Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 32391-32552 [2016-11754]
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Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
individuals with intellectual or
developmental disabilities in residential
homes and facilities with 15 or fewer
beds. This non-enforcement period will
last from December 1, 2016 (the
effective date of the Overtime Final
Rule) until March 17, 2019. During this
period of non-enforcement, the
Department will not enforce the
updated salary threshold of $913 per
week for the subset of employers
covered by this non-enforcement policy.
However, the Department will continue
to enforce all other provisions of the
Overtime Final Rule as to this subset of
employers, including in instances
involving employees who meet the
salary basis and duties tests but who
earn less than the previous salary
threshold of $455 per week. The nonenforcement policy does not apply to
providers of Medicaid- funded services
for individuals with intellectual or
developmental disabilities in residential
care facilities with 16 or more beds.
Regulatory Requirements
This document is non-binding
guidance articulating considerations
relevant to the Department’s exercise of
its enforcement authority under the
FLSA. It is therefore exempt from the
notice-and-comment rulemaking
requirements under the Administrative
Procedure Act pursuant to 5 U.S.C.
553(b).
Because no notice of proposed
rulemaking is required, the Regulatory
Flexibility Act does not require an
initial or final regulatory flexibility
analysis. 5 U.S.C. 603(a), 604(a). The
Department has determined that this
guidance does not impose any new or
revise any existing recordkeeping,
reporting, or disclosure requirements on
covered entities or members of the
public that would be collections of
information requiring OMB approval
under the Paperwork Reduction Act, 44
U.S.C. 3501 et seq.
Authority: 29 U.S.C. 216(c); Secretary’s
Order No. 01–2014.
Mary Ziegler,
Assistant Administrator for Policy, Wage and
Hour Division.
[FR Doc. 2016–11753 Filed 5–18–16; 8:45 am]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1235–AA11
Defining and Delimiting the
Exemptions for Executive,
Administrative, Professional, Outside
Sales and Computer Employees
Wage and Hour Division,
Department of Labor.
ACTION: Final rule.
AGENCY:
The Fair Labor Standards Act
(FLSA or Act) guarantees a minimum
wage for all hours worked during the
workweek and overtime premium pay of
not less than one and one-half times the
employee’s regular rate of pay for hours
worked over 40 in a workweek. While
these protections extend to most
workers, the FLSA does provide a
number of exemptions. In this Final
Rule, the Department of Labor
(Department) revises final regulations
under the FLSA implementing the
exemption from minimum wage and
overtime pay for executive,
administrative, professional, outside
sales, and computer employees. These
exemptions are frequently referred to as
the ‘‘EAP’’ or ‘‘white collar’’
exemptions. To be considered exempt
under part 541, employees must meet
certain minimum requirements related
to their primary job duties and, in most
instances, must be paid on a salary basis
at not less than the minimum amounts
specified in the regulations.
In this Final Rule the Department
updates the standard salary level and
total annual compensation requirements
to more effectively distinguish between
overtime-eligible white collar
employees and those who may be
exempt, thereby making the exemption
easier for employers and employees to
understand and ensuring that the
FLSA’s intended overtime protections
are fully implemented. The Department
sets the standard salary level for exempt
EAP employees at the 40th percentile of
weekly earnings of full-time salaried
workers in the lowest-wage Census
Region. The Department also permits
employers to satisfy up to 10 percent of
the standard salary requirement with
nondiscretionary bonuses, incentive
payments, and commissions, provided
these forms of compensation are paid at
least quarterly. The Department sets the
total annual compensation requirement
for an exempt Highly Compensated
Employee (HCE) equal to the annualized
weekly earnings of the 90th percentile
of full-time salaried workers nationally.
SUMMARY:
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The Department also adds a provision to
the regulations that automatically
updates the standard salary level and
HCE compensation requirements every
three years by maintaining the earnings
percentiles set in this Final Rule to
prevent these thresholds from becoming
outdated. Finally, the Department has
not made any changes in this Final Rule
to the duties tests for the EAP
exemption.
This Final Rule is effective on
December 1, 2016.
FOR FURTHER INFORMATION CONTACT:
Director, Division of Regulations,
Legislation and Interpretation, U.S.
Department of Labor, Wage and Hour
Division, Room S–3502, 200
Constitution Avenue NW., Washington,
DC 20210; telephone: (202) 693–0406
(this is not a toll-free number). Copies
of this Final Rule may be obtained in
alternative formats (Large Print, Braille,
Audio Tape or Disc), upon request, by
calling (202) 693–0675 (this is not a tollfree number). TTY/TDD callers may dial
toll-free 1–877–889–5627 to obtain
information or request materials in
alternative formats.
Questions of interpretation and/or
enforcement of the agency’s regulations
may be directed to the nearest 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 Web site at https://
www.dol.gov/whd/america2.htm for a
nationwide listing of WHD district and
area offices.
SUPPLEMENTARY INFORMATION:
DATES:
Table of Contents
I. Executive Summary
II. Background
A. What the FLSA Provides
B. Legislative History
C. Regulatory History
D. Overview of Existing Regulatory
Requirements
E. Presidential Memorandum
F. The Department’s Proposal
G. Effective Date
III. Need for Rulemaking
IV. Final Regulatory Revisions
A. Standard Salary Level
B. Special Salary Tests
C. Inclusion of Nondiscretionary Bonuses,
Incentive Payments, and Commissions in
the Salary Level Requirement
D. Highly Compensated Employees
E. Automatic Updates
F. Duties Requirements for Exemption
V. Paperwork Reduction Act
VI. Analysis Conducted in Accordance With
Executive Order 12866, Regulatory
Planning and Review, and Executive
Order 13563, Improving Regulation and
Regulatory Review
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VII. Final Regulatory Flexibility Analysis
VIII. Unfunded Mandates Reform Act
Analysis
VIIIX. Executive Order 13132, Federalism
IX. Executive Order 13175, Indian Tribal
Governments
XI. Effects on Families
XII. Executive Order 13045, Protection of
Children
XIII. Environmental Impact Assessment
XIV. Executive Order 13211, Energy Supply
XV. Executive Order 12630, Constitutionally
Protected Property Rights
XVI. Executive Order 12988, Civil Justice
Reform AnalysisFinal Amendments to
Regulatory Text
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I. Executive Summary
The Fair Labor Standards Act (FLSA
or Act) guarantees a minimum wage for
all hours worked and limits to 40 hours
per week the number of hours an
employee can work without additional
compensation. Section 13(a)(1) of the
FLSA, which was included in the
original Act in 1938, exempts from these
minimum wage and overtime pay
protections ‘‘any employee employed in
a bona fide executive, administrative, or
professional capacity.’’ The exemption
is premised on the belief that these
kinds of workers typically earn salaries
well above the minimum wage and
enjoy other privileges, including aboveaverage fringe benefits, greater job
security, and better opportunities for
advancement, setting them apart from
workers entitled to overtime pay. The
statute delegates to the Secretary of
Labor the authority to define and
delimit the terms of the exemption.
The Department has undertaken this
rulemaking in order to revise the
regulations so that they effectively
distinguish between overtime-eligible
white collar employees who Congress
intended to be protected by the FLSA’s
minimum wage and overtime provisions
and bona fide EAP employees whom it
intended to exempt. When the
definition becomes outdated, employees
who Congress intended to protect
receive neither the higher salaries and
above-average benefits expected for EAP
employees nor do they receive overtime
pay, and employers do not have an
efficient means of identifying workers
who are, and are not, entitled to the
FLSA’s protections. With this Final
Rule, the Department will ensure that
white collar employees who should
receive extra pay for overtime hours will
do so and that the test for exemption
remains up-to-date so future workers
will not be denied the protections that
Congress intended to afford them.
In 1938, the Department issued the
first regulations at 29 CFR part 541
defining the scope of the section 13(a)(1)
white collar exemption. Since 1940, the
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regulations implementing the
exemption have generally required each
of three tests to be met for the
exemption to apply: (1) The employee
must be paid a predetermined and fixed
salary that is not subject to reduction
because of variations in the quality or
quantity of work performed (the ‘‘salary
basis test’’); (2) the amount of salary
paid must meet a minimum specified
amount (the ‘‘salary level test’’); and (3)
the employee’s job duties must
primarily involve executive,
administrative, or professional duties as
defined by the regulations (the ‘‘duties
test’’). While payment of a salary does
not make an employee ineligible for
overtime compensation, the Department
has nonetheless long recognized the
salary level test is the best single test of
exempt status for white collar
employees. The salary level test is an
objective measure that helps distinguish
white collar employees who are entitled
to overtime from those who may be
bona fide executive, administrative, or
professional (EAP) employees. If left at
the same amount over time, however,
the effectiveness of the salary level test
as a means of determining exempt status
diminishes as the wages of employees
increase and the real value of the salary
threshold falls.
The Department has updated the
salary level requirements seven times
since 1938, most recently in 2004 when
the salary level an employee must be
paid to come within the standard test
for EAP exemption was set at $455 per
week ($23,660 per year for a full-year
worker), which nearly tripled the $155
per week minimum salary level required
for exemption up to that point. The
Department also modified the duties
tests in 2004, eliminating the ‘‘long’’
and ‘‘short’’ tests that had been part of
the regulations since 1949 and replacing
them with the ‘‘standard’’ test. The
historic long test paired a lower salary
requirement with a stringent duties test
including a 20 percent cap on the
amount of time most exempt employees
could spend on nonexempt duties,
while the short test paired a higher
salary requirement with a less stringent
duties test. In other words, prior to the
2004 Final Rule, to exempt lower-paid
employees from receiving overtime the
employer would have to meet more
rigorous requirements; but for higherpaid employees, the requirements to
establish the applicability of the
exemption were less rigorous. The
standard test established by the
Department in the 2004 Final Rule
paired a duties test closely based on the
less-stringent short duties test with a
salary level derived from the lower long
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test salary level. This had the effect of
making it easier for employers to both
pay employees a lower salary and not
pay them overtime for time worked
beyond 40 hours. The 2004 Final Rule
also created an exemption for highly
compensated employees (HCE), which
imposes a very minimal duties test but
requires that an employee must earn at
least $100,000 in total annual
compensation.
On March 13, 2014, President Obama
signed a Presidential Memorandum
directing the Department to update the
regulations defining which white collar
workers are protected by the FLSA’s
minimum wage and overtime standards.
79 FR 18737 (Apr. 3, 2014). The
memorandum instructed the
Department to look for ways to
modernize and simplify the regulations
while ensuring that the FLSA’s intended
overtime protections are fully
implemented. The Department
published a proposal to update the part
541 regulations on July 6, 2015.
One of the Department’s primary
goals in this rulemaking is updating the
standard salary requirement, both in
light of the passage of time since 2004,
and because the Department has
concluded that the effect of the 2004
Final Rule’s pairing of a standard duties
test based on the less rigorous short
duties test with the kind of low salary
level previously associated with the
more rigorous long duties test was to
exempt from overtime many lower paid
workers who performed little EAP work
and whose work was otherwise
indistinguishable from their overtimeeligible colleagues. This has resulted in
the inappropriate classification of
employees as EAP exempt—that is
overtime exempt—who pass the
standard duties test but would have
failed the long duties test. As the
Department noted in our proposal, the
salary level’s function in helping to
differentiate overtime-eligible
employees from employees who may be
exempt takes on greater importance
when the duties test does not include a
specific limit on the amount of
nonexempt works that an exempt
employee may perform.
In the Notice of Proposed Rulemaking
(NPRM), the Department proposed
setting the standard salary level at the
40th percentile of weekly earnings of
full-time salaried workers nationally
and setting the HCE total annual
compensation requirement at the
annualized value of the 90th percentile
of weekly earnings of full-time salaried
workers nationally. The Department
further proposed to automatically
update these levels annually to ensure
that they would continue to provide an
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effective test for exemption. In the
NPRM, the Department also asked for
the public’s comments on whether
nondiscretionary bonuses or incentive
payments should count toward some
portion of the required salary level.
Finally, the Department also discussed
concerns with the standard duties tests
and sought comments on a series of
questions regarding possible changes to
the tests.
After considering the comments, the
Department has made several changes
from the proposed rule to the Final
Rule. In particular, the Department has
modified the standard salary level to
more fully account for the lower salaries
paid in certain regions. In this Final
Rule, the Department sets the standard
salary level equal to the 40th percentile
of earnings of full-time salaried workers
in the lowest-wage Census Region
(currently the South). This results in a
salary level of $913 per week, or
$47,476 annually for a full-year worker,
based on data from the fourth quarter of
2015.1 The Department believes that a
standard salary level set at the 40th
percentile of full-time salaried
employees in the lowest-wage Census
Region will accomplish the goal of
setting a salary threshold that
adequately distinguishes between
employees who may meet the duties
requirements of the EAP exemption and
those who likely do not, without
necessitating the reintroduction of a
limit on nonexempt work, as existed
under the long duties test. The
Department sets the HCE total annual
compensation level equal to the 90th
percentile of earnings of full-time
salaried workers nationally ($134,004
annually based on the fourth quarter of
2015), as we proposed. This increase
will bring the annual compensation
requirement in line with the level
established in 2004. The Department
believes that this will avoid the
unintended exemption of large numbers
of employees in high-wage areas—such
as secretaries in New York City or Los
Angeles—who are clearly not
performing EAP duties.
In order to prevent the salary and
compensation levels from becoming
outdated, the Department is including
in the regulations a mechanism to
automatically update the salary and
compensation thresholds by
maintaining the fixed percentiles of
weekly earnings set in this Final Rule.
In response to comments, however, the
Final Rule provides for updates every
three years rather than for annual
updates as proposed. The first update
will take effect on January 1, 2020. The
Department believes that regularly
updating the salary and compensation
levels is the best method to ensure that
these tests continue to provide an
effective means of distinguishing
between overtime-eligible white collar
employees and those who may be bona
fide EAP employees. Based on historical
wage growth in the South, at the time
of the first update on January 1, 2020,
the standard salary level is likely to be
approximately $984 per week ($51,168
annually for a full-year worker) and the
HCE total annual compensation
requirement is likely to be
approximately $147,524.
The Department also revises the
regulations to permit employers for the
first time to count nondiscretionary
bonuses, incentives, and commissions
toward up to 10 percent of the required
salary level for the standard exemption,
so long as employers pay those amounts
on a quarterly or more frequent basis.
Finally, the Department has not made
any changes to the duties tests in this
Final Rule. The majority of the revisions
occur in §§ 541.600, 541.601, 541.602
and new § 541.607; conforming changes
were also made in §§ 541.100, 541.200,
541.204, 541.300, 541.400, 541.604,
541.605, and 541.709.
In FY2017,2 the Department estimates
there will be approximately 159.9
million wage and salary workers in the
United States, of whom we estimate that
22.5 million will be exempt EAP
workers potentially affected by this
Final Rule.3 In Year 1, FY2017, the
Department estimates that 4.2 million
currently exempt workers who earn at
least the current weekly salary level of
$455 but less than the 40th earnings
percentile in the South ($913) would,
without some intervening action by
their employers, become entitled to
minimum wage and overtime protection
under the FLSA (Table ES1). Similarly,
an estimated 65,000 currently exempt
workers who earn at least $100,000 but
less than the annualized earnings of the
90th percentile of full-time salaried
workers nationally ($134,004), and who
meet the HCE duties test but not the
standard duties test, may also become
eligible for minimum wage and
overtime protection. In Year 10, with
triennial automatic updating of the
salary and compensation levels, the
Department projects that 5.0 million
workers will be affected by the change
in the standard salary level test and
221,000 workers will be affected by the
change in the HCE total annual
compensation test.
Additionally, the Department
estimates that another 5.7 million white
collar workers who are currently
overtime eligible because they do not
satisfy the EAP duties tests and who
currently earn at least $455 per week
but less than $913 per week will have
their overtime protection strengthened
in Year 1 because their status as
overtime-eligible will be clear based on
the salary test alone without the need to
examine their duties. Reducing the
number of workers for whom employers
must apply the duties test to determine
exempt status simplifies the application
of the exemption and is consistent with
the President’s directive.
The Department quantified three
direct costs to employers in this Final
Rule: (1) Regulatory familiarization
costs; (2) adjustment costs; and (3)
managerial costs. Assuming a 7 percent
discount rate, the Department estimates
that average annualized direct employer
costs will total $295.1 million per year
(Table ES1). In addition to the direct
costs, this Final Rule will also transfer
income from employers to employees in
the form of higher earnings. We estimate
average annualized transfers to be
$1,189.1 million. The Department also
projects average annualized deadweight
loss of $9.2 million, and notes that the
projected deadweight loss is small in
comparison to the amount of estimated
costs.
The change to a standard salary level
based on the lowest-wage Census
Region has decreased the salary amount
from the proposal, resulting in a smaller
number of affected workers and lower
transfers than estimated in the NPRM.
Direct costs are higher than predicted in
the NPRM, primarily because the
Department has increased its estimate of
the number of affected workers who
work some overtime. Additionally, in
response to comments, the Department
has increased estimated regulatory
familiarization and adjustment costs in
the Final Rule.
Finally, the impacts of the Final Rule
extend beyond those we have estimated
quantitatively. The Department
1 The Bureau of Labor Statistics (BLS) estimated
this value using Current Population Survey (CPS)
data for earnings of full-time (defined as at least 35
hours per week) non-hourly paid employees. For
the purpose of this rulemaking, the Department
considers data representing compensation paid to
non-hourly workers to be an appropriate proxy for
compensation paid to salaried workers.
2 Affected workers, costs, and transfers were
estimated for the 2017 fiscal year (‘‘FY2017’’)
because this will be the first year the updated salary
levels will be in effect. FY2017 spans from October
1, 2016 to September 30, 2017.
3 White collar workers not subject to the EAP
salary level test include teachers, academic
administrative personnel, physicians, lawyers,
judges, and outside sales workers.
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discusses other transfers, costs, and
benefits in the relevant sections.
TABLE ES1—SUMMARY OF REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS
[Millions 2017$]
Future years [a]
Impact
Average annualized value
Year 1
Year 2
Year 10
3% real rate
7% real rate
Affected Workers (1,000s)
Standard ...............................................................................
HCE ......................................................................................
4,163
65
3,893
73
5,045
217
........................
........................
........................
........................
Total ..............................................................................
4,228
3,965
5,261
........................
........................
284.2
1,607.2
11.1
288.0
1,201.6
9.3
295.1
1,189.1
9.2
Costs and Transfers (Millions 2017$) [b]
Direct employer costs ..........................................................
Transfers [c] .........................................................................
DWL .....................................................................................
677.9
1,285.2
6.4
208.0
936.5
8.7
[a] Costs/transfers in years 3 through 9 are within the range bounded by the estimates for years 2 and 10.
[b] Costs and transfers for affected workers passing the standard and HCE tests are combined.
[c] This is the net transfer from employers to workers. There may also be transfers of hours and income from some workers to others.
II. Background
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A. What the FLSA Provides
The FLSA generally requires covered
employers to pay their employees at
least the federal minimum wage
(currently $7.25 an hour) for all hours
worked, and overtime premium pay of
one and one-half times the employee’s
regular rate of pay for all hours worked
over 40 in a workweek.4 However, there
are a number of exemptions from the
FLSA’s minimum wage and overtime
requirements. Section 13(a)(1) of the
FLSA, codified at 29 U.S.C. 213(a)(1),
exempts from both minimum wage and
overtime protection ‘‘any employee
employed in a bona fide executive,
administrative, or professional capacity
. . . or in the capacity of outside
salesman (as such terms are defined and
delimited from time to time by
regulations of the Secretary, subject to
the provisions of [the Administrative
Procedure Act] . . .).’’ The FLSA does
not define the terms ‘‘executive,’’
‘‘administrative,’’ ‘‘professional,’’ or
‘‘outside salesman.’’ Pursuant to
Congress’ grant of rulemaking authority,
the Department in 1938 issued the first
regulations at part 541 defining the
scope of the section 13(a)(1)
exemptions. Because Congress explicitly
delegated to the Secretary of Labor the
power to define and delimit the specific
terms of the exemptions through notice
and comment rulemaking, regulations
so issued have the binding effect of law.
4 As discussed below, the Department estimates
that 132.8 million workers are subject to the FLSA
and the Department’s regulations. Most of these
workers are covered by the Act’s minimum wage
and overtime pay protections.
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See Batterton v. Francis, 432 U.S. 416,
425 n.9 (1977).
The Department has consistently used
our rulemaking authority to define and
clarify the section 13(a)(1) exemptions.
Since 1940, the implementing
regulations have generally required each
of three tests to be met for the
exemptions to apply: (1) The employee
must be paid a predetermined and fixed
salary that is not subject to reduction
because of variations in the quality or
quantity of work performed (the ‘‘salary
basis test’’); (2) the amount of salary
paid must meet a minimum specified
amount (the ‘‘salary level test’’); and (3)
the employee’s job duties must
primarily involve executive,
administrative, or professional duties as
defined by the regulations (the ‘‘duties
test’’).
Employees who meet the
requirements of part 541 are exempted
from both the Act’s minimum wage and
overtime pay protections. As a result, an
employer may employ such employees
for any number of hours in the
workweek without paying the minimum
hourly wage or an overtime premium.
Some state laws have stricter exemption
standards than those described above.
The FLSA does not preempt any such
stricter state standards. If a State
establishes a higher standard than the
provisions of the FLSA, the higher
standard applies in that State. See 29
U.S.C. 218.
B. Legislative History
Section 13(a)(1) was included in the
original Act in 1938 and was based on
provisions contained in the earlier
National Industrial Recovery Act of
1933 (NIRA) and state law precedents.
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Specific references in the legislative
history to the exemptions contained in
section 13(a)(1) are scant. Although
section 13(a)(1) exempts covered
employees from both the FLSA’s
minimum wage and overtime
requirements, its most significant
impact is its removal of these employees
from the Act’s overtime protections.
The requirement that employers pay a
premium rate of pay for all hours
worked over 40 in a workweek is
grounded in two policy objectives. The
first is to spread employment (or, in
other words, reduce involuntary
unemployment) by incentivizing
employers to hire more employees
rather than requiring existing employees
to work longer hours. See, e.g., Davis v.
J.P. Morgan Chase, 587 F.3d 529, 535
(2d Cir. 2009). The second policy
objective is to reduce overwork and its
detrimental effect on the health and
well-being of workers. See, e.g.,
Barrentine v. Arkansas-Best Freight
System, Inc., 450 U.S. 728, 739 (1981).
In contrast, the exemptions contained
in section 13(a)(1) were premised on the
belief that the type of work exempt
employees performed was difficult to
standardize to any time frame and could
not be easily spread to other workers
after 40 hours in a week, making
enforcement of the overtime provisions
difficult and generally precluding the
potential job expansion intended by the
FLSA’s time-and-a-half overtime
premium. See Report of the Minimum
Wage Study Commission, Volume IV,
pp. 236 and 240 (June 1981).5 Further,
5 Congress created the Minimum Wage Study
Commission as part of the Fair Labor Standards
Amendments of 1977. See Sec. 2(e)(1), Public Law
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the exempted workers typically earned
salaries well above the minimum wage
and were presumed to enjoy other
privileges to compensate them for their
long hours of work, setting them apart
from the nonexempt workers entitled to
overtime pay. See id.
The universe of employees eligible for
the section 13(a)(1) exemptions has
fluctuated with amendments to the
FLSA. Initially, persons employed in a
‘‘local retailing capacity’’ were exempt,
but Congress eliminated that language
from section 13(a)(1) in 1961 when the
FLSA was expanded to cover retail and
service enterprises. See Public Law 87–
30, 75 Stat. 65 (May 5, 1961). Teachers
and academic administrative personnel
were added to the exemption when
elementary and secondary schools were
made subject to the FLSA in 1966. See
Sec. 214, Public Law 89–601, 80 Stat.
830 (Sept. 23, 1966). The Education
Amendments of 1972 made the Equal
Pay provisions, section 6(d) of the
FLSA, expressly applicable to
employees who were otherwise exempt
from the FLSA under section 13(a)(1).
See Sec. 906(b)(1), Public Law 92–318,
86 Stat. 235 (June 23, 1972).
A 1990 enactment expanded the EAP
exemptions to include computer
systems analysts, computer
programmers, software engineers, and
similarly skilled professional workers,
including those paid on an hourly basis
if paid at least 61⁄2 times the minimum
wage. See Sec. 2, Public Law 101–583,
104 Stat. 2871 (Nov. 15, 1990). The
compensation test for computer-related
occupations was subsequently capped at
$27.63 an hour (61⁄2 times the minimum
wage in effect at the time) as part of the
1996 FLSA Amendments, when
Congress enacted the new section
13(a)(17) exemption for such computer
employees. Section 13(a)(17) also
incorporated much of the regulatory
language that resulted from the 1990
enactment. See 29 U.S.C. 213(a)(17), as
added by the 1996 FLSA Amendments
(Sec. 2105(a), Public Law 104–188, 110
Stat. 1755 (Aug. 20, 1996)).
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C. Regulatory History
The FLSA became law on June 25,
1938, and the Department issued the
first version of the part 541 regulations,
setting forth criteria for exempt status
under section 13(a)(1), that October. 3
FR 2518 (Oct. 20, 1938). Following a
series of public hearings, which were
95–151, 91 Stat. 1246 (Nov. 1, 1977). This
independent commission was tasked with
examining many FLSA issues, including the Act’s
minimum wage and overtime exemptions, and
issuing a report to the President and to Congress
with the results of its study.
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discussed in a report issued by WHD,6
the Department published revised
regulations in 1940, which, among other
things, added the salary basis test. 5 FR
4077 (Oct. 15, 1940). Further hearings
were convened in 1947, as discussed in
a WHD-issued report,7 and the
Department issued revised regulations
in 1949, which updated the salary levels
required to meet the salary level test for
the various exemptions. 14 FR 7705
(Dec. 24, 1949). An explanatory bulletin
interpreting some of the terms used in
the regulations was published as
subpart B of part 541 in 1949. 14 FR
7730 (Dec. 28, 1949). In 1954, the
Department issued revisions to the
regulatory interpretations of the salary
basis test. 19 FR 4405 (July 17, 1954). In
1958, based on another WHD-issued
report,8 the regulations were revised to
update the required salary levels. 23 FR
8962 (Nov. 18, 1958). Additional
changes, including salary level updates,
were made to the regulations in 1961
(26 FR 8635, Sept. 15, 1961), 1963 (28
FR 9505, Aug. 30, 1963), 1967 (32 FR
7823, May 30, 1967), 1970 (35 FR 883,
Jan. 22, 1970), 1973 (38 FR 11390, May
7, 1973), and 1975 (40 FR 7091, Feb. 19,
1975). Revisions to increase the salary
levels in 1981 were stayed indefinitely
by the Department. 46 FR 11972 (Feb.
12, 1981). In 1985, the Department
published an Advance Notice of
Proposed Rulemaking that reopened the
comment period on the 1981 proposal
and broadened the review to all aspects
of the regulations, including whether to
increase the salary levels, but this
rulemaking was never finalized. 50 FR
47696 (Nov. 19, 1985).
The Department revised the part 541
regulations twice in 1992. First, the
Department created a limited exception
from the salary basis test for public
employees, permitting public employers
to follow public sector pay and leave
systems requiring partial-day
deductions from pay for absences for
personal reasons or due to illness or
injury not covered by accrued paid
leave, or due to budget-driven
furloughs, without defeating the salary
6 Executive, Administrative, Professional . . .
Outside Salesman Redefined, Wage and Hour
Division, U.S. Department of Labor, Report and
Recommendations of the Presiding Officer (Harold
Stein) at Hearings Preliminary to Redefinition (Oct.
10, 1940) (‘‘Stein Report’’).
7 Report and Recommendations on Proposed
Revisions of Regulations, Part 541, by Harry Weiss,
Presiding Officer, Wage and Hour and Public
Contracts Divisions, U.S. Department of Labor (June
30, 1949) (‘‘Weiss Report’’).
8 Report and Recommendations on Proposed
Revision of Regulations, Part 541, Under the Fair
Labor Standards Act, by Harry S. Kantor, Presiding
Officer, Wage and Hour and Public Contracts
Divisions, U.S. Department of Labor (Mar. 3, 1958)
(‘‘Kantor Report’’).
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32395
basis test required for exemption. 57 FR
37677 (Aug. 19, 1992). The Department
also implemented the 1990 law
requiring it to promulgate regulations
permitting employees in certain
computer-related occupations to qualify
as exempt under section 13(a)(1) of the
FLSA. 57 FR 46744 (Oct. 9, 1992); see
Sec. 2, Public Law 101–583, 104 Stat.
2871 (Nov. 15, 1990).
On March 31, 2003, the Department
published a Notice of Proposed
Rulemaking proposing significant
changes to the part 541 regulations. 68
FR 15560 (Mar. 31, 2003). On April 23,
2004, the Department issued a Final
Rule (2004 Final Rule), which raised the
salary level for the first time since 1975,
and made other changes, some of which
are discussed below. 69 FR 22122 (Apr.
23, 2004). Current regulations retain the
three tests for exempt status that have
been in effect since 1940: a salary basis
test, a salary level test, and a job duties
test.
D. Overview of Existing Regulatory
Requirements
The regulations in part 541 contain
specific criteria that define each
category of exemption provided by
section 13(a)(1) for bona fide executive,
administrative, and professional
employees (including teachers and
academic administrative personnel),
and outside sales employees. The
regulations also define those computer
employees who are exempt under
section 13(a)(1) and section 13(a)(17).
See §§ 541.400–.402. The employer
bears the burden of establishing the
applicability of any exemption from the
FLSA’s pay requirements. Job titles and
job descriptions do not determine
exempt status, nor does paying a salary
rather than an hourly rate. To qualify for
the EAP exemption, employees must
meet certain tests regarding their job
duties and generally must be paid on a
salary basis of not less than $455 per
week.9 In order for the exemption to
9 Alternatively, administrative and professional
employees may be paid on a ‘‘fee basis.’’ This
occurs where an employee is paid an agreed sum
for a single job regardless of the time required for
its completion. See § 541.605(a). Salary level test
compliance for fee basis employees is assessed by
determining whether the hourly rate for work
performed (i.e., the fee payment divided by the
number of hours worked) would total at least $455
per week if the employee worked 40 hours. See
§ 541.605(b). Some employees, such as doctors and
lawyers (§ 541.600(e)), teachers (§§ 541.303(d);
541.600(e)), and outside sales employees
(§ 541.500(c)), are not subject to a salary or fee basis
test. Some, such as academic administrative
personnel, are subject to a special, contingent salary
level. See § 541.600(c). There is also a separate
salary level in effect for workers in American
Samoa (§ 541.600(a)), and a special salary test for
motion picture industry employees (§ 541.709).
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apply, an employee’s specific job duties
and salary must meet all the
requirements of the Department’s
regulations. The duties tests differ for
each category of exemption.
The Department last updated the part
541 regulations in the 2004 Final Rule.
Prior to 2004, employers could assert
the EAP exemption for employees who
satisfied either a ‘‘long’’ test—which
paired a more restrictive duties test with
a lower salary level—or a ‘‘short’’ test—
which paired less stringent duties
requirements with a higher salary
level.10 In the 2004 Final Rule the
Department abandoned the concept of
separate long and short tests, opting
instead for one ‘‘standard’’ test, and set
the salary level under the new standard
duties test at $455 per week for
executive, administrative, and
professional employees.
Under the current part 541
regulations, an exempt executive
employee must be compensated on a
salary basis at a rate of not less than
$455 per week and have a primary duty
of managing the enterprise or a
department or subdivision of the
enterprise. See § 541.100(a)(1)–(2). An
exempt executive must also customarily
and regularly direct the work of at least
two employees and have the authority
to hire or fire, or the employee’s
suggestions and recommendations as to
the hiring, firing, or other change of
status of employees must be given
particular weight. See § 541.100(a)(3)–
(4).
An exempt administrative employee
must be compensated on a salary or fee
basis at a rate of not less than $455 per
week and have a primary duty of the
performance of office or non-manual
work directly related to the management
or general business operations of the
employer or the employer’s customers.
See § 541.200. An exempt
administrative employee’s primary duty
must include the exercise of discretion
and independent judgment with respect
to matters of significance. See id.
An exempt professional employee
must be compensated on a salary or fee
basis at a rate of not less than $455 per
week and have a primary duty of (1)
work requiring knowledge of an
advanced type in a field of science or
learning customarily acquired by
prolonged, specialized, intellectual
instruction and study, or (2) work that
is original and creative in a recognized
field of artistic endeavor, or (3) teaching
in a school system or educational
institution, or (4) work as a computer
systems analyst, computer programmer,
10 From 1949 until 2004 the regulations contained
both long and short tests for exemption.
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software engineer, or other similarlyskilled worker in the computer field.
See §§ 541.300; 541.303; 541.400. An
exempt professional employee must
perform work requiring the consistent
exercise of discretion and judgment, or
requiring invention, imagination, or
talent in a recognized field of artistic
endeavor. See § 541.300(a)(2). The
salary requirements do not apply to
certain licensed or certified doctors,
lawyers, and teachers. See
§§ 541.303(d); 541.304(d).
An exempt outside salesperson must
be customarily and regularly engaged
away from the employer’s place of
business and have a primary duty of
making sales, or obtaining orders or
contracts for services or for the use of
facilities. See § 541.500. There are no
salary or fee requirements for exempt
outside sales employees. See id.
The 2004 Final Rule also created a
test for exemption of highly
compensated executive, administrative,
and professional employees. Under the
HCE exemption, employees who are
paid total annual compensation of at
least $100,000 (which must include at
least $455 per week paid on a salary or
fee basis) are exempt from the FLSA’s
overtime requirements if they
customarily and regularly perform at
least one of the exempt duties or
responsibilities of an executive,
administrative, or professional
employee identified in the standard
tests for exemption. See § 541.601. The
HCE exemption applies only to
employees whose primary duty includes
performing office or non-manual work;
non-management production line
workers and employees who perform
work involving repetitive operations
with their hands, physical skill, and
energy are not exempt under this
section no matter how highly paid. See
id. Finally, in the 2004 Final Rule, the
Department, mindful that nearly 30
years had elapsed between salary level
increases, and in response to commenter
concerns that similar lapses would
occur in the future, expressed an intent
to ‘‘update the salary levels on a more
regular basis.’’ 69 FR 22171.
E. Presidential Memorandum
On March 13, 2014, President Obama
signed a Presidential Memorandum
directing the Department to update the
regulations defining which ‘‘white
collar’’ workers are protected by the
FLSA’s minimum wage and overtime
standards. See 79 FR 18737 (Apr. 3,
2014). The memorandum instructed the
Department to look for ways to
modernize and simplify the regulations
while ensuring that the FLSA’s intended
overtime protections are fully
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implemented. As the President noted at
the time, the FLSA’s overtime
protections are a linchpin of the middle
class, and the failure to keep the salary
level requirement for the white collar
exemption up to date has left millions
of low-paid salaried workers without
this basic protection.11 The current
salary level threshold for exemption of
$455 per week, or $23,660 annually, is
below the 2015 poverty threshold for a
family of four.12
Following issuance of the
memorandum, the Department
embarked on an extensive outreach
program, meeting with over 200
organizations in Washington, DC and
several other locations, as well as by
conference call. A wide range of
stakeholders attended the listening
sessions: employees, employers,
business associations, non-profit
organizations, employee advocates,
unions, state and local government
representatives, tribal representatives,
and small businesses. In these sessions
the Department asked stakeholders to
address, among other issues: (1) What is
the appropriate salary level for
exemption; (2) what, if any, changes
should be made to the duties tests; and
(3) how can the regulations be
simplified.
The stakeholders shared their
concerns with various aspects of the
current regulations, suggestions for
changes, and general concerns about the
scope of the exemption. The Department
greatly appreciated the wide range of
views that were shared during the
outreach sessions. The information
shared during those sessions informed
the Department’s NPRM.
The Department’s outreach also made
clear, however, that there are some
widespread misconceptions about
overtime eligibility under the FLSA,
some of which were echoed in the
comments received on the NPRM. For
example, many employers and
employees mistakenly believe that
payment of a salary automatically
disqualifies an employee from
entitlement to overtime compensation
irrespective of the duties performed.
Many employees are also unaware of the
duties required to be performed in order
for the exemption to apply.
Additionally, many employers seem to
mistakenly believe that newly overtime11 See https://www.whitehouse.gov/the-pressoffice/2014/03/13/fact-sheet-opportunity-allrewarding-hard-work-strengthening-overtime-pr.
12 See https://www.census.gov/hhes/www/poverty/
data/threshld/ (the 2015 poverty
threshold for a family of four with two related
children). The 2015 poverty threshold for a family
of four with two related people under 18 in the
household is $24,036.
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eligible employees (i.e., those earning
between the current and new salary
levels) must be converted to hourly
compensation.13 Similarly, some
employers erroneously believe that they
are prohibited from paying
nondiscretionary bonuses to EAP
employees, given that they cannot be
used to satisfy the salary requirement.
Some employers also mistakenly believe
that the EAP regulations limit their
ability to permit white collar employees
to work part-time or job share.14
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F. The Department’s Proposal
On July 6, 2015, in accordance with
the Presidential Memorandum, the
Department published a Notice of
Proposed Rulemaking to propose
revisions to the part 541 regulations. See
80 FR 38516 (July 6, 2015). The
Department’s proposal focused
primarily on updating the salary and
HCE compensation levels by proposing
that the standard salary level be set at
the 40th percentile of weekly earnings
of full-time salaried workers, proposing
to increase the HCE annual
compensation requirement to the
annualized value of the 90th percentile
of weekly earnings of full-time salaried
workers, and proposing a mechanism
for automatically updating the salary
and compensation levels going forward
to ensure that they will continue to
provide a useful and effective test for
exemption. While the primary
regulatory changes proposed were in
§§ 541.600 and 541.601, the Department
proposed additional conforming
changes to update references to the
salary level throughout part 541 as well
as to update the special salary
provisions for American Samoa and the
motion picture industry. In addition to
13 Such misconceptions are not new. In 1949 the
Department noted ‘‘the failure of some employers
to realize that salary is not the sole test of
exemption.’’ Weiss Report at 8 n. 27. In 1940 the
Department responded to the assertion that
employers would convert overtime-eligible white
collar employees to hourly pay instead of more
secure salaries, stating: ‘‘Without underestimating
the general desirability of weekly or monthly
salaries which enable employees to adjust their
expenditures on the basis of an assured income (so
long as they remain employed), there is little
advantage in salaried employment if it serves
merely as a cloak for long hours of work. Further,
such salaried employment may well conceal
excessively low hourly rates of pay.’’ Stein Report
at 7.
14 As the Department has previously explained,
there is no special salary level for EAP employees
working less than full-time. See 69 FR 22171.
Employers, however, can pay white collar
employees working part-time or job sharing a salary
of less than the required EAP salary threshold and
will not violate the Act so long as the salary equals
at least the minimum wage for all hours worked and
the employee does not work more than 40 hours a
week. See FLSA2008–1NA (Feb. 14, 2008). See also
section IV.A.iv.
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these proposed changes, the Department
also discussed whether to include
nondiscretionary bonuses in
determining whether the standard salary
level is met and whether changes to the
duties tests are warranted, but did not
propose specific regulatory revisions on
these issues.
More than 270,000 individuals and
organizations timely commented on the
NPRM during the sixty-day comment
period that ended on September 4, 2015.
The Department received comments
from a broad array of constituencies,
including small business owners,
Fortune 500 corporations, employer and
industry associations, individual
workers, worker advocacy groups,
unions, non-profit organizations, law
firms (representing both employers and
employees), educational organizations
and representatives, religious
organizations, economists, Members of
Congress, federal government agencies,
state and local governments and
representatives, tribal governments and
representatives, professional
associations, and other interested
members of the public. All timely
received comments may be viewed on
the www.regulations.gov Web site,
docket ID WHD–2015–0001.
Several organizations’ submissions
included attachments from their
individual members generally using
substantively identical form comments:
For example, AFSCME (24,122
comments), Center for American
Progress (6,697 comments from two
submissions), CREDO Action (58,927
comments), Democracy for America
(34,932 comments), Economic Policy
Institute (72,131 comments from five
submissions), Faculty Forward and
SEIU (515 comments), Jobs with Justice
(5,136 comments), Mom’s Rising (16,114
comments from three submissions),
National Partnership for Women and
Families (21,192 comments from two
submissions), National Restaurant
Association (2,648 comments), National
Women’s Law Center (6,753 comments
from two submissions), Partnership to
Protect Workplace Opportunity (1,770
comments from five submissions),
Social Security Works (15,575
comments), Society for Human Resource
Management (827 comments from two
submissions), and others. Other
organizations attached membership
signatures to their comments. These
included Care2 (37,459 signatures), the
International Franchise Association (17
signatures), Organizing for Action
(76,625 signatures), and 15 different
post-doctoral associations (560
signatures).
Many of the comments the
Department received were: (1) Very
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32397
general statements of support or
opposition; (2) personal anecdotes that
did not address a specific aspect of the
proposed changes; or (3) identical or
nearly identical ‘‘campaign’’ comments
sent in response to comment initiatives
sponsored by various groups. A large
number of commenters favored some
change to the existing regulations, and
commenters expressed a wide variety of
views on the merits of particular aspects
of the Department’s proposal. Some
commenters requested that the
Department withdraw the proposal.
Acknowledging that there are strong
views on the issues presented in this
rulemaking, the Department has
carefully considered the timely
submitted comments addressing the
proposed changes.
Significant issues raised in the timely
received comments are discussed below,
together with the Department’s response
to those comments and a topical
discussion of the changes that have been
made in the Final Rule and its
regulatory text. The Department also
received a number of submissions after
the close of the comment period,
including some campaign comments,
from a range of commenters
representing both employers and
employees. Late comments were not
considered in the development of this
Final Rule, and are not discussed in this
Final Rule. In instances where an
organization submitted both timely and
untimely comments, only the timely
comments were considered.
The Department received a number of
comments that are beyond the scope of
this rulemaking. These include, for
example, comments asking the
Department to issue a rule requiring
employers to provide employees with
‘‘clear pay stubs,’’ and requesting that
the Department clarify the definition of
‘‘establishment’’ under the exemption
for seasonal amusement or recreational
establishments. The Department does
not address such issues in this Final
Rule.
A number of commenters asked the
Department to provide guidance on how
the FLSA applies to non-profit
organizations. See, e.g., Alliance for
Strong Families and Communities
(describing ‘‘a tremendous amount of
confusion in the non-profit sector
concerning who is currently covered by
FLSA’’); Independent Sector (stating
that this rulemaking process has
‘‘highlighted a lack of clarity regarding
when and how the Fair Labor Standards
Act applies to the nonprofit sector
workforce’’); Alliance of Arizona
Nonprofits. Some commenters, such as
CASA, asserted that most charitable
organizations are not covered
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enterprises under the FLSA and, as a
result, this rulemaking ‘‘will not reach
a very sizable number of employees of
not-for-profit organizations.’’ Other
commenters stated that non-profit
employees may be individually covered
because they engage in interstate
commerce. A comment submitted on
behalf of 57 professors specializing in
employment and labor law, however,
asserted that the ‘‘overwhelming
majority of the millions of employees
excluded from FLSA coverage because
their not-for-profit employers are not
subject to enterprise coverage also are
not subject to individual FLSA
coverage,’’ and Economic Policy
Institute (EPI) asserted that non-profit
employers can limit the number of
employees covered on an individual
basis by managing interstate commerce
activity.
The Department notes that the FLSA
does not provide special rules for nonprofit organizations or their employees,
nor does this Final Rule. Nevertheless,
we agree that it is important for such
organizations to understand their
obligations under the Act. As a general
matter, non-profit charitable
organizations are not covered
enterprises under the FLSA unless they
engage in ordinary commercial activities
(for example, operating a gift shop). See
29 U.S.C. 203(r)–(s), 206(a), 207(a). For
a non-profit organization, enterprise
coverage applies only to the activities
performed for a business purpose; it
does not extend to the organization’s
charitable activities. An organization
that performs only charitable services,
such as providing free food to the
hungry, is not a covered enterprise;
however, an employee of such a nonprofit employer may nevertheless be
covered on an individual basis. See 29
U.S.C. 206(a), 207(a). The FLSA covers
an employee on an individual basis—
that is, an individual is protected by the
FLSA regardless of whether the
individual works for a covered
enterprise—if he or she engages in
interstate commerce through activities
such as making out-of-state phone calls,
sending mail, or handling credit card
transactions. This individual coverage
applies even if the employee is not
engaging in such activities for a
business purpose. For example, if an
employee regularly calls an out-of-state
store and uses a credit card to purchase
food for a non-profit that provides free
meals for the homeless, that employee is
protected by the FLSA on an individual
basis, even though the non-profit may
not be covered as an enterprise. WHD,
however, will not assert that an
employee who on isolated occasions
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spends an insubstantial amount of time
performing such work is individually
covered by the FLSA.
The Department also refers interested
stakeholders to guidance on the
application of the FLSA to non-profit
organizations available in WHD Fact
Sheet #14A: Non-Profit Organizations
and the Fair Labor Standards Act; 15 see
also Fact Sheet #14: Coverage Under the
Fair Labor Standards Act (FLSA).16
Additional information regarding the
applicability of the FLSA to non-profits
can be found in the WHD
Administrator’s blog post.17 Moreover, a
number of WHD Opinion Letters
address the applicability of the FLSA to
non-profits. See, e.g., FLSA2009–20
(Jan. 16, 2009); FLSA2008–8 (Sept. 29,
2008); FLSA2005–52 (Nov. 14, 2005);
FLSA2005–8NA (Sept. 2, 2005);
FLSA2005–12NA (Sept. 23, 2005);
FLSA2004–29NA (Nov. 30, 2004).18
Finally, the Department is issuing
additional guidance for the non-profit
sector in connection with the
publication of this Final Rule.
Commenters also asked for guidance
on the application of the EAP
exemption to educational institutions.
See, e.g., College and Universities
Human Resources Executives; Michigan
Head Start; Savannah-Chatham County
Public School System. Preschools,
elementary and secondary schools, and
institutions of higher education are
covered by the FLSA, and nothing in
this Final Rule changes that coverage.
29 U.S.C. 203(r)(2)(A). Employees of
such institutions therefore are generally
protected by the FLSA’s minimum wage
and overtime provisions; however,
special provisions apply to many
personnel at these institutions that make
them overtime exempt.
Although the EAP exemption
expressly applies to an ‘‘employee
employed in the capacity of academic
administrative personnel or teacher’’ 29
U.S.C. 213(a)(1); see §§ 541.204, .303,
the salary level and salary basis
requirements do not apply to bona fide
teachers. § 541.303(d), .600(e).
Accordingly, the increase in the
standard salary level in this Final Rule
will not affect the overtime eligibility of
bona fide teachers.
Commenters such as the NEA asked
the Department to clarify which workers
qualify as bona fide teachers. Teachers
15 Available at: https://www.dol.gov/whd/regs/
compliance/whdfs14a.pdf.
16 Available at: https://www.dol.gov/whd/regs/
compliance/whdfs14.pdf.
17 Available at: https://blog.dol.gov/2015/08/26/
non-profits-and-the-proposed-overtime-rule/.
18 Available at: https://www.dol.gov/whd/opinion/
flsa.htm; https://www.dol.gov/whd/opinion/
flsana.htm.
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are exempt if their primary duty is
teaching, tutoring, instructing or
lecturing in the activity of imparting
knowledge, and if they are employed
and engaged in this activity as a teacher
in an educational establishment.
§ 541.303(a). An educational
establishment is ‘‘an elementary or
secondary school system, an institution
of higher education or other educational
institution.’’ 19 § 541.204(b). Teachers
may include professors, adjunct
instructors, primary and secondary
school teachers, and teachers of skilled
and semi-skilled trades and
occupations. Preschool and
kindergarten teachers may also qualify
for exemption under the same
conditions as teachers in elementary
and secondary schools. See Fact Sheet
#46: Daycare Centers and Preschools
Under the Fair Labor Standards Act. In
addition, coaches may qualify for the
exemption if their primary duty is
teaching as opposed to recruiting
students to play sports or performing
manual labor. Some commenters
addressed other non-teaching staff. For
example, CUPA–HR commented about
workers including academic affairs
counselors and advisors, textbook
managers, and managers in food service,
security, and building and grounds,
among other employees working at
colleges and universities. Academic
administrative personnel subject to the
exemption include: Superintendents;
principals and vice-principals;
department heads in institutions of
higher education; academic counselors
and advisors; and other employees with
similar responsibilities. Academic
administrative employees are subject to
the salary basis requirement, but the
Department notes that a special
provision allows this requirement to be
met if such employees are paid ‘‘on a
salary basis which is at least equal to the
entrance salary for teachers in the
educational establishment by which
[they are] employed.’’ § 541.204(a)(1).
To the extent that this entrance salary is
below the salary level established in this
rule, academic administrative personnel
will be exempt if their salary equals or
exceeds the entrance salary. Employees
whose work relates to general business
operations, building management and
maintenance, or the health of students
and staff (such as lunch room
managers), do not perform academic
administrative functions. § 541.204(c).
The Department also received several
comments about postdoctoral scholars.
19 For purposes of the exemption, no distinction
is drawn between public and private schools, or
between those operated for profit and those that are
not for profit. § 541.204(b).
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See, e.g., Association of American
Medical Colleges; National Postdoctoral
Association; UAW Local 5810.
Postdoctoral scholars who do not have
a primary duty of teaching are not
considered bona fide teachers; these
employees would generally meet the
duties test for the learned professional
exemption and would be subject to the
salary basis and salary level tests.
Finally, the Council on Government
Relations commented that ‘‘it is our
understanding that the Wage and Hour
Division does not assert an employeeemployer relationship for graduate
students who are simultaneously
performing research under faculty
supervision.’’ The Department views
graduate students in a graduate school
engaged in research under the
supervision of a member of the faculty
and in the course of obtaining advanced
degrees as being in an educational
relationship and not in an employment
relationship with either the school or of
any grantor funding the research, even
though the student may receive a
stipend for performing the research.
1994 WL 1004845 (June 28, 1994). In an
effort to assist the educational sector
with the issues addressed above, the
Department is issuing additional
guidance for this sector in connection
with the publication of this Final Rule.
Lastly, in an attempt to address
concerns that the terms exempt and
nonexempt were not sufficiently
descriptive or intuitive, in the NPRM
the Department used the terms
‘‘overtime-protected’’ and ‘‘overtimeeligible’’ as synonyms for nonexempt,
and ‘‘not overtime-protected’’ and
‘‘overtime-ineligible’’ as synonyms for
exempt.20 The Department received
very few comments on this new
terminology. The Department believes
that these new terms are less confusing
to the public and continues to use them
in this Final Rule.
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G. Effective Date
The Department received a number of
comments concerning the effective date
of the Final Rule. Citing the need to
reduce the burden of implementation,
many commenters representing
employers requested a delayed effective
date following publication of the Final
Rule. Commenters including the Fisher
& Phillips law firm, the National
Association of Independent Schools and
the National Association of Business
Officers, requested an effective date at
least 120 days after publication as was
20 The Department is using the more precise term
‘‘overtime exempt’’ rather than ‘‘overtimeineligible’’ in this Final Rule.
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done in the Department’s 2004
rulemaking.
Other commenters requested a longer
period. The American Car Rental
Association (ACRA), Dollar Tree, and
the Retail Industry Leaders Association
(RILA) each requested a delayed
effective date of at least six months
following publication of the Final Rule.
The United States Chamber of
Commerce (Chamber), the Food
Marketing Institute (FMI), H–E–B,
Island Hospitality Management, the
National Association of Landscape
Professionals (NALP), the National
Council of Chain Restaurants (NCCR),
the National Retail Federation (NRF),
and the Securities Industry and
Financial Markets Association (SIFMA)
each requested a one-year delayed
effective date. Finally, Laff and
Associates, the National Association for
Home Care and Hospice, and American
Network of Community Options and
Resources (ANCOR), which coordinated
with more than three dozen home
health care organizations, submitted
comments requesting an effective date at
least two years following publication of
the Final Rule, to afford states sufficient
time to allocate and appropriate
funding.
More than 55,000 individuals
submitted comments coordinated by the
Center for American Progress, EPI, and
MomsRising, requesting that the salary
level be raised without delay. Many
labor organizations and social justice
and women’s advocacy organizations,
including the Center for Law and Social
Policy, the Center for Popular
Democracy, the First Shift Justice
Project, the Institute for Women’s Policy
Research (IWPR), the Leadership
Conference on Civil and Human Rights,
the National Education Association
(NEA), the National Coalition of
Classified Education Support
Employees Union, the National Urban
League, the Public Justice Center, the
United Automobile, Aerospace and
Agricultural Implement Workers of
America (UAW), Women Employed,
and others, similarly urged the
Department to implement the Final Rule
as soon as possible.
The Department has set an effective
date of December 1, 2016 for the Final
Rule. As several commenters noted, the
Department’s 2004 Final Rule set an
effective date 120 days following
publication of the final rule. See 79 FR
22126 (April 23, 2004). Explaining that
a 120-day effective date exceeds the 30day minimum required under the
Administrative Procedure Act (APA), 5
U.S.C. 553(d), and the 60 days
mandated for a ‘‘major rule’’ under the
Congressional Review Act, 5 U.S.C.
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32399
801(a)(3)(A), we concluded at that time
that ‘‘a period of 120 days after the date
of publication will provide employers
ample time to ensure compliance with
the final regulations.’’ Id. The changes
provided in the 2004 Final Rule were
more extensive and more complicated
for employers to implement—the 2004
Final Rule included several significant
changes: (1) A significant percentage
increase in the salary threshold; (2) a
significant reorganization of the part 541
regulations; (3) the elimination of the
short and long test structure that had
been in place for more than 50 years and
the creation of a single standard test;
and (4) the creation of a new test for
highly compensated employees. In light
of the Department’s decision not to
make changes to the standard duties test
at this time, the primary change in this
Final Rule is the revision to the salary
level test and, therefore, this rule will be
much less complicated for employers to
implement. Accordingly, the
Department believes that the December
1, 2016 effective date for this Final Rule
(more than 180 days after publication)
will provide ample time for employers
to ensure compliance.
Multiple commenters also requested a
delayed enforcement period or some
form of safe harbor following the
effective date of the Final Rule ranging
from six months to two years. See, e.g.,
ACRA; American Insurance Association
and the Property Casualty Insurers
Association of America (AIA–PCI);
AT&T; Chamber; Dollar Tree;
International Franchise Association
(IFA); the Littler Mendelson law firm;
RILA; the Wessels Sherman law firm;
World Travel. Several commenters also
asked the Department to provide
compliance assistance, whether related
specifically to the changes implemented
by the Final Rule or more broadly to the
FLSA’s white collar regulations in
general. See, e.g., Chamber; Dollar Tree;
IFA; Littler Mendelson; RILA.
The Department appreciates employer
concerns regarding compliance and
enforcement in light of this rulemaking.
As explained above, the Department
believes that the December 1, 2016
effective date will provide employers
ample time to make any changes that are
necessary to comply with the final
regulations. The Department will also
provide significant outreach and
compliance assistance, and will issue a
number of guidance documents in
connection with the publication of this
Final Rule.
III. Need for Rulemaking
One of the Department’s primary
goals in this rulemaking is updating the
section 13(a)(1) exemption’s standard
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salary level requirement. A salary level
test has been part of the regulations
since 1938 and has been long
recognized as ‘‘the best single test’’ of
exempt status. Stein Report at 19, 42;
see Weiss Report at 8–9; Kantor Report
at 2–3. The salary an employer pays an
employee provides ‘‘a valuable and
easily applied index to the ‘bona fide’
character of the employment for which
exemption is claimed’’ and ensures that
section 13(a)(1) of the FLSA ‘‘will not
invite evasion of section 6 [minimum
wage] and section 7 [overtime] for large
numbers of workers to whom the wageand-hour provisions should apply.’’
Stein Report at 19.
The salary level’s function in
differentiating exempt from overtimeeligible employees takes on greater
importance when there is only one
duties test that has no limitation on the
amount of nonexempt work that an
exempt employee may perform, as has
been the case since 2004. Historically,
the Department set two different salary
tests that were paired with different
duties tests. The long test salary level
set at the low end of salaries paid to
exempt employees imposed a cap on the
amount of nonexempt work that an
exempt employee could perform. This
aspect of the long duties test made it
effective in distinguishing lower-paid
exempt EAP employees from overtimeeligible employees. In effect, the long
duties test ensured that employers could
not avoid paying overtime by assigning
lower-paid employees a minimal
amount of exempt work. The short test
salary level, which was historically set
at a level between 130 and 180 percent
of the long test salary level, did not
impose any specific limit on the amount
of nonexempt work since that
distinction was not considered
necessary to aid in classifying higherpaid exempt EAP employees. In
eliminating the two salary tests in 2004,
the Department instead set the single
standard salary level equivalent to the
historic levels of the former long test
salary, but paired it with a standard
duties test based on the short duties test,
which did not include a limit on
nonexempt work. The effect of this
mismatch was to exempt from overtime
many lower-wage workers who
performed little EAP work and whose
work was otherwise indistinguishable
from their overtime-eligible colleagues.
The Department has now concluded
that the standard salary level we set in
2004 did not account for the absence of
the more rigorous long duties test and
thus has been less effective in
distinguishing between EAP employees
who are exempt from overtime and
overtime-eligible employees.
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Additionally, the salary level required
for exemption under section 13(a)(1) is
currently $455 a week and has not been
updated in more than 10 years. The
annual value of the salary level
($23,660) is now lower than the poverty
threshold for a family of four. As the
relationship between the current
standard salary level and the poverty
threshold shows, the effectiveness of the
salary level test as a means of helping
determine exempt status diminishes as
the wages of employees entitled to
overtime pay increase and the real value
of the salary threshold falls.
By way of this rulemaking, the
Department seeks to update the
standard salary level to ensure that it
works effectively with the standard
duties test to distinguish exempt EAP
employees from overtime-protected
white collar workers. This will make the
exemptions easier for employers and
workers to understand and ensure that
the FLSA’s intended overtime
protections are fully implemented. The
Department also proposed to update the
total annual compensation required for
the HCE exemption, because it too has
been unchanged since 2004 and must be
updated to avoid the unintended
exemption of employees in high-wage
areas who are clearly not performing
EAP duties.
In a further effort to respond to
changing conditions in the workplace,
the Department’s proposal also
requested comment on whether to allow
nondiscretionary bonuses and incentive
payments to satisfy some portion of the
standard test salary requirement.
Currently, such bonuses are only
included in calculating total annual
compensation under the HCE test, but
some stakeholders have urged broader
inclusion, pointing out that in some
industries significant portions of
salaried EAP employees’ earnings may
be in the form of such bonuses.
The Department also proposed
automatically updating the salary and
compensation levels to prevent the
levels from becoming outdated. The
Department proposed to automatically
update the standard salary test, the total
annual compensation requirement for
highly compensated employees, and the
special salary levels for American
Samoa and for motion picture industry
employees, in order to ensure the
continued utility of these tests over
time. As the Department explained in
1949, the salary test is only a strong
measure of exempt status if it is up to
date, and a weakness of the salary test
is that increases in wage rates and salary
levels over time gradually diminish its
effectiveness. See Weiss Report at 8. A
rule providing for automatic updates to
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the salary level using a consistent
methodology that has been subject to
notice and comment rulemaking will
maintain the utility of the dividing line
set by the salary level without the need
for frequent rulemaking. This
modernization of the regulations will
provide predictability for employers and
employees by replacing infrequent, and
thus more drastic, salary level increases
with gradual changes occurring at set
intervals.
Finally, the Department has always
recognized that the salary level test
works in tandem with the duties tests to
identify bona fide EAP employees. The
Department discussed concerns with the
duties test for executive employees in
the NPRM. The proposal also included
questions about the duties tests
including requiring exempt employees
to spend a specified amount of time
performing their primary duty (e.g., a 50
percent primary duty requirement as
required under California state law) or
otherwise limiting the amount of
nonexempt work an exempt employee
may perform, and adding to the
regulations additional examples
illustrating how the exemption may
apply to particular occupations. The
Department’s proposal sought feedback
on whether such revisions to the duties
tests are needed to ensure that these
tests fully reflect the purpose of the
exemption.
IV. Final Regulatory Revisions
A. Standard Salary Level
i. History of the Standard Salary Level
The FLSA became law on June 25,
1938, and the first version of part 541,
issued later that year, set a minimum
salary level of $30 per week for exempt
executive and administrative
employees. See 3 FR 2518. Since 1938,
the Department has increased the salary
levels seven times: in 1940, 1949, 1958,
1963, 1970, 1975, and 2004. See Table
A. While the Department has refined the
method for calculating the salary level
to fulfill its mandate, the purpose of the
salary level requirement has remained
consistent—to define and delimit the
scope of the executive, administrative,
and professional exemptions. See 29
U.S.C. 213(a)(1). The Department has
long recognized that the salary paid to
an employee is the ‘‘best single test’’ of
exempt status, Stein Report at 19, and
that the salary level test furnishes a
‘‘completely objective and precise
measure which is not subject to
differences of opinion or variations in
judgment.’’ Weiss Report at 8–9. The
Department reaffirmed this position in
the 2004 Final Rule, explaining that the
‘‘salary level test is intended to help
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distinguish bona fide executive,
administrative, and professional
employees from those who were not
intended by Congress to come within
these exempt categories,’’ and
reiterating that any increase in the
salary level must ‘‘have as its primary
objective the drawing of a line
32401
separating exempt from nonexempt
employees.’’ 69 FR 22165.
TABLE A—WEEKLY SALARY LEVELS FOR EXEMPTION
Long test
Professional
Short test
(all)
........................
$50
75
95
115
140
170
........................
........................
$100
125
150
200
250
Date enacted
Executive
1938
1940
1949
1958
1963
1970
1975
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
Administrative
$30
30
55
80
100
125
155
$30
50
75
95
100
125
155
Standard Test
2004 .................................................................................................................
In 1940, the Department maintained the
$30 per week salary level set in 1938 for
executive employees, increased the
salary level for administrative
employees, and established a salary
level for professional employees. The
Department used salary surveys from
federal and state government agencies,
experience gained under the National
Industrial Recovery Act, and federal
government salaries to determine the
salary level that was the ‘‘dividing line’’
between employees performing exempt
and nonexempt work. See Stein Report
at 9, 20–21, 31–32. The Department
recognized that the salary level falls
within a continuum of salaries that
overlaps the outer boundaries of exempt
and nonexempt employees. Specifically,
the Department stated:
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To make enforcement possible and to
provide for equity in competition, a rate
should be selected in each of the three
definitions which will be reasonable in the
light of average conditions for industry as a
whole. In some instances the rate selected
will inevitably deny exemption to a few
employees who might not unreasonably be
exempted, but, conversely, in other instances
it will undoubtedly permit the exemption of
some persons who should properly be
entitled to the benefits of the act.
Id. at 6. Taking into account the average
salary levels for employees in numerous
industries, and the percentage of
employees earning below these
amounts, the Department set the salary
level for each exemption slightly below
the ‘‘dividing line’’ suggested by these
averages.
In 1949, the Department again looked
at salary data from state and federal
agencies, including the Bureau of Labor
Statistics (BLS). The data reviewed
included wages in small towns and lowwage industries, earnings of federal
employees, average weekly earnings for
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$455
exempt employees, starting salaries for
college graduates, and salary ranges for
different occupations such as
bookkeepers, accountants, chemists, and
mining engineers. See Weiss Report at
10, 14–17, 19–20. The Department noted
that the ‘‘salary level adopted must
exclude the great bulk of nonexempt
persons if it is to be effective.’’ Id. at 18.
Recognizing that the ‘‘increase in wage
rates and salary levels’’ since 1940 had
‘‘gradually weakened the effectiveness
of the present salary tests as a dividing
line between exempt and nonexempt
employees,’’ the Department calculated
the percentage increase in weekly
earnings from 1940 to 1949, and then
adopted new salary levels ‘‘at a figure
slightly lower than might be indicated
by the data’’ in order to protect small
businesses. Id. at 8, 14. The Department
also cautioned that ‘‘a dividing line
cannot be drawn with great precision
but can at best be only approximate.’’ Id.
at 11.
Also in 1949, the Department
established a second, less-stringent
duties test for each exemption, but only
for those employees paid at or above a
higher ‘‘short test’’ salary level. Those
paid above the higher salary level were
exempt if they also met a ‘‘short’’ duties
test, which lessened the duties
requirements for exemption.21 The
original, more thorough duties test
became known as the ‘‘long’’ test, and
remained for more than 50 years the test
employers were required to satisfy for
those employees whose salary was
insufficient to meet the higher short test
salary level. Apart from the differing
salary requirements, the most significant
difference between the short test and the
21 These higher salary levels are presented under
the ‘‘Short Test’’ heading in Table A.
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long test was the long test’s limit on the
amount of time an exempt employee
could spend on nonexempt duties while
allowing the employer to claim the
exemption. A bright-line, 20 percent cap
on nonexempt work was instituted as
part of the long duties test in 1940 for
executive and professional employees,
and in 1949 for administrative
employees.22 The short duties tests did
not include a specific limit on
nonexempt work.23 The rationale for the
less rigorous short duties test was that
employees who met the higher salary
level were more likely to meet ‘‘all the
requirements for exemption . . .
including the requirement with respect
22 By statute, beginning in 1961, retail employees
could spend up to 40 percent of their hours worked
performing nonexempt work and still be found to
meet the duties tests for the EAP exemption. See 29
U.S.C. 213(a)(1).
23 For example, the long duties test in effect from
1949 to 2004 for administrative employees required
that an exempt employee: (1) Have a primary duty
consisting of the performance of office or nonmanual work directly related to management
policies or general business operations of the
employer or the employer’s customers; (2)
customarily and regularly exercise discretion and
independent judgment; (3) regularly and directly
assist a proprietor or a bona fide executive or
administrative employee, or perform under only
general supervision work along specialized or
technical lines requiring special training,
experience, or knowledge, or execute under only
general supervision special assignments and tasks;
and (4) not devote more than 20 percent (or 40
percent in a retail or service establishment) of hours
worked in the workweek to activities that are not
directly and closely related to the performance of
the work described above. See § 541.2 (2003). By
contrast, the short duties test in effect during the
1949 to 2004 period provided that an administrative
employee paid at or above the short test salary level
qualified for exemption if the employee’s primary
duty consisted of the performance of office or nonmanual work directly related to management
policies or general business operations of the
employer or the employer’s customers which
includes work requiring the exercise of discretion
and independent judgment. See id.
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to nonexempt work.’’ Id. at 22–23. Thus,
a ‘‘short-cut test for exemption . . .
would facilitate the administration of
the regulations without defeating the
purposes of section 13(a)(1).’’ Id.
In contrast to the Department’s
extensive discussion of the methodology
for setting the long test salary level, the
Department’s rulemakings have
included comparatively little discussion
of the methodology for setting the short
test levels. While the Department set the
long test salary level based on an
analysis of the defined sample, we set
the short test salary level in relation to
the long test salary, and the initial short
test salary set in 1949 was 133 percent
of the highest long test salary
(administrative and professional). In
1958, the Department rejected the
suggestion that the short test salary level
should be increased by the same dollar
amount that the highest long test salary
levels were increased and instead
increased the short test salary to
maintain the ‘‘percentage differential in
relation to the highest [long test] salary
requirement.’’ See Kantor Report at 10.
In 1970, the Department adopted a
‘‘slightly higher percentage differential’’
between the ‘‘basic and [short test]
salary figures,’’ than previously existed,
resulting in an approximately 143
percent ratio between the highest long
test salary level (professional) and the
short test. 35 FR 885. From 1949 to 1975
the Department set a single short test
salary level that applied to all categories
of EAP employees while maintaining
multiple long test salary levels that
applied to the different categories. The
ratio of the short test salary level to the
long test salary levels ranged from
approximately 130 percent to 180
percent over this period.24 The
existence of separate short and long
tests remained part of the Department’s
regulations until 2004. See Table A.
In setting the long test salary level in
1958, the Department considered data
collected during 1955 WHD
investigations on the ‘‘actual salaries
paid’’ to employees who ‘‘qualified for
exemption’’ (i.e., met the applicable
salary and duties tests), grouped by
geographic region, broad industry
groups, number of employees, and city
size, and supplemented with BLS and
Census data to reflect income increases
of white collar and manufacturing
employees during the period not
covered by the Department’s
24 The smallest ratio occurred in 1963 and was
between the long test salary requirement for
professionals ($115) and the short test salary level
($150). The largest ratio occurred in 1949 and was
between the long test salary requirement for
executives ($55) and the short test salary level
($100).
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investigations. Kantor Report at 6. The
Department then set the long test salary
levels for exempt employees ‘‘at about
the levels at which no more than about
10 percent of those in the lowest-wage
region, or in the smallest size
establishment group, or in the smallestsized city group, or in the lowest-wage
industry of each of the categories would
fail to meet the tests.’’ Id. at 6–7. In
other words, the Department set the
long test salary level so that only a
limited number of workers performing
EAP duties (about 10 percent) in the
lowest-wage regions and industries
would fail to meet the salary level test
and therefore be overtime protected. In
laying out this methodology, the
Department echoed comments from the
Weiss Report that the salary tests
‘‘simplify enforcement by providing a
ready method of screening out the
obviously nonexempt employees,’’ and
that ‘‘[e]mployees that do not meet the
salary test are generally also found not
to meet the other requirements of the
regulations.’’ Id. at 2–3. The Department
also noted that in our experience
misclassification of overtime-protected
employees occurs more frequently when
the salary levels have ‘‘become outdated
by a marked upward movement of
wages and salaries.’’ Id. at 5.
The Department followed a similar
methodology when determining the
appropriate long test salary level
increase in 1963, using data regarding
salaries paid to exempt workers
collected in a 1961 WHD survey. See 28
FR 7002. The salary level for executive
and administrative employees was
increased to $100 per week, for
example, when the 1961 survey data
showed that 13 percent of
establishments paid one or more exempt
executives less than $100 per week, and
4 percent of establishments paid one or
more exempt administrative employees
less than $100 a week. See 28 FR 7004.
The professional exemption salary level
was increased to $115 per week, when
the 1961 survey data showed that 12
percent of establishments surveyed paid
one or more professional employees less
than $115 per week. See id. The
Department noted that these salary
levels approximated the same
percentages used in 1958:
Salary tests set at this level would bear
approximately the same relationship to the
minimum salaries reflected in the 1961
survey data as the tests adopted in 1958, on
the occasion of the last previous adjustment,
bore to the minimum salaries reflected in a
comparable survey, adjusted by trend data to
early 1958. At that time, 10 percent of the
establishments employing executive
employees paid one or more executive
employees less than the minimum salary
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adopted for executive employees and 15
percent of the establishments employing
administrative or professional employees
paid one or more employees employed in
such capacities less than the minimum salary
adopted for administrative and professional
employees.
Id.
The Department continued to use a
similar methodology when updating the
long test salary 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,25 the
Department increased the long test
salary level for executive employees to
$125 per week when the salary data
showed that 20 percent of executive
employees from all regions and 12
percent of executive employees in the
West earned less than $130 a week. See
35 FR 884–85. The Department also
increased the long test salary levels for
administrative and professional
employees to $125 and $140,
respectively.
In 1975, instead of following these
prior approaches, the Department set
the long test salary levels based on
increases in the Consumer Price Index
(CPI), although the Department adjusted
the salary level downward ‘‘in order to
eliminate any inflationary impact.’’ 40
FR 7091. As a result of this recalibration
of the 1970 levels, the long test salary
level for the executive and
administrative exemptions was set at
$155, while the professional level was
set at $170. The salary levels adopted
were intended as interim levels
‘‘pending the completion and analysis
of a study by [BLS] covering a six month
period in 1975,’’ and were not meant to
set a precedent for future salary level
increases. Id. at 7091–92. Although the
Department intended to revise the salary
levels after completion of the BLS study
of actual salaries paid to employees, the
envisioned process was never
completed, and the ‘‘interim’’ salary
levels remained unchanged for the next
29 years.
As reflected in Table A, the short test
salary level increased in tandem with
the long test level throughout the
various rulemakings since 1949.
Because the short test was designed to
capture only those white collar
employees whose salary was sufficiently
high to indicate a stronger likelihood of
exempt status and thus warrant a less
stringent duties requirement, the short
25 Earnings Data Pertinent to a Review of the
Salary Tests for Executive, Administrative and
Professional Employees As Defined in Regulations
Part 541, (1969), cited in 34 FR 9935.
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test salary level was always set
significantly higher than the long test
salary levels. Thus, in 1975 while the
long test salary levels ranged from $155
to $170, the short test level was $250.
The salary level test was most
recently updated in 2004, when the
Department abandoned the concept of
separate long and short tests, opting
instead for one ‘‘standard’’ test, and set
the salary level associated with the new
standard duties test at $455 for
executive, administrative, and
professional employees. Due to the
lapse in time between the 1975 and
2004 rulemakings, the salary threshold
for the long duties tests (i.e., the lower
salary level) did not reflect salaries
being paid in the economy and had
become ineffective at distinguishing
between overtime-eligible and overtime
exempt white collar employees. For
example, at the time of the 2004 Final
Rule, the salary levels for the long
duties tests were $155 for executive and
administrative employees and $170 for
professional employees, while a fulltime employee working 40 hours per
week at the federal minimum wage
($5.15 per hour) earned $206 per week.
See 69 FR 22164. Even the short test
salary level at $250 per week was not far
above the minimum wage.
The Department in the 2004 Final
Rule based the new ‘‘standard’’ duties
tests on the short duties tests (which did
not limit the amount of nonexempt
work that could be performed), and tied
them to a single salary test level that
was updated from the long test salary
(which historically had been paired
with a cap on nonexempt work). See 69
FR 22164, 22168–69; see also 68 FR
15570 (‘‘Under the proposal, the
minimum salary level to qualify for
exemption from the FLSA minimum
wage and overtime requirements as an
executive, administrative, or
professional employee would be
increased from $155 per week to $425
per week. This salary level would be
referred to as the ‘standard test,’ thus
eliminating the ‘short test’ and ‘long
test’ terminology.’’). The Department
concluded that it would be burdensome
to require employers to comply with a
more complicated long duties test given
that the passage of time had rendered
the long test salary level largely
obsolete. See 69 FR 22164; 68 FR
15564–65. The Department stated at the
time that the new standard test salary
level accounted for the elimination of
the long duties test. See 69 FR 22167.
In determining the new salary level in
2004, the Department reaffirmed our oftrepeated position that the salary level is
the ‘‘best single test’’ of exempt status.
See 69 FR 22165. Consistent with prior
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rulemakings, the Department relied on
actual earnings data. However, instead
of using salary data gathered from WHD
investigations, as was done under the
Kantor method, the Department used
Current Population Survey (CPS) data
that encompassed most salaried
employees. The Department also set the
salary level to exclude roughly the
bottom 20 percent of these salaried
employees in each of the
subpopulations: (1) The South and (2)
the retail industry. Thus in setting the
standard salary level, the Department
was consistent with our previous
practice of setting the long test salary
level near the lower end of the current
range of salaries. Although prior long
test salary levels were based on salaries
of approximately the lowest 10 percent
of exempt salaried employees in lowwage regions and industries (the Kantor
long test method), the Department stated
that the change in methodology was
warranted in part to account for the
elimination of the short and long duties
tests, and because the utilized data
sample included nonexempt salaried
employees, as opposed to only exempt
salaried employees. However, as the
Department acknowledged, the salary
arrived at by this method was, in fact,
equivalent to the salary derived from the
Kantor long test method. See 69 FR
22168. Based on the adopted
methodology, the Department ultimately
set the salary level for the new standard
test at $455 per week.
In summary, the regulatory history
reveals a common methodology used,
with some variations, to determine
appropriate salary levels. In almost
every case, the Department examined a
broad set of data on actual wages paid
to salaried employees and then set the
long test salary level at an amount
slightly lower than might be indicated
by the data. In 1940 and 1949, the
Department set the long test salary
levels by looking to the average salary
paid to the lowest level of exempt
employees. 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 regions,
employment size groups, city sizes, and
industry sectors, and we followed a
similar methodology in 1963 and 1970.
