TIFF OMITTED] TR26AP24.162

7. Effects by Regions and Industries
    This section compares the number of affected workers, costs, and 
transfers across regions and industries. Although impacts will be more 
pronounced in some regions or industries, the Department has concluded 
that in no region or industry are the costs overly burdensome. The 
proportion of total costs and transfers in each region will be fairly 
consistent with the proportion of total workers in each region. 
Affected workers are overrepresented in some industries, but costs and 
transfers will still be manageable as a share of payroll and of total 
revenue (See Table 21 for regions and Table 24 for industries).
    The Department also compared costs and transfers relative to total 
payrolls and revenues. This provides a common method of assessing the 
relative effects of the rule on different regions or industries, and 
the magnitude of adjustments the rule may require on the part of 
enterprises in each region or 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 a 
region or industry because they benchmark against the cost category 
directly associated with the labor force. Average estimated costs and 
transfers from this rule are very small relative to current payroll or 
current revenue--less than a tenth of a percent of payroll and of 
revenue in each region and in each industry.
    Salaries vary across the U.S. geographically. To ensure the new 
standard salary level would not be too high in any region of the 
country, the Department has used only wages in the lowest-wage region, 
the South,\411\ to set the salary level. However, because wages are 
lower in the South and the Midwest \412\ than the Northeast \413\ and 
the West,\414\ impacts may be larger in these two lower-wage regions. 
This section considers impacts across the four Census regions to ensure 
the impacts in the lower-wage regions would be manageable. The South 
has by far the most affected workers (1.9 million), though it also has 
the most workers of any Census region (Table 18). As a share of 
potentially affected workers in the region, the South will have 
somewhat more affected workers relative to other regions (17.9 percent 
are affected compared with 11.0 to 15.4 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 (3.5 percent are 
affected compared with 2.3 to 3.0 percent in other regions).
---------------------------------------------------------------------------

    \411\ The South Census region is comprised of the following 
states: Alabama, Arkansas, Delaware, District of Columbia, Florida, 
Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, 
Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West 
Virginia.
    \412\ The Midwest Census region is comprised of the following 
states: Kansas, Illinois, Indiana, Iowa, Michigan, Minnesota, 
Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
    \413\ The Northeast Census region is comprised of the following 
states: Connecticut, Maine, Massachusetts, New Hampshire, New 
Jersey, New York, Pennsylvania, Rhode Island, Vermont.
    \414\ The West Census region is comprised of the following 
states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, 
Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming.
---------------------------------------------------------------------------

Table 18--Potentially Affected and Affected Workers, by Region, Year 1

[[Page 32928]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.163

    Total transfers in the first year were estimated to be $1.5 billion 
(Table 19). As expected, the transfers in the South will be the largest 
portion because the largest number of affected workers would be in the 
South. However, transfers per affected worker will be less in the South 
than in other Census regions. Annual transfers per affected worker will 
be $291 in the South, and between $346 and $462 in other regions.

Table 19--Annual Transfers by Region, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.164

Table 20--Annual Costs by Region, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.165


[[Page 32929]]


    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 
($581.7 million) and lowest in the Northeast ($240.7 million). 
Transfers and direct employer costs in each region, as a percentage of 
the total transfers and direct costs, would range from 16.9 percent in 
the Northeast to 38.2 percent in the South. These proportions are 
almost the same as the proportions of the total workforce in each 
region: 17.8 percent in the Northeast and 37.0 percent in the South. 
Costs and transfers per establishment would be slightly higher in the 
Midwest ($392) than on average, but still small (Table 21).
    Another way to compare the relative effects of this rule by region 
is to consider the transfers and costs as a proportion of payroll and 
revenues (Table 21).\415\ Nationally, employer costs and transfers will 
be approximately 0.031 percent of payroll. By region, direct employer 
costs and transfers as a percent of payroll will be approximately the 
same (between 0.025 and 0.036 percent of payroll). Employer costs and 
transfers as a percent of revenue will be 0.006 percent nationally and 
range between 0.005 and 0.006 percent in each region.
---------------------------------------------------------------------------

    \415\ The Department uses 2017 data here because although 
payroll data are available for more recent years, the most recent 
revenue data are for 2017.
---------------------------------------------------------------------------

Table 21--Annual Transfers and Costs as Percent of Payroll and of 
Revenue by Region, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.166

    Impacts may be more pronounced in some industries. In particular, 
lower-wage industries where more workers may earn between $684 and the 
new salary level may be impacted more. Additionally, industries where 
EAP workers are more prevalent may experience larger impacts. To gauge 
the effect of the rule on industries, the Department estimated affected 
workers, costs, and transfers for the 13 major industry groups. The 
Department also compared estimates of combined costs and transfers as a 
percent of payroll and revenue across industries.
    Table 22 presents the number of affected workers by industry. The 
industry with the most affected workers is professional and business 
services (827,400). The industry with the largest share of workers 
affected is financial activities (5.7 percent). This is because the 
financial activities industry is heavily composed of salaried white-
collar workers. As a share of potentially affected workers, the 
industry with the highest share affected is leisure and hospitality 
(24.3 percent), followed by agriculture, forestry, fishing, & hunting 
(22.8 percent).

[[Page 32930]]

Table 22--Potentially Affected and Affected Workers, by Industry, Year 
1
[GRAPHIC] [TIFF OMITTED] TR26AP24.167

    Both transfers and costs will be the largest in the professional 
and business services industry because this industry is large and 
heavily composed of salaried white-collar workers (Table 23). Combined, 
in Year 1, these total $564.7 million and represent 19.2 percent of 
nationwide transfers and costs. Transfers and costs are also large in 
the healthcare and social services industry, at least partially due to 
the large size of this industry. However, transfers per affected worker 
will be relatively low in this industry, $229 in the first year 
compared with $348 nationally. A third industry with relatively large 
total transfers and costs is the retail trade industry.

[[Page 32931]]

Table 23--Annual Transfers and Costs by Industry, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.168

    To measure the impact on businesses, a comparison of transfers and 
costs to payroll, revenue, or profit is more helpful than looking at 
the absolute size of transfers and costs per industry. As a percent of 
payroll, transfers and costs would be highest in agriculture, forestry, 
fishing, and hunting; retail trade; leisure and hospitality; and 
education (Table 24). However, the magnitude of the relative shares 
will be small, representing less than 0.1 percent of payroll costs in 
all industries. The Department's estimates of transfers and costs as a 
percent of revenue by industry also indicated a very small effect of 
less than 0.03 percent of revenues in any industry. The industries with 
the largest transfers and costs as a percent of revenue will be 
education; leisure and hospitality; and professional and business 
services. Table 24 illustrates that the differences in costs and 
transfers relative to revenues will be quite small across industry 
groupings.
    The overall magnitude of costs and transfers as a percentage of 
profits represents less than 1.0 percent of overall profits in each 
industry.416 417 By industry, the value of total costs and 
transfers as a percent of profits ranges from a low of 0.02 percent 
(wholesale trade) to a high of 0.62 percent (agriculture, forestry, 
fishing, and hunting). Benchmarking against profits is potentially 
helpful in the sense that it provides a measure of the rule's effect 
against returns to 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

[[Page 32932]]

differences in the firm-level adjustment to profit impacts reflecting 
cross-industry variation in market structure.\418\
---------------------------------------------------------------------------

    \416\ Internal Revenue Service. (2023). SOI Tax Stats--
Corporation Income Tax Returns Complete Report (Publication 16). 
Available at: https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-complete-report-publication-16.
    \417\ Table 1 of the IRS report provides total receipts, net 
income, and deficits by industry. For each industry, the Department 
calculated the profit-to-revenue ratio as net income (column (7)) 
less any deficit (column (8)) divided by total receipts (column 
(3)). Profits were then calculated as revenues multiplied by profit-
to-revenue ratios. Profits could not be used directly because they 
are limited to only active corporations.
    \418\ 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.
---------------------------------------------------------------------------

Table 24--Annual Transfers, Total Costs, and Transfers and Costs as 
Percent of Payroll, Revenue, and Profit by Industry, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.169


[[Page 32933]]


8. Regulatory Alternatives
    The Department considered a range of alternatives before selecting 
its methods for setting the standard salary level and the HCE 
compensation level. As seen in Table 25, the Department has calculated 
the salary/compensation levels, the number of affected workers, and the 
associated costs and transfers for these alternative levels.
    The Department is increasing the standard salary level using 
earnings for the 35th percentile of full-time salaried workers in the 
South Census Region, $1,128 per week. The alternative methods 
considered for setting the standard salary level are:
     Alternative 1: 2004/2019 method--$844 per week--20th 
percentile of earnings of nonhourly full-time workers in the South 
Census region and/or in the retail industry nationally.
     Alternative 2: Kantor long test method--$942 per week--
10th percentile of earnings of likely exempt workers.
     Alternative 3: 2016 method--$1,196 per week--40th 
percentile of earnings of nonhourly full-time workers in the South 
Census region.
     Alternative 4: Kantor short test method--$1,404 per week--
Kantor long test level multiplied by 149 percent (the historical 
average relationship between the long and short test levels).
    The Department considered using the 2004 methodology (the 20th 
percentile of full-time salaried white-collar workers in the lowest-
wage Census region (currently the South) and/or in retail nationally), 
which is currently $844 per week ($43,888 per year). This is also the 
methodology that the Department used in the 2019 rule.\419\ However, 
the salary level produced by the 2004 methodology is below the current 
equivalent long test salary level ($942 per week), which the Department 
considers to be a key parameter for determining an appropriate salary 
level.
---------------------------------------------------------------------------

    \419\ 84 FR 51260.
---------------------------------------------------------------------------

    The Department also considered setting the standard salary level at 
the long test level ($942 per week or $48,984 per year). Doing so would 
ensure the initial screening function of the salary level by restoring 
overtime protections to those employees who were consistently excluded 
from the EAP exemption under each iteration of the regulations prior to 
2019, either by the long test salary level itself, or under the 2004 
rule salary level, which was set equivalent to the long test salary 
level.\420\ However, as explained above, setting the standard salary 
level at the long test level would not address the impact of the change 
from a two-test to a one-test system.
---------------------------------------------------------------------------

    \420\ See section V.B.4.ii.
---------------------------------------------------------------------------

    The Department also considered setting the standard salary level at 
the 40th earnings percentile of salaried white-collar workers in the 
lowest-wage Census Region (currently the South) ($1,196 per week or 
$62,192 per year). However, the Department is concerned that this 
approach could be seen by courts as making salary level determinative 
of exemption status for too large a portion of employees, as this 
salary level would make the salary paid by the employer determinative 
of exemption status for more than half (55 percent) of white-collar 
employees who earn between the long and short test salary levels. The 
Department is also concerned that this approach would generate the same 
concerns that led to the district court decision invalidating the 2016 
rule (which adopted the same methodology).
    Finally, the Department considered setting the standard salary 
level at the current equivalent of the short test salary level ($1,404 
per week or $73,008 per year). This would ensure that all employees who 
earn between the long and short test salary levels and perform 
substantial amounts of nonexempt work would be entitled to overtime 
compensation. However, by making exemption status for all employees who 
earn between the long and short test levels depend on the salary paid 
by the employer, this approach would prevent employers from being able 
to use the EAP exemption for employees earning between these salary 
levels who do not perform substantial amounts of nonexempt work and 
thus were historically exempt under the long test.
    As described above, the Department is setting the HCE compensation 
level using earnings for the 85th percentile of all full-time salaried 
workers nationally, $151,164 per year. The Department also evaluated 
the following alternative methods to set the HCE compensation levels:
     HCE alternative 1: 2019 method \421\--$132,964 annually--
80th percentile of earnings of nonhourly full-time workers nationally.
---------------------------------------------------------------------------

    \421\ See 84 FR 51250.
---------------------------------------------------------------------------

     HCE alternative 2: 2016 method \422\--$179,972 annually--
90th percentile of earnings of nonhourly full-time workers nationally.
---------------------------------------------------------------------------

    \422\ See 81 FR 32429.
---------------------------------------------------------------------------

    The Department believes that HCE alternative 1 does not produce a 
threshold high enough to reserve the HCE test for employees who would 
``almost invariably pass the standard duties test.'' The Department 
also considered setting the HCE threshold at the 90th percentile; 
however, the Department is concerned that the resulting level 
($179,972) would restrict the use of the HCE exemption for employers in 
low-wage regions and industries. The Department believes its proposal 
to adjust the HCE total annual compensation threshold to reflect the 
85th percentile of earnings of nonhourly full-time workers nationally 
strikes the appropriate balance and ensures that the HCE test continues 
to serve its intended function as a streamlined alternative for 
employees who are highly likely to pass the standard duties test.

[[Page 32934]]

Table 25--Updated Standard Salary and HCE Compensation Levels and 
Alternatives, Affected EAP Workers, Costs, and Transfers, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.170


[[Page 32935]]


9. Triennial Updates to the Standard Salary and Annual Compensation 
Thresholds
    Between updates to the standard salary and HCE compensation levels, 
nominal wages typically increase, resulting in an increase in the 
number of workers qualifying for the EAP exemption, even if there has 
been no change in their real earnings. Thus, workers whom Congress 
intended to be covered by the minimum wage and overtime pay provisions 
of the FLSA may lose those protections. The mechanism the Department 
established in this rulemaking for updating the salary and compensation 
levels allows these thresholds to keep pace with changes in earnings 
and continue to serve as an effective dividing line between potentially 
exempt and nonexempt workers. Furthermore, the updating mechanism will 
provide employers more certainty in knowing that these levels will 
change by smaller amounts on a regular basis, rather than the more 
disruptive increases caused by much larger changes after longer, 
uncertain increments of time. This will allow firms to better predict 
short- and long-term costs and employment needs. In addition to the 
changes being made to the standard salary level and HCE compensation 
threshold, the Department is including in this rule a mechanism for 
updating the salary and compensation levels initially on July 1, 2024 
and every 3 years thereafter to reflect current earnings.
i. Initial Update
    As discussed in section IV, the new standard salary level and HCE 
total annual compensation threshold methodologies do not become 
applicable until approximately 8 months after publication of this final 
rule. Therefore, the initial update on July 1, 2024 will use the 
methodologies in place at the time of the update (i.e., the 2019 rule 
methodologies), which results in a $844 per week standard salary level 
and a $132,964 HCE total annual compensation threshold. Consistent with 
the 2019 rule, the Department used pooled CPS data for the most recent 
3 years (2021, 2022, 2023), adjusted to reflect 2023, for the initial 
updates to the standard salary and annual compensation thresholds.
    As previously discussed, the Department's affected worker, cost, 
and transfer estimates for Year 1 have accounted for the initial update 
and the new standard salary and annual compensation thresholds that 
become applicable 6 months after the initial update. Just looking at 
the initial update, the Department estimated the initial update to the 
standard salary level will affect workers who earn between $684 and 
$844 per week. The Department estimates that this update will result in 
959,000 affected workers. Of these affected workers, 68.7 percent of 
them do not work overtime. The Department estimated the Year 1 
adjustment and managerial costs for just this update would be $202.3 
million and transfer payments would be $204.3 million. For the initial 
update to the HCE total annual compensation threshold, the Department 
estimated that just the update would result in 223,000 affected 
workers, $58.7 million in adjustment and managerial costs, and $164.5 
million in transfer payments in Year 1.
ii. Future Updates
    The Department is establishing future updates to the standard 
salary level and HCE total annual compensation threshold with current 
earnings data beginning 3 years after the date of the initial update, 
and every 3 years thereafter, using the methodologies in place at the 
time of the updates. For purposes of this analysis, the Department 
assumes that the future triennial updates to the standard salary level 
will be based on the same methodology that the Department used to set 
the new standard salary level in this rule: the 35th percentile of 
weekly earnings of full-time salaried workers in the lowest-wage Census 
Region (currently the South). Likewise, the Department assumes that 
future triennial updates to the HCE total annual compensation level 
will be based on the same methodology the Department used to set this 
earnings threshold in this rulemaking: the annualized weekly earnings 
of 85th percentile of full-time salaried workers nationally.
    As previously discussed, future triennial updates will set the 
earnings thresholds using the most recent available 4 quarters of CPS 
data preceding the Department's notice with the updated thresholds. To 
estimate future thresholds in years when the salary and compensation 
levels will be updated, the Department used the historic geometric 
growth rate between 2012 and 2022 in (1) the 35th earnings percentile 
of full-time salaried workers in the South for the standard salary 
level and (2) the annualized weekly earnings of the 85th percentile of 
full-time salaried workers nationally for the HCE compensation level. 
For example, between 2012 and 2022, the annual growth rate in the 35th 
percentile of full-time salaried workers in the South has increased by 
3.17 percent. To estimate the first future triennial update salary 
level of $1,239, the Department multiplied $1,128 by 1.0317 to the 
power of three. Figure 5 shows the projected future triennial update 
levels for the first 10 years. Note that these projections are 
illustrative estimates based on past wage growth; the actual level at 
the time of the update will depend on the wage growth that occurs 
between now and the update date. Figure 6 shows the standard salary 
levels in both nominal and 2023 dollars.

