Updating Regulations Issued Under the Fair Labor Standards Act, 43654-43673 [E8-16631]

Agencies

• Wage and Hour Division
• DEPARTMENT OF LABOR

[Federal Register Volume 73, Number 145 (Monday, July 28, 2008)]
[Proposed Rules]
[Pages 43654-43673]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16631]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 4, 531, 553, 778, 779, 780, 785, 786, and 790

RIN 1215-AB13


Updating Regulations Issued Under the Fair Labor Standards Act

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

ACTION: Notice of proposed rulemaking and request for comments.

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

SUMMARY: In this proposed rule, the Department of Labor (Department or 
DOL) proposes to revise regulations issued pursuant to the Fair Labor 
Standards Act of 1938 (FLSA) and the Portal-to-Portal Act of 1947 
(Portal Act) that have become out of date because of subsequent 
legislation or court decisions. These proposed revisions will conform 
the regulations to FLSA amendments passed in 1974, 1977, 1996, 1997, 
1998, 1999, 2000, and 2007, and Portal Act amendments passed in 1996.

DATES: Comments must be received on or before September 11, 2008.

ADDRESSES: You may submit comments, identified by RIN 1215-AB13, by 
either one of the following methods:
     Electronic comments, through the federal eRulemaking 
Portal: https://

[[Page 43655]]

www.regulations.gov. Follow the instructions for submitting comments.
     Mail: Wage and Hour Division, Employment Standards 
Administration, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue, NW., Washington, DC 20210.
    Instructions: Please submit one copy of your comments by only one 
method. All submissions received must include the agency name and 
Regulatory Information Number (RIN) identified above for this 
rulemaking. Comments received will be posted to https://
www.regulations.gov, including any personal information provided. 
Because we continue to experience delays in receiving mail in the 
Washington, DC area, commenters are strongly encouraged to transmit 
their comments electronically via the federal eRulemaking Portal at 
https://www.regulations.gov or to submit them by mail early. For 
additional information on submitting comments and the rulemaking 
process, see the ``Public Participation'' heading of the SUPPLEMENTARY 
INFORMATION section of this document.
    Docket: For access to the docket to read background documents or 
comments received, go to the federal eRulemaking Portal at https://
www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Director, Office 
of Interpretations and Regulatory Analysis, Wage and Hour Division, 
Employment Standards Administration, U.S. Department of Labor, Room S-
3506, 200 Constitution Avenue, NW., Washington, DC 20210; telephone: 
(202) 693-0051 (this is not a toll-free number). Copies of this notice 
may be obtained in alternative formats (Large Print, Braille, Audio 
Tape or Disc), upon request, by calling (202) 693-0023 (not a toll-free 
number). TTY/TDD callers may dial toll-free (877) 889-5627 to obtain 
information or request materials in alternative formats.
    Questions of interpretation and/or enforcement of regulations 
issued by this agency or referenced in this notice may be directed to 
the nearest Wage and Hour Division (WHD) District Office. Locate the 
nearest office by calling our toll-free help line at (866) 4USWAGE 
((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or 
log onto the WHD's Web site for a nationwide listing of Wage and Hour 
District and Area Offices at: https://www.dol.gov/esa/contacts/whd/
america2.htm.

SUPPLEMENTARY INFORMATION:

I. Electronic Access and Filing Comments

    Public Participation: This notice is available through the Federal 
Register and the https://www.regulations.gov Web site. You may also 
access this notice via the WHD home page at https://www.dol.gov/esa/whd/
regulations/FLSA2008.htm. To comment electronically on federal 
rulemakings, go to the federal eRulemaking Portal at https://
www.regulations.gov, which will allow you to find, review, and submit 
comments on federal documents that are open for comment and published 
in the Federal Register. Please identify all comments submitted in 
electronic form by the RIN docket number (1215-AB13). Because of delays 
in receiving mail in the Washington, DC area, commenters should 
transmit their comments electronically via the federal eRulemaking 
Portal at https://www.regulations.gov, or submit them by mail early to 
ensure timely receipt prior to the close of the comment period. Submit 
one copy of your comments by only one method.

II. Request for Comment

    The Department requests comments on all issues related to this 
notice of proposed rulemaking. This proposed rule, if implemented as a 
final rule, will enhance the Department's enforcement of, and the 
public's understanding of, compliance obligations under the FLSA by 
replacing out of date regulations. The changes will not result in 
additional compliance costs for regulated entities. Updating the 
existing outdated regulatory provisions to reflect current law may 
result in cost savings through the avoidance of inadvertent violations 
and the costs of corrective compliance measures to remedy them.

III. Discussion of Changes

    The FLSA requires covered employers to pay their nonexempt 
employees a federal minimum wage and overtime premium pay of time and 
one-half the regular rate of pay for hours worked in excess of forty 
(40) in a work week. The FLSA also contains a number of exemptions from 
the minimum wage and overtime pay requirements.
    Over the years, Congress has amended the FLSA to refine or to add 
to these exemptions and to clarify the minimum wage and overtime pay 
requirements. As part of the U.S. Troop Readiness, Veterans' Care, 
Katrina Recovery, and Iraq Accountability Appropriations Act, 2007, 
Public Law 110-28 (May 25, 2007), Congress increased the FLSA minimum 
wage in three steps: to $5.85 per hour effective July 24, 2007; to 
$6.55 per hour effective July 24, 2008; and to $7.25 per hour effective 
July 24, 2009. As part of the Small Business Job Protection Act of 
1996, Congress amended section 4(a) of the Portal Act, 29 U.S.C. 
254(a), to define circumstances under which pay is not required for 
employees who use their employer's vehicle for home-to-work commuting 
purposes. The 1996 Act also created a youth opportunity wage at $4.25 
per hour under section 6(g) of the FLSA, 29 U.S.C. 206(g). In 1997, 
Congress amended section 13(b)(12) of the FLSA, 29 U.S.C. 213(b)(12), 
to expand the exemption from overtime pay for workers on ditches, 
canals, and reservoirs where 90% (rather than 100%) of the water is 
used for agricultural purposes. In 1998, Congress added section 3(e)(5) 
to the FLSA, 29 U.S.C. 203(e)(5), to provide that the term ``employee'' 
does not include individuals who volunteer solely for humanitarian 
purposes to private non-profit food banks and who receive groceries 
from those food banks. In 1999, Congress added section 3(y) to the 
FLSA, 29 U.S.C. 203(y), to define an employee who is engaged in ``fire 
protection activities.'' In 2000, Congress added section 7(e)(8) to the 
FLSA, 29 U.S.C. 207(e)(8), to treat stock options meeting certain 
criteria as an additional type of remuneration that is excludable from 
the computation of the regular rate. A 1974 amendment to section 
13(b)(10)(B) of the FLSA, 29 U.S.C. 213(b)(10)(B), extended an overtime 
exemption to include any salesman primarily engaged in selling boats 
and eliminated the overtime exemption previously in subsection (B) for 
partsmen and mechanics servicing trailers or aircraft. In addition, 
several appellate courts interpret the overtime exemption for ``any 
salesman, partsman, or mechanic primarily engaged in selling and 
servicing automobiles'' in section 13(b)(10)(A) of the FLSA, 29 U.S.C. 
213(b)(10)(A), as including service advisors.
    A number of courts have examined the proper interpretation of the 
FLSA's compensatory time provisions in section 7(o)(5) concerning 
public agency employers' obligation to grant employees' requests to use 
``comp time'' within a ``reasonable period after making the request if 
the use of the compensatory time does not unduly disrupt the operations 
of the public agency.'' 29 U.S.C. 207(o)(5). Finally, the regulations 
governing the ``fluctuating workweek'' method of computing half-time 
overtime pay for salaried nonexempt employees who work variable or 
fluctuating hours from

[[Page 43656]]

week to week are in need of clarification and updating to delete 
outmoded examples and eliminate confusion over the effect of paying 
bonus supplements and premium payments to affected employees.
    As discussed in more detail below, as a result of these amendments 
and court decisions, this proposed rule revises a number of out-of-date 
regulations issued under the FLSA and the Portal Act.