The levels were based on salaries in
low-wage categories in order to protect
the ability of employers in those areas
and industries to utilize the exemptions
and in order to mitigate the impact of
salaries in higher-paid regions and
sectors. In 1975, the Department
increased the long test salary levels
based on changes in the CPI, adjusting
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downward to eliminate any potential
inflationary impact. See 40 FR 7091
(‘‘However, in order to eliminate any
inflationary impact, the interim rates
hereinafter specified are set at a level
slightly below the rates based on the
CPI.’’). In each of these rulemakings, the
Department set the short test salary level
in relation to, and significantly higher
than, the long test salary levels (ranging
from approximately 130 to 180 percent
of the long test salary levels).
In 2004, the Department eliminated
the short and long duties tests in favor
of a standard duties test (that was
similar to the prior less rigorous short
test) for each exemption and a single
salary level for executive,
administrative, and professional
employees. This most recent revision
established a standard salary level of
$455 per week using earnings data of
full-time salaried employees (both
exempt and nonexempt) in the South
and in the retail sector. As in the past,
the Department used lower-salary data
sets to accommodate those businesses
for which salaries were generally lower
due to geographic or industry-specific
reasons.
ii. Standard Salary Level Proposal
To restore the effectiveness of the
salary test, in the NPRM the Department
proposed to set the standard salary level
equal to the 40th percentile of weekly
earnings of full-time salaried workers
nationally. Using salary data from 2013,
the proposed methodology resulted in a
standard salary level of $921 per week,
or $47,892 annually. The Department
estimated that, by the time of
publication of a Final Rule, the
proposed methodology would result in
a standard salary level of approximately
$970 per week, or $50,440 annually.
In proposing to update the salary
threshold, the Department sought to
reflect increases in actual salary levels
nationwide since 2004. As the
Department explained in the NPRM,
when left at the same amount over time,
the effectiveness of the salary level test
as a means of determining exempt status
diminishes as the wages of employees
entitled to overtime increase and the
real value of the salary threshold falls.
See 80 FR 38517.
The Department also sought to adjust
the salary level to address our
conclusion that the salary level we set
in 2004 was too low given the
Department’s elimination of the more
rigorous long duties test. As discussed
above, for many decades the long duties
test—which limited the amount of time
an exempt employee could spend on
nonexempt duties and was paired with
a lower salary level—existed in tandem
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with a short duties test—which did not
contain a specific limit on the amount
of nonexempt work and was paired with
a salary level that was approximately
130 to 180 percent of the long test salary
level. In 2004, the Department
eliminated the long and short duties
tests and created the new standard
duties test, based on the short duties
test. The creation of a single standard
test that did not limit nonexempt work
caused new uncertainty as to what
salary level is sufficient to ensure that
employees intended to be overtimeprotected are not subject to
inappropriate classification as not
overtime-protected, while minimizing
the number of employees disqualified
from the exemption even though their
primary duty is EAP exempt work. As
the Department had observed in 1975, if
the salary level associated with such a
test is too low, employers may use it to
inappropriately classify as exempt
employees who would not meet the
more rigorous long duties test. 40 FR
7092 (‘‘[T]here are indications that
certain employers are utilizing the high
salary test to employ otherwise
nonexempt employees (i.e., those who
perform work in excess of the 20
percent tolerance for nonexempt work
or the 40 percent tolerance allowed in
the case of executive and administrative
employees in retail and service
establishments) for excessively long
workweeks.’’). Rather than pair the
standard duties test with a salary level
based on the higher short test salary
level, however, we tied the new
standard duties test to a salary level
based on the long duties test. This
resulted in a standard salary level that,
even in 2004, was too low to effectively
screen out from the exemption
overtime-eligible white collar
employees.
The importance of ensuring that the
standard duties test is not paired with
too low of a salary level is illustrated by
the Department’s Burger King litigation
in the early 1980’s, when the short and
long tests were still actively in use. The
Department brought two actions arguing
that Burger King assistant managers
were entitled to overtime protection.
Sec’y of Labor v. Burger King Corp., 675
F.2d 516 (2d Cir. 1982); Sec’y of Labor
v. Burger King Corp., 672 F.2d 221 (1st
Cir. 1982). One group of assistant
managers satisfied the higher short test
salary level and was therefore subject to
the less rigorous short duties test; the
other group was paid less and was
therefore subject to the long duties test
with its limit on nonexempt work. All
of the assistant managers performed the
same duties, which included spending
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significant amounts of time performing
the same routine, nonexempt work as
their subordinates. Both appellate courts
found that the higher paid employees
were not overtime protected—even
though they performed substantial
amounts of nonexempt work—because
they satisfied the short duties test. The
lower paid employees, however, were
overtime-protected by application of the
more rigorous long duties test. If the
long test’s lower salary threshold had
been paired with a duties test that did
not limit nonexempt work—as the
Department did in 2004—the lower paid
assistant managers would have also lost
overtime protection.
In this rulemaking, the Department
sought to correct the mismatch between
the standard salary level (based on the
old long test) and the standard duties
test (based on the old short test). As we
noted in the NPRM, we are concerned
that at the current low salary level
employees in lower-level management
positions who would have failed the
long duties test may be inappropriately
classified as ineligible for overtime. At
the same time, the Department proposed
a lower salary level than the average
salary traditionally used for the short
duties test in order to minimize the
potential that bona fide EAP employees,
especially in low-wage regions and
industries, might become overtimeprotected because they fall below the
proposed salary level. As the
Department explained, an up-to-date
and effective salary level protects
against the misclassification of
overtime-eligible workers as exempt and
simplifies application of the exemption
for employers and employees alike.
Consistent with prior rulemakings,
the Department reached the proposed
salary level after considering available
data on actual salary levels currently
being paid in the economy. Specifically,
as we did in 2004, the Department used
CPS data comprising full-time
nonhourly employees to determine the
proposed salary level. Unlike in the
2004 rulemaking, however, the
Department did not further restrict the
data by filtering out various employees
based on statutory and regulatory
exclusions from FLSA coverage or the
salary requirement (such as federal
employees, doctors, lawyers, and
teachers).
The Department proposed to set the
salary level as a percentile rooted in the
distribution of earnings rather than a
specific dollar amount. Because
earnings are linked to the type of work
salaried workers perform, a percentile
serves as an appropriate proxy for
distinguishing between overtimeeligible and overtime exempt white
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collar workers. Based on the historical
relationship of the short test salary level
to the long test salary level, the
Department determined that a salary
between approximately the 35th and
55th percentiles of weekly earnings of
full-time salaried workers nationwide
would work appropriately with the
standard duties test. The Department
proposed to set the salary level at the
low end of this range—the 40th
percentile of weekly earnings of fulltime salaried workers nationally—to
account for low-wage regions and
industries and for the fact that
employers no longer have a long duties
test to fall back on for purposes of
exempting lower-salaried workers
performing bona fide EAP duties. The
Department explained, however, that a
standard salary threshold significantly
below the 40th percentile would require
a more rigorous duties test than the
current standard duties test in order to
effectively distinguish between white
collar employees who are overtime
protected and those who may be bona
fide EAP employees. See 80 FR 38519,
38532, 38543.
iii. Final Revisions to the Standard
Salary Level
The Final Rule adopts the proposed
methodology for setting the standard
salary level as a percentile of actual
salaries currently being paid to full-time
nonhourly employees, as reported by
BLS based on data obtained from the
CPS. However, we have adjusted the
data set used in response to a
substantial number of comments
asserting that the salary level proposed
would render overtime-eligible too
many bona fide EAP employees in lowwage areas. Rather than set the salary
level at the 40th percentile of weekly
earnings of full-time salaried workers
nationally, this Final Rule sets the
salary level at the 40th percentile of
weekly earnings of full-time salaried
workers in the lowest-wage Census
Region. Census Regions are groupings of
states and the District of Columbia that
subdivide the United States for the
presentation of data by the United States
Census Bureau. The current Census
Regions are: The Northeast, the
Midwest, the South, and the West.26
The Department determined the
‘‘lowest-wage Census Region’’ by
examining the 40th percentile of weekly
earnings of full-time salaried workers
based on CPS data in each region. For
the purposes of this rulemaking, we
define the ‘‘lowest-wage Census Region’’
as the Census Region having the lowest
26 See https://www.census.gov/geo/reference/gtc/
gtc_census_divreg.html.
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40th percentile of weekly earnings of
full-time salaried workers, which
currently is the South.27
In keeping with our practice, the
Department relies on the most up-todate data available to derive the final
salary level from this methodology. See
69 FR 22168. In the NPRM, the
Department utilized 2013 salary data for
estimating the salary level resulting
from the proposed methodology, which
was current at the time the Department
developed the proposal. In this Final
Rule, we rely on salary data from the
fourth quarter of 2015, as published by
BLS, to set the salary level.28 Using this
data, the Department has determined
that the required standard salary level
will be $913 per week, or $47,476
annually, based on the 40th percentile
of weekly earnings of full-time salaried
workers in the South. The $913 salary
level that results from the methodology
is at the low end of the historical range
of short test salary levels, based on the
historical ratios between the short and
long test salary levels ($889–$1231). See
section VI.C.iii.
White collar employees subject to the
salary level test earning less than $913
per week will not qualify for the EAP
exemption, and therefore will be eligible
for overtime, irrespective of their job
duties and responsibilities. Employees
earning this amount or more on a salary
or fee basis will qualify for exemption
only if they meet the standard duties
test, which is unchanged by this Final
Rule. As a result of this increase, 4.2
million employees who meet the
standard duties test will no longer fall
within the EAP exemption and therefore
will be overtime-protected.
Additionally, 8.9 million employees
paid between $455 and $913 per week
who do not meet the standard duties
test—5.7 million salaried white collar
employees and 3.2 million salaried blue
collar employees—will now face a lower
risk of misclassification.
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iv. Discussion of Comments
1. Proposed Increase in the Standard
Salary Level
The overwhelming majority of
commenters agreed that the standard
salary level needs to be increased,
including many commenters writing on
behalf of employers, such as the
Business Roundtable, Catholic Charities
USA, College and University
Professional Association for Human
27 For simplicity, in this rulemaking we refer to
the lowest-wage Census Region and the South
interchangeably.
28 BLS currently publishes this data at: https://
www.bls.gov/cps/
research_series_earnings_nonhourly_workers.htm.
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Resources (CUPA–HR), CVS Health, the
National Restaurant Association (NRA),
and the Northeastern Retail Lumber
Association. Multiple commenters
echoed the Department’s observation in
the NPRM that the current standard
salary level of $455 per week, or
$23,660 annually, is below the 2014
poverty threshold for a family of four.29
The American Federation of Labor and
Congress of Industrial Organizations
(AFL–CIO) pointed out that the current
salary level is only slightly higher than
the state minimum wage for forty hours
of work in several states, and noted that
it has long been widely recognized that
workers whose pay is ‘‘close to the
minimum wage’’ are ‘‘not the kind of
employees Congress intended to deny
overtime protection’’ (citing Stein
Report at 5). Some salaried employees
currently classified as exempt managers
commented that they earn less per hour
than the employees they supervise.
The Department also received
multiple comments, including
comments from the American
Sustainable Business Council and the
Heartland Alliance for Human Needs
and Human Rights, expressing concern
that the current salary level facilitates
the misclassification of overtime-eligible
employees as overtime exempt. The
RAND Corporation submitted a study
estimating that 11.5 percent of salaried
workers are misclassified as exempt—
and therefore do not receive overtime
compensation—even though their
primary duty is not exempt work or they
earn less than the current salary level,
while a human resource professional
from Florida ‘‘estimate[d] that 40
percent of those employees my clients
class[ify] as . . . exempt are really nonexempt.’’
A few commenters, however, such as
the National Grocers Association (NGA),
urged the Department to maintain the
current salary level of $455 per week.
For example, the National Lumber and
Building Material Dealers Association
stated that the current salary level is
appropriate for managers in many
sectors and regions. Mutual of Omaha
requested that the Department create a
‘‘grandfathered exemption,’’ by applying
the current salary level to currently
exempt employees.
The Department received a significant
number of comments in response to our
proposal to set the standard salary level
equal to the 40th percentile of weekly
earnings of full-time salaried employees
nationally (estimated to be $970 per
29 The 2015 poverty threshold for a family of four
with two related people under 18 in the household
is $24,036. Available at: https://www.census.gov/
hhes/www/poverty/data/threshld/.
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week, or $50,440 per year, in 2016).
Many commenters endorsed the
proposed salary level as an appropriate
dividing line between employees
performing exempt and overtimeprotected work, but others objected that
it was either too low or too high. The
majority of employees and commenters
representing employees believed the
proposed salary level amount was
appropriate or should be increased,
while the majority of employers and
commenters representing them believed
the salary level amount should be lower
than the threshold the Department
proposed.
A large number of commenters
supported the proposed salary level
either by explicitly endorsing the
proposed increase or supporting the
Department’s proposed rule generally.
Commenters who supported the salary
level included thousands of individual
employees, writing independently or as
part of comment campaigns, and
organizations representing employees
(such as the American Association of
Retired Persons (AARP), the Coalition of
Labor Union Women, National Council
of La Raza, the National Domestic
Workers Alliance (NDWA), the National
Partnership for Women & Families
(Partnership), Service Employees
International Union (SEIU), the United
Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied
Industrial and Service Workers
International Union (USW), and many
others). Some employers and human
resource professionals also supported
the proposed increase. For example, the
owner of a hardware store in
Minneapolis explained that he had
observed ‘‘large businesses abuse their
employees for many years by
misclassifying them as exempt from
overtime,’’ and stated that the
Department’s proposal would ‘‘help
bring things back in line.’’ H–E–B stated
that it pays ‘‘competitive wages,’’ and is
‘‘supportive of doubling the minimum
salary threshold to the proposed amount
of $50,400,’’ although it urged the
Department to consider making regional
adjustments because other retailers pay
lower wages based on geographic
differences. Some Members of Congress
expressed support for the Department’s
proposal, although other Members of
Congress opposed it.
The Department received many
comments from those who endorsed the
proposal (as well as those seeking a
higher salary level) asserting that a
significant increase to the current salary
level is necessary to effectuate Congress’
intent to extend the FLSA’s wage and
hour protections broadly to most
workers in the United States. See, e.g.,
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Comment from 57 labor law professors;
AFL–CIO; Equal Justice Center; National
Employment Lawyers Association
(NELA); Nichols Kaster law firm; SEIU.
AFL–CIO stated that Congress intended
the EAP exemptions to apply only to
employees who have sufficient
bargaining power such that they do not
need the Act’s protections against
overwork and who perform work that
cannot be easily spread to other
workers. AFL–CIO and the EPI further
stated that Congress knew from
experience with Depression-era worker
protection legislation that employers
sometimes misclassified ordinary
workers as managers to evade paying
overtime premiums, and as a result,
exempted only ‘‘bona fide’’ executive,
administrative, and professional
employees. The National Employment
Law Project (NELP) commented that the
Department set the salary level too low
in 2004, especially when paired with a
more lenient duties test than the prior
long duties test. A comment submitted
on behalf of 57 labor law professors
noted that, even if the Department had
paired the $455 per week standard
salary level set in 2004 with a more
rigorous duties test, it was still lower
than necessary to achieve a threshold
equivalent to the inflation-adjusted
amount of the 1975 long test salary
level.
The Department agrees with
commenters that a significant increase
in the salary threshold is required to
ensure the FLSA’s overtime protections
are fully implemented. The salary level
test should provide an ‘‘index to the
‘bona fide’ character of the employment
for which exemption is claimed’’ and
ensure that the EAP exemption ‘‘will
not invite evasion’’ of the FLSA’s
minimum wage and overtime
requirements ‘‘for large numbers of
workers to whom the wage-and-hour
provisions should apply.’’ Stein Report
at 19. The current salary level, however,
is less than the 10th percentile of
weekly earnings of full-time salaried
workers both nationally and in the
South. The salary threshold’s function
in differentiating exempt from
nonexempt employees takes on greater
importance, moreover, when there is
only one standard duties test that has no
limitation on the amount of nonexempt
work that an exempt employee may
perform, as has been the case since
2004. As the Department has long
recognized, if too low a salary level
accompanies a duties test that does not
limit nonexempt work, employers may
utilize the salary test to employ
‘‘otherwise nonexempt employees,’’
who perform large amounts of
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nonexempt work, ‘‘for excessively long
workweeks.’’ 40 FR 7092. The
Department believes that the effect of
the 2004 Final Rule’s pairing of a
standard duties test based on the short
duties test (for higher paid employees)
with a salary test based on the long test
(for lower paid employees) was to
exempt from overtime many lower paid
workers who performed little EAP work
and whose work was otherwise
indistinguishable from their overtimeeligible colleagues.30 This has resulted
in the inappropriate classification of
employees as EAP exempt who pass the
standard duties test but would have
failed the long duties test. A significant
increase from the 2004 threshold is
therefore necessary, not only to account
for the declining real value of the salary
threshold, but also to correct for the fact
that the Department set the standard
salary level in 2004 without adjusting
for the elimination of the more rigorous
long duties test.
Many commenters (including some
that believe that the proposed salary
level is reasonable) urged the
Department to choose a method that
results in a higher salary level. The vast
majority of these commenters, including
NELA, Nichols Kaster, the Rudy,
Exelrod, Zieff & Lowe law firm, the
Texas Employment Lawyers
Association, and the United Food and
Commercial Workers International
Union (UFCW), asserted that the
Department should set the standard
salary level equal to the 50th percentile
of earnings of full-time salaried workers
nationally. The Center for Effective
Government stated that the Department
should set the standard salary level
equal to the 60th percentile of earnings
of full-time salaried workers nationally.
NELP recommended that the
Department adjust for inflation the short
test salary level adopted by the
Department in 1975, or in the
alternative, adopt a threshold of $1,122
per week.
30 Jobs With Justice illustrated this phenomenon
in its comment by recounting the experience of a
store manager who was classified as exempt even
though she made only $34,700 per year and
regularly worked 70 hours per week, spending her
time performing routine tasks such as ‘‘unloading
merchandise from trucks, stocking shelves and
ringing up purchases.’’ See also In re Family Dollar
FLSA Litigation, 637 F.3d 508, 511, 516–18 (4th Cir.
2011) (holding that a retail manager paid $655 per
week plus bonus was an exempt executive even
though she ‘‘devoted most of her time to doing . . .
mundane physical activities’’ such as unloading
freight, stocking shelves, working the cash register,
or sweeping the floors); Soehnle v. Hess Corp., 399
Fed. App’x 749, 750 (3d Cir. 2010) (holding that a
gas station manager who was paid an annual salary
of $34,000, worked approximately 70 hours per
week, and spent 85 percent of time operating a cash
register was an exempt executive).
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Commenters, such as the UFCW,
pointed out that the Department’s
proposed salary is lower than the
average historical salary ratio associated
with the short duties test, which is the
basis for the standard duties test.
Multiple commenters noted that the
proposed salary level covers a smaller
share of all salaried workers (40 percent)
than the 1975 short test salary level,
which covered 62 percent of full-time
salaried employees. See, e.g., AFL–CIO;
NELA; Rudy, Exelrod, Zieff & Lowe.
NELA stated that the 1975 short test
salary level was 1.57 times the median
wage of all full-time wage and salary
workers, a ratio which they asserted
would result in a current salary
threshold of over $65,000 per year based
on first quarter 2015 data. EPI
commented that the proposed salary
level is lower than the short test salary
levels adopted by the Department in the
1960s and 1970s, when adjusted for
inflation to 2013 dollars. EPI also
asserted that the salary threshold should
be higher than the inflation-adjusted
amounts of short test salary levels from
the past in part to account for the fact
that management and professional
salaries grew faster than the rate of
inflation after 1970, noting that CEO pay
among the top 350 U.S. corporations
was almost 11 times higher in 2014 than
it was in 1978, after adjusting for
inflation. Other commenters, including
USW, similarly cited the large growth in
high-level executive pay in recent
decades in support of the Department’s
proposal.
Commenters urging a higher salary
level also asserted that the Department’s
proposed salary level excludes from
overtime protection too large a
percentage of employees in traditionally
nonexempt occupations and is too low
to adequately minimize the risk of
inappropriately classifying overtimeeligible workers as overtime exempt.
AFL–CIO stated that the Department has
previously set the long test salary level
at an amount about 25 percent higher
than the average starting salary for
newly hired college graduates, and they
asserted that this would yield a standard
salary level of $52,000 per year. AFL–
CIO contended that the salary test must
be set at a ‘‘high enough level that large
numbers of eligible workers are not
stranded above the threshold.’’ NELA
likewise urged the Department to ‘‘aim
for a threshold where the number of
non-exempt employees earning salaries
above the threshold equals the number
of otherwise exempt employees earning
less than the threshold’’—an amount we
estimated in the NPRM would be
roughly equal to the 50th percentile of
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weekly earnings of full-time salaried
workers nationally. See 80 FR 38560.
The Department understands
commenters’ concerns that the proposed
standard salary level was lower than the
50th percentile of full-time salaried
workers ($1,065 based on 2013 data)
and updating the 1975 short test salary
($1,083 based on 2013 data). As the
Department stated in the NPRM,
however, we are concerned that a
standard salary threshold at that level,
in the absence of a lower salary long test
to fall back on, would deny employers
the ability to use the exemption for too
many employees in low-wage areas and
industries who perform EAP duties.
In contrast to commenters
representing employees, a great number
of commenters representing employers
and many individual employers
objected that the Department’s proposed
salary level was too high. While
commenters supporting the proposed
threshold or advocating for a higher
threshold asserted that the proposal is
lower than indicated by historical short
test levels, commenters advocating for a
lower threshold asserted that the
proposed threshold is out of step with
historical long test levels. For example,
the Jackson Lewis law firm asserted that
the proposed threshold is higher than
any past long test salary level for the
executive exemption, when adjusted for
inflation to 2015 dollars. The Chamber
stated that the ratio of the proposed
salary level to the minimum wage is too
high, based on an analysis they
performed that weighted the historic
long test salary levels three times more
heavily than historic short test salary
levels.
Some commenters requesting a lower
salary threshold, such as the American
Association of Orthopaedic Executives,
Associated Builders and Contractors
(ABC), and the Montana Conservation
Corps, urged the Department to instead
adjust the 2004 salary level for inflation.
Many others stated that the Department
should set the salary level at the 20th
percentile of earnings of full-time
salaried employees in the South and in
the retail industry, as we did in 2004.
See, e.g., American Hotel and Lodging
Association (AH&LA); Dollar Tree; NRF.
The NRA stated that it could support
Alternative 3 in the NPRM, a salary
level derived from the Kantor long test
method taking the 10th percentile of
earnings of likely exempt employees in
low-wage regions, employment size
groups, city sizes, and industries. Fisher
& Phillips urged the Department to set
the salary level at the 20th percentile of
earnings of exempt employee salaries
‘‘in the lowest geographical and
industry sectors.’’ Some commenters
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suggested a lower percentile of full-time
salaried workers nationwide than the
Department proposed. For example, the
Chamber, which preferred that the
Department use a different data source
set to set the salary level, stated in the
alternative that a salary level at up to
the 30th percentile of earnings of fulltime salaried workers nationally would
‘‘better reflect the actual dividing line
between exempt and non-exempt
employees.’’ In addition, several
commenters focused on the salary level
amount rather than, or in addition to,
the methodology used to derive the
level. For example, a non-profit
organization providing senior care
recommended a salary level of up to
$40,000; FMI stated that most of its
grocer members would not see a
significant disruption at a salary level of
up to $38,376; and the BOK Financial
Corporation advocated for a $30,000
salary level. Finally, some commenters,
such as the Partnership to Protect
Workplace Opportunity (PPWO) and
IFA, asserted that the Department’s
proposed salary level should be lower,
but declined to propose a specific
number or method. Most of these
suggestions do not represent a
meaningful departure from the
methodology the Department has
historically used to set the lower long
test salary level, and the Department
does not believe that these suggested
salary levels are sufficient to account
fully for the elimination of the long
duties test, as explained below.
The Department received many
comments stating that by using a
nationwide data set, the proposal fails to
adequately account for salary disparities
among regions and areas, industries,
and firms of different sizes. Some
commenters, including the Assisted
Living Federation of America and the
American Seniors Housing Association
(ALFA), Jackson Lewis, and PPWO,
asserted that adopting the proposal
would effectively eliminate the
exemption for certain industries or in
certain parts of the country and, as a
result, would exceed the Department’s
statutory authority.
Multiple commenters asserted that the
proposed salary level is too high for
low-wage regions. See, e.g., Chamber;
FMI; International Association of
Amusement Parks and Attractions;
King’s Daughters’ School; NRF; PPWO;
Society for Human Resource
Management (SHRM); and many
individual commenters. Several
commenters cited to an analysis
conducted by Oxford Economics finding
that in eight southern states—Arkansas,
Florida, Louisiana, Mississippi, North
Carolina, Oklahoma, Tennessee, and
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West Virginia—more than 50 percent of
nonhourly workers earn less than $970
per week, the amount the Department
predicted the proposed salary level
would be in 2016. PPWO cited to a
study showing that 100 percent of firstline supervisors of food preparation and
serving workers in Mississippi—an
occupational category for which the
Department predicted 10 to 50 percent
of workers would likely pass the duties
test when we quantified the impact of
our proposal 31—would fall below the
proposed salary level. The National
Association of Home Builders (NAHB)
analyzed state-level data and found that
50 percent or more of first line
construction supervisors in Arkansas,
Mississippi, New Mexico, and
Tennessee would be affected by the
Department’s proposal. The National
Network to End Domestic Violence
commented that for one of its member
organizations in a rural state, nine out
of eleven staff members earn less than
the proposed salary level, and a lender
with locations across Alabama,
Louisiana, Mississippi, and Tennessee
stated that 81 percent (62 out of 74) of
its branch managers earn less than
$51,000 per year in base salary. Some
commenters, for example, the HR Policy
Association and National Association of
Manufacturers (NAM), expressed
concern that employees performing the
same duties will be exempt in one
location but overtime protected in
another.
In addition to these comments,
multiple commenters noted that salaries
may vary widely within a state or
region, especially between rural or
smaller communities and urban areas.
Several commenters, including
Columbia County, Pennsylvania,
Community Transportation Association
of the Northwest, Elk Valley Rancheria
Indian Tribe, Jackson Lewis, the
Jamestown S’Klallam Tribe, the
National Board for Certified Counselors,
the National Newspaper Association,
NRF, and the Northern Michigan
Chamber Alliance, commented that the
proposed salary level is too high for
rural areas and small communities. HR
Policy Association stated that 14
percent of chief executives and 32
percent of general and operations
managers in small cities and rural areas
earn less than the salary level calculated
using the proposed methodology and
2014 data. Commenters also compared
earnings and the cost of living in lowerwage communities to very high wage
urban areas and asserted that the
31 See Table A2—Probability Codes by
Occupation, 80 FR 38594; see also 80 FR 38553–
54.
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Department’s proposal fails to fully
analyze and take into account these
differences. See, e.g., America Outdoors
(comparing rural areas to Washington,
DC, New York City, and San Francisco);
Ashley Manor LLC; National Pest
Management Association.
Several commenters also asserted that
the proposed salary level ($50,440 based
on projections for 2016) would have a
disproportionate impact on employers
in low-wage industries, such as the
retail and restaurant industries. HR
Policy Association stated that in the
retail, accommodation, and food
services and drinking places industries,
over one-third of general and operations
managers would fall below the proposed
salary level in 2014 dollars. FMI stated
that ‘‘millions of employees in retail
who clearly meet the duties
requirements for retail earn below
$50,000.’’ NRA cited a 2014 survey
finding that the median base salary paid
to restaurant managers is $47,000 and to
crew and shift supervisors is $38,000,
and multiple chain restaurant
businesses submitted comments stating
that if the Department increased the
salary level to our proposed threshold
and updated it annually, ‘‘there might
be no exempt employees in many of our
restaurants.’’
The Department also heard from
multiple commenters, such as IFA, the
National Federation of Independent
Businesses (NFIB), NGA, the National
Independent Automobile Dealers
Association, the National Newspaper
Association, Senator David Vitter, and
Representative James Inhofe, that our
proposal would have a disproportionate
impact on small businesses. The Office
of Advocacy of the United States Small
Business Administration (Advocacy)
stated that the proposed salary
threshold would ‘‘add significant
compliance costs . . . . on small
entities, particularly to businesses in
low-wage regions and in industries that
operate with low profit margins.’’
Several commenters, including the
Chamber, Littler Mendelson, Fisher &
Phillips, and the Seyfarth Shaw law
firm, noted that the Department has
historically adjusted the salary level to
account for low-wage regions and
industries and small establishments,
and asserted that the Department failed
to do so in this rulemaking. These and
other commenters urged the Department
to account for such variations by setting
the salary level at a point near the lower
range of salaries in the lowest-wage
regions or industries. For example,
among other alternatives, the Chamber
asked the Department to consider
setting the salary level at the 40th
percentile of earnings of full-time
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salaried employees in Louisiana,
Mississippi, and Oklahoma ($784 per
week or $40,786 annually), which it
described as the three states with the
lowest salaries. Many other
commenters, including the International
Bancshares Corporation, the National
Association of Federal Credit Unions,
the National Council of Young Men’s
Christian Associations of the United
States of America (YMCA), and many
individual commenters, urged the
Department to adopt different salary
levels for different regions of the
country or for different industries or
sizes of businesses.
Commenters representing employee
interests, however, disagreed that the
Department should make further
adjustment for low-wage regions and
industries. EPI commented that because
the Department’s proposed standard
salary level falls within historic short
test levels, the Department’s earlier
adjustments to account for regional
wage disparities are ‘‘baked in.’’ See
also AFL–CIO. This is because the
Department historically set the short test
level as a function of a long test level,
which had been adjusted to reflect lowwage regions and industries. UFCW
similarly asserted that the Department
should not have proposed a salary
threshold lower than the average short
test salary level to account for low-wage
regions and industries, because the data
from which the Department drew the
percentile includes the earnings of
employees in low-wage industries and
regions. In addition, AFL–CIO and EPI
stated that the Department should be
less concerned about the impact of
regional wage variation than in prior
rulemakings. According to an analysis
conducted by EPI, over the past four
decades, wages in lower-wage states
have ‘‘moved much closer to national
norms.’’
The Department has considered these
comments and appreciates the strong
views in this area. While our proposal
did account for lower salaries in some
regions and industries by setting the
salary level lower than both the average
historical salary ratio associated with
the short duties test ($1,019 per week
according to the data set used in the
Final Rule) and the median of full-time
salaried workers ($1,146 according to
the data set used in the Final Rule), we
have determined that further adjustment
to account for regional variation is
warranted. The proposed salary level
($972 based on the fourth quarter 2015
data) is in the lowest quarter of the
historical range of the short test salary,
but it is not at the bottom of the range,
and based on the comments, we are
concerned that this salary would not
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sufficiently account for regional
variation in wages. Accordingly, we
have adjusted the data set used to set
the salary level to further reflect salary
disparities in low-wage areas. Under
this Final Rule, the Department will set
the standard salary level equal to the
40th percentile of weekly earnings of
full-time salaried workers in the lowestwage Census Region. Based on fourth
quarter 2015 data, the lowest-wage
Census Region is the South, and the
40th percentile of weekly earnings of
full-time salaried workers in the South
is $913.32 See Table B. By comparison,
the 40th percentile nationally is $972,
and the 40th percentile in the highestwage Census Region (the West) is
$1,050.
TABLE B—40TH PERCENTILE OF EARNINGS FOR FULL-TIME SALARIED
WORKERS BY CENSUS REGION
Census region
South ..............................
Midwest ...........................
Northeast ........................
West ................................
All Census Regions ........
40th percentile of
earnings of fulltime salaried
workers
(in 4th quarter
2015)
$913
994
1,036
1,050
972
This adjustment will ensure that the
salary level ‘‘is practicable over the
broadest possible range of industries,
business sizes and geographic regions.’’
69 FR 22171 (citing Kantor Report at 5).
Setting the salary level equal to the
weekly earnings of the 40th percentile
of full-time salaried workers in the
lowest-wage Census Region represents
the 22nd percentile of likely exempt
employees in the South, the 19th
percentile of likely exempt employees in
the Midwest, and the 16th percentile of
likely exempt employees in both the
West and the Northeast.33 The 40th
percentile of full-time salaried workers
in the South also represents the 20th
percentile of likely exempt employees
working in small establishments and the
28th percentile of likely exempt
employees who do not live in
32 The South Census Region includes Alabama,
Arkansas, Delaware, the District of Columbia,
Georgia, Florida, Kentucky, Louisiana, Maryland,
Mississippi, North Carolina, Oklahoma, South
Carolina, Tennessee, Texas, Virginia, and West
Virginia.
33 The population for determining employees
who are likely exempt under the standard duties
test is limited to potentially affected EAP workers
(i.e., white collar, salaried, not eligible for another
non-EAP overtime exemption, and not in a named
occupation) earning at least $455 but less than
$913.
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metropolitan areas.34 This increase from
the traditional 10 percent of exempt
employees excluded by the Kantor long
test method reflects the shift to a salary
level appropriate to the standard duties
test. Because the long duties test
included a limit on the amount of
nonexempt work that could be
performed, it could be paired with a low
salary that excluded few employees
performing EAP duties. In the absence
of such a limitation in the duties test, it
is necessary to set the salary level higher
(resulting in the exclusion of more
employees performing EAP duties)
because the salary level must perform
more of the screening function
previously performed by the long duties
test. Accordingly the salary level set in
this Final Rule corrects for the
mismatch in the 2004 Final Rule
between a low salary threshold and a
less rigorous duties test.
The decrease in the salary level due
to the change to the lowest-wage region
data set addresses commenters’
concerns that the salary test would
eliminate the exemption for certain
industries or certain parts of the
country. For example, while PPWO
asserted that the proposed salary level
would have excluded from the
exemption all first line supervisors of
food preparation and service workers in
Mississippi, the revised salary level
adopted in this Final Rule excludes only
78 percent of these workers. This leaves
22 percent of such workers covered by
the exemption in Mississippi—
appropriately within the 10 to 50
percent of employees in this occupation
nationwide predicted to pass the
standard duties test under the
Department’s probability codes. See
section VI Appendix A. Likewise, 55
percent of first line supervisors of
construction trades and extraction
workers in the South earn above the
Final Rule’s salary threshold, even
though only 0 to 10 percent of such
workers nationwide are likely to pass
the standard duties test. Id. The revised
salary is approximately equivalent to
the 2014 median base salary paid to
restaurant managers cited by NRA.
Setting the salary level equal to the
40th percentile of earnings of full-time
salaried workers in the lowest-wage
Census Region is consistent with the
Department’s historical practice of
examining a broad set of data on actual
wages paid to salaried employees and
then setting the salary level at an
34 The Department does not know which
employees work for small businesses and therefore
randomly assigns workers to small businesses. The
number of likely exempt employees who do not live
in metropolitan areas is based on employees who
do not live in a Metropolitan Statistical Area.
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amount slightly lower than might be
indicated by the data. In addition, this
method is consistent with our previous
practice of examining data broken out
by geographic area in setting the salary
level. The Final Rule methodology also
benefits from continuity with our 2004
methodology, in which we set the salary
level equal to a percentile of the
earnings of full-time salaried workers in
the South. Finally, the approach
adopted in this Final Rule fulfills the
Department’s goals of making the salary
methodology simpler and more
transparent. See 80 FR 38527.
The Department believes that the
standard salary level set in this Final
Rule will appropriately distinguish
between those who likely are bona fide
EAP employees and those who likely
are not, when paired with the current
duties test and will not require a return
to a limit on the performance of
nonexempt work. The Final Rule salary
level, like the Department’s proposed
salary threshold, exceeds the inflationadjusted 2004 salary level and the levels
suggested by the Kantor long test and
2004 methods (all of which were based
on the lower long test salary), but is at
the low end of the historical range of
short test salary levels, based on the
historical ratios between the short and
long test salary levels. A substantially
higher standard salary threshold, such
as the levels advocated by some
commenters representing employees,
would fail to account for the absence of
a long test, which historically allowed
employers to claim the exemption at a
lower salary level for employees who
satisfy a more restrictive duties test.
This is particularly true given that the
salary threshold will apply nationwide,
including in low-wage regions and lowwage industries. In the NPRM, the
Department considered setting the
standard salary equal to the 50th
percentile of earnings of full-time
salaried workers nationwide ($1,146 per
week or $59,592 annually according to
the data set used in this Final Rule); we
also considered adjusting the 1975 short
test salary level of $250 for inflation
($1,100 per week or $57,200 annually).
We declined to adopt either alternative,
however, due to our belief that the
salary level generated through these
methods would result in overtime
eligibility for too many employees in
low-wage regions and industries who
are bona fide EAP employees. See 80 FR
38534. As discussed above, the
Department received a great number of
comments in response to the NPRM that
confirm our concern about the
applicability of such a salary level in
low-wage regions and industries. Based
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32409
on these comments and for the reasons
discussed above, the Department has
decided to use a regional data set that
results in a lower standard salary level
than the national data set we proposed
in the NPRM.
The Department is mindful that any
salary level must adequately demarcate
bona fide EAP employees in higherwage, as well as lower-wage areas. As
we have previously explained when
discussing the salary level to be paired
with the more rigorous long duties test,
the threshold ‘‘can be of little help in
identifying’’ bona fide EAP employees
when ‘‘large numbers’’ of traditionally
nonexempt workers in large cities earn
more than this amount. Weiss Report at
10. By setting the salary equal to the
40th percentile of salaries in the lowestwage Census Region, a higher percentile
than we chose in 2004, the Department’s
methodology is sufficiently protective of
employees in higher-wage regions and
accounts for the fact that the standard
salary level will be paired with a less
rigorous standard duties test that does
not specifically limit the amount of
nonexempt work that can be performed.
The $913 salary level is within the
historical range of short test salary
levels, based on the ratios between the
short and long test salary levels, albeit
at the low end of that range. To the
extent that salaries in lower-wage
regions have converged with salaries
elsewhere in the country, as some
commenters suggested, tying the salary
level to salaries in the lowest-wage
Census Region is even less likely to
result in a threshold that is
inappropriate for other areas.
The Department believes the Final
Rule methodology strikes an appropriate
balance between minimizing the risk of
employers misclassifying overtimeeligible workers as exempt, while
reducing the undue exclusions from
exemption of bona fide EAP employees.
As the Department explained in the
NPRM, we have long recognized that
there will always be white collar
overtime-eligible employees who are
paid above the salary threshold, as well
as employees performing EAP duties
who are paid below the salary
threshold. Under the Final Rule, 5.7
million white collar employees who fail
the standard duties test will now also
fail the salary level test eliminating their
risk of misclassification as exempt. The
Department estimates that 732,000 of
these white collar salaried workers are
overtime-eligible but their employers do
not recognize them as such. See section
VI.C.ii. An additional 4.2 million
employees who meet the standard
duties test (but may not have met the
long duties test prior to 2004) will no
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longer qualify for the EAP exemption—
and therefore will become overtime
eligible—because they are paid less than
the new salary level. See section VI.C.ii.
Although the Department recognizes
that an estimated 6.5 million white
collar employees who fail the standard
duties test will still earn at least the new
salary level, these overtime-eligible
employees will be protected by the
application of the duties test.
Other measures confirm the
appropriateness of the new standard
salary level. The Department has
traditionally considered newly hired
college graduates to be overtime eligible
and the Final Rule salary level is
slightly higher than the average salary
for college graduates under 25 years
old.35 See Weiss Report at 19. Setting the
salary level at the 40th percentile of
weekly earnings of full-time salaried
workers in the South also places it far
enough above the minimum wage to
provide an effective means of screening
out workers who should be overtime
protected. Following each update from
1949 to 1975, the ratio of the short test
salary level to the earnings of a fulltime, nonexempt, minimum wage
worker equaled between approximately
3.0 and 6.25.36 The proposed salary
level is 3.15 times full-time minimum
wage earnings ($913/($7.25 × 40)),
which is within the historical range.
To the extent that some commenters
advocated an even further downward
adjustment to the salary level to account
for low-wage regions and industries, the
Department believes that such an
adjustment would not be appropriate
given that the Department has decided
not to introduce a specific limitation on
the performance of nonexempt work
into the standard duties test. Moreover,
we note that the standard salary level
must be practicable in high-wage areas
as well as in low-wage ones. As we have
previously stated, the salary threshold
‘‘can be of little help in identifying’’
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35 Several
commenters asserting that the
Department’s proposed salary level is too high,
including the American Council of Engineering
Companies and the American Institute of Certified
Public Accountants, suggested that increasing the
salary level could lead employers to classify recent
college graduates or junior employees as
nonexempt. The Department has long recognized
that ‘‘college graduates just starting on their
working careers . . . normally have not achieved
bona fide administrative or professional status, nor
are their salaries commensurate with those of fully
trained and experienced professional or
administrative employees.’’ Weiss Report at 19.
36 The 6.25 ratio is an outlier that was set in
December 1949 (when the short test was created)
and the minimum wage increased from $.40 to $.75
per hour one month later (which reduced the ratio
to 3.33). To return to the 6.25 ratio, the weekly
salary level would have to be set at $1,812.50,
which is around the 80th percentile of full-time
salaried employees nationally.
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bona fide EAP employees when ‘‘large
numbers’’ of traditionally nonexempt
workers in high wage areas earn in
excess of the salary level. Weiss Report
at 10. In California and New York, for
example, 69 percent of first-line
supervisors in construction, 51 percent
of paralegals and legal assistants, and 31
percent of secretaries and administrative
assistants earn $913 or more per week,
despite the fact that the probability of
these workers passing the standard
duties test is between 0 to 10 percent.
With respect to commenters who
expressed concern that employees
performing the same duties will be
exempt in one location and overtime
protected in another, the Department
notes that this has always been the case
and may occur at any salary level.
Lowering the salary threshold below the
amount set in this Final Rule would
result in a salary level that is
inappropriate for traditionally
nonexempt workers in high wage areas,
especially when paired with the less
rigorous standard duties test.
The $913 salary level adopted in this
Final Rule corresponds to the low end
of the historical range of salaries for the
short duties test on which the current
standard duties test is based ($889 to
$1,231). The Department considered the
possibility of adopting a salary level
equal to the 35th percentile of weekly
earnings of full-time salaried employees
in the South, which would yield a
salary level of $842 per week based on
fourth quarter 2015 data. However,
given that this would result in a salary
level lower than the bottom of the
historical range of short test salary
levels, based on the historical ratios
between the short and long test salary
levels, the Department determined that
setting the salary level at the 35th
percentile of the lowest-wage Census
Region would not work effectively with
the standard duties test. The
Department also considered adopting a
higher salary level within the historical
range of short test salaries as advocated
by many employee representatives, but
we remain concerned about the adverse
effect such a threshold might have on
low-wage regions. Accordingly, the
Department has concluded that the 40th
percentile of weekly earnings of fulltime salaried workers in the South
represents the best dividing line
between employees who are overtime
eligible and those who may not be
overtime eligible, when paired with the
standard duties test.
Historically the Department has
looked to low-wage industries as well as
low-wage regions in setting the long test
salary and, in 2004, we looked
specifically to the retail industry in
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setting the standard salary level.37 In
developing this Final Rule, the
Department examined weekly earnings
of full-time salaried employees in the
retail and restaurant industries to
determine if adjustment based on these
industries was appropriate. In the retail
industry, the 40th percentile of full-time
salaried employees nationally is $848
per week, a salary below the low end of
the historical range of the short test
salary ($889) and therefore one that
would not work effectively with the
standard duties test. In the restaurant
industry (food services and drinking
places), the 40th percentile of full-time
salaried employees nationally is $724
per week. This salary is not only below
the low end of the historical short test
range, but also only slightly above the
historical average of the long test salary
level ($719).38 39 The Department
therefore concluded that setting the
salary level based on wages in these
industries would require significant
changes to the standard duties test,
which commenters representing
employers overwhelmingly opposed,
see, e.g., NRF, NRA, FMI, and which
would be inconsistent with the
Department’s goal of simplifying the
exemption. The Department believes,
moreover, that the lower salary level
yielded by using the lowest-wage
Census Region is appropriate over the
range of industries, including low-wage
industries, because it captures
differences across regional labor markets
without attempting to adjust to specific
industry conditions.
With respect to the Chamber’s
suggestion that the Department limit the
data set to the three lowest-wage states
in the South (for which the 40th
percentile of weekly earnings is $784),
this methodology yields a salary level
significantly below the historical range
of short test salary levels and for all the
reasons discussed above would
37 In the past, salaries in low-wage areas and lowwage industries have been closely aligned, and in
2004 salaries in the South and in the retail industry
were similar. See 69 FR 22168 (‘‘[T]he lowest 20
percent of full-time salaried employees in the South
region earn approximately $450 per week. The
lowest 20 percent of full-time salaried employees in
the retail industry earn approximately $455 per
week.’’). This historical parity does not exist at the
40th percentile of workers in the restaurant and
retail industries, and adjusting the salary level
further to account for wages in these industries
would require changes to the standard duties test.
38 The Department calculated the historic average
of the long test salary level by averaging the 20
values set for the long test (executive,
administrative, and professional) from 1938 to 1975
in 2015 dollars. The historical average salary level
for the long test is $719.
39 The Department notes there are also significant
levels of misclassification of overtime-eligible white
collar workers as exempt in these industries. See
section VI.C.ii.
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therefore fail to work appropriately with
the standard duties test. If the
Department had instead looked to
Census divisions, the West South
Central division,40 which includes
Louisiana and Oklahoma has a 40th
percentile of weekly earnings of fulltime salaried workers of $878, and the
East South Central division,41 which
includes Mississippi, has a 40th
percentile of weekly earnings of fulltime salaried workers of $849. Both of
these would also result in a salary level
that is lower than the bottom of the
historical short test salary range and
would thus necessitate changes to the
duties test. Moreover, the Department
believes that the best practice is to set
the salary level based on an entire
region, as we did in 2004, rather than
based on a select and very small subset
of states or on a Census division.42 The
three Census divisions that make up the
South Census Region have lower wages
at the 40th percentile of weekly earnings
of full-time salaried workers than any
other Census divisions. By focusing on
the lowest-wage Census Region—made
up of the three lowest-wage Census
divisions—we have removed the effect
of the three higher earnings Census
Regions on the salary level, ensuring the
salary level is not driven by earnings in
high- or even middle-wage regions of
the country. Moreover, establishing the
salary level based on a Census Region
40 The West South Central division comprises
Arkansas, Louisiana, Oklahoma, and Texas.
41 The East South Central division comprises
Alabama, Kentucky, Mississippi, and Tennessee.
42 A number of commenters noted that the
Department’s proposal is higher than the minimum
salary level necessary for an EAP employee to be
exempt from state overtime laws in two high-wage
states, California ($41,600 in 2016) and New York
($35,100 in 2016). See, e.g., Corpus Christi Chamber
of Commerce; FMI; IFA; Littler Mendelson. The
salary thresholds for the white collar exemption in
California and New York are based on multipliers
of the full-time equivalents of those states’
minimum wages; the salary level in California is 2
times the state minimum wage, and the salary level
in New York is typically 1.875 times the state
minimum wage. See Cal. Lab. Code Sec. 515(a);
N.Y. Comp. Codes R. & Regs, 12 §§ 142–2.1, 2.14.
These multipliers are lower than the historical ratio
of the Department’s short test salary level and the
federal minimum wage (which has never been
lower than 2.98, see 80 FR 38533), and they
approximate the historical ratio between the
Department’s long test salary level and the federal
minimum wage (which, between 1958 and 1975,
ranged from 1.85 to 2.38). The Department believes
that the salary level yielded by our methodology,
which is 3.15 times the current federal minimum
wage, better corresponds to the standard duties test,
which—like the old short duties test—does not
include a quantitative limit on nonexempt work.
The Department also notes that California requires
exempt EAP employees to spend at least 50 percent
of their time performing their primary duty, not
counting time during which nonexempt work is
performed concurrently. See Cal. Lab. Code Sec.
515(a), (e); see Heyen v. Safeway Inc., 157 Cal. Rptr.
3d 280, 302 (Cal. Ct. App. 2013).
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provides a sufficient data set to capture
differences across regional labor markets
and produces a salary level that is
appropriate on a national basis.
The Department also declines to
adopt different salary levels for different
regions of the country or for different
industries or sizes of businesses. The
Department has always maintained a
salary level applicable to all areas and
industries. As the Department explained
when we rejected regional salary
thresholds in the 2004 Final Rule,
adopting multiple different salary levels
is not administratively feasible ‘‘because
of the large number of different salary
levels this would require.’’ 69 FR 22171.
Furthermore, as discussed earlier, the
Department believes the methodology
adopted in this Final Rule will
adequately account for commenters’
concerns about geographic and other
disparities by setting the salary level
based on salaries in the lowest-wage
Census Region.
In addition to asserting that the
proposed salary level is inappropriate
for low-wage regions and industries,
commenters requesting a lower salary
level also criticized the methodology the
Department used in our proposal, took
issue with the justifications
underpinning the proposal, and
predicted that the proposed salary level
would negatively impact employers and
employees. Some commenters criticized
the Department for using a different
percentile to set the salary threshold
than it has in the past. See, e.g., FMI;
National Roofing Contractors
Association (asserting that the
‘‘threshold would extend to the 40th
percentile of wage earners, up sharply
from methodologies used when
previously determining the threshold
that used the 10th and 20th percentile’’).
Several commenters also disagreed
with the Department’s explanation that
it was necessary to set a percentile that
would not only reflect increases in
nationwide salary levels since 2004, but
also correct for the fact that the salary
level set in 2004 was too low—when
paired with a duties test based on the
historical short duties test—to
effectively screen out overtimeprotected white collar employees from
the exemption. Many of these
commenters asserted that the
Department did account for the
elimination of the long duties test, by
increasing ‘‘the percentile used from
10th to 20th.’’ Littler Mendelson; see
also AH&LA; NRF. The Chamber
commented that the Department did not
need to adjust for the elimination of the
long duties test in 2004 because the long
test salary level was so in need of
updating that the long duties test had
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been effectively inoperative for many
years. Finally, some commenters
asserted that the Department improperly
equates the standard duties test with the
less rigorous short duties test. See, e.g.,
World Floor Covering Association
(‘‘DOL did not eliminate the long duty
test and keep the short duty test in 2004.
Rather, it combined the short and long
duties tests by relaxing the strict
standards under the long duty test and
increasing duties under the short duty
test.’’) The Chamber and the Iowa
Association of Business and Industry
pointed out that in 2004 the Department
added to the standard executive duties
test an additional requirement (that the
employee be one who has ‘‘the authority
to hire or fire other employees or whose
suggestions and recommendations’’ as
to these matters ‘‘are given particular
weight’’), and the Iowa Association of
Business and Industry also noted that
the Department added a ‘‘matters of
significance’’ qualification to the
administrative standard duties test.
The Department disagrees with these
comments, and we continue to believe
that the salary level set in 2004 was too
low to effectively screen out from the
exemption overtime-protected white
collar employees when paired with the
standard duties test. As an initial
matter, we disagree with commenters’
suggestion that the standard duties test
does not closely approximate the
historic short duties test because of
minor differences between the two tests.
In 2004, the Department described these
differences as merely ‘‘de minimis,’’ and
explained that the new standard duties
test is ‘‘substantially similar’’ to the old
short duties test. 69 FR 22192–93; 69 FR
22214. The key difference between the
old short test and the old long test was
that the long test imposed a bright-line
20 percent cap on the amount of time
an exempt employee could spend on
nonexempt duties (40 percent for
employees in the retail or service
industries). The short duties test, in
contrast, did not impose a specific
limitation on nonexempt work because
the short test was intended to apply
only to workers who earned salaries
high enough that such a limitation was
unnecessary. The standard duties test
developed in 2004 takes the short test
approach and does not specifically limit
nonexempt work.
When moving to a standard duties test
based on the short duties test in 2004,
the Department relied on the
methodology we had historically used
to set the long test salary threshold, with
two changes. First, the Department set
the salary level based on the earnings of
exempt and nonexempt full-time
salaried employees. In previous
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rulemakings, the Department had
looked only at salary data on employees
who met the EAP exemption, who earn
higher salaries on average than
nonexempt salaried employees. See 69
FR 22166–67. Second, recognizing that
‘‘employees earning a lower salary are
more likely non-exempt,’’ the
Department offset the first change by
making an additional adjustment. Id.
The 2004 Final Rule set the salary level
to exclude from exemption
‘‘approximately the lowest 20 percent of
all salaried employees,’’ whereas
previously the Department set the salary
level to exclude ‘‘approximately the
lowest-paid 10 percent of exempt
salaried employees.’’ 69 FR 22168
(emphases added and in original); 69 FR
22166 (emphases added). By setting the
salary threshold at a higher percentile of
a data set that included employees
likely to earn lower salaries, the
Department explained that we reached a
final salary level that was ‘‘very
consistent with past approaches’’ to
setting the long test salary threshold. 69
FR 22167.
Although the Department also
recognized the need to make an
additional adjustment to the long test
salary level methodology because of the
move to the standard duties test, see 69
FR 22167, the salary level included in
the 2004 Final Rule ultimately did not
do so. The Department indicated that
the change in percentile could account
for both the fact that the data now
‘‘included nonexempt salaried
employees’’ and ‘‘the proposed change
from the ‘short’ and ‘long’ test
structure.’’ Id.; see 68 FR 15571. At the
same time, however, the Department
acknowledged that the change to the
20th percentile of exempt and
nonexempt salaried employees
produced a salary that was in fact
roughly equivalent to the salary derived
through the methodology previously
used to set the long test salary levels.
See 69 FR 22168. As the data tables in
the 2004 Final Rule show, the $455
salary level excluded only 8.2 percent of
likely exempt employees in the South
and 10.2 percent of likely exempt
employees in retail. See 69 FR 22169,
Table 4; see also 69 FR 22168 (‘‘The
lowest 10 percent of likely exempt
salaried employees in the South earn
just over $475 per week.’’).43
43 While the 2004 method and the Kantor long
test method produced similar salaries in 2004, the
salary levels yielded by these methods now diverge
significantly. Today, the 2004 method would
produce a salary level of $596 per week, while
using the Kantor long test method would result in
a salary level of $684 per week. See section VI.C.iii.
Thus, not only would using the 2004 methodology
today fail to account for elimination of the long
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Accordingly, the Department set the
standard salary level using a
methodology that yielded a result
consistent with the methodology we had
historically used to set the salary level
paired with the long duties test, even
though the new standard duties test was
based on the short duties test. This was
a methodological error, even if
employers at the time were primarily
using the less rigorous short duties test.
The fact that the long duties test was
unused because the Department had
neglected to update the salary
associated with it for 29 years does not
mean that we did not need to account
for the removal of the long test when the
standard test was established. The
Department is now correcting this error
by setting the salary level equivalent to
the 40th, rather than the 20th, percentile
of weekly earnings of full-time salaried
workers in the lowest-wage Census
Region (the South). This percentile
results in a salary level that is at the low
end of the historical range of short test
salary levels, based on the historical
ratios between the short and long test
salary levels, but is appropriately higher
than the historical long test salary
levels. By making this change to our
2004 methodology, the Department
better accounts for the fact that the
standard duties test is significantly less
rigorous than the long duties test and,
therefore, the salary threshold must play
a greater role in protecting overtimeeligible employees.
2. Purpose of the Salary Level Test
Several commenters that stated that
the Department’s proposed threshold is
too high asserted that the proposal alters
the purpose of the salary test and
inappropriately minimizes the role of
the duties test by excluding from the
exemption too many employees who
satisfy the standard duties test. In
support of this point, SHRM noted the
Department’s estimate that 25 percent of
white collar workers subject to the
salary level test who currently meet the
duties test would be overtime-protected
under the Department’s proposed salary
level. HR Policy Association stated that,
if the salary level was set according to
the Department’s proposed
methodology, 25 percent of accountants
and auditors, 24 percent of business and
financial operation managers, and 11
percent of ‘‘chief executives’’ would not
qualify for the EAP exemption in 2014.
Several commenters representing
employers stated that the salary level
has historically been set at a level such
duties test, it would result in a noticeably lower
salary level than the average long test salary level
between 1940 and 2004 in 2015 dollars.
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that ‘‘employees below it would clearly
not meet any duties test,’’ or would be
very unlikely to satisfy the duties
requirements. NRA; see also HR Policy
Association; Jackson Lewis; SHRM.
SHRM and others asserted that the
proposal would for the first time set the
salary level such that a large number of
employees who satisfy the duties test
would be excluded from the exemption,
which would therefore make them
overtime eligible. These commenters
pointed to the Department’s statement,
when setting the long test salary
thresholds in 1949 and 1958, that the
thresholds should not defeat the
exemption for ‘‘any substantial number
of individuals who could reasonably be
classified for purposes of the Act as
bona fide executive, administrative, or
professional employees,’’ and should
provide a ‘‘ready method of screening
out the obviously exempt employees.’’
Weiss Report at 8–9; Kantor Report at
2–3. Commenters asserted that because
only those who are ‘‘very likely to
satisfy’’ the duties tests earn salaries
above the Department’s proposed
threshold, see Jackson Lewis (emphasis
in comment), the Department has turned
the historical purpose of the salary level
‘‘on its head.’’ See PPWO. PPWO,
SHRM, and others further commented
that the Department’s proposal
improperly renders the duties test
superfluous and makes the salary level
test the ‘‘sole’’ determinant of exempt
status.
The Chamber, FMI, and SHRM also
stated that the Department lacks the
authority to set wages for, or establish
a salary level with the goal of,
improving the conditions of executive,
administrative, and professional
employees. IFA asserted that because
the Department’s proposal makes
nonexempt what IFA characterized as a
significant number of employees who
would clearly meet the duties test, the
proposal ‘‘expands the number of
employees eligible for overtime beyond
what Congress envisioned.’’
Commenters representing employees,
however, disagreed that the purpose of
the salary level is to identify employees
who are very likely to fail the duties
tests. NELA and other commenters
asserted that the primary purpose of the
salary level is to prevent employers
from inappropriately classifying as
exempt those who are not ‘‘bona fide’’
executive, administrative, or
professional employees. NELA noted
that the proposed threshold is lower
than the salaries of roughly 41 percent
of salaried workers who fail the duties
test, according to the NPRM, and AFL–
CIO commented that under the
proposal, ‘‘the percentage of overtime-
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eligible white collar salaried employees
above’’ the salary level ‘‘will still be
considerably higher than the percentage
of employees below the threshold who
meet the duties test.’’ Commenters
representing employees also disagreed
that the Department’s proposal would
prevent employers from taking
advantage of the exemption for a
substantial number of bona fide
executive, administrative, or
professional employees. For instance,
EPI noted that BLS scores occupations
by skill, knowledge, and responsibility,
and finds an hourly wage of about $24
(or $970 for a 40-hour workweek) is
below the salary level associated with
supervisory responsibilities.
As the Department explained in the
NPRM, the purpose of the salary level
test has always been to ‘‘distinguish
bona fide executive, administrative, and
professional employees from those who
were not intended by Congress to come
within these exempt categories.’’ 80 FR
38524. Any increase in the salary level
must therefore ‘‘have as its primary
objective the drawing of a line
separating exempt from nonexempt
employees.’’ Id. The salary methodology
established in this Final Rule fulfills
this purpose by effectively and
efficiently demarcating between white
collar employees who are overtime
protected and those who may be bona
fide EAP employees.
The Department does not believe that
the methodology adopted in this Final
Rule would defeat the exemption for too
many employees who pass the standard
duties test, or render the standard duties
test superfluous. There will always be
some employees performing EAP duties
who are paid below the salary
threshold, as well as overtime-eligible
employees who are paid above the
salary threshold (and thus whose status
turns on the application of the duties
test). See 80 FR 38527. Under the Final
Rule, 6.5 million white collar workers
who earn above the required salary level
do not satisfy the standard duties test,
representing 47 percent of the total
number of white collar workers who fail
the duties test. For these overtimeeligible salaried workers, the standard
duties test rather than the salary test
will dictate their exemption status. For
example, 48 percent of secretaries and
administrative assistants in banking
nationwide earn at or above the $913
per week salary level adopted in this
Final Rule, although at most 10 percent
of such workers are likely to pass the
standard duties test. Likewise, 71
percent of first-line supervisors of
mechanics, installers, and repairers in
the utilities industry nationwide earn at
least $913 per week, even though only
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10 to 50 percent of such workers are
likely to pass the standard duties test.
By contrast, of salaried white collar
workers who currently meet the
standard duties test, 5.0 million (22.0
percent) earn less than $913 per week,
and will thus be eligible for overtime
under this Final Rule. Whenever the
Department increases the salary level, it
is inevitable that ‘‘some employees who
have been classified as exempt under
the present salary tests will no longer be
within the exemption under any new
tests adopted.’’ Kantor Report at 5. As
we have explained, such employees
include ‘‘some whose status in
management or the professions is
questionable in view of their low
salaries,’’ and some ‘‘whose exempt
status, on the basis of their duties and
responsibilities, is questionable.’’ Id.
Moreover, as we have long been aware,
if too low a salary level is paired with
a duties test that does not specifically
limit nonexempt work, employers may
inappropriately classify as exempt
workers who perform large amounts of
nonexempt work. See 40 FR 7092. The
Department believes that many of the
workers who will no longer be exempt
as a result of this rulemaking would
have failed the long duties test and are
currently inappropriately classified
because of the mismatch between the
current standard duties test and the
standard salary level. To the extent that
commenters expressed concerns that the
proposal would exclude from
exemption too many bona fide EAP
employees in certain areas and
industries, the Department has
recalibrated the methodology in this
Final Rule to better take into account
salaries in low-wage regions and
industries, as discussed earlier, while
remaining cognizant of the
corresponding but opposite impact on
high-wage regions and industries. See
section VI.C.ii.
Commenters asserting that the
Department’s proposal turned the
purpose of the salary level test ‘‘on its
head’’ misconstrue the relationship
between the salary level test and the
duties test as it has existed throughout
most of the history of the part 541
regulations. The fact that an employee
satisfies the duties test, especially the
more lenient standard duties test, does
not alone indicate that he or she is a
bona fide executive, administrative, or
professional employee. The salary level
test and duties test have always worked
in tandem to distinguish those who
Congress intended the FLSA to protect
from those who are ‘‘bona fide’’ EAP
employees. The Department has long
recognized, moreover, that ‘‘salary is the
best single indicator of the degree of
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32413
importance involved in a particular
employee’s job,’’ Weiss Report at 9, and
‘‘the best single test of the employer’s
good faith in characterizing the
employment as of a professional
nature.’’ Stein Report at 42. Thus, the
Department acknowledged shortly after
we first promulgated the part 541
regulations that, in the absence of a
clause ‘‘barring an employee from the
exemption if he performs a substantial
amount of nonexempt work,’’ it
becomes ‘‘all the more important’’ to set
the salary level ‘‘high enough to prevent
abuse.’’ Stein Report at 26. This inverse
correlation between the salary level and
the duties requirements was the basis of
the separate short and long tests, which
co-existed until 2004.
As reflected in many comments
favoring a lower salary level, the
Department historically paired the long
duties test—which limited that amount
of nonexempt work an exempt
employee could perform—with a salary
level designed to minimize the number
of employees satisfying that test who
would be deemed overtime-eligible
based on their salaries. Even then, the
Department noted that the long test
salary level should exclude the ‘‘great
bulk’’ of nonexempt employees from the
EAP exemption. Weiss Report at 18.
When the Department enacted the short
test in 1949, however, we recognized
that this more permissive ‘‘short-cut
test’’ for determining exempt status—
which did not specifically limit the
amount of time an exempt employee
could spend on nonexempt duties—
must be paired with a ‘‘considerably
higher’’ salary level. Id. at 23. This
salary level, the Department explained,
‘‘must be high enough’’ to qualify for the
EAP exemption ‘‘only those persons
about whose exemption there is
normally no question.’’ Id. Accordingly,
the Department set the short test
threshold such that those who earned
above this level would meet the
requirements of the long duties test—
including the limit on performing
nonexempt work—‘‘with only minor or
insignificant exceptions.’’ Id. In other
words, the short test salary threshold
was sufficiently high that an employee
earning above this level was not only
‘‘very likely,’’ but nearly certain, to
satisfy the long duties test, as well as the
short duties test. Between 1949 and
1975, the Department adhered to these
principles by enacting short test salary
levels at approximately 130 to 180
percent of the long test salary levels.
The standard duties test adopted in
2004, and unchanged by this Final Rule,
is essentially the same as the old short
duties test. It does not specifically limit
the amount of time an exempt employee
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can spend performing nonexempt
duties. Accordingly, the Department
disagrees with commenters that suggest
that the current duties test can be paired
appropriately with a salary level derived
from the same methodology we have
historically used to set the salary level
paired with the long duties test. The
Department also disagrees, however,
with commenters that suggest the
current standard duties test could be
paired with a salary level derived from
the 50th percentile of full-time salaried
workers or from the 1975 short test
salary level without also reinstating a
lower-salaried long test. The
methodology adopted in this Final Rule
results in a salary level that is higher
than indicated by historical long test
methodologies, but at the low end of the
historical salary range of short test
salary levels, based on the ratios
between the short and long test salary
levels. The Department believes that
this approach strikes an appropriate
balance between protecting overtimeeligible workers and reducing undue
exclusions from exemption of bona fide
EAP employees. It also does so without
necessitating a return to the two-test
structure or imposing a quantitative
limit on nonexempt work—alternatives
that many of these same commenters
strenuously opposed. See section IV.F.
3. Data Used To Set the Standard Salary
Level
Some commenters representing
employers also raised concerns about
the Department’s use of the CPS data on
full-time nonhourly employees. The
Chamber and Fisher & Phillips
advocated that rather than calculate the
salary level using the CPS data, the
Department should create our own data
set of exempt salaried employees drawn
from WHD investigations and field
research. NAM stated that the CPS data
provides an ‘‘apples-to-oranges’’
comparison because it reflects all
nonhourly compensation, while the
Department’s proposal excludes certain
forms of compensation (for example,
some incentive pay) from counting
toward the salary threshold, and other
commenters made similar assertions.
The Chamber, Fisher & Phillips, and the
Iowa Association of Business and
Industry (IABI) also disagreed with the
Department’s conclusion that CPS data
on compensation paid to nonhourly
workers is an appropriate proxy for
compensation paid to salaried workers.
Employees sampled might be paid on a
piece-rate or commission basis, for
example, and thus, the Chamber stated,
the ‘‘non-hourly worker category is at
best a rough and imprecise measure of
workers paid on the basis required for
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exempt status.’’ In addition, IABI, the
International Foodservice Distributors
Association, and others criticized the
Department for declining to further
restrict the CPS sample by filtering out
various categories of employees—such
as teachers, lawyers, or federal
employees—based on statutory and
regulatory exclusions from FLSA
coverage or the salary requirement.
The Department continues to believe,
as we did in 2004, that CPS data is the
best available data for setting the salary
threshold. The CPS is a large,
statistically robust survey jointly
administered by the Census Bureau and
BLS, and it is widely used and cited by
industry analysts. It surveys 60,000
households a month, covering a
nationally representative sample of
workers, industries, and geographic
areas and includes a breadth of detail
(e.g., occupation classifications, salary,
hours worked, and industry). As the
Department explained in the NPRM, the
CPS offers substantial advantage over
data drawn from the pool of our own
investigations, because the Department’s
investigations contain too few
observations to yield statistically
meaningful results. See 80 FR 38528.
The Department considers CPS data
representing compensation paid to
nonhourly workers to be an appropriate
proxy for compensation paid to salaried
workers, as we explained in the NPRM.
See 80 FR 38517 n.1. The Department
believes that most nonhourly workers
are likely to be paid a salary, and
although the data may include earnings
of workers paid on a fee basis, the EAP
exemption can apply to bona fide
administrative and professional
employees compensated in this manner.
See § 541.605. Moreover, as explained
in greater detail in section IV.C., the
Department has adopted a change to the
salary basis test in this Final Rule which
will newly allow employers to satisfy as
much as 10 percent of the standard
salary level requirement through the
payment of nondiscretionary bonuses
and incentive pay (including
commissions). The Department
acknowledges that the CPS data set may
include some compensation excluded
from the salary test; however, we are not
aware of any statistically robust source
that more closely reflects salary as
defined in our regulations, and the
commenters did not identify any such
source.
Finally, the Department disagrees that
we should have excluded the salaries of
employees in various job categories,
such as teachers, doctors, and lawyers,
because they are not subject to the part
541 salary level test. These white collar
professionals are part of the universe of
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executive, administrative, and
professional employees who Congress
intended to exempt from the FLSA’s
minimum wage and overtime
requirements. Including them in the
data set achieves a sample that is more
representative of EAP salary levels
throughout the economy. Moving to an
even more standardized sample that
does not require adjustments also serves
the Department’s goal of making the
salary methodology as transparent,
accessible, and as easily replicated as
possible, and is consistent with the
President’s directive to simplify the part
541 regulations.
4. Comments Requesting a Phase-In of
the Proposed Increase
Many employers and commenters
representing them also expressed
concern about the magnitude of the
Department’s proposed increase from
the 2004 salary level. Under the
proposal, the salary level would have
increased from $455 a week to $972 per
week based on fourth quarter 2015 data,
a 113.6 percent overall increase and 9.5
percent average per year increase. Under
the Final Rule, the salary level will
increase to $913 per week, a 100.7
percent overall increase and 8.4 percent
average per year increase. Several
commenters, including the Chamber,
Littler Mendelson, and NAHB,
described the proposed percentage
increase in the salary level as
‘‘unprecedented.’’ Many commenters
urged the Department to gradually
phase-in an increase to the salary level.
SHRM, for example, stated that a
phased-in approach will provide some
flexibility to employers, allowing them
to gather information about the hours
that currently nonexempt employees
work and to budget for any increased
wages and other costs. Independent
Sector noted that an appropriate phasein period would allow non-profit
organizations to adjust to a new salary
level without reducing programs and
services. Some commenters advocating
an incremental approach, such as PPWO
and the Chamber, opposed the proposed
salary level, but requested a gradual
phase-in if the Department moves
forward with the proposal. Others did
not oppose the Department’s proposed
threshold, so long as the Department
phases in the increase. See, e.g.,
National League of Cities; the
Northeastern Retail Lumber Association;
United Community Ministries; Walmart;
Washington Metro Area Transit
Authority (WMATA).
Contrary to some commenters’
assertions, the magnitude of the salary
increase proposed by the Department is
not unprecedented. The 2004 Final Rule
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increased the then-current long test
salary level for executive and
administrative employees by 193.5
percent (from $155 to $455), and
increased the then-current short test
salary level by 82 percent (from $250 to
$455). See 69 FR 22123 (explaining that
the final rule nearly ‘‘triples’’ the
‘‘minimum salary required for
exemption’’). Further, as EPI pointed
out in its comment, in the
approximately 11 years between 1938
and 1949, the administrative long test
salary test increased 150 percent. The
Department acknowledges that this
rulemaking enacts a sizeable increase to
the 2004 salary level; however, such an
increase is necessary in order to reflect
increases in actual salary levels
nationwide since 2004 and correct the
2004 Final Rule’s mismatch between the
standard duties test and the standard
salary level based on the long duties test
level. As we explained in the NPRM,
this is the first time that the Department
has needed to correct for an incongruity
between the existing salary level and the
applicable duties test. That said, under
our proposal, the salary level effective
in 2016 would have been $50,544;
under the Final Rule, we project that the
salary level will not reach $50,000 until
the first update on January 1, 2020.
Additionally, as explained in section
II.G., this Final Rule has a delayed
effective date of December 1, 2016—
more than the 120-day delayed effective
date following publication of the 2004
Final Rule. The Department believes
that the timing of the effective date of
this Final Rule will help minimize
disruption as employers adjust to the
new salary level.
5. Impacts of the Increased Salary Level
Commenters identified many impacts
that they believed would flow from the
proposed increase in the standard salary
level. Commenters representing
employers and employees differed
dramatically on some of the predicted
impacts of the rule. In addition, where
commenters representing employers and
employees agreed on likely outcomes,
they viewed the advantages and
disadvantages of those outcomes quite
differently.
Many employers and their
representatives stated that employers
would not be able to afford to increase
the salaries of most of their currently
exempt employees to the proposed
level. Therefore, they stated that they
were likely to reclassify many of these
employees to overtime-protected status,
which they asserted would disadvantage
the employees in a number of ways and
would not increase their total
compensation. In contrast, employee
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advocates predicted that workers will
benefit from the increased salary level;
those who receive a salary increase to
remain exempt will benefit directly, and
those who are reclassified as overtime
eligible will benefit in other ways, as
detailed below.
Employers and their representatives,
including AH&LA, CUPA–HR, NAM,
NRF, and the National Small Business
Association (NSBA), suggested that they
would reclassify many employees to
overtime-protected status. For example,
the NGA surveyed its members, and 98
percent stated they would reclassify
some currently exempt workers, and 80
percent stated that they would reclassify
50 percent or more because they cannot
afford to increase their salaries. NCCR
commented that one restaurant chain
stated it likely would reclassify 90
percent of its managers and another
company with more than 250 table
service restaurants estimated that 85
percent of its managers have base
salaries below the proposed threshold.
CUPA–HR stated that 87 percent of
those responding to its survey of higher
education human resource professionals
stated ‘‘they would have to reclassify
any exempt employee currently making
less than $47,500’’ (emphasis in
comment).
Many employers and their
representatives stated that they would
convert newly nonexempt employees to
hourly pay and pay them an hourly rate
that would result in employees working
the same number of hours and earning
the same amount of pay as before, even
after accounting for overtime premium
pay. Also, some employers indicated
they might reduce their workers’ hours,
especially over time, in an attempt to
avoid paying any overtime premium
pay, so the formerly exempt workers’
hours and pay ultimately could be
lower. See, e.g., AH&LA; CUPA–HR;
Jackson Lewis; NAM; NRF; NSBA.
Some commenters gave specific
estimates of the percentage of newly
nonexempt employees who would have
their overtime hours limited. Associated
General Contractors of America (AGC)
surveyed its construction contractor
members and more than 60 percent
expected to institute policies and
practices to ensure that newly overtimeeligible employees do not work more
than 40 hours per week. ANCOR
surveyed service provider organizations
and more than 70 percent stated that
they would prohibit or significantly
restrict overtime hours. SHRM similarly
commented that 70 percent of its survey
respondents stated they would
implement restrictive overtime policies.
NRF cited an Oxford Economics report
and stated that 463,000 retail workers
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32415
would be reclassified to nonexempt
status and those employees who work
overtime would be converted to hourly
pay, with their earnings remaining the
same after their hourly rates of pay were
adjusted, while an additional 231,500
retail employees would be reclassified
to nonexempt status and have their
hours and earnings reduced.44
Not all employers indicated such high
numbers of employees would be
reclassified, converted to hourly pay, or
limited in hours. For example, NAM
stated that 41 percent of manufacturers
stated they would reclassify employees
and 37.2 percent stated they would then
reduce employees’ hours. NAHB stated
that 33 percent of survey respondents
indicated they would need to make
some change regarding construction
supervisors, and 56 percent of that
subgroup indicated they would take
steps to minimize their overtime.
However, only 13 percent of
respondents stated they would reduce
salary, and only 13 percent stated they
would switch employees from a salary
to an hourly rate.
Numerous employers and their
representatives, including AH&LA,
CUPA–HR, NCCR, Nebraska Furniture
Mart, NRA, NRF, OneTouchPoint, Pizza
Properties, Seyfarth Shaw, SHRM,
SIFMA, and the Salvation Army, also
commented that the employees who
were reclassified to nonexempt status
would be further disadvantaged because
they would lose valuable fringe benefits,
such as life insurance, long-term
disability insurance, increased vacation
time, incentive compensation, tuition
reimbursement, and increased
retirement contributions. They noted
that many employers offer such benefits
only to exempt employees, or provide
them to exempt employees at a greater
rate or at a reduced cost. In addition,
ANCOR and others stated that
nonexempt workers’ fringe benefits
would be negatively affected because
employers would take funds away from
such benefits in order to pay for the
increased costs of the rule. AGC
surveyed its construction contractor
members, and 40 percent expected
44 NRF commissioned Oxford Economics to
examine the impact of the Department’s rulemaking
on the retail and restaurant industries and attached
three documents produced by the firm to its
comments on the NPRM. The first document is a
report titled ‘‘Rethinking Overtime—How
Increasing Overtime Will Affect the Retail and
Restaurant Industries’’ and was published before
the Department issued the NPRM. The second
document is a letter dated July 17, 2015 that
updates the estimates provided in the ‘‘Rethinking
Overtime’’ paper in light of the Department’s
proposal. The third document is a letter dated
August 18, 2015 that examines states’ prevailing
wage levels and the Department’s automatic
updating proposal.