Figure 5--Projected Future Salary and Compensation Levels, Nominal 
Dollars

[[Page 32936]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.171

Figure 6--Projected Future Standard Salary Levels, Nominal and Real 
(Constant 2023 Dollars)
[GRAPHIC] [TIFF OMITTED] TR26AP24.172


[[Page 32937]]


iii. Concerns With Use of Fixed Earnings Percentile as Updating 
Methodology
    As discussed in detail in section V.A.3.iii, some commenters 
expressed concern that triennially updating the salary level using a 
fixed percentile of earnings would result in the salary levels growing 
at too quick a rate. See, e.g., Chamber; National Lumber and Building 
Material Dealers Association; NRF; Seyfarth Shaw.
    These commenters stated that updating the standard salary level 
using a fixed percentile of earnings of full-time salaried workers will 
cause some or all of the newly nonexempt workers to be converted to 
hourly status and thus removed from the data set, and earnings at the 
35th percentile of salaried workers will quickly rise solely due to the 
exclusion of these hourly workers (an effect some commenters referred 
to as ``ratcheting''). Commenters asserted that this may cause growth 
in the 35th percentile of full-time salaried workers to no longer 
reflect prevailing economic conditions.
    Claims that an updating mechanism using the fixed percentile 
approach will lead to the rapid escalation of the salary level are 
based primarily on the assumption that employers will respond to this 
rulemaking by converting newly nonexempt workers to hourly pay status. 
However, the Department believes these concerns are overstated because 
many affected EAP workers who are reclassified as nonexempt are likely 
to remain salaried as: (1) An analysis of the 2004 rule's salary level 
update did not indicate significant numbers of workers were converted 
to hourly pay; and (2) an analysis of updates in California's higher 
EAP exemption salary level (under state law) did not indicate 
significant numbers of workers were reclassified as hourly. In any 
event, the Department's modeling of the impact of updating shows that 
any potential ``ratcheting'' effect that may occur would be small, 
largely because newly nonexempt workers compose a small percentage of 
the pool of full-time nonhourly workers in the dataset used to 
establish the salary level.
    The analyses discussed below are based on CPS MORG data. As 
acknowledged in the NPRM and above in section VII.B.5.i, salary status 
for CPS respondents cannot definitively be determined because workers 
who indicate they are paid on a salary basis or on some basis other 
than hourly are all classified as ``nonhourly.'' To consider the 
possibility this biases our results, the Department looked at the Panel 
Study of Income Dynamics (PSID). The PSID provides additional 
information concerning salaried versus other nonhourly workers. In the 
PSID, respondents are asked how they are paid on their main job and are 
asked for more detail if their response is in some way other than 
salaried or hourly.\423\ The available responses include piecework, 
commission, self-employed/farmer/profits, and by the job/day/mile. None 
of these options are ones to which employers are likely to change their 
salaried workers. The share of workers who are not paid on either an 
hourly or salaried basis is relatively small, about 10 percent of 
workers in the PSID. Accordingly, grouping nonhourly workers with 
salaried workers does not negate the following comparisons and 
conclusions based on CPS data.
---------------------------------------------------------------------------

    \423\ University of Michigan, Institute for Social Research. 
2019 PSID. Data available at: https://simba.isr.umich.edu/data/data.aspx.
---------------------------------------------------------------------------

(a) Workers May Remain Salaried Even if Nonexempt
    The Department disagrees with commenters that suggested that 
employers will likely (or automatically) convert large numbers of newly 
nonexempt employees to hourly pay status. In some instances such 
conversion may occur; for example, if an employee regularly works 
overtime and the employer is able to adjust his or her regular rate. 
However, for the majority of affected employees, there will be no 
incentive for employers to convert them to hourly pay because they do 
not work more than 40 hours in a workweek. Also, employers may have 
other incentives to maintain workers' salaried status; for example, 
they may offer salaried positions to attract talent. Some commenters 
representing employer interests highlighted that employees value job 
characteristics associated with salaried pay--such as earnings 
predictability--and so employers may pay nonexempt employees on a 
salary basis to preserve these benefits. Using the CPS MORG data pooled 
for 2021-2023 and projected to 2023, the Department estimated that 29.4 
percent of white-collar workers earning below $684 per week are 
nonhourly; based on findings from the PSID, the Department believes 
most of these nonhourly workers are salaried. This data shows that even 
for some current nonexempt workers, employers are choosing to keep them 
as salaried instead of hourly. Furthermore, some nonhourly workers 
above the current salary threshold fail the duties test, and are 
therefore nonexempt, which is further evidence that employers already 
employ nonexempt workers who are paid on a salary basis.
(b) Previous Salary Level Updates Did Not Indicate a Significant Number 
of Workers Being Converted to Hourly
    The ``ratcheting'' concerns raised in the comments are very similar 
to comments on this alleged effect that were received during the 2016 
rulemaking. In that rule the Department analyzed employer responses to 
the 2004 rule and to a series of revisions to California's salary level 
test for exemption under state law in order to better estimate whether 
workers who become nonexempt are more likely to be paid on an hourly 
basis.\424\ These analyses allow the identification of potential 
regulatory impact while controlling for time trends and a broad range 
of other relevant factors (education, occupation, industry, geographic 
location, etc.).
---------------------------------------------------------------------------

    \424\ See 81 FR 32441, 32507.
---------------------------------------------------------------------------

    In the 2016 rule the Department analyzed the effect of the Federal 
2004 salary level increase from $250 per week (short test salary level) 
to $455 (standard salary level) on the share of full-time, white-collar 
workers paid hourly. The analysis considered two types of differences: 
pre- versus post-rulemaking; and workers exempt before, but not after 
the rule compared to workers exempt both before and after the rule. As 
noted in the discussion of this analysis in the 2016 rule, if the 
salary level increase in the 2004 rule led employers to convert 
significant numbers of workers to hourly status (as commenters assert 
will result from the current rulemaking), then the Department would 
have expected to see a notable increase in the share of workers earning 
just below the new threshold at the time ($455) who are paid hourly 
relative to the share of workers earning just above the new threshold 
who are paid hourly. Instead, the Department found that between the 
first quarter of 2004 and the first quarter of 2005, the share of full-
time white-collar workers who are paid hourly decreased marginally in 
the group of potentially affected workers (those earning $250 to $455), 
whereas in the group earning above the salary level (those earning more 
than $455 but less than $600) it increased by 2.6 percentage points. 
These results do not suggest that the 2004 salary level increase caused 
an increase in the share of workers paid hourly below the new 
threshold, and thus provide no evidence that salary level increases due 
to triennial updates will result in employers converting significant

[[Page 32938]]

numbers of affected EAP workers to hourly pay status.
    The Department did not replicate this analysis for the salary level 
increase in the 2019 final rule, because it would require comparing a 
quarter in 2019 before the effective date of the rule with a quarter in 
2020 after the effective date. The economic effects of the COVID-19 
pandemic would make it impossible to isolate the impact of the 2019 
rule.
    In the 2016 rule the Department also analyzed the effect of changes 
to California statutes that set exempt salary levels at a level equal 
to twice the state minimum wage for 40 hours worked per week. The 
analysis considered two types of differences: pre- versus post-
rulemaking; workers exempt before, but not after the rule compared to 
workers exempt both before and after the rule; and California workers 
versus workers in other states where the salary level was not 
increased. The analysis of two updates found that the share of full-
time white-collar workers in California being paid hourly decreased 
from 73.4 percent to 73.1 percent compared to an increase of 66.2 
percent to 67.5 percent in states where the salary level did not change 
after the 2007-2008 update, while there was an increase from 72.0 
percent to 74.0 percent in California compared to an increase of 68.2 
to 69.4 percent in other states after the 2014 update.
    The Department found no evidence that changes in the salary level 
for exemption resulted in a statistically significant increase in the 
percent of full-time white-collar workers paid on an hourly basis 
following either the 2004 rule or the California salary level updates.
(c) The Department's Modeling of Possible ``Ratcheting'' Indicates 
Effect Would Be Negligible
    In a study referenced by PPWO, Edgeworth Economics estimated the 
impact that an updating mechanism using the fixed percentile approach 
would have on the salary level. They found that ``the DOL's automatic 
update mechanism would increase the salary threshold by approximately 
9.1% to the current 40th percentile [which Edgeworth Economics 
estimated was equivalent to the 35th percentile of the resulting 
distribution after workers are reclassified] within three years even if 
there was not ANY wage growth.'' Their estimate was based on the 
assumption that all affected workers in the South Census Region who 
earn between $684 and $1,059 per week and who are expected to pass the 
duties test, which they estimate to be 1.4 million, would be 
reclassified to hourly employees, thus falling out of the distribution 
of workers that are part of the 35th percentile in the Census Region. 
However, as discussed above, the Department has found no evidence that 
previous changes in the salary level for exemption have resulted in a 
statistically significant increase in the percent of full-time white-
collar workers paid on an hourly basis.
    NRF submitted a 2023 study by Oxford Economics that also considered 
how converting salaried workers to hourly status could influence future 
triennial updates. The Oxford study states that DOL's updating 
methodology ``suffers from the same technical flaw as its NPRM analysis 
of the effects of the proposed regulation suffers from: the failure to 
model newly nonexempt affected workers losing salaried status.'' The 
study presents a visual analysis showing a share of workers who earn 
below the overtime threshold losing their salaried status, and a higher 
threshold for 2027 after this rule than in the scenario where there is 
no change to the standard salary level. Like Edgeworth Economics, 
Oxford Economics erroneously assumes that a large share of all affected 
workers will lose their salaried status. As discussed previously, the 
Department has found no evidence that previous changes in the salary 
level for exemption have resulted in a statistically significant 
increase in the percent of full-time white-collar workers paid on an 
hourly basis.
    In 2016, the Department conducted a similar analysis, using what 
the Department believes are more realistic assumptions, and found a 
significantly smaller potential impact. The Department considered which 
affected workers are most likely to be converted from salaried to 
hourly pay as a result of that rulemaking. Type 4 workers, those whose 
salaries are increased to the new standard salary level, remain exempt 
and their method of pay will not change. Type 3 workers, who regularly 
work overtime and become nonexempt, and Type 2 workers, those who 
occasionally work overtime and become nonexempt, are the most likely to 
have their pay status changed. Type 1 workers (who, at the time, made 
up more than 60 percent of the affected workers) were assumed to not 
work overtime, and employers thus have little incentive to convert them 
to hourly pay. For this analysis, the Department assumed all Type 2 and 
Type 3 workers were converted to hourly status to generate a realistic 
upper bound of the magnitude of any possible ratcheting effect. The 
Department estimated that in 2026, after three updates over 10 years, 
the salary level as set in the final rule (based on weekly earnings of 
full-time salaried workers in the South) could be approximately 2.5 
percent higher than expected due to this effect. This figure is 
significantly smaller than the estimates provided by the commenters. 
Furthermore, the Department believes its estimate is an overestimate 
because it assumed employers convert all Type 2 and Type 3 workers to 
hourly status, which, for the reasons discussed above and in section 
V.A.3.iii of the preamble, the Department believes is a highly unlikely 
outcome. The Department did not replicate this analysis for the salary 
level increase in the 2019 final rule, because the economic effects of 
the COVID-19 pandemic make it difficult to compare periods before and 
after the effective date of the 2019 final rule and isolate the effect 
of the rule.
10. Projections
    The Department estimated that in Year 1, 4.3 million EAP workers 
will be affected, with about 292,900 of these attributable to the 
revised HCE compensation level (Table 26). In Year 10, the number of 
affected EAP workers was estimated to equal 6.0 million with 1.0 
million attributable to the updated HCE compensation level. Average 
annualized costs are $802.9 million and transfers are $1.5 billion 
using a 7 percent real discount rate. These projections involved 
several steps.
    1. Use past growth in the earnings distribution to estimate future 
salary and compensation levels (see section VII.C.9).
    2. Predict workers' earnings, absent a change in the salary levels.
    3. Compare workers' predicted earnings to the predicted salary and 
compensation levels to estimate affected workers.
    4. Project future employment levels.
    5. Estimate employer adjustments to hours and pay.
    6. Calculate costs and transfers.