1. 2007 Amendment to the FLSA Minimum Wage

    On May 25, 2007, President Bush signed into law the U.S. Troop 
Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability 
Appropriations Act, 2007 (Pub. L. 110-28). As part of that legislation, 
Congress amended the FLSA by increasing the applicable federal minimum 
wage under section 6(a) of the FLSA in three steps: to $5.85 per hour 
effective July 24, 2007; to $6.55 per hour effective July 24, 2008; and 
to $7.25 per hour effective July 24, 2009.
    This legislation did not change the definition of ``wage'' in 
section 3(m) of the FLSA for purposes of applying the tip credit 
formula in determining the wage paid to a qualifying tipped employee. 
Thus, the minimum required cash wage for a tipped employee under the 
FLSA remains $2.13 per hour. The maximum allowable tip credit for 
federal purposes under the FLSA increases as a result of the 2007 
legislation, and is determined by subtracting $2.13 from the applicable 
minimum wage provided by section 6(a)(1) of the FLSA. See 29 U.S.C. 
203(m).
    Changes are proposed in several of the FLSA's implementing 
regulations that cite to the applicable minimum wage to reflect these 
statutory changes, including at 29 CFR 531.36, 531.37, 778.110, 
778.111, 778.113, and 778.114. Additional revisions to the McNamara-
O'Hara Service Contract Act regulations eliminate outdated references 
to the FLSA minimum wage in 29 CFR 4.159 and 4.167.

2. Small Business Job Protection Act of 1996

    On August 20, 1996, Congress enacted the Small Business Job 
Protection Act of 1996 (SBJPA), Public Law No. 104-188, 100 Stat. 1755. 
SBJPA amended the Portal Act to define circumstances under which pay is 
not required for employees who use their employer's vehicle for home-
to-work commuting purposes and also amended the FLSA by creating a 
youth opportunity wage and modifying the allowable tip credit.
A. Employee Commuting Flexibility Act of 1996
    Sections 2101 through 2103 of Title II of SBJPA, entitled the 
``Employee Commuting Flexibility Act of 1996,'' amended section 4(a) of 
the Portal Act, 29 U.S.C. 254(a). The amendment, effective upon 
enactment, provides that

    The use of an employer's vehicle for travel by an employee and 
activities performed by an employee which are incidental to the use 
of such vehicle for commuting shall not be considered part of the 
employee's principal activities if the use of such vehicle for 
travel is within the normal commuting area for the employer's 
business or establishment and the use of the employer's vehicle is 
subject to an agreement on the part of the employer and the employee 
or representative of such employee.

    Employee Commuting Flexibility Act of 1996, Section 2102, 29 U.S.C. 
254(a).
    The House Committee Report states that the purpose of the amendment 
is to clarify how the Portal Act applies to ``employee use of employer-
provided vehicles for commuting at the beginning and end of the 
workday.'' H.R. Rep. No. 104-585, at 6 (1996). It states that such 
travel time is to be considered noncompensable if the use of the 
vehicle is ``conducted under an agreement between the employer and the 
employee or the employee's representative.'' Id. The agreement may be a 
formal written agreement, a collective bargaining agreement, or an 
understanding based on established industry or company practices. Id. 
In addition, ``the work sites must be located within the normal 
commuting area of the employer's establishment.'' Id. at 4-5. 
Activities that are merely incidental to the use of the vehicle for 
commuting at the start or end of the day are similarly noncompensable, 
such as communication between the employee and employer to obtain 
assignments or instructions, or to report work progress or completion. 
Id. at 5.
    This statutory amendment to the Portal Act affects certain 
regulations in 29 CFR parts 785 and 790 issued pursuant to the FLSA and 
the Portal Act. Current section 785.9(a) explains the statutory 
provisions that eliminate from working time certain ``preliminary'' and 
``postliminary'' activities performed prior to or subsequent to the 
workday. To incorporate this amendment, this proposed rule adds to that 
section the new provision that activities that are incidental to the 
use of an employer-provided vehicle for commuting are not considered 
principal activities, and are not compensable, when they meet the 
conditions of the amendment. Current Sec.  785.34 discusses the effect 
of section 4 of the Portal Act on determining whether time spent in 
travel is working time. This proposed rule adds a reference to the 
statutory conditions under which commuting in an employer-provided 
vehicle will not be considered part of the employee's principal 
activities and will not be compensable. The proposed rule also revises 
Sec. Sec.  785.50 and 790.3 to incorporate the 1996 amendment into the 
quotation of section 4 of the Portal Act.
B. Youth Opportunity Wage
    Section 2105 of the SBJPA amended the FLSA by adding section 6(g), 
which provides that ``[a]ny employer may pay any employee of such 
employer, during the first 90 consecutive calendar days after such 
employee is initially employed by such employer, a wage which is not 
less than $4.25 an hour.'' 29 U.S.C. 206(g)(1). This subminimum wage 
``shall only apply to an employee who has not attained the age of 20 
years.'' 29 U.S.C. 206(g)(4). The amendment also protects current 
workers by prohibiting employers from taking action to displace 
employees, including reducing hours, wages, or employment benefits, for 
the purpose of hiring workers at the opportunity wage. It also states 
that any employer violating this subsection shall be considered to have 
violated the anti-discrimination provisions of section 15(a)(3) of the 
FLSA. 29 U.S.C. 206(g)(3).
    In this proposed rule, the Department adds a new subpart G to 29 
CFR part 786--which will be renamed Miscellaneous Exemptions and 
Exclusions From Coverage--to set forth the provisions of this new youth 
opportunity wage.
C. Minimum Wage Increase Act of 1996
    Section 2105 of Title II of the SBJPA, entitled the ``Minimum Wage 
Increase Act of 1996,'' amended section 3(m) of the FLSA, 29 U.S.C. 
203(m), by providing that

    In determining the wage an employer is required to pay a tipped 
employee, the amount paid such employee by the employee's employer 
shall be an amount equal to--
    (1) The cash wage paid such employee which for purposes of such 
determination shall be not less than the cash wage required to be 
paid such an employee on the date of the enactment of this 
paragraph; and
    (2) An additional amount on account of the tips received by such 
employee which amount is equal to the difference between the wage 
specified in paragraph (1) and the wage in effect under section 
6(a)(1).
    The additional amount on account of tips may not exceed the 
value of the tips actually received by an employee. The preceding 2

[[Page 43657]]

sentences shall not apply with respect to any tipped employee unless 
such employee has been informed by the employer of the provisions of 
this subsection, and all tips received by such employee have been 
retained by the employee, except that this subsection shall not be 
construed to prohibit the pooling of tips among employees who 
customarily and regularly receive tips.