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affected employees to lose some fringe
benefits. With regard to those employees
who remain exempt and receive a
higher salary, some employer
representatives, including AH&LA,
NCCR, and NRF, stated that the
employees would not actually benefit
because employers would make other
changes, such as reducing or
eliminating bonuses or other incentive
compensation, in order to keep their
total labor costs the same. These
commenters viewed this as problematic
because these employees are in middle
management positions that are ‘‘key
steps on the ladder of professional
success’’ and incentive compensation is
an important motivator. AH&LA stated
that reducing incentive compensation
‘‘curtails the ability of employers to
reward their star employees,’’ although
they acknowledged that this concern
would be mitigated if incentive
compensation could count toward the
increased salary level. NAHB’s survey
results showed that 55 percent of those
employers who indicated that some
change for construction supervisors
would be necessary would reduce or
eliminate bonuses, while 33 percent
stated they would reduce or eliminate
other benefits.
Employer groups also stated that
employees reclassified to nonexempt
status and converted to hourly pay
would be harmed by the loss of
flexibility and the loss of the guarantee
of receiving the same salary every
workweek. Employers and their
representatives, including AH&LA,
American Bankers Association (ABA),
the Chamber, FMI, IFA, New Jersey
Association of Mental Health and
Addiction Agencies, OneTouchPoint,
PPWO, SIFMA, Seyfarth Shaw, and
SHRM, asserted that exempt status gives
employees the flexibility to come in
late, leave early, and respond to
unexpected events such as taking a sick
child to the doctor. Moreover, they can
do so without fear of losing pay for the
time spent away from work. Newly
overtime-eligible employees, these
commenters asserted, will have to
account for their time and they will
have to think more carefully about
taking unpaid time off to deal with
personal and family issues. Employer
representatives noted that another
benefit of exempt status is that many
employers allow exempt employees to
perform some of their work remotely
and outside of normal business hours,
such as from home during the evening,
as best suits the employees’ personal
schedules. See, e.g., AH&LA; American
Staffing Association; CUPA–HR; HR
Policy Association; Jackson Lewis;
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Maryland Chamber of Commerce;
SIFMA; Women Impacting Public Policy
(WIPP); YMCA. Commenters stated that
many employers do not allow
nonexempt employees this same
flexibility in work location and in the
ability to work during non-traditional
hours, as it is more difficult to monitor
their hours and ensure proper
compensation for all hours worked. For
example, SHRM stated that 67 percent
of its survey respondents indicated
decreased workplace flexibility and
autonomy were likely results of the
Department’s proposal.
Employer groups also stated that
employees reclassified to nonexempt
status will lose out on after-hours
management training programs and
committee meetings and thus have
fewer opportunities for career
advancement. See, e.g., AH&LA;
ANCOR; Construction Industry Round
Table; Credit Union National
Association; CUPA–HR; Jackson Lewis;
Kentucky Pharmacists Association;
Maryland Chamber of Commerce;
NCCR; NRF; New York State Restaurant
Association; PPWO; SIFMA; SHRM.
Many of these commenters also stated
that newly overtime-protected workers
will not be permitted to work extra
hours to get the job done as a way to
prove their talents and dedication, and
they will not be asked to perform the
most challenging and important
managerial functions. Employers
asserted that these changes will ‘‘hollow
out’’ the ranks of middle management,
limit existing career paths, and
negatively affect the newly nonexempt
employees’ promotion potential and
future earnings. See, e.g., Michigan
Chamber of Commerce; NCCR; NRF.
Many employers and their
representatives also emphasized that the
loss of exempt status will have a
negative impact on employee morale.
They stated that employees sought out
their management role and view their
exempt status as an indication of the
employer’s recognition of their
achievements and their position as part
of the management team. They stated
that the loss of exempt status will be
perceived as a demotion and
devaluation of their roles in the
organization, even if other aspects of
their compensation remain the same.
See, e.g., ANCOR; Chamber; CUPA–HR;
FMI; Jackson Lewis; NAM; NCCR; NGA;
NRA; Pizza Properties; SIFMA; SHRM;
Salvation Army. NRF cited a survey it
commissioned of 200 salaried retail and
restaurant managers showing that the
change in status would make 45 percent
of managers feel like they were
‘‘performing a job instead of pursuing a
career,’’ and 31 percent would feel
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limited in their ability to advance in
their careers.
Finally, employer representatives
identified a number of other negative
consequences that they believed would
flow from the adoption of the proposed
increase in the standard salary level. For
example, some employer groups,
including FMI, NRF, and WIPP,
emphasized that they believed
employers would eliminate full-time
jobs and create part-time jobs. FMI,
NGA, Seyfarth Shaw, and SHRM
indicated that employers would use
part-time workers to ensure that newly
overtime-eligible employees did not
have to work overtime hours. ANCOR,
NGA, Seyfarth Shaw, and the YMCA
also predicted that, as the hours of the
newly nonexempt workers are
restricted, employers will respond by
increasing the workload burden and
scope of responsibility of the managers
and supervisors who remain exempt.
Employees and employee advocates,
on the other hand, predicted that
workers would benefit in a variety of
ways from the proposed increase in the
standard salary level. First, they saw
direct benefits from the proposed salary
because, for those who remain exempt
but currently earn less than the
proposed increase, they will receive
additional pay each week in order to
raise them to the new salary level.
Employees who are reclassified to
nonexempt status will get more time
outside of work to spend with their
families or to engage in leisure activities
if their hours are reduced, and thus they
will have a better work-life balance;
alternatively, they will be paid timeand-a-half for any overtime hours they
work. Finally, work opportunities will
be spread as workers who had been
unemployed or underemployed will
gain additional hours. Employee
advocates viewed these outcomes as
consistent with the fundamental
purpose of the FLSA’s overtime
provision. See, e.g., AFL–CIO; American
Federation of Teachers (AFT); Legal Aid
Society-Employment Law Center (ELC);
National Women’s Law Center (NWLC);
Partnership.
Some advocates, including AFL–CIO,
AFT, and NELP, emphasized the
benefits of spreading employment in
light of the harms that come from
working long hours, citing studies
showing that long hours are related to
stress and injuries at the workplace and
increased incidences of certain chronic
diseases like heart disease, diabetes, and
depression. They also cited studies
showing the high cost to businesses
associated with absenteeism and
turnover due to workplace stress and
stated that productivity would improve
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by reducing turnover. The AFT noted
that if employers cut formerly exempt
workers’ hours and add more
nonexempt jobs, that would ‘‘likely
have a salutary effect on wages since the
low wage growth in our economy is
related to employment slack.’’
EPI disputed the employers’ claim
that wages and hours would remain the
same after employees were reclassified
to nonexempt status. EPI emphasized
that this view assumes that employees
have no bargaining power. However, EPI
stated that a ‘‘consistent finding of both
labor and macroeconomics is that
nominal wages are ‘sticky,’ meaning that
employers rarely will lower them.’’ EPI
concluded this is particularly likely to
be the case now, given that the
unemployment rate for college
graduates was just 2.6 percent in July
2015 and for those in ‘‘management,
professional, and related’’ occupations
was just 3.1 percent. Therefore,
employers will not be able to reduce
employees’ wage rates when they are
reclassified to nonexempt status to the
full extent that would be necessary for
the employees to receive no additional
compensation for overtime hours
worked. NELP similarly emphasized
that, at a time when even low-wage
employers are raising their starting
wages in order to attract and retain a
qualified workforce, it would be ‘‘a
foolhardy business practice’’ for
employers to risk losing formerly
exempt workers by decreasing their
wages and hours.
Worker advocates also disputed
employers’ claims that workers would
lose privileges and flexibility after they
were converted. For example, EPI
pointed to research based on the
General Social Survey showing that
salaried workers and hourly workers
experience similarly limited workplace
flexibility at levels below $50,000 per
year. The research showed that 43–44
percent of hourly workers paid between
$22,500 and $49,999 were able to
‘‘sometimes’’ or ‘‘often’’ change their
starting or quitting times. That
percentage only increased to 53–55
percent for salaried workers in that
same range. Only when salaries rose
above $60,000 did 80 percent of salaried
workers report being able to
‘‘sometimes’’ or ‘‘often’’ change their
starting or quitting times. Employees
paid hourly actually reported more
flexibility in the ability to take time off
during the work day to take care of
personal matters or family members,
with 41 percent of hourly workers
earning $40,000–$49,999 stating it was
‘‘not at all hard’’ compared to only 34
percent of salaried workers. Finally,
salaried workers reported slightly
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greater levels of work stress than hourly
workers, and they worked mandatory
overtime at the same frequency as
hourly workers and more days of
overtime in general.
Many of the comments from
individual exempt employees similarly
emphasized their lack of flexibility. For
example, a retail store manager
described working 55–60 hours a week,
with store staffing kept at the bare
minimum of two-person coverage.
Therefore, the manager has little
‘‘flexibility when an employee calls out
sick. I have to pick up the slack.’’ A chef
similarly stated that he routinely works
20–30 hours of overtime per week, and
has to modify his schedule to meet the
demands of the business, including by
filling in if an overtime-eligible cook
gets sick. Another exempt employee
who reported working 1136 hours of
overtime in three years (an average of
approximately 49 hours of work per
week) stated, ‘‘[i]f I complete my work
in 30 hours I still have to stay for the
required work hours of the company &
longer as required or requested.’’ A
manager of a community home for the
intellectually disabled concurred,
stating that the homes ‘‘have to be
staffed 24 hours a day, 365 day[s] per
year. To reduce[ ] organizational
overtime, managers are expected to
work when employees call in sick, are
on leave, and when a client is in the
hospital and needs a 24 hour sitter.
Managers also pitch in to help other
homes when there is a need.’’ Other
exempt workers similarly noted that
they are scheduled to staff specific shifts
and also are required to fill in for hourly
workers who call out sick, when
positions are vacant, when extra hours
are needed such as around the holidays,
or when the employer has to cut payroll
to meet its targets.
With regard to the loss of ‘‘status,’’
NELP commented that, even if
employers do reclassify some employees
to nonexempt status, there is no reason
to consider that a demotion. NELP
stated the employer can continue to give
nonexempt employees whatever job
titles are appropriate and is not required
to otherwise diminish their stature.
SEIU emphasized that it is not the
designation of ‘‘exempt’’ that provides
status to workers, but rather the pay and
benefits that should accompany that
designation. For example, most
registered nurses, who perform bona
fide professional duties and whose
earnings typically exceed the proposed
salary, nonetheless prefer to be paid
hourly and be overtime eligible. SEIU
concluded that ‘‘[b]eing classified as
ineligible for overtime is little comfort
to a worker who routinely works more
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32417
than forty hours a week and can barely
afford child care for the time she is
missing with her family.’’ The UAW,
representing postdoctoral scholars,
made the same point regarding status,
concluding that ‘‘their low pay indicates
that their employers do not view them
or treat them as bona fide
professionals.’’
Numerous individual employees also
stated that they would not perceive a
change from exempt to overtimeprotected status as a demotion. For
example, one employee stated that he
sometimes works seven days and more
than 55 hours per week, and that he
would ‘‘gladly move down to nonexempt and punch a time card. At least
I would finally be paid fairly for all the
hours I am putting in.’’ A retail store
manager similarly stated that he works
an average of 55–60 hours per week and
looks forward to either receiving an
increased salary or the return of his
personal life. He rejected the view that
exempt employees would feel demoted
by a change in status, saying he does not
want a meaningless title and would not
‘‘be embarrassed if my employees find
out I’ve been bumped to hourly again.’’
Another store manager with 12 years of
experience emphasized ‘‘I am NOT
concerned with the transition from
being exempt to non exempt if that were
to happen.’’ A convenience store
manager who works an average of 60–
65 hours per week stated that 7 of the
8 exempt employees he knows quit in
the past year due to being overworked
without any additional compensation,
and he stated that workers feel that an
exempt position is ‘‘a demotion rather
than a promotion.’’ Another exempt
employee stated that he believes that
businesses often use salaried positions
as a way to cut down on overtime costs,
and that the employers ‘‘who are
bemoaning the loss of ‘status’ for their
employees are probably those who have
used this trick to get more hours worked
for less money.’’
In response to some employers’
assertions that they will reclassify many
of their currently exempt employees to
overtime-protected status, convert them
to hourly pay, modify their pay so that
they work the same number of hours
and earn the same amount, and
potentially reduce their hours in the
long run, the Department estimates that
60.4 percent 45 of exempt affected
45 The Department stated in the NPRM that 74.7
percent of all affected workers were Type 1 workers
who did not regularly work overtime and did not
work overtime in the survey week; therefore, we
assumed they would not be paid an overtime
premium despite becoming overtime protected. See
80 FR 38574. However, as explained in section
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employees do not currently work any
overtime hours. As explained in detail
in the economic impact analysis in
section VI.D.iv., we expect there to be
relatively little change in the weekly
earnings or weekly hours of such
employees. We agree that for the
remaining employees, who do regularly
or occasionally work overtime hours,
the impact of the rule will depend upon
how their employers choose to respond,
and we recognize there likely will be a
variety of responses from which
employers can choose. For example,
employers will raise the salaries of some
employees to the new required level;
employers will reclassify some other
employees to nonexempt status and
provide minimum wage and overtime
protections and may attempt to
minimize the overall cost by modifying
those employees’ regular rates of pay
and reducing their hours. The economic
impact analysis discusses the range of
possible outcomes. However, as
explained in section VI.D.iv., based
upon our review of the economic
literature, the Department concludes
that the most likely outcome is that
affected workers who work overtime
hours and who are reclassified to
overtime-protected status on average
will receive increased earnings, because
employers will not be able to fully
adjust their regular rate of pay to the
extent necessary to provide only the
same level of earnings. As further
explained in the economic impact
analysis, workers whose exemption
status changes also will see their work
hours decrease on average, and the extra
hours will be spread among other
workers.46 The Department views these
outcomes as fully consistent with the
dual purposes of the FLSA’s overtime
requirement: (1) Spreading employment
by incentivizing employers to hire
additional employees, but rewarding
those employees who are required to
work overtime with time-and-a-half pay
for overtime hours; and (2) avoiding
detrimental effects on the health and
VI.D.iv., in response to comments that the
Department underestimated the number of affected
workers who work overtime, the Department has
now classified a share of workers who reported they
do not usually work overtime, and did not work
overtime in the reference week (previously
identified as Type 1 workers) as Type 2 workers
who work occasional overtime. Accordingly, we
now estimate that 60.4 percent of affected workers
will not receive any overtime premium.
46 Not all employers will choose to cover the
additional hours by hiring new employees.
Employers will balance the benefits of the
additional hours of work against the costs of hiring
workers for those hours. In some cases, this will
result in hiring new workers; in other cases,
employers will have incumbent workers provide
those additional hours.
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well-being of employees by minimizing
excessive working hours.
The Department recognizes that these
outcomes are averages and some
employees ultimately may receive lower
earnings if their employers reduce their
hours more extensively in an effort to
ensure that no overtime hours are
worked. However, such employees will
receive extra time off. Therefore, the
Department partially concurs with the
comments of the individual employees
and employee advocates who stated that
the overall impact of the rule would
benefit employees in a variety of ways,
whether through an increased salary,
overtime earnings when they have to
work extra hours, time off, and/or
additional hours of work for those who
were previously unemployed or
underemployed.
Some employers also asserted that
employees reclassified as nonexempt
would lose fringe benefits such as life
insurance, disability insurance,
increased vacation time, and bonuses
and other incentive compensation that
they provide only to exempt employees.
The Department notes that employers
may choose to continue to provide such
benefits to workers who employers like
ABA and IFA described as ‘‘critically
important’’; the design and scope of
such fringe benefit and incentive
compensation programs are within the
employers’ control. We see no
compelling reason why employers
cannot redesign their compensation
plans to provide such fringe benefits
and bonus payments based upon, for
example, the employees’ job titles rather
than based upon their exemption
status.47
With regard to the employer claim
that employees reclassified to overtimeprotected status would lose flexibility in
their schedule or the ability to take a
few hours off when needed for personal
purposes, the Department notes that the
employees who are affected by this
Final Rule currently earn a salary
between $455 per week and $913 per
week (or between $23,660 and $47,476
per year). The results of the General
Social Survey 48 research discussed in
47 Where nondiscretionary bonuses or incentive
payments are made to nonexempt employees, the
payments must be included in the regular rate when
calculating overtime pay. The Department’s
regulations at §§ 778.208–.210 explain how to
include such payments in the regular rate
calculation. One way to calculate and pay such
bonuses is as a percentage of the employee’s total
earnings. Under this method, the payment of the
bonus includes the simultaneous payment of
overtime due on the bonus payment. See § 778.210.
48 The General Social Survey, which started in
1972, is the largest project funded by the Sociology
Program of the National Science Foundation.
Except for the U.S. Census, it is the most frequently
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the EPI comment indicate that hourlypaid workers and salaried workers
earning between $22,500 and $49,999
have little difference in workplace
flexibility with regard to an employee’s
ability to modify his or her starting time
or quitting time; a substantial increase
in such flexibility is not seen until
workers earn above $60,000. Moreover,
workers paid hourly who earn between
$40,000 and $49,999 actually reported
more flexibility to take time off during
the day than salaried workers in that
pay range. Many of the comments the
Department received from individual
exempt employees similarly reflected a
lack of current flexibility, with
employees indicating they were
routinely scheduled to work well in
excess of 40 hours per week and also
had to fill in for other employees who
were out sick or on vacation or when
positions were unfilled. Therefore, the
Department does not believe that
workers will incur the significant
change in flexibility that some
employers envisioned if the employer
reclassifies them as nonexempt.
Employers also asserted that
employees whose exemption status
changes would lose the ability to work
from home and outside of normal
business hours, and they would lose the
ability to attend after-hours training
opportunities and meetings or to stay
late to ‘‘get the job done.’’ The
Department understands employers’
concerns regarding the need to control
and keep accurate records of the work
hours of overtime-eligible employees.49
However, this Final Rule does not
prohibit employers from continuing to
allow such employees flexibility in the
time and location where they work;
most employees affected by this Final
Rule are employees who employers now
trust to exercise discretion and
independent judgment with respect to
matters of significance on behalf of the
company or to supervise other
employees and play a role in hiring,
firing, and promoting other employees.
Employers should be able to trust such
valued employees to follow the
employers’ instructions regarding when,
where, and for how many hours they
may work and to accurately record their
hours worked.50 Moreover, as noted
analyzed source of information in the social
sciences. See https://www3.norc.org/GSS+Website/
About+GSS/.
49 The Department included in the fall 2015
Regulatory Agenda our intent to publish a Request
for Information seeking information from
stakeholders on the use of electronic devices by
overtime-protected employees outside of scheduled
work hours.
50 The Department notes that there is no
particular order or form of records required. See 29
CFR 516.1(a). Employers may choose whatever form
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above, an estimated 60.4 percent of
employees affected by this Final Rule do
not work overtime hours now; the
Department believes that any changes
for this substantial portion of affected
workers will be minimal. Further, the
Department notes that most employers
currently have both exempt and
nonexempt workers and therefore have
systems already in place for employers
to track hours. Nonetheless, for those
employees who do work overtime and
who become overtime eligible, the
employers will have to evaluate, for
example, whether training and other
activities that currently occur outside
the normal work day, and for which
employees currently receive no extra
pay, should be moved to within the
normal work day or whether they are
important enough to warrant payment
for any extra hours worked. However,
because the Department has concluded
that white collar employees earning a
salary of less than $913 per week are not
bona fide EAP workers, the Department
concludes that if the employees perform
extra work to ‘‘get the job done’’ they
should be paid for all such time.
Regarding the employer assertion that
the change in exemption status will
harm employees because they will not
be able to take time off without losing
pay for the time away from work, the
Department notes that employers are not
required to change employees’ pay basis
from salaried to hourly simply because
they are no longer exempt. Employers
may continue to pay employees a salary,
even when the employees are entitled to
overtime pay if they work in excess of
40 hours per week. See §§ 778.113–.114.
Moreover, even if newly overtimeeligible employees are converted to
hourly status, employers are not
required to dock such employees for the
hours they take off. Therefore,
employers have the authority to
determine how to structure the pay
plans of the newly overtime-eligible
employees, and employers need not
structure their pay plans in a manner
that results in the potentially adverse
effects that the employers identified.
Finally, employers asserted that the
loss of exempt status would have a
of recordkeeping works best for their business and
their employees. For example, employers may
require their employees to record their hours
worked; alternatively, some employers might
decide to record the hours themselves. Where an
employee works a fixed schedule that rarely varies,
the employer may simply keep a record of the
schedule and indicate the number of hours the
worker actually worked only when the worker
varies from the schedule (‘‘exceptions reporting’’).
29 CFR 516.2(c). Furthermore, the Department
believes that most employers already maintain
recordkeeping systems for their overtime-eligible
employees and that these systems can accommodate
newly overtime-eligible employees.
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negative impact on employees’ morale.
However, the Department believes that
for most employees their feelings of
importance and worth come not from
their FLSA exemption status but from
the increased pay, flexibility and fringe
benefits that traditionally have
accompanied exempt status, as well as
from the job responsibilities they are
assigned. None of these are
incompatible with overtime protection.
Many exempt employee commenters
expressed significant concern and low
morale regarding their current situation,
and they looked forward to an improved
situation under the new rule. Given the
employers’ emphasis on the important
roles that these employees play in the
success of their organizations, the
Department anticipates that employers
will strive to adapt to this rule in a way
that minimizes the financial impact on
their business while providing the
maximum benefits, flexibility, and
opportunities to their employees. If
employers make these changes in a way
that communicates the value they
continue to place on the contributions
of newly overtime-eligible workers, we
are confident that employers can
prevent employees from seeing their
new entitlement to overtime protection
as a demotion.
6. Impacts on Litigation
The Department also received several
comments predicting the impact
increasing the salary level would have
on litigation. Commenters representing
employees, such as the International
Association of Fire Fighters (IAFF),
stated that increasing the threshold
would more clearly demarcate between
employees who are entitled to overtime
and those who are not, decreasing
misclassification, and therefore,
litigation, involving the EAP exemption.
According to the joint comment
submitted by 57 labor law professors,
‘‘the excessive importance of the duties
test has resulted in the relatively high
volume of litigation surrounding the
exemptions and the many successful
claims that have been asserted against
employers in recent years,’’ so raising
the salary level ‘‘will benefit employers
by providing them more certainty and
relieve them of the litigation and other
costs of disputes over classification and
misclassification.’’ Weirich Consulting
& Mediation (Weirich Consulting)
commented in support of the salary
level change because it will make it
easier ‘‘to determine more efficiently—
and without needless litigation—
whether or not particular employees are
exempt.’’ Other commenters
representing employers disagreed,
however, with Jackson Lewis, NAM,
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32419
and the Wage and Hour Defense
Institute predicting that finalizing the
proposed salary level would increase
(rather than decrease) litigation. Jackson
Lewis commented that the duties test is
the main driver of litigation over the
EAP exemption, and ‘‘there will be no
end to litigation’’ so long as employers
must continue to apply the standard
duties tests to employees earning above
the salary threshold. Jackson Lewis and
NAM further asserted that the rule will
result in additional litigation brought by
‘‘very dissatisfied’’ newly overtimeprotected employees. Finally, Fisher &
Phillips commented that the ‘‘collateral
results’’ of selecting a particular salary
level, including avoiding or reducing
litigation, are not appropriate factors for
setting the salary level required for the
EAP exemption.
As we stated in the NPRM, the
number of wage and hour lawsuits filed
in federal courts increased substantially
in the period between 2001 and 2012,
from approximately 2,000 to
approximately 8,000 per year, with
stakeholders advising the Government
Accountability Office that one of the
reasons for the increased litigation was
employer confusion about which
workers should be classified as EAP
exempt. See 80 FR 38531. Thus, these
statistics support the Department’s
conclusion that the current standard
salary level was not effective in 2004 at
distinguishing between exempt and
nonexempt workers and is substantially
less effective today. Litigation under the
FLSA remains high, with approximately
8,000 FLSA cases continuing to be filed
each year.51
Although we did not establish the
standard salary level in this Final Rule
for the purpose of reducing litigation,
we believe that reduced litigation will
be one of the beneficial impacts of that
increase. The salary level will once
again serve as a clear and effective line
of demarcation, thereby reducing the
potential for misclassification and
litigation. See Weiss Report at 8 (the
salary tests prevent ‘‘the
misclassification by employers of
obviously nonexempt employees, thus
tending to reduce litigation. They have
simplified enforcement by providing a
ready method of screening out the
obviously nonexempt employees,
making an analysis of duties in such
cases unnecessary.’’). Given the new
standard salary level, there will be 9.9
million fewer white collar employees
for whom employers could be subject to
51 See https://www.uscourts.gov/statistics/table/c2/statistical-tables-federal-judiciary/2014/12/31;
https://www.uscourts.gov/statistics/table/c-2/
federal-judicial-caseload-statistics/2015/03/31.
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potential litigation regarding whether
they meet the duties test (4.2 million
currently EAP-exempt employees who
will be newly entitled to overtime
because they earn less than the new
standard salary and 5.7 million
overtime-eligible white collar
employees paid between $455 and $913
per week whose exemption status no
longer depends on the application of the
duties test).52
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7. Comments About Non-Profit
Employers
A substantial number of commenters
also addressed the impact that the
proposed standard salary would have on
non-profit employers. While many of
the concerns that the non-profit
employers expressed were the same as
those identified by other employers,
some of these commenters also
addressed particular concerns that they
believe they would face due to their
non-profit status.
Many non-profit employers, including
Habitat for Humanity, the National
Multiple Sclerosis Society, the New
Jersey Association of Mental Health and
Addiction Agencies, Operation Smile,
Catholic Charities, and the U.S. Public
Interest Research Group (USPIRG),
emphasized that non-profits generally
pay lower salaries than for-profit
employers, and therefore the proposed
salary level would not serve as an
effective dividing line between
employees performing exempt and
overtime-protected work in the nonprofit sector.
For example, USPIRG stated that 75
percent of employees it has classified as
exempt receive a salary below the 40th
percentile of full-time salaried workers
nationally. Operation Smile commented
that the proposed standard salary would
increase its payroll costs by nearly $1
million per year and affect more than 50
percent of its workforce. Habitat for
Humanity similarly stated that the
majority of its affiliates pay their highest
paid employee less than $50,440 and
estimated that approximately 40 percent
of its affiliates’ staff members would be
directly affected by the proposed salary
increase.
A number of non-profit commenters,
including the Alliance for Strong
Families and Communities, ANCOR,
Catholic Charities, Easter Seals, Habitat
for Humanity, and USPIRG, emphasized
that they do not have the same ability
as other employers to increase prices or
reduce the profits paid to shareholders
52 The Department estimates that 732,000 of these
white collar salaried workers are overtime-eligible
but their employers do not recognize them as such.
See section VI.C.ii.
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to compensate for the increased costs of
the proposed salary; some noted this is
because the prices for the services they
provide are set in government contracts
or by Medicaid, or because their
revenue is based on grants reflecting
labor costs at the time the grant is made
and there may be no option for seeking
an increase in funding. Several
nonprofits expressed concern that they
are constrained in their ability to
increase salaries for their staff because
funders evaluate them based on their
ability to keep overhead, including
salary costs, low, or because the terms
of their grants may strictly limit how
much of the grant can be allocated for
overhead. See, e.g., Boy Scouts of
America; Food Bank of Northern
Nevada; The Groundwater Foundation;
Operation Smile. Based upon these
funding issues, many commenters stated
that the unintended consequence of the
increased standard salary level would
be a decline in the quantity or quality
of the critical services they provide to
vulnerable individuals. See, e.g., CUPA–
HR; Father Flanagan’s Boys’ Home;
Lutheran Services in America; National
Multiple Sclerosis Society; Salvation
Army. Therefore, many non-profit
organizations requested that the
Department provide special relief for
non-profits such as: An exemption from
the salary requirement; a reduced salary
level for non-profits; an incremental
phased-in increase of the salary level
over a period of a year or more for nonprofits; a delayed implementation date
for non-profits; and the elimination of
automatic updating for non-profits. See,
e.g., Alliance for Strong Families and
Communities; Boy Scouts of America
(BSA); Boys and Girls Clubs of America;
Habitat for Humanity; Independent
Sector; United Community Ministries;
YWCA.
Nevertheless, despite their concerns
regarding the potential impact of the
proposed salary level, many non-profit
employers expressed their general
support for the intent and purpose of
the rule. See, e.g., Catholic Charities;
Easter Seals; Independent Sector;
Maryland Nonprofits; PathStone
Corporation; United Community
Ministries; YWCA. Moreover, some nonprofits, citing their role as both
employers and service providers,
supported the application of the NPRM
to non-profits as proposed. For example,
PathStone Corporation, and a comment
submitted by CASA on behalf of 21
additional non-profit organizations,
stated they fully supported the proposed
regulation, with the joint CASA
comment emphasizing that the ‘‘justice
we seek for our clients in the world
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must also exist within our own
organizations.’’ Similarly, Maryland
Nonprofits commented that ‘‘[t]he
nonprofit community recognizes better
than most the harsh economic realities
that lead to this proposed rule, and we
strongly endorse its purpose.’’
Other commenters indicated that the
impact on non-profit employers would
not be as significant as most non-profits
feared. For example, the comment
submitted by 57 labor law professors
noted that an economist found that
management employees working for
non-profits earned an average of $34.24
per hour in 2007, which far exceeds the
proposed salary level, and that they
presumably earn more than that now.
Therefore, they concluded that the
regulations ‘‘should not have a
deleterious effect on these valuable
organizations or their efforts to
accomplish their important missions.’’
EPI also stated that, where a non-profit
is engaged in revenue-producing
activities and, thus, is competing with
for-profit businesses, it ‘‘is only fair’’
that ‘‘it should be held to the same
employment standards’’ to achieve a
level playing field with regard to the
employees who are involved with that
commercial business or who are
engaged in interstate commerce. Other
commenters, such as the Wisconsin
Association of Family and Children’s
Agencies, questioned the wisdom of a
non-profit exemption, explaining that
for-profit agencies may perform the
same services as non-profits and rely on
the same government funding streams
and a non-profit exemption would not
help the similarly situated for-profit
service providers.
The Department recognizes and
values the enormous contributions that
non-profit 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. In
response to the commenters’ concerns,
we note that (as discussed in detail
above) we have modified the proposed
salary level to account for the fact that
salaries are lower in some regions than
others. This change yields a salary at the
low end of the historical range of short
test salaries. This lower final salary
level will also provide relief for nonprofit employers, just as it does for
employers in low-wage industries.
However, regarding the commenters’
suggestions that we create a special
exemption from the salary requirement,
a lower salary level, a delayed
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implementation date, or a phase-in
period for non-profits, we note that the
Department’s EAP exemption
regulations have never had special rules
for non-profit organizations; the
employees of non-profits have been
removed from minimum wage and
overtime protection pursuant to the EAP
exemptions only if they satisfied the
same salary level, salary basis, and
duties tests as other employees.
The Department concludes that such
special treatment is not necessary or
appropriate. As the comment from the
57 labor law professors noted, a study
of National Compensation Survey data
showed that the average hourly wage of
full-time management employees in the
not-for-profit sector was $34.24 per hour
in 2007 ($1,369 per 40-hour workweek),
which substantially exceeds the Final
Rule’s required salary of $913 per
week.53 The average hourly wage for
such management workers at nonprofits had increased to $38.67 by 2010
($1,547 per 40-hour week), which is
more than 50 percent higher than the
2016 required standard salary.54
Moreover, the average hourly wages of
non-profit employees are not uniformly
lower than those of employees in other
sectors. For example, in 2007 the
average hourly wages of both full-time
business and financial operations
employees and computer and
mathematical science employees
working at non-profits, $26.49 and
$32.00 per hour, respectively, exceeded
the average hourly earnings of such
workers employed in State
government.55 Wages of full-time
workers in healthcare practitioner and
technical occupations for non-profits
averaged $28.85 per hour in 2007,
higher than those for employees in the
same occupations in State and local
governments ($23.89 and $27.30,
respectively). Similarly, the 2007
average earnings of registered nurses
were $30.80 per hour at non-profits,
higher than those of registered nurses at
private establishments ($30.58) and at
State and local governments ($29.60).56
Based on CPS data, the Department
projects that for FY 2017, the median
53 See https://www.bls.gov/opub/mlr/cwc/wagesin-the-nonprofit-sector-management-professionaland-administrative-support-occupations.pdf. The
non-profit series was stopped in 2010 and the 2007
report on management, professional and
administrative support occupations is the most
recent data available.
54 See https://www.bls.gov/ncs/ncswage2010.htm
(Table 33).
55 See https://www.bls.gov/opub/mlr/cwc/wagesin-the-nonprofit-sector-management-professionaland-administrative-support-occupations.pdf.
56 See https://www.bls.gov/opub/mlr/cwc/wagesin-the-nonprofit-sector-healthcare-personal-careand-social-service-occupations.pdf.
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weekly earnings for affected workers in
non-profits will be $741.68 while the
median weekly earnings of affected
workers in the private sector will be
$745.54. The Department recognizes
however, that non-profit entities may
have a higher share of affected workers
than for-profit entities, but does not
believe that this will unduly impact this
sector. If all affected workers in the nonprofit sector who regularly work
overtime were increased to the new
salary level this would increase the total
amount that non-profits pay EAP
workers by 0.5 percent, compared to an
increase of 0.3 percent in other
sectors.57 Therefore, the Department
concludes that treating non-profit
employers differently than other
employers, such as by creating a special
salary level or an extended phase-in
period is not appropriate and is not
necessary, particularly given the fact
that the Final Rule modifies the
proposed rule by basing the standard
salary level on salaries in the lowestwage Census Region.
Finally, the Department also received
comments from a number of non-profit
higher education institutions. As
discussed above, some commenters
from the higher education community
also asked for guidance on the
application of the EAP exemption to
educational institutions. Additionally,
however, several commenters expressed
concern about the impact that the Final
Rule would have on higher education,
with some suggesting a lower salary
level for educational institutions. See,
e.g., Iowa Association of Community
College Trustees; CUPA–HR; Purdue
University; South Carolina Independent
Colleges and Universities. We recognize
that higher education is a complex and
important sector in our economy,
including a variety of both private and
public institutions, from small
community colleges to large research
institutions.
Commenters representing research
institutions raised concerns about the
impact of the proposed rule on
postdoctoral researchers. For example,
CUPA–HR noted that the National
Institutes of Health (NIH) stipend levels
for post-doctoral researchers are ‘‘well
below’’ the proposed salary level and
that post-doctoral researchers with less
than five years of experience would no
longer meet the salary level for
exemption. The Department notes that
the Final Rule salary level based on the
40th percentile in the lowest-wage
57 This is an overestimate as to both the non-profit
and for-profit sectors. As explained in section VI.D.
iv., we anticipate employers will increase the salary
level only for workers for whom it is less expensive
to pay the updated salary level than pay overtime.
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Census Region addresses some of these
concerns and results in a salary level
met by the NIH FY 2016 stipend level
for post-doctoral researchers with at
least three years of experience and is
only $208 a year above the stipend level
for a post-doctoral researcher with two
years of experience.
8. Other Comments
Like non-profit employers, other
commenters, including local
governments,58 Indian tribes, for-profit
entities receiving government funding,
and commenters writing on behalf of
small businesses, asserted that they do
not have the same ability as other
employers to increase prices or reduce
their profits.59 See, e.g., BFT Holding;
Charlotte County Government;
Jamestown S’Klallam Tribe. Some
commenters representing these groups,
as well as other commenters, requested
special treatment for certain industries
or employers. For example, some small
businesses and commenters
representing them, including the
American Association for Enterprise
Opportunity, California Association for
Micro Enterprise Opportunity, and
WIPP, requested an exemption for small
entities from the salary level or from the
FLSA’s requirements generally.
Likewise, the Gila River Indian
Community and the Ute Mountain Ute
Tribe submitted comments urging the
Department to ‘‘open consultation with
Indian tribes on the use of a lower salary
threshold for tribal entities’’ based on
‘‘the unique economic and demographic
factors that tribes face.’’ The Department
did not propose special treatment for
small businesses, tribal governments, or
other entities, and did not request
comment on these issues. The
Department believes such special
treatment is not necessary given that the
Final Rule modifies the proposed rule
by basing the standard salary level on
salaries in the lowest-wage Census
Region and this lower final salary level
will provide relief for these
stakeholders.
Conversely, some commenters
requested that the Department apply the
58 The Department notes that state and local
governments have greater options for satisfying
their overtime obligations than do private
employers. In particular, under certain conditions,
state or local government agencies may provide
their employees with compensatory time off (comp
time) instead of cash payment for overtime hours.
The comp time must be provided at a rate of oneand-one-half hours for each overtime hour worked.
For example, if a newly overtime-eligible state
government employee works 44 hours in a single
workweek, he would be entitled to 6 hours of
compensatory time off. See 29 CFR part 553.
59 Comments from state and local governments
and from Indian tribes are also addressed in section
VIII.
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salary level test to employees who have
historically not been subject to that test.
For example, the Department received
multiple comments from teachers,
university faculty, and their
representatives, asking us to repeal
§ 541.303(d), which provides that the
salary level requirement does not apply
to teaching professionals. See, e.g.,
National Association for the Education
of Young Children (NAEYC); NWLC;
New Faculty Majority Foundation;
SEIU. As the NAEYC acknowledged in
its comment, this request is ‘‘beyond the
scope’’ of the NPRM, which did not
propose changes to or invite comment
on § 541.303(d) or on § 541.600(e),
which also provides that the salary
requirement does not apply to teachers
and certain other professionals. See also
NWLC; SEIU. The Department notes
that regardless of their salary, teachers
qualify for the professional exemption
only if they have a primary duty of
teaching, tutoring, instructing or
lecturing in the activity of imparting
knowledge and are employed and
engaged in this activity as a teacher in
an educational establishment by which
they are employed.60 See § 541.303(a).
A number of comments, including a
joint comment from the AIA–PCI,
requested that the Department prorate
the new salary level for part-time
employees. The Department declines
this request. That employers currently
‘‘can afford to pay part-time exempt
employees the full salary required for
exempt status, even if they work just 15
or 20 hours per week,’’ as Seyfarth Shaw
noted in support of this request, merely
underscores the need to significantly
increase the 2004 salary level. The
Department has never prorated the
salary level for part-time positions, and
we considered and rejected a special
rule for part-time employees performing
EAP duties in 2004. See 69 FR 22171.
The Department continues to believe
that such a rule would be difficult to
administer, and notes that the FLSA
does not define full-time employment or
part-time employment, but leaves this
matter to be determined by employers.
Employees hired to work part time, by
most definitions, do not work in excess
of 40 hours in a workweek, and
overtime pay is not at issue for these
employees. An employer may pay a
60 The National Head Start Association and
several other commenters associated with Head
Start asked the Department to consider adopting the
position that all Head Start and Early Head Start
facilities are ‘‘educational establishments,’’ and
therefore that teachers at these facilities can meet
the professional exemption. The NPRM did not
propose changes to or invite comment on
§ 541.303(a) or § 541.204(b) (which defines
‘‘educational establishment’’), and the Final Rule
makes no changes to these sections.
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nonexempt employee a salary to work
part time without violating the
provisions of the FLSA so long as the
salary equals at least the minimum wage
when divided by the actual number of
hours the employee worked. See
FLSA2008–1NA (Feb. 14, 2008).
Employers can meet this standard with
a salary of as little as $145 for twenty
hours of work per week, and $217.50 for
30 hours of work per week—far below
even the 2004 salary level.61
Finally, a small number of
commenters, including the National
Automobile Dealers Association,
suggested that the Department should
eliminate the salary level test entirely,
so that the exempt status of every
employee would be determined on the
basis of their job duties and
responsibilities alone. The Department
has repeatedly rejected this approach,
and we do so again in this rulemaking.
The Department has long recognized
that ‘‘the amount of salary paid to an
employee is the ‘best single test’ of
exempt status,’’ and is the principal
delimiting requirement preventing
abuse. 69 FR 22172; Stein Report at 24.
Further, as the Department explained in
2004, eliminating the salary test is
contrary to the goal of simplifying the
application of the exemption, which the
President has directed us to do in this
rulemaking, and would require a
‘‘significant restructuring of the
regulations,’’ including the ‘‘use of more
rigid duties tests.’’ 69 FR 22172.
B. Special Salary Tests
i. American Samoa
As explained in our proposal, the
Department has historically applied a
special salary level test to employees in
American Samoa because minimum
wage rates there have remained lower
than the federal minimum wage. See 80
FR 38534. The Fair Minimum Wage Act
of 2007, as amended, provides that
industry-specific minimum wages rates
in American Samoa will increase by
$0.40 on September 30, 2018, and
continue to increase every three years
thereafter until each equals the federal
minimum wage. See Sec. 1, Public Law
114–61, 129 Stat. 545 (Oct. 7, 2015). The
minimum wage in American Samoa
currently ranges from $4.58 to $5.99 an
61 SIFMA noted that some employees who will
not meet the salary threshold because they work
part time, may nevertheless have responsibilities
during certain periods (for example, tax season) that
require them to work more than 40 hours in a week.
In such instances, if the employee earns less than
the standard salary level, the employee is eligible
to receive overtime premium pay for hours worked
over 40 in a week.
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hour depending on the industry,62 and
so the disparity with the federal
minimum wage is expected to remain
for the foreseeable future. Accordingly,
the Department proposed to continue
our longstanding practice of setting the
special salary level test for employees in
American Samoa at approximately 84
percent of the standard salary level,
which would have resulted in a salary
of $816 based on fourth quarter 2015
data for full-time salaried workers
nationwide.
The Department received only one
comment on this aspect of our
proposal—Nichols Kaster supported the
proposed increase. We conclude that the
proposed methodology remains
appropriate, and the Final Rule
accordingly sets the special salary level
for American Samoa at 84 percent of the
standard salary level set in the rule,
which equals $767 per week. The
Department has revised § 541.600(a)
accordingly.
ii. Motion Picture Producing Industry
The Department has permitted
employers to classify as exempt
employees in the motion picture
producing industry who are paid at a
base rate of at least $695 per week (or
a proportionate amount based on the
number of days worked), so long as they
meet the duties tests for the EAP
exemptions. See § 541.709. This
exception from the ‘‘salary basis’’
requirement was created in 1953 to
address the ‘‘peculiar employment
conditions existing in the [motion
picture] industry,’’ 18 FR 2881 (May 19,
1953), and applies, for example, when a
motion picture industry employee
works less than a full workweek and is
paid a daily base rate that would yield
at least $695 if six days were worked.
See id. Consistent with our practice in
the 2004 Final Rule, the Department
proposed to increase the required base
rate proportionally to the proposed
increase in the standard salary level test,
resulting in a proposed base rate of
$1,404 per week (or a proportionate
amount based on the number of days
worked). This method would have
resulted in a base rate of $1,487 based
on fourth quarter 2015 data for full-time
salaried workers nationwide.
The Department did not receive any
substantive comments on this subject;
two commenters, Nichols Kaster and the
UAW, offered general support for this
proposal. The Final Rule adopts the
methodology set forth in our proposal,
and using the new standard salary level
62 See WHD Minimum Wage Poster for American
Samoa, available at: https://www.dol.gov/whd/
minwage/AmericanSamoa/ASminwagePoster.pdf.
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($913) results in a base rate of $1,397
per week (or a proportionate amount
based on the number of days worked).63
The Department has revised § 541.709 to
incorporate this change.
iii. Other Comments Requesting Special
Salary Tests
The Department also received
approximately a dozen comments
concerning application of the proposed
salary level to Puerto Rico. Nearly all of
these commenters urged the Department
to either exempt Puerto Rico from the
updated standard salary level
requirement (thus keeping the salary
level at $455) or to reinstate a special
salary level test for Puerto Rico (set
between the current and proposed
salary levels).64 In 1949, the Department
established a special salary level for
Puerto Rico because its minimum wage
rate was below the FLSA minimum
wage. See 14 FR 7705–06 (Dec. 24,
1949); Weiss Report at 21. The Fair
Labor Standards Amendments of 1989
removed Puerto Rico from the special
minimum wage provisions and instead
applied the section 6(a)(1) minimum
wage to Puerto Rico. See Sec. 4, Public
Law 101–157, 103 Stat. 938 (Nov. 17,
1989). This change eliminated the
justification for maintaining a special
salary test in Puerto Rico, and so in the
2004 Final Rule we established that the
standard salary level test applies to
Puerto Rico. Puerto Rico continues to be
subject to the section 6(a)(1) minimum
wage, and the Department has
consistently maintained a uniform
salary level for all states and also for all
territories subject to the FLSA minimum
wage.
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C. Inclusion of Nondiscretionary
Bonuses, Incentive Payments, and
Commissions in the Salary Level
Requirement
As indicated in the NPRM, the
Department has consistently assessed
compliance with the salary level test by
looking only at actual salary or fee
63 The Department calculated this figure by
dividing the new salary level ($913) by the current
salary level ($455), and then multiplying this
product (rounded to the nearest hundredth) by the
current base rate ($695). This produces a new base
rate of $1,396.95, which we rounded to the nearest
whole dollar ($1397).
64 Commenters included the Cadillac Group of
Companies, Caribbean Restaurants, the Puerto Rico
Bankers Association, the Puerto Rico Chamber of
Commerce, the Puerto Rico Hotel & Tourism
Association, the Puerto Rico Manufacturers
Association, the Secretary of Labor for Puerto Rico
(the Honorable Vance Thomas), the Training and
Labor Affairs Advisory and Human Resources
Administration Office (OCALARH, by its Spanish
acronym), one individual commenter, and one
anonymous commenter. Two individual employee
commenters from Puerto Rico offered general
support for the Department’s proposal.
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payments made to employees and, with
the exception of the total annual
compensation requirement for highly
compensated employees, has not
included bonus payments of any kind in
this calculation. During stakeholder
listening sessions held prior to the
publication of the NPRM, several
business representatives asked the
Department to include nondiscretionary
bonuses and incentive payments as a
component of any revised salary level
requirement. These stakeholders
conveyed that nondiscretionary bonuses
and incentive payments are an
important component of employee
compensation in many industries and
stated that such compensation might be
curtailed if the standard salary level was
increased and employers had to shift
compensation from bonuses to salary to
satisfy the new standard salary level.
In recognition of the increased role
bonuses play in many compensation
systems, and as part of the Department’s
efforts to modernize the overtime
regulations, the Department sought
comments in the NPRM regarding
whether the regulations should permit
nondiscretionary bonuses and incentive
payments to count towards satisfying a
portion of the standard salary level test
for the executive, administrative, and
professional exemptions.65 Specifically,
the Department asked whether
employers should be allowed to use
nondiscretionary bonuses and incentive
payments, paid no less often than
monthly, to satisfy up to 10 percent of
the standard salary level test. To ensure
the integrity of the salary basis
requirement, the Department stressed
the importance of strictly limiting the
amount of the salary requirement that
could be satisfied through the payment
of nondiscretionary bonuses and
incentive pay, as well as the maximum
time period between such payments.
The Department did not propose any
changes to how bonuses are treated
under the ‘‘total annual compensation’’
requirement of the HCE test, and stated
that we were not considering changing
the exclusion of board, lodging, or other
facilities from the salary calculation or
expanding the salary level test
calculation to include discretionary
bonuses, payments for medical,
disability, or life insurance, or
contributions to retirement plans or
other fringe benefits. See, e.g., 80 FR
65 Promised bonuses such as those announced to
employees to induce them to work more efficiently
or to remain with the firm are considered nondiscretionary. See 29 CFR 778.211(c). Examples
include individual or group production bonuses,
and bonuses for quality and accuracy of work.
Incentive payments, including commissions, are
also considered non-discretionary.
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32423
38535–36, 38537 n.36. However, the
Department did seek comment on the
appropriateness of counting
commissions toward the salary level
requirement.
The requirement that exempt
employees be paid on a salary basis has
been a part of the Department’s part 541
regulations since 1940. As the
Department said at that time, ‘‘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
or she is properly within the exemption.
Stein Report at 26, see also id. at 19, 36.
Since 1940, therefore, the regulations
have required that an exempt EAP
employee be paid a predetermined and
fixed salary that is not subject to
reduction because of variations in the
quality or quantity of work performed.
More recently, the Department has
noted ‘‘that payment on a salary basis
reflects an employee’s discretion to
manage his or her time and to receive
compensatory privileges commensurate
with exempt status.’’ 69 FR 22177.
While, as the Department noted in the
NPRM, employers are allowed to pay
additional compensation beyond the
required salary in the form of bonuses,
those payments have not counted
towards the payment of the required
minimum salary level. The
Department’s discussion in the NPRM of
including nondiscretionary bonus
payments in the standard salary level
was informed by our concern that
permitting the standard salary level to
be satisfied by bonus payments that
frequently correlate to the quantity and
quality of work performed could
undermine the utility of the salary basis
requirement in identifying bona fide
EAP employees.
The Department received a variety of
comments concerning whether the
regulations should permit
nondiscretionary bonuses and incentive
payments to satisfy a portion of the
standard salary level test. Commenters
representing employers generally
supported this change as an
improvement over the current
regulations, though many objected that
the option the Department was
considering was too restrictive. Most of
the commenters representing employees
that addressed this idea opposed it on
the grounds that it would complicate
the test for exemption and undermine
the worker protections established by
the salary basis requirement.
Commenters representing employers
offered a range of reasons for generally
supporting the inclusion of
nondiscretionary bonuses and incentive
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payments. Many commenters, including
ACRA, the National Association of
Convenience Stores (NACS), and the
NRA, agreed that such payments are a
key part of exempt employees’
compensation in their industries. For
example, EBS Building Supplies stated
that its managers ‘‘can earn as much in
bonus payments as they earn in regular
salary during the year,’’ and Mill Creek
Companies stated that nondiscretionary
performance incentives can account for
‘‘up to 40% of a person’s total
compensation and are a most critical
part of our strategy to align the goals of
first line supervisors and professionals
with the goals of the company.’’
WorldatWork conducted a survey of
its human resources manager members
and found that ‘‘62% of respondents
said their employers offer
nondiscretionary incentive bonuses tied
to productivity and/or profitability.’’
Several trade associations reported
similar feedback from their members.
The World Floor Covering Association
stated that its ‘‘members have indicated
that many managers and administrators
receive bonuses based on the sales of
the stores that they manage or oversee,’’
and the National Pest Management
Association stated that 93 percent of its
member companies reported providing
some form of nondiscretionary bonuses.
The Chemical Industry Council of
Illinois and the National Council of
Farmer Cooperatives respectively
emphasized that nondiscretionary
bonuses ‘‘are an integral part’’ or ‘‘play
an important role’’ within an
employee’s total compensation package.
RILA noted that in the retail industry
‘‘many retail managers and other
exempt employees earn bonuses or
other incentive payments designed to
encourage a sense of ownership
consistent with their important
leadership roles within the
organization,’’ and that ‘‘[c]ounting nondiscretionary bonuses toward the
minimum threshold for exemption is
consistent with the purpose of the salary
level test—the payment, criteria, or
amount of these bonuses often reflects
the exempt status of the recipients.’’
Many commenters that opposed the
Department’s proposed increase to the
standard salary level, including
CalChamber Coalition, Fisher & Phillips,
FMI, Littler Mendelson, and the
National Association of Professional
Insurance Agents, acknowledged that
allowing employers to satisfy a portion
of the salary level with bonuses and
incentive payments would to some
extent mitigate the financial burden of
the proposed increase. Other
commenters, including IFA and the
Sheppard Mullin law firm, stated that
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not allowing nondiscretionary bonuses
and incentive payments to satisfy some
portion of the increased salary level
would likely reduce the prevalence of
those forms of compensation.
Among commenters that supported
the inclusion of nondiscretionary
bonuses and incentive payments in the
standard salary guarantee amount, many
objected that the option considered in
the Department’s NPRM was too
restrictive to be of much practical use
for employers. For example, several
commenters representing employers
criticized the Department’s proposal to
cap the crediting of nondiscretionary
bonuses or incentive payments at no
more than 10 percent of the standard
salary level, noting that bonuses,
incentive payments, and commissions
often comprise a far greater portion of
an exempt employee’s total
compensation. The Chamber stated that
‘‘unless the Department reconsiders its
proposed $50,440 salary level, a limit of
10 percent (or, $5,044) is too low to
provide any relief or make the
additional administrative burdens worth
the effort.’’ FMI, the National
Association of Truck Stop Operators,
Printing Industries of America, RILA,
Weirich Consulting, and a number of
other commenters requested that the
Department allow such compensation to
count for up to 20 percent of the
standard salary level. Other commenters
suggested a higher percentage, including
CalChamber Coalition (at least 30
percent), ACRA (at least 40 percent),
and HR Policy Association (50 percent).
Many commenters, including Fisher &
Phillips, the National Beer Wholesalers
Association, and the National Pest
Management Association, opposed the
imposition of any percentage cap on the
proportion of the salary level test that
could be satisfied with such payments.
Several commenters, however,
supported the Department’s 10 percent
limitation. See, e.g., Concord Hospitality
Enterprises; Fraternity Executive
Association.
Commenters also criticized the
Department’s decision to consider
crediting nondiscretionary bonuses and
incentive payments toward the salary
level test only if they are paid on a
monthly or more frequent basis.
According to AIA–PCI and PPWO, such
a limitation fails to account for the fact
that bonus payments ‘‘are typically
made less often than monthly because
they are tied to productivity, revenue
generation, profitability, and other
larger and longer-term business results
that can fluctuate significantly on a
month-to-month basis.’’ See also NRA.
AH&LA stated that many ‘‘supplemental
compensation programs in the lodging
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industry are not structured to be paid
with such frequency and it would place
a significant administrative burden on
employers to calculate and pay
incentive compensation on a monthly or
more frequent basis.’’ AH&LA and many
other commenters requested that the
Department credit bonuses and
incentive payments paid on an annual
basis against the salary level. HR Policy
Association pointed out that bonuses
paid annually are already included
within the ‘‘total compensation
requirement’’ under the HCE test, while
the Society of Independent Gasoline
Manufacturers (SIGMA) stated that
‘‘permitting employers to count bonuses
annually incentivizes them to hire
employees on an annual basis,
ultimately promoting job security and
long-term employment.’’ In the absence
of crediting annual bonuses, SIGMA and
several other commenters, including
IABI, AIA–PCI, the American Institute
of Certified Public Accountants, PPWO,
and Weirich Consulting, urged the
Department to credit bonuses and
incentive payments paid on a quarterly
basis or less frequently. Other
commenters favored the quarterly
frequency outright. See, e.g., American
Resort Development Association;
Fraternity Executives Association.
Fisher & Phillips and the NACS
opposed imposing any timeframe
limitation, but conceded that
‘‘experience suggests [quarterly] is a notuncommon frequency for the payment
of such amounts.’’
Several commenters requested that
the Department allow employers to
make catch-up (or ‘‘true-up’’) payments
to eliminate the risk of non-compliance
in the event that an employee’s bonuses
or incentive payments drop such that
the employee fails to satisfy the salary
level requirement in a given period. For
example, SIFMA wrote that they saw
‘‘no basis for distinguishing the use of
true-up payments outside of the context
of highly compensated employees,’’ and
remarked that ‘‘[a]llowing true-up
payments to count helps ensure that
exempt employees are receiving the
guaranteed income they anticipated and
is consistent with the historical salary
basis approach of ensuring guaranteed
income.’’ If annual catch-up payments
are not permitted, NRA urged the
Department ‘‘to permit employers to
make catch-up payments based on when
they pay the bonuses, i.e., monthly,
semi-annually, or quarterly.’’
Many commenters that supported the
crediting of incentive payments urged
the Department to also allow employers
to credit commissions. Several
commenters agreed with PPWO that ‘‘all
forms of compensation should be used
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to determine whether the salary level
has been met,’’ pointing out that the
CPS earnings data for nonhourly
employees that the Department is using
to derive the standard salary level
includes discretionary bonuses and
commissions. Many commenters
disputed the Department’s observation
in the NPRM that ‘‘employees who earn
commissions are usually sales
employees who . . . are generally
unable to satisfy the standard duties
test,’’ 80 FR 38536. AT&T stated that it
‘‘has management positions whose
responsibilities involve the supervision
of sales teams and support sales
channels that receive commissions as
part of their salaries and that have been
found to be exempt under the executive
and administrative exemptions,’’ and
the Chamber and FMI likewise
commented that in the real estate and
insurance industries ‘‘[m]any exempt
employees who perform little direct
sales work share commissions.’’ A few
other commenters pointed to a 2006
opinion letter advising that certain
‘‘registered representatives’’ in the
financial services industry qualify for
the administrative exemption even
though they receive commissions and
bonuses in addition to their salary. See
FLSA2006–43 (Nov. 27, 2006).
Other commenters urged the
Department to count discretionary
bonuses toward the salary level. For
example, PPWO stated that ‘‘[s]uch
payments are in many ways even more
reflective of an individual employee’s
efforts and contributions (and by
implication their exercise of
independent judgment and other
characteristics of the duties’ test) than
nondiscretionary bonuses.’’
Many commenters opposed
permitting nondiscretionary bonuses
and incentive payments to satisfy a
portion of the standard salary level test.
Some commenters stated that
nondiscretionary bonuses and incentive
payments do not indicate an employee’s
exempt status. For example, NELA and
Rudy, Exelrod, Zieff & Lowe wrote that
the types of nondiscretionary bonuses
described in the Department’s
regulations—including ‘‘bonuses that
are announced to employees to induce
them to work more steadily, rapidly, or
efficiently; bonuses to remain with the
employer; attendance bonuses;
individual or group production bonuses;
and bonuses for quality and accuracy of
work’’—are ‘‘intended to incentivize
workers of all types to perform their
duties well; but, do not afford them any
benefits of ownership.’’ These
commenters noted further that lower
level employees whom they have
represented also received these types of
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bonuses, and thus, the commenters
concluded that such bonuses ‘‘have no
bearing on whether an employee should
be excluded from overtime
requirements.’’ The Georgia Department
of Administrative Services and the
Mississippi State Personnel Board each
cautioned that there is ‘‘no guarantee
that the work rewarded by the bonus or
incentive payment will be FLSA exempt
in nature,’’ while KDS Consulting stated
that crediting bonuses and incentive
payments would undermine the premise
‘‘that management values the salaried
worker’s position for some reason
outside of time and task.’’
Several commenters asserted that
allowing nondiscretionary bonuses and
incentive payments to satisfy a portion
of the standard salary level would
dramatically complicate application of
the EAP exemptions, and introduce
periodic uncertainty regarding the
exempt status of employees who would
need such payments to meet the salary
level requirement. Nichols Kaster stated
that allowing nondiscretionary bonuses
and incentive payments to satisfy 10
percent of the standard salary level
‘‘could alter employees’ exempt status
on a weekly basis,’’ and put employers
in a position where they ‘‘would incur
substantial compliance costs reviewing
their payroll on a weekly or monthly
basis to determine which employees
satisfied the salary basis test’’ (emphasis
in comment). AFL–CIO and IAFF each
wrote that the proposal would be ‘‘in
direct contradiction to the purpose of
the proposed rule, which is to clarify,
streamline and simplify the
regulations,’’ while NELA and Rudy,
Exelrod, Zieff & Lowe commented that
‘‘[a]dding this component to the
threshold inquiry would only make the
calculation more confusing and spur
additional transaction costs to what
should be a straightforward
computation.’’ Nichols Kaster, NELA,
and The Labor Board, Inc., each warned
that allowing bonuses to satisfy a
portion of the standard salary level
would likely increase FLSA litigation,
while AFL–CIO noted that permitting
nondiscretionary bonuses and incentive
payments to satisfy a portion of the
standard salary level ‘‘could lead to
anomalous results’’ where employees
with similar job duties could be
classified differently depending on the
criteria for the bonuses.
Commenters also contended that
allowing nondiscretionary bonuses and
incentive payments to satisfy a portion
of the standard salary level would
undermine the scheduling flexibility
and income security associated with
exempt status, as codified in the salary
basis requirement. Nichols Kaster
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32425
opined that such a change ‘‘erodes the
salary basis test . . . [by] replac[ing] the
certainty of a salary with the uncertainty
of fluctuating compensation,’’ and
would have the practical effect of
reducing the standard salary level.
NELA and Rudy, Exelrod, Zieff & Lowe
agreed, stating that the Department’s
proposal ‘‘runs contrary to the stated
purpose of the salary basis test, which
is to make sure exempt employees are
guaranteed a minimum level of income
that is dependable and predictable to
meet their families’ monthly expenses
before they are exempted from the
protections of the overtime provisions of
the FLSA.’’ These commenters further
indicated that ‘‘[c]hanging the salary
threshold calculation to include
nondiscretionary bonuses would also
create a perverse incentive to employers
to move towards implementing more
deferred compensation pay structures.’’
Nichols Kaster wrote that ‘‘an exempt
employee who chooses not to leave
work early for a parent-teacher
conference for fear of missing a weekly
production metric loses some of the
benefit of her exempt status: The receipt
of her full pay for any week in which
she performs any work without regard
to the number of days or hours worked’’
(internal quotation marks and citation
omitted). Moreover, Nichols Kaster
asserted that ‘‘an ‘attendance bonus’ that
penalizes an employee for partial day
absences would be nothing more than
an end-around the existing prohibition
on partial day deductions from salary.’’
Finally, some commenters warned of
possible negative consequences that
might result from allowing bonuses and
incentive payments to satisfy a portion
of the standard salary level. For
example, the Georgia Department of
Administrative Services and the New
Mexico State Personnel Board stated
that crediting such payments would
create ‘‘a competitive disadvantage for
public sector employers,’’ because
public employers are not able to provide
non-discretionary bonuses and
incentive payments. KDS Consulting
speculated that allowing bonuses and
incentive payments to satisfy a part of
the standard salary level would
undermine the incentivizing value of
such payments, to the extent that
employers must pay them to maintain
the exempt status of their employees.
After considering the comments, the
Department has decided to permit
nondiscretionary bonuses and incentive
payments (including commissions) to
satisfy up to 10 percent of the standard
weekly salary level test, provided these
forms of compensation are paid at least
quarterly. The Final Rule revises
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§ 541.602(a) to incorporate this new
flexibility.
The Department analyzed comments
mindful of the need to ensure that the
salary level test accounts for employer
payment practices without
compromising the critical function of
the salary basis test, which is to serve
as a key indicator of exempt status.
Commenters representing employer
interests persuasively explained that
nondiscretionary bonuses are an
important part of many employer
compensation systems that cover EAP
employees. Modifying the tests for
exemption to incorporate this fact is
consistent with the President’s directive
to modernize the part 541 regulations.
The Department also recognizes the
concerns expressed by employee
advocates, however, that in some
instances nondiscretionary bonuses may
not be indicative of exempt status and
that counting such compensation
toward the standard salary level may
undermine the flexibility and income
security associated with exempt status.
While we share the concern that some
bonus and incentive programs cover
both overtime exempt and overtimeeligible employees, and the correlation
of those programs with exempt status is
therefore questionable, we are
persuaded overall that the provision of
nondiscretionary bonus and incentive
payments has become sufficiently
correlated with exempt status (for
example, as evidence of the overtime
exempt employee’s exercise of
management skill or exercise of
independent judgment) that its
inclusion on a limited basis in the
standard salary requirement is
appropriate. However, because such
payments also correlate directly or
indirectly in many instances with either
the quantity or quality of work
performed, we believe that careful limits
must be set on how nondiscretionary
bonuses and incentive pay are applied
to the salary level test.
The Department also sought
comments on the appropriateness of
including commissions as part of
nondiscretionary bonuses and other
incentive payments that could partially
satisfy the standard salary level test. In
the NPRM, we raised the concern that
it may be inappropriate to count
commissions toward the salary level
because employees who earn
commissions are usually sales
employees who—with the exception of
outside sales employees—are generally
unable to satisfy the duties test for the
EAP exemptions. Comments from the
Chamber, FMI, AT&T, and others have
convinced us that it is not uncommon
for employees who are not sales
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personnel, such as supervisors of a sales
team, to earn commissions based on the
sales of the employees they supervise.
Since such supervisors may satisfy the
duties test, the Department has
concluded that it is appropriate to treat
commissions like other types of
nondiscretionary bonuses and permit
them to be used to satisfy a portion of
the salary level test. Accordingly, we
have concluded that permitting
commissions to count against a limited
portion of the standard salary will not
undermine the effectiveness of the
salary basis test in identifying exempt
employees. This change will also ensure
that exemption status does not depend
on (and that this rulemaking does not
interfere with) whether an employer
chooses to label or structure a
nondiscretionary incentive payment as a
‘‘bonus’’ or as a ‘‘commission.’’ This
change is also consistent with the
Department’s position that certain
‘‘registered representatives’’ in the
securities and financial services
industry who receive commissions may
qualify for the administrative
exemption. See FLSA2006–43 (Nov. 27,
2006).
In the NPRM, the Department stated
that we were not considering expanding
the salary level test calculation to
include discretionary bonuses or
changing the exclusion of board,
lodging, or other facilities from the
salary calculation, a position that the
Department has held consistently since
the salary requirement was first
adopted. The Department also declined
to consider including in the salary
requirement payments for medical,
disability, or life insurance, or
contributions to retirement plans or
other fringe benefits. The Department
reemphasizes here that such forms of
compensation remain excluded from the
salary level test calculation.
Many commenters asked the
Department to increase beyond 10
percent the portion of the standard
weekly salary level employers could
satisfy using nondiscretionary bonuses
and incentive payments. After
consideration, the Department declines
these requests. Because the Department
has long found that the payment of a
fixed predetermined salary not subject
to change based on the quantity or
quality of work is a strong indicator of
exempt EAP status, it is important to
strictly limit the percentage of the salary
requirement that nondiscretionary
bonuses and incentive payments can
satisfy. Accordingly, setting the limit
above 10 percent could undermine the
premise of the salary basis test by
depriving workers of a predetermined
salary that does not fluctuate because of
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variations in the quality or quantity of
their work and thus is indicative of their
exempt status.66 We believe that a 10
percent limit is also appropriate given
that we are including nondiscretionary
bonuses, incentive payments, and
commissions as part of the salary level
test for the first time and the full impact
of this change on determination of EAP
status is not yet known. Because this is
the first time we have included
nondiscretionary bonuses, incentive
payments, and commissions, the
Department may revisit this threshold if
future experience supports additional
changes to § 541.602(a)(3).
The Department takes note of
comments from government employers
that expressed their view that inclusion
of nondiscretionary bonuses and
incentive payments in the salary level
creates a competitive disadvantage for
them. The Department believes that by
limiting to 10 percent the amount of
nondiscretionary bonuses and
commissions that can count toward the
required weekly minimum salary level,
we strike an appropriate balance which
allows employers to use expanded
sources of income to meet the required
salary level, does not unduly harm
government employers, and ensures that
the salary basis requirement remains ‘‘a
valuable and easily applied criterion
that is a hallmark of exempt status.’’ 69
FR 22175. The Department also
acknowledges the concern articulated
by AFL–CIO that this change to the part
541 regulations may result in employees
with similar job duties being classified
differently depending on the criteria for
the bonuses. However, such
discrepancies are unavoidable with a
salary requirement and already exist, for
example, when regional differences in
pay structure result in two employees
performing the same job in different
locations having different exemption
status.
The Department also requested
comments on whether payment on a
monthly basis is an appropriate interval
for nondiscretionary bonuses to be
credited toward the weekly salary
requirement. Numerous commenters
stated that a policy requiring payment
no less frequently than on a monthly
basis would fail to reflect current bonus
66 This 10 percent limit concerns an employer’s
ability to count nondiscretionary bonuses, incentive
payments, and commissions toward the salary level
requirement without violating the salary bases
requirement. This limit does not impact an
employer’s continued ability to provide an exempt
employee with additional compensation without
losing the exemption or violating the salary basis
requirement, provided the employment
arrangement also includes a guarantee of at least the
minimum weekly-required amount paid on a salary
basis. See § 541.604(a).
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payment practices and would make it
difficult for employers to utilize the new
regulation. The Department believes it is
appropriate to increase the permissible
bonus payment interval, and is
persuaded by comments from PPWO
and others suggesting that quarterly (as
opposed to monthly) payments of
nondiscretionary bonus and
commission income give employers
sufficient opportunity to measure,
quantify, and calculate payments tied to
productivity or profits. This lengthened
interval should also limit the
compliance costs that some commenters
suggested employers would incur from
having to review payroll on a monthly
(or more frequent) basis to determine
which employees satisfied the salary
level test. Accordingly, § 541.602(a)(3)
establishes that in order for
nondiscretionary bonuses and incentive
payments (including commissions) to
satisfy a portion of the standard salary
level test for the executive,
administrative, and professional
exemptions, such compensation must be
paid at least quarterly.
In response to commenter concerns,
the Department has also determined that
it is appropriate to permit a ‘‘catch-up’’
payment at the end of each quarter. This
will help decrease the administrative
burden on employers and ensure that
exempt employees receive the
compensation to which they are
entitled. The Department declines to
permit employers to make a yearly
catch-up payment like under the test for
highly compensated employees, as this
would significantly undermine the
integrity of the salary basis requirement,
which ensures that exempt workers
receive the standard salary level on a
consistent basis so that it serves as the
hallmark of their exempt status. This
concern is not implicated in the HCE
context because such employees must
receive the entire standard salary
amount each pay period on a salary or
fee basis and the annual catch-up
payment applies only to that part of
total annual compensation in excess of
the standard salary amount.
The Final Rule permits employers to
meet the standard salary level
requirement for executive,
administrative, and professional exempt
employees by making a catch-up
payment within one pay period of the
end of the quarter. In plain terms, each
pay period an employer must pay the
exempt executive, administrative, or
professional employee on a salary basis
at least 90 percent of the standard salary
level required in §§ 541.100(a)(1),
541.200(a)(1), or 541.300(a)(1), and, if at
the end of the quarter the sum of the
salary paid plus the nondiscretionary
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bonuses and incentive payments
(including commissions) paid does not
equal the standard salary level for 13
weeks, the employer has one pay period
to make up for the shortfall (up to 10
percent of the standard salary level).
Any such catch-up payment will count
only toward the prior quarter’s salary
amount and not toward the salary
amount in the quarter in which it was
paid. For example, assume Employee A
is an exempt professional employee
who is paid on a weekly basis, and that
the standard salary level test is $913 per
week. In January, February, and March,
Employee A must receive $821.70 per
week in salary (90 percent of $913), and
the remaining $91.30 in
nondiscretionary bonuses and incentive
payments (including commissions) must
be paid at least quarterly. If at the end
of the quarter the employee has not
received the equivalent of $91.30 per
week in such bonuses, the employer has
one additional pay period to pay the
employee a lump sum (no greater than
10 percent of the salary level) to raise
the employee’s earnings for the quarter
equal to the standard salary level.67 The
Department recognizes that some
businesses pay significantly larger
bonuses; where larger bonuses are paid,
however, the amount attributable
toward the EAP standard salary level is
capped at 10 percent of the required
salary amount.
The Department reemphasizes that
this rulemaking does not change the
requirement in § 541.601(b)(1) that
highly compensated employees must
receive at least the standard salary
amount each pay period on a salary or
fee basis without regard to the payment
of nondiscretionary bonuses and
incentive payments. While few
commenters addressed this precise
issue, the Clearing House Association
urged the Department to permit all types
of bonuses and incentive payments to
satisfy the entire HCE total
compensation requirement, including
the standard salary amount due each
pay period. While nondiscretionary
bonuses and incentive payments
(including commissions) may be
counted toward the HCE total annual
compensation requirement, the HCE test
does not allow employers to credit these
payment forms toward the standard
salary requirement. We conclude that
permitting employers to use
nondiscretionary bonuses and incentive
payments to satisfy the standard salary
amount is not appropriate because
67 If the employer chooses not to make the catchup payment, the employee would be entitled to
overtime pay for any overtime hours worked during
the quarter.
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32427
employers are already permitted to
fulfill almost two-thirds of the HCE total
annual compensation requirement with
commissions, nondiscretionary bonuses,
and other forms of nondiscretionary
deferred compensation (paid at least
annually). Thus, when conducting the
HCE analysis employers must remain
mindful that employees must receive
the full standard salary amount each
pay period on a salary or fee basis.
Finally, nothing adopted in this Final
Rule alters the Department’s
longstanding position that employers
may pay their exempt EAP employees
additional compensation of any form
beyond the minimum amount needed to
satisfy the salary basis and salary level
tests. See § 541.604(a). Similarly, as
noted in the NPRM, overtime-eligible
(i.e., nonexempt) employees may also
receive bonuses and incentive
payments. Where nondiscretionary
bonuses or incentive payments are made
to overtime-eligible employees, the
payments must be included in the
regular rate when calculating overtime
pay. The Department’s regulations at
§§ 778.208–.210 explain how to include
nondiscretionary bonuses in the regular
rate calculation.
D. Highly Compensated Employees
As noted in the NPRM, the
Department’s 2004 Final Rule created a
new highly compensated exemption for
certain EAP employees. Section
541.601(a) provides that such
employees are exempt if they earn at
least $100,000 in total annual
compensation and customarily and
regularly perform any one or more of the
exempt duties or responsibilities of an
executive, administrative, or
professional employee. Section
541.601(b)(1) states that employees must
receive at least $455 per week on a
salary or fee basis, while the remainder
of the total annual compensation may
include commissions, nondiscretionary
bonuses, and other nondiscretionary
compensation. The regulation also
clarifies that total annual compensation
does not include board, lodging, and
other facilities, and does not include
payments for medical insurance, life
insurance, retirement plans, or other
fringe benefits. Pursuant to
§ 541.601(b)(2), an employer is
permitted to make a final ‘‘catch-up’’
payment during the final pay period or
within one month after the end of the
52-week period to bring an employee’s
compensation up to the required level.
If an employee does not work for a full
year, § 541.601(b)(3) permits an
employer to pay a pro rata portion of the
required annual compensation, based
upon the number of weeks of
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employment (and one final payment
may be made, as under paragraph (b)(2),
within one month after the end of
employment).
The Department stated in the NPRM
that we continue to believe that an HCE
test for exemption is an appropriate
means of testing whether highly
compensated employees qualify as bona
fide executive, administrative, or
professional employees, but we
proposed to increase the total annual
compensation requirement and update
it automatically on an annual basis. In
the 2004 Final Rule, the Department
concluded that the requirement for
$100,000 in total annual compensation
struck the right balance by matching a
much higher compensation level than
was required for the standard salary
level test with a duties test that was
significantly less stringent than the
standard duties test, thereby creating a
test that allowed only appropriate
workers to qualify for exemption. See 69
FR 22174. This total annual
compensation requirement was set more
than four times higher than the standard
salary requirement of $455 per week,
which totals $23,660 per year. See id. at
22175. Such a balancing of a
substantially higher compensation
requirement with a minimal duties test
still is appropriate, so long as the
required annual compensation
threshold is sufficiently high to ensure
that it continues to cover only
employees who ‘‘have almost invariably
been found to meet all the other
requirements of the regulations for
exemption.’’ Id. at 22174.
In the NPRM, the Department
proposed to update § 541.601 by
increasing the total annual
compensation required for the highly
compensated test in order to ensure that
it remains a meaningful and appropriate
standard when matched with the
minimal duties test. The Department
noted that over the past decade, the
percentage of salaried employees who
earn at least $100,000 annually has
increased substantially to approximately
17 percent of full-time salaried workers,
more than twice the share who earned
that amount in 2004; therefore, we
proposed to increase the total annual
compensation requirement to the
annualized weekly earnings of the 90th
percentile of full-time salaried workers
nationally ($122,148 in 2013) to bring
the annual compensation requirement
more in line with the level established
in 2004. Consistent with the 2004
regulations, the Department also
proposed that at least the standard
salary requirement must be paid on a
salary or fee basis. The Department did
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Jkt 238001
not propose any changes to the HCE
duties test.