[[Page 32939]]

Figure 7--10-Year Projected Number of Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.173

Figure 8--10-Year Projected Costs and Transfers (Millions $2023)
[GRAPHIC] [TIFF OMITTED] TR26AP24.174


[[Page 32940]]



Table 26--Projected Costs and Transfers, Standard Salary and HCE 
Compensation Levels
[GRAPHIC] [TIFF OMITTED] TR26AP24.175


[[Page 32941]]


    The Department calculated workers' earnings in future years by 
applying the historical wage growth rate in the workers' industry-
occupation to current earnings. The wage growth rate was calculated as 
the geometric growth rate in median wages using CPS MORG data for 
occupation-industry categories from 2011-2023.\425\ The geometric 
growth rate is the constant annual growth rate that when compounded 
(applied to the first year's wage, then to the resulting second year's 
wage, etc.) yields the last historical year's wage. This rate only 
depends on the wage values in the first and last year.\426\
---------------------------------------------------------------------------

    \425\ To maximize the number of observations used in calculating 
the median wage for each occupation-industry category, 3 years of 
data were pooled for each of the endpoint years. Specifically, data 
from 2011, 2012, and 2013 (converted to 2012 dollars) were used to 
calculate the 2012 median wage and data from 2021, 2022, and 2023 
(converted to 2022 dollars) were used to calculate the 2022 median 
wage.
    \426\ The geometric growth rate may be a flawed measure if 
either or both of the endpoint years were atypical; however, in this 
instance these values seem typical. An alternative method would be 
to use the time series of median wage data to estimate the linear 
trend in the values and continue this to project future median 
wages. This method may be preferred if either or both of the 
endpoint years are outliers, since the trend will be less influenced 
by them. However, the linear trend may be flawed if there are 
outliers in the interim years. The Department chose to use the 
geometric mean because individual year fluctuations are difficult to 
predict and applying the geometric growth rate to each year provides 
a better estimate of the long-term growth in wages.
---------------------------------------------------------------------------

    The geometric wage growth rates per industry-occupation combination 
were also calculated from the BLS' Occupational Employment and Wage 
Statistics (OEWS) survey for 2012 to 2022. In occupation-industry 
categories where the CPS MORG data had an insufficient number of 
observations to reliably calculate median wages, the Department used 
the growth rate in median wages calculated from the OEWS data.\427\ Any 
remaining occupation-industry combinations without sufficient data in 
either data source were assigned the median of the growth rates in 
median wages from the CPS MORG data.
---------------------------------------------------------------------------

    \427\ To lessen small sample bias in the estimation of the 
median growth rate, this rate was only calculated using CPS MORG 
data when these data contained at least 10 observations in each time 
period.
---------------------------------------------------------------------------

    The Department compared workers' counter-factual earnings (i.e., 
absent the rulemaking) to the predicted salary levels. If the counter-
factual earnings are below the relevant salary 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 
absent the rule change (e.g., would earn at least $684 if exempt under 
standard salary level) but have projected earnings in the future year 
that are less than the relevant salary level. The projected number of 
affected workers also includes workers who were not EAP exempt in the 
base year but will become exempt in the absence of this rule in Years 2 
through 10. For example, a worker who passes the standard duties test 
may earn less than $684 in Year 1 but between $684 and the new salary 
level in subsequent years; such a worker will be counted as an affected 
worker in those subsequent years. Additionally, the number of affected 
workers is not limited to newly affected workers. Workers who are 
affected in a given year may remain affected in subsequent years (e.g., 
because they earn between $684 and $1,128 in years 1, 2, and 3), and 
continue to be counted as affected.
    The projected number of affected workers also accounts for 
anticipated employment growth. Employment growth was estimated as the 
geometric annual growth rate based on the 10-year employment projection 
from BLS' National Employment Matrix (NEM) for 2022 to 2032 within an 
occupation-industry category.428 429 The Department applied 
these growth rates to the sample weights of the workers to estimate 
increased employment levels over time. This is because the Department 
cannot introduce new observations to the CPS MORG data to represent the 
newly employed.
---------------------------------------------------------------------------

    \428\ Bureau of Labor Statistics, Employment Projections 
Program. 2022-32 National Employment Matrix. https://www.bls.gov/emp/ind-occ-matrix/matrix.xlsx.
    \429\ An alternative method is to spread the total change in the 
level of employment over the ten years evenly (constant change in 
the number employed). The Department believes that on average 
employment is more likely to grow at a constant percentage rate 
rather than by a constant level (a decreasing percentage rate).
---------------------------------------------------------------------------

    For workers newly affected in Year 2 through Year 10, employers' 
wage and hour adjustments due to the rulemaking are generally estimated 
as described in section VII.C.4. The only difference is the hours 
adjustment now uses a long-run elasticity of labor demand of -0.4.\430\ 
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).
---------------------------------------------------------------------------

    \430\ 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.
---------------------------------------------------------------------------

    The Department quantified three types of direct employer costs in 
the 10-year projections: (1) regulatory familiarization costs; (2) 
adjustment costs; and (3) managerial costs. Section VII.C.3 provides 
details on the methodology for estimating these costs. This section 
only discusses the aspects specific to projections. Projected costs and 
transfers were deflated to 2023 dollars using the Congressional Budget 
Office's projections for the CPI-U.\431\
---------------------------------------------------------------------------

    \431\ Congressional Budget Office. 2023. The Budget and Economic 
Outlook: 2023 To 2033. See https://www.cbo.gov/system/files/2023-02/58848-Outlook.pdf.
---------------------------------------------------------------------------

    Regulatory familiarization costs occur in years when the salary and 
compensation levels are updated. Thus, in addition to Year 1, some 
regulatory familiarization costs are expected to occur in Year 4, Year 
7, and Year 10. The Department assumed 10 minutes per establishment for 
time to access and read the published notice in the Federal Register 
with the updated standard salary level and HCE compensation level. This 
average time estimate is low because the majority of establishments 
will not have newly affected workers, and while some firms may spend 
more than 10 minutes to read the new rule, many firms will spend no 
time. The time estimate has been increased from 5 minutes in the 2016 
rulemaking. In each of these 3 years regulatory familiarization costs 
are between $68.9 and $73.1 million. Although start-up firms must 
become familiar with the FLSA, the difference between the time 
necessary for familiarization with the current part 541 exemptions and 
those exemptions as modified by this rulemaking is essentially zero. 
Therefore, projected regulatory familiarization costs for new entrants 
over the next 9 years are zero (although these new entrants will incur 
regulatory familiarization costs in years when the salary and 
compensation levels are updated).
    Adjustment costs are a function of the number of newly affected EAP 
workers and would occur in any year in which workers are newly 
affected. Adjustment costs would be largest in Year 1, of moderate size 
in update years, and smaller in other years. Management costs would 
recur each year for all affected EAP workers whose hours are adjusted. 
Therefore, managerial costs increase in update years and then modestly 
decrease between updates since earnings growth will cause some workers 
to no longer be affected in those years.

[[Page 32942]]

    The Department projected transfers from employers to employees due 
to the minimum wage provision and the overtime pay provision. Transfers 
to workers from employers due to the minimum wage provision would 
decline from $87.5 million in Year 1 to $22.6 million in Year 10 as 
increased earnings over time move workers' regular rates of pay above 
the minimum wage.\432\ Transfers due to overtime pay should grow 
slightly over time because the number of affected workers would 
increase, although transfers fall in years between updates. Transfers 
to workers from employers due to the overtime pay provision would 
increase from $1.4 billion in Year 1 to $2.5 billion in Year 10.
---------------------------------------------------------------------------

    \432\ State minimum wages above the Federal level as of January 
1, 2023 were incorporated and used for projected years. Increases in 
minimum wages were not projected. If state or Federal minimum wages 
increase over the next 10 years, then estimated projected minimum 
wage transfers would be underestimated.
---------------------------------------------------------------------------

    The Department compared projected impacts with and without updating 
(Table 27). Projections without updating are shown so impacts of the 
initial increase and subsequent increases can be disaggregated. With 
triennial updating, the number of affected EAP workers would increase 
from 4.3 million to 6.0 million over 10 years. Conversely, in the 
absence of updating, the number of affected EAP workers is projected to 
decline from 4.3 million in Year 1 to 2.6 million in Year 10. As shown 
in Figure 9, the number of affected workers decreases from year to year 
between updates as the real value of the salary and compensation levels 
decrease, and then increases in update years.
    Regarding costs, regulatory familiarization costs are lower without 
updating because, in the absence of updating, employers would not need 
to familiarize themselves with updated salary and compensation levels 
every 3 years. Adjustment costs and managerial costs are a function of 
the number of affected EAP workers and so will be higher with updating. 
Average annualized direct costs will be $802.9 million with updating 
and $615.6 million without updating. Transfers are also a function of 
the number of affected workers and hence are lower without updating. 
Average annualized transfers with a 7 percent real discount rate will 
be $1.5 billion with updating and $990 million without updating. Table 
27 shows aggregated costs and transfers over the 10-year horizon.

Figure 9--10-Year Projected Number of Affected Workers, With and 
Without Updating
[GRAPHIC] [TIFF OMITTED] TR26AP24.176


[[Page 32943]]



Table 27--Comparison of Projected Costs and Transfers With and Without 
Updating
[GRAPHIC] [TIFF OMITTED] TR26AP24.177

VIII. 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 Department has determined 
that this rulemaking is economically significant. This section (1) 
provides an overview of the objectives of this rule; (2) estimates the 
number of affected small entities and employees; (3) discusses 
reporting, recordkeeping, and other compliance requirements; (4) 
presents the steps the Department took to minimize the significant 
economic impact on small entities; and (5) declares that it is unaware 
of any relevant Federal rules that may duplicate, overlap, or conflict 
with this rule.

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 exemptions from the Act's minimum wage and overtime 
pay provisions, including one for bona fide executive, administrative, 
and professional (EAP) employees, as those terms are ``defined and 
delimited'' by the Department.\433\ The Department's regulations 
implementing this white-collar exemption are codified at 29 CFR part 
541.
---------------------------------------------------------------------------

    \433\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

    To qualify for the EAP exemption under the Department's 
regulations, the employee generally must meet three criteria: (1) the 
employee must be paid a predetermined and fixed salary that is not 
subject to reduction because of variations in the quality or quantity 
of work performed (the salary basis test); (2) the amount of salary 
paid must meet a minimum specified amount (the salary level test); and 
(3) the employee's job duties must primarily involve executive, 
administrative, or professional duties as defined by the regulations 
(the duties test). In 2004, the Department revised its regulations to 
include a highly compensated employee test with a higher salary 
threshold and a minimal

[[Page 32944]]

duties test.\434\ The Department has periodically updated the 
regulations governing the white-collar exemptions since the FLSA's 
enactment in 1938. Most recently, the 2019 rule updated the standard 
salary level test to $684 per week and the HCE compensation level to 
$107,432 annually.
---------------------------------------------------------------------------

    \434\ Sec.  541.601.
---------------------------------------------------------------------------

    The goal of this rulemaking is to set effective earnings thresholds 
to help define and delimit the FLSA's EAP exemption. To this end, the 
Department is finalizing its proposed change to the salary level. 
Specifically, the Department is adjusting the salary level by setting 
it equal to the 35th percentile of weekly earnings of full-time 
salaried workers in the lowest-wage Census Region (currently the 
South), based on the most recent year (2023) of Current Population 
Survey (CPS) data at the time of drafting. Using BLS 2023 data on 
percentiles of usual weekly earnings of nonhourly full-time workers, 
the standard salary level will be set at $1,128 per week. Additionally, 
to maintain the effectiveness of this test, the Department is 
finalizing an updating mechanism that will update the earnings 
thresholds to reflect current wage data on July 1, 2024 and every 3 
years thereafter.
    The Department's new salary level will, in combination with the 
standard duties test, better define and delimit which employees are 
employed in a bona fide EAP capacity in a one-test system. As explained 
in greater detail in sections III and V.B, setting the standard salary 
level at or below the long test salary level, as the 2004 and 2019 
rules did, results in the exemption of lower-salaried employees who 
traditionally were entitled to overtime protection under the long test 
either because of their low salary or because they perform large 
amounts of nonexempt work, in effect significantly broadening the 
exemption compared to the two-test system. Setting the salary level at 
the low end of the historic range of short test salary levels, as the 
2016 rule did, would have restored overtime protections to those 
employees who perform substantial amounts of nonexempt work and earned 
between the long test salary level and the low end of the short test 
salary range. However, it would also have resulted in denying employers 
the use of the exemption for lower-salaried employees who traditionally 
were not entitled to overtime compensation under the long test, which 
raised concerns that the Department was in effect narrowing the 
exemption. By setting a salary level above the equivalent of the long 
test salary level (using current data), the final rule will restore the 
right to overtime pay for salaried white-collar employees who prior to 
the 2019 rule were always considered nonexempt if they earned below the 
long test (or long test-equivalent) salary level. And it will ensure 
that fewer lower paid white-collar employees who perform significant 
amounts of nonexempt work are included in the exemption. At the same 
time, by setting it well below the equivalent of the short test salary 
level (using current data), the rule will allow employers to continue 
to use the exemption for many lower paid white-collar employees who 
were made exempt under the 2004 standard duties test. The new salary 
level will also more reasonably distribute between employees and their 
employers what the Department now understands to be the impact of the 
shift from a two-test to a one-test system on employees earning between 
the long and short test salary levels.
    As the Department has previously noted, the amount paid to an 
employee is ``a valuable and easily applied index to the `bona fide' 
character of the employment for which the exemption is claimed,'' as 
well as the ``principal[]'' ``delimiting requirement'' ``prevent[ing] 
abuse'' of the exemption.\435\ Additionally, the salary level test 
facilitates application of the exemption by saving employees and 
employers from having to apply the more time-consuming duties analysis 
to a large group of employees who will not pass it. For these reasons, 
the salary level test has been a key part of how the Department defines 
and delimits the EAP exemption since the beginning of its rulemaking on 
the EAP exemption.\436\ At the same time, the salary test's role in 
defining and delimiting the scope of the EAP exemption must allow for 
appropriate examination of employee duties.\437\ Under the final rule, 
duties will continue to determine the exemption status for most 
salaried white-collar employees.
---------------------------------------------------------------------------

    \435\ Stein Report at 19, 24; see also 81 FR 32422.
    \436\ See 84 FR 51237.
    \437\ See id. at 51238.
---------------------------------------------------------------------------

    The Department is also adjusting the HCE total annual compensation 
requirement to the annualized weekly earnings for the 85th percentile 
of full-time salaried workers nationally ($151,164 using 2023 data). 
Though not as high a percentile as the HCE threshold initially adopted 
in 2004, which covered 93.7 percent of all full-time salaried 
workers,\438\ the Department's new HCE threshold will ensure it 
continues to serve its intended function, because the HCE total annual 
compensation level will be high enough to exclude all but those 
employees at the very top of the economic ladder.
---------------------------------------------------------------------------

    \438\ See 69 FR 22169 (Table 3).
---------------------------------------------------------------------------

    In its three most recent part 541 rulemakings, the Department has 
expressed its commitment to keeping the earnings thresholds up to date 
to ensure that they remain effective in helping differentiate between 
exempt and nonexempt employees. Long intervals between rulemakings have 
resulted in eroded earnings thresholds based on outdated earnings data 
that were ill-equipped to help identify bona fide EAP employees. In 
contrast, routine updates to the part 541 earnings thresholds to 
reflect wage growth will bring certainty and stability to employers and 
employees alike. Based on its long experience with updating the salary 
levels, the Department has determined that adopting a regulatory 
provision for regularly updating the salary levels, with an exception 
for pausing future updates under certain conditions, is the most viable 
and efficient way to ensure the EAP exemption earnings thresholds keep 
pace with changes in employee pay and thus remain effective in helping 
determine exemption status. Accordingly, the Department is including in 
this rule a mechanism for updating the salary and compensation levels, 
to reflect current wage data, on July 1, 2024 and every 3 years 
thereafter. As explained in greater detail in section V.A, employees 
and employers alike will benefit from the certainty and stability of 
regularly scheduled updates.