Public Law No. 104-188, Sec.  2105(b) (1996). Prior to the 1996 
amendments, section 3(m) of the FLSA required an employer to pay its 
tipped employees a cash wage equal to 50 percent of the minimum wage 
(then $4.25 an hour). See Public Law No. 101-157, Sec.  5 (1989); 
Public Law No. 93-259, Sec.  13(e) (1974); 29 CFR 531.50. As amended, 
section 3(m)(1) provides that an employer's minimum cash wage 
obligation to its tipped employees is the minimum cash wage required on 
August 20, 1996, the date of the SBJPA enactment. Thus, section 3(m)(1) 
established an employer's cash wage obligations to tipped employees at 
the pre-SBJPA amount: 50 percent of the then-minimum wage of $4.25 per 
hour, or $2.13 per hour. See 29 U.S.C. Sec.  203(m)(1).
    Subsection (2) of the 1996 amendments bases an employer's maximum 
allowable tip credit on a specific formula in relation to the 
applicable minimum wage, stating that an employer may take a tip credit 
equal to the difference between the required minimum cash wage 
specified in paragraph 3(m)(1) ($2.13) and the minimum wage (now 
$5.85). Thus, the maximum tip credit that an employer currently is 
permitted to claim is $5.85 minus $2.13, or $3.72 per hour. (Effective 
July 24, 2008, the minimum wage required by the FLSA will increase to 
$6.55 an hour, resulting in a maximum federal tip credit limited to 
$4.42 an hour. Effective July 24, 2009, the minimum wage required by 
section 6(a)(1) of the FLSA will increase to $7.25 an hour, resulting 
in a maximum federal tip credit limited to $5.12 an hour.)
    This 1996 amendment affects certain regulations in 29 CFR part 531. 
Current Sec.  531.50(a) quotes section 3(m) of the FLSA as it appeared 
before the 1996 amendments. To incorporate the 1996 amendment, this 
proposed rule replaces the old statutory language with the current 
statutory provision. Current Sec. Sec.  531.56(d), 531.59, and 531.60 
refer to the pre-1996 statutory language setting the tip credit at 50 
percent of the minimum wage. The proposed rule deletes or changes these 
references to reflect the current statutory requirements (tip credit 
equaling the difference between the minimum wage required by section 
6(a)(1) of the FLSA and the $2.13 required cash wage). Additional 
changes related to tipped employees are discussed in this preamble at 
sections 7B and 8, infra.

3. Agricultural Workers on Water Storage/Irrigation Projects

    Section 105 of The Departments of Labor, Health, and Human 
Services, Education, and Related Agencies Appropriations Act, Public 
Law No. 105-78, 111 Stat. 1467 (Nov. 13, 1997), amended section 
13(b)(12) of the FLSA, 29 U.S.C. 213(b)(12), which provides an overtime 
exemption for agricultural employees and employees employed in 
connection with the operation or maintenance of certain waterways used 
for supply and storing of water for agricultural purposes. The 1997 
amendment deleted ``water for agricultural purposes'' and substituted 
``water, at least 90 percent of which was ultimately delivered for 
agricultural purposes during the preceding calendar year.'' Thus, this 
amendment makes the exemption from overtime pay requirements applicable 
to workers on water storage and irrigation projects where at least 90 
percent of the water is used for agricultural purposes, rather than 
where the water is used exclusively for agricultural purposes.
    In this proposed rule, the Department updates the regulations in 29 
CFR part 780, Subpart E to incorporate the statutory amendment. Thus, 
proposed Sec.  780.400 correctly quotes the statute, including the 
amendment. Section 780.401 provides an updated general explanatory 
statement of the history of the exemption. Section 780.406 deletes the 
last sentence of the current rule, which refers to the 1966 amendments, 
as no longer necessary. Finally, Sec.  780.408 is updated to describe 
the ``at least 90 percent'' requirement for using the water for 
agricultural purposes.

4. Certain Volunteers at Private Non-Profit Food Banks

    Section 1 of the Amy Somers Volunteers at Food Banks Act, Public 
Law No. 105-221, 112 Stat. 1248 (Aug. 7, 1998), amended section 3(e) of 
the FLSA, 29 U.S.C. 203(e), by adding section (5) to provide that the 
term ``employee'' does not include individuals volunteering solely for 
humanitarian purposes at private non-profit food banks and who receive 
groceries from those food banks given in recognition of such 
individual's needs and not in exchange for such individual's services. 
29 U.S.C. 203(e)(5). This proposed rule renames 29 CFR part 786 to 
``Miscellaneous Exemptions and Exclusions From Coverage'' and adds 
Subpart H to set forth this exclusion from FLSA coverage.

5. Employees Engaged in Fire Protection Activities

    In 1999, Congress amended section 3 of the FLSA, 29 U.S.C. 203, by 
adding section (y) to define ``an employee in fire protection 
activities.'' This amendment states that an ``employee in fire 
protection activities'' means

an employee, including a firefighter, paramedic, emergency medical 
technician, rescue worker, ambulance personnel, or hazardous 
material worker, who--(1) is trained in fire suppression, has the 
legal authority and responsibility to engage in fire suppression, 
and is employed by a fire department of a municipality, county, fire 
district, or State; and (2) is engaged in the prevention, control, 
and extinguishment of fires or response to emergency situations 
where life, property, or the environment is at risk.

Public Law No. 106-151, 113 Stat. 1731 (1999); 29 U.S.C. 203(y). Such 
employees may be covered by the partial overtime exemption allowed by 
Sec.  7(k) or the overtime exemption for public agencies with fewer 
than five employees in fire protection activities pursuant to Sec.  
13(b)(20). 29 U.S.C. 207(k); 213(b)(20).
    This proposed rule makes several revisions to 29 CFR part 553, 
Subpart C, to incorporate this amendment. In the first sentence of 
proposed Sec.  553.210(a), the statutory amendment language is 
substituted for the current four-part regulatory definition of the term 
``any employee * * * in fire protection activities.'' The proposed rule 
also deletes the last sentence of current section 553.210(a) stating 
that, ``[t]he term would also include rescue and ambulance service 
personnel if such personnel form an integral part of the public 
agency's fire protection services,'' and it deletes the cross-reference 
to section 553.215. The ``integral part'' test for the public agency 
employees is no longer needed because the new statutory standards 
define when such rescue and ambulance personnel qualify as employees in 
fire protection activities. Section 553.215(a) of the current rule 
discusses ambulance and rescue service employees who are employees of a 
public agency other than a fire protection or law enforcement agency. 
The section 3(y) amendment, however, specifically states that one of 
the requirements to be an ``employee in fire protection activities'' is 
that the employee is employed by a fire department of a municipality, 
county, fire district, or State. The proposed rule, therefore, deletes 
section 553.215(a)