Commenters provided both support
for, and opposition to, the Department’s
proposal to increase the total annual
compensation requirement for the HCE
exemption, with some commenters
preferring a higher compensation level
and others preferring a lower level.
Additionally, some commenters
suggested that the HCE exemption
should be eliminated entirely, while
others suggested that the HCE duties test
should be modified or eliminated. Both
commenters representing employers and
those representing employees generally
provided much less comment on, and
analysis of, the HCE proposal than they
did regarding the other issues raised in
the NPRM, however, with many
commenters mentioning the HCE
proposal only in passing or not at all.
Among those who supported the
proposal as written, the American
Federation of Government Employees
(AFGE) indicated that the ‘‘new salary
threshold for the HCE exemption
provides a more accurate representation
of which employees might be classified
as exempt from the FLSA based on their
salary,’’ and stated that the 90th
percentile of annual earnings of fulltime salaried workers ‘‘provides an
objective basis for determining which
employees are truly ‘highlycompensated’ and likely to meet the
qualifications of exemption from the
FLSA.’’ The Printing Industries of
America also supported the proposal,
stating that ‘‘we believe this is an
appropriate level for this particular
test.’’ The Partnership indicated that
increasing the HCE compensation
threshold to the 90th percentile
accounts for the fact that its 2004 value
has eroded over time and ‘‘is
appropriate to ensure that only the most
highly paid employees are categorically
excluded from overtime requirements,
as was the rule’s intent when it was
adopted in 2004.’’
Some commenters stated that the
proposed HCE total annual
compensation requirement should be
increased so that the percentage of
employees falling within the new
compensation level matched the
percentage covered in 2004. For
example, NELA and Rudy, Exelrod,
Zieff, & Lowe indicated that ‘‘[i]n 2004,
6.3 percent of full-time salaried workers
earned a salary higher than the HCE
compensation level of $100,000 . . . [so
in] order to maintain the . . . 93.7
percentile figure, the Department would
need to increase the HCE compensation
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level to $150,000 per year.’’ 68 These
commenters asserted that such a level
‘‘is the proper approach if the
exemption truly is going to exclude only
those at the very top of the ladder,’’ and
indicated that a substantial increase
from the current HCE compensation
level is warranted to ‘‘reflect the
purpose of this test.’’ The commenters
also cited to the 2004 Final Rule in
which the Department stated that
‘‘virtually every salaried ‘white collar’
employee with a total annual
compensation of $100,000 per year
would satisfy any duties test.’’ 69 FR
22174. Nichols Kaster similarly stated
that the 90th percentile of salaried
earnings is ‘‘too low to offset the
minimal duties test of the HCE
exemption.’’ Nichols Kaster favored
eliminating the HCE exemption entirely
and stated that the ‘‘statutory text of the
FLSA does not contain an exemption for
highly compensated employees
(HCEs).’’ This commenter also stated
that there ‘‘is no causal connection
between high compensation and exempt
job duties,’’ and thus expressed the view
that ‘‘[s]uch a test does not accurately
define or delimit bona fide exempt
employees.’’ However, Nichols Kaster
stated that if the Department retains the
HCE exemption, the compensation level
should be increased to the 95th
percentile, should not include ‘‘catchup’’ pay, and should be based only on
salary payments.
Other commenters opposed the
Department’s proposed increase to the
HCE exemption’s total annual
compensation requirement. Tracstaffing
opined that there ‘‘is no compelling
reason to increase the minimum salary
level for highly compensated salaried
employees.’’ H–E–B similarly stated that
‘‘[t]here is no public policy justification
for paying overtime to an individual
receiving a six figure annual income.’’
SIFMA advocated ‘‘maintaining the
$100,000 threshold for the highly
compensated test, as the ‘bright line’
$100,000 mark furthers the goal of
simplifying the analysis of who qualifies
for the test.’’ The Chamber, the National
Lumber and Building Material Dealers
Association, NSBA, PPWO, Seize This
Day Coaching, and several other
68 In the 2004 Final Rule, the Department set the
total annual compensation amount at a level
approximating the highest 10 percent of likely
exempt employees. In the NPRM, we noted that the
HCE total annual compensation level covered
approximately the highest 6.3 percent of all fulltime salaried employees at the time it was set. 80
FR 38562; see 69 FR 22169 (Table 3). In
commenting on the current proposal, some
commenters addressed the proposal in terms of
likely exempt employees (10 percent) while other
commenters addressed the proposal in terms of all
salaried employees (6.3 percent).
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commenters all similarly commented
that the compensation level should
remain the same for the HCE exemption
test. The Clearing House Association
and SIFMA commented that the HCE
exemption should not have an
associated duties test.
The Department has considered the
comments regarding the HCE test for
exemption and revises § 541.601 to set
the total annual compensation required
for the highly compensated exemption
at the annualized weekly earnings of the
90th percentile of full-time salaried
workers nationally as proposed
($134,004 based on the fourth quarter of
2015). The Department disagrees with
comments asserting that the HCE
exemption compensation level should
not be increased. The highly
compensated earnings level should be
set high enough to avoid the unintended
exemption of employees who clearly are
outside the scope of the exemptions and
are entitled to the FLSA’s minimum
wage and overtime pay
protections.69 See 69 FR 22174.
The Department notes that it has been
12 years since the HCE annual
compensation level was set and, as with
the standard salary level, the 2004 value
has eroded over time. In FY2017,
approximately 20 percent of full-time
salaried workers are projected to earn at
least $100,000 annually, about three
times the share who earned that amount
in 2004. See section VI.C.iv. In order to
ensure that the HCE compensation level
remains a meaningful and appropriate
standard when matched with the
minimal duties test, the Department is
increasing the HCE compensation level
to the annualized weekly earnings of the
90th percentile of full-time salaried
workers nationally. This level, which is
generally consistent with the level
established in the 2004 Final Rule, is an
appropriate proxy for identifying those
white collar workers who may qualify as
bona fide EAP workers without
sweeping in overtime-eligible workers
in high-wage regions. In response to the
comments from employee
representatives suggesting the new HCE
compensation level should be even
higher, the Department does not agree
that a compensation level higher than
the 90th percentile is necessary to
ensure that virtually every salaried
69 As the Department has previously noted this
includes employees such as secretaries in highwage markets. Courts have also found that real
estate appraisers and chief inspectors also do not
qualify for the HCE exemption. See Boyd v. Bank
of America Corp., 109 F.Supp.3d 1273 (C.D. Ca.
2015) (real estate appraisers); Zubair v. EnTech
Engineering P.C., 808 F.Supp.2d 592 (S.D.N.Y.
2011) (chief inspector who tested ‘‘concrete and
paint sample and recommended project
improvement to the overall paint systems’’).
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Jkt 238001
white collar employee would satisfy any
duties test. The Department notes that
the value of tying the HCE
compensation level to wage data is that
it will keep the HCE compensation level
in tandem with increases in actual
wages and therefore not grow either too
slowly or too quickly. Therefore, the
Final Rule increases the total annual
compensation requirement to the
annualized weekly earnings of the 90th
percentile of full-time salaried workers
nationally, which based on fourth
quarter of 2015 data is $134,004.70
Additionally, the Department
proposed to maintain the requirement
that at least the standard salary amount
must be paid on a salary or fee basis.
Under the current rule, employees for
whom the HCE exemption is claimed
must receive the full standard salary
amount of $455 weekly on a salary or
fee basis. See § 541.601(b). The
Department proposed to maintain this
requirement, updating the amount that
must be paid on a salary or fee basis to
the 40th percentile of weekly earnings
of full-time salaried employees
nationally. The Final Rule maintains
this requirement, but modifies the
amount of the standard salary to the
40th percentile of weekly earnings of
full-time salaried workers in the lowestwage Census Region. The Department
further stated that should it adopt a
provision in the Final Rule permitting
employers to take a credit against the
payment of the standard salary level for
nondiscretionary bonuses, that credit
would not be applicable to the HCE
exemption. 80 FR 38537 n.36. As
previously discussed in section IV.C.,
the Department received almost no
comments addressing the exclusion of
bonus payments from satisfaction of the
salary requirement for HCE employees.
The Final Rule maintains the
requirement that employees for whom
the HCE exemption is claimed must
receive the standard weekly salary
amount on a salary or fee basis and does
not permit employers to credit
nondiscretionary bonuses for up to 10
percent of that salary payment as is
permitted under this Final Rule under
the standard salary test. Employers can
already credit such payments toward
the portion of the HCE total
compensation requirement in excess of
the standard salary level; the
Department does not believe that
allowing such payments to also satisfy
a portion of the standard salary level for
HCE employees would be appropriate.
A few commenters requested a
regional adjustment for the HCE salary
70 See www.bls.gov/cps/research_series_earnings_
nonhourly_workers.htm.
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32429
level. The Chamber stated that the
‘‘Department should set the highly
compensated test using actual salary
levels of exempt employees working in
the South and in the retail sector that
would meet the highly compensated
exemption requirements.’’ The
Department notes that no regional
adjustment has been made to the HCE
compensation level in this Final Rule,
just as this was not part of the 2004
Final Rule’s determination of the
compensation level required for the
HCE exemption. The HCE exemption
must use a national wage rate to
effectively ensure that workers such as
secretaries in high-wage areas, such as
New York City and Los Angeles, are not
inappropriately exempted based upon
the HCE exemption’s minimal duties
test.
The Department proposed in the
NPRM to annually update the HCE total
annual compensation requirement. As
explained in greater detail in the
automatic updating section, the
Department will automatically update
the HCE compensation level every three
years, beginning on January 1, 2020.
The Department did not propose any
changes to the HCE duties test created
in 2004 and makes no change to the
HCE duties test in this Final Rule. With
respect to the call by some commenters
to eliminate the duties test for the HCE
exemption, the Department notes that
we have consistently declined to adopt
a salary-only test, because our statutory
authority is to define and delimit who
is employed in a bona fide executive,
administrative or professional capacity,
and salary alone is not an adequate
definition. In the 2004 Final Rule, the
Department expressed our agreement
with commenters ‘‘that the Secretary
does not have authority under the FLSA
to adopt a ‘salary only’ test for
exemption, and reject[ed] suggestions
from employer groups to do so,’’ and
further noted that ‘‘[t]he Department has
always maintained that the phrase ‘bona
fide executive, administrative, or
professional capacity’ in the statute
requires the performance of specific
duties.’’ See 69 FR 22173. The
Department continues to require, as we
did in the 2004 Final Rule, that an
employee have a primary duty that
includes performing office or nonmanual work to qualify for the HCE
exemption, and workers such as
‘‘carpenters, electricians, mechanics,
plumbers, iron workers, craftsmen,
operating engineers, longshoremen,
construction workers, laborers, and
other employees who perform work
involving repetitive operations with
their hands, physical skill and energy
are not exempt under this section no
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matter how highly paid they might be.’’
§ 541.601(d).
With respect to Nichols Kaster’s
comment asserting that the HCE
exemption lacks a meaningful duties
test, the Department notes that pursuant
to § 541.601(a), HCE employees must
customarily and regularly perform any
one or more of the exempt duties or
responsibilities of an executive,
administrative, or professional
employee as identified in the
regulations. As noted in the 2004 Final
Rule, the ‘‘Department continues to find
that employees at higher salary levels
are more likely to satisfy the
requirements for exemption as an
executive, administrative, or
professional employee.’’ 69 FR 22174.
Therefore, ‘‘the purpose of section
541.601 was to provide a short-cut test
for such highly compensated employees
who have almost invariably been found
to meet all the other requirements of the
regulations for exemption.’’ Id. (internal
quotation marks omitted). As we noted
in the 2004 Final Rule, the ‘‘Department
has the authority to adopt a more
streamlined duties test for employees
paid at a higher salary level.’’ 69 FR
22173. We continue to believe that the
existing HCE duties test is appropriate
for those earning at the 90th percentile
of full-time salaried workers, especially
in light of the fact that the required
compensation level will be routinely
updated and, therefore, will remain a
meaningful test.
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E. Automatic Updates
As the Department noted in the
NPRM, even a well-calibrated salary
level that is fixed becomes obsolete as
wages for nonexempt workers increase
over time. Lapses between rulemakings
have resulted in EAP salary levels that
are based on outdated salary data, and
thus are ill-equipped to help employers
assess which employees are unlikely to
meet the duties tests for the exemptions.
To ensure that the salary level set in this
rulemaking remains effective, the
Department proposed to modernize the
regulations by establishing a mechanism
for automatically updating the standard
salary test, as well as the total annual
compensation requirement for highly
compensated employees. The
Department explained that the addition
of automatic updating would ensure
that the salary test level is based on the
best available data (and thus remains a
meaningful, bright-line test), produce
more predictable and incremental
changes in the salary required for the
EAP exemptions, and therefore provide
certainty to employers, and promote
government efficiency.
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The Department sought comments on
two alternative automatic updating
methodologies. One method would
update the threshold based on a fixed
percentile of earnings of full-time
salaried workers. The other method
would update the threshold based on
changes in the Consumer Price Index for
All Urban Consumers (CPI–U). The
Department also proposed to
automatically update the total annual
compensation requirement for the HCE
exemption with the same method
chosen to update the standard salary
test. Regardless of the method selected,
the Department proposed that automatic
updating for both thresholds would
occur annually, but invited comment
regarding whether a different updating
frequency would be more appropriate.
Finally, the Department proposed to
publish the updated rates at least 60
days before they take effect, and invited
comment regarding whether the
updated rates should take effect based
on the effective date of the Final Rule,
on January 1, or on some other specified
date. The Department received many
comments in response to these
proposals.
The Final Rule establishes that the
Department will automatically update
the standard salary level test by
maintaining the salary level at the 40th
percentile of weekly earnings of fulltime salaried workers in the lowestwage Census Region. The Department
will update the annual compensation
requirement for highly compensated
employees by maintaining this level at
the annualized value of the 90th
percentile of the weekly earnings of fulltime salaried workers nationwide. In
response to commenter concerns, the
Department has modified the frequency
and advance-notice elements of the
updating mechanisms. The Final Rule
establishes that automatic updates to the
standard salary level and the HCE
annual compensation requirements will
occur every three years on the first of
the year, and that the Department will
publish the updated rates in the Federal
Register at least 150 days before their
effective date, and post the updated
salary and compensation levels on the
WHD Web site. The first automatic
update will take effect on January 1,
2020. The automatic updating provision
is set forth in new § 541.607.
i. The Department’s Legal Authority To
Automatically Update the Salary Level
Most commenters that addressed
automatic updating focused on the
merits of the Department’s proposal, but
some discussed our authority to
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automatically update the salary level.71
Commenters that opposed automatic
updating discussed this issue more
frequently and in much greater detail
than those that favored the Department’s
proposal.
Organizations representing employee
interests, including AFL–CIO and
NWLC, asserted that the Department has
authority to establish an automatic
updating mechanism through notice and
comment rulemaking. These
commenters stated that just as the
Department has authority under 29
U.S.C. 213(a)(1) to establish the salary
level test, we likewise have authority to
automatically update the salary level to
ensure it remains effective. Several
commenters emphasized that Congress
has never limited the Department’s
ability to update the salary level. For
example, EPI stated that ‘‘Congress in
1938 gave the authority to define and
delimit the terms ‘bona fide executive,
administrative, or professional’ to the
Secretary of Labor and has never taken
it back, except with respect to very
particular occupations,’’ and a comment
from 57 labor law professors similarly
stated that automatic updating is
‘‘within [the Department’s] discretion
and authority’’ because ‘‘Congress
granted the agency wide discretion in
implementation of the statutory
language.’’ Other commenters, including
AFSCME and NELP, highlighted that
automatic updating is consistent with
the FLSA’s purpose.
In contrast, a number of organizations
representing employer interests
challenged the Department’s authority
to add an updating mechanism. Many of
these commenters, including ABC,
ALFA, CUPA–HR, NRA, PPWO, and
Seyfarth Shaw, stated that Congress has
never granted the Department authority
to institute automatic updating, and
asserted that section 13(a)(1)’s silence
on this issue reflects that Congress did
not intend the salary level test to be
automatically updated. These and other
commenters stressed that whereas
Congress has never amended section
13(a)(1) to expressly include automatic
updating, Congress has expressly
authorized indexing under other
71 Some commenters, like the Equal Employment
Advisory Council (EEAC), addressed the
Department’s authority to automatically update the
HCE compensation requirement by noting that its
reservations regarding automatic updating of the
standard salary level apply equally to the
Department’s proposal to automatically update the
HCE exemption’s threshold. We do not separately
address this issue since, like the standard salary
level, our authority to automatically update the
HCE threshold is grounded in section 13(a)(1), and
the discussion in this section therefore applies
equally to our adoption of a mechanism to
automatically update the HCE total compensation
requirement.
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statutes. Many commenters, including
the Chamber, CUPA–HR, and FMI,
highlighted that Congress has never
provided for automatic increases to the
FLSA minimum wage, and the Chamber
added that Congress has not indexed the
minimum hourly wage for exempt
computer employees under section
13(a)(17) of the FLSA, the cash wage for
tipped employees under section 3(m) of
the FLSA, or any of the FLSA’s
subminimum wages.
These comments reveal disagreement
about the scope of the Department’s
delegated authority under section
13(a)(1) to define and delimit the EAP
exemptions. The Department disagrees
with the position that section 13(a)(1)’s
silence on automatic updating
forecloses the Department from
establishing an updating mechanism.
While it is true that section 13(a)(1) does
not reference automatic updating, it also
does not reference a salary level or
salary basis test, a duties test, or other
longstanding regulatory requirements.
Rather than set precise criteria for
defining the EAP exemptions, Congress
delegated that task to the Secretary by
expressly giving the Department the
broad authority to define and delimit
who is a bona fide executive,
administrative, or professional
employee. As we explained in the
NPRM, since 1938 the Department has
used this authority to promulgate many
significant regulatory changes to the
EAP exemptions, including adding a
separate salary level for professional
employees and a separate duties test for
administrative employees in 1940,
adopting separate short and long test
salary levels in 1949, and eliminating
the long duties test and creating a single
standard salary level test and a new
HCE exemption in 2004. These changes
were all made without specific
Congressional authorization. Despite
numerous amendments to the FLSA
over the past 78 years, Congress has not
altered the Department’s authority to
promulgate, update, and enforce the
salary test regulations. The Department
concludes that just as we have authority
under section 13(a)(1) to establish the
salary level test, we likewise have
authority to adopt a methodology
through notice and comment
rulemaking for automatically updating
the salary level to ensure that the test
remains effective. This interpretation is
consistent with the well-settled
principle that agencies have authority to
‘‘ ‘fill any gap left, implicitly or
explicitly, by Congress.’ ’’ Long Island
Care at Home, Ltd. v. Coke, 551 U.S.
158, 165 (2007) (quoting Chevron,
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U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837,843 (1984)).
That other statutes expressly provide
for indexing does not alter our
interpretation of the FLSA. The
Department’s authority to set and
update the salary level test is based in
the language of the FLSA, and the fact
that there are indexing provisions in
other statutes does not limit that
authority. Moreover, three of the four
non-indexed FLSA wage rates that the
Chamber and other commenters
referenced—the section 6(a)(1)
minimum wage, the minimum hourly
wage for exempt computer employees
under section 13(a)(17), and the cash
wage for tipped employees under
section 3(m)—are set by statute.72 In
contrast, the salary level is purely a
creature of regulation. Whether
Congress has indexed statutorilyestablished rates within the FLSA does
not inform, let alone undermine, the
Department’s authority to use notice
and comment rulemaking to create a
mechanism for keeping the regulatory
salary level up to date.
The Department also received several
comments stating that automatic
updating violates section 13(a)(1)’s
mandate that the Secretary define and
delimit the EAP exemption from ‘‘time
to time.’’ For example, the Chamber
commented that this statutory language
gives ‘‘no indication that Congress
wanted to put these regulations on autopilot,’’ but instead supports that
‘‘Congress wants the Department to
‘continually revisit’ the Part 541
regulations’’ (emphasis in comment)
(quoting 80 FR 38537). However,
promulgating an automatic updating
mechanism does not conflict with
section 13(a)(1)’s ‘‘time to time’’
language. The salary level percentile
adopted in this rulemaking reflects the
Department’s analysis of the appropriate
line of demarcation between exempt
and nonexempt workers; providing that
this dividing line will continue to
remain up to date over time fulfills the
Department’s obligation to ensure that
only ‘‘bona fide’’ EAP workers qualify
for exemption. Moreover, maintaining
the salary level at the 40th percentile of
salaries in the lowest-wage Census
Region by updating it every three years
in no way precludes the Department
from revisiting this methodology from
‘‘time to time’’ should cumulative
changes in job duties, compensation
practices, and other relevant working
72 The Chamber also referenced the FLSA’s
subminimum wage rates. While the Secretary sets
some subminimum wage rates, the FLSA
establishes the existence of such rates. See, e.g., 29
U.S.C. 214(a) (minimum wage for learners,
apprentices, and messengers).
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32431
conditions indicate that changes to the
salary level calculation method may be
warranted.
The Department also received several
comments asserting that automatic
updating violates the APA and section
13(a)(1)’s requirement that the EAP
exemption be defined and delimited by
regulations of the Secretary subject to
the provisions of the APA. These
commenters asserted, albeit on slightly
different grounds, that notice and
comment rulemaking must precede any
salary level change. CUPA–HR
emphasized that under section 13(a)(1)
any updating must be done by
regulation, and EEAC asserted that ‘‘the
FLSA exemptions have the full force
and effect of law’’ and the ‘‘APA
requires notice-and-comment
rulemaking each time an agency issues,
repeals, or amends a legislative rule.’’
NRF stated that any increase should be
‘‘based on an individualized evaluation
of economic conditions rather than an
automatic arbitrary formula,’’ and
several commenters stressed that the
Department must consider prevailing
conditions and provide for public
comment before updating the salary
level. See, e.g., Jackson Lewis; NAM;
PPWO.
The Department believes that
automatically updating the salary level
fully complies with the APA and
section 13(a)(1). Through this
rulemaking the Department is
promulgating an automatic updating
mechanism by regulation and in
accordance with the APA’s notice and
comment requirements. The updating
mechanism is not an ‘‘arbitrary
formula,’’ but the product of an
exhaustive rulemaking process that took
into consideration the views of
thousands of commenters. These
comments raised a wide range of
relevant issues, including the impact of
an updating mechanism, and greatly
influenced the content of the Final Rule.
For example, in response to these
comments (and as discussed in detail
below) the Department adopted a fixed
percentile approach to automatic
updating, changed the updating
frequency from annually to every three
years, increased the period between
announcing the updated salary level
and the effective date of the update from
60 days to at least 150 days, and set
January 1 as the effective date for future
salary level updates. As to commenter
concerns about accounting for
prevailing economic conditions, both
the NPRM and this Final Rule contain
detailed 10-year projections of the costs
and transfers associated with automatic
updating. See section VI.D.x.; 80 FR
38586–89. Moreover, maintaining the
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salary level at a fixed percentile of
earnings will help ensure the test
continues to reflect prevailing wage
conditions, and does not preclude the
Department from revising the updating
mechanism in the future through notice
and comment rulemaking if we
determine that conditions warrant. We
disagree with commenter statements
that notice and comment rulemaking
must precede every salary level update
when the underlying salary setting
methodology is unchanged and reject
the notion that in directing the
Department to define and delimit the
EAP exemption by regulations, Congress
intended to prohibit the Department
from establishing an automatic updating
mechanism through notice and
comment rulemaking.
Relatedly, a few commenters
interpreted our NPRM statement that
automatic updating would remove ‘‘the
need to continually revisit this issue
through resource-intensive notice and
comment rulemaking,’’ 80 FR 38537, as
an attempt to impermissibly circumvent
the APA. See, e.g., Chamber; NRA. This
statement was not an attempt to sidestep
the APA, but rather part of our
explanation for seeking comment on the
merit of using an updating mechanism
to keep the salary level test current. The
Department has dedicated considerable
resources toward this rulemaking,
including conducting extensive
outreach prior to issuing the NPRM,
drafting a comprehensive NPRM,
receiving and reviewing more than
270,000 timely comments, and drafting
a Final Rule addressing these
comments. The Department recognizes
and appreciates the commenters’ views.
We disagree, however, that section
13(a)(1) or the APA prohibits us from
establishing a mechanism to keep the
salary level up to date so that it
continues to work effectively with the
duties test. Instead, we conclude that
introducing an updating mechanism
that ensures that the EAP exemptions
remain up to date is a reasonable
exercise of the Department’s statutorilyestablished authority to define and
delimit the EAP exemptions.73
The Department also received several
comments highlighting that in two prior
rulemakings we rejected commenter
requests to automatically update the
salary level. Specifically, some
73 This approach is consistent with the
Department’s approach taken when issuing
regulations to establish required wage rates in other
programs for which we have enforcement
responsibility. See 20 CFR 655.120 (describing
method for updating adverse effect wage rates for
H–2A visa program); 20 CFR 655.211 (using
Employment Cost Index to update required wage for
employees engaged in herding or the production of
livestock under the H–2A program).
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commenters raised that in our 1970
rulemaking we stated, in response to a
comment, that automatic updating
would ‘‘require further study,’’ 35 FR
884, and that we declined a similar
request in 2004. See, e.g., Chamber;
FMI. The Department acknowledged
these prior statements in the NPRM.
While we agree with commenters that
our decision to institute automatic
updating in this Final Rule departs from
our 1970 and 2004 rulemakings, these
past statements in no way foreclose our
current action. The 1970 rulemaking
stated that the request to automatically
update the salary level ‘‘appears to have
some merit, particularly since past
practice has indicated that
approximately 7 years elapse between
amendment of the salary level
requirements.’’ 35 FR 884. The time
between rulemakings has increased
since 1970 (this will be the third salary
level update in 46 years), underscoring
the merit of automatic updating.
Consistent with our earlier statement
that automatic updating ‘‘would require
further study,’’ the Department has
proposed the addition of an updating
mechanism in this rulemaking and
considered the wide-range of comments
received on the issue. While in the 2004
Final Rule we declined to institute
automatic updating and instead
expressed our intent ‘‘in the future to
update the salary levels on a more
regular basis, as [we] did prior to 1975,’’
69 FR 22171, our subsequent experience
has prompted us to reexamine this
matter.
Several commenters, including IFA
and Littler Mendelson, specifically
referenced our refusal to institute
inflation-based indexing in the 2004
Final Rule. In that rulemaking we
stated, in response to a comment, that
‘‘the Department has repeatedly rejected
requests to mechanically rely on
inflationary measures when setting the
salary levels in the past because of
concerns regarding the impact on lowerwage geographic regions and
industries.’’ 69 FR 22172. We then
stated that such ‘‘reasoning applies
equally when considering automatic
increases to the salary levels’’ and that
‘‘the Department believes that adopting
such approaches in this rulemaking is
both contrary to congressional intent
and inappropriate.’’ Id. In its comment,
the Chamber interpreted this language
as expressing our conclusion ‘‘that
Congress did not give the Department
authority to provide automatic increases
to the salary level’’ and stated that ‘‘the
Chamber is unaware of any legislative or
legal development that would justify
[our purported] reversal.’’
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These commenters’ reading of the
2004 Final Rule is overly broad, as we
did not conclude that the Department
lacks legal authority to institute
automatic updating. Our reference to
automatic updating simply reflected our
conclusion at that time that an inflationbased 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. As explained in the
NPRM, closer examination reveals that
concerns raised when setting a new
salary level using an inflation index are
far less problematic in the automatic
updating context. See 80 FR 38540. For
example, in the automatic updating
context there is little risk of using an
outdated salary level as a baseline for
inflation-based adjustments, and the
inability of inflation-based indicators to
account for changes in working
conditions is therefore less concerning.
See id. Regardless, our prior concerns
about inflation-based updating are not
implicated here because the Department
has chosen to automatically update the
salary level based on a fixed percentile
of earnings of full-time salaried workers.
As explained in detail in section IV.A.,
in response to commenter concerns that
setting the salary level using the 40th
percentile of a nationwide data set
would adversely impact low-wage
regions and industries, the Department
is setting the salary level at the 40th
percentile of full-time salaried workers
in the lowest-wage Census Region,
which yields a lower salary level that
will exclude fewer employees
performing EAP duties in low-wage
regions and industries. Tying the salary
level and updating mechanism to a
fixed percentile of earnings in the
lowest-wage Census Region squarely
addresses the concern we raised in the
2004 Final Rule, and ensures that our
updating mechanism is appropriate for
all areas and industries.
Several commenters, including
CUPA–HR and FMI, also deemed the
Department’s proposal inconsistent with
our statement in the 2004 Final Rule
that ‘‘the Department finds nothing in
the legislative or regulatory history that
would support indexing or automatic
increases.’’ 69 FR 22171. But as
explained in our proposal, the lack of
on-point legislative history—either
favoring or disfavoring automatic
updating—is unsurprising given the
origin and evolution of the salary level
test. Congress did not set forth any
criteria, such as a salary level test, for
defining the EAP exemptions, but
instead delegated that task to the
Secretary. The Department established
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the first salary level tests by regulation
in 1938, using our delegated authority to
define and delimit the EAP exemptions.
See 29 U.S.C. 213(a)(1). The fact that the
salary level tests were created by
regulation after the FLSA was enacted
accounts for the lack of legislative
history addressing the salary level tests
or updating methods. As previously
discussed, despite numerous
amendments to the FLSA over the past
78 years, and the Department making
many significant changes to the EAP
exemptions, Congress has not altered
the Department’s authority to
promulgate, update, and enforce the
salary test regulations. We agree with
commenters that instituting an
automatic updating mechanism departs
from the Department’s past practice, but
believe this is an appropriate
modernization and within the
Department’s authority.
The Department also received several
comments addressing the impact of
automatic updating on compliance with
the Regulatory Flexibility Act (‘‘RFA’’)
and Executive Order 13563, Improving
Regulation and Regulatory Review.
Seyfarth Shaw urged the Department to
not proceed with automatic updating in
part because this mechanism would
‘‘effectively bypass[]’’ these authorities.
PPWO raised similar RFA concerns and
characterized the Department’s
rulemaking as a ‘‘ ‘super-proposal,’
deciding once and for all what (in the
Department’s belief) is best without
consideration of its impact now or in
the future.’’ PPWO further stated that ‘‘it
would not be possible for the
Department to accurately estimate the
impact of the automatic increases in
future years as the workforce and the
economy are always changing.’’
The RFA requires a regulatory
flexibility analysis to accompany any
agency rule promulgated under 5 U.S.C.
553. See 5 U.S.C. 603–604. In
accordance with this requirement, this
rulemaking estimates the future costs of
automatic updating using the fixed
percentile approach. The RFA only
requires that such analyses accompany
rulemaking, and commenters have not
cited any RFA provision that would
require the Department to conduct a
new regulatory flexibility analysis
before each automatic salary level
update. In response to PPWO’s concern
about this rulemaking setting the salary
level updating process ‘‘once and for
all,’’ we reiterate that this Final Rule
does not preclude further rulemaking
should the Department determine that
future conditions indicate that revisions
to the salary level updating
methodology may be warranted.
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Similarly, 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 VI;
80 FR 38545, and commenters have
cited no portion of this directive that
would require notice and comment
rulemaking to precede future automatic
salary level increases made through the
updating mechanism established in this
rulemaking.
Finally, Fisher & Phillips and the
Southeastern Alliance of Child Care
Associations stated that because the
Department did not propose specific
regulatory text concerning automatic
updating, ‘‘adoption of any such
indexing mechanism would be unlawful
and without effect’’ under the APA.
These commenters did not specify the
provision of the APA that is purportedly
violated. The APA requires that the
notice of proposed rulemaking
published in the Federal Register
include either the terms or substance of
the proposed rule or a description of the
subjects and issues involved. See 5
U.S.C. 553(b)(3). The Department’s
proposal fully satisfies this standard,
which does not require the NPRM to
‘‘contain every precise proposal which
(the agency) may ultimately adopt as a
rule,’’ much less the specific regulatory
text. Ethyl Corp. v. EPA, 541 F.2d 1, 48
(D.C. Cir. 1976) (en banc) (internal
quotation marks and citations omitted).
The proposed regulatory text for each
exemption states that the salary level
will be updated annually (on a to-bedetermined date) and that the
Department will publish a notice with
the updated levels at least sixty days
before these rates become effective. See
80 FR 38610–11. The proposal also
explains why, rather than propose
regulatory text for a specific updating
method, the Department sought
comments on two alternatives (each of
which we discussed in depth). See 80
FR 38539. The Department’s NPRM
fully satisfies the APA.
ii. Rationale for Automatically Updating
Salary Levels
The Department proposed to establish
automatic updating mechanisms to
ensure that the standard salary test and
the HCE total annual compensation
requirement remain meaningful tests for
distinguishing between bona fide EAP
workers who are not entitled to
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32433
overtime and overtime-protected white
collar workers, and continue to work
effectively with the duties tests. The
Department’s proposal explained that
this change would ensure that these
thresholds are based on the best
available data and reflect prevailing
salary conditions, and will produce
more predictable and incremental
changes in the salary required for the
EAP exemptions. The Department
received numerous comments
addressing our automatic updating
proposal.
Commenters were sharply divided
over whether the Department should
automatically update the salary level.74
Employees and commenters
representing employee interests
overwhelmingly supported this change,
while most employers and commenters
representing employer interests opposed
automatic updating. Overall, those
supporting automatic updating
generally agreed with the Department’s
rationale presented in the NPRM and
emphasized the benefits to employees
and employers of maintaining an up-todate salary level, while those in
opposition challenged the Department’s
rationale and emphasized the burdens
annual updating would impose on
employers. Several employers favored
automatic updating, but requested that
updates occur less frequently than on an
annual basis. Additionally, some
commenters that opposed automatic
updating nonetheless expressed a
preference for a particular updating
methodology should the Department go
forward with this aspect of our
proposal.
Commenters that supported automatic
updating focused primarily on the
benefits of maintaining an up-to-date
salary level. Many commenters agreed
with the Department’s proposal, stating
that automatic updating is a transparent
way to maintain an effective salary level
and avoid the negative effects of
infrequent salary level updates. For
example, NELP stated that automatic
updating ‘‘is by far the most reasonable,
efficient and predictable way to ensure
that the standard for exemption remains
true to the statute’s intended purposes,’’
AFL–CIO stated that a ‘‘transparent
updating process would provide greater
certainty and predictability for
employers and workers alike,’’ and
74 Relatively few commenters specifically
addressed the proposal to automatically update the
HCE total annual compensation level, and those
that did generally stated that their views mirrored
their comments on the proposal to automatically
update the standard salary level. Accordingly, this
discussion focuses on the standard salary level but
also applies to the Department’s adoption of an
automatic updating mechanism for the HCE
compensation requirement.
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Bend the Arc, Employment Justice
Center, Maintenance Cooperation Trust
Fund, and several other worker
advocacy groups stated that indexing
‘‘the salary threshold to an objective
measure provides a predictable and
efficient way to ensure that those
workers intended to be covered by the
[FLSA] get its protections.’’ Many other
commenters made similar statements.
See, e.g., AARP; AFT; EPI; the Gillespie
Sanford law firm; Labor and
Employment Committee of the National
Lawyers Guild-New York City Chapter;
NWLC.
Commenters supporting automatic
updating also frequently discussed, and
viewed the Department’s proposal as a
solution to, the Department’s past
inability to regularly update the salary
level. These commenters emphasized
that automatic updating would increase
predictability in both the frequency and
size of salary level changes, benefiting
employers and employees. See, e.g.,
Comment from 57 labor law professors;
AFL–CIO; Partnership. Several
commenters representing employer
interests viewed automatic updating as
a means of producing more predictable
salary level changes. See, e.g., American
Council of Engineering Companies; CVS
Health. Similarly, SIGMA supported
automatic updating because ‘‘[s]udden,
large adjustments to the threshold
without warning can cause dislocation
in the industry, increase compliance
costs, and provide disincentives to
employing people on a salaried rather
than an hourly basis.’’ ANCOR stated
that ‘‘steadier, more predictable’’ salary
level changes would ‘‘likely benefit
providers who will be able to adjust to
smaller, more frequent changes better
than to larger, less frequent ones.’’
Some commenters that supported
automatic updating, including Athens
for Everyone, NELA, Rudy, Exelrod,
Zieff & Lowe, and many others, stressed
that a fixed salary level harms
employees because inflation causes the
salary threshold’s real value to decline
over time. AFSCME submitted
campaign comments from 24,122 of its
members who agreed that ‘‘overtime
protections have been eroded by
inflation,’’ and highlighted the ‘‘need to
index these protections to keep them
from being eroded again in the future.’’
NELA and Rudy, Exelrod, Zieff & Lowe
also stated that this decline particularly
harms workers earning just below the
fixed salary level when it is first set,
because they will ‘‘soon see that figure
fall below their salary’’ and lose
overtime protection even if ‘‘the real
value of their salary stays entirely
constant.’’ Likewise, Nichols Kaster
stated that infrequent salary level
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updates have harmed workers earning
just above the salary threshold when it
is first set, as these workers have ‘‘no
protection against working long hours
for diminishing returns.’’
A number of commenters also raised
the related view that automatic updating
would decrease inappropriate
classification of lower salaried white
collar employees as exempt. AFGE,
IAFF, and others noted that the salary
level’s effectiveness at distinguishing
between exempt and nonexempt
workers diminishes over time as the
wages of employees increase and the
real value of the salary threshold falls.
SEIU and a number of worker advocacy
groups, including Equal Justice Center,
NDWA, and Texas RioGrande Legal Aid,
asserted that infrequent salary level
updates have permitted employers to
sweep too many low-salaried workers
into the exemption, with NELP citing
the proximity of the current salary
threshold to the poverty level as a
‘‘potent example’’ of how the ‘‘current
method of setting fixed levels results in
outdated thresholds and ballooning
numbers of workers improperly subject
to employer classification as exempt.’’
Some commenters, including AFL–CIO
and UFCW, asserted that failing to
regularly update the standard salary
level also exposes growing numbers of
workers who fail the standard duties
test to the ‘‘risk of misclassification.’’
The Department received numerous
comments from employers and groups
representing employers opposing the
introduction of an automatic updating
mechanism. These commenters raised a
variety of concerns and urged the
Department not to finalize this aspect of
our proposal. Consistent with how
many commenters organized their
comments, these views are aptly
separated into two broad categories:
Those addressing whether automatic
updating is appropriate as a general
matter, and those discussing potential
financial and administrative effects of
automatically updating the salary levels
on an annual basis. Both of these broad
categories of comments are discussed
below.
Some commenters cited the
Department’s past refusal to institute
automatic updating and emphasized
that the part 541 regulations have
benefited from the rulemaking process.
For example, the Chamber, FMI, and
others stated that rulemaking has
generated vigorous public debate about
the salary levels, and that the
Department has increased and
decreased proposed salary levels in
response to public comment—including
in 2004 when the Department increased
the proposed salary level and HCE
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compensation requirements in our final
rule. PPWO stated that the
‘‘Department’s own actions in reaching
out to the regulated community before
publication of the NPRM, as well as
soliciting input on the salary level in the
NPRM itself, demonstrate the
importance of notice-and-comment on
the salary level.’’
Many commenters stated that the
Department should only update the
salary level when conditions warrant,
not automatically. CUPA–HR
commented that the rates of increase
and the duration between updates have
always varied as the Department has
tailored the salary levels ‘‘to ensure that
the exemptions remained true to their
purpose in the face of changing
workforces and changing economic
circumstances.’’ NGA cited the
statement in the 2004 Final Rule that
‘‘salary levels should be adjusted when
wage survey data or other policy
concerns support such a change,’’ 69 FR
22171, and stated that the Department
should only change the salary level
when changes in earnings are
substantial. Similarly, AH&LA, Island
Hospitality Management, NCCR, and
NRF all stated that a salary increase
‘‘should be based on an individualized
evaluation of economic conditions
rather than an automatic arbitrary
formula.’’ Other commenters expressed
similar views. See, e.g., Agricultural
Retailers Association and the Fertilizer
Institute; National Council of Farmers
Cooperatives. PPWO contended that the
salary level needs to be ‘‘fixed’’ only
‘‘when it approaches the end of its
usefulness.’’ EEAC and Fisher & Phillips
stated that the Department could simply
reallocate resources as necessary to
maintain an appropriate salary level
without automatic updating.
Several commenters raised the related
concern that automatic updating could
harm the economy by increasing the
financial burden on employers during
economic downturns. The Chamber
stated that either proposed updating
method would be slow to reflect actual
economic conditions, and would
prevent employers from ‘‘lowering
salaries to quickly respond to decreased
revenue experienced in bad economic
times.’’ Fisher & Phillips stated that
automatic updating during periods of
high inflation could ‘‘contribute to a
serious inflationary spiral.’’ Analogizing
to the minimum wage context,
CalChamber Coalition stated that
automatic updates during economic
downturns may lead employers to
reclassify more employees as
nonexempt, reduce hours, and increase
layoffs.
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Some commenters worried that
automatic updating would create an
untenably high salary level that would
harm low-income regions and
industries, and small businesses. For
example, Alpha Graphics stated that
automatic updating would produce ‘‘an
inappropriately high level in a matter of
a few years,’’ and NGA stated that salary
level increases would harm
independent grocers with low profit
margins because the updating
mechanism ‘‘would not provide the
necessary protection for low-wage
industries and geographic areas.’’ See
also, e.g., ALFA; NFIB. SHRM expressed
concern that automatic updating based
on a national salary level would not
account for the fact that salaries in all
regions and industries do not rise at the
same pace, and it questioned whether
the Department could realistically use
additional rulemaking to correct for
regional disparities that may arise in the
future.
Several commenters asserted that
updating is problematic regardless of
the updating method the Department
chooses, with some suggesting that the
salary level and automatic updating are
incompatible concepts. Seyfarth Shaw
stated that any updating method ‘‘would
establish an ad hoc, artificially-created
level determined by statistical
assumptions.’’ See also Wendy’s
(describing the updating methods as
‘‘based on untested and complicated
methodologies’’). EEAC expressed
concern that if the salary-setting
methodology in this rulemaking results
in an incorrect salary level (as the
Department now states was the case in
2004) automatic updating would
compound this error indefinitely.
NACS, the Southeastern Alliance of
Child Care Associations, and others
stated that establishing an automatic
updating mechanism is inconsistent
with the Department’s recognition that
‘‘the line of demarcation’’ provided by
the salary test ‘‘cannot be reduced to a
standard formula.’’
As to the effect of automatic updating
on salary level predictability, PPWO
stated that ‘‘it will be difficult, if not
impossible, for employers and
employees to determine with precision
each year’s new salary level in advance
of the Department’s pronouncement in
the Federal Register,’’ and AIA–PCI and
the Clearing House Association agreed
that this uncertainty is demonstrated by
the Department’s statement in the
NPRM that ‘‘the public will not be able
to exactly replicate the weekly earnings
and percentiles’’ used to calculate the
salary level, 80 FR 38528 n.24.
The Department recognizes that our
automatic updating proposal has
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elicited strong and diverse reactions
from stakeholders. After review of
submitted comments, the Department
remains convinced that instituting an
automatic updating mechanism is the
best means of ensuring that the salary
level test continues to provide an
effective means of distinguishing
between overtime-eligible white collar
employees and those who may be bona
fide EAP employees, and continues to
work appropriately with the duties test.
The Department shares commenters’
concerns that a fixed and outdated
salary level increases the number of
low-salaried employees at risk of being
inappropriately classified as exempt as
the real value of the salary threshold
falls, and that workers earning near the
fixed salary level when it is set are
particularly vulnerable. The Department
also agrees with commenters that the
updates to the salary level should reflect
prevailing economic conditions. The
Department’s updating mechanism
directly addresses both of these issues
by ensuring that the salary test level is
based on the best available data and
reflects current salary conditions. As
explained in more detail below, the
Department will use the updating
mechanism established under new
§ 541.607 to reset the salary level using
the most recent BLS data on earnings for
salaried workers. Linking the salary
level to earnings ensures that economic
changes that impact employee salaries
are reflected in the salary level test.
Also, because regular updates will
ensure that the salary level is in step
with prevailing economic conditions,
the Department does not believe that the
updating mechanism will lead to undue
salary level increases during economic
downturns or other inopportune times.
Salary level changes will occur at
regular intervals using a set
methodology and a publicly available
data source. This improvement to the
current regulations will benefit
employers and employees by replacing
infrequent, and thus more drastic, salary
level changes with gradual changes
occurring at predictable intervals.
The Department is committed to
ensuring that the updating mechanism
yields a salary that is appropriate for
low-wage industries and geographic
areas. As previously discussed in
section IV.A.iv., in response to
commenters’ concerns, the Department
is setting the salary level at the 40th
percentile of weekly earnings of fulltime salaried workers in the lowestwage Census Region (currently the
South). Commenters raised similar
concerns about using a nationwide data
set for automatic updating. The reasons
that supported changing from a national
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32435
to a regional data set in the standard
salary level setting context apply
equally in the salary updating context,
and new § 541.607 accordingly
incorporates this data set change.75 The
Department recognizes that salaries do
not change at the same rate nationwide,
and this modification will ensure that
any future increase in earnings will only
impact the standard salary level to the
extent that those gains are also realized
by employees in the lowest-wage
Census Region. This change will also
further guard against commenter
concerns that using a nationwide data
set could lead to a standard salary level
increase that does not reflect the
prevailing economic climate.76
Experience has shown that the salary
level test is only a strong measure of
exempt status if it is up to date, and that
left unchanged the test becomes
substantially less effective as wages for
overtime-protected workers increase
over time. As we explained in the
NPRM, competing regulatory priorities,
overall agency workload, and the timeintensive nature of notice and comment
rulemaking have all contributed to the
Department only having updated the
salary level once since 1975 (in 2004).
In the 2004 Final Rule the Department
expressed the intent to ‘‘update the
salary levels on a more regular basis,’’
69 FR 22171, yet more than a decade
has passed since the last update. While
some commenters viewed this inaction
and the Department’s past decision not
to institute automatic updating as
reason for withdrawing our current
proposal, we believe this history
underscores the appropriateness of
adding an automatic updating provision
to the regulations.
Contrary to several commenters’
concerns, prior Department statements
about the salary level test in no way
undermine the Department’s decision
now to incorporate an automatic
updating mechanism into the
regulations. The Department’s statement
that the ‘‘line of demarcation’’ between
exempt and nonexempt employees
‘‘cannot be reduced to a standard
formula,’’ 80 FR 38527, simply reflects
75 Similarly, for the same reasons that the
Department declines commenter requests to
institute a special salary level for non-profit
employers, we also decline to exempt non-profit
employers from automatically updated salary
levels.
76 As explained in section IV.D., as in the 2004
Final Rule, the Department is using a nationwide
data set to set the HCE compensation level in this
rulemaking, and we will use nationwide data to
update the HCE compensation level. The use of
nationwide data is necessary to ensure that
overtime-eligible workers in high-wage areas are not
inappropriately exempted based upon the HCE
exemption’s minimal duties test.
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our continued belief that no single
formula can unerringly separate exempt
and nonexempt employees, and that the
salary test must therefore work in
tandem with the duties test for the EAP
exemption to function effectively. The
salary level test remains the ‘‘best single
test’’ of exempt status, Stein Report at
19, and the method for setting and
updating the salary level adopted
through this rulemaking represents the
Department’s best determination of the
appropriate dividing line between
exempt and nonexempt workers, when
paired with the standard duties test.
While the precise updating ‘‘formula’’
chosen—the 40th percentile of weekly
earnings of full-time salaried workers in
the lowest-wage Census Region—is new,
the underlying methodology is broadly
consistent with the Department’s past
salary setting methods, see section
IV.A.i., and the salary setting and
updating methodology have been
promulgated through notice and
comment rulemaking.
The Department agrees with
commenters that stated that automatic
updating will increase predictability in
both the frequency and size of salary
level changes, benefiting employers and
employees alike. We find to be
unfounded comments that salary level
unpredictability is evident from our
statement that ‘‘the public will not be
able to exactly replicate the weekly
earnings and percentiles [used to
calculate the salary level] from the
public-use files made available by BLS.’’
80 FR 38528 n.24. This explanatory
footnote addressed the public’s ability
to duplicate BLS’ deciles table using the
public-use data. The referenced
discrepancy is very small, and in no
way compromises the public’s ability to
estimate future salary level changes
based on the trend in quarterly earnings
data published by BLS.77 As discussed
in the NPRM and above in section
IV.A.iv., the Department will update the
salary level using the deciles table for
Census Regions as published by BLS,
without modifying the data in any way
or otherwise engaging in complex data
analysis. This process is transparent,
predictable, and straightforward.
The essentially ministerial act of
applying the updating mechanism to
maintain the salary level underscores
77 As we noted in the NPRM, to ensure the
confidentiality of survey respondents the data in all
BLS public-use files use adjusted weights and
therefore minor discrepancies between internal BLS
files and public-use files exist. See 80 FR 38528
n.24. This means that the public will be able to
estimate future salary levels based on BLS’ regularly
published regional deciles, but will not be able to
precisely recreate the salary amounts in the
published deciles due to minor adjustments in the
publically available data.
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why the Department does not share
commenter concerns about resetting the
salary level without further rulemaking.
The Department agrees with
commenters that past salary level
changes have benefited from (and
required) notice and comment
rulemaking. This rulemaking is no
exception, as public feedback was
critical to finalizing the new standard
salary level and the automatic updating
mechanism. In response to public
comments, the Department has changed
the data set used for setting and
updating the salary level, and (as
discussed in greater detail below)
chosen to update the salary using the
‘‘fixed percentile’’ approach, increased
the period between notice of the
updated salary level and its effective
date, and changed the updating
frequency. But unlike salary updates
made up to this point, which have all
involved some change to the salary
setting methodology, salary level
updates under new § 541.607 will use a
fixed methodology that (through this
rulemaking) has already been subject to
notice and comment. Public feedback
was critical to finalizing the updating
mechanism, but is unnecessary when
simply maintaining the salary level
using this mechanism. Of course,
should the Department choose to make
any changes to the updating
methodology in the future, such changes
would require notice and comment
rulemaking.78
The Department also disagrees with
commenters that stated that we should
simply reallocate agency resources as
necessary to maintain an updated salary
level. Whereas most regulations require
a one-time expenditure of resources to
promulgate, and then once issued can
remain both unchanged and forceful for
many years if not decades, without
automatic updating the Department
would have to engage in nearly
continuous rulemaking to ensure that
the salary test accurately reflects
employee salary levels. The new
automatic updating mechanism will
enable the Department to maintain an
effective and up-to-date salary level,
while preserving our ability to revisit
the underlying salary setting
methodology through rulemaking as
future conditions warrant. For the above
reasons, the Department is finalizing our
proposal to institute a regulatory
mechanism for automatically updating
the salary level.
78 Additionally, and as acknowledged in the
NPRM, 80 FR 38522, the Department will consider
conducting a retrospective review of this Final Rule
at an appropriate future time. See Executive Order
13563 (Jan. 18, 2011); see also 5 U.S.C. 610.
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The Department received many
comments expressing concern about the
financial and administrative burden that
annual updating would impose on
employers. In particular, many
commenters stated that annual updating
would require employers to conduct a
yearly ‘‘classification analysis’’—to
assess employee exemption status and
determine whether salary increases to
preserve exempt status are warranted—
and then incur additional costs
implementing any changes. AIA–PCI;
see also, e.g., Business Roundtable;
Maryland Chamber of Commerce;
PPWO. Several commenters described
these costs in detail. For example, the
Chamber’s comment identified many
common concerns:
The annual salary increase proposed by the
Department will require an employer to:
Analyze whether business conditions allow a
salary increase or whether they need to
reclassify employees as non-exempt; prepare
new compensation plans for reclassified
employees; develop materials to explain the
reclassification to employees; review
timekeeping and payroll systems to ensure
compliance with the FLSA recordkeeping
requirements and compliant overtime
calculations; review or adopt new policies for
the reclassified employees, including policies
prohibiting off-the-clock work, when
employees will be permitted to work
overtime, payment for waiting time, training
time and travel time, etc.; train the
reclassified employees, and the managers
who supervise them on recording time and
other wage-hour topics. If the salary change
is implemented as proposed, a large number
of workers will have to be added to
timekeeping systems. This may require server
and system upgrades to account for the
additional users. Best practices take time.
Additionally, ABA stated that automatic
updating would require employers to
consider whether to restructure the
duties of newly nonexempt employees,
and NFIB stated that it would require
employers to annually ‘‘reassess
potential raises, bonuses, or
promotions’’ for employees. Seyfarth
Shaw and others stated that the
Department significantly
underestimated the cost and time
obligations associated with these
actions.
Multiple commenters also
emphasized that annual updating would
negatively impact employer budgets and
budget planning. NALP, NGA, NRF,
Wendy’s, and others stated that not
knowing employee exemption status
from year to year would make it more
difficult for employers to forecast costs
or profit margins. CUPA–HR stated that
in response to a survey of its members
about the Department’s proposal, 91
percent of respondents stated that
automatic updating as proposed would
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negatively impact their budgets, while
63.6 percent said this change would
negatively impact financial planning
ability. The California State Association
of Counties stated that annual updating
would be especially hard for public
entities because ‘‘public sector salaries
are generally not as flexible as private
sector salaries and have many
additional constraints, including
bargaining agreements, restricted
sources of revenue, and civil service
rules.’’ Similarly, several commenters
stated that updating would be
particularly difficult for non-profit
employers that have limited ability to
increase revenue in response to
increased labor costs. See, e.g.,
American Academy of Otolaryngic
Allergy; BSA; USPIRG. WorldatWork
stated that budget overruns resulting
from annual salary increases could
deplete capital available for other
business areas such as research and
development, business equity for future
growth, or voluntary employer
contributions to retirement plans, and
FMI stated that budgetary uncertainty
and the ‘‘specter of unexpected cost
increases provides disincentives for
businesses to engage in capital spending
and increase hiring and thereby grow
the economy.’’
Several commenters expressed
concern that updating could create
‘‘salary compression’’ issues and
impede employers’ ability to give meritbased salary increases. To illustrate
these interrelated concerns, SHRM
provided a hypothetical in which ten
exempt employees earn $975 per week
(above the 2016 salary level of $970
predicted in the NPRM), and an
employer budgets for a three percent
annual salary increase (totaling
$15,210). SHRM contended that without
automatic updating the employer could
reward better performing employees
with large raises and give lower raises
or no raise to average or poor
performers. If, however, the salary level
were automatically increased by two
percent, the employer ‘‘would be
required to adjust all ten salaries up to
$989 per week in order to maintain their
exempt status,’’ significantly reducing
the total amount available for merit
increases. SHRM concluded that after
several automatic updates ‘‘the gap in
pay between more senior and less
senior, more experienced and less
experienced, or more productive and
less productive employees will become
smaller over time, creating significant
morale problems and other management
challenges.’’ AIA–PCI stated that
automatic updating would in many
instances place ‘‘an artificial obligation
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on the company to provide a salary
increase to an underperforming
employee . . . simply to maintain the
employee’s exempt status,’’ and NGA
stated that if ‘‘managers know they will
receive an automatic raise each year by
meeting minimum performance
standards, they have little incentive to
work increased hours and take on more
responsibility while also maintaining a
high performance level.’’ Relatedly,
several commenters, including IFA,
Littler Mendelson, and Fisher &
Phillips, stated that in addition to
raising employee salaries to maintain
their exempt status, employers will have
to raise the salaries of those earning
above the salary threshold to avoid
compression in compensation scales
among exempt employees.
Some commenters stated that
automatic updating would also
adversely impact employees. AH&LA,
NRF, and others stated that annual
updating would create instability in
employee compensation and benefits
(which are often tied to exempt status)
and that employers would likely reduce
exempt employee benefits to cover
annual updating’s administrative costs.
Similarly, AT&T stated that uncertainty
about employees’ year-to-year
exemption status will likely cause
companies to ‘‘hedge against
unanticipated overtime payments,
thereby putting downward pressure on
annual salary increases.’’ Other
commenters stated that possible changes
in exempt status and employers’
inability to provide merit increases will
undermine employee morale. See, e.g.,
CUPA–HR; Seyfarth Shaw. IFA asserted
that such complexities illustrate that an
automatic updating mechanism is
inconsistent with the President’s
directive to ‘‘modernize’’ the EAP
regulations.
The Department acknowledges
employers’ strong views on the financial
and administrative considerations
associated with annual automatic
updating, and we agree that updating
the salary level annually may increase
the impact on employers. In particular,
we agree that this change may require
employers to reassess employee
exemption status more frequently and in
some instances to more closely monitor
hours of newly overtime-eligible
employees. These costs are discussed in
greater detail in the Department’s
economic impact analysis, see section
VI.D.x. However, the link between
automatic updating and other costs
commenters have raised is less clear and
was generally not supported by data in
the comments. Moreover, many
commenters did not address the fact
that the alternative to automatic
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32437
updating is not a permanent fixed
standard salary level, but instead larger
changes to the standard salary level that
would occur during irregular future
updates.
The Department believes that in
several respects commenters overstated
the impact of automatic updating on
employers. In some instances
commenters failed to account for
existing employer practices. For
example, the concern that automatic
updating will require employers to
develop policies and trainings to
explain reclassification to newly
overtime-eligible employees ignores that
employers already have overtimeeligible employees and thus typically
have these procedures in place.
Additionally, many commenters
conflated the distinction between costs
associated with the current salary
increase (to $913), and those due to
future automatic updates. For example,
the cost of adding newly overtimeeligible workers to timekeeping systems
and reviewing timekeeping and payroll
systems to ensure compliance with
FLSA recordkeeping requirements are
likely overstated. These costs are
primarily incurred when employees are
initially reclassified, and the
Department predicts that the number of
reclassified employees at future updates
will be much smaller than the number
reclassified at the initial salary increase
since the updating mechanism will
change the salary level regularly and
incrementally, and the salary level is
based on actual wages of salaried
workers.
The Department is also not persuaded
that automatic updating (at any
frequency) will force employers to
reward underperforming employees,
impede merit-based pay increases, or
create salary compression issues. These
interrelated concerns arise from the
faulty premise that the automatic
updating mechanism will in effect
require employers to increase salaries of
all affected workers. This is not the case
as employers have many options for
managing their workforces. The
updating mechanism simply adjusts the
salary level to ensure that it reflects
prevailing salary conditions and can
effectively work in combination with
the duties test to identify exempt and
nonexempt employees. Because any
increase in the salary level is based on
actual increases in workers’ salaries,
employers may find that they are
already paying their exempt employees
wages above the updated salary level.
Where this is not the case, employers
can respond to salary level updates by
(for example) increasing employee pay
to retain overtime exempt status,
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reclassifying employees to overtimeeligible status, decreasing hours of
newly overtime-eligible employees to
avoid overtime, paying overtime to
newly overtime-eligible workers,
redistributing hours among the
workforce, and/or hiring new
employees. Similarly, employers are
under no obligation to reward
underperforming employees with a raise
(a concern discussed in a number of
comments). Employers can reclassify
such employees to nonexempt status,
redistribute employee workloads, or
take any number of other managerial
actions in lieu of increasing their salary
to maintain the exemption.
The Department is more persuaded by
commenter concerns that annual
updating would inject uncertainty into
the annual employer budgeting process.
While the ripple effects of this
uncertainty on employee compensation
are open to debate, the immediate
impact on employers is clear. Although
commenters often raised budgeting
concerns as part of their general
opposition to automatic updating, closer
examination reveals that these concerns
are closely linked to the updating
frequency. For example, comments that
updating would impact employers’
ability to forecast profit margins,
determine store and supply chain labor
costs, and plan and implement yearly
salary increases, are all most directly
implicated by annual updating, as are
government and non-profit commenter
concerns tied to the lack of short-term
control over revenue streams and
employee costs. Even some of the
commenters that opposed automatic
updating agreed that lengthening the
period between updates would help
alleviate some employer concerns. See,
e.g., CUPA–HR (updating every five
years ‘‘could avoid many of the negative
consequences associated with automatic
annual increases’’); BSA. Accordingly,
the Department is modifying our
proposal, which would have updated
the salary level annually.
Commenters that favored automatic
updating often also favored annual
updates. See, e.g., Nichols Kaster;
UFCW. Commenters that opposed
automatic updating expressed more
varied opinions. AT&T, CUPA–HR,
SIFMA, and others favored updating no
more frequently than every five years,
with some noting that this was the
shortest interval between the
Department’s past salary level updates
(since 1940). Notably, several of the
commenters representing employer
interests that supported some form of
automatic updating favored revisiting
the salary level every three years, see
American Council of Engineering
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Companies; American Resort
Development Association; WMATA, as
did several commenters that opposed
updating generally, see BSA (no more
than every two or three years); Fisher &
Phillips (‘‘not less than every three
years’’). Other commenters favored
other updating periods. See, e.g.,
Association of Regional Center Agencies
(‘‘no more frequently than biennially’’).
In response to commenter concerns
about the burdens of annual updating,
and mindful of the range of views
expressed on the appropriate updating
frequency, new § 541.607 provides that
updating will occur every three years.
This change from the Department’s
proposal strikes an appropriate balance
between ensuring that the salary level
remains an effective ‘‘line of
demarcation’’ and not burdening
employers or their workforces with
possible changes to exemption status on
a yearly basis. Increasing the time
period between updates will also
decrease the direct costs associated with
updating because regulatory
familiarization costs are only incurred
in years in which the salary is updated
and the number of affected workers will
drop in years in which the salary is
unchanged leading to lower managerial
costs in those years. Triennial updates
using a fixed and predictable method
should significantly mitigate the annual
budget planning concerns that
commenters raised. Additionally,
employers will always know when the
salary level will be updated, and
between updates can access BLS data to
estimate the likely size of this change.
Lengthening the updating frequency to
three years also responds to commenter
concerns that minor year-to-year
fluctuations in employee earnings
should not trigger reclassification
analyses.
iii. Automatic Updating Method
The Department’s proposal discussed
and requested comments on two
alternative updating methodologies—
updating using a fixed percentile of fulltime salaried employee earnings or
using the CPI–U. As we explained in
our proposal, the fixed percentile
approach would allow the Department
to reset the salary level test by applying
the same methodology proposed to set
the initial salary level, whereas the CPI–
U approach would update the salary
amount based on changes to the CPI–
U—a commonly used economic
indicator for measuring inflation. The
Department’s proposal did not express a
preference for either updating method
and instead sought comments on these
two alternatives.
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The Department received numerous
comments addressing these two
proposed updating methods, although
many commenters that supported
automatic updating did not express a
methodology preference. See, e.g.,
AARP; American Association of
University Women; Legare, Atwood &
Wolfe law firm; Santa Clara County
Probation Peace Officers’ Union.
Commenters that favored automatic
updating and expressed a preference for
a methodology generally preferred the
fixed percentile approach, although
some favored the CPI–U method. Both
of these groups of commenters preferred
either method to no automatic updating.
Commenters that opposed any form of
automatic updating generally expressed
concerns with both updating methods.
In some instances, however, these
commenters preferred a particular
method (typically the CPI–U) should the
Department institute automatic
updating. Additionally, a few
commenters suggested automatic
updating methods not included in the
Department’s proposal.
The majority of commenters that
supported automatic updating and
expressed a methodology preference
favored the fixed percentile approach.
Many of these commenters explained
that the reasons for initially setting the
salary level at a fixed percentile of
earnings of full-time salaried workers
also supported updating using the same
method. For example, NWLC stated that
just as the Department determined that
‘‘looking to the actual earnings of
workers provides the best evidence of
the rise in prevailing salary levels and,
thus, constitutes the best source for
setting the proposed salary
requirement,’’ 80 FR 38533, automatic
updating should be based on changes in
earnings rather than changes in prices.
AFGE, EPI, IWPR, NEA, and many
others agreed that salary level updates
should reflect changes in wages and not
prices, and thus favored updating using
a wage index (i.e., the fixed percentile
approach) rather than a price index (i.e.,
the CPI–U). NELP, the Partnership, and
others added that a wage index is more
appropriate because wages are less
volatile than prices and increase in a
more consistent and predictable fashion.
Commenters that favored the fixed
percentile approach also highlighted the
link between wages and the EAP
exemptions’ purpose and function.
NELP stated that using a wage index is
consistent with the fact that the
exemptions are intended to cover
higher-paid employees in the workforce,
and NELA stated that this method
reflects ‘‘the fact that the EAP
exemption is, in many respects,
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premised on an employee’s relative
position in the workplace’’ and ‘‘is the
fairest way to maintain consistency in
workers’ FLSA eligibility in light of
inevitable economic change.’’
Of the relatively few commenters
representing employer interests that
supported some form of automatic
updating, several favored the fixed
percentile method. For example, SIGMA
(which favored automatically updating a
salary level based on the 2004 method
every three to five years) stated that this
approach ‘‘will help the threshold keep
pace with actual wage changes in the
market,’’ while an inflation-based index
‘‘will risk harming workers and
businesses’’ because inflation and wages
‘‘can increase at very different rates.’’
Printing Industries of America and at
least eight of its member businesses
agreed that ‘‘[a]ny indexing should
reflect wage changes.’’ Similarly, CVS
Health and several non-profit
commenters (which incorporated or
referenced a comment submitted by
ANCOR) favored the fixed percentile
approach over the CPI–U, provided in
part that the Department account for
regional salary level disparities and
update the salary level on a less
frequent basis than annually.
Most commenters representing
employers opposed any form of
automatic updating, and many of these
commenters strongly opposed automatic
updating using the fixed percentile
method. The predominant concern
among commenters that opposed the
fixed percentile approach was that this
method would produce drastic increases
in the salary threshold level arising from
the updating method itself, rather than
from market forces. Some of these
commenters predicted that employers
will respond to each salary level update
by converting all or a certain percentage
of all full-time salaried employees
earning below the new EAP salary level
to hourly status. See, e.g., Dollar Tree;
HR Policy Association. Others predicted
employers would convert all or a certain
percentage of affected employees (i.e.,
those EAP employees earning between
the old and new salary levels) to hourly
status. See, e.g., Chamber; FMI; Jackson
Lewis; NAM; Small Business Legislative
Council. Both of these groups of
commenters stated that such conversion
would decrease the number of salaried
workers in the CPS data set by removing
those at the lower end of the salary
distribution, which would produce an
upward shift (or ‘‘ratcheting’’) of the
salary level with each successive
update. CUPA–HR, Fisher & Phillips,
and others further stated that if
employers increase employee salaries to
preserve exempt status, this would
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apply further upward pressure on the
40th percentile, and CUPA–HR and
Seyfarth Shaw added that this effect
would also occur to the extent
employers paid overtime to newly
nonexempt salaried workers but did not
convert them to hourly pay.
Given these predictions, several
commenters estimated the impact that
automatic updating using the fixed
percentile approach would have on the
salary level. Many stated that salary
level growth would far exceed the 2.6
percent average annual growth rate for
the 40th percentile of full-time salaried
workers’ weekly earnings that the
Department estimated occurred between
2003 and 2013, 80 FR 38587. See, e.g.,
IFA; Littler Mendelson; Seyfarth Shaw.
Other commenters, including the
Chamber and FMI, submitted an Oxford
Economics letter (prepared for the NRF)
which projected that by 2016 annual
updating would produce a salary level
of approximately $1,400 per week
assuming all salaried employees below
the standard salary level would be
converted to hourly. The Chamber and
PPWO referenced (but did not submit)
an article from Edgeworth Economics,
an employer consulting firm, which
stated that if 25 percent ‘‘of the full-time
nonhourly workers earning less than
[the 40th percentile salary level] were
re-classified as hourly workers,’’ after
five annual updates the salary level
would equal $72,436 annually ($1,393
per week). Other commenters provided
their own projections of salary level test
growth. For example, WorldatWork
stated that after five annual updates the
salary level would reach $233,217, and
HR Policy Association stated that if ‘‘the
bottom 20 percent of salaried
employees’’ are converted to hourly
status the salary level would increase on
average by 18 percent per year over five
years. Such projections led several
commenters to conclude that automatic
updating using the fixed percentile
approach would render the duties test
increasingly obsolete and in effect
eliminate the availability of the EAP
exemptions in many regions and
industries. See, e.g., NRA; Seyfarth
Shaw. ABA captured the views of
several employer representatives in
stating that, because of concerns that the
fixed percentile method would unduly
accelerate salary level test growth,
automatic updating using the CPI–U is
a ‘‘less harmful approach to a bad idea.’’
See also NRA.
Most commenters representing
employee interests did not discuss
whether automatic updating using the
fixed percentile approach would lead
employers to convert large numbers of
newly nonexempt employees to hourly
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32439
status. One exception was EPI, which
stated that employer projections of
accelerated salary growth due to mass
conversion of employees to hourly pay
were inaccurate because they
underestimated employee bargaining
power by failing to account for low
unemployment rates and the fact that
‘‘nominal wages are ‘sticky,’ meaning
that employers rarely will lower them.’’
EPI added that employers will have a
difficult time converting salaried
workers to hourly status because the
new salary level will ‘‘establish a clearly
observable new norm in the workplace’’
and so it will ‘‘be obvious to employees
that any reclassification will be done to
disadvantage them.’’ For these reasons,
EPI concluded that the ‘‘wholesale
reclassification of current salaried
workers to hourly status . . . seems an
unlikely outcome.’’
While employer commenters that
opposed the fixed percentile approach
generally focused on the concerns
discussed above, some commenters also
objected to this approach based on the
same concerns they raised with respect
to the underlying salary level.
Commenters criticized the CPS data set,
see, e.g., Fisher & Phillips, expressed
concern that the proposed methodology
results in too high a salary level for lowwage areas, see, e.g., ACRA, and
asserted that updating using the same
methodology would ‘‘compound the
Department’s error,’’ see PPWO, in
setting the salary level. These
commenters opposed any form of
automatic updating, but deemed the
fixed percentile method particularly
troubling.
The Department also received many
comments from organizations and
individuals favoring automatic updating
using the CPI–U. Overall, these
commenters addressed this issue in less
detail than those that favored the fixed
percentile approach, often only stating
that the salary level should be updated
based on inflation. While the majority of
these comments favoring updating using
the CPI–U came from individuals, a few
employers and commenters representing
them also supported this approach. For
example, HMR Acquisition Company
favored indexing the salary level to
inflation (provided the Department also
lowers and phases in the new salary
level requirement). Many individual
commenters also recommended
updating using the CPI–U. For example,
one human resources professional
suggested increasing the salary
biennially ‘‘with the national rate of
inflation,’’ another human resources
professional favoring this method stated
that changes in the CPI–U are ‘‘smaller
and easier for employers to absorb,’’ and
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one individual stated that updating
using the CPI–U ‘‘will make sure that
the rises in the salary level and highly
compensated level will mirror economic
changes, rather than create a base
percentile change yearly that may or
may not work for all regions of the
country.’’ Board Game Barrister stated
that updating using the CPI–U ‘‘is both
predictable and fair in preventing
erosion of the salary test,’’ while the
Illinois Credit Union League stated that
credit unions are ‘‘familiar with the
CPI–U and utilize this standard when
considering salary increases.’’
As previously discussed, among
commenters representing employer
interests that opposed any form of
automatic updating, concerns that the
fixed percentile approach would
quickly escalate the salary level led
some commenters to reluctantly prefer
the CPI–U. However, these commenters
often stressed that they only preferred
this method if the Department refused to
withdraw the automatic updating
proposal, and they generally did not
provide any additional grounds for
supporting use of the CPI–U as an
updating mechanism. The Colorado
Youth Corps Association and Firehouse
Subs appeared to support automatic
updating using the CPI–U provided that
the Department set the initial salary
level lower. NRA (which opposed either
updating method) provided similar
qualified support, stating that ‘‘for CPI–
U indexing to be considered reasonable,
the salary level itself needs to be
reasonable.’’
Other commenters representing
employer interests that opposed any
form of automatic updating provided
reasons not to update the salary level
using the CPI–U. The Chamber, FMI,
and others stressed that prices and
salaries are only correlated in the longrun. Seyfarth Shaw opined that the
‘‘CPI–U is a volatile index’’ and that the
basket of goods used to calculate the
CPI–U is ‘‘not tied in any direct way to
employees’ wages rates’’ and is ‘‘not an
appropriate indicator of wage growth (or
decline).’’ Relatedly, ACRA stated that
the fact that there have ‘‘been periods
where the CPI–U has outpaced wages
and other periods where wages have
grown faster than CPI–U’’ illustrates that
the CPI–U is ‘‘an unreliable benchmark
for wages.’’
Several commenters worried that
updating using the CPI–U would have
an adverse impact on low-wage regions
and industries because inflation does
not impact all regions uniformly. For
example, Dollar Tree observed that the
CPI–U ‘‘focuses exclusively on urban
areas, and therefore fails to account for
the rural economy and cost of living,’’
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and Lutheran Services in America
Disability Network stated that this
updating method ‘‘will
disproportionately impact different
regions, potentially worsening the
income disparity and inadvertently
harming workers.’’ See also, e.g., ACRA;
ANCOR; SIGMA. Other commenters
referenced the Department’s past
decision not to automatically update the
salary level using an inflationary index.
Although this fact was usually raised to
assert that the Department lacked
authority to automatically update the
salary level, Fisher & Phillips referenced
the Department’s recognition in the
NPRM that ‘‘inflation has been used as
a method for setting the precise salary
level only in the breach,’’ (emphasis in
comment), as indicating that the CPI–U
would not be an appropriate updating
methodology. 80 FR 38533.
Finally, a few commenters suggested
that the Department automatically
update the salary level using methods
other than those discussed in the
NPRM. For example, AFL–CIO and
AFSCME urged the Department to
consider updating the salary level using
BLS’ Employment Cost Index for total
compensation of management,
professional, and related workers. See
also UFCW. Many commenters,
including several disability services
providers, favored updating using
‘‘regional salary data.’’ See, e.g.,
Lutheran Services in America. WMATA
stated that automatic updates affecting
government entities should be tied to
‘‘the federal government’s adjustments
to General Schedule pay schedules,’’
and the American Resort Development
Association favored a fixed annual
increase of, for example, two percent.
Fisher & Phillips, which opposed both
methods, wanted the Department to
issue a new proposal to update the
salary level using internal Department
data on likely exempt workers.
The Department recognizes
commenters’ strong views on the
proposed automatic updating
alternatives and has considered the
comments concerning this issue. The
Department has determined that
automatically updating the salary level
using a fixed percentile of earnings will
best ensure that the salary level test
effectively differentiates between bona
fide EAP workers who are not entitled
to overtime and overtime-eligible white
collar workers and continues to work
effectively with the duties test.
Accordingly, new § 541.607 will reset
the salary level triennially using the
same methodology used in this
rulemaking to set the initial salary
level—the 40th percentile of earnings of
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full-time salaried workers in the
country’s lowest-wage Census Region.
The Department agrees with the view
of many commenters that the same
reasons that justify setting the salary
level at a fixed percentile of earnings of
full-time salaried workers also support
updating using this method. As
explained at length in section IV.A.,
setting the initial salary level equal to
the 40th percentile of earnings of fulltime salaried workers in the South
reflects the Department’s best
determination of the appropriate line of
demarcation between exempt and
nonexempt workers. This method
provides necessary protection for
workers by accounting for the
elimination of the more stringent long
duties test, while at the same time not
excluding from exemption too many
employees performing EAP duties in
low-wage geographic areas, and yielding
a lower salary that is appropriate across
industries. Likewise, applying this same
methodology for automatic updating is
the most effective and transparent way
to ensure that future salary levels
continue to fulfill these objectives and
work appropriately with the duties test.
Unlike the CPI–U method, updating
the salary level based on the 40th
percentile of earnings of full-time
salaried workers in the country’s lowestwage Census Region also eliminates the
risk that future salary levels will deviate
from the underlying salary setting
methodology established in this
rulemaking. Ensuring that the salary
level does not depart from the
designated percentile ensures that the
salary level does not become too low—
leading to an increased risk of
inappropriate classification of lowsalaried employees as exempt—or too
high—depriving employers of the
exemption for employees performing
bona fide EAP duties, and also ensures
that the standard salary level continues
to work effectively with the standard
duties test. For the same reasons, the
Department also declines to
automatically update the salary level
using any of the suggested alternatives
(such as the Employment Cost Index,
GS-Pay Scale, and others). These
methods would result in different salary
level setting and updating
methodologies and thus increase the
risk of future salary levels diverging
from the appropriate line of
demarcation between exempt and
nonexempt workers, which would in
turn necessitate additional rulemaking
to reset the salary level or updating
methodology.