B. Response to Comment Filed by the Chief Counsel for Advocacy of the 
Small Business Administration

    SBA Advocacy expressed similar concerns as those expressed by other 
small business commenters, based upon its meetings, roundtables, and 
other discussions regarding the NPRM. SBA Advocacy stated that it was 
concerned that the IRFA underestimated the compliance costs of the 
rule, the proposed rule would add to the current difficult business 
environment, the proposed rule would have significant impacts on small 
nonprofits, the IRFA did not account for non-financial costs to small 
entities and employees, and the IRFA did not consider less burdensome 
alternatives. SBA Advocacy recommended that the Department issue a 
supplemental RFA to reanalyze small entity impacts, adopt a lower 
standard salary level, update the standard salary level every four 
years through notice and comment rulemaking, publish a

[[Page 32945]]

small entity compliance guide, provide more time for compliance, and 
add provisions to help small nonprofits comply. SBA Advocacy's comments 
and the Department's response to those comments are discussed in detail 
below.
    SBA Advocacy reported that participants at its roundtables 
estimated first year costs would be much higher than the estimates in 
the IRFA, from $20,000 to over $200,000 in compliance costs per small 
entity. SBA Advocacy asserted that small businesses may have to hire 
outside staff to interpret and implement the rule and face high 
administrative and operational costs to schedule and track employee 
hours to minimize overtime costs. SBA Advocacy also stated that 
participants at their roundtables reported much higher payroll costs 
than the estimates provided by the Department in the IRFA. Advocacy 
further stated that the IRFA failed to estimate compliance costs by 
small entity size and revenue by presenting average impacts by 
industry.
    The assumptions small businesses used to estimate first-year 
compliance costs ranging from $20,000 to $200,000 per entity were not 
described. However, the Department clearly outlined its methodology and 
assumptions used to estimate regulatory familiarization, adjustment, 
and management costs that it expects businesses, including small 
businesses, might incur. The Department disagrees that it 
underestimated small entity costs in the IRFA. First, this rulemaking 
is narrow in scope as it only makes changes relating to earnings 
thresholds in the part 541 regulations. The Department published final 
rules changing the salary thresholds in 2016 and 2019. The Department 
therefore expects that most businesses will not require significant 
time to become familiar with these regulations, or that they will 
require significant time from outside consultants. Furthermore, the 
Department expects that small entities will rely upon compliance 
assistance materials provided by the Department, including the small 
entity compliance guide that will be published, or industry 
associations to become familiar with the final rule.
    Second, the Department estimates businesses will require an average 
of 75 minutes per employee to choose how to make adjustments for 
affected employees. The Department expects that employers will most 
likely need to spend little to no time making adjustments for many 
affected workers, such as the almost 70 percent of the employees who do 
not work overtime (Type 1 employees) and those whose salaries are well 
below the new standard salary level or only occasionally work overtime. 
If, for example, decisions can be quickly made for half of a business' 
affected employees, then that leaves two hours or more per employee for 
employers to consider how to respond with regard to employees requiring 
more consideration.
    Third, the Department believes that most, if not all, 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, on average, not 
require more than 10 minutes per week per worker who works overtime in 
managerial time cost, as employers will rely on policies such as a 
policy against working overtime without express approval or a standard 
weekly schedule of assigned hours. The Department notes that nearly 70 
percent of affected employees do not work overtime, and another 17 
percent who do work overtime average about an hour of overtime per 
week; less than 15 percent of currently exempt employees average 10 or 
more hours of overtime per week. The Department therefore disagrees 
with SBA Advocacy that small entities will ``face vast administrative 
and operational costs to schedule and track employee hours to minimize 
overtime costs.'' Consistent with the approach taken in calculating 
managerial costs in the 2019 rule,\439\ the Department believes that an 
average of 10 additional minutes per week managing the hours of each 
newly exempt worker who works overtime is appropriate.
---------------------------------------------------------------------------

    \439\ See 84 FR 51267.
---------------------------------------------------------------------------

    SBA Advocacy bases its claim that the Department underestimated 
payroll costs on reports from ``[r]oundtable participants'' of ``much 
higher payroll costs,'' pointing to four businesses--``an Arkansas 
restaurant with four locations'' and three ``small amusement 
businesses''--which claimed they would need to increase manager 
salaries from $57,000 to $250,000 to comply with the rule. SBA Advocacy 
also provided hypothetical scenarios of potential salary increases that 
restaurant employers with currently exempt employees would need to 
incur to comply with the proposed rule based on various assumptions. As 
discussed in section VII.C.4.iii.c, these anecdotal reports and 
hypothetical examples do not have any information on the actual amount 
of overtime work being performed by employees who could become newly 
nonexempt under the new salary level. The Department expects that 
businesses that would be faced with large increases in payroll costs if 
they were to increase salaries to the new threshold would instead find 
other responses more economically feasible, such as limiting the number 
of overtime hours worked by nonexempt workers.
    Moreover, as explained above, the majority of affected workers who 
work no overtime or minimal overtime will likely receive little 
additional pay as a result of the rule. While some employers might have 
to pay the overtime premium, when combined with the 85 percent of 
affected employees who will receive little or no overtime pay premium 
because they work little or no overtime, the average pay raise over all 
affected employees and their employers will be much smaller than the 
examples presented in SBA Advocacy's comment.
    SBA Advocacy stated that small firms have expressed the sentiment 
that they would have to fire and not promote employees and limit hours 
worked as a result of the rule, after recent inflation, supply chain 
disruptions, shutdowns and tight labor markets that followed the COVID-
19 pandemic. The Department acknowledges that the economic climate has 
been difficult to navigate since the start of 2020. However, most 
indications are that the economy has been returning to long run growth 
patterns with subsiding inflation. For example, a report by Van 
Nostrand and Sinclair (2023) \440\ from the U.S. Department of the 
Treasury indicates that the United States has seen a strong GDP 
recovery and was on track during 2023 to recover to levels predicted 
before the pandemic. Similarly, reflecting improvements in inflation 
and personal incomes, the Survey of Consumers from the University of 
Michigan reported that consumer sentiment in January 2024 grew by 13 
percent and reached its highest level since July 2021.\441\ To the 
extent that labor markets remain tight, that might be a reflection of 
significant, potentially long-run changes in factors such as long run 
labor force participation rates.\442\ Regardless,

[[Page 32946]]

workers affected by this rule compose a relatively small part of the 
overall labor market and the increase in wages should be relatively 
small (see e.g., estimated transfers per worker, Table 23). While small 
businesses may be more affected by labor market turmoil, the overall 
size of the impact of this rule on the economy would indicate that it 
is unlikely that the rule will have a significant impact on this market 
turmoil.
---------------------------------------------------------------------------

    \440\ Van Nostrand and Sinclair (2023). The U.S. Economy in 
Global Context. U.S. Department of the Treasury. https://home.treasury.gov/news/featured-stories/the-us-economy-in-global-context.
    \441\ University of Michigan (2024). Surveys of Consumers. 
http://www.sca.isr.umich.edu/.
    \442\ Bognar et al. (2023) What Does Everything Besides the 
Unemployment Rate Tell Us About Labor Market Tightness?. Federal 
Reserve Bank of Chicago. https://www.chicagofed.org/publications/chicago-fed-letter/2023/491. Hornstein and Kudlyak (2022). The 
Pandemic's Impact on Unemployment and Labor Force Participation 
Trends. Federal Reserve of Richmond Economic https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-12.
---------------------------------------------------------------------------

    SBA Advocacy also stated that it believes that the Department 
underestimated the impact of the proposed rule on small nonprofit 
organizations, citing examples of small nonprofits that estimate costs 
above the one to three percent of revenue threshold, a measure for 
determining the economic impact on small entities from SBA Advocacy's 
RFA compliance guide. The Department disagrees that it underestimated 
the impact of this rule on small nonprofits. First, many nonprofits are 
non-covered enterprises because when determining enterprise coverage, 
only revenue derived from business operations, not charitable 
activities, is included. However, as discussed in section VII.B.3, the 
Department nonetheless included workers employed by enterprises that do 
not meet the enterprise coverage requirements in its estimate of 
workers subject to the FLSA, since there is no data set that would 
adequately inform an estimate of the size of this worker population in 
order to exclude them from these estimates. \443\ Second, for the 
reasons stated above, the Department believes that expected costs and 
payroll impacts of the rule cited by SBA Advocacy and other commenters 
are overestimates, and that the Department's estimates are more 
accurate reflections of costs and impacts. The Department finds that 
even if all employees at a small entity, whether for-profit or 
nonprofit, are exempt--an unlikely scenario--then cost and increased 
payroll combined comprise about one percent of payroll per affected 
small entity, and therefore an even smaller percentage of revenues. See 
Table 32. SBA Advocacy cited concerns about the rule's effect on 
seasonal businesses raised by a representative from America Outdoors 
Association, which asserted that many affected employees in seasonal 
recreational businesses work nontraditional work schedules that would 
make it difficult to reclassify them as hourly workers, as well as a 
concern raised by a representative of the Independent Community Bankers 
Association of America that the rule could cause its members to reduce 
services in ``rural or less profitable areas.'' The Department 
reiterates that employers do not need to reclassify nonexempt workers 
as hourly employees; they merely need to pay an overtime premium for 
hours worked over 40 in a workweek. While there will be affected 
workers in the finance sector, the Department believes that costs and 
transfers for small entities in the finance sector will be manageable 
as a share of payroll and of total revenue.\444\
---------------------------------------------------------------------------

    \443\ Although not excluding such entities and associated 
workers only affects a small percentage of workers generally, it may 
have a larger effect (and result in a larger overestimate) for 
nonprofits, because revenue from charitable activities is not 
included when determining enterprise coverage. See section VII.B.3.
    \444\ See Table 32.
---------------------------------------------------------------------------

    SBA Advocacy further stated that the IRFA ``does not consider the 
non-financial consequences to reclassify workers, such as the effect on 
worker flexibility, worker morale, and loss of benefits and career 
advancement.'' The Department addresses these and other possible 
impacts that cannot be quantified in sections V.B.4.v and VII.C.3.v. In 
addition, the Department believes that while individual experiences 
vary, the rule will benefit employees in a variety of ways (e.g., 
through increased earnings and an increase in personal time for some 
affected workers).
    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. However, 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. Further, a study by Lonnie 
Golden \445\ using data from the General Social Survey (GSS) found that 
``[i]n general, salaried workers at the lower (less than $50,000) 
income levels don't have noticeably greater levels of work flexibility 
that they would `lose' if they became more like their hourly 
counterparts.''
---------------------------------------------------------------------------

    \445\ Golden, L. (2014). Flexibility and Overtime Among Hourly 
and Salaried Workers. Economic Policy Institute. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597174.
---------------------------------------------------------------------------

    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. As noted above in section 
VII.C.3.v, research has shown that salaried workers are more likely 
than hourly workers to receive benefits such as paid vacation time and 
health insurance,\446\ and are more satisfied with their benefits.\447\ 
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.\448\ 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.
---------------------------------------------------------------------------

    \446\ 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.
    \447\ Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of 
Employee Benefits Satisfaction. Journal of Business and Psychology, 
7(3), 323-339.
    \448\ 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 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 premium on 
that base wage for any overtime hours each week. Similarly, employers 
may continue to provide these workers with the same level of benefits 
as previously, whether paid on an hourly or salary basis. While 
reducing benefits may be one way for employers to offset payroll 
increases associated with this rule, as shown below, the Department 
estimates that costs and payroll increases for small, affected firms 
are less than 0.9 percent of payroll and less than 0.2 percent of 
estimated revenues. Therefore, the Department does anticipate that it 
will be necessarily for a significant number of employers to reduce 
employee benefits.

[[Page 32947]]

    Finally, it is unclear why career advancement will be inhibited. As 
noted above, see section VII.C.3.v., nothing in this rule requires 
employers to limit advancement opportunities for newly nonexempt 
workers. The Department notes that if an employer believes that career 
advancement opportunities such as training are sufficiently important, 
it can ensure employees attend the trainings during their 40-hour 
workweek or pay the overtime premium where training attendance causes 
the employee to work over 40 hours in a workweek.
    SBA Advocacy stated that the IRFA was incomplete ``because it d[id] 
not analyze any regulatory alternatives that would minimize the impact 
of the rule for small businesses, such as lower salary levels.'' 
However, the Department considered several regulatory alternatives in 
the NPRM, describing both the alternatives it considered, which 
included lower (and higher) thresholds for the standard salary level 
and HCE total compensation requirement, and why it chose the earnings 
thresholds it proposed.\449\ And it has considered and analyzed 
multiple regulatory alternatives, including lower (and higher) 
thresholds for the standard salary and HCE total compensation 
requirement, in this final rule as well.\450\
---------------------------------------------------------------------------

    \449\ See 88 FR 62217.
    \450\ See section VII.C.8.
---------------------------------------------------------------------------

    SBA Advocacy recommended that the Department issue a Supplemental 
Regulatory Flexibility Analysis to be published in the Federal Register 
for public comment addressing compliance costs in and after the first 
year, compliance costs by different sized small entities, the current 
business environment, impacts to small nonprofits, the non-financial 
consequences of the rule, and the impacts of adopting alternative 
salary thresholds on different sizes of small businesses. The 
Department disagrees with SBA Advocacy that this rulemaking should be 
delayed for this reason. The Department provided a fully robust and 
transparent analysis of estimated impacts on small entities in its 
IRFA, relying on largely the same methods and assumptions the 
Department employed in drafting the IFRA in its 2019 rulemaking.
    As the Department stated in the IRFA, it is difficult to directly 
evaluate compliance cost impacts by entity size due to lack of data 
concerning the distribution of affected workers by entity size. There 
are fewer affected workers than there are small entities. Therefore, 
many small entities will employ zero affected workers; small entities 
that do employ affected workers may employ one affected worker, or have 
nearly all workers affected, and anywhere in between. The number of 
small entities that employ affected workers will be inversely related 
to the number of affected employees per entity; if small entities only 
employ one affected worker, more entities will be affected, and vice 
versa.
    Therefore, the Department evaluated a range of potential impacts 
from lowest to highest depending on whether one or all employees are 
affected. Furthermore, the Department evaluated the impact of 
regulatory compliance costs plus increased wages as a percent of 
payroll. Payroll is largely proportionate to the number of employees at 
the firm; if one entity has 10 times as many employees as another, its 
payroll is likely to be 10 times larger. Similarly, if an entity has 10 
times more affected employees than another firm, then it will likely 
incur 10 times more compliance cost and wage impacts. Finally, firms 
hire more workers to increase production and sales, so entity revenues 
will be a multiple of payroll, although that multiple might vary by 
industry. If compliance costs and increased wages comprise 2 percent of 
payroll, those costs will comprise less than 2 percent of revenues. 
Thus, regardless of the size of the small entity, regulatory impacts 
should fall within the range calculated by the Department.
    The Department shows in Table 34 that with the exception of the 
accommodation and the food services and drinking places industries, if 
all employees at an entity are affected by the rule, compliance cost 
and increased wages comprise less than 1.5 percent of payroll and 
substantially less than 1 percent of revenues per affected small 
entity. Although compliance costs and increased wages might comprise 
3.55 percent of payroll in the food services and drinking places 
industry, that is about 1.10 percent of revenues. Performing this 
analysis for different sized firms should not appreciably change these 
results.
    SBA Advocacy also recommended adopting a lower standard salary 
level that considers the significant small business impacts of the 
rule. The comment proposed two alternatives: retain the current 
standard salary threshold, or ``adjust[ ] the standard salary threshold 
by a particular industry sector that will experience the greatest 
economic costs,'' noting that the 2019 standard salary level was based 
on earnings in both the lowest-wage Census region and the retail 
industry. The comment also stated that small entities at SBA Advocacy's 
roundtable recommended a gradual or phased increase in the standard 
salary threshold.
    Although SBA Advocacy disagreed with the standard salary level 
selected by the Department, the salary level accounts for regions and 
industries likely to be most affected by the rule. As discussed 
above,\451\ the Department is setting the final rule standard salary 
level using the lowest-wage Census Region, instead of a national level, 
ensuring the salary level is not driven by earnings in high- or even 
middle-wage regions of the country. The Department believes that using 
earnings data from the lowest-wage Census Region produces a salary 
level that accounts for differences across industries and regional 
labor markets. The Department thus believes that the standard salary 
level is appropriate for small businesses.
---------------------------------------------------------------------------