[[Page 43658]]

because it permits non-fire department public agencies to treat their 
ambulance and rescue service employees as employees engaged in fire 
protection activities, contrary to the new statutory conditions. This 
proposed rule also deletes Sec. Sec.  553.215(b) (stating that rescue 
service employees of hospitals and nursing homes cannot qualify for the 
exemption) and 553.215(c) (stating that ambulance and rescue service 
employees of private organizations do not come within the exemption) as 
unnecessary in light of the clear statutory requirement for employment 
by a fire department. Finally, in Sec. Sec.  553.221, 553.222, 553.223, 
and 553.226, the Department is substituting ``employee in fire 
protection activities'' or ``employees in fire protection activities,'' 
respectively, wherever the terms ``firefighter'' or ``firefighters'' 
appeared.
    The Department reexamined the other regulations in part 553, 
Subpart C, in light of the section 3(y) amendment to assess whether any 
other changes were appropriate. Current Sec.  553.210 characterizes as 
exempt work related incidental activities such as equipment 
maintenance, lecturing and fire prevention inspections. Current Sec.  
553.210 also recognizes that employees can come within the exemption 
whether their status is ``trainee,'' ``probationary,'' or 
``permanent,'' and regardless of their particular specialty or job 
title or assignment to certain support activities. The Department 
believes that these provisions are consistent with statutory intent and 
remain the appropriate interpretation of the new statutory definition 
and, thus, makes no further changes to section 553.210.
    Current section 553.212 recognizes that exempt employees may engage 
in some nonexempt work, such as firefighters who work for forest 
conservation agencies and who plant trees and perform other 
conservation activities unrelated to their firefighting duties during 
slack times. The Department reexamined this regulation, particularly in 
light of the court's decision in McGavock v. City of Water Valley, 452 
F.3d 423 (5th Cir. 2006). That court noted that the Department had not 
updated its regulations since the passage of section 3(y). It found 
that the regulation at Sec.  553.210, defining an employee in fire 
protection activities, was supplanted by the amendment. It also 
concluded that the 20% tolerance for nonexempt work in Sec.  553.212 
simply put a gloss on the pre-existing regulatory definition. 
Therefore, the court concluded that Sec. Sec.  553.210 and 553.212 were 
``obsolete and without effect.'' 452 F.3d at 428. See also Huff v. 
DeKalb County, Ga., 516 F.3d 1273, 1278 (11th Cir. 2008) (agreeing that 
new section 3(y) is a streamlined definition that made existing 
provisions in Sec. Sec.  553.210 and 553.212 obsolete). Congress stated 
in section 3(y) that an employee must be ``engaged in the prevention, 
control, and extinguishment of fires or response to emergency 
situations where life, property, or the environment is at risk'' in 
order to qualify as an employee in fire protection activities. 29 
U.S.C. 203(y). Congress thus defined emergency medical response work as 
exempt work, when performed by an employee who meets the other tests in 
section 3(y). This proposed rule therefore deletes Sec.  553.212 as 
unnecessary in light of the court decisions and statutory amendment.

6. Stock Options Excluded From the Computation of the Regular Rate

    The Worker Economic Opportunity Act, Public Law No. 106-202, 114 
Stat. 308, enacted by Congress on May 18, 2000, amended Sec. Sec.  7(e) 
and 7(h) of the FLSA. 29 U.S.C. 207(e), (h). In Sec.  7(e), a new 
subsection (8) adds ``[a]ny value or income derived from employer-
provided grants or rights provided pursuant to a stock option, stock 
appreciation right, or bona fide employee stock purchase program'' 
meeting particular criteria to the types of remuneration that are 
excluded from the computation of the regular rate. In Sec.  7(h), the 
amendment clarifies that the amounts excluded under Sec.  7(e) may not 
be counted toward the employer's minimum wage requirement under section 
6, and that extra compensation excluded pursuant to the new subsection 
(8) may not be counted toward overtime pay under Sec.  7.
    The proposed rule incorporates the amendments made by the Worker 
Economic Opportunity Act by adding to the regulatory provisions which 
simply quote the statute in section 778.200(a) and (b). Section 778.208 
also is revised simply to update from ``seven'' to ``eight'' the number 
of types of remuneration excluded in computing the regular rate.

7. Fair Labor Standards Act Amendments of 1974

A. Service Advisors Working for Automobile Dealerships and Boat 
Salespersons
    On April 7, 1974, Congress enacted an amendment to section 
13(b)(10)(B) of the FLSA, 29 U.S.C. 213(b)(10)(B). Public Law No. 93-
259, 88 Stat. 55 (1974). This amendment added an overtime exemption for 
salespersons primarily engaged in selling boats (in addition to the 
pre-existing exemption for sellers of trailers or aircraft). This 
amendment also eliminated the overtime exemption for partsmen and 
mechanics servicing trailers or aircraft. This proposed rule revises 29 
CFR part 779, Subpart D--Exemptions for Certain Retail or Service 
Establishments, so that the regulations implementing section 
13(b)(10)(B) conform to this 1974 amendment. Section 779.371(a) is 
revised to reflect the amendment's addition of boat salespersons to the 
exemption. Proposed Sec.  779.372(a) now clarifies that salespersons 
primarily engaged in selling trailers, boats, or aircraft, but not 
partsmen or mechanics for such vehicles, are covered by the exemption; 
portions of Sec.  779.372(b) and (c) also are changed accordingly.
    Section 13(b)(10)(A) of the FLSA provides that ``any salesman, 
partsman, or mechanic engaged in selling or servicing automobiles, 
trucks or farm implements, if he is employed by a nonmanufacturing 
establishment primarily engaged in the business of selling such 
vehicles or implements to ultimate purchasers'' shall be exempt from 
the overtime requirements of the Act. 29 U.S.C. 213(b)(10)(A). The 
current regulation at 29 CFR 779.372(c)(4) states that an employee 
described as a service manager, service writer, service advisor, or 
service salesman, is not exempt under section 13(b)(10)(A).
    Uniform appellate and district court decisions, however, hold that 
service advisors are exempt under section 13(b)(10)(A) because they are 
``salesmen'' who are primarily engaged in ``servicing'' automobiles. 
See, e.g., Walton v. Greenbrier Ford, Inc., 370 F.3d 446, 452 (4th Cir. 
2004) (The current regulatory interpretation of this exemption is ``an 
impermissibly restrictive construction of the statute.''); Brennan v. 
Deel Motors, Inc., 475 F.2d 1095, 1097 (5th Cir. 1973) (Service 
advisors are ``functionally similar to the mechanics and partsmen who 
service the automobiles. All three work as an integrated unit, 
performing the services necessary * * * with the service salesman 
coordinating these specialties.''); Brennan v. North Brothers Ford, 
Inc., 1975 WL 1074 at *3 (E.D. Mich. 1975) (unpublished) (``The spirit 
of 13(b)(10) is best fulfilled by recognizing the functional similarity 
of service salesmen to partsmen and mechanics which are both expressly 
exempted.''), aff'd sub. nom. Dunlop v. North Brothers Ford, Inc., 529 
F.2d 524 (6th Cir. 1976) (Table).