The Department also concludes that it
is preferable to update the salary level
based on changes in earnings rather
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than changes in prices. As many
commenters observed, a wage index
provides the best evidence of changes in
prevailing salary levels. While wages
and prices may be correlated in the
long-run, linking the salary level to
earnings is the most direct way to
ensure that the salary level reflects
prevailing economic conditions and can
thus fulfill its intended function. This
approach is also consistent with the
Department’s longstanding practice of
basing the salary requirement on actual
salaries paid to workers. The salary
level test works in tandem with the
duties test to operate effectively, and we
agree with the Chamber, FMI, and
others that changes in job duties are
more closely correlated with changes in
wages than in prices. Similarly, using an
earnings index for automatic updates is
most consistent with the Department’s
long-held view that ‘‘the best single test
of the employer’s good faith in
attributing importance to the employee’s
service is the amount [the employer]
pays for them.’’ Stein Report at 19. New
§ 541.607 provides that automatic
updates will be based on CPS data for
the 40th percentile of earnings of fulltime salaried workers in the country’s
lowest-wage Census Region. This data
will be readily available and
transparent, and at the designated
percentile is representative of those
employees who may be bona fide
executive, administrative, or
professional workers.
Commenters that opposed the fixed
percentile approach focused primarily
on their concern that this methodology
would lead to drastic salary level
increases that would render the EAP
exemptions virtually obsolete in certain
industries and geographic areas. The
linchpin of this ‘‘ratcheting’’
argument—and the crux of most
opposition to the fixed percentile
updating method—is the belief that
employers will respond to an
automatically updated salary level by
converting newly nonexempt workers to
hourly status, thus removing them from
the data set of full-time salaried
workers. The Department examined this
issue closely and concludes that past
experience and the comments
themselves do not substantiate
commenter concerns.
To evaluate the likelihood that salary
level increases will lead employers to
convert affected employees to hourly
pay status, the Department first
examined historical data concerning
how employers responded to the 2004
Final Rule’s salary increase. This prior
rulemaking raised the standard salary
level to 182 percent of the short test
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salary level—from $250 to $455.79 As
discussed in more detail in section
VI.D.ix., if the salary level increase in
2004 led employers to convert
significant numbers of workers to
hourly status (as commenters assert will
result from this rulemaking), then we
would expect to see a notable increase
in the share of workers earning just
below the new threshold ($455) who are
paid hourly relative to the share of
workers earning just above the new
threshold who are paid hourly. The
Department looked at the share of fulltime white collar workers paid on an
hourly basis before and after the 2004
Final Rule (January–March 2004;
January–March 2005) both below and
above the standard salary level (at least
$250 but less than $455 per week; at
least $455 but less than $600 per week).
The Department found that following
the 2004 Final Rule, the share of fulltime 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. See
section VI.D.ix. 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
automatic updating will result in
employers converting significant
numbers of affected EAP workers to
hourly pay status.80
In addition to the lack of historical
data supporting commenters’ concerns,
commenters failed to persuasively
support their key assumption that
automatically updated salary levels will
lead to widespread conversion of
employees to hourly pay status. Most of
these commenters, including Dollar
Tree, Jackson Lewis, and several others
79 The 2004 Final Rule increased the salary level
from the previous long test level of $155 per week
(executive and administrative exemptions) or $170
per week (professional exemption) to $455 per
week. For purposes of this analysis, the Department
compared the increase from the short test salary
level ($250 per week) since the long test was no
longer operative due to increases in the minimum
wage.
80 To further test whether the widespread
conversion to hourly pay status of newly
nonexempt employees predicted by some
commenters would occur, the Department also
performed a similar analysis of increases in the
state EAP salary level in California in 2007–2008
and 2014. In 2007–2008, the results showed a
decrease in the share of full-time white collar
workers paid on an hourly basis below the new
salary level, thus providing no evidence of a
‘‘ratcheting’’ effect. In 2014, the share of full-time
white collar workers paid on an hourly basis below
the salary level increased marginally, but this
impact was not significantly different from the
change in the rest of the U.S. and thus provides no
evidence that this effect was caused by changes to
the salary level.
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32441
simply stated—without citing any
supporting data—that automatic
updating would produce this effect,
with several commenters mistakenly
contending that such a conversion to
hourly status was automatic. Even those
commenters that provided more
detailed economic analyses often rested
their views on the same faulty
assumption. For example, the submitted
Oxford Economics letter assumed ‘‘that
the lowest 40% of the salaried full-time
wage distribution in 2016 were
converted to hourly status.’’ Some
commenters predicted the impact of
automatic updating on the salary level
if a set percentage of employees were
converted to hourly pay. For example,
HR Policy Association predicted the
effect if ‘‘the bottom 20 percent of
salaried employees’’ were converted to
hourly status, and the Chamber and
PPWO (quoting an article from
Edgeworth Economics) commented on
the impact if 25 percent ‘‘of the full-time
nonhourly workers earning less than
[the 40th percentile salary level] were
re-classified as hourly.’’ But while these
commenters stressed the purported
impact of these employee conversion
rates on the salary level, none explained
why these rates are accurate estimates of
employer responses.81
The Department believes that
commenters that asserted that
‘‘ratcheting’’ will occur have greatly
overestimated the number of employees
that employers may convert to hourly
status, and the impact that any such
conversion would have on the salary
level. Some commenters assumed that
all (or a certain percentage of all) fulltime salaried workers earning below the
salary level would be converted to
hourly status and dropped from the data
set. This assumption is plainly
erroneous because it fails to account for
whether the employees perform white
collar work and are subject to the EAP
exemption. Of the 18.6 million full-time
salaried white collar workers earning
below the $913 salary level, only 4.2
million are currently exempt and earn
between the current and new salary
levels. The remaining 14.4 million
workers are not currently classified as
exempt under the EAP exemption, and
so there is no reason to believe that their
employers will convert them to hourly
pay status as a result of this rulemaking.
Accordingly, salary level predictions
81 Oxford Economics stated that its model was
‘‘not meant as a literal prediction of what the new
rule would mean, since some non-exempt workers
still report salaried status in the Current Population
Survey, and since the process would be iterative.’’
However, Oxford Economics did not attempt to
quantify these other factors to produce a more
accurate estimate.
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that are grounded in the belief that a
certain percentage of all salaried
workers will no longer be included in
the BLS data set because they will be
converted to hourly pay status
regardless of whether or not they are
affected by the rule are unsupported.
Other commenters predicted that
employers would convert all (or a
significant percentage of) affected EAP
employees to hourly status. The
Department believes that these
predications are also inaccurate because
they fail to account for whether the
affected employees work overtime. As
discussed in the economic impact
analysis of this Final Rule, the majority
of workers affected by this rulemaking
do not work more than 40 hours per
week, and so employers will have no
need to change their compensation and
can continue to pay them a salary. Even
as to those affected EAP workers who
will become nonexempt and regularly or
occasionally work overtime (which the
Department estimates will be
approximately 39 percent of the total
number of affected EAP workers when
the salary level is updated to $913),
there is no reason to believe that
employers will engage in wholesale
conversion of these employees to hourly
status. Employers commented at great
length during outreach discussions prior
to the publication of the NPRM and in
the submitted comments that employees
desire to be salaried because of status
concerns. Also, the FLSA and
regulations promulgated under it
expressly permit paying nonexempt
employees a salary so long as they
receive overtime compensation when
they exceed 40 hours during a
workweek. See §§ 778.113-.114. The
Department therefore anticipates that
employers will continue to pay many
affected EAP workers who work
overtime on a salary basis, and these
workers therefore will remain part of the
distribution of full-time salaried
workers. As discussed in detail later,
our analysis of the impacts of the 2004
Final Rule further supports our
assumption that employers will not
convert large numbers of newly
overtime-eligible salaried employees to
hourly pay status. Accordingly, the pool
of workers who are likely to be
converted to hourly pay is much smaller
than supposed by those commenters
that assert that the fixed percentile
approach will lead to drastic salary level
increases.
To the extent that some affected EAP
workers are converted to hourly status
and not included in the BLS data set of
all salaried workers, the Department
believes this will have a negligible
impact on the salary level because this
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group would not constitute more than a
small fraction of the population of fulltime salaried workers that comprises the
data set used to calculate the salary
level. The Department believes that
employers will have little incentive to
change the pay status of those affected
employees who do not work overtime
(60.4 percent of affected employees);
similarly, employers will not change the
salaried status of those employees who
work overtime and whose salary is
raised to maintain their exempt status
(2.3 percent of affected employees). The
Department therefore believes that an
upper bound estimate of any potential
‘‘ratcheting’’ effect would assume the
conversion to hourly pay status of all
newly nonexempt employees working
either occasional or regular overtime
(approximately 37.3 percent of affected
employees). Based on this assumption,
the Department estimated that the salary
level as set in this Final Rule (based on
weekly earnings of full-time salaried
workers in the South) could be
approximately two and a-half percent
higher due to this effect in 2026, after
three updates. This estimate is
significantly smaller than the estimates
provided by commenters that argued
use of a fixed percentile for updating
would lead to widespread conversion of
salaried employees to hourly pay status.
See section VI.D.ix.
The sample used to set the standard
salary level—full-time salaried workers
in the South—represents 20 million
workers, including, for example, bluecollar salaried workers to whom this
rulemaking does not apply and
overtime-eligible white collar
employees. The Department estimates
that 671,000 affected EAP employees in
the South regularly or occasionally work
overtime, which represents just 3.3
percent of the sample. For the reasons
discussed above, many of these workers
are likely to remain salaried. But as
noted above, even if we assume that all
affected employees who occasionally or
regularly work overtime are converted
to hourly pay status (and therefore are
no longer part of the sample), the impact
on the salary level will be minimal
because they constitute such a small
percentage of the sample. For the same
reasons, the Department does not share
commenter concerns that the salary
level will drastically increase if
employers raise affected employees’
salaries to preserve their exempt status.
The Department estimates that
approximately 43,000 affected
employees in the South will fall into
this category, constituting just 0.2
percent of the 20 million workers in the
sample.
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For the above reasons, the Department
concludes that automatically updating
the salary level using a fixed percentile
of earnings will not cause the salary
level to diverge from prevailing
economic conditions, and thus we do
not share commenters’ concerns about
‘‘ratcheting’’ or believe that they provide
a basis for declining to adopt the fixed
percentile updating method. Moreover,
the Department’s decision to reset the
salary level triennially (instead of
annually) would further minimize any
ratcheting if such an effect were to
occur.
Beyond concerns about a possible
ratcheting effect, commenters raised
relatively few additional objections to
the fixed percentile method of
automatic updating. The Department
agrees with commenters that updating
the salary level using an inappropriate
earnings percentile would produce an
improper salary level. However, for the
reasons previously discussed at length,
the Department has concluded that
setting the salary level at the 40th
percentile of earnings of full-time
salaried workers in the lowest-wage
Census Region produces the appropriate
line of demarcation between exempt
and nonexempt workers. Similarly, the
Department’s decision to change the
updating mechanism from a nationwide
to a regional data set addresses
commenter concerns about the impact
of the fixed percentile approach on lowwage regions and industries.
The Department believes that the
chosen updating method is also
responsive to many of the reasons that
commenters provided for supporting
updating using the CPI–U. For example,
some commenters lauded the CPI’s
familiarity and widespread acceptance.
The CPS data set is publicly available,
as is BLS’ deciles table for Census
Regions that the Department will use for
automatic updates. Other commenters
stressed that updating using the CPI–U
would ensure that the salary level keeps
pace with inflation. These commenters
were generally concerned with the
adverse effect of a fixed salary level, as
opposed to the effect of updating using
the CPI–U versus another approach. The
Department believes that a regularly
updated salary level reflecting changes
in salaries paid will largely alleviate this
inflation concern, particularly to the
extent that changes in wages and prices
are correlated over time. For all the
above reasons, the Department has
decided to automatically update the
salary level using the 40th percentile of
earnings of full-time salaried workers in
the country’s lowest-wage Census
Region.
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The Department’s proposal also
sought public comment on whether
automatic updates to the salary level
should take effect based on the effective
date of the Final Rule, on January 1, or
on some other specified date. The
majority of commenters that addressed
this issue favored January 1. For
example, Tinker Federal Credit Union
stated that this date corresponds with
when their internal pay changes become
effective, and AH&LA stated that
updating the salary level mid-year could
cause newly nonexempt employees to
‘‘lose eligibility for a bonus and fringe
benefits that he or she was counting on
when the year began.’’ Other
commenters, including Nichols Kaster,
Quicken Loans, and several small
businesses, also favored January 1. In
contrast, other organizations favored a
July 1 effective date for automatically
updated salary levels. ANCOR and
numerous other non-profit organizations
favored this date because their funding
is linked to state budget cycles, and the
‘‘majority of states have a budget cycle
that ends in June.’’
As multiple commenters observed,
employers operate on varying fiscal
calendars, and so it is impossible for the
Department to select an effective date
for automatically updated salary levels
that will suit everyone. After reviewing
commenter submissions on this issue,
the Department has determined that
future automatic updates to the salary
level will take effect on January 1. The
Department believes this effective date
aligns with the pay practices of many
employers and, when combined with
the 150-day advance notice period, will
best promote a smooth transition to new
salary levels. While we recognize that
some commenters favored new rates
taking effect on July 1 to account for
state budgeting cycles, any disruption
caused by the January 1 effective date is
mitigated by the Department’s decision
to update the salary level every three
years and increase the amount of notice
before automatically updated rates take
effect. These changes ensure that those
who favored a different effective date
have ample notice of both when the
Department will issue new salary levels
and when these rates will apply.82
82 The U.S. Department of Treasury-Office of
Human Capital Strategic Management asked that
each automatically updated salary level become
effective at ‘‘the start of the pay period following
the date of the annual adjustment’’ in order to avoid
having a new salary level take effect in the middle
of a pay period. We appreciate this comment, but
have decided not to institute this requested change.
The Department has always made new salary levels
effective on a specific date, rather than in relation
to employer pay periods. We believe this practice
remains appropriate, and that any administrative
burden on employers will be minimal given that
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The Department also proposed to
publish a notice with the new salary
level in the Federal Register at least 60
days before the updated rates would
become effective. Commenters that
explicitly addressed this issue generally
favored a longer notice period. For
example, the American Council of
Engineering Companies supported
automatic updating but stated that ‘‘120
days’ notice would be more workable
for employers.’’ Many commenters that
opposed automatic updating similarly
sought more advance notice should the
Department go forward with the
proposal. See, e.g., ABA (at least six
months); CUPA–HR (at least one year);
SHRM (at least one year). Finally, some
commenters deemed 60 days of notice
inadequate, but did not suggest an
alternative. See, e.g., Credit Union
National Association; NFIB; Seyfarth
Shaw; University of Wisconsin.
In response to commenter concerns,
the Department is increasing from 60 to
at least 150 days the amount of notice
provided before the updated salary level
takes effect. The Department believes
that this change will provide employers
sufficient time to adjust to the new
salary level, especially since (as
previously discussed) between updates
employers will be able to access BLS
data to help anticipate the approximate
size of the salary level change, while
also ensuring that salary level updates
are based on the most recent available
data. This increase to 150 days is also
more than the amount of notice the
Department has provided in each of our
prior rulemakings increasing the salary
threshold. Accordingly, § 541.607(g)
states that the Department will publish
notice of the new salary level no later
than 150 days before the updated rate
takes effect.
As discussed in more detail in the
economic impact analysis, the
Department will set the new salary level
using BLS’ deciles table of Census
Regions, without modifying the data in
any way.83 In order to ensure that the
updated salary level is based on the
most recent data, the Department will
use data from the second quarter
(April—June) of the year prior to the
update. For example, the salary level
that will take effect on January 1, 2020
will be published in the Federal
Register on or before August 4, 2019,
salary level changes will occur triennially and the
Department will publish the new salary level in the
Federal Register at least 150 days before it takes
effect.
83 This deciles table is currently available at:
https://www.bls.gov/cps/research_series_earnings_
nonhourly_workers.htm.
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and will be based on BLS data for the
second quarter of 2019.
The Department also proposed to
update the HCE total annual
compensation requirement with the
same method and frequency used to
update the standard salary level test.
Relatively few commenters specifically
addressed this aspect of the
Department’s proposal, and those that
did generally supported updating using
the same method—the fixed percentile
approach or the CPI–U—used for
updating the standard salary level. See,
e.g., NEA; NELA; Partnership; and
several individual commenters.
Similarly, those that opposed
automatically updating the standard
salary level also opposed automatically
updating the HCE total annual
compensation requirement. See, e.g.,
PPWO; Seyfarth Shaw. In light of these
comments, and given our decision to
update the standard salary level using
the fixed percentile method, the Final
Rule provides that the Department will
automatically update the HCE total
annual compensation level triennially to
keep it at the annualized value of the
90th percentile of the weekly earnings
of full-time salaried workers
nationwide. This updating methodology
will ensure that only those who are ‘‘at
the very top of [the] economic ladder’’
satisfy the total annual compensation
requirement and are thus subject to a
minimal duties test analysis. 69 FR
22174. The Department also finalizes
our proposal to update the portion of
the total annual compensation level that
employers must pay on a salary basis
($913 as of the effective date of this rule)
so that it continues to mirror the amount
of the standard salary requirement as it
is updated. As previously discussed in
sections IV.C., highly compensated
employees must receive at least the
standard salary amount each pay period
on a salary or fee basis without regard
to the payment of nondiscretionary
bonuses and incentive payments.
Finally, the Department proposed to
automatically update the special salary
level test for employees in American
Samoa by keeping it at 84 percent of the
standard salary level, and to
automatically update the base rate test
for motion picture industry employees
by changing the base rate
proportionately to the change in the
standard salary level. See 80 FR 38541.
The Department did not receive any
comments opposing these proposed
updating mechanisms, and new
§§ 541.607(b) and (c) finalize these
proposals.
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F. Duties Requirements for Exemption
Examination of the duties performed
by the employee has always been an
integral part of the determination of
exempt status, and employers must
establish that the employee’s ‘‘primary
duty’’ is the performance of exempt
work in order for the exemption to
apply. Each of the categories included
in section 13(a)(1) has separate duties
requirements. As previously discussed,
from 1949 until 2004 the regulations
contained two different duties tests for
executive, administrative, and
professional employees depending on
the salary level paid—a long duties test
for employees paid a lower salary, and
a short duties test for employees paid at
a higher salary level. The long duties
test included a 20 percent limit on the
time spent on nonexempt tasks (40
percent for employees in the retail or
service industries). In the 2004 Final
Rule, the Department replaced the
differing short and long duties tests with
a single standard test for executive,
administrative, and professional
employees that did not include a cap on
the amount of nonexempt work that
could be performed.
The Department has always
recognized that the salary level test
works in tandem with the duties
requirements to identify bona fide EAP
employees and protect the overtime
rights of nonexempt white collar
workers. The Department has often
noted that as salary levels rise a less
robust examination of the duties is
needed. This inverse correlation
between the salary level and the need
for an extensive duties analysis was the
basis of the historical short and long
duties tests. While the salary provides
an initial bright-line test for EAP
exemption, application of a duties test
is imperative to ensure that overtimeeligible employees are not swept into
the exemption. While the contours of
the duties tests have evolved over time,
the Department has steadfastly
maintained that meeting a duties test
remains a core requirement for the
exemption.
As explained in the NPRM, however,
the Department is concerned that under
the current regulations employees in
lower-level management positions may
be classified as exempt and thus
ineligible for overtime pay even though
they are spending a significant amount
of their work time performing
nonexempt work. In such cases, there is
a question as to whether the employees
truly have a primary duty of EAP work.
The Department believes that our
pairing in the 2004 rulemaking of a
standard duties test based on the less
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stringent short test for higher paid
employees, with a salary level based on
the long test for lower paid employees,
has exacerbated these concerns and led
to the inappropriate classification as
EAP exempt of employees who pass the
standard duties test but would have
failed the long duties test. As we noted
in the NPRM, this issue can arise when
a manager is performing exempt duties
less than 50 percent of the time, but it
is argued that those duties are
sufficiently important to nonetheless be
considered the employee’s primary
duty. It can also arise when a manager
who is performing nonexempt duties
much of the time is deemed to perform
exempt duties concurrently with those
nonexempt duties, and it is argued the
employee is exempt on that basis.
While the Department believed that
the proposed salary level increase,
coupled with automatic updates to
maintain the effectiveness of the salary
level test, would address most of the
concerns relating to the application of
the EAP exemption, we invited
comments on whether adjustments to
the duties tests were also necessary. The
Department did not propose any
specific changes to the duties tests, but
instead requested comment on a series
of specific issues:
A. What, if any, changes should be
made to the duties tests?
B. Should employees be required to
spend a minimum amount of time
performing work that is their primary
duty in order to qualify for exemption?
If so, what should that minimum
amount be?
C. Should the Department look to the
State of California’s law (requiring that
50 percent of an employee’s time be
spent exclusively on work that is the
employee’s primary duty) as a model? Is
some other threshold that is less than 50
percent of an employee’s time worked a
better indicator of the realities of the
workplace today?
D. Does the single standard duties test
for each exemption category
appropriately distinguish between
exempt and nonexempt employees?
Should the Department reconsider our
decision to eliminate the long/short
duties tests structure?
E. Is the concurrent duties regulation
for executive employees (allowing the
performance of both exempt and
nonexempt duties concurrently)
working appropriately or does it need to
be modified to avoid sweeping
nonexempt employees into the
exemption? Alternatively, should there
be a limitation on the amount of
nonexempt work? To what extent are
exempt lower-level executive employees
performing nonexempt work?
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Finally, the Department solicited
feedback regarding whether to add
additional examples of specific
occupations to the regulations to
provide guidance in administering the
EAP exemptions, particularly for
employees in the computer and
information technology industries. See
80 FR 38543.
After considering the comments
received in response to the questions
posed in the NPRM, the Department has
decided against making any changes to
the standard duties test or adding new
examples to the regulations at this time.
The Department recognizes that
stakeholders have strong and divergent
views about the standard duties test. We
also recognize that changes to the duties
test can be more difficult for employers
and employees to both understand and
implement. As explained in greater
detail below, the Department believes
that the standard salary level adopted in
this Final Rule coupled with automatic
updating in the future will adequately
address the problems and concerns that
motivated the questions posed in the
NPRM about the standard duties test.
As an initial matter, many
commenters asserted that the
Department lacks the legal authority to
enact any changes to the job duty
requirements in this Final Rule without
first proposing specific regulatory
changes in a new NPRM. As we
explained earlier with respect to our
automatic updating mechanism, nothing
in the APA or other referenced laws
requires an agency’s proposal to include
regulatory text for all provisions that
may appear in a final rule. See section
IV.E.i.
There were some areas of agreement
among the commenters in response to
the questions posed in the NPRM. For
example, a wide cross-section of
commenters opposed the idea of
reintroducing the long test/short test
structure that existed before the 2004
rulemaking. A joint comment submitted
by 57 labor law professors stated ‘‘it is
now true that reimplementation of the
two-tiered standards would serve to
complicate, rather than simplify, the test
for the exemption currently in use.’’
Commenters representing employers
stated that resurrecting the pre-2004
long test/short test structure would
contravene the President’s expressed
intent to modernize and simplify the
FLSA’s overtime regulations, and
expressed concern about the burden
such an approach would impose. See,
e.g., Fisher & Phillips; FMI; Littler
Mendelson; RILA; Seyfarth Shaw;
Sheppard Mullin. Commenters
representing employee interests, such as
NELA, explained that ‘‘having two tests
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resulted in inefficient litigation as to
which test applied to which employees
for which periods of time,’’ concluding
that ‘‘it is best to proceed with a
standard duties test supported by a
realistic and fully indexed salary level
test.’’ See also Employee Rights
Advocacy Group; Rudy, Exelrod, Zieff &
Lowe.
Many commenters also seemed to
appreciate the inverse relationship
between the duties test and the salary
level test. For example, although it
disagreed with the Department’s
proposed standard salary level, HR
Policy Association stated it ‘‘strongly
agrees with the Department that the
proposed salary level increase addresses
the concerns relating to executive
employees performing nonexempt
duties.’’ See also Employers Association
of New Jersey. EEAC noted that ‘‘a
robust salary threshold and strict duties
tests’’ (emphasis in comment) would
inappropriately screen out employees
who should be classified as exempt.
Commenters including AFL–CIO and
the Alaska Department of Labor and
Workforce Development, however,
asserted that the proposed salary level
was not sufficiently high to work with
the current duties test and therefore the
duties test needed to be strengthened.
Comments on the merits of changing
the current duties requirements were
sharply divergent, with many employee
advocates supporting additional
requirements to strengthen the standard
duties test and most employer
organizations strongly opposing any
changes. Commenters representing
employees generally asserted that
changes to the standard duties test are
needed to narrow the scope of an FLSA
exemption they believe has been
applied too broadly, as well as to reduce
litigation and compliance costs
attributable to the ambiguity and
subjectivity of the primary duty test.
Commenters representing employers
generally opposed changes to the
current duties test on the grounds that
the kind of changes contemplated by the
Department in the NPRM would be
excessively burdensome and disruptive
for employers and undermine the
President’s goal of modernizing the EAP
regulations.
As a general matter, commenter views
on the adequacy of the regulation’s
existing duty requirements reflected
their broader disagreement over whether
employees who pass the primary duty
test but perform substantial amounts of
nonexempt work should qualify as
‘‘bona fide’’ EAP workers. AFL–CIO,
AFT, and SEIU, for example, stated that
the standard duties test undermines the
breadth of coverage critical to the
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success of the FLSA by allowing
employers to exempt too many workers
performing substantial amounts of
nonexempt work, including workers
earning more than the standard salary
level proposed in the Department’s
NPRM. In contrast, the American
Staffing Association and NSBA stated
that the standard duties test
appropriately emphasizes the
importance of an employee’s primary
duty, not incidental nonexempt tasks he
or she may also perform. Several
commenters representing employers
asserted that the duties test must
account for the fact that exempt
employees now perform more of their
own clerical duties without the support
of nonexempt administrative support
staff. See, e.g., Joint Comment of the
International Public Management
Association for Human Resources and
the International Municipal Lawyers
Association.
Employee and employer organizations
similarly disagreed over whether the
current standard duties test adequately
works to prevent the misclassification of
workers who do not meet the duties test
and thus should receive overtime pay.
Commenters representing employees,
like NELP, stated that ambiguities in the
existing duty requirements ‘‘enable
employers to easily and successfully
manipulate employee job titles to sweep
more workers into the EAP
exemptions.’’ Some employers,
however, disagreed that non-compliance
by employers is prevalent, with SHRM
asserting that there is no evidence that
the standard duties test leads to ‘‘mass
misclassification of employees.’’ The
New Jersey Employers Association
commented that purported noncompliance in specific industries like
restaurant or retail does not justify
imposing burdensome new
requirements on all employers
throughout the entire economy.
Commenter views diverged even more
sharply in response to the specific
issues raised for consideration. Many
employee advocates supported the
introduction of a minimum requirement
for time spent on an employee’s primary
duty to the standard duties test. A large
number of these commenters endorsed
the adoption of a California-style rule,
which would require at least 50 percent
of an employee’s time to be spent
exclusively on work that is the
employee’s primary duty. See, e.g.,
AFSCME; Bend the Arc; ELC;
Employment Justice Center; IWPR;
Moreland law firm; National Women’s
Law Center; NDWA; NELP; Northwest
Workers Justice Project; Partnership;
SEIU; Shriver Center; Women
Employed; Workplace Fairness. Other
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32445
employee advocates expressed the point
as a preference for a 50 percent limit on
nonexempt work. See, e.g., AFL–CIO;
EPI; Nichols Kaster; Outten & Golden
law firm. UFCW supported a 40-percent
limit on the performance of nonexempt
work, while Legare, Attwood & Wolfe
supported reinstatement of the 20percent limit on nonexempt work that
existed under the former long duties
test.
In support of such requirements,
AFL–CIO, EPI, NELA, Nichols Kaster,
and several other commenters asserted
that employees who spend a majority of
their time performing nonexempt duties
should not qualify under the law as
‘‘bona fide’’ EAP workers. Legare,
Attwood & Wolfe stated that while the
percentage of time an employee spends
performing duties is not a perfect
indicator of her primary duty, it is a
‘‘very good proxy.’’ ELC, the Moreland
law firm, NELA, and several others
asserted that adding a ‘‘bright-line’’
quantitative component to the standard
duties test would simplify compliance
or reduce FLSA litigation attributable to
the subjectivity of the primary duty test,
while AFL–CIO stated that
implementing a more objective duties
test would lead to fewer ‘‘anomalous
outcomes’’ from court decisions
analyzing similar sets of facts.
Several commenters representing
employers addressed the issue of
concurrent duties—that is, the provision
in the executive duties test that permits
employees to perform nonexempt duties
while simultaneously performing
exempt management duties. See
§ 541.106. A number of employer
representatives noted that the
Department examined this issue in 2004
when the concurrent duties regulation
was promulgated as a separate provision
and asserted that there was no need for
the Department to alter the conclusions
we reached at that time. See, e.g.,
Chamber; FMI; IFA; Littler Mendelson.
Other commenters discussed how the
regulation applied to particular work
environments. See, e.g., ACRA
(‘‘Managers and assistant managers
employed by ACRA’s members often
‘lead by example’ by illustrating to
subordinate employees how to provide
top-notch customer service and take
pride in all aspects of one’s job.’’); RILA
(‘‘Leading by example by lending a hand
at the cash register or on the sales floor
is essential to employee training and
morale, as well as good customer
service.’’); Southeastern Alliance of
Child Care Associations (‘‘The
‘concurrent duties’ concept is of
particular relevance to the child care
industry. Consider, as an illustration, a
director who, in cleaning and/or feeding
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a young student, simultaneously trains
a new teacher on how students are to be
cleaned and/or fed in compliance with
state regulatory requirements.’’). UFCW,
however, questioned whether
employees were, in fact, leading by
example and pitching-in or, instead,
were being required by their employers
to perform such large quantities of
nonexempt work that their primary duty
could not be said to be management. See
UFCW (‘‘many employers maintain
policies which require exempt managers
to spend substantial periods of time
performing nonexempt hourly work’’
because they ‘‘do not budget sufficient
hours for nonexempt employees to
complete the work.’’). Some individual
commenters echoed this concern. For
example, a retail store manager
described working 55–60 hours a week
and because of low staffing noted that
he has little ‘‘flexibility when an
employee calls out sick. I have to pick
up the slack.’’ Similarly, a manager of a
community home for the intellectually
disabled stated that ‘‘[t]o reduce
organizational overtime, managers are
expected to work when employees call
in sick, are on leave, and when a client
is in the hospital and needs a 24 hour
sitter.’’
While few commenters representing
employees specifically addressed the
concurrent duties provision, many
endorsed California’s duties test, which
NWLC observed does not allow
employers to credit ‘‘time during which
non-exempt work is performed
concurrently.’’ See Heyen v. Safeway
Inc., 157 Cal. Rptr. 3d 280, 299–304
(Cal. Ct. App. 2013). AFL–CIO
explained that it ‘‘is not enough to
require that ‘bona fide’ EAP employees
spend 50 percent of their time doing
exempt work: they must spend 50
percent of their time exclusively on
exempt work.’’ (emphasis in comment);
see also NELA; UFCW. Outten & Golden
explicitly requested the Department to
rescind the concurrent duties provision,
asserting that it contributes to the
confusion surrounding the application
of the executive exemption and fails to
account for instances ‘‘when the amount
of non-exempt work overwhelms [an
executive’s] capacity to perform their
supervisory functions.’’
Commenters representing employers
strongly opposed the addition of any
kind of limitation on the performance of
nonexempt work to the standard duties
test and any revisions to the concurrent
duties regulation, stating that such
changes would fail to account for the
realities of the modern workplace. See,
e.g., Chamber; HR Policy Association;
NCCR; NRF; NSBA; SIGMA. Further,
many commenters, including AH&LA,
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NRA, Petroleum Marketers Association
of America, PPWO, and SHRM, stated
that imposing any quantitative
restrictions or eliminating the
concurrent duties regulation would
prevent exempt employees from
‘‘pitching in’’ during staff shortages or
busy periods, increasing labor costs or
negatively affecting business efficiency
and customer service. A few
commenters representing employers
also asserted such changes would
undermine the sense of teamwork in the
workplace. See, e.g., American Resort
Developmental Association; NCCR;
Weirich Consulting.
AIA–PCI, NFIB, PPWO, and many
others objected that introducing a cap
on nonexempt work to the standard
duties test would also impose
significant recordkeeping burdens on
employers, and several commenters,
including the Chamber, Littler
Mendelson, and RILA, noted that the
Department previously acknowledged
such concerns in the 2004 Final Rule.
See 69 FR 22127. Some commenters,
including AH&LA and NFIB, also
asserted that the recordkeeping burden
would at least partially fall onto exempt
employees themselves. In addition,
many commenters representing
employers asserted that introducing a
quantitative component to the duties
test would increase FLSA litigation due
to the administrative difficulties
associated with tracking the hours of
exempt employees. See, e.g., AIA–PCI;
CalChamber Coalition; Seyfarth Shaw;
Weirich Consulting. FMI, IFA, Littler
Mendelson, and the Chamber all noted
that departing from the holistic
approach to the standard duties test
would ‘‘result in the upheaval of the
past decade of case law and agency
opinions.’’
After considering the comments, the
Department has decided against adding
a quantitative limitation on the
performance of nonexempt work in the
standard duties test, or making any
other revisions to the duties test in this
rulemaking. The Department continues
to believe that, at some point, a
disproportionate amount of time spent
on nonexempt duties may call into
question whether an employee is, in
fact, a bona fide EAP employee. We also
understand the concerns of some
commenters that contend that the
qualitative nature of the primary duty
test may allow the classification of
lower-level employees as exempt and
thus ineligible for overtime pay even
though they are spending a significant
amount of work time performing
nonexempt work. The Department
expects that setting the standard salary
level at the 40th percentile of weekly
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earnings of full-time salaried workers in
the lowest-wage Census Region and
updating that salary level on a regular
basis going forward will address these
concerns, which we believe are most
prevalent among low-salaried white
collar employees. While this salary level
is lower than that proposed in the
NPRM, the Department believes that it
is sufficient to work effectively in
combination with the current duties
test. The Department will consider the
impact of this rule going forward to
ensure that the salary level and the
duties test continue to work together to
appropriately distinguish between
exempt EAP employees and overtimeprotected white collar workers.84
The Department also understands the
concerns of employers and their
advocates that prohibiting managers
from ‘‘pitching-in’’ could negatively
affect the workplace. The Department
believes, however, that there is an
important difference between a manager
who occasionally demonstrates how to
properly stock shelves to instruct a new
employee, or who occasionally opens an
additional cash register to assist in
clearing a line of waiting customers, and
a manager who must routinely perform
significant amounts of nonexempt work
because her employer does not provide
appropriate staffing on all shifts. See
AH&LA (‘‘In short, when an exempt
manager makes the decision that he or
she needs to perform non-exempt duties
to help the operation run smoothly, the
manager’s primary duty continues to be
managing his or her staff and the
operations of their department.’’); NRA
(‘‘Performing hands-on work at the
manager’s own discretion to ensure that
operations are successfully run in no
way compromises the fact that the
manager’s primary responsibility is
performing exempt work.’’). In those
situations such as those described by
employee commenters above, where
managers as a practical matter must
perform significant amounts of
nonexempt work, the Department does
84 Some commenters, including AT&T, the
Brevard Achievement Center, Eden Financial, and
the Nixon Peabody law firm, suggested eliminating
the duties test entirely, making exempt status
dependent on the amount of an employee’s salary
alone. As we have done in prior rulemakings, we
again reject such an approach as precluded by the
FLSA. As the Department said in 1949, the
‘‘Administrator would undoubtedly be exceeding
his authority if he included within the definition of
these terms craftsmen, such as mechanics,
carpenters, or linotype operators, no matter how
highly paid they might be.’’ Weiss Report at 23.
Most recently, in the 2004 Final Rule, we stated
‘‘the Secretary does not have authority under the
FLSA to adopt a ‘salary only’ test for exemption.’’
69 FR 22173. Our conclusion that there is a
necessity for the duties tests in order to define who
is a bona fide exempt EAP employee has not
changed.
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not believe that the manager is in any
meaningful sense able to ‘‘make the
decision regarding when to perform
nonexempt duties’’ and a close
examination of the specific facts must
be made of whether the employee’s
primary duty is, in fact, the performance
of exempt work. § 541.106(a).
In the NPRM, the Department also
sought feedback regarding whether
additional occupation examples should
be added to the regulations, and, if so,
which specific examples would be most
helpful to include. Some commenters,
including the American Staffing
Association, the Maryland Chamber of
Commerce, and the Poarch Band of
Creek Indians, agreed that adding new
examples to the regulations would be
helpful in applying the EAP exemption.
The American Trucking Association
stated that additional regulatory
examples would be particularly useful
for clarifying the administrative
employee exemption, which many
commenters asserted is more ambiguous
than the executive or professional
exemptions. A number of commenters
offered specific suggestions of
occupations they would like to see
addressed in the regulations. See, e.g.,
American Staffing Association (staffing
firm recruiters and account managers);
American Trucking Association (truck
company dispatchers); Information
Technology Alliance for Public Sector
(employees performing various
computer-related duties); Joint
Comment of Postdoctoral Associations
and individuals (postdoctoral fellows);
Printing Industries of America
(customer service representatives). The
Fraternity Executives Association, the
International Association of Fire Chiefs,
and the Michigan Society of Association
Executives, requested regulatory
examples relevant to associations,
membership organizations and
charitable foundations.
ABA and several commenters
representing employees, including
AFL–CIO, however, asserted that
regulatory examples distract from the
longstanding principle that job titles
alone are insufficient to establish the
exempt status of an employee. Nichols
Kaster stated that regulatory examples of
exempt occupations ‘‘encourage
employers to manipulate job
descriptions to classify non-exempt
employees as exempt.’’ Finally, AFL–
CIO and NELA each stated that
including additional examples of
generally exempt or generally
nonexempt occupations is neither
helpful nor necessary.
Upon further consideration, the
Department has decided against
introducing any new examples to the
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existing regulations in this rulemaking.
We note that the existing examples in
the regulations do not provide
categorical exemptions for certain
occupations but instead set out typical
job duties associated with specific
occupations which if performed by an
employee generally would, or generally
would not, qualify the employee for
exemption. In all instances, it is the
application of the duties test to the
specific facts of the employee’s work
that determines whether the employee
satisfies the requirements for the EAP
exemption. Although the Department
received feedback on suggested
regulatory examples from some
commenters, the stakeholder input we
received overall did not justify the
introduction of any new examples into
the EAP regulations at this time.
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA), 44 U.S.C. 3501 et seq., and its
attendant regulations, 5 CFR part 1320,
requires that the Department consider
the impact of paperwork and other
information collection burdens imposed
on the public. Under the PRA, an
agency may not collect or sponsor the
collection of information, nor may it
impose an information collection
requirement unless it displays a
currently valid Office of Management
and Budget (OMB) control number. See
5 CFR 1320.8(b)(3)(vi).
OMB has assigned control number
1235–0018 to the Fair Labor Standards
Act (FLSA) information collections.
OMB has assigned control number
1235–0021 to Employment Information
Form collections, which the Department
uses to obtain information from
complainants regarding FLSA
violations. In accordance with the PRA,
the Department solicited comments on
the FLSA information collections and
the Employment Information Form
collections in the NPRM published July
6, 2015, see 80 FR 38516, as the NPRM
was expected to impact these
collections. 44 U.S.C. 3506(c)(2). The
Department also submitted a
contemporaneous request for OMB
review of the proposed revisions to the
FLSA information collections, in
accordance with 44 U.S.C. 3507(d). On
September 29, 2015, OMB issued a
notice for each collection (1235–0018
and 1235–0021) that continued the
previous approval of the FLSA
information collections and the
Employment Information Form
collections under the existing terms of
clearance. OMB asked the Department
to resubmit the information collection
request upon promulgation of the Final
Rule and after considering public
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32447
comments on the proposed rule dated
July 6, 2015.
Circumstances Necessitating
Collection: The FLSA, 29 U.S.C. 201 et
seq., sets the federal minimum wage,
overtime pay, recordkeeping and youth
employment standards of most general
application. Section 11(c) of the FLSA
requires all employers covered by the
FLSA to make, keep, and preserve
records of employees and of wages,
hours, and other conditions and
practices of employment. An FLSA
covered employer must maintain the
records for such period of time and
make such reports as prescribed by
regulations issued by the Secretary of
Labor. The Department has promulgated
regulations at part 516 to establish the
basic FLSA recordkeeping requirements,
which are approved under OMB control
number 1235–0018.
FLSA section 11(a) provides that the
Secretary of Labor may investigate and
gather data regarding the wages, hours,
or other conditions and practices of
employment in any industry subject to
the FLSA, and may enter and inspect
such places and such records (and make
such transcriptions thereof), question
such employees, and investigate such
facts, conditions, practices, or matters
deemed necessary or appropriate to
determine whether any person has
violated any provision of the FLSA. 29
U.S.C. 211(a). The information
collection approved under OMB control
number 1235–0021 provides a method
for the Wage and Hour Division of the
U.S. Department of Labor to obtain
information from complainants
regarding alleged violations of the labor
standards the agency administers and
enforces. This Final Rule revises the
existing information collections
previously approved under OMB
control number 1235–0018 (Records to
be Kept by Employers—Fair Labor
Standards Act) and OMB control
number 1235–0021 (Employment
Information Form).
This Final Rule does not impose new
information collection requirements;
rather, burdens under existing
requirements are expected to increase as
more employees receive minimum wage
and overtime protections due to the
proposed increase in the salary level
requirement. More specifically, the
changes adopted in this Final Rule may
cause an increase in burden on the
regulated community because
employers will have additional
employees to whom certain longestablished recordkeeping requirements
apply (e.g., maintaining daily records of
hours worked by employees who are not
exempt from the both minimum wage
and overtime provisions). Additionally,
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the changes adopted in this Final Rule
may cause an initial increase in burden
if more employees file a complaint with
WHD to collect back wages under the
overtime pay requirements.
Public Comments: The Department
sought public comments regarding the
burdens imposed by information
collections contained in the proposed
rule. Several employer commenters and
those representing them stated that
employers would need to maintain
records of hours worked for more
employees as a result of our proposal to
increase the salary level. See, e.g.,
American Feed Industry Association;
National Roofing Contractors
Association; Nebraska Furniture Mart.
Many of these comments came from
individual employers as part of a
campaign organized by the National
Automatic Merchandising Association
(NAMA), stating that the Department’s
proposal to raise the salary threshold
would ‘‘create a challenge by placing a
burden on the employers to closely
track nonexempt employees’ hours to
ensure compliance with overtime pay
and other requirements,’’ and this
‘‘tracking of hours would also produce
increased human resources paperwork.’’
The Office of Advocacy of the U.S.
Small Business Administration asserted
that increasing the salary level as the
Department proposed would add
‘‘significant’’ paperwork burdens on
small entities, ‘‘particularly businesses
in low wage regions and in industries
that operate with low profit margins.’’ In
addition, some commenters expressed
concern that the Department’s cost
estimates related to recordkeeping were
too low, given that employers would
need to set up revised recordkeeping
and payroll systems for newly overtimeeligible employees. See, e.g., NSBA;
Reid Petroleum; SA Photonics; Seyfarth
Shaw; Surescan Corporation. The
National Association for Home Care and
Hospice asserted that if the Department
were to adopt the proposed salary level,
home care and hospice companies
would need to ‘‘completely modify their
recordkeeping on worker time,’’ and
‘‘such changes will double payroll
management costs.’’ In response to these
comments, the Department notes that
we believe that most employers
currently have both exempt and
nonexempt workers and therefore have
systems already in place for employers
to track hours. The Department also
notes that commenters did not offer
alternatives for estimates or make
suggestions regarding methodology for
the PRA burdens. The actual
recordkeeping requirements are not
changing in the Final Rule. However,
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the pool of workers for whom an
employer will be required to make and
maintain records has increased under
the Final Rule, and as a result the
burden hours have increased. Included
in this PRA section are the regulatory
familiarization costs for this Final Rule.
We note however, that this is a
duplication of the regulatory
familiarization costs contained in the
economic impact analysis, see section
VI.
A number of commenters also
expressed concern about potential
changes to the duties tests. Some
commenters specifically articulated
concern about implementing a
percentage duties test. See, e.g.,
American Society of Association
Executives (ASAE); Community Bankers
Association; International Franchise
Association; Lutheran Services of
America; Society for Human Resources
Management. For example, Walmart
stated that it ‘‘would be concerned if
such a proposal includes any
quantitative or time based assessment of
an exempt employee’s duties or further,
a prohibition on concurrent duties.
Such changes would require employers
to undertake significant recordkeeping
burdens and add to the uncertainty over
classifications.’’ Other commenters
expressed their view that the
Department would violate the PRA by
making any changes to the duties tests,
because the Department did not provide
specific proposed changes to the duties
tests in the NPRM. See, e.g., ASAE;
Christian Camp and Conference
Association, International; Community
Bankers Association; Diving Equipment
and Marketing Association; Equal
Employment Advisory Committee;
International Bancshares Corporation,
International Dairy Foods Association;
Island Hospitality Management;
National Council of Chain Restaurants;
National Retail Federation; New Jersey
Association of Mental Health and
Addiction Agencies; Recreational
Diving Industry; WorldatWork; YMCA–
USA. Since the Department has decided
against enacting any changes to the
standard duties test or adding new
examples to the current regulatory text
at this time, these commenters’ concerns
have been addressed.
An agency may not conduct an
information collection unless it has a
currently valid OMB approval, and the
Department has submitted the identified
information collection contained in the
proposed rule to OMB for review under
the PRA under the Control Numbers
1235–0018 and 1235–0021. See 44
U.S.C. 3507(d); 5 CFR 1320.11. The
Department has resubmitted the revised
FLSA information collections to OMB
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for approval, and intends to publish a
notice announcing OMB’s decision
regarding this information collection
request. A copy of the information
collection request can be obtained at
https://www.Reginfo.gov or by contacting
the Wage and Hour Division as shown
in the FOR FURTHER INFORMATION
CONTACT section of this preamble.
OMB Control Number: 1235–0018.
Affected Public: Businesses or other
for-profit, farms, not-for-profit
institutions, state, local and tribal
governments, and individuals or
households.
Total Respondents: 5,511,960
(2,506,666 affected by this Final Rule).
Total Annual Responses: 46,057,855
(2,552,656 from this Final Rule).
Estimated Burden Hours: 3,489,585
(2,506,666 from this Final Rule)
Estimated Time per Response:
various.
Frequency: Various.
Total Burden Cost (capital/startup): 0.
Total Burden Costs (operation/
maintenance): $126,392,768
($90,791,443 from this Final Rule).
Title: Employment Information Form.
OMB Control Number: 1235–0021.
Affected Public: Businesses or other
for-profit, farms, not-for-profit
institutions, state, local and tribal
governments, and individuals or
households.
Total Respondents: 37,367 (2,017
added by this rulemaking).
Estimated Number of Responses:
37,367 (2,017 added by this
rulemaking).
Estimated Burden Hours: 12,456 (672
hours added by this rulemaking).
Estimated Time per Response: 20
minutes (unaffected by this rulemaking).
Frequency: Once.
Other Burden Cost: 0.
VI. Analysis Conducted In Accordance
with Executive Order 12866, Regulatory
Planning and Review, and Executive
Order 13563, Improving Regulation and
Regulatory Review
Executive Orders 12866 and 13563
direct agencies to assess the costs and
benefits of a regulation and to adopt a
regulation only upon a reasoned
determination that the regulation’s net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity)
justify its costs. Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility.
Under Executive Order 12866, the
Office of Management and Budget
(OMB) must determine whether a
regulatory action is a ‘‘significant
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regulatory action,’’ which includes an
action that has an annual effect of $100
million or more on the economy.
Significant regulatory actions are subject
to review by OMB. As described below,
this Final Rule is economically
significant. Therefore, the Department
has prepared a Regulatory Impact
Analysis (RIA) 85 in connection with
this Final Rule as required under
section 6(a)(3) of Executive Order
12866, and OMB has reviewed the rule.
A. Introduction
i. 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 the
persons employed by the employer and
of the wages, hours, and other
conditions and practices of
employment. It is widely recognized
that the general requirement that
employers pay a premium rate of pay for
all hours worked over 40 in a workweek
is a cornerstone of the Act, grounded in
two policy objectives. The first is to
spread employment (or, in other words,
reduce involuntary unemployment) by
incentivizing employers to hire more
employees rather than requiring existing
employees to work longer hours. The
second policy objective is to reduce
overwork and its detrimental effect on
the health and well-being of workers.
The FLSA provides a number of
exemptions from the Act’s minimum
wage and overtime pay provisions,
including one for bona fide executive,
administrative, and professional (EAP)
employees. Such employees perform
work that cannot easily be spread to
other workers after 40 hours in a week
and that is difficult to standardize to
any timeframe; they also typically
receive more monetary and nonmonetary benefits than most blue collar
and lower-level office workers. The
exemption applies to employees
employed in a bona fide executive,
administrative, or professional capacity
and for outside sales employees, as
those terms are ‘‘defined and delimited’’
by the Department. 29 U.S.C. 213(a)(1).
The Department’s regulations
implementing these ‘‘white collar’’
exemptions are codified at part 541.
For an employer to exclude an
employee from minimum wage and
overtime protection pursuant to the EAP
exemption, the employee generally must
meet three criteria: (1) The employee
must be paid a predetermined and fixed
salary that is not subject to reduction
because of variations in the quality or
quantity of work performed (the ‘‘salary
basis test’’); (2) the amount of salary
paid must meet a minimum specified
amount (the ‘‘salary level test’’); and (3)
the employee’s job duties must
primarily involve executive,
administrative, or professional duties as
defined by the regulations (the ‘‘duties
test’’). The Department has periodically
updated the regulations governing these
tests since the FLSA’s enactment in
1938, most recently in 2004 when,
among other revisions, the Department
created the standard duties test and
paired it with a salary level test of $455
per week. The Department also
established an abbreviated duties test
for highly compensated employees
(HCE)—i.e., white collar workers with a
total annual compensation of at least
$100,000. To satisfy the total annual
compensation requirement, an
employee must earn at least $455 per
week on a salary or fee basis, and total
annual compensation may also include
commissions, nondiscretionary bonuses,
and other nondiscretionary
compensation.
As a result of inflation, the real value
of the standard salary and HCE
compensation thresholds have fallen
significantly since they were set in
2004, making them inconsistent with
32449
Congress’ intent to exempt only ‘‘bona
fide’’ EAP workers, who typically earn
salaries well above those of any workers
they may supervise and presumably
enjoy other privileges of employment
such as above average fringe benefits,
greater job security, and better
opportunities for advancement. Stein
Report at 21–22. For example, the
annualized equivalent of the standard
salary level ($23,660, or $455 per week
for 52 weeks) is now below the 2015
poverty threshold for a family of four
($24,036).86 Similarly, by October 1,
2016, approximately 20 percent of fulltime salaried workers are projected to
earn at least $100,000 annually, almost
three times the share who earned that
amount when the HCE test was created.
The premise behind the standard
salary level test and the HCE total
annual compensation requirement is
that employers are more likely to pay
higher salaries to workers in bona fide
EAP jobs. A high salary is considered a
measure of an employer’s good faith in
classifying an employee as exempt,
because an employer is less likely to
have misclassified a worker as exempt
if he or she is paid a high wage. Stein
Report at 5; Weiss Report at 8.
The salary level requirement was
created to identify the dividing line
distinguishing workers who may be
performing exempt duties from the
nonexempt workers whom Congress
intended to be protected by the FLSA’s
minimum wage and overtime
provisions. Throughout the regulatory
history of the FLSA, the Department has
considered the salary level test the ‘‘best
single test’’ of exempt status. Stein
Report at 19. This bright-line test is
easily observed, objective, and clear. Id.
ii. Need for Rulemaking
The salary level test has been updated
seven times since it was implemented in
1938. Table 1 presents the weekly salary
levels associated with the EAP
exemptions since 1938, organized by
exemption and long/short/standard
duties test.87
TABLE 1—HISTORICAL SALARY LEVELS FOR THE EAP EXEMPTIONS
Long test
Professional
Short test
(all)
........................
$50
75
95
........................
........................
$100
125
Date enacted
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Executive
1938
1940
1949
1958
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
85 The terms ‘‘regulatory impact analysis’’ and
‘‘economic impact analysis’’ are used
interchangeably throughout this Final Rule.
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$30
30
55
80
86 This is the 2015 poverty threshold for a family
of four with two related people under 18 in the
household. Available at: https://www.census.gov/
hhes/www/poverty/data/threshld/.
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Administrative
$30
50
75
95
87 From 1949 until 2004 the regulations contained
two different tests for exemption—a long duties test
for employees paid a lower salary, and a short
duties test for employees paid at a higher salary
level.
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TABLE 1—HISTORICAL SALARY LEVELS FOR THE EAP EXEMPTIONS—Continued
Long test
Date enacted
Executive
1963 .................................................................................................................
1970 .................................................................................................................
1975 .................................................................................................................
Administrative
100
125
155
100
125
155
Professional
115
140
170
Short test
(all)
150
200
250
Standard Test
2004 .................................................................................................................
$455
the salary threshold. Between 2004 and
2015, the real value of the standard
salary level declined 20.3 percent,
calculated using the Consumer Price
Index for all urban consumers (CPI–
U).88 The decline is even larger when
comparing the salary level in 2015 with
1975 levels. Figure 1 demonstrates how
the real values of the salary levels have
changed since 1938, measured in 2015
dollars. The Final Rule’s standard salary
level is below the real value of the short
test salary level in all previous years
when it was updated.
As a result of the erosion of the real
value of the standard salary level, more
and more workers lack the clear
protection the salary level test is meant
to provide. Each year that the salary
level is not updated, its utility as a
distinguishing mechanism between
exempt and nonexempt workers
declines. The Department has revised
the levels just once in the 41 years since
1975. In contrast, in the 37 years
between 1938 and 1975, salary test
levels were increased approximately
every five to nine years. In our 2004
rulemaking, the Department stated the
intention to ‘‘update the salary levels on
a more regular basis, as it did prior to
1975,’’ and added that the ‘‘salary levels
should be adjusted when wage survey
data and other policy concerns support
such a change.’’ 69 FR 22171. Now, in
order to restore the value of the standard
salary level as a line of demarcation
between those workers for whom
Congress intended to provide minimum
wage and overtime protections and
those workers who may be performing
bona fide EAP duties, and to maintain
its continued validity, in this Final Rule
the Department is setting the standard
salary level equal to the 40th percentile
of weekly earnings of all full-time
salaried workers in the lowest-wage
88 CPI–U data available at: https://data.bls.gov/cgibin/cpicalc.pl.
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In 2004, the Department set the
standard salary level at $455 per week.
Following more than ten years of
inflation, the purchasing power, or real
value, of the standard salary level test
has eroded substantially, and as a result
increasingly more workers earn above
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Census Region. The Department
determined the ‘‘lowest-wage Census
Region’’ by examining Current
Population Survey (CPS) data for each
Census Region to find the region having
the lowest salary amount at the 40th
percentile of weekly earnings of fulltime salaried workers, which currently
is the South.89 Based on the fourth
quarter of 2015 CPS data, the 40th
percentile for the South Census Region
is $913 per week. To bring the HCE
annual compensation requirement in
line with the level established in 2004,
the Department, in this Final Rule, is
setting the HCE total annual
compensation level at the 90th
percentile of annualized weekly
earnings of full-time salaried workers
nationally. Based on the fourth quarter
of 2015 CPS data, the HCE
compensation level is $134,004
annually.
In addition, this Final Rule has
introduced a mechanism to
automatically update the standard
salary and HCE total annual
compensation levels every three years,
with the first update taking effect on
January 1, 2020. This triennial
automatic updating will preserve the
effectiveness of the salary level as a
dividing line between nonexempt
workers and workers who may be
exempt, eliminate the volatility
associated with previous changes in the
thresholds, and increase certainty for
employers with respect to future
changes. It will also simplify the
updating process, as the Department
will simply publish a notice in the
Federal Register with the updated
salary and compensation thresholds at
least 150 days in advance of the update,
and post the updated salary and
compensation levels on the Wage and
Hour Division (WHD) Web site. Should
the Department determine in the future
that changes in the updating
methodology may be warranted, the
Department can engage in notice and
comment rulemaking.
iii. Summary of Affected Workers,
Costs, Benefits, and Transfers
The Department estimated the
number of affected workers and
quantified costs and transfer payments
associated with this Final Rule. To
produce these estimates, the Department
used data from the CPS, a monthly
survey of 60,000 households conducted
by the U.S. Census Bureau. Many of the
data variables used in this analysis are
from the CPS’s Merged Outgoing
89 For simplicity, in this rulemaking we refer to
the lowest-wage Census Region and the South
interchangeably.
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Rotation Group (MORG) data. The
impacts calculated by the Department in
this analysis are based on FY2013–
FY2015 data projected to reflect
FY2017. The Department used the same
data available to the public to analyze
the impact of this Final Rule.90 Data for
FY2015 were the most recently available
at the time of writing.91 However, the
Department pooled three years of data
in order to increase the sample size.
Additionally, because the rulemaking
will take effect December 1, 2016, the
Department has projected the data to
represent FY2017 as Year 1 (the fiscal
year most similar to the first year of
implementation).
Some commenters, such as the United
States Chamber of Commerce
(Chamber), National Retail Federation
(NRF), and the Florida Department of
Economic Opportunity (FL DEO),
expressed concern that the estimated
impacts in the Preliminary Regulatory
Impact Analysis (PRIA) are not
replicable. To the extent that these
commenters suggested that the entire
PRIA was based on non-public data, the
Department emphasizes that we used
the non-publicly available data only for
determining percentiles of the earnings
distribution. As we noted in the NPRM,
the public will not be able to precisely
recreate the salary amounts in the
published deciles because to ensure the
confidentiality of survey respondents,
the data in BLS public-use files use
adjusted weights and therefore minor
discrepancies between internal BLS files
and public-use files exist. See 80 FR
38528 n.24. Some commenters also
asserted that the methodology used in
the PRIA to estimate the impact of this
rulemaking could not be replicated
because the Department did not
sufficiently explain our analysis. The
Department believes that the analytic
methodology was thoroughly described
throughout the NPRM, PRIA and
Appendix A, 80 FR 38545–601.
Nevertheless, we have provided
additional details in this RIA to address
concerns about replicability.
The Department estimates that in
FY2017, there will be 44.8 million white
collar salaried employees who do not
qualify for any other FLSA exemption
and therefore may be affected by a
change to the Department’s part 541
regulations (Table 7). Of these workers,
the Department estimates that 29.9
million would be exempt from the
minimum wage and overtime pay
90 To ensure the confidentiality of survey
respondents, data in the public-use files use
adjusted weights and top-coded earnings.
91 FY2015 includes October 1, 2014 through
September 30, 2015.
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provisions under the part 541 EAP
exemptions (in the baseline scenario
without the rule taking effect). The other
14.9 million workers do not satisfy the
duties tests for EAP exemption and/or
earn less than $455 per week (Table
7).92 However, of the 29.9 million EAPexempt workers, 7.4 million are in
‘‘named occupations’’ and thus need
only pass the duties tests to be subject
to the standard EAP exemptions.93
Therefore, these workers are not
considered in the analysis, leaving 22.5
million EAP-exempt workers potentially
affected by this Final Rule.
In Year 1, an estimated 4.2 million
workers will be affected by the increase
in the standard salary level test (Table
2). This figure consists of currently EAPexempt workers subject to the salary
level test who earn at least $455 per
week but less than the 40th percentile
of full-time salaried workers in the
South ($913). Additionally, an
estimated 65,000 workers will be
affected by the increase in the HCE
compensation test.94 Finally, 732,000
white collar, salaried workers making
between $455 and $913 who do not
meet the duties test are already overtime
eligible but do not receive overtime pay
because they are misclassified. While
these workers are not ‘‘affected’’ by the
Final Rule because their entitlement to
overtime will not change, as a result of
the change in the salary level their
exemption status will be clear based on
the salary test alone and they will no
longer be misclassified due to
misapplication of the duties test. In Year
10, with automatic updating,95 5.0
million workers are projected to be
affected by the change in the standard
salary level test and 217,000 workers
will be affected by the change in the
HCE total annual compensation test.
92 Here and elsewhere in this analysis, numbers
are reported at varying levels of aggregation, and are
generally rounded to a single decimal point.
However, calculations are performed using exact
numbers. Therefore, some numbers may not match
the reported total or the calculation shown due to
rounding of components.
93 Workers not subject to the EAP salary level test
include teachers, academic administrative
personnel, physicians, lawyers, judges, and outside
sales workers.
94 In later years, earnings growth will cause some
workers to no longer be affected in those years
because their earnings will exceed the salary
threshold. Additionally, some workers will become
newly affected because their earnings will exceed
$455 per week, and in the absence of this Final Rule
would have lost their overtime protections. In order
to estimate the total number of affected workers
over time, the Department accounts for both of
these effects. Thus, in Year 2, an estimated 4.0
million workers will be affected, and by Year 10,
an estimated 5.3 million workers will be affected.
95 Future automatic updates to the standard salary
and HCE compensation level requirements will
occur in Years 4, 7, and 10.
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Three direct costs to employers are
quantified in this analysis: (1)
Regulatory familiarization costs; (2)
adjustment costs; and (3) managerial
costs. Regulatory familiarization costs
are the costs incurred to read and
become familiar with the requirements
of the rule. Adjustment costs are the
costs accrued to determine workers’
new exemption statuses, notify
employees of policy changes, and
update payroll systems. Managerial
costs associated with this Final Rule
occur because hours of workers who are
newly entitled to overtime may be more
closely scheduled and monitored to
minimize or avoid overtime hours
worked.
The costs presented here are the
combined costs for both the change in
the standard salary level test and the
HCE annual compensation level (these
will be disaggregated in section
VI.D.iii.). Total average annualized
direct employer costs over the first 10
years are estimated to be $295.1 million,
assuming a 7 percent discount rate;
hereafter, unless otherwise specified,
average annualized values will be
presented using the 7 percent real
discount rate (Table 2). Deadweight loss
(DWL) is also a cost but not a direct
employer cost. DWL is a function of the
difference between the wage employers
are willing to pay for the hours lost, and
the wage workers are willing to take for
those hours. In other words, DWL
represents the decrease in total
economic surplus in the market arising
from the change in the regulation. The
Department estimates average
annualized DWL to be $9.2 million.96
In addition to the costs described
above, this Final Rule will also transfer
income from employers to employees in
the form of wages. The Department
estimates average annualized transfers
will be $1,189.1 million. The majority of
these transfers are attributable to the
FLSA’s overtime provision; a far smaller
share is attributable to the FLSA’s
minimum wage requirement. Transfers
also include additional pay to increase
the salaries of some affected EAP
workers who remain exempt.
Employers may incur additional costs,
such as hiring new workers. These other
potential costs are discussed in section
VI.D.iii. Benefits of this Final Rule are
discussed in section VI.D.vii.
TABLE 2—SUMMARY OF REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS
[Millions 2017$]
Future years a
Impact
Average annualized value
Year 1
Year 2
Year 10
3% real rate
7% real rate
Affected Workers (1,000s)
Standard ..................................................................................................
HCE .........................................................................................................
Total ..................................................................................................
4,163
65
4,228
3,893
73
3,965
5,045
217
5,261
....................
....................
....................
....................
....................
....................
$208.0
936.5
8.7
$284.2
1,607.2
11.1
$288.0
1,201.6
9.3
$295.1
1,189.1
9.2
Costs and Transfers (Millions 2017$) b
Direct employer costs ..............................................................................
Transfers c ................................................................................................
DWL .........................................................................................................
$677.9
1,285.2
6.4
a These
costs/transfers represent a range over the nine-year span.
and transfers for affected workers passing the standard and HCE tests are combined.
c This is the net transfer that we primarily describe as being from employers to workers. There may also be transfers of hours and income from
some workers to others. Moreover, some of these transfers may be intrapersonal, for instance, higher earnings may be offset by increased hours
worked for employees who remain overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees.
b Costs
Affected EAP workers: The population of
potentially affected EAP workers who either
pass the standard duties test and earn at least
$455 but less than the new salary level of the
40th percentile of weekly earnings of fulltime salaried workers in the lowest-wage
Census Region (currently the South) ($913 in
Year 1), or pass only the HCE duties test and
earn at least $100,000 but less than the
annualized earnings of the 90th percentile of
full-time salaried workers nationally
($134,004 in Year 1). This is estimated to be
4.2 million workers.97
Baseline EAP exempt workers: The
projected number of workers who would be
EAP exempt in FY2017 if the rulemaking did
not take effect.
BLS: Bureau of Labor Statistics.
CPI–U: Consumer Price Index for all urban
consumers.
CPS: Current Population Survey.
Duties test: To be exempt from the FLSA’s
minimum wage and overtime requirements
under section 13(a)(1), the employee’s
primary job duty must involve bona fide
executive, administrative, or professional
duties as defined by the regulations. The
Department distinguishes among four such
tests:
Standard duties test: The duties test used
in conjunction with the standard salary level
test, as set in 2004 and applied to date, to
determine eligibility for the EAP exemptions.
It replaced the short and long tests in effect
from 1949 to 2004, but its criteria closely
follow those of the former short test.
HCE duties test: The duties test used in
conjunction with the HCE total annual
compensation requirement, as set in 2004
and applied to date, to determine eligibility
for the HCE exemption. It is much less
stringent than the standard and short duties
tests to reflect that very highly paid
employees are much more likely to be
properly classified as exempt.
Long duties test: One of two duties tests
used from 1949 until 2004; this more
restrictive duties test had a greater number of
requirements, including a limit on the
amount of nonexempt work that could be
performed, and was used in conjunction with
96 The estimate of DWL assumes the market meets
the theoretical conditions for an efficient market in
the absence of this intervention (e.g., all conditions
of a perfectly competitive market hold: full
information, no barriers to entry, etc.). Since labor
markets are generally not perfectly competitive, this
is likely an overestimate of the DWL.
97 Setting the standard salary level at the 40th
percentile of weekly earnings of full-time salaried
workers in the South is estimated to affect
4,163,000 workers. See Table 2. The estimate is
based on the effect of the change in overtime
protection under the FLSA from this Final Rule. It
includes workers who may currently be overtimeeligible under more protective state EAP laws and
regulations, such as some workers in Alaska,
California, and New York. Additionally, 65,000
workers are potentially affected by the change in
the HCE exemption’s total compensation level. Id.
Accordingly, throughout this RIA we refer to the
total affected workers as 4.2 million (4,163,000 +
65,000, rounded to the nearest 100,000 workers).
iv. Terminology and Abbreviations
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The following terminology and
abbreviations will be used throughout
this RIA.
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SIPP: Survey of Income and Program
Participation.
Workers covered by the FLSA and subject
to the Department’s part 541 regulations:
Includes all workers except those excluded
from the analysis because they are not
covered by the FLSA or subject to the
Department’s requirements. Excluded
workers include: Members of the military,
unpaid volunteers, the self-employed, many
religious workers, and federal employees
(with a few exceptions).101
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a lower salary level to determine eligibility
for the EAP exemptions (see Table 1).
Short duties test: One of two duties tests
used from 1949 to 2004; this less restrictive
duties test had fewer requirements, did not
limit the amount of nonexempt work that
could be performed, and was used in
conjunction with a higher salary level to
determine eligibility for the EAP exemptions
(see Table 1).
DWL: Deadweight loss; the loss of
economic efficiency that can occur when the
perfectly competitive equilibrium in a market
for a good or service is not achieved.
EAP: Executive, administrative, and
professional.
FY: Fiscal year. The federal fiscal year is
from October 1 through September 30.
HCE: Highly compensated employee; a
category of EAP exempt employee,
established in 2004 and characterized by
high earnings and a minimal duties test.
Hourly wage: For the purpose of this RIA,
the amount an employee is paid for an hour
of work.
Base hourly wage: The hourly wage
excluding any overtime payments. Also used
to express the wage rate without accounting
for benefits.
Implicit hourly wage: Hourly wage
calculated by dividing reported weekly
earnings by reported hours worked.
Straight time wage: Another term for the
hourly wage excluding any overtime
payments.
MORG: Merged Outgoing Rotation Group
supplement to the CPS.
Named occupations: Workers in named
occupations are not subject to the salary level
or salary basis tests. These occupations
include teachers, academic administrative
personnel,98 physicians,99 lawyers, judges,100
and outside sales workers.
Overtime workers: The Department
distinguishes between two types of overtime
workers.
Occasional overtime workers: The
Department uses two steps to identify
occasional overtime workers. First, all
workers who report they usually work 40
hours or less per week (identified with
variable PEHRUSL1 in CPS MORG) but in the
survey (or reference) week worked more than
40 hours (variable PEHRACT1 in CPS MORG)
are classified as occasional overtime workers.
Second, some additional workers who do not
report usually working overtime and did not
report working overtime in the reference
week are randomly selected to be classified
as occasional overtime workers so that the
proportion of workers who work overtime in
our sample matches the proportion of
workers, measured using SIPP data, who
work overtime at some point in the year.
Regular overtime workers: Workers who
report they usually work more than 40 hours
per week (identified with variable
PEHRUSL1 in CPS MORG).
Pooled data for FY2013–FY2015: CPS
MORG data from FY2013–FY2015 adjusted
to represent FY2015 with earnings inflated to
FY2017 dollars and sample observations
weighted to reflect projected employment in
FY2017. Pooled data were used to increase
sample size.
Potentially affected EAP workers: EAP
exempt workers who are not in named
occupations and are included in the analysis
(i.e., white collar, salaried, not eligible for
another (non-EAP) overtime pay exemption).
This is estimated to be 22.5 million workers.
Price elasticity of demand (with respect to
wage): The percentage change in labor hours
demanded in response to a one percent
change in wages.
Real dollars (2017$): Dollars adjusted using
the CPI–U to reflect the purchasing power
they would have in FY2017.
Salary basis test: The EAP exemptions’
requirement that workers be paid on a salary
basis, that is, a pre-determined amount that
cannot be reduced because of variations in
the quality or quantity of the employee’s
work.
Salary level test: The salary a worker must
earn in order to be subject to the EAP
exemptions. The Department distinguishes
among four such tests:
Standard salary level: The weekly salary
level associated with the standard duties test
that determines eligibility for the EAP
exemptions. The standard salary level was
set at $455 per week in the 2004 Final Rule.
HCE compensation level: Workers who
meet the standard salary level requirement
but not the standard duties test nevertheless
are exempt if they pass a minimal duties test
and earn at least the HCE total annual
compensation required amount. The HCE
required compensation level was set at
$100,000 per year in the 2004 Final Rule, of
which at least $455 per week must be paid
on a salary or fee basis.
Short test salary level: The weekly salary
level associated with the short duties test
(eliminated in 2004).
Long test salary level: The weekly salary
level associated with the long duties test
(eliminated in 2004).
This section explains the
methodology used to estimate the
number of workers who are subject to
the EAP exemptions. In this Final Rule,
as in the 2004 Final Rule, the
Department estimated the number of
EAP exempt workers because there is no
data source that identifies workers as
EAP exempt. Employers are not
required to report EAP exempt workers
to any central agency or as part of any
employee or establishment survey.102
The methodology described here is
largely based on the approach the
Department used in the 2004 Final Rule.
69 FR 22196–209. All tables include
projected estimates for FY2017, which
begins on October 1, 2016. Some tables
also include estimates for FY2005 (the
first full fiscal year after the most recent
increase to the salary level was
implemented) to demonstrate how the
prevalence of the EAP exemption has
changed in the 12 years since our last
rulemaking. We note that the PRIA used
calendar year 2005 whereas this Final
Rule uses FY2005. Therefore, the
numbers have changed slightly. Figure 2
illustrates how the U.S. civilian
workforce was analyzed through
successive stages to estimate the number
of potentially affected EAP workers.
98 Academic administrative personnel (including
admissions counselors and academic counselors)
need to be paid either (1) the salary level or (2) a
salary that is at least equal to the entrance salary
for teachers in the educational establishment at
which they are employed (see § 541.204). Entrance
salaries at the educational establishment of
employment cannot be distinguished in the data
and so this alternative is not considered (thus these
employees were excluded from the analysis, the
same as was done in the 2004 Final Rule).
99 The term physician includes medical doctors
including general practitioners and specialists,
osteopathic physicians (doctors of osteopathy),
podiatrists, dentists (doctors of dental medicine),
and optometrists (doctors of optometry or with a
Bachelor of Science in optometry). § 541.304(b).
100 Judges may not be considered ‘‘employees’’
under the FLSA definition. However, since this
distinction cannot be made in the data, all judges
are excluded (the same as was done in the 2004
Final Rule). Including these workers in the model
as FLSA employees would not impact the estimate
of affected workers.
101 Employees of firms with annual revenue less
than $500,000 who are not engaged in interstate
commerce are also not covered by the FLSA.
However, these workers are not excluded from this
analysis because the Department has no reliable
way of estimating the size of this worker
population, although the Department believes it
composes a small percent of workers. These
workers were also not excluded from the 2004 Final
Rule.
102 RAND recently released results from a survey
conducted to estimate EAP exempt workers.
However, this survey does not have the variables or
sample size necessary for the Department to base
the RIA on this analysis. These survey results were
submitted by the authors as a comment on the
proposed rule. 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.
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The Department also notes that the
terms employee and worker are used
interchangeably throughout this
analysis.
B. Methodology To Determine the
Number of Potentially Affected EAP
Workers
i. Overview
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ii. Data
The estimates of EAP exempt workers
are based on data drawn from the CPS
MORG, which is sponsored jointly by
the U.S. Census Bureau and the BLS.
The CPS is a large, nationally
representative sample of the labor force.
Households are surveyed for four
months, excluded from the survey for
eight months, surveyed for an additional
four months, then permanently dropped
from the sample. During the last month
of each rotation in the sample (month 4
and month 16), employed respondents
complete a supplementary
questionnaire in addition to the regular
survey.103 This supplement contains the
detailed information on earnings
necessary to estimate a worker’s
exemption status. Responses are based
on the reference week, which is always
the week that includes the 12th day of
the month.
Although the CPS is a large scale
survey, administered to 60,000
households representing the entire
nation, it is still possible to have
relatively few observations when
looking at subsets of employees, such as
103 This is the outgoing rotation group (ORG);
however, this analysis uses the data merged over
twelve months and thus will be referred to as
MORG.
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exempt workers in a specific occupation
employed in a specific industry, or
workers in a specific geographic
location. To increase the sample size,
the Department pooled together three
years of CPS MORG data (FY2013
through FY2015). Earnings for each
FY2013 and FY2014 observation were
inflated to FY2015 dollars using the
CPI–U, and the weight of each
observation was adjusted so that the
total number of potentially affected EAP
workers in the pooled sample remained
the same as the number for the FY2015
CPS MORG. Thus, the pooled CPS
MORG sample uses roughly three times
as many observations to represent the
same total number of workers in
FY2015. The additional observations
allow the Department to better estimate
certain attributes of the potentially
affected labor force.
Next, this pooled sample was adjusted
to reflect the FY2017 economy by
further inflating wages and sampling
weights to project to FY2017. The
Department applied two years of wage
growth based on the average annual
growth rate in median wages. The wage
growth rate is calculated as the
geometric growth rate in median wages
using the historical CPS MORG data for
occupation-industry categories from
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FY2006 to FY2014.104 105 The geometric
growth rate is the constant annual
growth rate that when compounded
(applied to the first year’s wage, then to
the resulting second year’s wage, etc.)
yields the last historical year’s wage.
This method only depends on the value
of the wage in the first available year
and the last available year.106
104 In order to maximize the number of
observations used in calculating the median wage
for each occupation-industry category, three years
of data were pooled for each of the endpoint years.