    \451\ See sections V.B.4.iv, VII.C.2.
---------------------------------------------------------------------------

    Consistent with the history of the part 541 regulations, the 
Department also declines to create a lower salary level requirement for 
employees employed at small entities, or to exclude such employees from 
the salary level test. As the Department has previously noted, while 
``the FLSA itself does provide special treatment for small entities 
under some of its exemptions . . . the FLSA's statutory exemption for 
white-collar employees in section 13(a)(1) contains no special 
provision based on size of business.'' \452\ In the 86-year history of 
the part 541 regulations defining the EAP exemption, the salary level 
requirements have never varied according to the size or revenue of the 
employer.\453\
---------------------------------------------------------------------------

    \452\ See 81 FR 32526; 69 FR 22238.
    \453\ See Stein Report at 5-6 (rejecting proposals to set 
varying regional salary levels); see also 69 FR 22238 (stating that 
implementing differing salary levels based on business size 
industry-by-industry ``would present the same insurmountable 
challenges'' as adopting regional or population-based salary 
levels).
---------------------------------------------------------------------------

    SBA Advocacy recommended that updates to the standard salary 
threshold be made once every 4 years through a proposed rule with a 
notice and comment process for each update, as opposed to updating the 
standard salary level every three years through the proposed updating 
mechanism. The comment conveyed skepticism regarding the lawfulness of 
the Department's proposed updating mechanism asserting that the FLSA 
requires the Department to periodically issue regulations to set the 
standard salary level. The comment also expressed concern that the 
updating provision would drive wage inflation for salaried workers 
because employers

[[Page 32948]]

may raise the salaries of their newly nonexempt workers to keep them 
exempt or move them to hourly work to comply with the rule, thereby 
causing ``a self-perpetuating threshold, as the salary level of the 
35th percentile would grow each iteration or three years.'' The comment 
reported small businesses at Advocacy's roundtable opposed the proposed 
updating mechanism ``because it creates steep and unpredictable changes 
to the EAP exemption and uncertainty for employers[,]'' and asserted 
that small entities have highlighted the administrative burdens of 
reclassifying workers and tracking employee hours. The comment also 
mentioned the concern from small construction and professional services 
businesses about difficulties setting price structures on long term 
federal and private contracts.
    The Department disagrees with SBA Advocacy's skepticism regarding 
the lawfulness of the updating mechanism. As explained in section 
V.A.3.i, the Department is adopting an updating mechanism in this 
rulemaking after publishing a notice of the proposed rule and providing 
opportunity for stakeholders to comment in accordance with the 
appropriate notice and comment requirements. The Department has 
received and considered numerous comments on the proposed updating 
mechanism. Future updates under the triennial updating mechanism would 
simply reset the thresholds by applying current data to a standard 
already established by regulation. Therefore, the Department disagrees 
with the assertion that a notice and comment rulemaking must precede 
each future update made through the updating mechanism even where the 
methodology for setting the compensation levels and the mechanism for 
updating those levels would remain unchanged.
    The Department also disagrees with the concern that the updating 
mechanism would result in rapid increases to the salary level solely 
because of employers' actions in response to the rule. This assertion 
is akin to the ones made by a number of other commenters that the 
updating mechanism tied to a fixed percentile would lead to the salary 
level being ratcheted upward over time due to the resulting actions of 
employers. As explained in detail in sections V.A.3.iii and VII.C.9, 
there is nothing to substantiate this assertion. On the contrary, the 
Department's analyses shows that employers' actions in response to the 
rule will not have the asserted impact on future updates. Rather, the 
updating mechanism will only ensure that the salary level continues to 
reflect prevailing economic conditions.
    The Department also finds unpersuasive the assertion that the 
updating mechanism will lead to unpredictable changes and uncertainty 
for employers. Unlike irregular updates to the earnings thresholds, 
which may result in drastic changes to the thresholds, regular updates 
on a pre-determined interval and using an established methodology will 
produce more predictable and incremental changes. Through the updating 
mechanism, the Department will reset the standard salary level and 
total annual compensation threshold using the most recent, publicly 
available, BLS data on earnings for salaried workers. Therefore, 
employers will be able to track where the thresholds would fall on a 
quarterly basis by looking at the BLS data and can estimate the changes 
in the thresholds even before the Department publishes the notice with 
the adjusted thresholds in the Federal Register. The Department 
believes that, compared to the irregular updates of the past, employers 
will be better positioned to anticipate and prepare for future updates 
under the updating mechanism.
    SBA Advocacy also referenced that the Department must publish a 
small entity compliance guide for this rule. Pursuant to its 
obligations under section 212 of SBREFA, the Department will publish a 
small entity compliance guide for this rule.
    SBA Advocacy recommended the Department add provisions to help 
small nonprofits comply with the rule, due to difficulties 
renegotiating government grants and contracts. As explained in section 
II.D, issues directly related to the public financing available for 
certain employers that might be affected by this final rule are beyond 
the Department's authority to address. However, the Department intends 
to issue technical assistance to help employers comply with the FLSA.
    Finally, SBA Advocacy recommended an extended effective date for 
the rule of at least 1 year or 18 months, as small entities indicated 
needing ``more time to understand and evaluate the rule, and possibly 
reclassify their workforce and budget for expenditures.'' As discussed 
in section IV, having considered commenter feedback in response to the 
NPRM, the Department has determined that a delayed applicability date 
is appropriate for the new standard salary level and the HCE total 
annual compensation threshold. Specifically, the new $1,128 per week 
standard salary level and $151,164 per year HCE total annual 
compensation threshold will not be applicable until approximately 8 
months after publication of this final rule in the Federal Register. 
The Department will initially update those thresholds on July 1, 2024, 
by reapplying the methodologies used to set those thresholds in the 
2019 rule, resulting in an initial salary level of $844 per week and an 
initial HCE total annual compensation threshold of $132,964 per year. 
Those initial thresholds will remain in effect until the higher 
thresholds become applicable.

C. Significant Issues Raised by Public Comments in Response to the 
Initial Regulatory Flexibility Analysis

    Many of the issues raised by small businesses in the public 
comments received on the proposed rule are described in the preamble 
and RIA above, which are incorporated herein. Nevertheless, significant 
issues raised by representatives of small businesses are also addressed 
here.
    Most of the comments received concerning small businesses centered 
on the burden that the proposed salary level would impose on small 
entities. Many such commenters emphasized that rule-related costs would 
detrimentally impact small businesses. See, e.g., Amusement and Music 
Operators Association; Independent Women's Forum; NSBA. Some commenters 
specifically asserted that the Department underestimated compliance 
costs for small entities under the proposed rule. See, e.g., ABC; The 
4A's. For example, NFIB contended that the rule could cost small 
businesses more than large businesses because, among other reasons, 
small businesses often have fewer resources (such as administrative 
staff members, experienced human resources personnel, or regular access 
to legal counsel). Sixteen Members of the U.S. House of Representatives 
cited rule-related costs, combined with burdens facing small 
businesses, in urging the Department to withdraw its proposal. A number 
of small businesses specifically raised concerns about the impact of 
the proposed salary level on small entities in low-wage regions and 
industries. See, e.g., Nebraska Bankers Association; National 
Restaurant Association. Other commenters, including the Job Creators 
Network Foundation, expressed concern that the rule would adversely 
impact small businesses by increasing inflation. Some small businesses, 
raising these and similar concerns, urged the Department to set a 
special salary level or create an exemption for small businesses. See, 
e.g., Bowling Proprietors Association of America; WFCA. Opposition was 
not uniform,

[[Page 32949]]