[[Page 43659]]

    Based upon the court decisions, the Wage and Hour Division has 
adopted an enforcement position since 1987 that Wage and Hour ``will no 
longer deny the [overtime] exemption for such employees,'' and that the 
regulation would be revised. See Wage and Hour Division Field 
Operations Handbook (FOH) section 24L04(k). Therefore, this proposed 
rule changes Sec.  779.372(c), entitled ``Salesman, partsman, or 
mechanic,'' to follow the courts' consistent holdings that employees 
performing the duties typical of service advisors are within the 
section 13(b)(10)(A) exemption. Section 779.372(c)(1) is revised to 
include such an employee as a salesman primarily engaged in servicing 
automobiles. Section 779.372(c)(4) is rewritten to clarify that such 
employees qualify for the exemption.
B. Tipped Employees
    Section 3(m) of the FLSA defines the term ``wage'' and includes 
conditions for taking tip credits when making wage payments to 
qualifying tipped employees under the FLSA. The Department's tip credit 
regulations were promulgated in 1967, one year after hotels and 
restaurants were brought under the FLSA. Section 13(e) of the Fair 
Labor Standards Act Amendments of 1974 amended the last sentence of 
section 3(m) by providing that an employer could not take a tip credit 
unless:

    (1) [its] employee has been informed by the employer of the 
provisions of this subsection and (2) all tips received by such 
employee have been retained by the employee, except that this 
subsection shall not be construed to prohibit the pooling of tips 
among employees who customarily and regularly receive tips.

    Public Law No. 93-259, Sec.  13(e), 88 Stat. 55.
    Prior notice by the employer to employees of the employer's intent 
to avail itself of the tip credit is a statutory requirement pursuant 
to the 1974 amendments. Courts have disallowed the use of the tip 
credit for lack of notice even ``where the employee has actually 
received and retained base wages and tips that together amply satisfy 
the minimum wage requirements,'' remarking that ``[i]f the penalty for 
omitting notice appears harsh, it is also true that notice is not 
difficult for the employer to provide.'' Reich v. Chez Robert, Inc., 28 
F.3d 401, 404 (3d Cir. 1994) (citing Martin v. Tango's Restaurant, 969 
F.2d 1319, 1323 (1st Cir. 1992)). Although written notice is frequently 
provided, it is not required to satisfy the employer's notice burden. 
Compare Kilgore v. Outback Steakhouse of Florida, Inc., 160 F.3d 294, 
299 (6th Cir. 1998) (written notice provided to all applicants as 
matter of course), with Pellon v. Business Representation Int'l, Inc., 
528 F. Supp. 2d 1306, 1310-11 (S.D. Fla. 2007), appeal docketed, No. 
08-10133 (11th Cir. Jan. 8, 2008) (Section 3(m)'s requirement was met 
through verbal notice that plaintiff would be paid $2.13 plus tips, 
combined with prominent display of FLSA poster explaining tip credit). 
Additionally, while employees must be ``informed'' of the employer's 
use of the tip credit, the employer need not ``explain'' the tip 
credit. See Kilgore, 160 F.3d at 298 (``[A]n employer must provide 
notice to the employees, but need not necessarily `explain' the tip 
credit * * * `[I]nform' requires less from an employer than the word 
`explain.' ''); cf. Bonham v. Copper Cellar Corp., 476 F. Supp. at 101 
& n.6 (``vague references to conversations about the minimum wage'' are 
insufficient to establish section 3(m) notice).
    The second provision of the 1974 amendments to section 3(m) made it 
clear that tipped employees must receive at least the minimum wage and 
must generally retain any tips received by them as gratuities for 
services performed. An employer, however, can take advantage of a ``tip 
credit'' to offset a portion of its minimum wage obligation. Prior to 
the 1974 amendments, the compensation of tipped employees was often a 
matter of agreement. Tipped employees could agree, for example, that an 
employer was only obligated to pay cash wages when an employee's tips 
were less than the minimum wage, or that the employee's tips would be 
turned over to the employer, who could then use the tips to pay the 
minimum wage. See Usery v. Emersons Ltd., 1976 WL 1668, *2 (E.D. Va. 
1976), vacated and remanded on other grounds sub. nom. Marshall v. 
Emersons Ltd., 593 F.2d 565 (4th Cir. 1979). The 1974 amendments to 
section 3(m) were intended to prohibit such agreements. See S. Rep. No. 
93-690, at 43 (1974) (``The latter provision is added to make clear the 
original Congressional intent that an employer could not use the tips 
of a `tipped employee' to satisfy more than 50 percent of the Act's 
applicable minimum wage.''). The Department's current regulations, 
which were in effect prior to the 1974 amendments and allowed an 
employer to require employees to turn over all their tips to the 
employer, were therefore invalidated by the amendment to the extent 
that turning tips over to the employer effectively cuts into the 
minimum wage.
    Under the 1974 amendments to section 3(m), an employer's ability to 
utilize an employee's tips to satisfy any portion of the employer's 
minimum wage obligation was limited to taking a credit against the 
employee's tips of up to 50 percent of that obligation. Section 3(m) 
provides the only method by which an employer may use tips received by 
an employee to satisfy the employer's minimum wage obligation. An 
employer's only options under section 3(m) are to take a credit against 
the employee's tips of up to the statutory differential, or to pay the 
entire minimum wage directly. See Wage and Hour Opinion Letter WH-536, 
1989 WL 610348 (October 26, 1989) (defining when an employer does not 
claim a tip credit as when the employer does not retain any tips and 
pays the employee the minimum wage).
    Thus, in a situation in which an employee earns $10 an hour in tips 
and the employer pays $2.13 an hour in cash wages and claims the 
statutory maximum as a tip credit, the employee has received only the 
minimum wage under section 3(m). (Under section 3(m), the ``wage'' of a 
tipped employee equals the sum of the cash wage paid by the employer 
and the amount it claimed as a tip credit.) The amount of tips the 
employee received in excess of the tip credit are not considered 
``wages'' paid by the employer and any deductions from the employee's 
tips made by the employer would therefore result in a violation of the 
employer's minimum wage obligation. If, however, the employer paid the 
employee a direct wage in excess of the minimum wage--and thus did not 
claim a credit against any portion of the employee's tips--the employer 
would be able to make deductions so long as they did not reduce the 
direct wage payment below the minimum wage. See Wage and Hour Opinion 
Letter WH-536, 1989 WL 610348 (October 26, 1989). In such a situation, 
the deduction would be viewed as coming from the employer's wage 
payment that exceeds the minimum wage.
    The proposed rule updates the regulations to incorporate the 1974 
amendments, the legislative history, subsequent court decisions, and 
the Department's interpretations. Sections 531.52, 531.55(a), 
531.55(b), and 531.59 eliminate references to employment agreements 
providing either that tips are the property of the employer or that 
employees will turn tips over to their employers, and clarify that the 
availability of the tip credit provided by section 3(m) requires that 
all tips