Specifically, data from FY2005, FY2006, and
FY2007 (converted to FY2006 dollars) were used to
calculate the FY2006 median wage and data from
FY2013, FY2014, and FY2015 (converted to FY2014
dollars) were used to calculate the FY2014 median
wage.
105 In the NPRM only wage growth rates for
exempt workers were used; therefore, growth was
based on historical wage growth for exempt
workers. Since the Final Rule projects all workers’
earnings for Year 1, wage growth was estimated for
all workers based on the historical growth rate for
all workers. Additionally, for the Final Rule, the
Department projected earnings prior to determining
which workers are exempt, necessitating a change
in the methodology.
106 The geometric mean may be a flawed measure
if either or both of those 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.
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because the Department cannot estimate
impacts for these workers since it is
unknown whether they work overtime
and therefore unknown whether there
would be any need to pay for overtime
if their status changed from exempt to
nonexempt. The Department reweighted
the rest of the sample to account for this
change (i.e., to keep the same total
employment estimates).109 This
adjustment assumes that the
distribution of hours worked by workers
whose hours do not vary is
representative of hours worked by
workers whose hours do vary. The
Department believes that without more
information this is an appropriate
assumption.110
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.
107 The OES growth measure compared median
wages in the 2006 and the 2014 OES by industryoccupation combination. The difference between
the OES and CPS growth measures averaged
0.00173 percentage points, but varied by up to 15.4
percentage points, depending on the occupationindustry category.
108 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.
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The geometric wage growth rate was
also calculated from the BLS’
Occupational Employment Statistics
(OES) survey and used as a validity
check.107 Additionally, in occupationindustry categories where the CPS
MORG data had an insufficient number
of observations to reliably calculate
median wages, the Department used the
growth rate in median wages calculated
from the OES data.108 Any remaining
occupation-industry combinations
without estimated median growth rates
were assigned the median of the growth
rates in median wages from the CPS
MORG data.
The employment growth rate is the
geometric annual growth rate based on
the ten-year employment projection
from BLS’ National Employment Matrix
(NEM) for 2014 to 2024 within an
occupation-industry category. An
alternative method is to spread the total
change in the level of employment over
the ten years evenly across years
(constant change in the number
employed). The Department believes
that on average employment is more
likely to grow at a constant percentage
rate rather than by a constant level (a
decreasing percentage rate). To account
for employment growth, the Department
applied the growth rates to the sample
weights of the workers. This is because
the Department cannot introduce new
observations to the CPS MORG data to
represent the newly employed.
In addition to the calculations
described above, some assumptions had
to be made to use these data as the basis
for the analysis. For example, the
Department eliminated workers who
reported that their weekly hours vary
and provided no additional information
on hours worked. This was done
109 The Department also reweighted for workers
reporting zero earnings. The Department
eliminated, without reweighting, workers who
reported usually working zero hours and working
zero hours in the past week.
110 This is justifiable because demographic and
employment characteristics are similar across these
two populations (e.g., age, gender, education,
distribution across industries, share paid
nonhourly). The share of all workers who stated
that their hours vary (but provided no additional
information) is 5.7 percent. To the extent these
excluded workers are exempt, if they tend to work
more overtime than other workers, then transfer
payments, costs, and DWL may be underestimated.
Conversely, if they work fewer overtime hours, then
transfer payments, costs, and DWL may be
overestimated.
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iii. Number of Workers Covered by the
Department’s Part 541 Regulations
To estimate the number of workers
covered by the FLSA and subject to the
Department’s part 541 regulations, the
Department excluded workers who are
not protected by the FLSA or are not
subject to the Department’s regulations
for a variety of reasons—for instance,
they may not be covered by, or
considered to be employees under, the
FLSA. These workers include:
• Military personnel,
• unpaid volunteers,
• self-employed individuals,
• clergy and other religious workers,
and
• federal employees (with a few
exceptions described below).
Many of these workers are excluded
from the CPS MORG: Members of the
military on active duty, unpaid
volunteers, and the self-employed.
Religious workers were excluded from
the analysis after being identified by
their occupation codes: ‘clergy’ (Census
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occupational code 2040), ‘directors,
religious activities and education’
(2050), and ‘religious workers, all other’
(2060). Most employees of the federal
government are covered by the FLSA
but are not subject to the Department’s
part 541 regulations because their
entitlement to minimum wage and
overtime pay is regulated by the Office
of Personnel Management (OPM).111 See
29 U.S.C. 204(f). Exceptions exist for
U.S. Postal Service employees,
Tennessee Valley Authority employees,
and Library of Congress employees. See
29 U.S.C. 203(e)(2)(A). These covered
federal workers were identified and
included in the analysis using
occupation and/or industry codes.112
Employees of firms that have annual
revenue of less than $500,000 and who
are not engaged in interstate commerce
are also not covered by the FLSA. The
Department does not exclude them from
the analysis because we have no reliable
way of estimating the size of this worker
population, although the Department
believes it is a small percentage of
workers. The 2004 Final Rule analysis
similarly did not adjust for these
workers.
Table 3 presents the Department’s
estimates of the total number of
workers, and the number of workers
covered by the FLSA and subject to the
Department’s part 541 regulations, in
FY2005 and FY2017. The Department
projected that in FY2017 there will be
159.9 million wage and salary workers
in the United States. Of these, in the
baseline scenario without changes in the
salary levels, 132.8 million would be
covered by the FLSA and subject to the
Department’s regulations (83.0 percent).
The remaining 27.2 million workers
would be excluded from FLSA coverage
for the reasons described above and
delineated in Table 4.
111 Federal workers are identified in the CPS
MORG with the class of worker variable
PEIO1COW.
112 Postal Service employees were identified with
the Census industry classification for postal service
(6370). Tennessee Valley Authority employees were
identified as federal workers employed in the
electric power generation, transmission, and
distribution industry (570) and in Kentucky,
Tennessee, Mississippi, Alabama, Georgia, North
Carolina, or Virginia. Library of Congress employees
were identified as federal workers under Census
industry ‘libraries and archives’ (6770) and residing
in Washington, DC.
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TABLE 3—ESTIMATED NUMBER OF WORKERS COVERED BY THE FLSA AND SUBJECT TO THE DEPARTMENT’S PART 541
REGULATIONS, FY2005 AND FY2017
Year
FY2005 a ......................................................................................................................................
FY2017 ........................................................................................................................................
a The
Subject to the Department’s
regulations
Civilian
employment
(1,000s)
Number
(1,000s)
141,519
159,914
Percent
122,043
b 132,754
86.2
83.0
PRIA provided figures from calendar year 2005, which differ slightly from the fiscal year 2005 figures provided in this analysis.
uses pooled data for FY2013–FY2015 projected to reflect FY2017.
b Estimate
TABLE 4—REASON NOT SUBJECT TO Department’s part 541 regulations,
THE DEPARTMENT’S PART 541 REG- several other groups of workers are
identified and excluded from further
ULATIONS, FY2017
Number
(1,000s)
Reason
Total ......................................
Self-employed and unpaid
workers a ...........................
Religious workers .................
Federal employees b .............
27,160
23,607
550
3,005
Note: Estimates use pooled data for
FY2013–FY2015 projected to reflect FY2017.
a Self-employed workers (both incorporated
and unincorporated) and workers ‘‘without
pay’’ are excluded from the MORG supplement. We assume workers ‘‘without pay’’ are
‘‘unpaid volunteers.’’ These workers are identified as the difference between the population
of workers in the CPS basic data and the CPS
MORG data.
b Most employees of the federal government
are covered by the FLSA but are not covered
by part 541. Exceptions are for U.S. Postal
Service employees, Tennessee Valley Authority employees, and Library of Congress
employees.
iv. Number of Workers in the Analysis
After limiting the analysis to workers
covered by the FLSA and subject to the
analysis since they are unlikely to be
affected by this Final Rule. These
include:
• Blue collar workers,
• workers paid hourly, and
• workers who are exempt under
certain other (non-EAP) exemptions.
The Department excludes a total of
87.9 million workers from the analysis
for one or more of these reasons, which
often overlapped (e.g., many blue collar
workers are also paid hourly). In
FY2017, we project there will be 48.1
million blue collar workers (Table 5).
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 113 and
the Department’s 2004 regulatory
impact analysis. See 69 FR 22240–44
(Table A–1). Supervisors in traditionally
blue collar industries are classified as
white collar workers because their
duties are generally managerial or
administrative, and therefore they were
not excluded as blue collar workers. The
Department used the CPS MORG
variable PEERNHRY to determine
hourly status, and determined that 78.3
million workers will be paid on an
hourly basis in FY 2017.
Also excluded from further analysis
were workers who are exempt under
certain other (non-EAP) exemptions.
Although some of these workers may
also be exempt under the EAP
exemptions, even if these workers lost
their EAP exempt status they would
remain exempt from the minimum wage
and/or overtime pay provisions based
on the non-EAP exemption, and thus
were excluded from the analysis. We
excluded an estimated 4.5 million
workers, including some agricultural
and transportation workers, from further
analysis because they will be subject to
another (non-EAP) overtime exemption.
See Appendix A: Methodology for
Estimating Exemption Status, for details
on how this population was identified.
TABLE 5—ESTIMATED NUMBER OF WORKERS COVERED BY THE FLSA AND SUBJECT TO THE DEPARTMENT’S PART 541
REGULATIONS, FY2005 AND FY2017 (1,000S)
Reason excluded b
Year
Subject to
DOL’s Part
541 Reg.
FY2005 .............................
FY2017 .............................
Workers
in the
analysis a
122,043
132,754
Excluded
from
analysis
39,447
44,845
82,595
87,909
Another exemption c
Blue collar
workers
45,889
48,119
Hourly
workers
Agriculture
73,813
78,310
778
902
Transportation
1,911
1,912
Other
967
1,691
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Note: FY2017 estimates use pooled data for FY2013–FY2015 projected to reflect FY2017.
a Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption.
b Numbers do not add to total due to overlap.
c Eligible for another (non-EAP) overtime pay exemption.
In the 2004 Final Rule the Department
excluded some of these workers from
the population of potentially affected
EAP workers, but not all of them.
Agricultural and transportation workers
are two of the largest groups of workers
excluded from this analysis, and they
were similarly excluded in 2004.
Agricultural workers were identified by
occupational-industry combination.114
Transportation workers were defined as
those who are subject to the following
113 GAO/HEHS. (1999). Fair Labor Standards Act:
White Collar Exemptions in the Modern Work
Place. GAO/HEHS–99–164, 40–41.
114 In the 2004 Final Rule all workers in
agricultural industries were excluded. 69 FR 22197.
Here only workers also in select occupations were
excluded since not all workers in agricultural
industries qualify for the agricultural overtime pay
exemptions. See Appendix A. This method better
approximates the true number of exempt
agricultural workers and provides a more
conservative—i.e., greater—estimate of the number
of affected workers.
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FLSA exemptions: Section 13(b)(1),
section 13(b)(2), section 13(b)(3), section
13(b)(6), or section 13(b)(10). This
methodology is the same as in the 2004
Final Rule and is explained in
Appendix A. The Department excluded
902,000 agricultural workers and 1.9
million transportation workers from the
analysis. In addition, the Department
excluded another 1.7 million workers
who fall within one or more of multiple
FLSA minimum wage and overtime
exemptions and are detailed in
Appendix A. However, of these 1.7
million workers, all but 25,600 are
either blue collar or hourly and thus the
impact of excluding these workers is
negligible.
v. Number of Potentially Affected EAP
Workers
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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 would be 44.8 million
salaried white collar workers for whom
employers might claim either the
standard EAP exemption or the HCE
exemption. To be exempt under the
standard EAP test the employee must:
• Be paid a predetermined and fixed
salary that is not subject to reduction
because of variations in the quality or
quantity of work performed (the salary
basis test); 115, 116
• earn at least a designated salary
amount; the salary level has been set at
$455 per week since 2004 (the salary
level test); and
115 Hourly computer employees who earn at least
$27.63 per hour and perform certain duties are
exempt under section 13(a)(17) of the FLSA. These
workers are considered part of the EAP exemptions
but were excluded from the analysis because they
are paid hourly and will not be affected by this
Final Rule (these workers were similarly excluded
in the 2004 analysis). Salaried computer workers
are exempt if they meet the salary and duties tests
applicable to the EAP exemptions, and are included
in the analysis since they will be impacted by this
Final Rule.
116 Additionally, administrative and professional
employees may be paid on a fee basis, as opposed
to a salary basis, at a rate of at least the amount
specified by the Department in the regulations.
Payment on a ‘‘fee basis’’ occurs where an employee
is paid an agreed sum for a single job regardless of
the time required for its completion. § 541.605(a).
Salary level test compliance for fee basis employees
is assessed by determining whether the hourly rate
for work performed (i.e., the fee payment divided
by the number of hours worked) would total at least
$455 per week if the employee worked 40 hours.
§ 541.605(b). However, the CPS MORG does not
identify workers paid on a fee basis (only hourly or
nonhourly). Thus in the analysis, workers paid on
a fee basis are considered with nonhourly workers
and consequently classified as ‘‘salaried’’ (as was
done in the 2004 Final Rule).
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• perform work activities that
primarily involve executive,
administrative, or professional duties as
defined by the regulations (the duties
test).
The 2004 Final Rule’s HCE test
requires the employee to pass the same
standard salary basis and salary level
tests. However, the HCE duties test is
much less restrictive than the standard
duties test, and the employee must earn
at least $100,000 in total annual
compensation, including at least $455
per week paid on a salary or fee basis,
while the balance may be paid as
nondiscretionary bonuses and
commissions.
Salary Basis
As discussed above, the Department
included only nonhourly workers in the
analysis using the CPS variable
PEERNHRY, which identifies workers as
either hourly or nonhourly. For the
purpose of this rulemaking, the
Department considers data representing
compensation paid to nonhourly
workers to be an appropriate proxy for
compensation paid to salaried workers.
The Department notes that we made the
same assumption regarding nonhourly
workers in the 2004 Final Rule. See 69
FR 22197. Several commenters asserted
that the Department’s use of the CPS
variable PEERNHRY to indicate whether
a worker is salaried is inappropriate. For
example, the NRF included an analysis
it commissioned from Oxford
Economics, which stated that this
variable is inappropriate because all
workers who earn under $455 a week
(and are therefore nonexempt) will
report that they are ‘‘paid at an hourly
rate.’’ The Department believes this is
an entirely unwarranted assumption:
exempt status is not a prerequisite for
being salaried; salaried status is a
prerequisite for being exempt (the salary
basis test). Millions of workers—white
and blue collar alike—are salaried
despite being nonexempt, including 3.2
million white-collar workers who
reported earning less than $455 per
week in the CPS. See 80 FR 38522
(noting the ‘‘widespread
misconception[ ]’’ that ‘‘payment of a
salary automatically disqualifies an
employee from entitlement to overtime
compensation.’’)
Some commenters, such as the
Chamber and the National Association
of Convenience Stores (NACS),
expressed concern that the Department
is using ‘‘nonhourly’’ workers to
approximate ‘‘salaried’’ workers, even
though this may include workers who
are paid on a piece-rate, a day-rate, or
largely on bonuses or commissions. The
Panel Study of Income Dynamics (PSID)
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provides additional information on how
nonhourly workers are paid. In the
PSID, respondents are asked how they
are paid on their main job and are 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 our regulations, and the
commenters did not identify any such
source.
Salary Level
Weekly earnings are available in the
CPS MORG data, which allowed the
Department to estimate how many
nonhourly workers pass the salary level
tests.117 The Fisher & Phillips law firm,
Jackson Lewis law firm, NACS, and the
Clearing House Association (Clearing
House) commented that CPS earnings
data may be inappropriate because the
data includes overtime pay,
commissions, or tips. The Department
notes that employers may factor into an
employee’s salary a premium for
expected overtime hours worked. To the
extent they do so, that premium would
be reflected in the data. Similarly, the
Department believes tips will be an
uncommon form of payment for these
workers since tips are uncommon for
white-collar workers. Lastly, the
Department believes that commissions
make up a relatively small share of
earnings among nonhourly
employees.118 In any event, as discussed
earlier in section IV.C., the Department
has adopted a change to the salary basis
test in this Final Rule that will newly
117 The CPS MORG variable PRERNWA, which
measures weekly earnings, is used to identify
weekly salary. The CPS variable includes all
nondiscretionary bonuses and commissions, which
do not count toward the standard salary level under
the current regulations but may be used to satisfy
up to 10 percent of the new standard salary level
when this Final Rule takes effect. This discrepancy
between the earnings variable used and the FLSA
definition of salary may cause a slight overestimate
of the number of workers estimated to meet the
standard test. Additionally, because the variable
includes earnings across all jobs, this could bias
upward workers’ earnings on a given job. However,
the Department believes this bias is small because
only 4.2 percent of salaried, white collar workers
hold multiple jobs.
118 In the PSID, relatively few nonhourly workers
were paid by commission. Additionally, according
to the BLS Employment Cost Index (ECI), about 5
percent of the private workforce is incentive-paid
workers (incentive pay is defined as payment that
relates earnings to actual individual or group
production). See: https://www.bls.gov/opub/mlr/
cwc/the-effect-of-incentive-pay-on-rates-of-changein-wages-and-salaries.pdf.
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allow employers to satisfy as much as
10 percent of the standard salary level
requirement for employees who meet
the standard duties test through the
payment of nondiscretionary bonuses,
incentive payments, and commissions.
NACS also asserted that the CPS
MORG earnings data are unreliable
because they ‘‘are self-reported and are
therefore not subject to verification.’’
The Department acknowledges that the
CPS, like all surveys, involves some
measurement error. However, based on
the literature measuring error in CPS
earnings data, the Department believes
that measurement error should not
significantly bias its results.119
Duties
The CPS MORG data do not capture
information about job duties, and at the
time of writing the NPRM, there were no
data available on the prevalence of EAP
exempt workers. Due to this data
limitation, the Department used
occupational titles, combined with
probability estimates of passing the
duties test by occupational title, to
estimate the number of workers passing
the duties test. This methodology is very
similar to the methodology used in the
2004 rulemaking, and was the best
available data and methodology. To
determine whether a worker met the
duties test, the Department used an
analysis performed by WHD in 1998 in
response to a request from the GAO.
Because WHD enforces the FLSA’s
overtime requirements and regularly
assesses workers’ exempt status, WHD’s
representatives were uniquely qualified
to provide the analysis. The analysis
was used in both the GAO’s 1999 white
collar exemptions report 120 and the
Department’s 2004 regulatory impact
analysis. See 69 FR 22198.
WHD’s representatives examined 499
occupational codes, excluding nine that
were not relevant to the analysis for
various reasons (one code was assigned
to unemployed persons whose last job
was in the Armed Forces, some codes
were assigned to workers who are not
FLSA covered, others had no
observations). Of the remaining
occupational codes, WHD’s
representatives determined that 251
occupational codes likely included EAP
exempt workers and assigned one of
four probability codes reflecting the
estimated likelihood, expressed as
ranges, that a worker in a specific
occupation would perform duties
required to meet the EAP duties tests.
The Department supplemented this
analysis in the 2004 Final Rule
regulatory impact analysis when the
HCE exemption was introduced. The
Department modified the four
probability codes for highly paid
workers based upon our analysis of the
provisions of the highly compensated
test relative to the standard duties test
(Table 6). To illustrate, WHD
representatives 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 and 10 percent
likelihood of meeting the standard EAP
duties test. However, if that worker
earns at least $100,000 annually, he or
she has a 15 percent probability of
passing the shorter HCE duties test.
The occupations identified in GAO’s
1999 report and used by the Department
in the 2004 Final Rule map to an earlier
occupational classification scheme (the
1990 Census occupational codes).
Therefore, for this Final Rule, the
Department used an occupational
crosswalk to map the previous
occupational codes to the 2002 Census
occupational codes which are used in
the CPS MORG 2002 through 2010 data,
and to the 2010 Census occupational
codes which are used in the CPS MORG
FY2013 through FY2015 data.121 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.
TABLE 6—PROBABILITY WORKER IN CATEGORY PASSES THE DUTIES TEST
The Standard EAP test
Probability code
0
1
2
3
4
Lower bound
(%)
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
.......................................................................................................................
The HCE test
Upper bound
(%)
0
90
50
10
0
0
100
90
50
10
Lower bound
(%)
0
100
94
58.4
15
Upper bound
(%)
0
100
96
60
15
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These codes provide information on
the likelihood an employee in a category
met the duties test but they do not
identify the workers in the CPS MORG
who actually passed the test. Therefore,
the Department designated workers as
exempt or nonexempt based on the
probabilities. For example, for every ten
public relations managers, between five
and nine were estimated to pass the
standard duties test (based on
probability category 2). However, it is
unknown which of these ten workers
are exempt; therefore, the Department
must determine the status for these
workers. Exemption status could be
randomly assigned with equal
probability, but this would ignore the
earnings of the worker as a factor in
determining the probability of
exemption. The probability of qualifying
for the exemption increases with
earnings because higher paid workers
are more likely to perform the required
duties, an assumption adhered to by
both the Department in the 2004 Final
Rule and the GAO in its 1999 Report.122
The Department estimated the
probability of exemption for each
worker as a function of both earnings
119 For example, researchers have found that
worker and employer reported earnings correlate
0.90 percent or higher. Bound, J., Brown, C.,
Mathiowetz, N. Measurement error in survey data.
In Handbook of Econometrics; Heckman, J.J.,
Leamer, E.E., Eds.; North-Holland: Amsterdam, The
Netherlands, V, 3705–3843.
120 GAO/HEHS. (1999). Fair Labor Standards Act:
White Collar Exemptions in the Modern Work
Place. GAO/HEHS–99–164, 40–41.
121 References to occupational codes in this
analysis refer to the 2002 Census occupational
codes. Crosswalks and methodology available at:
https://www.census.gov/people/io/methodology/.
122 For the standard exemption, the relationship
between earnings and exemption status is not linear
and is better represented with a gamma
distribution. For the HCE exemption, the
relationship between earnings and exemption can
be well represented with a linear function because
the relationship is linear at high salary levels (as
determined by the Department in the 2004 Final
Rule). Therefore, the gamma model and the linear
model would produce similar results. See 69 FR
22204–08, 22215–16.
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and the occupation’s exempt probability
category using a gamma distribution.123
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.124
However, which particular workers are
designated as exempt may vary with
each set of ten random draws. For
details see Appendix A.
The Chamber attached to its comment
an Oxford Economic analysis
commissioned by the NRF, which also
submitted the analysis, asserting that
that CPS data may not be appropriate to
determine how many workers are EAP
exempt, and specifically how many pass
the duties test. The Oxford Economics
analysis contends that occupational
titles in the CPS are less accurate than
the OES survey, a BLS-published data
set based on employer surveys, because
the occupational titles in the CPS are
self-reported, while occupational titles
in the OES survey are reported by firms,
and are therefore better suited to obtain
information on actual occupations.
Oxford Economics asserts in their
Appendix A that there is title-inflation
in the CPS data, which would imply
that the Department’s number of
affected workers was overestimated.
Similarly, the Chamber described the
CPS job title information as based on
‘‘brief, limited individual verbal
responses.’’
The Department acknowledges that an
establishment survey (like the OES) may
more accurately reflect the occupational
titles applied to workers by individual
employers; however, we note that
businesses, like workers, may also have
an incentive to inflate or deflate
occupational titles. In addition, Oxford
Economics and the Chamber overstate
the presumed weaknesses of the CPS
occupation classification. When the CPS
123 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).
124 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.
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reports occupation codes, occupation is
generally determined from the initial,
in-person, in-depth interview with the
respondent, and the interviewer is
directed to determine the respondent’s
duties and responsibilities, not merely
accept the occupational title at face
value; Census coders then assign the
occupation code based on the interview.
Moreover, there are important
shortcomings of the OES, which made it
an inappropriate data source for the
Department’s purposes. First, the OES
data do not include individual level
data. For example, earnings are not
disaggregated by respondent; only select
decile estimates are presented. This
does not allow estimation of the number
of workers earning at least $455.125
Second, the OES does not provide
information on hours worked. In order
to estimate costs and transfers using
OES data, Oxford Economics had to
apply estimates of hours worked from
the CPS data to the OES data. This
requires mapping CPS occupational
titles to OES occupational titles, and
therefore does not avoid use of the titles
Oxford Economics finds inadequate.
The Department believes the direct
information on earnings and hours
worked from CPS is more germane to
the analysis than some potential
inaccuracy in occupational titles, and
will result in a more accurate analysis
than trying to map worker
characteristics such as data on hours
worked by earnings from CPS to the
OES. Finally, even if there are slight
discrepancies in occupational titles, a
review of the occupational titles in
Appendix A of this RIA will show that
closely related occupational titles are
generally assigned the same probability
of exemption (for example, different
types of engineers are all classified as
probability code 1; and cashiers and
counter and rental clerks are both
classified as probability code 4).
The Chamber expressed concern that
the probability codes used to determine
the share of workers in an occupation
who are EAP exempt are 17 years old
and therefore out of date. Similarly, the
Economic Policy Institute (EPI)
commented that we underestimated the
number of exempt workers for this
reason. The Department acknowledges
these codes were developed in 1998 for
use by the GAO in its study of the part
541 exemptions, but we believe the
probability codes continue to accurately
estimate exemption status given the fact
that the standard duties test is not
substantively different from the former
short duties tests reflected in the
codes.126 The Department looked at
O*NET 127 to determine the extent to
which the 1998 probability codes
reflected occupational duties today. The
Department’s review of O*NET verified
the continued appropriateness of the
1998 probability codes.
The Partnership to Protect Workplace
Opportunity (PPWO) cited an
Edgeworth Economics article asserting
that the probability codes are
inappropriate because there is evidence
that the relationship between salaries
and job duties assumed by the
Department is not valid. The article
provides the following example: ‘‘the
median pay of ‘Occupational Therapists’
is more than twice as high as the
median pay of ‘First Line Supervisors/
Managers of Retail Sales Workers,’ yet
the DOL places ‘Occupational
Therapists’ in the 10 to 50 percent
category for managerial and professional
duties, while 50 to 90 percent of the
positions in ‘First Line Supervisors/
Managers of Retail Sales Workers’ were
determined to include managerial and
professional duties.’’ However, this
criticism is not valid since the positive
relationship between salary levels and
passing the duties test was assumed
within probability code categories, not
between probability code categories.
The probability codes only reflect the
likelihood within an occupation of
passing the duties test, not the
probability of being exempt.
125 Oxford Economics made assumptions to
estimate the number of workers earning at least
$455 per week. The firm chose to include or
exclude all workers in an occupation based on
whether ‘‘the threshold wage was below the 10th
percentile or above the 90th percentile
respectively.’’ See Appendix A: Detailed
Methodology Description, at 32, available at https://
nrf.com/sites/default/files/Documents/
retail%20library/Rethinking-OvertimeAppendices.pdf.
126 The Chamber additionally expressed concern
about the use of proxy respondents in the CPS. To
check whether proxy respondents may cause biased
results, the Department excluded proxy responses
from the data and found that the share of
potentially affected workers who are affected by the
rulemaking remains very similar (it drops from 18.8
percent (see section VI.D.ii.) to 18.1 percent).
127 The O*NET database contains hundreds of
standardized and occupation-specific descriptions.
See www.onetcenter.org.
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Potentially Affected Exempt EAP
Workers
The Department estimated that of the
44.8 million salaried white collar
workers considered in the analysis, 29.9
million qualified for the EAP
exemptions under the current
regulations (Table 7). However, some of
these workers were excluded from
further analysis because they would not
be affected by the Final Rule. This
excluded group contains workers in
named occupations who are not
required to pass the salary requirements
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(although they must still pass a duties
test) and therefore whose exemption
status is not dependent on their
earnings. These occupations include
physicians (identified with Census
occupation codes 3010, 3040, 3060,
3120), lawyers (2100), teachers
(occupations 2200–2550 and industries
7860 or 7870), academic administrative
personnel (school counselors
(occupation 2000 and industries 7860 or
7870) and educational administrators
(occupation 0230 and industries 7860 or
7870)), and outside sales workers (a
subset of occupation 4950).128 Out of
the 29.9 million workers who are EAP
exempt, 7.4 million, or 24.8 percent, are
expected to be in named occupations in
FY2017. Thus these workers will be
unaffected by changes in the standard
salary level and HCE compensation
tests. The 22.5 million EAP exempt
workers remaining in the analysis are
referred to in this Final Rule as
‘‘potentially affected.’’ In addition to the
22.5 million potentially affected EAP
exempt workers, the Department
estimates that an additional 5.7 million
salaried white collar workers who do
not satisfy the duties test and who
currently earn at least $455 per week
but less than the updated salary level,
will have their overtime protection
strengthened because their exemption
status will be clear based on the salary
test alone without the need to examine
their duties.
TABLE 7—ESTIMATED PERCENTAGES OF EAP EXEMPT WORKERS IN NAMED OCCUPATIONS, PRIOR TO RULEMAKING,
FY2005 AND FY2017
Workers in
the analysis
(millions) a
Year
FY2005 ............................................................................................................
FY2017 ............................................................................................................
EAP Exempt
(millions)
39.4
44.8
24.9
29.9
EAP Exempt
in named occupations
(millions) b
% of EAP
exempt in
named
occupations
6.4
7.4
25.9
24.8
Note: FY2017 estimates use pooled data for FY2013–FY2015 projected to reflect FY2017.
a Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption.
b Workers not subject to a salary level test include teachers, academic administrative personnel, physicians, lawyers, judges, and outside sales
workers.
In response to the NPRM, the FL DEO
conducted their own analysis of the
number of Florida workers potentially
affected by the proposed rule and
asserted that the Department’s analysis
in the NPRM overestimates ‘‘by 195,000
the number of Florida workers who will
qualify for overtime.’’ The Department’s
NPRM estimated that 370,000 workers
would be affected in Florida whereas
the FL DEO estimated 175,100.129
However, FL DEO did not provide
details explaining how they arrived at
their lower number so the Department
has no way to judge the validity of their
analysis or to update our own analysis
to incorporate any methodological
improvements that may exist in the FL
DEO study.
There are three groups of workers
who qualify for the EAP exemptions: (1)
Those passing only the standard EAP
test (i.e., passing the standard duties
test, the salary basis test, and the
standard salary level test but not passing
the HCE total annual compensation
requirement); (2) those passing only the
HCE test (i.e., passing the HCE duties
test, the salary basis test, and the HCE
total annual compensation requirement
but not passing the standard duties test);
and (3) those passing all requirements of
both the standard and HCE tests. Based
on analysis of the occupational codes
and CPS earnings data, the Department
has concluded that in FY2017, in the
baseline scenario where the rule does
not change, of the 22.5 million
potentially affected EAP workers,
approximately 15.4 million will pass
only the standard EAP test, 7.0 million
will pass both the standard and the HCE
tests, and approximately 100,000 will
pass only the HCE test (Table 8). When
impacts are discussed in section VI.D.,
workers who pass both tests will be
considered with those who pass only
the standard EAP test because the
standard salary level test is lower (i.e.,
the worker may continue to pass the
standard salary level test even if he or
she no longer passes the HCE total
annual compensation requirement).
TABLE 8—ESTIMATED NUMBER OF WORKERS EXEMPT UNDER THE EAP EXEMPTIONS BY TEST TYPE, PRIOR TO
RULEMAKING, FY2005 AND FY2017
Potentially affected EAP workers
(millions)
Year
Pass standard
test only
Total
FY2005 ............................................................................................................
FY2017 ............................................................................................................
18.4
22.5
15.8
15.4
Pass both
tests
2.6
7.0
Pass HCE
test only
0.04
0.10
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Note: FY2017 estimates use pooled data for FY2013–FY2015 projected to reflect FY2017.
128 Some commenters asserted it is inappropriate
to exclude these named occupations from the
impact analysis, but not from the data set used to
derive the salary level. These workers were
included in the earnings distribution used to set the
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salary level because it achieves a sample that is
more representative of EAP salary levels throughout
the economy (see section IV.A.iv.).
129 State level data was not included in the NPRM
analysis, but was posted at the time of the NPRM
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www.whitehouse.gov/sites/default/files/docs/ot_
state_by_state_fact_sheet.pdf.
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C. Determining the Revised Salary and
Compensation Levels
The Final Rule sets the EAP standard
salary level at the 40th percentile of the
weekly earnings distribution of full-time
salaried workers in the lowest-wage
Census Region (currently the South) and
sets the HCE total annual compensation
requirement equal to the annual
earnings equivalent of the 90th
percentile of the weekly earnings
distribution of full-time salaried
workers nationally.130 These methods
were chosen in part because they
generate salary levels that (1)
appropriately distinguish between
workers who are eligible for overtime
and those who may be EAP exempt; (2)
are easy to calculate and thus easy to
replicate, creating transparency through
simplicity; and (3) are predictable. The
Department believes that the standard
salary level set using the methodology
established in this rulemaking allows
for reliance on the current standard
duties test without necessitating a
return to the more detailed long duties
test. Additionally, the Department
believes this salary level will not result
in an unacceptably high risk that
employees performing bona fide EAP
duties will become entitled to overtime
protection by virtue of the salary test.
In the NPRM, the Department
proposed setting the EAP standard
salary level at the 40th percentile of the
weekly earnings distribution of full-time
salaried workers nationally. In response
to commenters’ concerns that the
proposed salary level would disqualify
too many bona fide EAP employees in
low-wage areas and industries, the
Department limited the distribution to
workers in the lowest-wage Census
Region.
i. Methodology for the Standard Salary
Level and Comparison to Past
Methodologies
The Department in this rulemaking is
setting the standard salary level at the
40th percentile of weekly earnings of
full-time salaried workers in the lowestwage Census Region (currently the
South). This methodology differs
somewhat from previous revisions to
the salary levels but the general concept
holds: Define a relevant population of
workers, estimate an earnings
distribution for that population, then set
a salary level that corresponds to a
designated percentile of that
130 On a quarterly basis, BLS publishes a table of
deciles of the weekly wages of full-time nonhourly
workers, calculated using CPS data, which
employers can use to help anticipate the likely
amount of automatically updated salary levels. See
https://www.bls.gov/cps/research_series_earnings_
nonhourly_workers.htm.
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distribution in order for the salary to
serve as a meaningful line of
demarcation between those Congress
intended to protect and those who may
qualify for exemption. The salary setting
methodology adopted in this Final Rule
continues the evolution of the
Department’s approach. Where the
methodology differs from past
methodologies, the Department believes
the changes are an improvement. A
comparison of this new method with
methods from past rulemakings, and the
reasons for selecting the new method
are detailed in the rest of this section.
As discussed in section IV.A., the
historical methodologies used to revise
the EAP salary levels have varied
somewhat across the seven updates to
the salary level test since it was
implemented in 1938. To guide the
determination of the salary level, the
Department considered methodologies
used previously to revise the EAP salary
levels. In particular, the Department
focused on the 1958 revisions and the
most recent revisions in 2004. The 1958
methodology is particularly instructive
in that it synthesized previous
approaches to setting the long-test salary
level, and the basic structures it adopted
have been a touchstone to setting the
long test salary level in subsequent
rulemakings (with the exception of
1975).
In 1958, the Department updated the
salary levels based on a 1958 Report and
Recommendations on Proposed
Revision of Regulations, Part 541, by
Harry S. Kantor (Kantor Report). To
determine the revised salary levels the
Department looked at data collected
during WHD investigations on actual
salaries paid to exempt EAP employees,
grouped by geographic region, industry
groups, number of employees, and size
of city. The Department then set the
long test salary levels so that no more
than about 10 percent of exempt EAP
employees in the lowest-wage region,
lowest-wage industry, smallest
establishment group, or smallest city
group would fail to meet the test. Kantor
Report at 6–7.131 132 The Department
then set the short test salary level in
relation to, and significantly higher
than, the long test salary levels. This
methodology is referred to as the Kantor
131 The Kantor long test method was based on an
analysis of a survey of exempt workers as
determined by investigations conducted by WHD.
Subsequent analyses, including both the 2004
rulemaking and this Final Rule, have estimated
exempt status using multiple data sources.
132 Because the salary level test is likely to have
the largest impact on the low-wage segments of the
economy (e.g., low-wage regions and industries),
salaries in those segments were selected as the basis
for the required salary level under the Kantor long
test method.
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32461
method, and the Department followed a
similar methodology in setting the
salary levels in 1963 and 1970.
A significant change in 2004 from the
long test Kantor method was that the
Department used the salaries of both
exempt and nonexempt full-time
salaried workers in the South and the
retail industry to determine the required
salary level (hereafter referred to as the
2004 method), rather than the salaries of
exempt workers only. However, because
the salaries of exempt workers on
average are higher than the salaries of
all full-time salaried workers, the
Department selected a higher earnings
percentile when setting the required
salary. Based on the Department’s 2004
analysis, the 20th percentile of earnings
for exempt and nonexempt full-time
salaried workers in the South and retail
achieved a result very similar to the
10th percentile for workers in the
lowest-wage regions and industries who
were estimated to be exempt. See 69 FR
22169.
In the current rulemaking, the
Department replicated the Kantor long
test method and the 2004 method to
evaluate and compare them to the
chosen salary level.133 Although the
Department was able to replicate the
1958 and 2004 methods reasonably
well, we could not completely replicate
those methods due to changes in data
availability, occupation classification
systems, and incomplete
documentation. In general, there are
four steps in the process:
1. Identify workers likely to be
members of the population of interest.
2. Further narrow the population of
interest by distinguishing the subpopulation employed in low-wage
categories.
3. Estimate the distribution of
earnings for these workers.
4. Identify the salary level that is
equal to a pre-determined percentile of
the distribution.
The population of workers considered
for purposes of setting the salary level
depends on whether the 2004 method or
the Kantor long test method is used. In
replicating both methods, the
Department limited the population to
workers subject to the FLSA and
covered by the Department’s part 541
provisions, and excluded exempt EAP
workers in named occupations, and
those exempt under another (non-EAP)
exemption. For the 2004 method, the
133 The Department followed the same
methodology used in the 2004 Final Rule for
estimating the Kantor long test method with minor
adjustments. In an attempt to more accurately
estimate the Kantor long test method, for example,
this analysis included non-MSAs as a low-wage
sector as Kantor did but the 2004 revisions did not.
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Department further limited the
population to full-time salaried workers,
and for the Kantor long test method
further limited the population of
interest by only including those workers
determined as likely to be EAP exempt
(see more detailed methodology in
section VI.C. and Appendix A).
In the 2004 Final Rule, the
Department identified two low-wage
categories: The South (low-wage
geographic region), and the retail
industry (low-wage industry). In the
current rulemaking, the Department
identified low-wage categories by
comparing average weekly earnings
across categories for the populations of
workers used in the Kantor long test
method and the 2004 method. The
South was determined to be the lowestwage Census Region and was used for
the 2004 method; however, the
Department chose to use a more detailed
geographical break-down for the Kantor
long test method to reflect the
geographic categories Kantor used.
Therefore, for the Kantor long test
method the East South Central Census
Division is considered the lowest-wage
geographical area.134 The Department
used three low-wage industries: Leisure
and hospitality, other services, and
public administration.135 The
Department also considered non-MSAs
as a low-wage sector in the Kantor long
test method. The 2004 revision did not
consider population density but the
Kantor long test method examined
earnings across population size groups.
In conclusion, for this analysis the 2004
method looks at workers in the South
and the three low-wage industries,
whereas the Kantor long test method
looks at workers in the East South
Central Division, non-MSAs, and the
three low-wage industries.
Next, the Department estimated the
distributions of weekly earnings of two
populations: (1) Workers who are in at
least one of the low-wage categories and
in the Kantor population (likely exempt
workers), and (2) workers who are in at
least one of the low-wage categories and
in the 2004 population (full-time
salaried workers). From these
distributions, alternate salary levels
were identified based on predetermined percentiles. For the Kantor
long test method, the salary level for the
long duties test is identified based on
the 10th percentile of weekly earnings
for likely EAP exempt workers, while
the 2004 method salary level is
identified based on the 20th percentile
of weekly earnings for both exempt and
nonexempt salaried workers. Using
2015 quarter 3 CPS MORG data, the
Kantor long test method resulted in a
salary level of $684 per week, and the
2004 method resulted in a salary level
of $596 per week.136 Table 9 presents
the distributions of weekly earnings
used to estimate the salary levels under
the method used in this Final Rule, the
NPRM method, the 2004 method, and
the Kantor long test method.
TABLE 9—WEEKLY EARNINGS DISTRIBUTIONS
Weekly
earnings
Percentile
Full-time salaried 2015Q4 b
Full-time salaried 2015Q4 b
South
10
20
30
40
50
...............
...............
...............
...............
...............
Annual earnings a
$479
633
768
913
1,054
2004 Method
2015Q3 c
Nationally
$509
692
838
972
1,146
Kantor Long
Test Method
2015Q3 d
$429
596
726
844
988
South
$684
817
949
1,110
1,259
$24,908
32,916
39,936
47,476
54,808
Nationally
$26,468
35,984
43,576
50,544
59,592
2004 Method
2015Q3 c
$22,319
31,015
37,749
43,878
51,381
Kantor Long
Test Method
2015Q3 d
$35,560
42,491
49,332
57,739
65,451
a Weekly
earnings multiplied by 52.
Available at: https://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
c Full-time salaried workers in the South or employed in a low-wage industry (excludes workers not subject to the FLSA, not subject to the salary level test, and in agriculture or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently available data.
d Salaried, white collar workers who earn at least $455 per week, pass the EAP duties test, and either live in the East South Central Division or
a non-MSA or are employed in a low-wage industry (excludes workers not subject to FLSA, not subject to the salary level test, and in agriculture
or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently available data.
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b BLS.
In response to the NPRM, the Iowa
Association of Business and Industry
(IABI) commented that the Department
incorrectly replicated the Kantor long
test methodology. Kantor determined
the salary levels by looking separately at
low-wage regions, less populated
geographic regions, and low-wage
industries and then identifying a single
salary level that fits within these salary
numbers. IABI asserted that we
misapplied the methodology by
aggregating these low-wage sectors into
a single group. The Department
disagrees with IABI that we misapplied
the Kantor long-test methodology. As
discussed at length in the NPRM, the
Department replicated the Kantor
methodology as closely as possible
given changes in data availability. See
80 FR 38557.
The chosen methodology—the 40th
percentile of full-time salaried workers
in the lowest-wage Census Region—was
selected because it (1) corrects for the
elimination of the long duties test and
allows for reliance on the current
standard duties test; (2) appropriately
distinguishes between workers who are
eligible for overtime and those who may
be EAP exempt in all regions and
industries; (3) is easy to calculate and
thus easy to replicate, creating
transparency through simplicity; and (4)
produces predictable salary levels.
The salary level test has historically
been intended to serve as an initial
bright-line test for overtime eligibility
for white collar employees. As
134 The East South Central Division is a subset of
the South and includes Alabama, Kentucky,
Mississippi, and Tennessee. If the South is used
instead, the resulting salary levels would increase
slightly.
135 In the NPRM, the Department found that the
industry with the lowest mean weekly earnings
depends on whether the Kantor long test method or
the 2004 method’s population was used. Therefore,
three industries were considered low-wage. For the
Final Rule, the ‘‘other services’’ industry was
consistently the lowest-wage industry. However,
the Department continues to use all three low-wage
industries for consistency and because these three
continue to be the three lowest-wage industries.
136 Quarter 3 was used instead of quarter 4, which
was used for the distribution of all full-time salaried
workers, because at the time the analysis was
conducted this was the most recently available data.
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ii. Rationale for the Methodology
Chosen
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discussed previously, however, there
will always be white collar overtimeeligible employees who are paid above
the salary threshold. A low salary level
increases the number of these
employees. The necessity of applying
the duties test to these overtimeprotected employees consumes
employer resources, may result in
misclassification (which imposes
additional costs to employers and
society in the form of litigation), and is
an indicator of the effectiveness of the
salary level. Similarly, there will always
be employees performing bona fide EAP
duties who are paid below the salary
threshold; the inability of employers to
claim the EAP exemption for these
employees is also an indicator of the
effectiveness of the salary level.
Selecting the standard salary level will
inevitably affect the number of workers
falling into each of these two categories.
1. Correcting for the Elimination of the
Long Duties Test
The Kantor long test method sought to
minimize the number of white collar
employees who pass the long duties test
but were excluded from the exemption
by the salary threshold and therefore set
the salary level at the bottom 10 percent
of earnings of exempt EAP employees in
low-wage regions and industries so as to
prevent ‘‘disqualifying any substantial
number of such employees.’’ Kantor
Report at 5. This method was based on
the long/short test structure, in which
employees paid at lower salary levels
were protected by significantly more
rigorous duties requirements than are
part of the current standard duties test.
This approach, however, does not
sufficiently take into account the
inefficiencies of applying the duties test
to large numbers of overtime-eligible
white collar employees and the
possibility of misclassification of those
employees as exempt.
As discussed in section IV.A., for
many decades the long duties test—
which limited the amount of time an
exempt employee could spend on
nonexempt duties and was paired with
a lower salary level—existed in tandem
with a short duties test—which did not
contain a specific limit on the amount
of nonexempt work and was paired with
a significantly higher salary level. In
2004, the Department eliminated the
long and short duties tests and created
the new standard duties test, based on
the short duties test. The creation of a
single standard test that did not limit
nonexempt work caused new
uncertainty as to what salary level is
sufficient to ensure that employees
intended to be overtime-protected are
not subject to inappropriate
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classification as exempt, while
minimizing the number of employees
disqualified from the exemption even
though their primary duty is EAP
exempt work.
In the Final Rule, the Department
corrects for the elimination of the long
duties test and sets a salary level that
works in tandem with the standard
duties test to appropriately classify
white collar workers as entitled to
minimum wage and overtime protection
or potentially exempt. Thus, while the
standard salary level set by the
Department is higher than the level the
Kantor long test or 2004 methods would
generate, it is set at the low end of the
range of the historical short test levels,
based on the ratios between the short
test and long test levels, and much
lower than the historical average for the
short test. Between 1949 and 2003, the
ratio of the short to long salary tests
ranged from approximately 130 percent
to 180 percent. The low end of this
range would result in a salary level of
$889; the high end would result in a
salary of $1,231 (measured in FY2015
dollars). The short salary level updates
between 1949 and 2003 averaged $1,100
per week (measured in FY2015
dollars).137 At the 40th percentile of
weekly earnings of full-time workers in
the South, 9.9 million white collar
employees would no longer be subject
to the standard duties test (4.2 million
currently EAP exempt employees who
would be newly entitled to overtime
protection due to the increase in the
salary threshold and 5.7 million
overtime eligible white collar employees
who are paid between $455 and $913
per week whose exemption status
would no longer depend on the
application of the duties test). As
discussed in section IV.A.iv., the
Department believes that many of the
workers who will no longer be exempt
are currently inappropriately classified
because of the mismatch between the
standard duties test and the standard
salary level. The final salary threshold
will therefore more efficiently
distinguish between employees who
may meet the duties requirement of the
EAP exemption and those who do not,
without necessitating a return to the
more detailed long duties test.
2. Appropriately Distinguishing
Overtime-Eligible White Collar Workers
and Those Who May Be EAP Exempt
The revised salary level also reduces
the likelihood of workers being
misclassified as exempt from overtime
pay, providing an additional measure of
137 This is the average of the values of the short
test salary level inflated to 2015 dollars.
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the effectiveness of the salary level as a
bright-line test delineating exempt and
nonexempt workers. In the NPRM, the
Department estimated that 13.5 percent
of overtime-eligible white collar workers
earning between the current salary level
and the proposed salary level were
misclassified. 80 FR 38559.
The Department updated our estimate
of potential misclassification based on
the salary level set in this Final Rule.
The Department’s analysis of
misclassification draws on CPS data and
looked at workers who are white collar,
salaried, subject to the FLSA and
covered by part 541 regulations, earn at
least $455 but less than $913 per week,
and fail the duties test. Because only
workers who work overtime may receive
overtime pay, when determining the
share of workers who are misclassified
the sample was limited to those who
usually work overtime.138 Workers were
considered misclassified if they did not
receive overtime pay.139 The
Department estimates that 12.8 percent
of workers in this analysis who usually
work overtime do not receive overtime
compensation and are therefore
misclassified as exempt. Applying this
estimate to the sample of white collar
salaried workers who fail the duties test
and earn at least $455 but less than
$913, the Department estimates that
there are approximately 732,000 white
collar salaried workers earning at least
$455 but less than $913 who are
overtime-eligible but whose employers
do not recognize them as such.140 These
employees’ entitlement to overtime pay
will now be abundantly evident.
Table 10 provides estimates of the
extent of misclassification of workers as
exempt among first-line supervisors/
managers in a variety of industries using
the same method of looking at white
collar salaried employees who fail the
duties test and who report working
more than 40 hours a week but do not
report receiving overtime
compensation.141 The Department’s
analysis found that 41 percent of firstline supervisors/managers of food
138 We have excluded workers who are in named
occupations or are exempt under another non-EAP
exemption.
139 Overtime pay status was based on worker
responses to the CPS MORG question concerning
whether they receive overtime pay, tips, or
commissions at their job (‘‘PEERNUOT’’ variable).
140 The Department applies the misclassification
estimate derived here to both the group of workers
who usually work more than 40 hours and to those
who do not.
141 The occupational category of first-line
supervisors and managers illustrates the concept
across a range of industries. This category of
workers may be susceptible to potential
misclassification because they are the first level of
management above overtime-protected line
workers.
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preparation and serving workers, and 35
percent of first-line supervisors/
managers of retail sales workers are
misclassified.
The Department also found that the
industries with the largest number of
workers who fail the duties test and
report working more than 40 hours a
week but do not receive overtime
compensation are retail trade (125,000
workers) and food services and drinking
places (97,000 workers). In these
industries, the Department estimates the
rate of misclassification to be 41percent
of food services and drinking workers
and 18 percent of retail workers.
TABLE 10—ESTIMATES OF MISCLASSIFICATION AMONG FIRST-LINE SUPERVISORS AND MANAGERS COVERED BY THE FINAL
RULE WHO EARN AT LEAST $455 AND LESS THAN $913
Overtime eligible
salaried workers
who earn between
$455 and $913
per week
(1,000s)
First-line supervisors/manager occupations
Total .......................................................................................................................................
Percent who
usually work
>40 hours a
Percent
misclassified b
5,697
15.0
12.8
208.5
66.0
62.4
58.5
55.5
35.0
28.9
26.9
21.0
17.4
39.9
32.6
26.3
19.9
44.9
22.0
29.2
14.0
31.5
29.3
34.6
27.5
24.0
19.0
41.0
17.2
27.6
13.1
24.3
26.0
First-line supervisors/managers of . . .
Retail sales workers ..............................................................................................................
Non-retail sales workers ........................................................................................................
Production and operating workers .........................................................................................
Construction trades and extraction workers ..........................................................................
Food preparation and serving workers ..................................................................................
Housekeeping and janitorial workers ....................................................................................
Mechanics, installers, and repairers ......................................................................................
Office and administrative support workers ............................................................................
Personal service workers ......................................................................................................
Landscaping, lawn service, and grounds keeping workers ..................................................
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Source: CPS extract. Workers who are white collar, salaried, subject to the FLSA and covered by the part 541 regulations, earn at least $455
but less than $913 per week, and fail the duties test.
a Percent of overtime eligible salaried workers who usually work more than 40 hours per week. This differs from the 40 percent of all workers
who work more than 40 hours in a week at least once per year because it only includes overtime eligible workers and excludes occasional overtime workers.
b Share of respondents who report usually working more than 40 hours per week and do not report that they ‘‘usually receive overtime pay,
tips, or commissions.’’
Since the NPRM was published,
RAND has conducted a survey to
identify the number of workers who
may be misclassified as EAP exempt.
The survey, a special module to the
American Life Panel, asks respondents
(1) hours worked, (2) whether they are
paid on an hourly or salary basis, (3)
their typical earnings, (4) whether they
perform certain job responsibilities that
are treated as proxies for whether they
would justify exempt status, and (5)
whether they receive any overtime pay.
Using these data, Susann Rohwedder
and Jeffrey B. Wenger 142 found ‘‘11.5
percent of salaried workers were
classified as exempt by their employer
although they did not meet the criteria
for being so.’’ Using RAND’s estimate of
the rate of misclassification (11.5
percent), at the new salary level, the
Department estimates that
approximately 1.8 million salaried
workers earning between $455 and $913
per week who fail the standard duties
142 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.
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test are currently misclassified as
exempt.143
The Department also assessed the
impact of the standard salary level as a
bright-line test for EAP exemption by
examining: (1) The number of salaried
white collar workers who pass the
standard salary level test but not the
duties test and (2) the number of
salaried white collar workers who pass
the standard duties test but not the
salary level test.144 This first group is
equivalent to the number of salaried
white collar workers who are eligible for
overtime pay because they do not pass
the standard EAP duties test, but earn
above a specific salary level. The second
143 The number of misclassified workers
estimated based on the RAND research cannot be
directly compared to the Department’s estimates
because of differences in data, methodology, and
assumptions. Although it is impossible to reconcile
the two different approaches without further
information, by calculating misclassified workers as
a percent of all salaried workers in its sample,
RAND uses a larger denominator than the
Department. If calculated on a more directly
comparable basis, the Department expects the
RAND estimate of the misclassification rate would
still be higher than the Department’s estimate.
144 These populations are limited to salaried,
white collar workers subject to the FLSA and the
Department’s part 541 regulations, and not eligible
for another (non-EAP) exemption, not in a named
occupation, and not HCE only.
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group is the number of salaried white
collar workers who satisfy the standard
duties test but earn less than a specific
standard salary level. The Department
makes this assessment at the current
salary level ($455) and the final salary
level ($913), while holding all other
factors determining exempt status
constant (e.g., not considering whether
the duties test is correctly applied or
potential employer response to the
change in the salary level test).
Examining the impact of the salary
threshold in isolation from the
application of the duties test or
employer adjustments to pay or hours
does not provide a complete picture of
the impact of a new salary threshold. It
does, however, allow the Department to
evaluate the effectiveness of the salary
level in protecting overtime-eligible
white collar employees without unduly
excluding from the exemption
employees performing EAP duties.
As a benchmark, the Department
estimates that at the current standard
salary threshold, there are 12.2 million
salaried white collar workers who fail
the standard duties test and are
therefore overtime eligible, but earn at
least the $455 threshold, while there are
only 838,000 salaried white collar
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32465
threshold but do not pass the duties test
would be reduced almost in half to 6.5
million (approximately 47 percent of all
white collar salaried employees who fail
the duties test). At a salary level of $913,
the number of salaried white collar
workers who would pass the standard
duties test but earn less than the salary
level would increase to 5.0 million
(approximately 22 percent of all white
collar salaried employees who pass the
standard duties test). While this number
is higher than the number of such
employees under the Kantor long test
method (approximately 10 percent), it
includes employees who would have
been overtime-eligible because they
would not have passed the more
rigorous long duties test, which had a
cap on the percentage of time an
employee could spend on nonexempt
duties, and therefore were not included
under that approach. Further, the
number of salaried white collar workers
who pass the new salary threshold test
but not the duties test (6.5 million) is 31
percent higher than the number of
salaried white collar workers who pass
the duties test but are paid below the
salary threshold (5.0 million).
Figure 3: Percentage of White Collar
Salaried Workers by Earnings and
Duties Test Status for National, HighestWage, and Lowest-Wage Regions
As illustrated in Figure 3, as the
salary threshold increases there is a
decrease in the share of overtimeeligible white collar workers for whom
employers would be required to make
an assessment under the duties test and
who would be subject to possible
misclassification (descending lines). At
the same time, as the salary level
increases there is an increase in the
share of salaried white collar workers
who pass the standard duties test but
are screened from exemption by the
salary threshold (ascending lines).145 As
previously discussed, the increase in the
share from the traditional 10 percent of
exempt employees excluded by the
Kantor long test method reflects the
shift to a salary level appropriate to the
standard duties test. Because the long
duties test included a limit on the
amount of nonexempt work that could
be performed, it could be paired with a
low salary that excluded few employees
performing EAP duties. In the absences
of such a limitation in the duties test, it
is necessary to set the salary level higher
(resulting in the exclusion of more
employees performing EAP duties)
because the salary level must perform
more of the screening function
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Jkt 238001
145 Of employees who are paid on a salary basis
of at least $455 per week and meet the standard
duties test, approximately 81 percent earn at least
the new level of $913 per week. Conversely, among
overtime-eligible salaried white collar employees
earning at least $455 per week, approximately 47
percent earn less than the new salary level.
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23MYR2
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workers who pass the standard duties
test but earn less than the $455 level.
Thus the number of salaried white
collar workers who pass the current
salary threshold test but not the duties
test is nearly 15 times the number of
salaried white collar workers who pass
the duties test but are paid below the
salary threshold. This underscores the
large number of overtime-eligible
workers for whom employers must
perform a duties analysis, and who may
be at risk of misclassification as EAP
exempt. At a salary threshold equal to
the 40th percentile of full-time salaried
workers in the South ($913), the number
of overtime-eligible salaried white collar
workers who would earn at least the
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previously performed by the long duties
test.
At the current salary level (far left of
Figure 3), there is a very large gap
between salaried white collar workers
who are overtime eligible but earn at
least the threshold (about 87 percent of
all salaried white collar workers who
fail the duties test are paid at least $455
per week) and salaried white collar
workers who pass the standard duties
test but do not meet the current salary
level (about 4 percent of all salaried
white collar workers who pass the
duties test are paid less than $455 per
week). At the salary level of the 40th
percentile of weekly earnings of fulltime salaried workers in the South ($913
per week), the percentage of overtimeeligible salaried white collar workers
who earn above the threshold (and thus
would be at risk of misclassification)
still remains higher than the percentage
of salaried white collar workers who
pass the duties test but earn less than
the salary threshold (and would become
overtime protected).146 The salary
threshold would have to be
considerably higher (at a weekly salary
level of approximately $1,100) before
the percentage of salaried white collar
workers who earn less than the
threshold but pass the duties test would
equal the percentage who are overtime
eligible but earn at least the salary
threshold. While some commenters
favored setting the salary level at this
intersection point, the Department
concludes that the resulting salary level
would unduly impact low-wage regions
and industries.
The Department has also looked at the
impact of the new salary level on these
two groups of workers in low-wage (East
South Central) and high-wage (Pacific)
Census divisions in addition to
nationally.147 For the East South Central
Census division, the salary level at
which the percentages of the two groups
are about equal is approximately $995
per week, while in the Pacific Census
division, the salary at which the
percentages of the two groups are equal
is approximately $1,217 per week. The
Department’s new salary level of the
40th percentile of weekly earnings of
full-time salaried workers in the lowest146 Approximately 47 percent of white collar
salaried workers who do not pass the duties test
earn at least the new salary level ($913 per week).
Conversely, approximately 22 percent of employees
who pass the standard duties test earn less than the
new salary level.
147 Of the nine Census divisions, the East South
Central and Pacific divisions correspond to the
divisions with the lowest and highest earnings
using the Kantor long test method. The East South
Central includes Alabama, Kentucky, Mississippi,
and Tennessee. The Pacific includes Alaska,
California, Hawaii, Oregon, and Washington.
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wage Census Region ($913 per week)
falls below the estimate for the East
South Central division. This further
supports that the Department’s change
in the Final Rule to the lowest-wage
Census Region establishes a salary level
that is appropriate for classifying
workers as entitled to minimum wage
and overtime pay or potentially exempt
in even the lowest wage areas.
3. Simplicity and Transparency
The method of basing the standard
salary threshold on a particular
percentile of weekly earnings of fulltime salaried employees in the lowestwage Census Region involves less
estimation than previous updates,
making it easier to implement, less
prone to error, and more transparent
than before. The method reduces
computation by simplifying the
classification of workers to just two
criteria: wage or salaried, and full-time
or part-time. Application of the Kantor
long test method, in particular, would
involve significant work to replicate
since one would need to identify likely
EAP exempt workers, a process which
requires applying the standard duties
test to determine the population of
workers used in the earnings
distribution. In addition, both the
Kantor long test and 2004 methods
exclude workers not subject to the
FLSA, not subject to the salary level
test, or in agriculture or transportation.
The method adopted in this Final Rule
is easier for stakeholders to replicate
and understand because the standard
duties test does not need to be applied
to determine the population of workers
used in the earnings distribution.
International Foodservice Distributors
Association, IABI, and others criticized
the Department for not restricting the
CPS sample to workers subject to the
part 541 regulations or subject to the
salary level test. As explained in section
IV.A.iv., the Department believes these
white collar professionals are part of the
universe of executive, administrative,
and professional employees who
Congress intended to exempt from the
FLSA’s minimum wage and overtime
requirements and including them in the
data set achieves a sample that is more
representative of EAP salary levels
throughout the economy.
4. Consistency and Predictability
A method that produces very different
salary levels in consecutive years may
reduce confidence that the salary levels
in any given year are optimal. The
growth rate using the Kantor long test
method varies across years. The primary
reason for this is because the Kantor
long test method—or any other method
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that limits the data set to currently
exempt workers—uses the value of the
current salary level test to identify the
population of workers from which the
earnings distribution is determined.
Therefore, the Kantor long test method
limits the pool of workers in the sample
used to set the salary level to those who
meet the currently required salary level,
while the 2004 method and the new
method implemented in this Final Rule
do not exclude workers with salaries
below the current salary level. Since
FY2004, the salary levels that would
have been generated by the Kantor
method increased by 3.6 percent on
average annually.148 Conversely, since
FY2004, the 40th percentile of earnings
of full-time salaried workers in the
South has increased by an average of 2.4
percent annually. Similarly, the salary
levels that would have been generated
by the 2004 method (keeping low-wage
sectors constant) increased 2.5 percent
annually on average. This explains why
the salary levels generated by the Kantor
long test method and the 2004 method
have diverged significantly since 2004
(in the third quarter of 2015, Kantor =
$684; 2004 = $596).
For example, in 2003 the Kantor long
test method’s population of interest was
limited to workers earning at least $155
per week (the 1975 long test salary
level); in this Final Rule the Kantor long
test method’s population was restricted
to workers earning at least $455 per
week. Therefore the population
considered in the Kantor long test
method changes each time the salary
level is changed. The Department’s
Final Rule, like the 2004 method,
considers all full-time salaried workers
and does not limit the pool to only those
workers who meet the current salary
level test, thus avoiding this potential
shortcoming of the Kantor long test
method.
iii. Standard Salary Levels With
Alternative Methodologies
When assessing the standard salary
level, the Department evaluated several
alternatives in addition to the level
chosen. This section presents the
alternative salary levels considered and
the bases for identifying those
alternative levels. While commenters
proposed other methods for calculating
the salary level, the Department
determined that these alternatives
remained the best comparators for
evaluating the chosen salary level
methodology. As shown in Table 11, the
alternative salary levels evaluated are:
148 Values calculated using geometric growth
rates and starting in FY2004, the last time the salary
level was increased.
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• Alternative 1: Inflate the 2004
weekly salary level to FY2015 dollars,
which results in a salary level of $570
per week.
• Alternative 2: Use the 2004 method
to set the salary level at $596 per week.
• Alternative 3: Use the Kantor long
test level of $684 per week.
• Alternative 4: Use the 40th earnings
percentile of full-time salaried workers
nationally. This was the methodology
proposed in the NPRM. This results in
a salary level of $972 per week.
• Alternative 5: Adjust the salary
level from the Kantor long test method
to reflect the average historical ratio
between the long and short test salary
levels. This results in a salary level of
$1,019 per week.
• Alternative 6: Inflate the 1975 short
duties test salary level, which is $1,100
in FY2015 dollars.
TABLE 11—STANDARD SALARY LEVEL AND ALTERNATIVES, FY2017
Salary level
(weekly/annually)
Alternative
Alt. #1: Inflate 2004 level b .....................................................................................................................
Alt. #2: 2004 method c ...........................................................................................................................
Alt. #3: Kantor long test c .......................................................................................................................
Final Rule method (40th percentile of full-time salaried workers in lowest-wage Census Region) .....
Alt. #4: 40th percentile of full-time salaried workers nationally .............................................................
Alt. #5: Kantor short test c ......................................................................................................................
Alt. #6: Inflate 1975 short test level b ....................................................................................................
$570/$29,640
596/31,015
684/35,568
913/47,476
972/50,544
1,019/52,984
1,100/57,205
Total increase a
$
%
115
141
229
458
517
564
645
25.3
31.1
50.3
100.7
113.6
123.9
141.8
a Change
between salary level or alternative and the salary level set in 2004 ($455 per week).
in FY2015$. Inflated using CPI–U to FY2015$ (most recent data available).
for 2015, quarter 3.
b Value
mstockstill on DSK3G9T082PROD with RULES2
c Data
Alternative 1 inflates the 2004
standard salary level ($455) to FY2015
dollars using the CPI–U. This produces
a salary level of $570 per week. As
noted above, the 2004 method sets the
standard salary level at approximately
the 20th percentile of full-time salaried
workers in the South and retail
industry. Alternative 2 applies this
methodology to more recent data
(quarter 3 of 2015), resulting in a salary
level of $596 per week. Alternative 3
produces the salary level using the
Kantor method for the long duties test,
resulting in a level of $684 per week. As
we explain earlier in the preamble, the
Department rejected the use of these
alternatives because they pair a salary
level appropriate for use with the long
duties test with a duties test appropriate
for use with the short test salary.
Alternative 4 sets the standard salary
equal to the 40th percentile of weekly
earnings of all full-time salaried workers
nationally. This is the approach that the
Department proposed in the NPRM.
This alternative uses the same
methodology as this Final Rule—setting
the salary level at the 40th percentile of
earnings—but uses a data set including
full-time salaried workers nationwide
instead of limiting the population to the
lowest-wage Census Region. The 40th
percentile of earnings of all full-time
salaried workers nationally, in the
fourth quarter of 2015, is $972. As
discussed in more detail in section
IV.A.iv., the Department declined to
adopt this method in response to
commenters’ concerns that the proposed
salary level could disproportionately
impact workers in low-wage regions and
industries by inappropriately excluding
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Jkt 238001
from exemption too many workers who
meet the duties test.
Alternative 5 (Kantor short test) is
also based on the Kantor method but,
whereas alternative 3 generates the
salary level associated with the long
duties test, alternative 5 generates a
level more closely resembling the salary
associated with the short duties test,
which the Department set as a function
of the Kantor long test. In the 2004 Final
Rule, the Department replaced the
structure of separate short and long
duties tests with a single standard
duties test based on the less restrictive
short duties test, which had historically
been paired with a higher salary level
test. However, the Department set the
standard salary level in 2004 at a level
that was equivalent to the Kantor long
test salary level, which was associated
with the long duties test and limited the
amount of nonexempt work that the
employee could perform. In alternative
5, the Department therefore considered
revising the standard salary level to
approximate the short test salary that
better matches the standard duties test.
On average, the salary levels set in 1949
through 1975 were 149 percent higher
for the short test than the long test.
Therefore, the Department inflated the
Kantor estimate of $684 by 149 percent,
which generated a short salary level
equivalent of $1,019 per week.149 While
149 The Department estimated the average historic
ratio of 149 percent as the simple average of the
fifteen historical ratios of the short duties salary
level to the long duties salary level (salary levels
were set in 5 years and in each year the salary level
varied between the three exemptions: executive,
administrative, and professional). If the Department
had weighted the average ratio based on the length
of time the historic salary levels were in effect, this
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the Department used the average
difference between the Kantor short and
long tests for this alternative, the ratio
of the short to long salary tests ranged
from approximately 130 percent to 180
percent between 1949 and 2004. The
low end of this range would result in a
weekly salary of $889; the high end
would result in a salary of $1,231. The
Department rejected the use of the
Kantor short test, as explained in this
preamble, because we concluded that a
standard salary level of $1,019 per week
might exclude from exemption too
many bona fide EAP workers in certain
regions or industries.
Alternative 6 inflates the 1975 short
duties test salary level to $1,100 per
week in FY2015 dollars. Similar to
alternative 5, the Department rejected
the use of a short test salary level due
to the concern that it might exclude
from exemption too many bona fide
EAP workers in certain regions or
industries.
Section VI.D. details the transfers,
costs, and benefits of the new salary
level and the above alternatives. A
comparison of the costs and benefits
supports the Department’s decision to
set the standard salary level of the 40th
percentile of weekly earnings of all fulltime salaried workers in the South ($913
per week).
iv. Methodology for the HCE Total
Annual Compensation Level and
Alternative Methods
The Department sets the HCE
compensation level equal to the annual
equivalent of the 90th percentile of the
would have yielded an average historic ratio of 152
percent and a salary level of $1,039.
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distribution of earnings of all full-time
salaried workers nationally. BLS
calculated the salary level from the CPS
MORG data by limiting the population
to nonhourly workers who work fulltime (i.e., at least 35 hours per week)
and determining the 90th percentile of
the resulting weighted weekly earnings
distribution. The 90th percentile of
weekly earnings in the fourth quarter of
2015 was $2,577. This was then
multiplied by 52 to determine the
annual earnings equivalent ($134,004).
This method uses a percentile towards
the top of the nationwide earnings
distribution to reflect the minimal
duties criteria associated with the
highly compensated employee
exemption.
The Department also evaluated the
following alternative HCE compensation
levels:
• HCE alternative 1: Leave the HCE
compensation level unchanged at
$100,000 per year.
• HCE alternative 2: Inflate the 2004
level using CPI–U to $125,320 per year
in FY2015 dollars.
• HCE alternative 3: Set the HCE
compensation level at $149,894 per
year, which is approximately the
annualized level of weekly earnings
exceeded by 6.3 percent of full-time
salaried workers. This is the same
percent of such workers that exceeded
the HCE compensation level in 2004.
See 69 FR 22169.
The Department continues to believe
that HCE alternative 1 is inappropriate
because leaving the HCE compensation
level unchanged at $100,000 per year
would ignore more than 10 years of
wage growth. In FY2017, approximately
20 percent of full-time salaried workers
are projected to earn at least $100,000
annually, more than three times the
share who earned that amount in the
2004 Final Rule analysis. HCE
alternative 2 uses the CPI–U to inflate
the value set in 2004 instead of using
the higher wage growth over that time
and between employees, direct
employer costs, and DWL depend on
how employers respond to the Final
Rule.
In order to increase the sample size
and the reliability and granularity of
results in this analysis, the Department
used three years (FY2013–FY2015) of
CPS MORG data to represent the
FY2015 labor market. Monetary values
in FY2013 and FY2014 were inflated to
FY2015 dollars and the sample was
reweighted to reflect the population of
potentially affected workers in FY2015.
Afterwards, this pooled sample was
adjusted to reflect the FY2017 economy
by further inflating wages and sampling
weights to match projections for
FY2017. See section VI.B.ii.
Table 12 presents the projected
impact on affected workers, costs,
transfers, and DWL associated with
increasing the standard EAP salary level
from $455 per week to the 40th earnings
percentile of full-time salaried workers
in the South, $913 per week; increasing
the HCE compensation level from
$100,000 to the 90th earnings percentile
of full-time salaried workers nationally,
$134,004 annually; and updating both of
these levels triennially. The Department
estimated that the direct employer costs
of this Final Rule will total $677.9
million in the first year, with average
annualized direct costs of $295.1
million per year over 10 years. In
addition to these direct costs, this Final
Rule will also transfer income from
employers to employees. Year 1
transfers will equal $1,285.2 million,
with average annualized transfers
estimated at $1,189.1 million per year
over 10 years. Finally, the 10-year
average annualized DWL was estimated
to be $9.2 million. Potential employer
costs due to reduced profits and
additional hiring were not quantified
but are discussed in section VI.D.iii.
Benefits were also not quantified but are
discussed in section VI.D.vii.
period, and therefore the Department
does not believe this alternative
accurately reflects wage growth since
2004. Finally, HCE alternative 3 would
set the annual compensation level at
$149,894. The Department believes this
compensation level would be too high
to provide a meaningful alternative test
for exemption. Thus, the Department
concludes that adjusting the HCE total
annual compensation to reflect the 90th
percentile of earnings of full-time
salaried workers nationwide ($134,004)
strikes the appropriate balance.
D. Impacts of Revised Salary and
Compensation Level Test Values
i. Overview and Summary of Quantified
Impacts
The impacts of increasing the EAP
salary and compensation levels will
depend on how employers respond.
Employer response is expected to vary
by the characteristics of the affected
EAP workers. For workers who usually
work 40 hours a week or less, the
Department assumes that employers
will reclassify these affected EAP
workers as overtime-eligible and will
pay them the same weekly earnings for
the same number of hours worked.
While these employees will become
overtime eligible, employers can
continue to pay their current salaries
and will not need to make any
adjustments as long as the employees’
hours do not exceed 40 hours in a
workweek. For affected EAP employees
who work overtime, employers may: (1)
Pay the required overtime premium for
the current number of overtime hours
based upon the current implicit regular
rate of pay; (2) reduce or eliminate
overtime hours; (3) reduce the regular
rate of pay so total weekly earnings and
hours do not change after overtime is
paid; (4) increase employees’ salaries to
the new salary level; or (5) use some
combination of these responses.
Transfers from employers to employees
TABLE 12—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY
LEVELS
Future years b
Impact a
Average annualized value
Year 1
Year 2
Year 10
3% real rate
7% real rate
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Affected Workers (1000s)
Standard ..................................................................................................
HCE .........................................................................................................
4,163
65
3,893
73
5,045
217
....................
....................
....................
....................
Total ..................................................................................................
4,228
3,965
5,261
....................
....................
$0.0
1.5
$23.1
5.9
$37.6
25.4
$42.4
29.0
Direct Employer Costs (Millions FY2017$)
Regulatory familiarization c .......................................................................
Adjustment d .............................................................................................
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TABLE 12—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY
LEVELS—Continued
Future years b
Impact a
Average annualized value
Year 1
Year 2
Year 10
3% real rate
7% real rate
Managerial ...............................................................................................
214.0
206.6
255.1
225.0
223.6
Total direct costs e ............................................................................
677.9
208.0
284.2
288.0
295.1
Transfers from Employers to Workers (Millions
FY2017) f
Due to minimum wage .............................................................................
Due to overtime pay ................................................................................
$34.3
1,250.8
$28.5
907.9
$17.8
1,589.4
$23.2
1,178.5
$23.8
1,165.3
Total transfers e .................................................................................
1,285.2
936.5
1,607.2
1,201.6
1,189.1
8.7
11.1
9.3
9.2
DWL (Millions FY2017) g
DWL .........................................................................................................
6.4
a Additional
costs and benefits of the rule that could not be quantified or monetized are discussed in the text.
b These costs/transfers represent a range over the nine-year span.
c Regulatory familiarization costs occur only in years when the salary levels are updated (Years 1, 4, 7, and 10).
d Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment
costs may occur in years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth.
e Components may not add to total due to rounding.
f This is the net transfer that we primarily describe as being from employers to workers. There may also be transfers between workers. Moreover, some of these transfers may be intrapersonal (for instance, higher earnings may be offset by increased hours worked for employees who
remain overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees).
g DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated
with the minimum wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.
ii. Affected EAP Workers
1. Overview
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Costs, transfer payments, DWL, and
benefits of this Final Rule depend on
the number of affected EAP workers and
labor market adjustments made by
employers. The Department estimated
there were 22.5 million potentially
affected EAP workers: that is, EAP
workers who either (1) passed the salary
basis test, the standard salary level test,
and the standard duties test, or (2)
passed the salary basis test, passed the
standard salary level test, the HCE total
compensation level test, and the HCE
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duties test. This number excludes
workers in named occupations who are
not subject to the salary tests or who
qualify for another (non-EAP)
exemption.
The Department estimated that
increasing the standard salary level from
$455 per week to the 40th earnings
percentile of all full-time salaried
workers in the lowest-wage Census
Region (South, $913 per week) would
affect 4.2 million workers (i.e., the
number of potentially affected workers
who earn at least $455 per week but less
than $913 per week). These affected
workers compose 18.5 percent of
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potentially affected EAP workers. The
Department also estimated that 65,000
workers would be affected by an
increase in the HCE compensation level
from $100,000 to the annual earnings
equivalent of the 90th percentile of fulltime workers nationally (the number of
potentially affected workers who earn at
least $100,000 but less than $134,004
annually and pass the minimal duties
test but not the standard duties test,
about 0.3 percent of the pool of
potentially affected EAP workers). By
Year 10 the total number of affected
workers is predicted to increase to 5.3
million.