however, as some small businesses supported the proposed rule. See, 
e.g. A Few Cool Hardware Stores; BA Auto Care; Well-Paid Maids.
    For the reasons previously discussed in detail, the Department 
believes its cost estimates are appropriate and do not provide a basis 
for changing the methodology used to set the salary level or for 
abandoning this rulemaking altogether. The Department does not agree 
with those commenters who asserted that the proposal would be ruinous 
for small businesses. As shown later in this section, Department's 
upper bound estimate of the impact of this rule per small establishment 
(which assumed all employees in a small firm are affected by the new 
rule) shows that costs and payroll increases for small affected firms 
were less than 0.9 percent of payroll and less than 0.2 percent of 
estimated revenues. While the affect in some industries will be 
somewhat larger, these figures reinforce that this rule will not be 
unduly burdensome for small businesses. In addition, the Department 
believes that most, if not all, small businesses, like larger 
businesses, employ a mix of exempt and overtime-protected workers. As 
such, to the extent cost concerns are tied in part to small businesses 
reclassifying some employees who become nonexempt as hourly as a result 
of this rule, many employers will already have policies and systems in 
place for scheduling workers and monitoring overtime hours worked and 
the corresponding overtime premium pay. Such established procedures, 
and experience gained through fairly recent rulemakings to increase the 
earnings thresholds, may help mitigate concerns related to small 
businesses requiring substantial assistance from outside professionals 
to comply with this final rule. Additionally, the Department intends to 
publish compliance assistance materials, including a small entity 
compliance guide. Industry associations also typically become familiar 
with rulemakings such as this one and often provide compliance 
assistance to association members. As to inflationary concerns, as 
previously discussed, the Department does not expect its rule to lead 
to increased inflation on a national level.
    The Department recognizes that many small employers operate in low-
paying regions or industries, and the Department has historically 
accounted for small employers when setting the salary level.\454\ This 
final rule is no exception, as the Department is setting the salary 
level using the lowest-wage Census Region. The Department declines to 
adopt special exceptions or lower salary levels for small businesses. 
As stated above and as the Department has emphasized in past rules, 
```the FLSA's statutory exemption for white-collar employees in section 
13(a)(1) contains no special provision based on size of business.' '' 
\455\ In the 86-year history of the part 541 regulations defining the 
EAP exemption, the Department has never adopted special salary levels 
for small businesses. The Department continues to believe that 
implementing differing salary levels based on business size industry-
by-industry would be inadvisable because, among other reasons, it 
``would present the same insurmountable challenges'' as adopting 
regional or population-based salary levels.\456\
---------------------------------------------------------------------------

    \454\ See, e.g., Weiss Report at 14-15 (setting the long test 
salary level for executive employees ``slightly lower than might be 
indicated by the data'' in part to avoid excluding ``large numbers 
of the executives of small establishments from the exemption'').
    \455\ See 81 FR 32526 (quoting 69 FR 22238).
    \456\ 69 FR 22238.
---------------------------------------------------------------------------

    The Department received many comments in response to its proposed 
mechanism to update the standard salary and HCE total annual 
compensation requirements. As discussed in section V.A.3.i, some 
commenters asserted that the proposed updating mechanism would violate 
the RFA. Commenters, including Independent Electrical Contracts, RILA, 
and Seyfarth Shaw, commented that the RFA required the Department ``to 
undertake a detailed economic and cost analysis'' and that Department's 
proposed updating mechanism would bypass these requirements. The RFA 
requires a regulatory flexibility analysis to accompany any agency 
final rule promulgated under 5 U.S.C. 553.\457\ In accordance with this 
requirement, this section estimates the costs of future triennial 
updates using the fixed percentile method. The RFA only requires that 
such analyses accompany rulemaking, and commenters did not cite any RFA 
provision that would require the Department to conduct a new regulatory 
flexibility analysis before each scheduled update to the salary and 
annual compensation thresholds.
---------------------------------------------------------------------------

    \457\ See 5 U.S.C. 603-604.
---------------------------------------------------------------------------

    Several commenters addressed the potential effects that the 
proposed updating mechanism could have on small entities. Small 
Business Majority expressed support for the proposed updating 
mechanism, asserting that ``[s]maller, predictable increases that are 
known well in advance will allow small business owners to be better 
prepared for any staffing or compensation changes they need to make.'' 
Business for a Fair Minimum Wage--whose members include many small 
business owners--commented that the proposed updating mechanism would 
keep the thresholds up to date and predictable for employers. In 
contrast, NFIB asserted that ``triennial updates would result in 
instability in labor and administrative costs for small businesses in 
perpetuity'' as small businesses would have to reconsider the 
classifications given to their employees every 3 years. The 4As 
similarly asserted that the updating mechanism imposes substantial 
ongoing expense on small agencies noting that ``[l]ike many small 
businesses, small agencies often outsource legal, payroll, and some HR 
functions to outside professionals.'' ASTA expressed concern that 
``small business owners with limited resources to engage outside help, 
would have difficulty keeping abreast of salary level increases and 
could inadvertently find themselves out of compliance.''
    As previously explained, the Department believes the updating 
mechanism adopted by this final rule will ensure greater certainty and 
predictability for the regulated community. For all future triennial 
updates, the Department will publish a notice with the revised salary 
and annual compensation thresholds not fewer than 150 days before the 
new thresholds are set to take effect. Moreover, businesses will be 
able to estimate the changes in the thresholds by looking at BLS data 
even before the Department publishes the notice with the adjusted 
thresholds. The Department believes that, compared to the irregular 
updates of the past, employers will be better positioned to anticipate 
and prepare for future updates under the updating mechanism. As noted 
in section V.A.3.ii, the alternative to Department's updating mechanism 
is not a permanent fixed earnings threshold, but instead larger changes 
to the threshold that would occur during irregular future updates. 
Since the updating mechanism will change the thresholds regularly and 
incrementally, and based on actual earnings of salaried workers, the 
Department predicts that employers will be in a better position to be 
able to adjust to the changes resulting from triennial updates.
    The Department believes that the updating mechanism will ensure 
that the earnings thresholds for the EAP exemption will remain 
effective and up to date over time. The updating mechanism should 
benefit employers of

[[Page 32950]]

all sizes going forward by avoiding the uncertainty and disruptiveness 
of larger increases that would likely occur as a result of irregular 
updates.

D. Estimate of the Number of Affected Small Entities

1. Definition of Small Entity
    The RFA defines a ``small entity'' as (1) a small not-for-profit 
organization, (2) a small governmental jurisdiction, or (3) a small 
business. The Department used the entity size standards defined by SBA 
and in effect as of 2019, to classify entities as small or large.\458\ 
The most recent size standards were released in 2022 and use the 2022 
NAICS. However, because the data used by the Department to estimate the 
number of small entities uses the 2017 NAICS, the Department used the 
2019 entity size standards instead of the 2022 standards.\459\
---------------------------------------------------------------------------

    \458\ See https://data.sba.gov/dataset/small-business-size-standards/resource/d89a5f17-ab8e-4698-9031-dfeb34d0a773.
    \459\ The SBA size standard changes in 2022 primarily adjusted 
the standards to the 2022 NAICS, these changes were not substantive. 
https://www.govinfo.gov/content/pkg/FR-2022-09-29/pdf/2022-20513.pdf.
---------------------------------------------------------------------------

    SBA establishes standards for 6-digit NAICS industry codes, and 
standard size cutoffs are typically based on either the average number 
of employees or average annual receipts. However, some exceptions 
exist, the most notable being that depository institutions (including 
credit unions, commercial banks, and non-commercial banks) are 
classified by total assets and small governmental jurisdictions are 
defined as areas with populations of less than 50,000.\460\
---------------------------------------------------------------------------

    \460\ See https://advocacy.sba.gov/resources/the-regulatory-flexibility-act/rfa-data-resources-for-federal-agencies/ for 
details.
---------------------------------------------------------------------------

2. Number of Small Entities and Employees
    The primary data source used to estimate the number of small 
entities and employment in these entities is the Statistics of U.S. 
Businesses (SUSB). Alternative sources were used for industries with 
asset thresholds (credit unions,\461\ commercial banks and savings 
institutions,\462\ agriculture \463\), and public administration.\464\ 
The Department used 2017 data, when possible, to align with the use of 
2017 SUSB data. Private households are excluded from the analysis due 
to lack of data.
---------------------------------------------------------------------------

    \461\ National Credit Union Association. (2018). 2018 Year End 
Statistics for Federally Insured Credit Unions. Available at: 
https://www.cuna.org/advocacy/credit-union_-economic-data/data_-
statistics/credit-union-profile-reports.html.
    \462\ Federal Depository Insurance Corporation. (2018). 
Quarterly Financial Reports-Statistics On Depository Institutions 
(SDI). Available at: https://www.fdic.gov/foia/ris/id-sdi/index.html. Data are from 12/31/17.
    \463\ 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.
    \464\ Census of Governments. 2017. Available at: https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

    For each industry, the SUSB 2017 tabulates 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).\465\ Although more recent SUSB data are 
available, these data do not disaggregate entities by revenue sizes. 
The Department combined these data with the SBA size standards to 
estimate the proportion of firms and establishments in each industry 
that are considered small, and the proportion of workers employed by a 
small entity. The Department classified all firms and establishments 
and their employees in categories below the SBA cutoff as small.\466\ 
If a cutoff fell in the middle of a category, the Department assumed a 
uniform distribution of employees across that bracket to determine what 
proportion of establishments should be classified as small.\467\ The 
estimated share of establishments that were small in 2017 was applied 
to the more recent 2021 SUSB data on the number of small establishments 
to determine the number of small entities.\468\
---------------------------------------------------------------------------

    \465\ The SUSB defines employment as of March 12th.
    \466\ The Department's estimates of the numbers of affected 
small entities and affected workers who are employees of small 
entities includes entities not covered by the FLSA and thus are 
likely overestimates. The Department had no credible way to estimate 
which enterprises with annual revenues below $500,000 also did not 
engage in interstate commerce and hence are not subject to the FLSA.
    \467\ 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.
    \468\ Statistics of U.S. Businesses 2021, https://www.census.gov/programs-surveys/susb.html.
---------------------------------------------------------------------------

    The Department also estimated the number of small establishments 
and their employees by employer type (nonprofit, for-profit, 
government). This calculation is similar to the calculation of the 
number of establishments by industry but with different data. Instead 
of using data by industry, the Department used SUSB data by Legal Form 
of Organization for nonprofit and for-profit establishments. The 
estimated share of establishments that were calculated as small with 
the 2017 data was then applied to the 2021 SUSB counts. For 
governments, the Department used the number of governments reported in 
the 2017 Census of Governments.\469\
---------------------------------------------------------------------------

    \469\ Census of Governments 2017. Available at https://www.census.gov/programs-surveys/cog.html.
---------------------------------------------------------------------------

    Table 28 presents the estimated number of establishments/
governments and small establishments/governments in the U.S. 
(hereafter, referred to as ``entities'').\470\ The numbers in the 
following tables are for Year 1; projected impacts are considered 
later. The Department found that of the 8.2 million entities, 80 
percent (6.6 million) are small by SBA standards. These small entities 
employ 55.3 million workers, about 37 percent of workers (excluding 
self-employed, unpaid workers, and members of the armed forces). They 
also account for roughly 35 percent of total payroll ($3.7 trillion of 
$10.7 trillion).\471\
---------------------------------------------------------------------------

    \470\ 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. The Department based the 
analysis on the number of establishments rather than firms for a 
more conservative estimate (potential overestimate) of the number of 
small businesses.
    \471\ 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.
---------------------------------------------------------------------------

    Although the Department used 6-digit NAICS to determine the number 
of small entities and the associated number of employees, the following 
tables aggregate findings to 27 industry categories. This was the most 
detailed level available while maintaining adequate sample sizes.\472\ 
The Department started with the 51-industry breakdown and aggregated 
where necessary to obtain adequate sample sizes.
---------------------------------------------------------------------------

    \472\ The Department required at least 15 affected workers 
(i.e., observations) in small entities in Year 1.
---------------------------------------------------------------------------

Table 28--Number of Entities and Employees by SBA Size Standards, by 
Industry and Employer Type

[[Page 32951]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.178


[[Page 32952]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.179

    Estimates are not limited to entities subject to the FLSA because 
the Department cannot estimate which enterprises do not meet the 
enterprise coverage requirements because of data limitations. Although 
not excluding such entities and associated 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.
3. Number of Affected Small Entities and Employees
    The calculation of the number of affected EAP workers was explained 
in detail in section VII.B. Here, the Department focuses on how these 
workers were allocated to either small or large entities. To estimate 
the probability that an exempt EAP worker in the CPS data is employed 
by a small entity, the Department assumed this probability is equal to 
the proportion of all workers employed by small entities 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 one out of every two exempt EAP workers in this 
industry.\473\ 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.474 475
---------------------------------------------------------------------------

    \473\ 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.
    \474\ A strand of literature indicates that small businesses 
tend to pay lower wages than larger businesses. 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.
    \475\ Workers are designated as employed in a small business 
based on their industry of employment. The share of workers 
considered small in nonprofit, for profit, and government entities 
is therefore the weighted average of the shares for the industries 
that compose these categories.
---------------------------------------------------------------------------

    The Department estimated that small entities employ 1.6 million of 
the 4.3 million affected workers (36.3 percent) (Table 29). This 
composes 2.8 percent of the 55.3 million workers that small entities 
employ. The sectors with the highest total number of affected workers 
employed by small entities are professional and technical services 
(281,000); health care services, except hospitals (140,000); and retail 
trade (125,000). The sectors with the largest percent of workers 
employed by small entities who are affected include:

[[Page 32953]]

insurance (7.0 percent); membership associations and organizations (5.7 
percent); and professional and technical services (5.3 percent).

Table 29--Number of Affected Workers Employed by Small Entities, by 
Industry and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.180


[[Page 32954]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.181

    Because no information is available on how affected workers would 
be distributed among small entities, the Department estimated a range 
of effects. At one end of this range, the Department assumed that each 
small entity employs no more than one affected worker, meaning that at 
most 1.6 million of the 6.6 million small entities will employ an 
affected worker. Thus, these assumptions provide an upper-end estimate 
of the number of affected small entities. (However, it provides a 
lower-end estimate of the effect per small entity because costs are 
spread over a larger number of entities; the impacts experienced by an 
entity would increase as the share of its workers that are affected 
increases.) For the purpose of estimating a lower-range number of 
affected small entities, the Department used the average size of a 
small entity as the typical size of an affected small entity, and 
assumed all workers are affected. This can be considered an 
approximation of all employees at an entity affected.\476\ The average 
number

[[Page 32955]]

of employees in a small entity is the number of workers that small 
entities employ divided by the total number of small establishments in 
that industry. The number of affected employees at small businesses is 
then divided by this average number of employees to calculate 208,300 
affected small entities.
---------------------------------------------------------------------------

    \476\ This is not the true lower bound estimate of the number of 
affected entities. Strictly speaking, a true lower bound estimate of 
the number of affected small entities would be calculated by 
assuming all employees in the largest small entity are affected. For 
example, if the SBA standard is that entities with 500 employees are 
``small,'' and 1,350 affected workers are employed by small entities 
in that industry, then the smallest number of entities 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 30 summarizes the estimated number of affected workers that 
small entities employ and the expected range for the number of affected 
small entities by industry. The Department estimated that the rule will 
affect 1.6 million workers who are employed by somewhere between 
208,300 and 1.6 million small entities; this comprises from 3.2 percent 
to 23.9 percent of all small entities. It also means that from 5.0 
million to 6.4 million small entities would incur no more than minimal 
regulatory familiarization costs (i.e., 6.6 million minus 1.6 million 
equals 5.0 million; 6.6 million minus 208,300 equals 6.4 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 would be affected. For the other method, by 
definition, there would always be one affected employee per 
establishment. Also displayed is the average payroll per small 
establishment by industry (based on both affected and non-affected 
small entities), calculated by dividing total payroll of small 
businesses by the number of small businesses (Table 28) (applicable to 
both methods).

[[Page 32956]]

Table 30--Number of Small Affected Entities and Employees by Industry 
and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.182


[[Page 32957]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.183

4. Impacts to Affected Small Entities
    For small entities, the Department estimated various types of 
effects, including regulatory familiarization costs, adjustment costs, 
managerial costs, and payroll increases borne by employers. The 
Department estimated a range for the number of affected small entities 
and the impacts they incur. While the upper and lower bounds are likely 
over- and under-estimates, respectively, of effects per small entity, 