[[Page 43660]]

received must be paid out to tipped employees in accordance with the 
1974 amendments. Section 531.55(a), which describes compulsory service 
charges, also is updated by changing the example of such a charge from 
10 percent to 15 percent to reflect more current customary industry 
practices.
    The 1974 amendments also clarified that section 3(m)'s statement 
that employees must retain their tips does not preclude the practice of 
tip pooling ``among employees who customarily and regularly receive 
tips.'' 29 U.S.C. 203(m). The Department's regulation on the subject 
provides that ``the amounts received and retained by each individual 
[through a tip pooling arrangement] as his own are counted as his tips 
for purposes of the Act.'' 29 CFR 531.54.
    Wage and Hour interpreted the tip pooling clause more fully in 
opinion letters and in its FOH. The FOH provides, for example, that a 
tip pooling arrangement cannot require employees to contribute a 
greater percentage of their tips to the tip pool than is ``customary 
and reasonable.'' FOH section 30d04(b). The agency expanded upon this 
position, in its opinion letters and in litigation, that ``customary 
and reasonable'' equates to 15 percent of an employee's tips or two 
percent of daily gross sales. See, e.g., Wage and Hour Opinion Letter 
WH-468, 1978 WL 51429 (Sept. 5, 1978). Several courts have rejected the 
agency's maximum contribution percentages, however, ``because neither 
the statute nor the regulations mention [the requirement stated in the 
agency interpretation] and the opinion letters do not explain the 
statutory source for the limitation that they create.'' Kilgore v. 
Outback Steakhouse of Fla., Inc., 160 F.3d 294, 302-03 (6th Cir. 1998); 
see Davis v. B&S, Inc., 38 F. Supp. 2d 707, 718 n.16 (N.D. Ind. 1998) 
(citing Dole v. Continental Cuisine, Inc., 751 F. Supp. 799, 803 (E.D. 
Ark. 1990) (``The Court can find no statutory or regulatory authority 
for the Secretary's opinion [articulated in an opinion letter] that 
contributions in excess of 15% of tips or 2% of daily gross sales are 
excessive.'')). Based on these court decisions and the unequivocal 
statutory language, the proposed rule updates Sec.  531.54 to clarify 
that section 3(m) of the FLSA does not impose a maximum tip pool 
contribution percentage. However, the proposed rule states that the 
employer must inform each employee of the required tip pool 
contribution, and an employee's participation in a tip pool cannot 
bring the employee's wages below the minimum wage.
    The 1974 amendments also revised another aspect of section 3(m). 
Prior to the 1974 amendments, section 3(m) of the FLSA provided that an 
employee could petition the Wage and Hour Administrator to review the 
tip credit claimed by an employer. See Public Law No. 89-601, 80 Stat. 
830 (1966) (``[I]n the case of an employee who (either himself or 
acting through his representative) shows to the satisfaction of the 
Secretary that the actual amount of tips received by him was less than 
the amount determined by the employer as the amount by which the wage 
paid him was deemed to be increased * * * the amount paid such employee 
by his employer shall be deemed to have been increased by such lesser 
amount.''). The 1974 amendments eliminated the review clause to clarify 
that the employer, not the employee, bears the ultimate burden of 
proving ``the amount of tip credit, if any, [he] is entitled to 
claim.'' S. Rep. No. 93-690, at 43. Two outdated regulatory provisions 
promulgated in 1967, however, still purport to permit petitions to the 
Wage and Hour Administrator for tip credit review despite the fact that 
the statute no longer provides for this review. See 29 CFR 531.7, 
531.59.
    Consistent with the 1974 amendments, this proposed rule deletes 
section 531.7, which permits employees to petition the Wage and Hour 
Administrator for tip credit review. References to the Administrator's 
review in section 531.59 are also deleted, and the language is updated 
to reflect the burden on the employer to prove the amount of the tip 
credit to which it is entitled.

8. Fair Labor Standards Act Amendments of 1977

    On November 1, 1977, Congress amended section 3(t) of the FLSA, 29 
U.S.C. 203(t). Public Law No. 95-151, Sec.  3(a), 91 Stat. 1245. 
Section 3(t) of the FLSA defines the phrase ``tipped employee.'' Prior 
to the 1977 amendment, the definition encompassed ``any employee 
engaged in an occupation in which he customarily and regularly receives 
more than $20 a month in tips.'' The 1977 amendment raised the 
threshold in section 3(t) to $30 a month in tips.
    To reflect the 1977 amendment, this proposed rule changes the 
references in 29 CFR 531.50(b), 531.51, 531.56(a)-(e), 531.57, and 
531.58 from $20 to $30.

9. Meal Credit Under Section 3(m)

    The proposed rule further amends Sec.  531.30 to incorporate Wage 
and Hour's longstanding enforcement position regarding the voluntary 
acceptance of meals. A ``wage'' paid pursuant to section 3(m) of the 
FLSA may include ``the reasonable cost * * * to the employer of 
furnishing * * * board, lodging, or other facilities * * * customarily 
furnished by such employer to his employees.'' 29 U.S.C. 203(m). 
``Facilities'' include employer-provided meals. See 29 CFR 531.32. The 
Department's regulation at 29 CFR 531.30, however, provides that an 
employer's ability to take credit for a facility is limited to those 
instances where an employee's acceptance was ``voluntary and 
uncoerced.'' In other words, an employer could not take a wage credit 
for employees who did not choose to accept the meal.
    After a number of courts rejected the agency's position on this 
point with regard to credit for meals, the agency adopted an 
enforcement position providing that an employer can take a meal credit 
even if an employee does not voluntarily accept the meal. See FOH 
section 30c09(b) (``WH no longer enforces the `voluntary' provision 
with respect to meals.''); see also Davis Bros., Inc. v. Donovan, 700 
F.2d 1368, 1370 (11th Cir. 1983); Donovan v. Miller Properties, Inc., 
711 F.2d 49, 50 (5th Cir. 1983).
    Thus, under the agency's current enforcement policy articulated in 
the FOH, an employer may require an employee to accept a meal provided 
by the employer as a condition of employment, and may take credit for 
the actual cost of that meal even if the employee's acceptance is not 
voluntary. The proposed rule amends 29 CFR 531.30 to reflect previous 
court decisions and the agency's current enforcement posture on meal 
credits.

10. Section 7(o) Compensatory Time Off

    Section 7 of the FLSA requires that a covered employee receive 
compensation for hours worked in excess of 40 in a workweek at a rate 
not less than one and one-half times the regular rate of pay at which 
the employee is employed. 29 U.S.C. 207(a). In 1985, subsequent to the 
U.S. Supreme Court's decision in Garcia v. San Antonio Metropolitan 
Transit Authority, 469 U.S. 528 (1985), which held that the FLSA may be 
constitutionally applied to state and local governments, Congress added 
section 7(o), 29 U.S.C. 207(o), to the FLSA to permit public agencies 
to grant employees compensatory time off in lieu of cash overtime 
compensation pursuant to an agreement with employees or their 
representatives. The purpose of this exception to the Act's usual 
requirement of cash overtime pay was ``to provide flexibility to state 
and local government employers and an

[[Page 43661]]

element of choice to their employees regarding compensation for 
statutory overtime hours.'' H.R. Rep. No. 331, 99th Cong., 1st Sess. 19 
(1985).
    Section 7(o) provides a detailed scheme for the accrual and use of 
compensatory time off. Subsection 7(o)(1) authorizes the provision of 
compensatory time off in lieu of overtime pay. Subsection 7(o)(2) 
specifies how a public employer creates a compensatory time off plan. 
Subsection 7(o)(3) establishes limits for the amount of compensatory 
time off that an employee may accrue. Section 7(o)(4) provides the 
requirements for cashing out compensatory time upon an employee's 
termination. Section 7(o)(5) governs a public employee's use of accrued 
compensatory leave. That section states:

    An employee of a public agency which is a State, political 
subdivision of a State, or an interstate governmental agency--(A) 
who has accrued compensatory time off authorized to be provided 
under paragraph (1), and (B) who has requested the use of such 
compensatory time, shall be permitted by the employee's employer to 
use such time within a reasonable period after making the request if 
the use of the compensatory time does not unduly disrupt the 
operations of the public agency.