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Table 13 presents the number of
affected EAP workers, the mean number
of overtime hours they work per week,
and their average weekly earnings. The
4.2 million workers affected by the
increase in the standard salary level
average 1.4 hours of overtime per week
and earn an average of $734 per week.
The average number of overtime hours
is low because most of these workers
(3.3 million) do not usually work
overtime.150 However, the estimated
825,000 affected workers who regularly
work overtime average 11.1 hours of
overtime per week. The 65,000 EAP
workers affected by the change in the
HCE annual compensation level average
5.5 hours of overtime per week and earn
an average of $2,181 per week ($113,389
per year).
Although most affected EAP workers
who typically do not work overtime
might experience little or no change in
their daily work routine, those who
regularly work overtime may experience
significant changes. The Department
expects that workers who routinely
work some overtime or who earn less
than the minimum wage are most likely
to be tangibly impacted by the revised
standard salary level.151 Employers
might respond by: Reclassifying such
employees to nonexempt status (either
paying at least the hourly minimum
wage and a premium for any overtime
hours, or its salary equivalent with halftime paid for any overtime hours);
reducing workers’ regular wage rates
(provided that the reduced rates still
exceed the minimum wage); increasing
the employees’ salary to the salary level;
reducing or eliminating overtime hours;
or using some combination of these
responses.
TABLE 13—NUMBER OF AFFECTED EAP WORKERS, MEAN OVERTIME HOURS, AND MEAN WEEKLY EARNINGS, FY2017
Affected EAP workers a
Type of affected EAP worker
Number
(1,000s)
% of total
Mean overtime
hours
Mean usual
weekly
earnings
Standard Salary Level
All affected EAP workers .................................................................................
Earn less than the minimum wage b ................................................................
Regularly work overtime ..................................................................................
CPS occasionally work overtime c ...................................................................
4,163
11
825
150
100
0.3
19.8
3.6
1.4
29.3
11.1
8.5
$734
551
744
727
65
........................
30
3
100
........................
45.8
4.2
5.5
........................
12.3
8.5
$2,181
........................
2,153
2,309
HCE Compensation Level
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
b The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE workers will not be impacted by
the minimum wage provision. These workers all regularly work overtime and are also included in that row.
c Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These workers are identified later when we define Type 2 workers.
150 That is, workers who report they usually work
40 hours or less per week (identified with variable
PEHRUSL1 in CPS MORG).
151 A small proportion (0.3 percent) of affected
EAP workers earns implicit hourly wages that are
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less than the applicable minimum wage (the higher
of the state or federal minimum wage). The implicit
hourly wage is calculated as an affected EAP
employee’s total weekly earnings divided by total
weekly hours worked. For example, workers
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earning the current $455 per week standard salary
level would earn less than the federal minimum
wage if they work 63 or more hours in a week
($455/63 hours = $7.22 per hour).
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All affected EAP workers .................................................................................
Earn less than the minimum wage b ................................................................
Regularly work overtime ..................................................................................
CPS occasionally work overtime c ...................................................................
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The Department considered two types
of overtime workers in this analysis:
regular overtime workers and occasional
overtime workers.152 Regular overtime
workers typically worked more than 40
hours per week. Occasional overtime
workers typically worked 40 hours or
less per week, but they worked more
than 40 hours in the week they were
surveyed. The Department considers
these two populations separately in the
analysis because labor market responses
to overtime pay requirements may differ
for these two types of workers.
In a representative week, an estimated
152,000 occasional overtime workers
will be affected by either the standard
salary level or the HCE total annual
compensation level increase (3.6
percent of all affected EAP workers; this
number does not match Table 13 due to
rounding). They averaged 8.5 hours of
overtime in weeks when they work at
least some overtime. This group
represents the number of workers with
occasional overtime hours in the week
the CPS MORG survey was conducted.
In other weeks, these specific
individuals may not work overtime but
other workers, who did not work
overtime in the survey week, may work
overtime. Because the survey week is a
representative week, the Department
believes the prevalence of occasional
overtime in the survey week, and the
characteristics of these workers, is
representative of other weeks (even
though a different group of workers
would be identified as occasional
overtime workers in a different
week).153
2. Characteristics of Affected EAP
Workers
In this section the Department
examines the characteristics of affected
EAP workers. Table 14 presents the
distribution of affected workers across
industries and occupations. The
industry with the most affected EAP
workers was education and health
services (956,000 affected workers).
Other industries where a large number
of workers are expected to be affected
are professional and business services
(704,000), financial activities (571,000),
and wholesale and retail trade
(562,000). The industries with the
32471
largest share of potentially affected
workers who are affected are ‘‘other
services’’ (30 percent) and leisure and
hospitality (30 percent). Impacts by
industry are considered in section
VI.D.v.
The management, business, and
financial occupation category accounted
for the most affected EAP workers by
occupation (1.8 million). A large
number of workers are expected to be
affected in the professional and related
occupations category (1.4 million). The
occupations with the largest share of
potentially affected workers who are
expected to be affected are farming,
fishing, and forestry (63 percent),154
office and administrative support (39
percent), and services (37 percent).
Some commenters expressed concern
about the impacts of the rule on nonprofits organizations. The Department
found that workers in non-profits are
somewhat more likely to be affected by
the rulemaking; 25 percent of
potentially affected workers in private
non-profits are affected compared to 18
percent in private for-profit firms.
TABLE 14—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY
AND OCCUPATION, FY2017
Workers
subject to
FLSA
(millions)
Industry/occupation/non-profit
Total .....................................................................................
Potentially
affected EAP
workers
(millions) a
132.75
Not-affected
(millions) b
Affected
(millions) c
Affected as
share of
potentially
affected
(percent)
22.51
18.29
4.23
19
0.03
0.23
0.80
3.26
2.46
0.79
0.95
3.43
4.64
3.73
0.78
0.58
0.85
0.03
0.21
0.67
2.89
1.90
0.65
0.78
2.86
3.94
2.77
0.54
0.40
0.65
0.01
0.02
0.13
0.36
0.56
0.13
0.17
0.57
0.70
0.96
0.23
0.18
0.20
16
10
16
11
23
17
18
17
15
26
30
30
24
11.36
7.66
0.20
2.16
0.94
0.00
0.03
9.52
6.31
0.13
1.60
0.57
0.00
0.02
1.84
1.35
0.08
0.56
0.37
0.00
0.01
16
18
37
26
39
63
21
By Industry
Agriculture, forestry, fishing, & hunting ................................
Mining ...................................................................................
Construction .........................................................................
Manufacturing ......................................................................
Wholesale & retail trade ......................................................
Transportation & utilities ......................................................
Information ...........................................................................
Financial activities ................................................................
Professional & business services ........................................
Education & health services ................................................
Leisure & hospitality .............................................................
Other services ......................................................................
Public administration ............................................................
1.12
1.04
7.41
14.82
19.03
6.95
2.86
9.21
14.22
32.95
12.58
5.36
5.19
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By Occupation
Management, business, & financial .....................................
Professional & related ..........................................................
Services ...............................................................................
Sales and related .................................................................
Office & administrative support ............................................
Farming, fishing, & forestry ..................................................
Construction & extraction .....................................................
152 Regular overtime workers were identified in
the CPS MORG with variable PEHRUSL1.
Occasional overtime workers were identified with
variables PEHRUSL1 and PEHRACT1. As described
in section VI.D.iv., some workers who are not
observed working overtime in the reference week
are assumed to be occasional overtime workers.
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19.18
30.30
23.61
13.72
17.82
0.84
6.16
This analysis therefore accounts for workers who
work overtime at some point in the year, although
they did not work overtime in the reference week.
153 The Department cannot identify which of the
workers in the CPS sample work occasional
overtime in a week other than the reference week.
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154 There are only 33,000 potentially affected
workers in the farming, fishing, and forestry
industry. Although a large share of potentially
affected workers may be affected in this industry,
many of these workers are exempt under another
non-EAP exemption, and therefore their entitlement
to overtime will not change.
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TABLE 14—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY
AND OCCUPATION, FY2017—Continued
Workers
subject to
FLSA
(millions)
Industry/occupation/non-profit
Installation, maintenance, & repair ......................................
Production ............................................................................
Transportation & material moving ........................................
Potentially
affected EAP
workers
(millions) a
4.63
8.31
8.20
Not-affected
(millions) b
0.04
0.08
0.03
Affected
(millions) c
Affected as
share of
potentially
affected
(percent)
0.03
0.07
0.02
0.01
0.01
0.01
15
17
24
1.35
15.49
1.45
0.46
3.31
0.46
25
18
24
By Non-Profit and Government Status
Non-profit, private d ..............................................................
For profit, private ..................................................................
Government (state, local, and federal) ................................
9.12
105.08
18.55
1.81
18.80
1.91
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to
the new salary level).
c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
d As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet
the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers
at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Although not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a
larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived
from business operations, not charitable activities, are included.
Table 15 presents the distribution of
affected workers based on Census
Regions and divisions, and MSA status.
The region with the most affected
workers is the South (1.7 million).
However, as a share of potentially
affected workers in the region, the South
is not unduly affected relative to other
regions (22 percent are affected
compared with 16 to 19 percent in other
regions). Impacts by region are
considered in section VI.D.v. Although
the vast majority of affected EAP
workers resided in MSAs (3.8 of 4.2
million, or 89 percent), this largely
reflects the fact that 86.7 percent of all
workers reside in metropolitan areas.155
Employers in low-wage industries,
regions, and non-metropolitan areas
may perceive a greater impact due to the
lower wages and salaries typically paid
in those areas and industries. The
Department believes the salary level
adopted in this Final Rule (which we
have adjusted downward from the
amount proposed in the NPRM to
account for these low-wage areas) is
appropriate. In addition, the vast
majority of potentially affected workers
reside in metropolitan areas and do not
work in low-wage industries, and
workers in low-wage regions are not
unduly affected relative to other regions.
TABLE 15—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY
LEVELS, BY REGION, DIVISION, AND MSA STATUS, FY2017
Workers
subject to
FLSA
(millions)
Region/division/metropolitan status
Total .....................................................................................
Potentially
affected EAP
workers
(millions) a
132.75
Not-affected
(millions) b
Affected
(millions) c
Affected as
share of
potentially
affected
(percent)
22.51
18.29
4.23
19
4.80
1.36
3.44
4.73
3.17
1.56
7.84
4.47
0.94
2.44
5.15
1.51
3.64
4.02
1.17
2.84
3.84
2.58
1.26
6.10
3.51
0.69
1.90
4.32
1.22
3.10
0.79
0.19
0.59
0.88
0.58
0.30
1.74
0.95
0.25
0.53
0.82
0.29
0.53
16
14
17
19
18
19
22
21
27
22
16
19
15
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By Region/Division
Northeast ..............................................................................
New England ................................................................
Middle Atlantic ..............................................................
Midwest ................................................................................
East North Central ........................................................
West North Central .......................................................
South ....................................................................................
South Atlantic ................................................................
East South Central .......................................................
West South Central ......................................................
West .....................................................................................
Mountain .......................................................................
Pacific ...........................................................................
24.77
6.69
18.08
29.53
19.97
9.56
48.21
25.02
7.23
15.96
30.25
9.48
20.76
155 Identified with CPS MORG variable
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TABLE 15—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY
LEVELS, BY REGION, DIVISION, AND MSA STATUS, FY2017—Continued
Workers
subject to
FLSA
(millions)
Region/division/metropolitan status
Potentially
affected EAP
workers
(millions) a
Affected
(millions) c
Not-affected
(millions) b
Affected as
share of
potentially
affected
(percent)
By Metropolitan Status
Metropolitan .........................................................................
Non-metropolitan ..................................................................
Not identified ........................................................................
114.56
17.24
0.96
20.82
1.59
0.10
17.07
1.14
0.08
3.75
0.45
0.03
18
28
25
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to
the new salary level).
c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
iii. Costs
1. Summary
Three direct costs to employers were
quantified in this analysis: (1)
Regulatory familiarization costs; (2)
adjustment costs; and (3) managerial
costs. Regulatory familiarization costs
are costs to learn about the change in
the regulation, occurring primarily in
Year 1 and to a lesser extent in future
years when the salary and compensation
levels are automatically updated (e.g.,
Years 4, 7, 10). Adjustment costs are
costs incurred by firms to determine
workers’ exemption statuses, notify
employees of policy changes, and
update payroll systems. Managerial
costs occur because employers may
spend more time scheduling newly
nonexempt employees and more closely
monitor their hours to minimize or
avoid paying the overtime premium.
The Department estimated costs for
Year 1 assuming that the first year of the
analysis will be FY2017. The
Department estimated that Year 1
regulatory familiarization costs will
equal $272.5 million, Year 1 adjustment
costs will sum to $191.4 million, and
Year 1 managerial costs will total $214.0
million (Table 16). Total direct
employer costs in Year 1 are estimated
to equal $677.9 million. Regulatory
familiarization costs, adjustment costs
and management costs are recurring and
thus are projected for years 2 through 10
(section VI.D.x.).
Many commenters, including PPWO,
NRF, and the National Grocers
Association, stated that the NPRM
underestimated the costs of complying
with the rulemaking. The Assisted
Living Federation of America,
Associated Builders and Contractors,
and the College and University
Professional Association for Human
Resources (CUPA–HR) stated that 80 to
90 percent of respondents to their
member surveys indicated that the
Department’s costs estimates were
understated. Throughout this analysis,
the Department addresses comments
relating to regulatory familiarization
costs, adjustment costs, and managerial
costs in turn. We also discuss costs that
are not quantified and comments
asserting that the regulation will result
in additional unquantified costs in
section VI.D.iii. Regulatory
familiarization costs, adjustment costs
and managerial costs associated with
automatically updating the standard
salary level are discussed in section
VI.D.x.
TABLE 16—SUMMARY OF YEAR 1 DIRECT EMPLOYER COSTS
[Millions]
Direct employer costs
Standard
salary level
HCE
Compensation
level
Regulatory familiarization a ..........................................................................................................
Adjustment ...................................................................................................................................
Managerial ...................................................................................................................................
Total direct costs .........................................................................................................................
........................
$188.5
208.6
397.0
........................
$2.9
5.5
8.4
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a Regulatory
$272.5
191.4
214.0
677.9
familiarization costs are assessed jointly for the change in the standard salary level and the HCE compensation level.
2. Regulatory Familiarization Costs
Changing the standard salary and HCE
total compensation thresholds will
impose direct costs on businesses by
requiring them to review the regulation.
It is not clear whether regulatory
familiarization costs are a function of
the number of establishments or the
number of firms. The Department
believes that generally the headquarters
of a firm will conduct the regulatory
review for the entire company; however,
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some firms provide more autonomy to
their establishments, and in such cases
regulatory familiarization may occur at
the establishment level. To be
conservative, the Department uses the
number of establishments in its cost
estimate assuming that regulatory
familiarization occurs at a decentralized
level.
The Department believes that all
establishments will incur some
regulatory familiarization costs, even if
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they do not employ exempt workers,
because all establishments will need to
confirm whether this Final Rule
includes any provisions that may
impact their workers. Firms with more
affected EAP workers will likely spend
more time reviewing the regulation than
firms with fewer or no affected EAP
workers (since a careful reading of the
regulations will probably follow the
initial decision that the firm is affected).
However, the Department does not
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know the distribution of affected EAP
workers across firms and so an average
cost per establishment is used.
In the NPRM, the Department
requested that commenters provide data
if possible on the costs of regulatory
familiarization, and a few commenters
provided estimates based on personal
judgments or responses by members.
While the information provided may
reflect the experiences of individual
commenters, the information does not
provide a basis for the Department to
revise its estimate of time required for
regulatory familiarization. The
Department continues to believe that
our estimate of one hour per
establishment in the NPRM is a
reasonable average that accounts for
some businesses requiring more time
while other businesses require less time.
To estimate the total regulatory
familiarization costs, three pieces of
information must be estimated: (1) A
wage level for the employees reviewing
the rule; (2) the number of hours
employees spend reviewing the rule;
and (3) the number of establishments
employing workers. The Department’s
analysis assumes that mid-level human
resource workers with a median wage of
$24.86 per hour will review the Final
Rule.156 Assuming benefits are paid at a
rate of 46 percent of the base wage and
one hour of time is required for
regulatory familiarization, the average
cost per establishment is $36.22.157 The
156 We calculated this wage as the projected
median wage in the CPS for workers with the
Census 2010 occupations ‘‘human resources
workers’’ (0630); ‘‘compensation, benefits, and job
analysis specialists’’ (0640); and ‘‘training and
development specialists’’ (0650) in FY2013–
FY2015, projected to FY2017. The Department
determined these occupations include most of the
workers who would conduct these tasks. Bureau of
Labor Statistics, U.S. Department of Labor,
Occupational Outlook Handbook, 2014–15 Edition.
These are the same occupation classifications used
in the NPRM but updated to reflect the Census 2010
occupational classification.
157 The benefits-earnings ratio is derived from the
BLS’ Employer Costs for Employee Compensation
data using variables CMU1020000000000D and
CMU1030000000000D. This fringe benefit rate
includes some fixed costs such as health insurance.
The Department believes that the overhead costs
associated with for this rule are small because
existing systems maintained by employers to track
currently hourly employees can be used for newly
overtime eligible workers. However, acknowledging
that there might be additional overhead costs, as a
sensitivity analysis of results, we calculate the
impact of more significant overhead costs by
including an overhead rate of 17 percent. This rate
has been used by the Environmental Protection
Agency (EPA) in its final rules (see for example,
EPA Electronic Reporting under the Toxic
Substances Control Act Final Rule, Supporting &
Related Material), and is based upon a Chemical
Manufacturers Association study. An overhead rate
from chemical manufacturing may not be
appropriate for all industries, so there may be
substantial uncertainty concerning the estimates
based on this illustrative example. Using an
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number of establishments with paid
employees was 7.52 million.158
Regulatory familiarization costs in Year
1 were estimated to be $272.5 million
($36.22 per hour × 1 hour × 7.52 million
establishments).159 Regulatory
familiarization costs in future years are
discussed in section VI.D.x.
briefed on the rule, we expect in general
that mid-level human resource
specialists will be the individuals
primarily responsible for becoming
familiar with the new rule. Moreover,
this wage estimate is an average across
all firms, some of which will pay higher
rates and others lower rates.
Wage Rate
The Department estimated in the
NPRM that one hour of regulatory
familiarization time costs $34.19 based
on the wage for a mid-level human
resources worker adjusted to include
benefits. We follow the same approach
in this RIA; however, due to growth in
wages, the wage rate used in the Final
Rule is $36.22. The Chamber asserted
that time spent on regulatory
familiarization will generally be
conducted by a manager with a base
wage better approximated at $60 per
hour, multiplied by a mark-up of 3.3 to
cover indirect overhead and support.160
The National Association of Landscape
Professionals (NALP) commented that
92 percent of the members it surveyed
believe the wage rate should be ‘‘be
more like $51.00 to $68.00 per hour.’’ 161
The Department believes that we have
utilized an appropriate wage rate; we
similarly used wage rates for human
resources specialists in the 2004 Final
Rule (using a low to high range of such
rates, depending upon employer size,
rather than a single mid-level wage rate
as we do currently). 69 FR 22222–24.
Although higher paid managers may be
Time Requirement
In the NPRM, the Department
estimated each establishment will, on
average, spend one hour on regulatory
familiarization. Firms with more
affected EAP workers will likely spend
more time reviewing the regulation than
firms with fewer or no affected EAP
workers. No data were identified from
which to estimate in the NPRM the
amount of time required to review the
regulation, and the Department
requested that commenters provide data
if possible. The Department did not
receive any reliable data from
commenters, although some
commenters suggested different
amounts of time based on their personal
judgment or surveys they conducted.
The American Hotel and Lodging
Association (AH&LA), the National
Roofing Contractors Association, NRF
and others commented that regulatory
familiarization will take longer than one
hour, with some stating that several
individuals in each of their
establishments will need to read and
familiarize themselves with the new
rule. AH&LA estimated it will take at
least four hours per establishment to
become familiar with the Final Rule.
The Chamber commented that an
average of 6 hours of time is appropriate
because: ‘‘For the very smallest
establishments a familiarization time of
one to two hours may be possible, but
for larger establishments the number of
labor hours may amount to hundreds or
more.’’
The Department believes these
commenters significantly overestimate
the time necessary for regulatory
familiarization. The EAP exemptions
have been in existence in one form or
another since 1938, and were updated
as recently as 2004. While the 2004
rulemaking promulgated a host of
changes, including revisions to the
duties test, the most significant change
promulgated in this rulemaking is
setting a new standard salary level for
exempt workers, and updating that
salary level every three years. The
Department believes that, on average,
one hour is sufficient to time to read
about and understand, for example, the
change in the standard salary level from
$455 to $913 per week, and we note that
the regulatory text changes comprise
only a few pages.
overhead rate of 17 percent would increase total
costs (including regulatory familiarization costs,
adjustment costs, and managerial costs) by from
$677.9 million in Year 1 to $757.0 million, or 11.7
percent. For the reasons stated above, the
Department believes this estimate overestimates the
additional costs arising from overhead costs while
recognizing that there is not one uniform approach
to estimating the marginal cost of labor.
158 Data for 2012 were the most recent available
at the time of writing. Survey of U.S. Businesses
2012. Available at: https://www.census.gov/econ/
susb/. Also included in the number of
establishments incurring regulatory familiarization
costs are the 90,106 state and local governments
reported in the 2012 Census of Governments:
Employment Summary Report. Available at: https://
www2.census.gov/govs/cog/g12_org.pdf.
159 As previously noted, the Department chose to
use the number of establishments rather than the
number of firms to provide a more conservative
estimate of the regulatory familiarization cost.
Using the number of firms, 5.82 million, would
result in a reduced regulatory familiarization cost
estimate of $210.7 million in Year 1.
160 The Chamber also incorrectly stated that the
Department used the wage for a ‘‘human resources
office administrative clerk;’’ the Department
actually used wages for ‘‘human resources, training,
and labor relations specialists.’’
161 NALP believes both time and hourly cost are
underestimated. It is not clear whether the amount
cited is the hourly wage rate members believe is
appropriate or the total cost across more than one
hour of time.
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Recurrence
The Chamber criticized the
Department for failing to estimate
regulatory familiarization costs
occurring after the first year,
commenting that regulatory
familiarization costs would repeat with
each automatic update to the salary
level. Upon further consideration, the
Department agrees there will be some
regulatory familiarization costs in future
years when the salary level is updated
(e.g., 2020, 2023, 2026). However,
because subsequent updates will use the
same method adopted in this Final Rule,
and this rule informs stakeholders that
the salary and compensation levels will
be updated every three years, there is
little additional regulatory change with
which employers will have to
familiarize themselves. Accordingly, the
Department has added 5 minutes per
establishment of regulatory
familiarization time to access and read
the published salary levels in future
years when the salary and compensation
levels are automatically updated (see
projected costs in section VI.D.x.).
3. Adjustment Costs
Changes in the standard salary and
HCE compensation levels will impose
direct costs on firms by requiring them
to re-determine the exemption status of
employees, update and adapt overtime
policies, notify employees of policy
changes, and adjust their payroll
systems. The Department believes the
size of these costs will depend on the
number of affected EAP workers and
will occur in any year when 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 for human resources, training,
and labor relations specialists is $36.22
per hour (as explained above). No
applicable data were identified from
which to estimate the amount of time
required to make these adjustments.162
However, in response to comments
claiming that the Department
underestimated the adjustment time, for
this Final Rule, the Department
increased the time from one hour to 75
minutes per affected worker. The
estimated number of affected EAP
162 Costs stated in the 2004 Final Rule were
considered, but because that revision included
changes to the duties test, the cost estimates are not
directly applicable; in addition, the 2004 Final Rule
did not separately account for managerial costs.
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workers in Year 1 is 4.2 million (as
discussed in section VI.D.ii.). Therefore,
total Year 1 adjustment costs were
estimated to equal $191.4 million
($36.22 × 1.25 hours × 4.2 million
workers).
Adjustment costs may be partially
offset by a reduction in the cost to
employers of determining employees’
exempt status. Currently, to determine
whether an employee is exempt firms
must apply the duties test to salaried
workers who earn at least $455 per
week. Following this rulemaking, firms
will no longer be required to apply the
potentially time-consuming duties test
to employees earning less than the
updated salary level. This will be a clear
cost savings to employers for employees
who do not pass the duties test and earn
at least $455 per week but less than the
updated salary level. The Department
did not estimate the potential size of
this cost savings.
Wage Rate
The Chamber commented that a more
appropriate wage rate would be $200
per hour, based on a manager’s wage of
around $60 per hour, multiplied by a
mark-up (or loaded) rate of 3.3 to cover
indirect overhead and support. The
Department believes its use of the
occupation of ‘‘human resources,
training, and labor relations specialists’’
and corresponding wage rate
appropriately reflects the occupational
classification and wage rate on average
for the individuals who will redetermine the exemption status of
employees, update and adapt overtime
policies, notify employees of policy
changes, and adjust their payroll
systems. The Department recognizes
that in some businesses, more senior
staff will conduct at least portions of
this work, while in other businesses,
more junior staff may perform at least a
portion of this work. Therefore, the
Department continues to rely on its use
of the ‘‘human resources, training, and
labor relations specialists’’ and
corresponding wage rate to reflect the
average costs to businesses impacted by
this Final Rule. The Department also
disagrees with the mark-up rate
suggested by the Chamber, because an
additional 75 minutes of time will have
little-to-no effect on the cost of overhead
and support services. No other
commenters provided alternative wage
rates.
Time Requirement
To estimate adjustment costs, the
Department assumed in the NPRM that
each establishment will, on average,
spend one hour of time per affected
worker to make adjustments required
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32475
because of this rulemaking. 80 FR
38566. The Department requested that
commenters provide any applicable data
concerning this issue, but no applicable
data were identified from which to
estimate the amount of time required to
make these adjustments. The
Department believes that commenters
that did address adjustment costs
significantly overestimated the time
necessary for making appropriate
workplace adjustments. However, the
Department agrees that some increase is
warranted, and thus increased the
estimated average adjustment time to 75
minutes per affected worker.
Based on feedback from their
members, AH&LA and Island
Hospitality Management estimated that
employers will need approximately four
to seven hours per affected employee.
The National Council of Chain
Restaurants (NCCR) stated that
‘‘[e]mployers have told NCCR that the
approximate time needed to make such
adjustments will be 3–4 hours per
employee,’’ and NRF reported that its
members ‘‘estimate it would take at least
three to four hours per affected
employee to make applicable
adjustments.’’ The American Insurance
Association and the Property Casualty
Insurers Association of America (AIA–
PCI) asserted that adjustments will
require more time than the Department
estimated because employers will not
make adjustments in response to the
rule ‘‘in a vacuum; legal, HR, and
operations all will need to be involved
to assess risk, determine value, and
ultimately decide whether a position, or
classification, or part of a classification
should be reclassified to non-exempt as
a result of the Department’s salary level
increase.’’ New Castle Hotels & Resorts
similarly stated that a ‘‘hotel’s GM and
HR as well as the Department Head and
the effected manager would all need to
be involved together with payroll.’’
AIA–PCI also asserted that in many
cases, information technology systems
‘‘cannot be configured to accommodate
exempt and non-exempt employees in
the same job classification,’’ and thus
additional time will be required to
reconfigure these systems.
A report by Oxford Economics,
submitted by NRF and referenced by
other commenters, estimated the
‘‘transitional costs’’ associated with this
rule.163 The tasks covered by Oxford
163 Oxford Economics. (2015). Rethinking
Overtime: How Increasing Overtime Exemption
Thresholds Will Affect The Retail And Restaurant
Industries. Two additional documents produced by
Oxford Economics were also included by some
commenters: Letter dated July 17, 2015 that updates
the estimates provided in the ‘‘Rethinking
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Economics’ transition cost measure
include: ‘‘identifying which employees
ought to have salaries adjusted and then
making and communicating that
adjustment’’; ‘‘converting a salaried
employee to an hourly rate and then
adding that employee to the time
tracking system (already in use for
existing hourly employees)’’;
disruptions to normal business
operations; time for ‘‘HR personnel [to]
communicate and implement the
change’’; time for additional IT support
for time-tracking system; costs
associated with the added complexity of
managing and scheduling people’s time;
and costs associated with ‘‘establishing
an hourly rate (lower than existing base
salary) that is calculated so that overall
compensation (including new overtime
payments) will leave current total
compensation unchanged.’’ These costs
appear to be roughly comparable to the
Department’s adjustment cost category,
although with some inclusion of costs
the Department categorized as
managerial costs. However, Oxford
Economics also included costs
associated with converting newly
nonexempt workers from salaried to
hourly status, which the Department
recognizes is a choice some employers
may make in responding to this rule, but
is not a requirement of the regulation.
Oxford Economics estimated Year 1
transactional costs of $648 million in
the retail and restaurant industry if the
salary level were set at $808 per week,
and $874 million if the salary level were
set at $984 per week. These costs for the
retail and restaurant industry alone are
roughly 4 to 5.5 times larger than our
NPRM estimate for all industries ($160.1
million based on a $921 salary level in
Year 1). The Department has evaluated
Oxford Economics’ analysis and
determined that this discrepancy is due
in part to Oxford Economics’ estimation
of the time requirement for
adjustment.164
Oxford Economics assumed that
adjustment costs for Type 1 workers
(those who do not work overtime) are
zero, and that each worker who receives
a pay increase to the new salary level in
Overtime’’ paper in light of the Department’s
proposal; and a letter dated August 18, 2015 that
examines states’ prevailing wage levels and the
Department’s automatic updating proposal.
164 Although Oxford Economics’ Table A2 reports
some values they used to calculate transactional
costs, the report NRF submitted to the record does
not explain why they chose these values, nor does
it describe in detail the source for these values,
other than noting that it obtained information from
‘‘interviews with industry experts.’’ Therefore, the
Department could not easily assess the
reasonableness of these estimates. See https://
nrf.com/sites/default/files/Documents/
retail%20library/Rethinking-OvertimeAppendices.pdf.
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order to remain exempt (Oxford
Economics’ equivalent to Type 4
workers) requires 1/1000th of a human
resource employee full time equivalent;
this equates to approximately 2.1 hours
of time per affected worker (i.e., 2,080
FTE hours/1,000).165 These per worker
cost estimates are comparable to the
Department’s cost estimates. However,
for employees reclassified as nonexempt
as a result of the rulemaking, Oxford
Economics appears to estimate that
transitioning these workers will require
34.7 hours per worker for ‘‘group 2’’
workers and 10.4 hours per worker for
‘‘group 3’’ workers.166 These workers
appear to be very roughly comparable to
the Department’s Type 2 and 3 workers,
but with much more extreme
assumptions concerning how employers
will respond (e.g., all overtime hours
will be eliminated instead of reduced as
the Department expects). Oxford
Economics defines ‘‘group 2’’ workers as
those who ‘‘will have their hourly wage
rate set in such a way that their total
compensation remains unchanged,’’ and
‘‘group 3’’ workers as those who will
‘‘see their hours cut to 38 per week,
with their salary cut proportionally.’’
The Department believes Oxford
Economics’ estimates of the time
requirement for adjusting Type 2 and 3
(Oxford Economics’ ‘‘group 2’’ and
‘‘group 3’’) workers are too high. It is
unreasonable to expect, for example,
that it will take a human resource
worker 34.7 hours (almost an entire
workweek) to reclassify each Type 2
worker as nonexempt, and possibly
adjust his or her implicit hourly wage
rate so the total compensation remains
unchanged. As we stated above, in this
Final Rule, the Department estimates an
average of 75 minutes of adjustment
time per affected worker. However,
employers will need to exert minimal
effort to determine the change in status
of perhaps 60 percent of affected
workers (e.g., the majority of affected
workers who work no overtime). Thus,
we assume that the average of 75
minutes per worker is concentrated on
165 As detailed in section VI.D.iv., the Department
concludes that employers will respond to the Final
Rule differently for different categories of workers,
depending upon whether they work overtime and
the nature of the overtime. The Department has
divided workers into four categories, based upon
the nature of any overtime work. Type 1 workers
do not work overtime; Type 2 workers work
occasional overtime (some on a regular basis and
some on an unpredictable basis): Type 3 workers
regularly work overtime; and Type 4 workers
regularly work overtime and will earn sufficient
wages after the Final Rule is implemented that
employers will increase their salaries to the new
level.
166 Oxford Economics also estimated costs related
to changing computer systems. This discussion
focuses on Human Resources costs.
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the subset of employees requiring more
analysis to make a decision. If, for
example, we allocate 0.5 hours per Type
1 worker and 50 percent of Type 2
workers (i.e., workers whose hours and
base wage rates do not change), then
that still leaves 3.0 hours per worker for
the remaining 50 percent of Type 2
workers, and all Type 3 and Type 4
workers. Finally, larger firms are likely
to experience economies of scale in
evaluating affected workers; a decision
on how to treat a worker with specific
characteristics (e.g., earnings, hours,
duties) is likely to be applicable to
multiple workers.
With respect to the concern raised by
AIA–PCI about reconfiguring
information technology systems to
include both exempt and overtimeprotected workers, the Department notes
that most organizations affected by the
rule already employ overtime-eligible
workers and have in place payroll
systems and personnel practices (e.g.,
requiring advance authorization for
overtime hours) so that additional costs
associated with the rule should be
relatively small in the short run.167
Recurrence
The Chamber also expressed concern
the Department underestimated
projected adjustment costs associated
with automatic updating, stating that
employers would incur significant
adjustment costs in years the salary is
automatically updated, even if
subsequent salary level changes affect
fewer workers than the initial increase
(to $913). Similarly, PPWO stated that
the Department’s cost projections did
not account for the fact that
‘‘compliance review activities that take
place in Year 1 will be repeated on an
annual basis, for different groups of
employees that fall below the new
salary minimum.’’ See also North
Dakota Bankers Association (the
Department should recognize that future
salary updates require time to determine
whether an employee should be
classified as exempt or nonexempt, not
just time to reprogram the payroll).
Contrary to these comments, 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
167 The Department notes that no particular form
or order of records is required and employers may
choose how to record hours worked for overtimeeligible employees. For example where an
employee works a fixed schedule that rarely varies,
the employer may simply keep a record of the
schedule and indicate the number of hours the
worker actually worked only when the worker
varies from the schedule. This is sometimes referred
to as exceptions reporting. 29 CFR 516.2(c).
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no need to ‘‘adjust’’ for workers who are
already overtime eligible (due to a prior
adjustment of the EAP salary level)
when the salary level is updated again.
4. Managerial Costs
If employers reclassify employees as
overtime eligible due to the changes in
the salary levels, then firms may incur
ongoing managerial costs associated
with this Final Rule because the
employer may schedule and more
closely monitor an employee’s hours to
minimize or avoid working overtimeeligible employees more than 40 hours
in a week. For example, the manager of
a reclassified worker may have to assess
whether the marginal benefit of
scheduling the worker for more than 40
hours exceeds the marginal cost of
paying the overtime premium.
Additionally, the manager may have to
spend more time monitoring the
employee’s work and productivity since
the marginal cost of employing the
worker per hour has increased. Unlike
regulatory familiarization and
adjustment costs, which occur primarily
in Year 1 and to a much lesser extent
in years when the salary is
automatically updated, managerial costs
are incurred more uniformly every year.
Because there was little precedent or
data to aid in evaluating these costs, the
Department examined several sources to
estimate costs. First, prior part 541
rulemakings were reviewed to
determine whether managerial costs
were estimated. No estimates were
found. This cost was not quantified for
the 2004 rulemaking. Second, a
literature review was conducted in an
effort to identify information to help
guide the cost estimates; again, no
estimates were found. The Department
also requested data from the public
applicable to this cost estimate;
however, as discussed below, the
Department received no time estimates
that seemed more appropriate than the
estimates used in the NPRM.
Based on commenters’ concerns,
discussed below, that managerial costs
are applicable to more workers than
were included in the NPRM, the
Department expanded the number of
workers for whom employers
experience additional managerial costs
(section VI.D.iv.) As in the NPRM,
managerial costs are applied to workers
who are reclassified as overtimeprotected and who either regularly work
overtime or occasionally work overtime
but on a regular basis. For the Final
Rule, however, the Department
expanded its count of the number of
workers who occasionally work regular
overtime (defined later as half of Type
2 workers) by assuming that some Type
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1 workers (who report that they do not
work overtime) will actually work
overtime during some week of the year.
Therefore, the number of workers for
whom we apply managerial costs
increased from 808,000 using the NPRM
methodology to 1.2 million using the
Final Rule methodology.
To provide a sense of the potential
magnitude of these costs, the
Department estimated these costs
assuming that management spends an
additional five minutes per week
scheduling and monitoring each
affected worker expected to be
reclassified as overtime eligible as a
result of this rule, and whose hours are
adjusted (1.2 million affected EAP
workers as calculated in section
VI.D.iv.). As will be discussed in detail
below, most affected workers do not
currently work overtime, and there is no
reason to expect their hours worked to
change when their status changes from
exempt to nonexempt. Similarly,
employers are likely to find that it is
less costly to give some workers a raise
in order to maintain their exempt status.
For both these groups of workers,
management will have little or no need
to increase their monitoring of hours
worked. Under these assumptions, the
additional managerial hours worked per
week were estimated to be 97,300 hours
((5 minutes/60 minutes) × 1.2 million
workers).
The median hourly wage in FY2017
for a manager is estimated to be $29.04
and benefits are estimated to be paid at
a rate of 46 percent of the base wage,
which totals $42.31 per hour.168 169
Multiplying the additional 97,300
weekly managerial hours by the hourly
wage of $42.31 and 52 weeks per year,
the Year 1 managerial costs were
estimated to total $208.6 million due to
this rule. Although the exact magnitude
would vary with the number of affected
EAP workers each year, managerial
costs would be incurred annually.
Additional Investment
Some commenters, such as the
National Grocers Association and the
National Association of Area Agencies
on Aging asserted that managerial costs
will be higher than the Department
estimated because some employers may
need to purchase new systems or hire
additional personnel to monitor hours.
However, the Department believes that
168 Calculated as the projected median wage in
the CPS for workers in management occupations
(excluding chief executives) in FY2013–FY2015,
projected to FY2017.
169 The adjustment ratio is derived from the BLS’
Employer Costs for Employee Compensation data
using variables CMU1020000000000D and
CMU1030000000000D.
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32477
most companies already manage a mix
of exempt and nonexempt employees,
and already have policies and
recordkeeping systems in place for
nonexempt employees. Thus, they are
unlikely to need to purchase systems or
hire additional monitoring personnel as
a result of this rulemaking. Moreover,
no particular form or order of records is
required and employers may choose
whatever form of recordkeeping works
best for their business and their
employees. For example, where an
employee works a fixed schedule that
rarely varies, the employer may simply
keep a record of the schedule and
indicate the number of hours the worker
actually worked only when the worker
varies from the schedule (‘‘exceptions
reporting’’). 29 CFR 516.2(c). Because
simple recordkeeping systems, such as
exceptions reporting systems for
workers on a fixed schedule, are
permissible, costs may be minimal.
Time Requirement
Several commenters asserted that
scheduling and monitoring newly
overtime eligible workers will require
more time than the Department
assumes. One human resource manager
commented that the time required will
‘‘be closer to 15 minutes than 5,’’ and
AH&LA stated that its members believe
these costs ‘‘will be closer to 25 minutes
to an hour a week.’’ NCCR stated that it
received feedback from employers in the
restaurant industry who estimated that
managerial costs will range from one to
three hours per week. NRF similarly
states that its members estimated that
managerial costs would range from one
to three hours per week.
The Department believes these
commenters’ estimates are excessive.
For example, 75 percent of currently
exempt employees who work overtime
average less than 10 hours of overtime
per week. Assuming a newly nonexempt
employee averages 10 hours of overtime
per week, then based on NCCR’s
estimate, a manager would spend from
6 minutes to 18 minutes monitoring for
each hour of overtime worked by that
employee. The Department believes this
estimate is unrealistically high. We also
note that commenters did not submit
any data supporting their 15 minute and
25 minute estimates. Furthermore, we
recognize that employers routinely
apply efficiencies in their operations,
and see no reason why they will not do
so with regard to scheduling as well.
Wage Rate
The Chamber recommended that the
Department use the mean wage rather
than the median to calculate hourly
managerial costs, and also asserted that
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the wage should include all loaded
overhead cost. However, the mean and
median wages for managers are very
similar in the CPS data ($32.71 versus
$29.04, respectively), so using the mean
wage will not result in substantially
different estimated costs. Furthermore,
if the distribution of wages is skewed (as
demonstrated here by a mean wage
larger than the median wage), the
median value is more representative of
the wage most firms will pay. The
Department does not believe it is
appropriate to use all overhead costs in
estimating a marginal cost increase
because the relevant cost is the marginal
value of the cost of labor, which is much
smaller than the loaded overhead cost.
Most overhead costs are largely fixed
and unaffected if an employee works an
incremental hour. For example,
accounting and administrative staff are
unlikely to work more time; building
rent, heat and electricity are unlikely to
change if a supervisor or human
resource staff person works an
incremental hour. However,
acknowledging that there might be some
overhead costs, we include a sensitivity
analysis providing an upper bound cost
estimate.170
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Number of Affected Workers
The Chamber also asserted that
managerial costs should apply to all
affected workers whose status changes,
not just those who regularly work
overtime, because ‘‘even those who
usually work only 40 hours will require
additional management schedule
monitoring to ensure that their hours do
not go higher.’’ The Department believes
that although some companies may
closely monitor hours for workers who
usually do not work overtime, many
companies do not. Many companies
simply prohibit overtime without
express approval and/or assign workers
to a set weekly schedule of hours; in
such firms monitoring costs for these
newly nonexempt workers who usually
170 As a sensitivity analysis of results, we
calculate the impact of more significant overhead
costs by including an overhead rate of 17 percent.
This rate has been used by the EPA in its final rules
(see for example, EPA Electronic Reporting under
the Toxic Substances Control Act Final Rule,
Supporting & Related Material), and is based upon
a Chemical Manufacturers Association study. An
overhead rate from chemical manufacturing may
not be appropriate for all industries, so there may
be substantial uncertainty concerning the estimates
based on this illustrative example. Using an
overhead rate of 17 percent would increase total
costs (including regulatory familiarization costs,
adjustment costs, and managerial costs) by from
$677.9 million in Year 1 to $757.0 million, or 11.7
percent. For the reasons stated above, the
Department believes this estimate overestimates the
additional costs arising from overhead costs while
recognizing that there is not one uniform approach
to estimating the marginal cost of labor.
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do not work overtime should be
negligible. Furthermore, without
additional information, it is impossible
to determine the prevalence of the more
strenuous form of managerial oversight
described by the Chamber. However, we
did increase the number of workers for
whom managerial costs are estimated to
include more occasional overtime
workers, as discussed above.
Lonnie Golden,171 referenced by the
National Employment Law Project
(NELP), 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
became more like their hourly
counterparts.’’
5. Other Potential Costs
Reclassification to Overtime Eligible
Status
Some commenters asserted that the
rulemaking will negatively affect the
morale of employees reclassified as
overtime eligible.172 For example,
WorldatWork stated that 79 percent of
survey respondents said the proposed
rule would have a negative effect on the
reclassified employees’ morale, as
exemption classification is a perceived
measure of status desired by employees,
and Kimball Midwest similarly
commented that ‘‘many of the young
professionals that we employ would
view being reclassified to nonexempt as
a demotion and an insult to their
professional and social status in the
workplace.’’ The Department believes
that for most 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.
However, if the worker does prefer to
be salaried rather than hourly, then this
change may impact the worker. The
likelihood of this impact occurring
depends on the costs to employers and
benefits to employees of being salaried.
Research has shown that salaried
workers (who are not synonymous with
exempt workers, but whose status is
correlated with exempt status) are more
likely than hourly workers to receive
benefits such as paid vacation time and
health insurance,173 are more satisfied
with their benefits,174 and that when
employer demand for labor decreases,
In addition to the costs discussed
above, there may be additional costs
that have not been quantified. In the
NPRM we identified these potential
costs to include reduced profits and
hiring costs. See 80 FR 38578–80.
Commenters addressed a variety of
other potential costs.
Reduced Scheduling Flexibility
Some commenters, such as the ASAE,
Thombert, Inc., Applied Measurement
Professionals; and Alaska USA Federal
Credit Union, asserted that exempt
workers enjoy more scheduling
flexibility claiming that their hours
generally are not monitored, and thus
this rulemaking will impose costs on
newly overtime-eligible workers by (for
example) limiting their ability to adjust
their schedule to meet personal and
family obligations. Other commenters
suggested that the rulemaking would
impose costs on employers because they
will lose flexibility to schedule
employees. For example,
TRANSITIONS for the Developmentally
Disabled commented that ‘‘[h]aving
managers that can work those urgencies
and emergencies, then giving them time
off later to make up for those extra
hours, helps our managers manage the
business without us paying expensive
overtime or having someone without
managerial skills deal with those
situations’’ (emphasis in comment).
The Final Rule does not necessitate
that employers reduce scheduling
flexibility. Employers can continue to
offer flexible schedules and require
workers to monitor their own hours and
to follow the employers’ timekeeping
rules. Additionally, some exempt
workers already monitor their hours for
billing purposes. For these reasons, and
because there is little data or literature
on these costs, the Department does not
quantify potential costs regarding
scheduling flexibility to either
employees or employers. Moreover, the
limited literature available suggests that
if there is a reduction in flexibility for
employees, it would not be as large as
commenters suggested. A study by
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171 Golden, L. (2014). Flexibility and Overtime
Among Hourly and Salaried Workers. Economic
Policy Institute.
172 The Department notes that to the extent that
such negative effects are attributable to the
employer converting the employee to hourly pay
status, employers can avoid this consequence by
continuing to pay overtime-eligible employees a
salary and pay overtime when the employee works
more than 40 hours in the workweek.
173 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.
174 Balkin, D. B., & Griffeth, R. W. (1993). The
Determinants of Employee Benefits Satisfaction.
Journal of Business and Psychology, 7(3), 323–339.
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hourly workers tend to see their hours
cut before salaried workers, making
earnings for hourly workers less
predictable.175 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.
Some evidence suggests that it is more
costly for the employer to employ a
salaried worker than an hourly worker.
If true, employers may choose to
accompany the change in exemption
status with a change to the employee’s
method of pay, from salary to an hourly
basis, since there is no longer as great
an incentive to classify the worker as
salaried.176
Jackson Lewis asserted that the
Department did not adequately consider
other costs associated with reclassifying
employees from exempt to nonexempt:
‘‘This is not just a mere matter of
accounting for potential changes in
direct wage costs. Exempt and nonexempt employees function very
differently in the workplace.
Reclassifying employees imposes costs
with respect to re-engineering roles,
determining new performance metrics,
and devising compensation programs
that drive the desired behaviors
consistent with an obligation to pay a
wage premium after forty hours in a
workweek.’’ We believe these
considerations are adequately accounted
for in the Department’s adjustment cost
estimate, which we increased by 15
minutes from 60 to 75 minutes for each
affected worker.
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Earnings Predictability
Some commenters asserted that
employers will convert newly
nonexempt employees to hourly pay
and that these employees will lose the
earnings predictability of a guaranteed
salary. See, e.g., AH&LA; Island
Hospitality Management; NCCR; NRF.
These commenters asserted that receipt
of a guaranteed minimum salary
provides peace of mind to employees.
These comments appear to reflect a
common misperception among
175 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.
176 There is not requirement that overtime eligible
employees be paid on an hourly basis. Paying such
employees a salary is appropriate so long as the
employee receives overtime pay for working more
than 40 hours in the workweek. See §§ 778.113–
.114.
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employers that overtime-eligible
employees must be paid on an hourly
basis. Overtime-eligible employees 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. §§ 778.113–
.114.
Reduced Opportunities for Training and
Advancement
Some commenters stated that the
rulemaking will reduce training and
promotional opportunities. For
example, ASAE commented that
employers would not permit newly
overtime eligible employees to attend
conferences and annual meetings. In
response to these comments, 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, we decline to do so in this
analysis.
Reduced Productivity
Some commenters expressed concern
that the automatic updating provisions
of the rule may reduce productivity. For
example, the Michael Best & Friedrich
law firm commented that many
employees will ‘‘assume they could
perform at the same level, or do the bare
minimum, and still receive an automatic
pay increase,’’ and this ‘‘unmotivated
workforce will lead to lesser
productivity.’’ This rulemaking does not
require any employer to provide an
automatic pay raise when the standard
salary level increases. As always,
employers have the ability to determine
which employees deserve raises, and
the size of that raise, and to decide how
to handle employees whose work is
unsatisfactory. Additionally, the Final
Rule has been modified so that updating
will occur every three years, not
annually, which should lessen
commenters’ concerns on this issue.
Furthermore, as discussed in section
VI.D.vii., the Department believes that
in some instances employers may in fact
experience increased worker
productivity due to factors including
efficiency wages, improved worker
health, and a reduction in turnover.
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32479
Quality of Services
Some commenters expressed concern
that the rulemaking, by restricting work
hours, will negatively impact the quality
of public services provided by local
governments, see, e.g., City of Galax;
disability services providers, see, e.g.,
American Network of Community
Options and Resources (ANCOR); health
care providers, see, e.g., Lutheran
Services in America; education
providers, see, e.g., La Salle Catholic
College Preparatory, and others. The
Indian River Schools commented that
the ‘‘only way a school system can
adjust for this change is to reduce
services to students, given that our
industry operates with low-overhead.’’
The Department believes the impact
of the rule on public services will be
small. The Department acknowledges
that some employees who work
overtime providing public services may
see a reduction in hours as an effect of
the rulemaking. However, 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, as discussed in section
VI.D.vii., may offset some reduction in
services. Furthermore, the Department
notes that school systems would largely
be unaffected by the rulemaking:
Teachers and academic administrative
personnel are ‘‘named occupations’’ and
thus do not have to pass the salary level
test to remain exempt. In addition, the
Department expects many employers
will adjust base wages downward to
some degree so that even after paying
the overtime premium, overall pay and
hours of work for many employees will
be relatively minimally impacted, as
indicated in the comments of many
employers.
Increased Prices
Some commenters expressed concern
that increased labor costs will be passed
along to consumers in the form of higher
prices. See, e.g., National Association of
Home Builders (NAHB) (stating that of
the 33 percent of members surveyed
who predicted some change, 44 percent
indicated that the proposal ‘‘would
result in higher home prices for
consumers’’); SnowSports Industries of
America. NRF stated that many of its
members noted that raising prices
would result in a loss of sales.
The Department does anticipate that,
in some cases, part of the additional
labor costs may be offset by higher
prices of goods and services. However,
because costs and transfers are on
average small relative to payroll and
revenues, the Department does not
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expect this rulemaking to have a
significant effect on prices. The
Department projects that, on average,
costs and transfers make up less than
0.03 percent of payroll and less than
0.01 percent of revenues, although for
specific industries and firms this
percentage may be larger. Therefore, the
Department expects that any potential
change in prices will be modest.
Further, any significant price increases,
would generally not represent a separate
category of impacts relative to those
estimated in the RIA; rather, price
increases (where they occur) are the
channel through which consumers,
rather than employers or employees,
bear rule-induced costs (including
transfers).177
Foreign Competition
Some commenters expressed concern
that the rulemaking will hurt the United
States’ ability to compete in the
international market. See, e.g, Jackson
Lewis; NACCO Industries; National
Association of Manufacturers; National
Association of Wholesale Distributors;
Precision Machined Products
Association. The Department does not
believe this is a serious concern due to
the small ratio of employer costs and
transfers to revenues.
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Substitution of Capital
Some commenters, such as the
National Parking Association and the
National Beer Wholesalers Association,
asserted that, by increasing the marginal
cost of labor, the rule will lead
companies to automate their business
operations and substitute capital for
labor. The Department believes that it is
unlikely that employees performing jobs
that can be easily automated will satisfy
the duties test, and that any such effect
would be negligible due to the small
ratio of employer costs and transfer
payments to operating revenue.
Wage Compression and Spillover Effects
Several commenters stated that
employers may increase the wages of
workers currently paid just above the
new threshold to maintain a distribution
of wages, and some asserted that the
Department failed to account for this
effort to avoid salary compression in our
economic analysis. See, e.g.,
Cornerstone Credit Union League; First
Premier Bank; HMR Acquisition
Company; International Franchise
Association; PPWO; Seyfarth Shaw law
177 The deadweight loss associated with price
increases is appropriately categorized as a cost, but
it is discussed in detail in in section VI.D.vi because
the methodology whereby it is estimated is more
clearly explained as a follow-up to the transfers
methodology.
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firm; Tulsa Regional Chamber. The
Department did not consider salary
compression in the NPRM because data
are not available to estimate this effect.
For the same reason, we decline to
consider this cost in the analysis
accompanying this Final Rule.
Substitution of Part-Time Jobs in Place
of Full-Time Jobs
Some commenters stated that firms
will reduce the number of full-time
positions and replace them with parttime positions to limit overtime
payments. See, e.g., Associated General
Contractors of America (AGC); National
Newspaper Association; SnowSports
Industries of America. These
commenters assume that rather than
cutting the hours of a worker who works
60 hours per week to 40 hours and
hiring a part-time employee to work the
remaining 20 hours (which would
potentially reduce unemployment),
employers will create part-time
positions at the expense of full-time
employment.
As an initial matter, an employer will
have an incentive to make these
adjustments only if the cost of paying
overtime is greater than the costs
associated with hiring another worker.
Further, although the Department
acknowledges the possibility that firms
may reduce the number of full-time
positions and replace them with parttime positions, on net the Department
believes the benefits of additional jobs
(i.e., external margins) will outweigh
any detriment of reduction in hours for
current employees (i.e., internal
margins), although the Department
cannot quantify this effect. Due to data
limitations the Department has not
estimated transfers between workers.
We note, however, that most of the
estimates submitted by commenters of
large costs, transfers, and employment
impacts rely implicitly on the
assumption that employers make no
adjustment to the rulemaking except to
pay the overtime premium. This lack of
employer response is contradicted by
quantitative analysis of employer
behavior (see Barkume,178 for example),
and by the employer comments on this
rulemaking. Employers will adjust to
the rule by adjusting base pay for newly
nonexempt employees, as well as in
other ways. After accounting for
employer adjustments, the costs and
transfers resulting from the rule are
small relative to payroll and revenues,
as are the projected reductions in
employee hours, and the likelihood of
178 Barkume, A. (2010). The Structure of Labor
Costs with Overtime Work in U.S. Jobs. Industrial
and Labor Relations Review, 64(1), 128–142.
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large scale impacts on employment
appears to be small.
Conversely, other commenters, such
as the International Food Service
Distributors Association, expressed
concern that employers would eliminate
part-time positions ‘‘where the
employees value the flexibility.’’ See
also CUPA–HR. The Department
believes it is unlikely that an employer
will eliminate part-time positions
simply because the workers become
eligible for overtime, as an employer
will not have to pay workers employed
for less than 40 hours per week the
overtime premium even if they are
newly entitled to overtime pay.
Finally, the Home Loan and
Investment Company and other
commenters also asserted that some
workers who currently hold only one
job will need to take a second job to
supplement their now reduced hours.
This would reduce workers’ utility since
juggling two jobs is more difficult than
holding one job, even if the total hours
are the same. To address this concern,
the Department looked at the effect of
the 2004 rulemaking on the probability
of multiple job holding. The 2004
rulemaking increased the salary level
required to be eligible for exemption
from $250 per week (short test salary
level) to $455 (standard test salary
level).179 To estimate the effect of this
update on the share of full-time, white
collar workers holding multiple jobs,
the Department conducted a differencein-differences (DD) analysis. This
analysis allows the identification of any
potential regulatory impact, while
controlling for time trends and a broad
range of other relevant factors
(education, occupation, industry,
geographic location, etc.). The
Department compared January–March
2004 to January–March 2005 180 and
compared workers earning between
$250 and $455 and those earning at least
$455 but less than $600. The
Department found no statistically
significant change in workers’
probability of holding multiple jobs
before and after the 2004 Final Rule
took effect.181 However, a caveat should
be noted about interpreting this result as
an indication that the Final Rule will
not lead to an increase in the holding of
multiple jobs. This rule is estimated to
179 The 2004 Final Rule increased the salary level
from the previous long test level of $155 per week
(executive and administrative exemptions) or $170
per week (professional exemption) to $455 per
week. For purposes of this analysis, the Department
compared the increase from the short test salary
level ($250 per week) since the long test was no
longer operative due to increases in the minimum
wage.
180 The 2004 Final Rule was published April 23,
2004 and went into effect August 23, 2004.
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that could not be controlled for in the
analysis of the 2004 rule may lead to a
different outcome based on this rule.
181 The difference-in-differences model
used to examine whether the share of
workers holding multiple jobs increased as a
result of the 2004 rule can be written as
where Mi is equal to 1 if worker i is has more
than one job and 0 otherwise, Ti is equal to
1 if worker i earns at least $250 but less than
$455 and 0 if he earns between $455 and
$600, Pi is equal to 1 for the post-change
period (Jan.–Mar. 2005) and 0 for the prechange period (Jan.–Mar. 2004), and Ci is a
set of worker-specific controls (age,
education, gender, race, ethnicity,
occupation, industry, state of residence,
working overtime, whether paid hourly or
salaried). The model was estimated using a
probit regression. The relevant marginal
effect is ¥0.009 (i.e., the amount the
likelihood of multiple job holding changes
post rulemaking for workers earning between
$250 and $455 per week relative to the
change for workers earning between $455
and $600), with a standard deviation of
0.006. Thus, while the point estimate shows
a decrease in the probability of multiple job
holding for affected workers after the 2004
Final Rule took effect, the finding is not
statistically significant at conventional
thresholds for significance. The Department
also used a difference-in-difference-indifferences model to examine whether the
share of workers holding multiple jobs
increased as a result of the California’s
increase in the salary threshold from $540 to
$640 between 2006 and 2008 and from $640
to $720 between 2014 and 2015. That model
can be written as
where Mi is equal to 1 if worker i has
multiple jobs and 0 otherwise, Ti is equal to
1 if worker i earns between the old threshold
and the new threshold and 0 if he earns just
above the new threshold, Pi is equal to 1 for
the post-change period and 0 for the prechange period, Si is equal to 1 if worker i is
in California and 0 if she is in other states
where the salary level was not increased, and
Ci is the same set of worker-specific controls
used in the DD analysis. The model was
estimated using a probit regression. For the
change between 2006 and 2008, the relevant
marginal effect is ¥0.025 with a standard
deviation of 0.004, and for the change
between 2014 and 2015, the relevant
marginal effect is 0.042 with a standard
deviation of 0.018. Thus we observe a
statistically significant (at conventional
thresholds) increase in the share of workers
holding multiple jobs in one period but a
statistically significant (at conventional
thresholds) decrease in the other.
may be reduced due to increased
employer costs and transfer payments as
a result of this rule, although some of
these costs and transfers may be offset
by making payroll adjustments or the
profit consequences of costs and
transfers partially mitigated through
increased prices.182 The Department
notes that firms have a broad array of
approaches for adjusting to the
rulemaking: Firms that face robust
demand may be able to increase product
prices and may make smaller
adjustments to base wages or overtime
hours; firms that have little ability to
raise prices may have to make more
substantial changes to wages or other
variables. Further, because costs and
transfers are on average small relative to
payroll and revenues, the Department
does not expect this rulemaking to have
a significant effect on profits.
Additionally, increased payroll may
lead to increased consumer spending
which may translate into higher profits,
offsetting part of the initial reduction in
profits. Two business owners who
commented separately in support of the
Department’s proposal cited an increase
in sales as a likely consequence of this
rulemaking.
of employees working more than 40
hours per week. To the extent that firms
respond to an update to the salary level
test by reducing overtime, they may do
so by spreading hours to other workers,
including: Current workers employed
for less than 40 hours per week by that
employer, current workers who retain
their exempt status, and newly hired
workers. If new workers are hired to
absorb these transferred hours, then the
associated hiring costs are a cost of this
Final Rule.
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Hiring Costs
One of Congress’ goals in enacting the
FLSA in 1938 was to spread
employment to a greater number of
workers by effectively raising the wages
182 As shown below, because costs and transfers
generally compose less than one percent of
revenues, the Department expects any such price
increases to be minor.
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1. Overview
Transfer payments occur when
income is redistributed from one party
to another. The Department has
quantified two possible transfers from
employers to employees likely to result
from this update to the salary level tests:
(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 to workers from
employers due to the minimum wage
provision were estimated to be $34.3
million. The increase in the HCE
compensation level does not affect
minimum wage transfers because
workers eligible for the HCE exemption
earn well above the minimum wage.
Transfers to employees from employers
due to the overtime pay provision were
estimated to be $1,250.8 million,
$1,152.3 million of which is from the
increased standard salary level, while
the remainder is attributable to the
increased HCE compensation level.
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ER23MY16.005</GPH>
Reduced Profits
Some commenters, including an HR
consultant, a small business owner, and
a commenter from the restaurant
industry, expressed concern that
establishments with small profit
margins may lose money or go out of
business. The increase in workers’
earnings resulting from the revised
salary level is a transfer of income from
firms to workers, not a cost, and is thus
neutral concerning its primary effect on
welfare. However, there are potential
secondary effects (both costs and
benefits) of the transfer due to the
potential difference in the marginal
utility of income and the marginal
propensity to consume or save between
workers and business owners. Thus, the
Department acknowledges that profits
iv. Transfers
ER23MY16.004</GPH>
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affect approximately three times as
many workers as the 2004 rule (for
which the Department estimated 1.3
million affected workers), and factors
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Total Year 1 transfers were estimated to
be $1,285.2 million (Table 17).
TABLE 17—SUMMARY OF YEAR 1 REGULATORY TRANSFERS
[Millions]
Standard
salary level
Transfer from employers to workers
HCE
Compensation
level
Total
Due to minimum wage .................................................................................................................
Due to overtime pay ....................................................................................................................
$34.3
1,152.3
$0.0
98.5
$34.3
1,250.8
Total transfers .......................................................................................................................
1,186.6
98.5
1,285.2
Because the overtime premium
depends on the base wage, the estimates
of minimum wage transfers and
overtime transfers are linked. This can
be considered a two-step approach. The
Department first identified affected EAP
workers with an implicit regular hourly
wage lower than the minimum wage,
and then calculated the wage increase
necessary to reach the minimum wage.
The implicit regular rate of pay is
calculated as usual weekly earnings
divided by usual weekly hours worked.
For those employees whose implicit
regular rate of pay is below the
minimum wage, the overtime premium
was based on the minimum wage as the
regular rate of pay.
2. Transfers Due to the Minimum Wage
Provision
Transfers from employers to workers
to ensure compliance with the higher of
the federal or applicable state minimum
wage are small compared to the
transfers attributed to overtime pay and
are only associated with the change in
the standard salary level. For purposes
of this analysis, the hourly rate of pay
is calculated as usual weekly earnings
divided by usual weekly hours worked.
In addition to earning below the federal
or state minimum wage, this set of
workers also works many hours per
week. To demonstrate, in order to earn
less than the federal minimum wage of
$7.25 per hour, but at least $455 per
week, these workers must regularly
work significant amounts of overtime
(since $455/$7.25 = 62.8 hours). The
applicable minimum wage is the higher
of the federal minimum wage and the
state minimum wage as of January 2016.
Most affected EAP workers already
receive at least the minimum wage; an
estimated 11,200 affected EAP workers
(less than 0.3 percent of all affected EAP
workers) currently earn an implicit
hourly rate of pay less than the
minimum wage. The Department
estimated transfers due to payment of
the minimum wage by calculating the
change in earnings if wages rose to the
minimum wage for workers who
become nonexempt and thus would
have to be paid at least the minimum
wage.183
In response to an increase in the
regular rate of pay to the minimum
wage, employers may reduce the
workers’ hours, which must be
considered when estimating transfers
attributed to payment of the minimum
wage to newly overtime-eligible
workers. In theory, because the quantity
of labor hours demanded is inversely
related to wages, a higher mandated
wage could result in fewer hours of
labor demanded. However, the weight of
the empirical evidence finds that
increases in the minimum wage have
caused little or no significant job loss.184
Thus, in the case of this regulation, the
Department believes that any
disemployment effect due to the
minimum wage provision would be
negligible. This is partially due to the
small number of workers affected by
this provision. The Department
estimates the potential disemployment
effects (i.e., the estimated reduction in
hours) of the transfer attributed to the
minimum wage by multiplying the
percent change in the regular rate of pay
by a labor demand elasticity of
¥0.075.185
At the new standard salary level ($913
per week), the Department estimates
that 11,200 affected EAP workers will
on average see an hourly wage increase
of $0.91, work 0.7 fewer hours per week,
and receive an increase in weekly
earnings of $59.10 as a result of
coverage by the minimum wage
provisions (Table 18). The total change
in weekly earnings due to the payment
of the minimum wage was estimated to
be $660,300 per week ($59.10 × 11,200)
or $34.3 million in Year 1.
TABLE 18—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL OVERTIME HOURS, AND WEEKLY EARNINGS FOR
AFFECTED EAP WORKERS, FY2017
Hourly wage a
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Before Final Rule .............................................................................................
After Final Rule ................................................................................................
183 Because these workers’ hourly wages will be
set at the minimum wage after this Final Rule, their
employers will not be able to adjust their wages
downward to offset part of the cost of paying the
overtime pay premium (which will be discussed in
the following section). Therefore, these workers will
generally receive larger transfers attributed to the
overtime pay provision than other workers.
184 Belman, D., and P.J. Wolfson (2014). What
Does the Minimum Wage Do? Kalamazoo, MI: W.E.
Upjohn Institute for Employment Research. Dube,
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$8.13
9.04
A., T.W. Lester, and M. Reich. (2010). Minimum
Wage Effects Across State Borders: Estimates Using
Contiguous Counties. The Review of Economics and
Statistics, 92(4), 945–964. Schmitt, J. (2013). Why
Does the Minimum Wage Have No Discernible
Effect on Employment? Center for Economic and
Policy Research.
185 This is based on the estimated impact of a
change in the minimum wage from $7.25 to $9.00
per hour on the employment of teenagers from the
Congressional Budget Office. (2014). The Effects of
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Usual weekly
hours
69.3
68.6
Usual weekly
earnings
$551.2
610.3
Total weekly
transfer
(1,000s)
........................
........................
a Minimum Wage Increase on Employment and
Family Income. While an elasticity estimate for
adult workers would be more appropriate, the
report stated that the elasticity for adults was
‘‘about one-third of the elasticity’’ for teenagers,
without providing a specific value. In addition, the
literature for adults is more limited. The size of the
estimated reduction in hours is thus likely to be an
upper bound.
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32483
TABLE 18—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL OVERTIME HOURS, AND WEEKLY EARNINGS FOR
AFFECTED EAP WORKERS, FY2017—Continued
Hourly wage a
Change ............................................................................................................
Usual weekly
hours
¥0.7
0.91
Usual weekly
earnings
59.1
Total weekly
transfer
(1,000s)
$660.3
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.
Modeling employer adjustments for
these workers is a two-step process.
First, employers adjust wages and hours
to meet the minimum wage
requirement, as described here. Then,
these workers’ hours will be further
adjusted in response to the requirement
to pay the overtime premium, which is
discussed in the following section. The
transfers presented here only apply to
the minimum wage provision. However,
minimum wage transfers impact
overtime transfers because the overtime
premium is calculated based on the
minimum wage, not the worker’s
original wage. Thus, the two are not
entirely separable.
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3. Transfers Due to the Overtime Pay
Provision
Introduction
The Final Rule will also transfer
income to affected workers who work in
excess of 40 hours per week. Requiring
an overtime premium increases the
marginal cost of labor, which employers
will likely try to offset by adjusting
wages or hours. Thus, the size of the
transfers due to the overtime pay
provision will depend largely on how
employers respond to the updated
salary levels. How employers respond
and the ensuing changes in employment
conditions will depend on the demand
for labor, current wages, employer and
employee bargaining power, and other
factors. Employers may respond by: (1)
Paying the required overtime premium
to affected workers for the same number
of overtime hours at the same implicit
regular rate of pay; (2) reducing
overtime hours and potentially
transferring some of these hours to other
workers; (3) increasing workers’ salaries
to the updated salary or compensation
level; (4) reducing the regular rate of pay
for workers working overtime; 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.
The simplest approach to estimating
these transfer payments would be to
multiply an employee’s regular rate of
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pay (after compliance with the
minimum wage) by 1.5 for all overtime
hours; this is referred to as the ‘‘full
overtime premium’’ model.186 However,
due to expected wage and hour
adjustments by employers, this would
likely overestimate the size of the
transfer. Therefore, the Department used
a methodology that allows for employer
adjustments, such as changes in the
regular rate of pay or hours worked. The
size of these adjustments is likely to
vary depending on the affected worker’s
salary and work patterns. To model
employer responses, the Department
used a method that reflects the average
response among all employers for all
affected workers. However, individual
employer responses will vary.
Literature on Employer Adjustments
Two conceptual models are useful for
thinking about how employers may
respond to reclassifying certain
employees as overtime eligible: The
‘‘full overtime premium’’ model and the
‘‘employment contract’’ model.187 These
models make different assumptions
about the demand for overtime hours
and the structure of the employment
agreement which result in different
implications for predicting employer
responses.
The full overtime premium model is
based on what we will refer to as the
‘‘labor demand’’ model of determining
wage and hour conditions. In the labor
demand model, employers and
employees negotiate fixed hourly wages
and then subsequently negotiate hours
worked, rather than determining both
hours and pay simultaneously. This
186 The implicit regular rate of pay is calculated
as usual weekly earnings divided by usual weekly
hours worked. For example, the regular rate of pay
for an employee previously ineligible for overtime
whose usual weekly earnings was $600 and usual
weekly hours was 50 would be $12 per hour. Under
the full overtime premium model, this employee
would receive $660 ((40 hours × $12) + (10 hours
× $12 × 1.5)).
187 The employment contract model is also
known as the fixed-job model. See Trejo, S.J. (1991).
The Effects of Overtime Pay Regulation on Worker
Compensation. American Economic Review, 81(4),
719–740, and Barkume, A. (2010). The Structure of
Labor Costs with Overtime Work in U.S. Jobs.
Industrial and Labor Relations Review, 64(1), 128–
142.
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model assumes employees are aware of
the hourly wage rate they negotiated
and may be more reluctant to accept
downward adjustments. The labor
demand model would apply if
employees had a contract to be paid at
an hourly rate, meaning that employers
could not reduce the regular rate of pay
in response to the requirement to pay a
50 percent premium on hours worked
beyond 40 in a week. However, the
increase in the marginal cost of labor
would lead to a reduction in the hours
of labor demanded as long as labor
demand is not completely inelastic. The
full overtime premium model is a
special case of the labor demand model
in which the demand for labor is
completely inelastic, that is employers
will demand the same number of hours
worked regardless of the cost.
In the employment contract model,
employers and employees negotiate
total pay and hours simultaneously,
rather than negotiating a fixed hourly
wage and then determining hours.
Under this model, when employers are
required to pay employees an overtime
premium, they adjust the employees’
implicit hourly rate of pay downward so
that when the overtime premium is paid
total employee earnings (and thus total
employer cost) remain constant, along
with the employees’ hours. The
employer does not experience a change
in cost and the employee does not
experience a change in earnings or
hours. The employment contract model
would hold if the workers who are
reclassified as overtime protected had
an employment agreement specifying
set total earnings and hours of work.
The employment contract model
tends to be more applicable when
overtime hours are predictable, while
the labor demand model is generally
more applicable to situations where the
need for overtime is unanticipated (for
example, where there are unforeseen,
short-term increases in demand).
However, the employment contract
model may not fully hold even for
workers who work predictable overtime
due to market imperfections, employer
incentives, or workers’ bargaining
power. Four examples are provided.
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• Employers are constrained because
they cannot reduce an employee’s
implicit hourly rate of pay below the
minimum wage. If the employee’s
implicit hourly rate of pay before the
change is at or below the minimum
wage, then employers will not be able
to reduce the rate of pay to offset the
cost of paying the overtime premium.
• Employees generally have some,
albeit limited, bargaining power which
may prevent employers from reducing
the employee’s implicit hourly rate of
pay to fully offset increased costs.
• Employers may be hesitant to
reduce the employee’s implicit hourly
rate of pay by the entire amount
predicted by the employment contract
model because it may hurt employee
morale and consequently
productivity.188
• Employers are often limited in their
ability to pay different regular rates of
pay to different employees who perform
the same work and have the same
qualifications because of fairness
concerns. In order to keep wages
constant across employees and reduce
wages for overtime workers, employers
would need to reduce the implicit
hourly rate of pay for employees who do
not work overtime as well as those who
do work overtime. This would reduce
total earnings for these non-overtime
employees (potentially causing
retention problems, productivity losses,
and morale concerns).189
Therefore, the likely outcome will fall
somewhere between the conditions
predicted by the full overtime premium
and employment contract models. For
example, the implicit hourly rate of pay
may fall, but not all the way to the wage
predicted by the employment contract
model, and overtime hours may fall but
not be eliminated since the implicit
hourly rate of pay has fallen. The
Department conducted a literature
review to evaluate how the market
would adjust to a change in the
requirement to pay overtime.
Barkume (2010) and Trejo (1991)
empirically tested for evidence of these
two competing models by measuring
labor market responses to the
application of FLSA overtime pay
188 For example: Bewley, T. (1999). Why Wages
Don’t Fall During a Recession. Cambridge, MA:
Harvard University Press. Brown, C. & Medoff, J.
(1989). The Employer Size Wage Effect. Quarterly
Journal of Economics, 97(5), 1027–1059. See also
the literature on implicit contracts in labor markets.
189 For example: Fehr & Schmidt. (2007). ‘‘A
Theory of Fairness Competition and Cooperation.’’
Quarterly Journal of Economics. Vol 97 No. 2 pp.
867–868. Milgram, Paul. (1988). ‘‘Employment
Contracts Influence Activities and Efficient
Organization Design.’’ Journal of Political Economy,
Vol. 96 No. 1 pp. 42–60.
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regulations.190 Both concluded that
wages partially adjust toward the level
consistent with the employment
contract model in response to the
overtime pay provision.191 Barkume
found that employee wage rates were
adjusted downward by 40 to 80 percent
of the amount the employment contract
model predicted, depending on
modeling assumptions. Earlier research
had demonstrated that in the absence of
regulation some employers may
voluntarily pay workers some overtime
premium to entice them to work longer
hours, to compensate workers for
unexpected changes in their schedules,
or as a result of collective bargaining.192
Thus Barkume assumed that workers
would receive an average voluntary
overtime pay premium of 28 percent in
the absence of an overtime pay
regulation. Including this voluntary
overtime pay from employers, he
estimated that in response to overtime
pay regulation, the wage adjusted
downward by 80 percent of the amount
that would occur with the employment
contract model. Conversely, when
Barkume assumed workers would
receive no voluntary overtime pay
premium in the absence of an overtime
pay regulation, wages adjusted
downward 40 percent of the amount the
employment contract model
predicted.193 194 However, while it
190 Barkume, A. (2010). The Structure of Labor
Costs with Overtime Work in U.S. Jobs. Industrial
and Labor Relations Review, 64(1), 128–142. Trejo,
S.J. (1991). The Effects of Overtime Pay Regulation
on Worker Compensation. American Economic
Review, 81(4), 719–740.
191 Since both papers were based on crosssectional data, findings were assumed to be at the
final equilibrium wages. However, studies showing
wage contracts are likely to be stickier in the short
run than in the long run have limited applicability
here since this analysis deals exclusively with
salaried workers seeing an increase in their weekly
wage while seeing a downward adjustment in their
implicit hourly wage rate, and they may be less
aware of their implicit hourly wage rate. The
Department has modeled a sticky adjustment
process by assuming the wage elasticity of demand
for labor is smaller in Year 1 than in subsequent
years.
192 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.
193 Barkume’s estimates are consistent with
Trejo’s 1991 finding that the wage adjustment when
there is no overtime premium was only about 40
percent of the full employment contract model
adjustment. Trejo’s estimates range from 25 percent
to 49 percent and average 40 percent.
194 Consider a worker earning $500 and working
50 hours per week. Assuming no overtime premium
is paid the imputed hourly rate of pay is $10.