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.\477\ Furthermore, the smaller estimate of the 
number of affected entities (i.e., where all employees at each affected 
employer 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 entity size.
---------------------------------------------------------------------------

    \477\ 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.
---------------------------------------------------------------------------

    Parameters that are used in the small business cost analysis for 
Year 1 are provided in Table 31, along with summary data of the 
impacts.\478\
---------------------------------------------------------------------------

    \478\ See section VII.C.3 for a more fulsome discussion on these 
costs.

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

[[Page 32958]]

Table 31--Overview of Parameters Used for Costs to Small Businesses and 
the Impacts on Small Businesses
[GRAPHIC] [TIFF OMITTED] TR26AP24.184

    The Department expects total direct employer costs will range from 
$368.7 million to $443.6 million for affected small entities (i.e., 
those with affected employees) in the first year (an average cost of 
between $282 to $1,771 per entity) (Table 32). Small entities that do 
not employ affected workers will incur $274.9 million to $349.7 million 
in regulatory familiarization costs (an average cost of $54.82 per 
entity). The three industries with the highest costs (professional and 
technical services; health care services, except hospitals; and retail 
trade) account for about 35 percent of the costs. Hospitals are 
expected to incur the largest cost per establishment ($42,900 using the 
method where all employees are affected), although the costs are not 
expected to exceed 0.3 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 0.69 percent of 
average entity payroll).

[[Page 32959]]

Table 32--Year 1 Small Establishment Direct Costs, Total and per 
Establishment, by Industry and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.185


[[Page 32960]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.186

    It is possible that the costs of the rule may be disproportionately 
large for small entities, especially because small entities often have 
limited human resources personnel on staff. However, the Department 
expects that small entities would rely on compliance assistance 
materials provided by the Department or industry associations to become 
familiar with the final rule. Additionally, the Department notes that 
the rule is narrow in scope because the changes all relate 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 entities 
are expected to increase by about $7.06 per week per affected worker, 
using the incomplete fixed-job model \479\ described in section 
VII.C.4.iii.\480\ This would lead to $577.5 million in additional 
annual wage payments to employees in small entities (less than 0.5 
percent of aggregate affected establishment payroll; Table 33). The 
largest payroll increases per establishment are expected in utilities 
(up to $15,500 per entity); hospitals (up to $14,300 per entity); and 
manufacturing--durable goods (up to

[[Page 32961]]

$13,000 per entity). However, average payroll increases per entity 
would exceed one percent of average annual payroll in only two sectors: 
food services and drinking places (2.9 percent) and accommodation (1.1 
percent).
---------------------------------------------------------------------------

    \479\ 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.
    \480\ This is an average increase for all affected workers (both 
standard test and HCE), and reconciles to the weighted average of 
individual salary changes discussed in the Transfers section.
---------------------------------------------------------------------------

Table 33--Year 1 Small Establishment Payroll Increases, Total and per 
Establishment, by Industry and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.187


[[Page 32962]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.188

    Table 34 presents estimated first year direct costs and payroll 
increases combined per entity and the costs and payroll increases as a 
percent of average entity payroll. The Department presents only the 
results for the upper bound scenario where all workers employed by the 
entity are affected. Combined costs and payroll increases per 
establishment range from $1,800 in insurance to $57,200 in hospitals. 
Combined costs and payroll increases compose more than two percent of 
average annual payroll in one sector, food services and drinking places 
(3.6 percent).
    However, comparing costs and payroll increases to payrolls 
overstates the effects on entities because payroll represents only a 
fraction of the financial resources available to an establishment. The 
Department approximated revenue per affected small establishment by 
calculating the ratio of small business revenues to payroll by industry 
from the 2017 SUSB data then multiplying that ratio by average small 
entity payroll.\481\ Using this approximation of annual revenues as a 
benchmark, only one sector will have costs and payroll increases 
amounting to greater than one percent of revenues, food services and 
drinking places (1.1 percent).
---------------------------------------------------------------------------

    \481\ The Department used this estimate of revenue, instead of 
small business revenue reported directly from the 2017 SUSB so 
revenue aligned with payrolls in 2023.

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

[[Page 32963]]

Table 34--Year 1 Small Establishment Direct Costs and Payroll 
Increases, Total and per Entity, by Industry and Employer Type, Using 
All Employees in Entity Affected Method
[GRAPHIC] [TIFF OMITTED] TR26AP24.189


[[Page 32964]]


[GRAPHIC] [TIFF OMITTED] TR26AP24.190

5. Projected Effects to Affected Small Entities in Year 2 Through Year 
10
    To determine how small businesses would be affected in future 
years, the Department projected costs to small businesses for 9 years 
after Year 1 of the rule. Projected employment and earnings were 
calculated using the same methodology described in section VII.B.3. 
Affected employees in small firms follow a similar pattern to affected 
workers in all entities: the number decreases gradually between 
automatic update years, and then increases. There are 1.6 million 
affected workers in small entities in Year 1 and 2.2 million in Year 
10. Table 35 reports affected workers in these 2 years only.

[[Page 32965]]

Table 35--Projected Number of Affected Workers in Small Entities, by 
Industry
[GRAPHIC] [TIFF OMITTED] TR26AP24.191

    Direct costs and payroll increases for small entities vary by year 
but generally decrease between updates as the real value of the salary 
and compensation levels decrease and the number of affected workers 
consequently decreases. In updating years, costs will increase due to 
newly affected workers and some regulatory familiarization costs. 
Direct costs and payroll increases for small businesses will increase 
in Year 10 (an automatic update year) compared to Year 1, $946 million 
in Year 1 and $1.3 billion in Year 10 (Table 36 and Figure 10).

[[Page 32966]]

Table 36--Projected Direct Costs and Payroll Increases for Affected 
Small Entities, by Industry, Using All Employees in Entity Affected 
Method
[GRAPHIC] [TIFF OMITTED] TR26AP24.192


[[Page 32967]]



Figure 10--10-Year Projected Number of Affected Workers in Small 
Entities, and Associated Costs and Payroll Increases
[GRAPHIC] [TIFF OMITTED] TR26AP24.193

E. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the 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.
    Pursuant to section 11(c) of the FLSA, the Department's regulations 
at part 516 require covered employers to maintain certain records about 
their employees. Bona fide EAP workers are subject to some of these 
recordkeeping requirements but are exempt from others related to pay 
and hours worked.\482\ Thus, although this rulemaking does not 
introduce any new recordkeeping requirements, employers will need to 
keep some additional records for affected employees who become newly 
nonexempt if they do not presently record such information. As 
indicated in this analysis, this rule expands minimum wage and overtime 
pay coverage to 4.3 million affected EAP workers, of which 1.6 million 
are employed by a small entity. This will result in an increase in 
employer burden and was estimated in the PRA portion (section VI) of 
this rule.
---------------------------------------------------------------------------

    \482\ See 29 CFR 516.3 (providing that employers need not 
maintain the records required by 29 CFR 516.2(a)(6) through (10) for 
their EAP workers).
---------------------------------------------------------------------------

F. Steps the Agency Has Taken To Minimize the Significant Economic 
Impact on Small Entities

    This section describes 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 rule and why alternatives were rejected.
    In this rule, the Department sets the standard salary level equal 
to the 35th percentile of earnings of full-time salaried workers in the 
lowest-wage Census Region (currently the South). Based on 2023 data, 
this results in a salary level of $1,128 per week. This approach will 
fully restore the salary level's screening function and, by setting the 
salary level above the long test salary level, ensure that fewer lower 
paid white-collar employees who perform significant amounts of 
nonexempt work are included in the exemption. At the same time, by 
setting it below the short test salary level, the new salary level 
allows employers to continue to use the exemption for many lower paid 
white-collar employees who were made exempt under the 2004 standard 
duties test. Thus, the Department believes that the new salary level 
will also more reasonably distribute between employees and their 
employers the impact of the shift from a two-test to a one-test system 
on employees earning between the long and short test salary levels. As 
in prior rulemakings, the Department is not establishing multiple 
salary levels based on region, industry, employer size, or any other 
factor, which stakeholders have generally agreed would significantly 
complicate the regulations.\483\ Instead, the Department is setting the 
standard salary level using earnings data from the lowest-wage Census 
Region, in part to accommodate small employers and employers in low-
wage industries.\484\
---------------------------------------------------------------------------

    \483\ See 84 FR 51239; 81 FR 32411; 69 FR 22171.
    \484\ See 84 FR 51238; 81 FR 32527; 69 FR 22237.
---------------------------------------------------------------------------

    The Department is setting the HCE total annual compensation level 
equal to the 85th percentile of earnings of full-time salaried workers 
nationally ($151,164 annually based on 2023 data).

[[Page 32968]]

The Department believes that this level avoids costs associated with 
evaluating, under the 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. While 
the threshold is higher than the HCE level adopted in the 2019 rule 
(which was set equal to the 80th percentile of earnings for salaried 
workers nationwide), the HCE threshold in this rule is lower than the 
HCE percentile adopted in the 2004 and 2016 rules, which covered 93.7 
and 90 percent of salaried workers nationwide respectively. The 
Department further believes that nearly all of the highly-paid white-
collar workers earning above this threshold ``would satisfy any duties 
test.'' \485\
---------------------------------------------------------------------------

    \485\ See 84 FR 51250 (internal citation omitted).
---------------------------------------------------------------------------

1. Differing Compliance and Reporting Requirements for Small Entities
    This rule provides no differing compliance requirements and 
reporting requirements for small entities. The Department strives to 
minimize respondent recordkeeping burden by requiring no specific form 
or order of records under the FLSA and its corresponding regulations. 
Moreover, employers normally maintain the records under usual or 
customary business practices.
2. Least Burdensome Option or Explanation Required
    The Department believes it has chosen the most effective option 
that updates and clarifies the rule and results in the least burden. 
Among the options considered by the Department, the least restrictive 
option was using the 2004 methodology (the 20th percentile of weekly 
earnings of full-time nonhourly workers in the lowest-wage Census 
region, currently the South, and in retail nationally) to set the 
standard salary level, which was also the methodology used in the 2019 
rule. As noted above, however, the salary level produced by the 2004 
methodology is below the long test salary level, which the Department 
considers to be a key parameter for determining an appropriate salary 
level in a one-test system using the current standard duties test. 
Using the 2004 methodology thus does not address the Department's 
concerns discussed above under Objectives of, and Need for, the Rule.
    Pursuant to section 603(c) of the RFA, the following alternatives 
are to be addressed:
i. Differing Compliance or Reporting Requirements That Take Into 
Account the Resources Available to Small Entities
    The FLSA creates a level playing field for businesses by setting a 
floor below which employers may not pay their employees. To establish 
differing compliance or reporting requirements for small businesses 
would undermine this important purpose of the FLSA. The Department 
makes available a variety of resources to employers for understanding 
their obligations and achieving compliance. Therefore, the Department 
is not implementing differing compliance or reporting requirements for 
small businesses.
ii. The Clarification, Consolidation, or Simplification of Compliance 
and Reporting Requirements for Small Entities
    This rule imposes no new reporting requirements. The Department 
makes available a variety of resources to employers for understanding 
their obligations and achieving compliance.
iii. The Use of Performance Rather Than Design Standards
    Under this rule, employers may achieve compliance through a variety 
of means. Employers may elect to continue to claim the EAP exemption 
for affected employees by adjusting salary levels, hiring additional 
workers, spreading overtime hours to other employees, or compensating 
employees for overtime hours worked. The Department makes available a 
variety of resources to employers for understanding their obligations 
and achieving compliance.
iv. An Exemption From Coverage of the Rule, or any Part Thereof, for 
Such Small Entities
    Creating an exemption from coverage of this rulemaking 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.\486\
---------------------------------------------------------------------------

    \486\ See 29 U.S.C. 203(s).
---------------------------------------------------------------------------

IX. Unfunded Mandates Reform Act Analysis

    The Unfunded Mandates Reform Act of 1995 (UMRA),\487\ requires 
agencies to prepare a written statement for rulemaking that includes 
any Federal mandate that may result in increased expenditures by state, 
local, and tribal governments, in the aggregate, or by the private 
sector, of $200 million ($100 million in 1995 dollars adjusted for 
inflation to 2023) 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, present 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. This rule contains unfunded mandates 
as described below.
---------------------------------------------------------------------------

    \487\ 2 U.S.C. 1501 et seq.
---------------------------------------------------------------------------

A. Authorizing Legislation

    This final rule is issued pursuant to section 13(a)(1) of the FLSA, 
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] . . .).'' \488\ The requirements of the 
exemption are contained in part 541 of the Department's regulations. 
Section 3(e) of the FLSA \489\ 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 \490\ also 
defines public agencies to include the government of a state or 
political subdivision thereof, or any interstate governmental agency.
---------------------------------------------------------------------------

    \488\ 29 U.S.C. 213(a)(1).
    \489\ 29 U.S.C. 203(e).
    \490\ 29 U.S.C. 203(x).
---------------------------------------------------------------------------

B. 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 $200 million in at least one year and result in increased 
expenditures by state, local and tribal governments, in the aggregate, 
of $200 million or more in at least one year. Based on the economic 
impact analysis of this final rule, the Department determined that Year 
1 costs for state and local governments would total $197.7 million, of 
which $98.9 million are direct employer costs and $98.8

[[Page 32969]]

million are payroll increases (Table 37). In subsequent years, state 
and local governments may experience payroll increases of as much as 
$183.7 million (in year 10 of the rule).
    The Department estimates that the final rule will result in Year 1 
costs to the private sector of approximately $2.7 billion, of which 
$1.3 billion are direct employer costs and $1.4 billion are payroll 
increases.

Table 37--Summary of Year 1 Impacts by Type of Employer
[GRAPHIC] [TIFF OMITTED] TR26AP24.194

    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.\491\ 
However, OMB guidance on this requirement notes that such macroeconomic 
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 $68.4 billion to $136.8 billion 
(using 2023 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 rule.
---------------------------------------------------------------------------

    \491\ 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 would be approximately $2.7 billion for private 
employers and $197.7 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 state and local government costs compose 0.02 
percent of state and local government payrolls.\492\ First-year state 
and local government costs compose 0.004 percent of state and local 
government revenues (projected 2023 revenues were estimated to be $5.0 
trillion).\493\ Effects of this magnitude will not result in 
significant disruptions to typical state and local governments. The 
$197.7 million in state and local government costs constitutes an 
average of approximately $2,200 for each of the approximately 90,126 
state and local entities. The Department considers these costs to be 
quite small both in absolute terms and in relation to payroll and 
revenue.
---------------------------------------------------------------------------

    \492\ 2020 state and local government payrolls were $1.1 
trillion, inflated to 2023 payroll costs of $1.2 trillion using the 
GDP deflator. State and Local Government Finances 2020. Available at 
https://www.census.gov/data/datasets/2020/econ/local/public-use-datasets.html.
    \493\ 2020 state and local revenues were $4.3 trillion, inflated 
to 2023 dollars using the GDP deflator. State and Local Government 
Finances 2020. Available at https://www.census.gov/data/datasets/2020/econ/local/public-use-datasets.html.
---------------------------------------------------------------------------

    Total first-year private sector costs compose 0.034 percent of 
private sector payrolls nationwide.\494\ Total private sector first-
year costs compose 0.006 percent of national private sector revenues 
(revenues in 2023 are projected to be $45.3 trillion).\495\ 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.
---------------------------------------------------------------------------

    \494\ Private sector payroll costs are projected to be $8.1 
trillion in 2023 based on private sector payroll costs of $6.6 
trillion in 2017, inflated to 2023 dollars using the GDP deflator. 
2017 Economic Census of the United States.
    \495\ Private sector revenues in 2017 were $37.0 trillion using 
the 2017 Economic Census of the United States. This was inflated to 
2023 dollars using the GDP deflator.
---------------------------------------------------------------------------

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

    Prior to issuing the NPRM, the Department held a series of 
stakeholder listening sessions between March 8, 2022, and June 3, 2022 
to gather input on its part 541 regulations. Stakeholders invited to 
participate in these listening sessions included representatives from 
labor unions; worker advocate groups; industry associations; small 
business associations; state and local governments; tribal governments; 
non-profits; and representatives from specific industries such as K-12 
education, higher education, healthcare, retail, restaurant, 
manufacturing, and wholesale. Stakeholders were invited to share their 
input on issues including the appropriate EAP salary level, the costs 
and benefits of increasing the salary level to employers and employees, 
the methodology for updating the salary level and frequency of updates, 
and whether changes to the duties test are

[[Page 32970]]

warranted. A listening session was held specifically for state and 
local governments on April 1, 2022, and a session for tribal 
governments was held on May 12, 2022. The input received at these 
listening sessions aided the Department in drafting its rule.
    The Department received mixed feedback on the proposed rule from 
state, local, and tribal government commenters. Some state and local 
government stakeholders voiced strong support for the proposed rule. 
For example, the Coalition of State AGs supported the proposal, stating 
that the current salary level is too low and that the proposed updating 