29 U.S.C. 207(o)(5)(A), (B).
    In 1987, after notice and comment, the Department issued final 
regulations implementing section 7(o) (29 CFR 553.20-.28). Section 
553.25 of the regulations implements section 7(o)(5)'s requirements 
regarding the use of compensatory time off. Section 553.25(c) provides:

    (1) Whether a request to use compensatory time has been granted 
within a ``reasonable period'' will be determined by considering the 
customary work practices within the agency based on the facts and 
circumstances in each case. Such practices include, but are not 
limited to (a) the normal schedule of work, (b) anticipated peak 
workloads based on past experience, (c) emergency requirements for 
staff and services, and (d) the availability of qualified substitute 
staff.
    (2) The use of compensatory time in lieu of cash payment for 
overtime must be pursuant to some form of agreement or understanding 
between the employers and the employee (or the representative of the 
employee) reached prior to the performance of the work. (See Sec.  
553.23). To the extent that the []conditions under which an employee 
can take compensatory time off are contained in an agreement or 
understanding as defined in Sec.  553.23, the terms of such 
agreement or understanding will govern the meaning of ``reasonable 
period''.

    Section 553.25(d) states:

    When an employer receives a request for compensatory time off, 
it shall be honored unless to do so would be ``unduly disruptive'' 
to the agency's operations. Mere inconvenience to the employer is an 
insufficient basis for denial of a request for compensatory time 
off. (See H. Rep. 99-331, p. 23.) For an agency to turn down a 
request from an employee for compensatory time off requires that it 
should reasonably and in good faith anticipate that it would impose 
an unreasonable burden on the agency's ability to provide services 
of acceptable quality and quantity for the public during the time 
requested without the use of the employee's services.

    In recent years, a number of courts have examined the proper 
interpretation of section 7(o)(5)(B)'s ``reasonable period'' 
requirement with regard to whether an employer must allow an employee 
to take off the specific days that the employee requests unless that 
time off would cause an undue disruption.
    In Mortensen v. County of Sacramento, 368 F.3d 1082 (9th Cir. 
2004), the court held that under section 7(o)(5)(B), a public agency 
may deny its employees the right to use accrued compensatory time off 
on the specific days they request, without establishing that such use 
of compensatory time would ``unduly disrupt the operations of the 
public agency.'' The court relied upon the statutory language providing 
that an employee who has requested the use of compensatory time ``shall 
be permitted * * * to use such time within a reasonable period after 
making the request.'' 29 U.S.C. 207(o)(5)(B). The court held that this 
language unambiguously states that once an employee requests 
compensatory time off, the employer must allow the employee to use the 
time within a reasonable period after the request and, thus, it does 
not require the employer to grant the time off on the specific days 
requested. In the court's opinion, section 7(o)(5)(B)'s ``unduly 
disrupt'' clause merely indicates the condition that releases an 
employer from the obligation to permit the use of compensatory time 
within a ``reasonable period'' after it is requested. Because the court 
found no ambiguity in the statute, it declined to defer to the 
Department's regulation at 29 CFR 553.25(d). Accord Scott v. City of 
New York, 340 F. Supp. 2d 371, 380 (S.D.N.Y. 2004).
    Similarly, in Houston Police Officers Union v. City of Houston, 330 
F.3d 298 (5th Cir.), cert. denied, 540 U.S. 879 (2003), the court held 
that the plain language of section 207(o)(5)(B) does not require a 
public agency to grant compensatory time off on the date specifically 
requested, but instead requires that the agency permit the leave within 
a reasonable period after the employee requests its use. The court 
stated that ``mandating a `reasonable period' for use of comp time is 
different from mandating the employee's chosen dates. The language 
offers a span of time to the employer, the beginning of which is the 
date of the employee's request.'' 330 F.3d at 303. The court noted that 
if granting the request would unduly disrupt operations, the public 
agency is released from the previously imposed requirement. Because the 
court deemed the statutory language unambiguous, it held that deference 
to the Department's regulation would be inappropriate. Moreover, the 
court stated that even if the statute were ambiguous, the regulation at 
section 553.25(d) ``simply does not address whether the statute 
mandates an employee's specifically requested dates for comp time.'' 
330 F.3d at 304. The court (330 F.3d at 304-05) also refused to defer 
to the Department's amicus curiae brief filed in DeBraska v. City of 
Milwaukee, 131 F. Supp. 2d 1032 (E.D. Wis. 2000).\1\
---------------------------------------------------------------------------

    \1\ In contrast to Houston Police Officers Union, the district 
court in DeBraska v. City of Milwaukee, 131 F. Supp. 2d at 1034, 
found that the statute was ``somewhat ambiguous.'' The court held 
that section 7(o)(5)(B) establishes that if an employee gives 
reasonable notice of a request for compensatory time, the specific 
days requested must be granted unless the employer demonstrates that 
the leave would unduly disrupt the employer's services to the 
public. The court thus agreed with the interpretation of section 
7(o)(5) presented in the Department's amicus curiae brief, and it 
concluded that the current regulations support this view, because 
Sec.  553.25(d) provides that in order to deny a compensatory leave 
request an agency must believe that granting the leave would 
``impose an unreasonable burden on the agency's ability to provide 
services of acceptable quality and quantity for the public during 
the time requested[.]'' (Emphasis added). The court stated that 
granting time off on an alternate date would be inconsistent with 
this phrase.
---------------------------------------------------------------------------

    In Aiken v. City of Memphis, 190 F.3d 753 (6th Cir. 1999), cert. 
denied, 528 U.S. 1157 (2000), the court held that the plaintiffs-police 
officers' collective bargaining agreement with the City of Memphis 
permitted the City to deny the specific day requested for the use of 
compensatory time without a showing that such use would unduly disrupt 
its operations. Under the agreement, the City required police officers 
requesting compensatory time to sign the precinct's ``comp time'' log 
book within 30 days of the requested day off. Once the commanding 
officer determined that additional requests for a particular day would 
adversely affect the functioning of the unit, no additional requests 
for the use of compensatory time on that day were allowed.
    The plaintiffs-police officers argued that the City's practice of 
denying officers the use of compensatory time off on a particular day 
violated section 7(o)(5)(B) because the City denied the leave without 
satisfying the ``unduly

[[Page 43662]]

disrupt'' standard. The court rejected the argument on the ground that 
it ``completely ignores the phrase `reasonable period,' which the Act 
gives the parties the freedom to define.'' 190 F.3d at 756 (citations 
omitted). The court noted that the regulations provide that to the 
extent that the parties' agreement specifies ``the conditions under 
which an employee can take compensatory time off * * * the terms of 
such agreement or understanding will govern the meaning of `reasonable 
period.' '' 190 F.3d at 756-57 (quoting 29 CFR 553.25(c)(2)). The court 
reasoned that the parties had agreed that ``the reasonable period for 
requesting the use of banked compensatory time begins thirty days prior 
to the day in question and ends when the number of officers requesting 
the use of compensatory time on the given date would bring the 
precinct's staffing levels to the minimum level necessary for efficient 
operation.'' 190 F.3d at 757. Therefore, on this basis, the court 
upheld the district court's determination that the City had not 
violated section 7(o)(5)(B). See Beck v. City of Cleveland, 390 F.3d 
912 (6th Cir. 2004), cert. denied, 125 S. Ct. 2930 (2005) (Aiken 
involved the ``reasonable period'' clause of section 7(o)(5)(B)).
    The appellate decisions uniformly read the statutory language 
unambiguously to state that once an employee requests compensatory time 
off, the employer has a reasonable period of time to allow the employee 
to use the time, unless doing so would be unduly disruptive. The 
Department proposes to revise the current rule to adhere to the 
appellate court rulings cited above. Proposed Sec.  553.25(c) adds a 
sentence that states that section 7(o)(5)(B) does not require a public 
agency to allow the use of compensatory time on the day specifically 
requested, but only requires that the agency permit the use of the time 
within a reasonable period after the employee makes the request, unless 
the use would unduly disrupt the agency's operations. Additionally, the 
phrase ``within a reasonable period after the request'' has been added 
to the final sentence of proposed Sec.  553.25(d) and the phrase 
``during the time requested'' has been replaced with ``during the time 
off'' to clarify the employer's obligation.