mechanism ``is important for employers in our respective states to have 
predictability in their labor costs.'' The Washington State Department 
of Labor & Industries noted that it implemented a state EAP salary 
level through administrative rulemaking which is currently $1,302.40 
per week ($67,724.80 annually), stating that ``the State of Washington 
considered many of the same factors'' as the Department to set its 
salary level. Commenting on behalf of 1.4 million members who are state 
and local government employees, AFSCME described the proposed salary 
level as ``a modest increase that will nevertheless benefit millions of 
workers.''
    Other state and local government stakeholders voiced opposition to 
the proposed rule. The National Association of Counties asserted that 
the proposed threshold increases would have a disproportionate impact 
on small and rural county governments, emphasizing that practical and 
legal constraints limit the ability of county governments to raise 
revenues to account for added labor costs. Similarly, Ohio Township 
Association commented that ``[if] townships [do] not wish to raise 
taxes or residents reject a property tax levy for such purpose, the 
township will be forced to cut or eliminate services.'' See also 
Pennsylvania State Association of Township Supervisors (providing 
similar feedback). The Mississippi State Personnel Board asserted that 
the proposed rule could jeopardize Mississippi's use of telework to 
recruit and retain certain employees for the state government.
    The Department received one comment from a tribal government 
stakeholder--Ho-Chuck Inc., a subsidiary of the Winnebago Tribe of 
Nebraska. Explaining that it operates various establishments in the 
gaming and retail industries, Ho-Chuck Inc. expressed concern about the 
magnitude of the Department's proposed increase to the standard salary 
level and of the NPRM's proposed 60-day effective date. Ho-Chuck Inc. 
requested the Department to consider a smaller increase, such as a 25 
percent increase to the current $684 per week salary level (i.e., $855 
per week), with ``staggered increases over a period of 3 to 5 years to 
the higher amount.''
    As discussed in this final rule,\496\ the Department agrees with 
commenters such as the Coalition of State AGs that the updating 
mechanism's triennial updates to the earnings thresholds for exemption 
will provide greater certainty and predictability for the regulated 
community. The Department appreciates that some employers, such as 
state, local, and tribal governments, may have less flexibility than 
others to account for new labor costs, as well as that 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 that costs and transfers associated with this 
rule will be manageable for and will not result in significant 
disruptions to state, local, and tribal governments. The Department is 
setting the standard salary level using earnings data from the lowest-
wage Census Region, in part to accommodate small employers and 
employers in low-wage sectors and regions. As discussed earlier in this 
section, the Department estimates that total first-year costs for state 
and local governments comprise 0.02 percent of state and local 
government payrolls and 0.004 percent of state and local government 
revenues. Moreover, as discussed in this final rule,\497\ the 
Department has determined, upon consideration of commenter feedback, 
that a delayed applicability date is appropriate for the new standard 
salary level and the HCE total annual compensation threshold. 
Specifically, the new $1,128 per week standard salary level and 
$151,164 per year HCE total annual compensation threshold will not be 
applicable until January 1, 2025.
---------------------------------------------------------------------------

    \496\ See sections V.A.3, VII.C.
    \497\ See section IV.
---------------------------------------------------------------------------

D. Least Burdensome Option or Explanation Required

    This final rule has described the Department's consideration of 
various options throughout the preamble (see section V.B.4.iv) and 
economic impact analysis (see section VII.C.8). 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 to define and delimit the scope of the EAP 
exemption. Although some alternative options considered would set the 
standard salary level at a rate lower than the finalized level, that 
outcome would not necessarily be the most cost-effective or least-
burdensome. A salary level equal to or below the long test level would 
result in the exemption of lower-salaried employees who traditionally 
were entitled to overtime protection under the long test either because 
of their low salary or because they perform large amounts of nonexempt 
work. This approach would also effectively place the burden of the move 
from a two-test system to a one-test system on employees who 
historically were nonexempt because they earned between the long and 
short test salary levels but did not meet the long duties test.
    Selecting a standard salary level in a one-test system inevitably 
affects the impact of providing overtime protection to employees paid 
between the long and short test salary levels. Too low of a salary 
level shifts the impact of the move to a one-test system to employees 
by exempting lower-salaried employees who perform large amounts of 
nonexempt work. However, too high a salary level shifts the impact of 
the move to a one-test system to employers by denying them the use of 
the exemption for lower-salaried employees who traditionally were 
exempt under the long duties test, thereby increasing their labor 
costs. The Department has determined that setting the standard salary 
level equivalent to the earnings of the 35th percentile of full-time 
salaried workers in the lowest-wage Census Region will more effectively 
identify in a one-test system who is employed in a bona fide EAP 
capacity in a manner that reasonably distributes among employees 
earning between the long and short test salary levels and their 
employers the impact of the Department's move from a two-test to a one-
test system. The Department believes that the final rule reduces burden 
on employers of nonexempt workers who earn between the current and 
finalized standard salary level. Currently, employers must rely on the 
duties test to determine the exemption status of these workers. Under 
this final rule, the exemption status of these workers will be 
determined based on the simpler salary level test.
    The Department is also adopting a mechanism to regularly update the 
standard salary level and HCE total compensation requirement for wage 
growth, which will ensure that the thresholds continue to work 
efficiently to help identify EAP employees. As

[[Page 32971]]

noted above, the history of the part 541 regulations shows multiple, 
significant gaps during which the earnings thresholds were not updated 
and their effectiveness in helping to define the EAP exemption 
decreased as wages increased. Routine updates of the earnings 
thresholds to reflect wage growth will bring certainty and stability to 
employers and employees alike.

X. Executive Order 13132, Federalism

    The Department has reviewed this rule in accordance with Executive 
Order 13132 regarding federalism and determined that it does not have 
federalism implications. The proposed rule would not have substantial 
direct effects on the States, on the relationship between the National 
Government and the States, or on the distribution of power and 
responsibilities among the various levels of government.

XI. Executive Order 13175, Indian Tribal Governments

    This rule will not have tribal implications under Executive Order 
13175 that would require a tribal summary impact statement. The 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.

    For the reasons set out in the preamble, the Wage and Hour 
Division, Department of Labor amends Title 29 CFR chapter V, 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. Add Sec.  541.5 to read as follows:


Sec.  541.5  Severability.

    The provisions of this part are separate and severable and operate 
independently from one another. If any provision of this part is held 
to be invalid or unenforceable by its terms, or as applied to any 
person or circumstance, or stayed pending further agency action, the 
provision must be construed so as to continue to give the maximum 
effect to the provision permitted by law, unless such holding be one of 
utter invalidity or unenforceability, in which event the provision will 
be severable from part 541 and will not affect the remainder thereof.

0
3. Amend Sec.  541.100, by revising paragraph (a)(1) to read as 
follows:


Sec.  541.100  General rule for executive employees.

    (a) * * *
    (1) Compensated on a salary basis at not less than the level set 
forth in Sec.  541.600;
* * * * *

0
4. Amend Sec.  541.200, by revising paragraph (a)(1) to read as 
follows:


Sec.  541.200  General rule for administrative employees.

    (a) * * *
    (1) Compensated on a salary or fee basis at not less than the level 
set forth in Sec.  541.600;
* * * * *

0
5. Amend Sec.  541.204, by revising paragraph (a)(1) to read as 
follows:


Sec.  541.204  Educational establishments.

    (a) * * *
    (1) Compensated on a salary or fee basis at not less than the level 
set forth in Sec.  541.600; 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
6. Amend Sec.  541.300, by revising paragraph (a)(1) to read as 
follows:


Sec.  541.300  General rule for professional employees.

    (a) * * *
    (1) Compensated on a salary or fee basis at not less than the level 
set forth in Sec.  541.600; and
* * * * *

0
7. Amend Sec.  541.400, by revising the first sentence of paragraph (b) 
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 not less than the level 
set forth in Sec.  541.600. * * *
* * * * *

0
8. Revise Sec.  541.600 to read as follows:


Sec.  541.600  Amount of salary required.

    (a) Standard salary level. 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 per 
week of not less than the amount set forth in paragraphs (a)(1) through 
(3) of this section, exclusive of board, lodging or other facilities, 
unless paragraph (b) or (c) of this section applies. Administrative and 
professional employees may also be paid on a fee basis, as defined in 
Sec.  541.605.
    (1) Beginning on July 1, 2024, $844 per week (the 20th percentile 
of weekly earnings of full-time nonhourly workers in the lowest-wage 
Census Region and/or retail industry nationally).
    (2) Beginning on January 1, 2025, $1,128 per week (the 35th 
percentile of weekly earnings of full-time nonhourly workers in the 
lowest-wage Census Region).
    (3) As of July 1, 2027, the level calculated pursuant to Sec.  
541.607(b)(1).
    (b) Commonwealth of the Northern Mariana Islands, Guam, Puerto 
Rico, U.S. Virgin Islands. To qualify as an exempt executive, 
administrative, or professional employee under section 13(a)(1) of the 
Act, an employee in the Commonwealth of the Northern Mariana Islands, 
Guam, Puerto Rico, or the U.S. Virgin Islands employed by employers 
other than the Federal Government must be compensated on a salary basis 
at a rate of not less than $455 per week, exclusive of board, lodging 
or other facilities. Administrative and professional employees may also 
be paid on a fee basis, as defined in Sec.  541.605.
    (c) American Samoa. To qualify as an exempt executive, 
administrative, or professional employee under section 13(a)(1) of the 
Act, an employee in American Samoa employed by employers other than the 
Federal Government must be compensated on a salary basis at a rate of 
not less than $380 per week, exclusive of board, lodging or other 
facilities. Administrative and professional employees may also be paid 
on a fee basis, as defined in Sec.  541.605.
    (d) Frequency of payment. The salary level requirement may be 
translated into equivalent amounts for periods longer than one week. 
For example, the $1,128 per week requirement described in paragraph 
(a)(2) of this section would be met if the employee is compensated 
biweekly on a salary basis of not less than $2,256, semimonthly on a 
salary basis of not less than $2,444, or monthly on a salary basis of 
not less than $4,888. However, the shortest period of payment that will 
meet this compensation requirement is one week.
    (e) Alternative salary level for academic administrative employees. 
In

[[Page 32972]]

the case of academic administrative employees, the salary level 
requirement also may be met by compensation on a salary basis at a rate 
at least equal to the entrance salary for teachers in the educational 
establishment by which the employee is employed, as provided in Sec.  
541.204(a)(1).
    (f) Hourly rate for computer employees. In the case of computer 
employees, the compensation requirement also may be met by compensation 
on an hourly basis at a rate not less than $27.63 an hour, as provided 
in Sec.  541.400(b).
    (g) Exceptions to the standard salary criteria. In the case of 
professional employees, the compensation requirements in this section 
shall not apply to employees engaged as teachers (see Sec.  541.303); 
employees who hold a valid license or certificate permitting the 
practice of law or medicine or any of their branches and are actually 
engaged in the practice thereof (see Sec.  541.304); or to employees 
who hold the requisite academic degree for the general practice of 
medicine and are engaged in an internship or resident program pursuant 
to the practice of the profession (see Sec.  541.304). In the case of 
medical occupations, the exception from the salary or fee requirement 
does not apply to pharmacists, nurses, therapists, technologists, 
sanitarians, dietitians, social workers, psychologists, psychometrists, 
or other professions which service the medical profession.

0
9. Amend Sec.  541.601 by revising paragraph (a), the first sentence of 
paragraph (b)(1), and paragraph (b)(2) to read as follows:


Sec.  541.601  Highly compensated employees.

    (a) An employee shall be exempt under section 13(a)(1) of the Act 
if the employee receives total annual compensation of not less than the 
amount set forth in paragraph (a)(1) through (4) of this section, and 
the employee customarily and regularly performs any one or more of the 
exempt duties or responsibilities of an executive, administrative, or 
professional employee identified in subpart B, C, or D of this part:
    (1) Beginning on July 1, 2024, $132,964 per year (the annualized 
earnings amount of the 80th percentile of full-time nonhourly workers 
nationally).
    (2) Beginning on January 1, 2025, $151,164 per year (the annualized 
earnings amount of the 85th percentile of full-time nonhourly workers 
nationally).
    (3) As of July 1, 2027, the total annual compensation level 
calculated pursuant to Sec.  541.607(b)(2).
    (4) Where the annual period covers periods during which multiple 
total annual compensation levels apply, the amount of total annual 
compensation due will be determined on a proportional basis.
    (b)(1) Total annual compensation must include at least a weekly 
amount equal to that required by Sec.  541.600(a)(1) through (3) paid 
on a salary or fee basis as set forth in Sec. Sec.  541.602 and 
541.605, except that Sec.  541.602(a)(3) shall not apply to highly 
compensated employees. * * *
    (2) If an employee's total annual compensation does not total at 
least the amount set forth in paragraph (a) of this section by the last 
pay period of the 52-week period, the employer may, during the last pay 
period or within one month after the end of the 52-week period, make 
one final payment sufficient to achieve the required level. For 
example, for a 52-week period beginning January 1, 2025, an employee 
may earn $135,000 in base salary, and the employer may anticipate based 
upon past sales that the employee also will earn $20,000 in 
commissions. However, due to poor sales in the final quarter of the 
year, the employee only earns $14,000 in commissions. In this 
situation, the employer may within one month after the end of the year 
make a payment of at least $2,164 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 subpart B, 
C, or D of this part.
* * * * *

0
10. Amend Sec.  541.602 by revising the first sentence of paragraph 
(a)(3) and the first sentence of paragraph (a)(3)(i) to read as 
follows:


Sec.  541.602  Salary basis.

* * * * *
    (a)(3) Up to ten percent of the salary amount required by Sec.  
541.600(a) through (c) may be satisfied by the payment of 
nondiscretionary bonuses, incentives, and commissions, that are paid 
annually or more frequently. * * *
    (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.  541.600(a) through (c), 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. * * *
* * * * *

0
11. Amend Sec.  541.604 by
0
a. Revising the second, third, and fourth sentences of paragraph (a) 
and;
0
b. Revising the third sentence in paragraph (b).
    The revisions and additions read as follows:


Sec.  541.604  Minimum guarantee plus extras.

    (a) * * * Thus, for example under the salary requirement described 
in Sec.  541.600(a)(2), an exempt employee guaranteed at least $1,128 
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 
$1,128 each week paid on a salary basis. Similarly, the exemption is 
not lost if an exempt employee who is guaranteed at least $1,128 each 
week paid on a salary basis also receives additional compensation based 
on hours worked for work beyond the normal workweek. * * *
    (b) * * * Thus, for example under the salary requirement described 
in Sec.  541.600(a)(2), an exempt employee guaranteed compensation of 
at least $1,210 for any week in which the employee performs any work, 
and who normally works four or five shifts each week, may be paid $350 
per shift without violating the $1,128 per week salary basis 
requirement. * * *

0
12. Amend Sec.  541.605 by revising 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.  
541.600(a) through (c) and 541.602(a), if the employee worked 40 hours. 
Thus, for example under the salary requirement described in Sec.  
541.600(a)(2), an artist paid $600 for a picture that took 20 hours to 
complete meets the $1,128 minimum salary requirement for exemption 
since earnings at this rate would yield the artist $1,200 if 40 hours 
were worked.

0
13. Add Sec.  541.607 to read as follows:

[[Page 32973]]

Sec.  541.607  Regular updates to amounts of salary and compensation 
required.

    (a) Initial update--(1) Standard salary level. Beginning on July 1, 
2024, the amount required to be paid per week to an exempt employee on 
a salary or fee basis, as applicable, pursuant to Sec.  541.600(a)(1) 
will be not less than $844.
    (2) Highly compensated employees. Beginning on July 1, 2024, the 
amount required to be paid in total annual compensation to an exempt 
highly compensated employee pursuant to Sec.  541.601(a)(1) will be not 
less than $132,964.
    (b) Future updates--(1) Standard salary level. (i) As of July 1, 
2027, and every 3 years thereafter, the amount required to be paid to 
an exempt employee on a salary or fee basis, as applicable, pursuant to 
Sec.  541.600(a) will be updated to reflect current earnings data.
    (ii) The Secretary will determine the future update amounts by 
applying the methodology in effect under Sec.  541.600(a) at the time 
the Secretary issues the notice required by paragraph (b)(3) of this 
section to current earnings data.
    (2) Highly compensated employees. (i) As of July 1, 2027, and every 
3 years thereafter, the amount required to be paid in total annual 
compensation to an exempt highly compensated employee pursuant to Sec.  
541.601(a) will be updated to reflect current earnings data.
    (ii) The Secretary will determine the future update amounts by 
applying the methodology used to determine the total annual 
compensation amount in effect under Sec.  541.601(a) at the time the 
Secretary issues the notice required by paragraph (b)(3) of this 
section to current earnings data.
    (3) Notice. (i) Not fewer than 150 days before each future update 
of the earnings requirements under paragraphs (b)(1) and (2) of this 
section, the Secretary will publish a notice in the Federal Register 
stating the updated amounts based on the most recent available 4 
quarters of CPS MORG data, or its successor publication, as published 
by the Bureau of Labor Statistics.
    (ii) No later than the effective date of the updated earnings 
requirements, the Wage and Hour Division will publish on its website 
the updated amounts for employees paid pursuant to this part.
    (4) Delay of updates. A future update to the earnings thresholds 
under this section is delayed from taking effect for a period of 120 
days if the Secretary has separately published a notice of proposed 
rulemaking in the Federal Register, not fewer than 150 days before the 
date the update is set to take effect, proposing changes to the 
earnings threshold(s) and/or updating mechanism due to unforeseen 
economic or other conditions. The Secretary must state in the notice 
issued pursuant to paragraph (b)(3)(i) of this section that the 
scheduled update is delayed in accordance with this paragraph (b)(4). 
If the Secretary does not issue a final rule affecting the scheduled 
update to the earnings thresholds by the end of the 120-day extension 
period, the updated amounts published in accordance with paragraph 
(b)(3) of this section will take effect upon the expiration of the 120-
day period. The 120-day delay of a scheduled update under this 
paragraph will not change the effective dates for future updates of the 
earnings requirements under this section.

    Signed this 11th day of April, 2024.
Jessica Looman,
Administrator, Wage and Hour Division.
[FR Doc. 2024-08038 Filed 4-24-24; 8:45 am]
 BILLING CODE 4510-27-P