11. Fluctuating Workweek Method of Computing Overtime Under 29 CFR 
778.114

    The proposed rule would also clarify the Department's regulation at 
29 CFR 778.114 addressing the fluctuating workweek method of computing 
overtime compensation for salaried nonexempt employees. The current 
regulation provides that an employer may use the fluctuating workweek 
method for computing half-time overtime compensation if an employee 
works fluctuating hours from week to week and receives, pursuant to an 
understanding with the employer, a fixed salary as straight-time 
compensation ``(apart from overtime premiums)'' for whatever hours the 
employee is called upon to work in a workweek, whether few or many. In 
such cases, an employer satisfies the overtime pay requirement of 
section 7(a) of the FLSA if it compensates the employee, in addition to 
the salary amount, at least one-half of the regular rate of pay for the 
hours worked in excess of 40 hours in each workweek. Because the 
employee's hours of work fluctuate from week to week, the regular rate 
must be determined separately each week based on the number of hours 
actually worked each week. The payment of additional bonus supplements 
and premium payments to employees compensated under the fluctuating 
workweek method has presented challenges to both employers and the 
courts in applying the current regulations.
    The proposed regulation provides that bona fide bonus or premium 
payments do not invalidate the fluctuating workweek method of 
compensation, but that such payments (as well as ``overtime premiums'') 
must be included in the calculation of the regular rate unless they are 
excluded by FLSA sections 7(e)(1)-(8). The proposal also adds an 
example to Sec.  778.114(b) to illustrate these principles where an 
employer pays an employee a nightshift differential in addition to a 
fixed salary.
    Paying employees bonus or premium payments for certain activities 
such as working undesirable hours is a common and beneficial practice 
for employees. Moreover, the Department's proposed clarification is 
consistent with the Supreme Court's decision in Overnight Motor 
Transportation Co. v. Missel, 316 U.S. 572 (1942), on which the 
existing regulation is patterned. That case held that, where a 
nonexempt employee had received only a fixed weekly salary (with no 
additional overtime premium pay) for working variable irregular hours 
that regularly exceeded 40 per week and fluctuated from week to week, 
the employer was required to retroactively pay an additional 50% of the 
employee's regular rate of pay multiplied by the overtime hours worked 
to satisfy the FLSA's time and a half overtime pay requirement. Id. at 
573-74, 580-81. The quotient of the weekly wage divided by the number 
of hours actually worked each week, including the overtime hours, 
determined the ``regular rate at which [the] employee [was] employed'' 
under the fixed salary arrangement. Id. at 580. The Department's 
proposed clarification would eliminate any disincentive for employers 
to pay additional bona fide bonus or premium payments.

IV. Paperwork Reduction Act

    This rule does not impose new information collection requirements 
for purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et 
seq.

V. Executive Order 12866; Small Business Regulatory Enforcement 
Fairness Act; Regulatory Flexibility

    This proposed rule is not economically significant within the 
meaning of Executive Order 12866, or a ``major rule'' under the 
Unfunded Mandates Reform Act or Section 801 of the Small Business 
Regulatory Enforcement Fairness Act.
    As discussed previously in this preamble, over the years, Congress 
has amended the FLSA to refine or to add to exemptions and to clarify 
the minimum wage and overtime pay requirements. However, in many cases, 
the Department of Labor has not revised the FLSA regulations to comport 
with these statutory changes. The Department believes that the existing 
outdated regulatory provisions may cause confusion within the regulated 
community resulting in inadvertent violations and the costs of 
corrective compliance measures to remedy them.
    The Department has determined that the proposed changes will not 
result in any additional compliance costs for regulated entities 
because the current compliance obligations derive from current law and 
not the outdated regulatory provisions that have been superseded years 
ago.
    The Department is aware that this interpretation appears to be 
inconsistent with OMB Circular A-4's guidance on the use of analysis 
baselines, which states: ``In some cases, substantial portions of a 
rule may simply restate statutory requirements that would be self-
implementing, even in the absence of the regulatory action. In these 
cases, you should use a pre-statute baseline'' to conduct the 
preliminary regulatory impact analysis. However, as the discussion 
below indicates, the Department believes the use of a pre-statute 
baseline would be extremely difficult for statutes enacted a decade or 
more in the past. Fundamental changes in the economy and labor market 
(e.g., the introduction of technology, changes in the size and 
composition of the labor

[[Page 43663]]

force, changes in the economy that impact the demand for labor, etc.) 
would make it difficult, if not impossible, to separate those changes 
from changes that resulted from enactment of the statute.
    Moreover, the Department believes the economic impacts due to the 
statutory changes to the FLSA are typically greatest in the short run 
and diminish over time. This is due to labor markets determining the 
most efficient way to adjust to the new requirements, and because the 
Department believes many of the changes mandated by various revisions 
to the FLSA are reflective of the natural evolution of the labor market 
and would have become more common even in the absence of regulatory 
changes.\2\ Therefore, the impacts resulting from the promulgation of 
the proposed regulations are not likely to be measurable. In fact, the 
Department anticipates that if implemented as a final rule, this 
proposed rule will simply enhance the Department's enforcement of, and 
the public's understanding of, compliance obligations under the FLSA by 
replacing outdated regulations with updated provisions that reflect 
current law.
---------------------------------------------------------------------------

    \2\ For example, as nominal wages rise over time, the marginal 
impact of a fixed minimum wage provision decreases, since it is less 
binding on the market.
---------------------------------------------------------------------------

    The Department requests comments on this assessment.

1996 and 2007 Amendments to the FLSA Minimum Wage

    The current FLSA regulations reference the minimum wage in several 
places. In some places the regulations refer to the 1981 minimum wage 
of $3.35 while in others they refer to the 1991 minimum wage of $4.25.
    In order to avoid the current inconsistencies between the FLSA 
regulations and the statute the Department is proposing to revise the 
regulations so that they refer to the statutory minimum wage rather 
than a specific minimum wage. Since the proposed regulations do not 
include any reference to a specific minimum wage, the Department 
believes they do not impose the burden of increasing the minimum wage 
from the levels specified in the current regulations. That burden was 
imposed by the statutory changes and is unrelated to the FLSA 
regulations.
    Thus, the Department concludes that the only incremental effect of 
this pro