Assuming a 28 percent overtime premium, the
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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.195
Comments Regarding Transfers
The few commenters who tried to
model employer responses generally
used or cited the same literature the
Department used (in particular,
Barkume (2010) and Trejo (1991)).
Susann Rohwedder and Jeffrey B.
Wenger conducted an analysis for
RAND on the impacts of the rulemaking
and, like our analysis, found small
effects on individual workers’ earnings
and hours.196
Some organizations conducted
surveys to evaluate how employers may
respond. Although these surveys may be
helpful as background information, they
generally cannot be used in a
quantitative analysis due to issues such
as insufficient sample sizes, missing
sampling methodology, and missing
magnitudes. As an example of the last
concern, the American Association of
Orthopaedic Executives (AAOE)
conducted a survey of their members
and found ‘‘19% of respondents
indicated that they would change the
number of staff hours worked in order
to avoid paying overtime.’’ The
Department agrees firms will generally
change staffing hours and has included
this in the quantitative analysis. The
modeling question is to what degree
employers will adjust hours.
Despite the inability to incorporate
these survey results into the analysis,
hourly rate of pay is $9.47 (($9.47 × 40 hours) +
($9.47 × 10 hours × 1.28)) = $500. If the hourly rate
of pay was fully adjusted to the employment
contract model level when overtime pay is newly
required, the hourly rate of pay would be $9.09
(($9.09 × 40 hours) + ($9.09 × 10 hours × 1.5)) =
$500. Forty percent of the adjustment from $10 to
$9.09 results in an adjusted regular rate of pay of
$9.64. Eighty percent of the adjustment from $9.47
to $9.09 results in an adjusted hourly rate of pay
of $9.17. The Department took the average of these
two adjusted wages to estimate that the resulting
hourly rate of pay would be $9.40.
195 Barkume (2010) based this assumption on the
findings of Bell, D. and Hart, R. (2003). Wages,
Hours, and Overtime Premia: Evidence from the
British Labor Market. Industrial and Labor
Relations Review, 56(3), 470–480. This study used
1998 data on male, non-managerial, full-time
workers in Britain. British workers were likely paid
a larger voluntary overtime premium than
American workers because Britain did not have a
required overtime pay regulation and so collective
bargaining played a larger role in implementing
overtime pay.
196 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.
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they may be informative and select
results are presented here.
• The AAOE found ‘‘18% [of
members] indicated that they would not
change their current practice operations.
16% stated that they would increase
salaries to the new threshold. 11%
would change the affected employees to
hourly employees, and 4% stated that
they would eliminate positions within
their practice.’’ This indicates
employers will use a variety of
mechanisms to reduce transfer
payments, as discussed and modeled by
the Department.
• The 2015 WorldatWork survey
found ‘‘73% of respondents stated they
would have more nonexempt
employees.’’
• Kansas Bankers Association
compiled member banks’ analyses of the
rule that found ‘‘[o]verwhelmingly . . .
the response was not to increase the
newly non-exempt salaries to continue
to keep the position as an exempt
position. In fact, only 2 bank CEOs
responded that they would choose to do
so. Rather, the overwhelming majority
of bank CEOs stated those employees
would move to non-exempt status, and
overtime would be restricted or
prohibited.’’
• The NAHB presented results from a
member survey that found 33 percent of
companies indicated a change in
company policies, with respect to
construction supervisors, would occur.
Among those firms, ‘‘56% of
respondents indicated that they would
take steps to minimize overtime, such as
cut workers hours.’’
• ANCOR found ‘‘[l]ess than a third
of providers would be able to increase
the salary of full-time exempt workers to
meet the projected threshold.’’
• Society for Human Resource
Management (SHRM) reported that,
according to its survey ‘‘the most
significant result identified was the
implementation of restrictive overtime
policies leading to potential reduction
in employees working overtime, with 70
percent of respondents indicating that
would be a likely outcome.’’
• AGC reported its survey found
‘‘74% of AGC-surveyed construction
contractors responded that they would
likely reclassify some or all of the
impacted exempt workers to a nonexempt hourly status at their current
salaries. The survey results also show
that: Over 60% of respondents expect
the proposed rule to result in the
institution of policies and practices to
ensure that affected employees do not
work over 40 hours a week.’’
• International Public Management
Association for Human Resources
(IMPA–HR) and the International
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Municipal Lawyers Association
reported from an IPMA–HR survey that
‘‘[a]bout 60% said they would convert
currently exempt employees to nonexempt and pay them overtime while
the same amount would prohibit them
from working more than 40 hours per
week without approval. Only 1/3 would
raise salaries to at least $970 per week.’’
• National Association of Professional
Insurance Agents asked survey
respondents with workers who would
be converted to nonexempt status and
who work overtime whether they would
decrease overtime hours; 65 percent
responded they would.
Some commenters stated that many
employers will respond by reducing
hours and base wages more than the
Department estimated. The National
Association of Manufacturers wrote:
While in the initial months following a
reclassification, most employees tend to
come out about the same in terms of total
work and total compensation, the steady
pressure of the overtime premium tends to
result in a gradual reduction of the
employee’s schedule. The challenge for that
employee is that the hourly rate does not
normally increase to offset this loss in hours.
Instead, the employer looks to give the work
to other employees. The scaling back of the
employee’s weekly working hours can take a
significant toll on the employee’s earnings,
especially given that the wages lost for each
hour of overtime eliminated are at premium
rates. The net economic effect of the
Proposed Rule will be to take working hours
and pay away from employees currently
classified as exempt and redistribute those
hours and pay to other employees.
Some commenters, including Jackson
Lewis, the National RV Dealers
Association, and the Sheppard Mullin
law firm, asserted that many employers
may follow the full employment
contract model rather than the partial
employment contract model used by the
Department in the analysis. The Iowa
Association of Community Providers
wrote that ‘‘[i]n order to maintain
current payroll budgets, the
organizations will need to lower the
hourly wages of non-exempt employees,
such that their total annual
compensation, including overtime
payments, remains at the prior year’s
level.’’ The Construction Industry
Round Table asserted that ‘‘empirical
research generally supports the ‘fixedjob’ model rather than the ‘fixed-wage’
model.’’
Other commenters stated that
overtime will be reduced significantly
more than the Department estimated in
the NPRM. However, little data was
provided to support these claims,
making them difficult to incorporate
into the analysis. For example,
Audubon Area Community Services
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32485
believes that ‘‘[b]ecause additional
revenue is not an option, our agency
would have to reclassify all but 10 of
our positions to non-exempt with no
overtime allowed by any staff.’’
The Department’s reading and
analysis of the literature cited in the
rulemaking is that a result between the
fixed-job model and the fixed-wage
model would occur and thus we
modeled our results accordingly.
Specifically, based upon Barkume’s
findings regarding employer responses
and transfer payments, we believe the
partial employment contract model is
most appropriate and consistent with
the literature. Therefore, we have not
changed the analysis. Several
commenters commented on the
literature we used to support using the
partial employment contract model. The
Center for American Progress expressed
support for our use of Barkume’s
analysis and stated that this would
result in some transfer payments since
employers cannot fully adjust base
wages. The Washington Center for
Equitable Growth noted the Department
‘‘should make clear that under certain
conditions the fixed-wage model
underlying [the Department’s] analysis
implies that some workers will see an
increase in hours. If these workers are
under-employed, the shift in the
composition of those hours from overworked to under-worked employees will
be a welfare-improving consequence of
the proposed rule.’’
Identifying Types of Affected Workers
The Department identified four types
of workers whose work characteristics
impact how employers were modeled to
respond to the changes in both the
standard and HCE salary levels:
• Type 1: Workers who do not work
overtime.
• Type 2: Workers who do not
regularly work overtime but
occasionally work overtime.
• Type 3: Workers who regularly
work overtime.
• Type 4: Workers who regularly
work overtime. These workers differ
from the Type 3 workers because it is
less expensive for the employer to pay
the updated salary level than pay
overtime and incur managerial costs for
these workers.197
The Department began by identifying
the number of workers in each type.
After modeling employer adjustments,
transfer payments were then estimated.
Type 3 and 4 workers are identified as
197 It is possible that employers will increase the
salaries paid to some ‘‘occasional’’ overtime
workers to maintain the exemption for the worker,
but the Department has no way of identifying these
workers.
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those who regularly work overtime (CPS
variable PEHRUSL1 greater than 40).
These workers are divided between
Type 3 and Type 4 depending on
whether their weekly earnings are raised
to the updated EAP salary level or they
become nonexempt. Distinguishing
Type 3 workers from Type 4 workers is
a four step process. First we identify all
workers who regularly work overtime.
Then we estimate each worker’s weekly
earnings if they became nonexempt, to
which we add weekly managerial costs
for each affected worker of $3.53 ($42.31
per hour × (5 minutes/60 minutes)).
Lastly, we identify as Type 4 those
workers whose expected nonexempt
earnings plus weekly managerial costs
exceeds the updated standard salary
level; those whose expected nonexempt
earnings plus weekly managerial costs
are less than the new standard salary
level are classified as Type 3 workers.
The Department assumes 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. Thus, it is appropriate to
determine if the additional earnings
plus the additional managerial costs for
an affected worker exceed the revised
salary level. In the NPRM managerial
costs were not included in the
determination of whether a worker is a
Type 3 or Type 4 worker. Therefore, in
this Final Rule there are somewhat more
Type 4 workers than the NPRM
methodology would yield.
Identifying Type 2 workers involves
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).
These workers represent those who
occasionally work overtime and
happened to work overtime in that
specific week. The survey (or reference)
week is always the pay period that
includes the 12th day of the month and
contains responses for all twelve
months. In a different week the identity
of workers who work overtime might
differ, but the number working overtime
and the hours of overtime worked are
similar because the survey week is
representative of occasional overtime
patterns.
The second step for identifying Type
2 workers in the Final Rule differs from
the methodology used in the NPRM. In
the NPRM, we used only the first step
described above to identify Type 2
workers. Those who did not regularly
work overtime and did not work
overtime in the survey week were
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classified as Type 1 workers. As
previously discussed, commenters
expressed concerns that the Department
underestimated the number of workers
who will experience changes in their
wages or hours, and therefore that we
underestimated costs, because
managerial costs are a function of the
number of workers who work overtime.
Therefore, for this Final Rule, the
Department supplemented the CPS data
with data from the Survey of Income
and Program Participation (SIPP) in
order to look at likelihood of working
some overtime during the year. Based
on 2012 data, the most recent available,
the Department found that 39.4 percent
of nonhourly workers worked overtime
at some point in a year. Workers already
identified as Types 2, 3, and 4, using the
methodology in the NPRM, compose 24
percent of affected workers. Therefore,
as a second step, the Department
classified a share of workers who
reported they do not usually work
overtime, and did not work overtime in
the reference week (previously
identified as Type 1 workers), as Type
2 workers such that a total of 39.4
percent of affected workers were Type 2,
3, or 4. Therefore, the Department
estimates fewer Type 1 workers and
more Type 2 workers than in the NPRM.
Modeling Changes in Wages and Hours
In practice, employers do not seem to
adjust wages of regular overtime
workers to the full extent indicated by
the employment contract model, and
thus employees appear to get a small but
significant increase in weekly earnings
due to overtime pay coverage. Barkume
and Trejo found evidence partially
supporting both the employment
contract model and the full overtime
premium model in response to a 50
percent overtime premium requirement:
A decrease in the regular rate of pay for
workers with overtime (but not the full
decrease to the employment contract
model level) and a decrease in the
amount of overtime worked. Therefore,
when modeling employer responses
with respect to the adjustment to the
regular rate of pay, the Department used
a method that falls somewhere between
the employment contract model and the
full overtime premium model (i.e., the
partial employment contract model).
Barkume reported two methods to
estimate this partial employment
contract wage, depending on the
amount of overtime pay assumed to be
paid in the absence of regulation. As
noted above, the Department believes
both the model assuming a voluntary 28
percent overtime premium and the
model assuming no voluntary overtime
premium are unrealistic for the affected
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population. Therefore, lacking more
information, the Department determined
that an appropriate estimate of the
impact on the implicit hourly rate of
pay for regular overtime workers after
the Final Rule should be determined
using the average of Barkume’s two
estimates of partial employment
contract model adjustments: A wage
change that is 40 percent of the
adjustment toward the amount
predicted by the employment contract
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.198 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 mid-point
between 0 and 28 percent).
Modeling changes in wages, hours,
and earnings for Type 1 and Type 4
workers is relatively straightforward.
Type 1 affected EAP workers will
become overtime eligible, but since they
do not work overtime, they will see no
change in their weekly earnings. Type 4
workers will remain exempt because
their earnings will be raised to the
updated EAP salary level (either the
standard salary level or HCE
compensation level depending on
which test the worker passed). These
workers’ earnings will increase by the
difference between their current
earnings and the amount necessary to
satisfy the new standard salary
requirement or comply with the new
total annual compensation level. It is
possible employers will increase these
workers’ hours in response to paying
them a higher salary, but the
Department has not modeled this
potential change.199
198 Both studies considered a population that
included hourly workers. Evidence is not available
on how the adjustment towards the employment
contract model differs between salaried and hourly
workers. The employment contract model may be
more likely to hold for salaried workers than for
hourly workers since salaried workers directly
observe their weekly total earnings, not their
implicit equivalent hourly wage. Thus, applying the
partial adjustment to the employment contract
model as estimated by these studies may
overestimate the transfers from employers to
salaried workers. We note that such an out-ofsample extrapolation has the potential to introduce
uncertainty, just as there is uncertainty associated
with other effects, such as the replacement of fulltime jobs with part-time jobs, where studies have
suggested directionally non-beneficial effects that
are not statistically significant. Due to the lack of
modeling results for salaried employees in the
employment contract model, we do not attempt to
quantify the magnitude of this uncertainty or
potential overestimate.
199 Cherry, Monica, ‘‘Are Salaried Workers
Compensated for Overtime Hours?’’ Journal of
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Modeling changes in wages, hours,
and earnings for Type 2 and Type 3
workers is more complex and uses
findings from Barkume discussed above.
The Department distinguishes those
who regularly work overtime (Type 3
workers) from those who occasionally,
or irregularly, work overtime (Type 2
workers) because employer adjustment
to the Final Rule may differ accordingly.
The Department believes that employers
are more likely to adjust hours worked
and wages for regular overtime workers
because their hours are predictable.
Conversely, it may be more difficult to
adjust hours and wages for occasional
overtime workers because employers
may be responding to a transient,
perhaps unpredicted, shift in market
demand for the good or service they
provide. In this case, it is likely
advantageous for the employer to pay
for this occasional overtime rather than
to adjust permanent staffing.
Additionally, the transient and possibly
unpredicted nature of the change may
make it difficult to adjust wages for
these workers.
The Department treats Type 2 affected
workers in two ways due to the
uncertainty of the nature of these
occasional overtime hours worked. If
these workers work extra hours on an
unforeseen, short-term, as-needed basis
(e.g., to adjust to unanticipated
increases in demand), then there may be
less opportunity for employers to adjust
straight-time wages downward.200
However, if these workers work extra
hours on a foreseen, periodic basis (e.g.,
work a few extra hours one week each
month, but workers do not consider it
‘‘regular overtime’’ because they do not
work overtime during three weeks each
month), then there may be some
opportunity for employers to adjust
straight-time wages downward (e.g., so
pre- and post-revision monthly income
is more similar). That this overtime is
periodic and predictable is what makes
it much more similar to that worked by
Labor Research 25(3): 485–494, September 2004,
found that exempt full-time salaried employees
earn more when they work more hours, but we have
chosen not to use her results for the quantification
of the effect on hours of an increase in earnings.
200 Employers may be reluctant to reset hourly
wage rates to respond to unexpected changes to the
need for overtime because the negative impact on
worker morale may outweigh the gains from
adjusting wages to unexpected shifts in demand. Of
relevance is the well-established literature that
shows employers do not quickly adjust wages
downward in response to downturns in the
economy; the same logic applies to our approach to
unexpected changes in demand. See, for example:
Bewley, T. (1999). Why Wages Don’t Fall During a
Recession. Cambridge, MA: Harvard University
Press. See also Barzel, Y. (1973). The Determination
of Daily Hours and Wages. The Quarterly Journal
of Economics, 87(2), 220–238.
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Type 3 workers, and provides
employers with more opportunity to
adjust hours and wages. Since in reality
there is likely a mix of these two
occasional overtime scenarios, the
Department combines models
representing these two scenarios when
estimating impacts.
Our estimate for how Type 2 workers
are affected is based on the assumption
that 50 percent of these workers who
worked occasional overtime worked
expected overtime hours and the other
50 percent worked unexpected
overtime.201 Workers were randomly
assigned to these two groups. Workers
with expected occasional overtime
hours were treated like Type 3 affected
workers (partial employment contract
model adjustments). Workers with
unexpected occasional overtime hours
were assumed to receive a 50 percent
pay premium for the overtime hours
worked and receive no change in base
wage or hours (full overtime premium
model). When modeling Type 2
workers’ hour and wage adjustments,
we treated those identified as Type 2
using the CPS data as representative of
all Type 2 workers. We 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, we assume total transfers for
the year are equal to 52 times the
transfers estimated for the single
representative week for which we have
CPS data. However, these transfers are
spread over a larger group including
those who occasionally work overtime
but did not do so in the CPS reference
week.202 203
201 Trejo’s and Barkume’s adjustments are
averages; excluding some workers (i.e., half of Type
2 workers) from these adjustments could potentially
bias the size of the adjustment for the workers who
continue to receive the adjustment. This bias would
exist if Barkume and Trejo estimated the average
adjustment for a sample of workers including
irregular overtime workers and the size of the
adjustment for these workers differs from other
workers. It is not clear whether Trejo’s and
Barkume’s samples include both occasional and
regular overtime workers; however, the
Department’s interpretation is that Trejo includes
only workers who usually work overtime and
Barkume includes both. If these assumptions are
correct, the magnitude of this RIA’s adjustment
made for the workers whose wages and hours are
adjusted would be appropriate if it were applying
Trejo’s results but may, due to applying Barkume’s,
result in an underestimate of the average fall in base
wages. We believe the magnitude of any potential
bias will be small because the half of Type 2
workers who are occasional, regular overtime
workers in the CPS reference week (and thus treated
differently) compose only 9 percent of Type 2 and
Type 3 workers.
202 Because these workers do not work overtime
every week, the size of the wage and hour
adjustments will be smaller than modeled.
However, we are only modeling wage and hour
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32487
Since Type 2 and Type 3 EAP workers
work more than 40 hours per week,
whether routinely or occasionally, they
will receive an overtime premium based
on their implicit hourly wage adjusted
as described above. Because employers
must now pay more for the same
number of labor hours, they will seek to
reduce those hours; in economics, this
is described as a decrease in the
quantity of labor hours demanded (a
movement to the left along the labor
demand curve). It is the net effect of
these two changes that will determine
the final weekly earnings for affected
EAP workers. The reduction in hours is
calculated using the elasticity of labor
demand with respect to wages. The
Department used a short-run demand
elasticity of ¥0.20 to estimate the
percentage decrease in hours worked
resulting from the increase in average
hourly wages in Year 1, calculated using
the adjusted base wage and the overtime
wage premium.204 The interpretation of
the short run demand elasticity in this
context is that a 10 percent increase in
wages will result in a 2 percent decrease
in hours demanded. Transfers projected
for years 2 through 10 used a long-run
elasticity; this is discussed in section
VI.D.x.205
For Type 3 affected workers, and the
50 percent of Type 2 affected workers
who worked expected overtime, we
estimated adjusted total hours worked
after making wage adjustments using the
partial employment contract model. To
estimate adjusted hours worked, we set
adjustments for a subset of workers. If the wage and
hour adjustments are linear, then our modeling
assumptions should yield the same aggregate results
as making smaller adjustments for all workers.
203 If a different week was chosen as the survey
week, then likely some of these workers would not
have worked overtime. However, because the data
are representative of both the population and all
twelve months in a year, the Department believes
the share of Type 2 workers identified in the CPS
data in the given week is representative of an
average week in the year.
204 This elasticity estimate is based on the
Department’s analysis of Lichter, A., Peichl, A. &
Siegloch, A. (2014). The Own-Wage Elasticity of
Labor Demand: A Meta-Regression Analysis. IZA
DP No. 7958. Some researchers have estimated
larger impacts on the number of overtime hours
worked (Hamermesh, D. and S. Trejo. (2000). The
Demand for Hours of Labor: Direct Evidence from
California. The Review of Economics and Statistics,
82(1), 38–47 concludes the price elasticity of
demand for overtime hours is at least ¥0.5. The
Department decided to use a general measure of
elasticity applied to the average change in wages
since the increase in the overtime wage is
somewhat offset by a decrease in the non-overtime
wage as indicated in the employment contract
model. The Department invited comments on the
appropriate elasticity to be used in this analysis, but
no relevant comments were received.
205 In the short run not all factors of production
can be changed and so the change in hours
demanded is smaller than in the long run, when all
factors are flexible.
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the percent change in total hours
worked equal to the percent change in
average wages multiplied by the wage
elasticity of labor demand.206 The
percent change in average wages is
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206 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.
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equal to the adjusted implicit average
hourly wage minus the original implicit
average hourly wage divided by the
original implicit average hourly wage.
The original implicit average hourly
wage is equal to original weekly
earnings divided by original hours
worked. The adjusted implicit average
hourly wage is equal to adjusted weekly
earnings divided by adjusted total hours
worked. Adjusted weekly earnings
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equals the adjusted hourly wage (i.e.,
after the partial employment contract
model adjustment) multiplied by 40
hours plus adjusted hours worked in
excess of 40 multiplied by 1.5 times the
adjusted hourly wage.
Figure 4 is a flow chart summarizing
the four types of affected EAP workers.
Also shown are the impacts on exempt
status, weekly earnings, and hours
worked for each type of affected worker.
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32489
Figure 4: Flow Chart of Final Rule's Impact on Earnings and Hours Worked
Affected
workers [a]
.............................................................
,
______ .. ______
(
Regular hourly
wages< MW
I
I
I
I
,
______ . ______
(
Regular hourly
wages~ MW
........................................,.
I
I
I
Regularly work
OT
Do not usually
workOT
/
/
~
Do not work
occasional OT
I
I
No change in
weekly
earnings
No change in
hours
Remain exempt
I
Weekly earnings
increase on
average [e]
I
Weekly earnings
increase on
average [e]
Weekly earnings
increase on
average
I
I
Hours decrease on
average
Type 1
I
Gain MW/OT
protection
I
I
Weekly earnings
increase to new
salary level [d]
I
Gain MW/OT
protection
I
~
Hourly wages
adjust downward
to offset some OT
compensation [c]
Work occasional
OT[b]
Gain MW/OT
protection
Hourly wages
increase to MW
I
Hours decrease
on average
Type2
No change in
hours [f]
Type3
Type4
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[a] Affected EAP workers are those who are exempt under the current EAP exemptions and
would gain minimum wage and overtime protection or receive a raise to the increased salary or
compensation level.
[b] There are two methods the Department uses to identify occasional overtime workers. The
first includes workers who report they usually work 40 hours or less per week (identified with
variable PEHRUSLl in CPS MORG) but in the reference week worked more than 40 hours
(variable PEHRACTl in CPS MORG). The second includes reclassifying some additional
workers who usually work 40 hours or less per week, and in the reference week worked 40 hours
or less, to match the proportion of workers measured in other data sets who work overtime at any
point in the year.
32490
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
Estimated Number of and Impacts on
Affected EAP Workers
The Department projects 4.2 million
workers will be affected by either (1) an
increase in the standard salary level to
the 40th percentile of weekly earnings
of full-time salaried workers in the
South because they earn salaries of at
least $455 per week and less than $913
per week, or (2) an increase in the HCE
compensation level to the 90th
percentile of earnings of full-time
salaried workers nationwide because
they only pass the HCE duties test and
earn at least $100,000 and less than
$134,004 annually. These workers are
categorized into the four ‘‘types’’
identified previously. There are 2.6
million Type 1 workers (60.4 percent of
all affected EAP workers), those who
work 40 hours per week or less and thus
will not be paid an overtime premium
despite their expected change in status
to overtime protected (Table 19). The
number of Type 1 workers decreased
from the NPRM because some of these
workers are now classified as Type 2
workers (as explained above). Type 2
workers, those who are expected to
become overtime eligible and do not
usually work overtime but do
occasionally work overtime and will be
paid the overtime premium, total
817,000 (19.3 percent of all affected EAP
workers). Type 3 workers, those who
regularly work overtime and are
expected to become overtime eligible
and be paid the overtime premium, are
composed of an estimated 759,000
workers (17.9 percent of all affected
EAP workers). The number of affected
Type 4 workers was estimated to be
96,000 workers (2.3 percent of all
affected workers); these are workers
who the Department believes will
remain exempt because firms will have
a financial incentive to increase their
weekly salaries to the updated salary
and compensation levels, rather than
pay a premium for overtime hours.207
TABLE 19—AFFECTED EAP WORKERS BY TYPE (1,000s), FY2017
Regular overtime
No
overtime
(T1)
Total
Occasional
overtime
(T2)
Newly
nonexempt
(T3)
Remain
exempt
(T4)
Standard salary level ...........................................................
HCE compensation level .....................................................
4,163
64.9
2,523
32.5
815
2.7
730
28.5
95
1.2
Total ..............................................................................
4,228
2,555
817
759
96
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly hours increase, but regular
rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
earnings in Table 22. How these will
change depends on the type of worker,
but on average weekly earnings are
unchanged or increase while hours
worked are unchanged or decrease.
Type 1 workers will have no change
in wages, hours, or earnings.208
Estimating changes in the regular rate of
pay for Type 3 workers and the 50
percent of Type 2 workers who regularly
work occasional overtime requires
207 As previously described, the Department
calculated a wage and hour adjustment for all
regular overtime workers. Consider, by way of
example, a worker who initially earned $900 and
worked 70 hours per week. Suppose the partial
employment contract adjustment results in a regular
rate of pay of $11.94 and 69.5 hours worked per
week. After the partial employment contract
adjustments, this worker would receive
approximately $1,006 per week ((40 × $11.94) +
(29.5 × ($11.94 × 1.5)). Since this is greater than the
proposed standard salary level, the Department
estimated that this worker would have his salary
increased to $913 and remain exempt.
208 It is possible that these workers may
experience an increase in hours and weekly
earnings because of transfers of hours from overtime
workers. Due to the high level of uncertainty in
employers’ responses regarding the transfer of
hours, the Department did not have credible
evidence to support an estimation of the number of
hours transferred to other workers.
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The Final Rule will likely impact
some affected workers’ hourly wages,
hours, and weekly earnings. Predicted
changes in implicit wage rates are
outlined in Table 20; changes in hours
in Table 21; and changes in weekly
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
application of the partial employment
contract model, which predicts a
decrease in their average regular rates of
pay. The Department estimates that
employers would decrease these
workers’ regular hourly rates of pay to
the amount predicted by the partial
employment contract model adjustment.
Employers are assumed to be unable to
adjust the hours or regular rate of pay
for the occasional overtime workers
whose overtime is irregularly scheduled
and unpredictable (the remaining 50
percent of Type 2 workers); therefore,
their earnings will increase because they
will receive the overtime premium for
their unpredictable overtime hours. As
a group, Type 2 workers currently
exempt under the standard test would
see a decrease in their average regular
hourly wage (i.e., excluding the
overtime premium) from $19.00 to
$18.92, a decrease of 0.4 percent (Table
20). Type 2 workers paid between
$100,000 and the updated HCE
compensation level would see an
average decrease in their regular hourly
wage from $57.73 to $55.02, a decrease
of 4.7 percent. However, because
workers will now receive a 50 percent
premium on their regular hourly wage
for each hour worked in excess of 40
hours per week, average weekly
earnings for Type 2 workers would
increase.209
Type 3 workers will also receive
decreases in their regular hourly wage
as predicted by the partial employment
contract model. Type 3 affected workers
paid below the new standard salary
level would have their regular hourly
rate of pay decrease on average from
$14.51 to $13.74 per hour, a decrease of
5.3 percent. Type 3 workers paid
between $100,000 and the new HCE
compensation level would have their
32491
regular rate of pay decrease on average
from $41.43 to $38.80 per hour, a
decrease of 6.3 percent. Again, although
regular hourly rates decline, weekly
earnings will increase on average
because these workers are now eligible
for the overtime premium.
Type 4 workers’ implicit hourly rates
of pay would increase in order for their
earnings to meet the updated standard
salary level ($913 per week) or the
updated HCE annual compensation
level ($134,004 annually). The implicit
hourly rate for Type 4 affected EAP
workers who had earned at least $455
and below $913 per week would
increase on average from $17.32 to
$17.54 (a 1.3 percent increase). The
implicit hourly rate of pay for Type 4
workers who had earned between
$100,000 and $134,004 annually would
increase on average from $49.97 to
$50.76 (a 1.6 percent increase).
TABLE 20—AVERAGE REGULAR RATE OF PAY BY TYPE OF AFFECTED EAP WORKER, FY2017
Regular overtime
No
overtime
(T1)
Total
Occasional
overtime
(T2)
Newly
nonexempt
(T3)
Remain
exempt
(T4)
Standard Salary Level
Before Final Rule .................................................................
After Final Rule ....................................................................
Change ($) ...........................................................................
Change (%) ..........................................................................
$18.39
$18.25
¥$0.15
¥0.8%
$19.36
$19.36
$0.00
0.0%
$19.00
$18.92
¥$0.08
¥0.4%
$14.51
$13.74
¥$0.77
¥5.3%
$17.32
$17.54
$0.23
1.3%
$56.13
$56.13
$0.00
0.0%
$57.73
$55.02
¥$2.72
¥4.7%
$41.43
$38.80
¥$2.63
¥6.3%
$49.97
$50.76
$0.79
1.6%
HCE Compensation Level
Before Final Rule .................................................................
After Final Rule ....................................................................
Change ($) ...........................................................................
Change (%) ..........................................................................
$49.62
$48.37
¥$1.25
¥2.5%
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Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
Type 1 and Type 4 workers would
have no change in hours. Type 1
workers’ hours would not change
because they do not work overtime and
thus the requirement to pay an overtime
premium does not affect them. Type 4
workers’ hours may increase, but due to
lack of data, the Department assumed
hours would not change. Half of Type
2 and all Type 3 workers would see a
small decrease in their hours of
overtime worked. This reduction in
hours is relatively small and is due to
the effect on labor demand from the
increase in the average hourly base wage
as predicted by the employment
contract model.
Type 2 workers who work occasional
overtime hours would be newly
overtime eligible and would see a
negligible decrease in average weekly
hours in weeks where occasional
overtime is worked (0.1 percent
decrease) (Table 21).210 This is the
average change across all weeks,
including weeks without overtime, in
which the decrease in hours is zero.
Type 2 workers who would no longer
earn the updated HCE compensation
level would see a decrease in average
weekly hours in applicable weeks from
48.5 to 48.2 (0.5 percent). Type 3
workers affected by the increase in the
standard salary level would see a
decrease in hours worked from 50.8 to
50.3 hours per week (0.8 percent). Type
209 Type 2 workers do not see increases in regular
earnings to the new salary level (as Type 4 workers
do) even if their new earnings exceed that new
level. This is because the estimated new earnings
only reflect their earnings in that week when
overtime is worked; their earnings in typical weeks
that they do not work overtime do not exceed the
salary level.
210 The Department estimates that half of Type 2
workers (those who work unpredictable overtime
hours) will not see a reduction in their hours;
however as a group, Type 2 workers are expected
to experience a reduction in their hours of work.
Because only half these workers experience a
change in hours and because they work less
overtime on average, the aggregate change is smaller
than for Type 3 workers.
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3 workers affected by the increase in the
HCE compensation level would see an
average decrease from 52.4 to 52.0 hours
per week (0.7 percent).
TABLE 21—AVERAGE WEEKLY HOURS FOR AFFECTED EAP WORKERS BY TYPE, FY2017
No
overtime
worked
(T1)
Total
Regular OT
Occasional
OT
(T2)
Newly
nonexempt
(T3)
Remain
exempt
(T4)
Standard Salary Level a
Before Final Rule .................................................................
After Final Rule ....................................................................
Change ($) ...........................................................................
Change (%) ..........................................................................
41.4
41.3
¥0.1
¥0.2%
38.6
38.6
0.0
0.0%
40.3
40.3
0.0
¥0.1%
50.8
50.3
¥0.4
¥0.8%
53.5
53.5
0.0
0.0%
39.0
39.0
0.0
0.0%
48.5
48.2
¥0.3
¥0.5%
52.4
52.0
¥0.4
¥0.7%
51.1
51.1
0.0
0.0%
HCE Compensation Level a
Before Final Rule .................................................................
After Final Rule ....................................................................
Change ($) ...........................................................................
Change (%) ..........................................................................
45.5
45.3
¥0.2
¥0.4%
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
Because Type 1 workers do not
experience a change in their regular rate
of pay or hours, they would have no
change in earnings due to the Final Rule
(Table 22). While their hours are not
expected to change, Type 4 workers’
salaries would increase to the new
standard salary level or HCE
compensation level (depending on
which test they pass). Thus, Type 4
workers’ average weekly earnings would
increase by $12.70 (1.4 percent) for
those affected by the change in the
standard salary level and by $41.58 per
week (1.6 percent) for those affected by
the HCE compensation level.
Although both Type 2 and Type 3
workers on average experience a
decrease in both their regular rate of pay
and hours worked, their weekly
earnings are expected to increase as a
result of the overtime premium. Based
on a standard salary level of $913 per
week, Type 2 workers’ average weekly
earnings increase from $751.47 to
$760.11, a 1.1 percent increase. The
average weekly earnings of Type 2
workers affected by the change in the
HCE compensation level were estimated
to increase from $2,778.65 to $2,836.63,
a 2.1 percent increase. For Type 3
workers affected by the standard salary
level, average weekly earnings would
increase from $723.86 to $743.83, an
increase of 2.8 percent. Type 3 workers
affected by the change in the HCE
compensation level have an increase in
average weekly earnings from $2,136.91
to $2,196.10, an increase of 2.8 percent.
Weekly earnings after the standard
salary level increased were estimated
using the new wage (i.e., the partial
employment contract model wage) and
the reduced number of overtime hours
worked.
TABLE 22—AVERAGE WEEKLY EARNINGS FOR AFFECTED EAP WORKERS BY TYPE, FY2017
No
overtime
(T1)
Total
Occasional
overtime
(T2)
Regular
overtime
Newly
nonexempt
(T3)
Remain
exempt
(T4)
Standard Salary Level a
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Before Final Rule .................................................................
After Final Rule ....................................................................
Change ($) ...........................................................................
Change (%) ..........................................................................
$733.65
$739.13
$5.48
0.7%
$724.45
$724.45
$0.00
0.0%
$751.47
$760.11
$8.63
1.1%
$723.86
$743.83
$19.97
2.8%
$900.30
$913.00
$12.70
1.4%
$2,778.65
$2,836.63
$57.98
2.1%
$2,136.91
$2,196.10
$59.19
2.8%
$2,535.42
$2,577.00
$41.58
1.6%
HCE Compensation Level a
Before Final Rule .................................................................
After Final Rule ....................................................................
Change ($) ...........................................................................
Change (%) ..........................................................................
$2,180.55
$2,209.75
$29.19
1.3%
$2,155.94
$2,155.94
$0.00
0.0%
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
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a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the weekly earnings because the
product of two averages is not necessarily equal to the average of the product.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).
At the new standard salary level, the
average weekly earnings of all affected
workers is expected to increase from
$733.65 to $739.13, a change of $5.48
(0.7 percent). However, these figures
mask the impact on workers whose
hours and earnings will change because
Type 1 workers, who do not work
overtime, make up more than 60 percent
of the pool of affected workers. If Type
1 workers are excluded, the average
increase in weekly earnings is $13.91
(1.9 percent). Multiplying the average
change of $5.48 by the 4.2 million
affected standard EAP workers equals
an increase in earnings of $22.8 million
per week or $1,187 million in the first
year (Table 23). Of the weekly total,
$660,000 is due to the minimum wage
provision and $22.2 million stems from
the overtime pay provision.
For workers affected by the change in
the HCE compensation level, average
weekly earnings increase by $29.19
($57.57 if Type 1 workers, who do not
work overtime, are excluded). When
multiplied by 65,000 affected workers,
the national increase in weekly earnings
is $1.9 million per week, or $98.5
million in the first year. Thus, total Year
1 transfer payments attributable to this
Final Rule total $1,285.2 million.
TABLE 23—TOTAL CHANGE IN WEEKLY AND ANNUAL EARNINGS FOR AFFECTED EAP WORKERS BY PROVISION, FY2017
Total change in earnings
(1,000s)
Provision
Weekly
Total a .......................................................................................................................................................................
Standard salary level:.
Total ..................................................................................................................................................................
Minimum wage only ..........................................................................................................................................
Overtime pay only b ..........................................................................................................................................
HCE compensation level:.
Total ..................................................................................................................................................................
Minimum wage only.
Overtime pay only b ..........................................................................................................................................
a Due
Annual
$24,715
$1,285,162
22,820
660
22,160
1,186,646
34,338
1,152,308
1,895
98,515
1,895
98,515
to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.
by subtracting the minimum wage transfer from the total transfer.
b Estimated
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4. Potential Transfers Not Quantified
There may be additional transfers
attributable to this Final Rule; however,
the magnitude of these other transfers
could not be quantified.
Reduced Earnings for Some Workers
Holding regular rate of pay and work
hours constant, payment of an overtime
premium will increase weekly earnings
for workers who work overtime.
However, as discussed previously,
employers may try to mitigate cost
increases by reducing the number of
overtime hours worked, either by
transferring these hours to other workers
or monitoring hours more closely.
Depending on how hours are adjusted,
a specific worker may earn less pay after
this Final Rule. For example, assume an
exempt worker is paid for overtime
hours at his regular rate of pay (not paid
the overtime premium but still acquires
a benefit from each additional hour
worked over 40 in a week). If the
employer does not raise the worker’s
salary to the new level, requiring the
overtime premium may cause the
employer to reduce the worker’s hours
to 40 per week. If the worker’s regular
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rate of pay does not increase, the worker
will earn less due to the lost hours of
work.
Additional Work for Some Workers
Affected workers who remain exempt
will see an increase in pay but may also
see an increase in workload as Emerge
Center and other commenters noted.
The Department estimated the net
changes in hours, but as noted in
section VI.D.iv.3, subpart Modeling
Changes in Wages and Hours, did not
estimate changes in hours for affected
workers whose earnings increase
(perhaps most notably those whose
salary is increased to the new threshold
so they remain overtime exempt).
Reduction in Bonuses and Benefits
Some commenters stated that
employers may offset increased labor
costs by reducing bonuses or
benefits.211 See, e.g., Greater
211 Other commenters asserted that some newly
overtime-eligible employees will lose benefits that
their employers tie to exempt status. See, e.g.,
CUPA–HR; National Association of Electrical
Distributors; WorldatWork. As the Department
explained in section IV.A.iv., we see no compelling
reason why employers cannot change their
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Philadelphia Chamber of Commerce;
Kentucky Society of CPAs; Michigan
Association of Certified Public
Accountants; Rockingham County,
North Carolina. AGC stated that 40
percent of the members it surveyed
expected affected employees to lose
some fringe benefits. Other commenters,
such as AIA–PCI, stated that employers
would reduce bonus and incentive pay
to newly overtime-eligible workers,
offsetting some of the earnings gains
achieved through overtime pay. NAHB
presented results from a survey
conducted of members concerning
overtime of construction supervisors,
and stated that of the 33 percent of
companies indicating that a change in
company policies, with respect to
construction supervisors, would occur,
55 percent reported they would ‘‘reduce
or eliminate bonuses’’ and 33 percent
indicated they would ‘‘reduce or
eliminate other benefits.’’ This results in
approximately 18 percent of
respondents predicting reduced bonuses
compensation plans to provide such fringe benefits
and bonus payments based upon, for example, the
employees’ job titles rather than based upon their
exemption status.
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and 11 percent predicting reduced
benefits.
Commenters did not provide any data
from which to estimate the potential
magnitude of changes to benefits or
bonuses. Therefore, the Department has
not incorporated these impacts into the
cost and transfer estimates.
Furthermore, the Department believes if
employers reduce benefits or bonuses,
those reductions will occur instead of
the full employer adjustments included
in the model; that is, an employer who
reduces benefits or bonuses is likely to
reduce base wages by a smaller amount.
The labor market will constrain to some
extent employers’ ability to reduce labor
costs, regardless of the types of
compensation they use to achieve those
reductions.
v. Sensitivity Analysis
This section includes estimated costs
and transfers using either different
assumptions or segments of the
population. First, the Department
presents bounds on transfer payments
estimated using alternative
assumptions. Second, in response to
commenter concerns that the
rulemaking would have a
disproportionate impact on low-wage
regions and industries, the Department
considers costs and transfers by region
and by industry.
1. Bounds on Transfer Payments
Because the Department cannot
predict employers’ precise reaction to
the Final Rule, the Department
calculated bounds on the size of the
estimated transfers from employers to
workers using a variety of assumptions.
Since transfer payments are the largest
component of this Final Rule, the
scenarios considered here are bounds
around the transfer estimate. Based on
the assumptions made, these bounds do
not generate bounded estimates for costs
or DWL.
The potential upper limit for transfers
occurs with the assumption that the
demand for labor is completely
inelastic, and therefore neither the
implicit regular hourly rate of pay nor
hours worked adjust in response to the
changes in the EAP standard salary level
and HCE annual compensation level.
Under this assumption, employers pay
workers one and a half times their
current implicit hourly rate of pay for
all overtime hours currently worked
(i.e., the full overtime premium). The
potential lower bound occurs when
wages adjust completely and weekly
earnings are unchanged as predicted by
the employment contract model. The
Department believes that both the upper
bound scenario and the lower bound
scenario are unrealistic; therefore, we
constructed more credible bounds.
For a more realistic upper bound on
transfer payments, the Department
assumed that all occasional overtime
workers and half of regular overtime
workers would receive the full overtime
premium (i.e., such workers would
work the same number of hours but be
paid 1.5 times their implicit initial
hourly wage for all overtime hours).
Conversely, in the preferred model the
Department assumed that only 50
percent of occasional overtime workers
and no regular overtime workers would
receive the full overtime premium. 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 partial employment
contract model (wage rates fall and
hours are reduced but total earnings
continue to increase, as in the preferred
method). Table 24 summarizes the
assumptions described above.
The plausible lower transfer bound
also depends on whether employees
work regular overtime or occasional
overtime. For those who regularly work
overtime hours and half of those who
work occasional overtime, the
Department assumes the employees’
wages will fully adjust as predicted by
the employment contract model (in the
preferred method their wages adjust
based on the partial employment
contract model).212 For the other half of
employees with occasional overtime
hours, the lower bound assumes they
will be paid one and one-half times
their implicit hourly wage for overtime
hours worked (full overtime premium).
TABLE 24—SUMMARY OF THE ASSUMPTIONS USED TO CALCULATE THE LOWER ESTIMATE, PREFERRED ESTIMATE, AND
UPPER ESTIMATE OF TRANSFERS
Lower transfer estimate
Preferred estimate
Upper transfer estimate
Occasional Overtime Workers (Type 2)
50% full EC model adj .......................................
50% full overtime premium ................................
50% partial EC model adj ................................
50% full overtime premium.
100% full overtime premium.
Regular Overtime Workers (Type 3)
100% full EC model adj .....................................
100% partial EC model adj ..............................
50% partial EC model adj.
50% full overtime premium.
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* Full overtime premium: Regular rate of pay equals the implicit hourly wage prior to the regulation (with no adjustments); workers are paid 1.5
times this base wage for the same number of overtime hours worked prior to the regulation.
* Full employment contract (EC) model: Base wages are set at the higher of: (1) A rate such that total earnings and hours remain the same
before and after the regulation; thus the base wage falls, and workers are paid 1.5 times the new base wage for overtime hours (the employment
contract model) or (2) the minimum wage.
* Partial employment contract model: Regular rates of pay are partially adjusted to the wage implied by the employment contract model. The
resulting regular rate of pay is the midpoint of: (1) A base wage that adjusts 40 percent of the way to the employment contract model wage level,
assuming no overtime premium was initially paid and (2) a base wage that adjusts 80 percent of the way to the employment contract model
wage level, assuming the workers initially received a 28 percent premium for overtime hours worked.
The cost and transfer payment
estimates associated with the bounds
are presented in Table 25. Regulatory
familiarization costs and adjustment
costs do not vary across the scenarios.
These employer costs are a function of
the number of affected firms or affected
workers, human resource personnel
hourly wages, and time estimates. None
of these vary based on the assumptions
made above. Conversely, managerial
costs are lower under these alternative
212 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.
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employer response assumptions because
fewer workers’ hours are adjusted by
employers and thus managerial costs,
which depend in part on the number of
workers whose hours change, will be
smaller.213 Depending on how
employers adjust the implicit regular
hourly wage, estimated transfers may
32495
range from $487.5 million to $2,525.3
million, with the preferred estimate
equal to $1,285.2 million.
TABLE 25—BOUNDS ON YEAR 1 COST AND TRANSFER PAYMENT ESTIMATES, FY 2017
[Millions]
Lower transfer
estimate
Cost/transfer
Direct employer costs:
Reg. familiarization ...............................................................................................................
Adjustment costs ..................................................................................................................
Managerial costs ..................................................................................................................
Total direct employer costs .........................................................................................................
Transfers ......................................................................................................................................
Preferred
estimate
$272.5
191.4
0.0
463.9
487.5
Upper transfer
estimate
$272.5
191.4
214.0
677.9
1,285.2
$272.5
191.4
62.4
526.2
2,525.3
Note 1: Pooled data for FY2013–FY2015 projected to reflect FY2017.
Note 2: Estimates due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE
compensation level.
2. Impacts by Regions and Industries
In response to commenter concerns
that the proposed standard salary level
would disproportionately impact lowwage regions and low-wage industries,
and requests for additional information
on impacts by region and/or industry,
this section presents estimates of the
impacts of this Final Rule by region and
by industry (see section IV.A.iv.).
PPWO asserted that the Department’s
probability codes demonstrate that the
proposed salary level will
disproportionately impact low-wage
regions and industries. Specifically,
PPWO cited a study that found 100
percent of first-line supervisors of food
preparation and serving workers in
Mississippi would fall below the new
threshold, even though the
Department’s probability codes state
that 10 to 50 percent of employees in
this occupation should pass the duties
test. The Department estimated based on
CPS data for FY2013–FY2015 that about
20 percent of first-line supervisors of
food preparation and serving workers in
Mississippi in this industry will exceed
the Final Rule salary threshold, while
only 10 to 50 percent will pass the
duties test, which shows the change in
the Final Rule mitigates the impact on
low-wage regions and industries.
Similarly, the National Association of
Home Builders (NAHB) analyzed statelevel data and found that 50 percent or
more of first line construction
supervisors in Arkansas, Mississippi,
New Mexico, and Tennessee would be
affected by the Department’s proposal.
However, 55 percent of first line
supervisors of construction trades and
extraction workers in the South earn
above the Final Rule’s salary threshold,
even though only 0 to 10 percent of
such workers nationwide are likely to
pass the standard duties test. Finally,
the National Restaurant Association
(NRA) noted, based on a 2014 study,
that the median base salary paid to
restaurant managers is $47,000 and to
crew and shift supervisors is $38,000.
As revised, the standard salary level in
this Final Rule is approximately
equivalent to the 2014 median base
salary paid to restaurant managers cited
by NRA.
The Department analyzed impacts to
low wage regions by comparing the
number of affected workers, costs, and
transfers across the four Census Regions.
The region with the most affected
workers is the South (1.7 million).
However, as a share of potentially
affected workers in the region, the South
is not unduly affected relative to other
regions (22 percent are affected
compared with 16 to 19 percent in other
regions); as a share of all workers in the
region, the South is also not unduly
affected relative to other regions (3.6
percent are affected compared with 2.7
to 3.2 percent in other regions).
TABLE 26—POTENTIALLY AFFECTED AND AFFECTED WORKERS, BY REGION, FY2017
Affected workers
Workers
subject to
FLSA
(millions)
Region
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All .....................................................................................
Northeast ..........................................................................
Midwest ............................................................................
South ................................................................................
West .................................................................................
132.8
24.8
29.5
48.2
30.2
Potentially
affected
workers
(millions) a
22.5
4.8
4.7
7.8
5.1
Number
(millions) b
Percent of
total
affected
4.2
0.8
0.9
1.7
0.8
100
18.6
20.8
41.1
19.5
Percent of
potentially
affected
workers in
region
18.8
16.4
18.6
22.2
16.0
Percent of
all workers
in region
3.2
3.2
3.0
3.6
2.7
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption,
and not in a named occupation.
b Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
213 In the lower transfer estimate, managerial
costs are zero because hours do not change for any
Type 2 or Type 3 workers.
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percent of all transfers, while the South
composes 41.1 percent of all affected
workers (see section VI.D.ii.), thus,
transfers per affected workers are
somewhat below average in the South.
Annual transfers per worker are $270 in
the South and range from $242 to $378
Total transfers in the first year were
estimated to be $1.3 billion (Table 27).
As expected, the transfers in the South
are the largest portion because the
largest number of affected workers is
employed in the South. Transfers in the
South were estimated to be about 36.5
in other regions. Excluding Type 1
workers, whose hours do not change,
annual transfers per worker are $699 in
the South and range from $664 to $1,004
in other regions.
TABLE 27—TRANSFERS BY REGION, FY2017
Total change
in earnings
(millions) a
Region
Total .............................................................................................................................................
Northeast .....................................................................................................................................
Midwest ........................................................................................................................................
South ............................................................................................................................................
West .............................................................................................................................................
Percent of
total
$1,285.2
189.9
314.7
469.3
311.3
100
14.8
24.5
36.5
24.2
Per affected
worker
$304.00
241.86
357.13
269.96
378.28
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.
Direct employer costs are composed
of regulatory familiarization costs,
adjustment costs, and management
costs. Total first year direct employer
costs were estimated to be $677.9
million (Table 28). Total direct
employer costs were estimated to be the
highest in the South ($259.6 million)
and lowest in the Northeast ($123.0
million). While the three components of
direct employer costs vary as a percent
of these total costs by region, the
percentage of total direct costs in each
region is fairly consistent with the share
of all workers in a region. Direct
employer costs in each region as a
percentage of the total direct costs were
estimated to be 18.1 percent in the
Northeast, 22.7 percent in the Midwest,
38.3 percent in the South, and 20.9
percent in the West. Once again, these
proportions are almost the same as the
proportions of the total workforce in
each region: 18.5 percent in the
Northeast, 22.0 percent in the Midwest,
36.7 percent in the South, and 22.8
percent in the West.
TABLE 28—DIRECT EMPLOYER COSTS BY REGION, FY2017
Direct employer costs a
All regions
Northeast
Midwest
South
West
Costs (Millions)
Regulatory familiarization .....................................................
Adjustment ...........................................................................
Managerial ...........................................................................
Total direct costs ..........................................................
$272.5
191.4
214.0
677.9
$52.6
35.6
34.9
123.0
$59.9
39.9
54.1
153.9
$95.7
78.7
85.1
259.6
$64.3
37.3
39.9
141.5
22.0
20.8
25.3
22.7
35.1
41.1
39.8
38.3
23.6
19.5
18.7
20.9
Percent of Total Costs by Region
Regulatory familiarization .....................................................
Adjustment ...........................................................................
Managerial ...........................................................................
Total direct costs ..........................................................
100
100
100
100
19.3
18.6
16.3
18.1
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Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a All costs include both standard salary level costs and HCE compensation level costs.
Another way to compare the relative
impacts of this Final Rule by region is
to consider the transfers and costs as a
proportion of current payroll and
current revenues (Table 29). Nationally,
direct employer costs are 0.010 percent
of payroll. By region, direct employer
costs as a percent of payroll are also
approximately the same (between 0.009
and 0.012 percent of payroll). Direct
employer costs as a percent of revenue
are 0.002 percent nationally and in each
region.
Transfers as a percent of payroll show
greater variation among the regions than
costs, but the levels are still very low.
Transfers as a percent of payroll range
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from 0.013 percent in the Northeast to
0.023 percent in the Midwest. As a
percent of revenue, transfers range from
0.003 to 0.004 percent. Thus, although
there are some slight differences among
regions, costs and transfers relative to
either current payroll or revenue are less
than a tenth of one percent. It is
unlikely that a difference of 0.012
percent in costs and transfers as a
percentage of payroll between the
Northeast (0.022 percent—the lowest
percentage) and the Midwest (0.034
percent—the highest percentage) would
create any significant regional
competitive advantage.
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Several commenters expressed
concern that this rulemaking will be
more costly in low-wage regions due to
lower revenue; for example, an
individual commenter wrote ‘‘a
restaurant in NYC taking in a million or
more per year may not have any
problem paying their manager or
managers this proposed minimum
salary. However a restaurant in a midwest town that does say half that or
500,000 in sales, simply cannot afford
such a salary.’’ Similarly, the National
Funeral Directors Association asserted
the rule will ‘‘be much more disruptive
for funeral homes in smaller rural
communities where many of those
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family-owned businesses are already
wrestling with lower revenue levels.’’
However, regional comparisons must
incorporate more than a comparison of
a single occupation: while revenues of
a typical restaurant in NYC are higher
than a typical restaurant in Milwaukee,
so are costs including managers’
salaries, other employees’ wages, food
costs and overhead, thus the relative
ability of the NYC restaurant to increase
managers’ salaries might be more
apparent than real. In addition, the
Department has noted in our analysis
that employers will adjust employees’
earnings and hours to reduce the impact
of the rule beyond the simple
calculation of multiplying the overtime
premium by the number of overtime
hours worked. For example, in Table 22,
the Department indicates that on
average Type 3 workers will receive a
less than three percent increase in
weekly earnings. In the restaurant
scenario described, this small increase
in earnings applies to a fraction of the
restaurant’s labor force, which in itself
is a fraction of total costs and revenues.
Therefore, based on the above analysis,
the Department does not believe lowwage regions will be unduly affected.
TABLE 29—ANNUAL TRANSFERS AND COSTS AS PERCENTS OF PAYROLL AND OF REVENUE BY REGION, FY2017
Direct employer costs
Payroll
(billions)
Region
Total .........................................................
Northeast ..................................................
Midwest ....................................................
South ........................................................
West .........................................................
$6,524
1,440
1,393
2,171
1,520
Revenue
(billions)
As percent of
payroll
$37,261
7,492
8,503
13,362
7,905
0.010%
0.009
0.011
0.012
0.009
Transfers
As percent of
revenue
0.002%
0.002
0.002
0.002
0.002
As percent of
payroll
0.020%
0.013
0.023
0.022
0.020
As percent of
revenue
0.003%
0.003
0.004
0.004
0.004
Notes: Pooled data for FY2013–FY2015 projected to reflect FY2017. Payroll, revenue, costs, and transfers all exclude the federal government.
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll data from 2014 Annual Survey of Public Employment and Payroll. State and local revenue data from 2012 Census of Governments.
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In order to gauge the impact of the
final rule on industries, the Department
compared estimates of combined direct
costs and transfers as a percent of
payroll, profits, and revenue, for the 13
major industry groups (Table 30).214
This provides a common method of
assessing the relative impacts of the rule
on different industries, and the
magnitude of adjustments the rule may
require on the part of enterprises in each
industry. The relative costs and
transfers expressed as a percentage of
payroll are particularly useful measures
of the relative size of adjustment faced
by organizations in an industry because
they benchmark against the cost
category directly associated with the
labor force. Measured in these terms,
costs and transfers as a percent of
payroll are highest in agriculture, other
services, and leisure and hospitality.
However, the overall magnitude of the
relative shares are small, representing
less than 0.1 percent of overall payroll
costs across industries. The differences
between industries are also small, with
the range of values of total costs and
transfers as a percent of payroll ranging
from a low of .01 percent (public
administration) to a high of 0.09 percent
(agriculture).
The Department also estimates
transfers and costs as a percent of
profits.215 216 Benchmarking against
profits is potentially helpful in the sense
that it provides a measure of the Final
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
differences in the firm-level adjustment
to profits impacts reflecting crossindustry variation in market
structure.217 Nonetheless, the overall
magnitude of costs and transfers as a
percentage of profits are small,
representing in all industries except one
(transportation and utilities) less than
1.0 percent of overall profits. The
differences between industries are also
small, with the range of values of total
costs and transfers as a percent of profits
ranging from a low of .04 percent
(financial activities) to a high of 1.46
percent (transportation and utilities).
Finally, the Department’s estimates of
transfers and costs as a percent of
revenue by industry also indicate very
small impacts (Table 30). The industries
with the largest costs and transfers as a
percent of revenue are leisure and
hospitality and other services. However,
the difference between the leisure and
hospitality industry, the industry with
the highest costs and transfers as a
percent of revenue, and the industry
with the lowest costs and transfers as a
percent of revenue (public
administration) is 0.02 percentage
points. Table 30 illustrates that the
actual differences in costs relative to
revenues are quite small across industry
groupings.
214 Note that the totals in this table for transfers
and direct costs do not match the totals in other
sections due to the exclusion of transfers to federal
workers and costs to federal entities. Federal costs
and transfers are excluded to be consistent with
payroll and revenue which exclude the federal
government.
215 Internal Revenue Service. (2012). Corporation
Income Tax Returns. Available at: https://
www.irs.gov/pub/irs-soi/12coccr.pdf.
216 Table 1 of the IRS report provides information
on total receipts, net income, and deficits. The
Department calculated the ratio of net income
(column (7)) less any deficit (column (8)) to total
receipts (column (3)) for all firms by major industry
categories. Costs and transfers as a percent of
revenues were divided by the profit to receipts
ratios to calculate the costs and transfers as a
percent of profit.
217 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.
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TABLE 30—ANNUAL TRANSFERS, TOTAL COSTS, AND TRANSFERS AND COSTS AS PERCENT OF PAYROLL, REVENUE, AND
PROFIT BY INDUSTRY, FY2017
Costs and transfers
Transfers
(millions)
Industry
All .........................................................................................
Agriculture, forestry, fishing, & hunting ................................
Mining ...................................................................................
Construction .........................................................................
Manufacturing ......................................................................
Wholesale & retail trade ......................................................
Transportation & utilities ......................................................
Information ...........................................................................
Financial activities ................................................................
Professional & business services ........................................
Education & health services ................................................
Leisure & hospitality .............................................................
Other services ......................................................................
Public administration ............................................................
Direct costs
(millions)
$1,282.70
4.10
11.90
50.20
125.60
248.50
44.50
48.90
134.90
181.50
183.70
142.60
71.60
34.80
$676.70
1.40
3.50
36.60
46.00
117.60
21.80
21.80
79.60
113.30
114.80
57.40
45.20
17.70
As percent of
payroll
0.03%
0.09
0.02
0.03
0.03
0.05
0.03
0.03
0.03
0.02
0.03
0.07
0.08
0.01
As percent of
revenue
0.01%
0.02
0.00
0.01
0.00
0.00
0.01
0.01
0.01
0.01
0.01
0.02
0.02
0.00
As percent of
profit a
0.09%
0.34
0.08
0.21
0.05
0.09
1.46
0.08
0.04
0.14
0.21
0.40
0.46
b
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll data from 2014 Annual Survey of Public Employment and Payroll. State and local revenue data from 2012 Census of Governments. Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns.
a Profit data based on corporations only.
b Profit is not applicable for public administration.
Although labor market conditions
vary by Census Region and industry, the
impacts from updating the standard
salary level and the HCE compensation
level do not unduly affect any of the
regions or industries. The proportion of
total costs and transfers in each region
is fairly consistent with the proportion
of total workers in each region.
Additionally, the estimated costs and
transfers from this Final Rule are very
small relative to current payroll or
current revenue—less than a tenth of a
percent of payroll and less than threehundredths of a percent of revenue in
each region and in each industry.
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vi. Deadweight Loss
Deadweight loss (DWL) occurs when
a market operates at less than optimal
equilibrium output. This typically
results from an intervention that sets, in
the case of a labor market, wages above
their equilibrium level. While the higher
wage results in transfers from employers
to workers, it also often causes a
decrease in the total number of labor
hours that are being purchased on the
market. DWL is a function of the
difference between the wage employers
were willing to pay for the hours lost
and the wage workers were willing to
take for those hours. In other words,
DWL represents the total loss in
economic surplus resulting from a
‘‘wedge’’ between the employer’s
willingness to pay and the worker’s
willingness to accept. DWL may vary in
magnitude depending on market
parameters, but is typically small when
wage changes are small or when labor
supply and labor demand are relatively
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price (wage) inelastic. The estimate of
DWL assumes the market meets the
theoretical conditions for an efficient
market in the absence of this
intervention (e.g., all conditions of a
perfectly competitive market hold: full
information, no barriers to entry, etc.).
Since labor markets are generally not
perfectly competitive, the Department’s
estimate of DWL is likely an
overestimate.
The DWL resulting from this Final
Rule was estimated based on the average
decrease in hours worked and increase
in hourly wages calculated in section
VI.D.iv. As the cost of labor rises due to
the requirement to pay the overtime
premium, the demand for overtime
hours decreases, which results in fewer
hours of overtime worked. To calculate
the DWL, the following values must be
estimated:
• The increase in average hourly
wages for affected EAP workers (holding
hours constant),
• the decrease in average hours per
worker, and
• the number of affected EAP
workers.
Only 50 percent of Type 2 workers with
overtime hours worked in the survey
week (those who work regular or
predictable occasional overtime) and
Type 3 workers are included in the
DWL calculation because the other
workers either do not work overtime
(Type 1), continue to work the same
number of overtime hours (Type 4), or
their employers are unable to adjust
their hourly wage because their
overtime hours worked are
unpredictable (the other 50 percent of
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Type 2 workers). As described above,
after taking into account a variety of
potential responses by employers, the
Department estimated the average wage
change for affected EAP workers whose
hours change. Workers impacted by the
change in the standard salary level are
considered separately from workers
impacted by the change in the HCE
compensation level.
For workers affected by the revised
standard salary level, and who
experience a change in hours, average
wages (including overtime) will increase
by $0.69 per hour prior to employer
hour adjustments (Table 31). This
represents the size of the wedge
between labor supply and labor
demand. Average hours will fall by 0.40
per week. These changes result in an
average DWL of $0.14 per week per
Type 2 (the 50 percent of CPS
occasional overtime workers who work
foreseeable overtime) and Type 3
worker. An estimated 803,500 workers
will be eligible for the overtime
premium on some of their hours worked
each week after employer adjustments
are taken into account. Multiplying the
$0.14 per worker per week estimate by
the number of affected workers results
in a total DWL of $5.8 million in the
first year of this Final Rule attributable
to the revised standard salary level
(803,500 workers in DWL analysis ×
$0.14 per worker per week × 52 weeks).
For workers affected by the revised
HCE compensation level and who
experience a change in hours, the
average hourly wage will increase by
$2.01 and average hours worked will
fall by 0.37 per week. This results in an
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average DWL of $0.38 per week for each
of the estimated 31,200 workers affected
by the compensation level who will see
their hours fall. Multiplying this per
worker estimate by the number of
affected workers results in a DWL of
$610,000 in the first year attributable to
the HCE component of this Final Rule
(31,200 workers in DWL analysis ×
$0.38 per worker × 52 weeks). Thus,
32499
total DWL is estimated to be $6.4
million in Year 1, which is small in
comparison to the size of the costs and
transfers associated with this
proposal.218
TABLE 31—SUMMARY OF DEADWEIGHT LOSS COMPONENT VALUES IN YEAR 1
Standard
salary level
Component
Average hourly wages (holding hours constant)
Pre ....................................................................................................................................................................
Post ...................................................................................................................................................................
Change .............................................................................................................................................................
Average overtime hours
Pre ....................................................................................................................................................................
Post ...................................................................................................................................................................
Change .............................................................................................................................................................
Affected EAP workers ..............................................................................................................................................
DWL
DWL per worker per week ...............................................................................................................................
Total annual DWL (millions) ......................................................................................................................
HCE
Compensation
level
$14.86
$15.55
$0.69
$42.84
$44.85
$2.01
10.60
10.20
¥0.40
803,476
12.03
11.65
¥0.37
31,225
$0.14
$5.78
$0.38
$0.61
Note: DWL analysis is limited to workers who experience hour adjustments in the reference week (50 percent of Type 2 workers identified in
the CPS and Type 3).
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Some commenters expressed concern
that the rulemaking will lead to a
reduction in employment or an increase
in unemployment. For example, the
National Newspaper Association stated
that 41 percent of surveyed members
said the proposal would ‘‘lead to an
overall loss of jobs in the community,’’
and AGC reported 33 percent of
surveyed members ‘‘expect some
positions to be eliminated.’’ See also
Erie Sport Store; Michigan Federation
for Children and Families; Texas
Society of CPAs; Virginia Veterinary
Medical Association. One small
business owner wrote: ‘‘If I find that I
am forced to pay additional money to
my existing staff . . . [m]y current
employees will continue to work
unwanted hours while another person
continues to be unemployed.’’ The
Department acknowledges that by
increasing the cost of labor, the total
number of labor hours demanded is
expected to fall. However, the
Department has estimated the net
decrease in labor hours to be small
(334,000 hours per week in Year 1). We
expect this reduction in hours to be
largest for affected workers who
presently work a significant amount of
overtime and who will become
nonexempt. We believe that most of the
reduction in these employees’ hours due
to the increased marginal cost of their
labor will be offset by increased hours
for other workers. This may be in the
form of hiring of additional staff or
increased hours for part-time or exempt
employees. By increasing the marginal
cost of labor for newly overtime-eligible
workers, employers have an incentive to
avoid overtime hours worked by newly
overtime-eligible workers, spreading
work to other employees (which may
increase employment), or making other
production-related decisions. These
effects may offset DWL, and, as
discussed later, may affect social
welfare. However, we do not attempt to
quantify those effects here.
If firms increase workers’ pay to meet
the new salary level, rather than paying
overtime, however, then we may see
these particular workers working longer
hours to justify their increase in pay.
This could consequently limit the
spread of employment that is
traditionally recognized as a goal of
overtime laws. The Department
acknowledges this may occur in some
instances, however, we do not attempt
to estimate transfers between workers
due to uncertainty concerning the
218 Very few commenters addressed the
Department’s DWL calculation in the NPRM. The
FL DEO derived their own estimate for deadweight
loss in Florida, which if applied nationally would
be significantly larger than the Department’s DWL
estimate. However, FL DEO did not explain how
they arrived at their estimate, nor did they note any
specific problems with our calculation. Therefore,
the Department has not adjusted our DWL
calculations. Additionally, FL DEO’s concern that
the Department’s DWL estimate is too low because
it is ‘‘only $1.58 per worker, per year’’ divides the
DWL costs across all affected workers. If instead
these costs are spread across only those workers
whose hours or wages change, the cost per worker
is larger.
219 Stiglitz, Joseph E. (2000) ‘‘The Contributions
of the Economics of Information to Twentieth
Century Economics’’, Quarterly Journal of
Economics 115 (4): 1441–1478.
220 Wozniak, Abigail (2010) ‘‘Are College
Graduates More Responsive to Distant Labor Market
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prevalence and magnitude of such
transfers.
vii. Benefits and Effects Not Discussed
Elsewhere
In general, benefits of the rulemaking
were not quantified due to data
limitations. However, these benefits are
discussed qualitatively.
Market inefficiencies may be reflected
in employees’ choices concerning
earnings and hours worked. These
inefficiencies may result from the
presence of information asymmetries,219
labor market immobility, and other
forms of labor market imperfection that
lead to outcomes that differ from models
that assume competitive labor markets.
For example, empirical research by
Wozniak and others 220 indicate that a
variety of factors (e.g., educational
endowment, exposure to local economic
shocks early in work history, and lower
earnings) are associated with less
effective job search networks and lower
labor market mobility. These may arise
from a variety of sources, such as less
sophistication in eliciting outside offers
or less effective search heuristics.
Salaried workers at the lower end of the
compensation scale are more vulnerable
to these inefficiencies than those at the
Opportunities?’’ Journal of Human Resources 45(3):
994–970. Bound, John and Harry Holzer (200)
‘‘Demand Shifts, Population Adjustments, and
Labor Market Outcomes during the 1980s’’ Journal
of Labor Economics 18(1): 20–54. Greenwoods,
Michael, J (1997) ‘‘Internal Migration in Developed
Countries’’ in Handbook of Population and Family
Economics, ed Mark Rosenzweig and Oded Stark.
New York: Elsevier Science.
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higher end. Such workers are also more
likely to be functioning in those parts of
the labor market more impacted by
trade, technological change, and other
factors that may lead to a greater
number of job seekers than job
vacancies. Given these well documented
market imperfections, tailored
government intervention can result in
social benefits. In a frictionless labor
market, we would expect workers to
find jobs where, at the margin, their
compensation is equivalent to the value
of their leisure time. However, labor
market frictions of the sort discussed
above diminish mobility and therefore
lead to suboptimal outcomes for
overtime exempt workers with few
outside options, specifically, in them
having excessive hours of work. In the
presence of labor market friction,
tailored government intervention can
make these workers better off from a
social welfare perspective.
1. Strengthening Overtime Protection for
Other Workers
In addition to the 4.2 million affected
EAP workers who will be newly eligible
for overtime protection (absent
employer response to increase the salary
level to retain the exemption), overtime
protection will be strengthened for an
additional 8.9 million salaried workers
who earn between the current salary
level of $455 per week and the updated
salary level of $913 per week. These
workers, who were previously
vulnerable to misclassification through
misapplication of the duties test, will
now be automatically overtime
protected because their salaries fall
below the new salary level and therefore
they will not be subject to the duties
test. These 8.9 million workers include:
• 5.7 million salaried white collar
workers who are at particular risk of
being misclassified because they
currently pass the salary level test but
do not satisfy the duties test; and
• 3.2 million salaried workers in blue
collar occupations whose overtime
protection will be strengthened because
their salary will fall below the new
salary threshold.221 (Identification of
blue collar workers is explained in
section VI.B.iv).
Although these workers are currently
entitled to minimum wage and overtime
protection, their protection is better
assured with the updated salary level.
The salary level test is considered a
bright-line test because it is immediately
clear to employers and employees alike
whether or not a worker passes the
salary threshold. The duties test (which
221 Some workers in this group may be overtime
exempt due to another non-EAP exemption.
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is the reason employers cannot
currently claim the EAP exemption for
the above workers) is more subjective
and therefore harder to apply. An
outdated salary level reduces the
effectiveness of this bright-line test. At
the new salary level, the number of
overtime-eligible white collar salaried
workers earning at or above the salary
level will decrease by 5.7 million, and
if we use our estimate of
misclassification of 12.8 percent, then
an estimated 732,000 of these workers
are currently entitled to overtime
protection but their employers do not
recognize them as such. Therefore,
increasing the salary level is expected to
result in less worker misclassification.
These reductions will have the greatest
impact on workers concentrated in
certain occupations and industries as
shown in Table 10. Employers will be
able to more readily determine their
legal obligations and comply with the
law. The resulting effects, although
unquantified, would be categorized into
costs (e.g., increased managerial effort),
transfers (e.g., increased payments from
employers to workers) and benefits in
the same manner as effects are
categorized in the analysis of EAP
workers who will be newly eligible for
overtime protection.
2. Reduction in Litigation
Reducing the number of white collar
employees for whom a duties analysis
must be performed in order to
determine entitlement to overtime will
also reduce some types of litigation
related to the EAP exemption. As
previously discussed, employer
uncertainty about which workers should
be classified as EAP exempt has
contributed to a sharp increase in FLSA
lawsuits over the past decade. Much of
this litigation has involved whether
employees who satisfy the salary level
test also meet the duties test for
exemption. See, e.g, Soehnle v. Hess
Corp., 399 F. App’x 749 (3d Cir. 2010)
(gas station manager earning
approximately $654 per week satisfied
duties test for executive employee);
Morgan v. Family Dollar Stores, Inc.,
551 F.3d 1233 (11th Cir. 2008) (store
managers earning an average weekly
salary of up to $706 did not satisfy
duties test for executive exemption).
Setting an appropriate salary level for
the standard duties test, and
maintaining the salary level with
automatic updates, will restore the test’s
effectiveness as a bright-line method for
separating overtime-protected workers
from those who may be bona fide EAP
workers, and in turn decrease the
litigation risk created when employers
must apply the duties test to employees
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who generally are not performing bona
fide EAP work. This will vastly reduce
legal challenges regarding the duties test
for employees earning between the
current salary level ($455) and the
updated level ($913). See, e.g., Little v.
Belle Tire Distribs., Inc., 588 F. App’x
424 (6th Cir. 2014) (applicability of
administrative or executive exemption
to tire store assistant manager earning
$1,100 semi-monthly); Taylor v.
Autozone, Inc., 572 F. App’x 515 (9th
Cir. 2014) (applicability of executive
exemption to store managers earning as
little as $800 per week); Diaz v. Team
Oney, Inc., 291 F. App’x. 947 (11th Cir.
2008) (applicability of executive duties
test to pizza restaurant assistant
manager earning $525 per week). Setting
the salary level test at the 40th
percentile of weekly earnings of fulltime salaried workers in the lowestwage Census Region ($913) will
alleviate the need for employers to
apply the duties test in these types of
cases, which is expected to result in
decreased litigation as employers will
be able to determine employee
exemption status through application of
the salary level test without the need to
perform a duties analysis. See Weiss
Report at 8 (explaining that the salary
tests ‘‘have amply proved their
effectiveness in preventing the
misclassification by employers of
obviously nonexempt employees, thus
tending to reduce litigation. They have
simplified enforcement by providing a
ready method of screening out the
obviously nonexempt employees,
making an analysis of duties in such
cases unnecessary.’’)
The International Association of Fire
Fighters (IAFF) concurred, stating that
‘‘reducing the number of employees for
whom the duties test must be applied
will significantly reduce litigation
related to the EAP exemption.’’ Other
commenters agreed that the proposed
rule would make the exemption easier
to apply, resulting in savings as a result
of reduced litigation. See Comment from
57 labor law professors; American
Federation of State, County and
Municipal Employees; NELP. Another
attorney, commenting on his own,
similarly stated that the rule would
reduce the potential for the
misclassification of employees that
often leads to litigation.222
222 Some commenters, including the National
Association of Manufacturers and Jackson Lewis,
expressed concern that the rulemaking will increase
rather than decrease litigation costs because there
will be a ‘‘spike in employees who were unhappy
about being reclassified’’ and disputes about issues
such as what is compensable time, the accuracy of
time records, and compliance with rest/meal period
requirements. See also Wage and Hour Defense
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The size of the potential social
benefits from reducing litigation can be
illuminated with the following
estimation method. The Department
estimated the share of FLSA cases that
could potentially be avoided due to the
revised salary levels. The Department
used data from the U.S. Court’s Public
Access to Court Electronic Records
(PACER) system and the CPS to estimate
the percent of FLSA cases that concern
EAP exemptions and are likely to be
affected by the final rule and data from
a published study of the cost of civil
litigation to determine the potential
benefits of reduced litigation arising
from the final rule.
In order to determine the potential
number of cases that would be affected
by the Final Rule, the Department
obtained a list of all FLSA cases closed
in 2014 from PACER (8,256 cases). From
this list the Department selected a
random sample of 500 cases. For each
case in this sample, relevant
information was reviewed and the
Department identified the cases that
were associated with the EAP
exemption. The Department found that
12.0 percent of FLSA cases (60 of 500)
were related to the EAP exemptions.223
Next the Department determined what
share of these cases could potentially be
avoided by an increase in the standard
salary level to $913 and an increase in
the annual HCE compensation level to
$134,004.
The Department estimated the share
of EAP cases that may be avoided due
to the Final Rule by using data on the
salaried earnings distribution from the
CPS to determine the share of
potentially avoidable EAP cases where
workers earn at least $455 but less than
$913 per week or at least $100,000 but
less than $134,004 annually. From CPS,
the Department selected white collar,
nonhourly workers as the appropriate
reference group for defining the
earnings distribution instead of exempt
workers because of the simple fact that
if a worker is litigating his or her
exempt status, then we do not know if
that worker is exempt or not. Based on
this analysis, the Department
determined that 35.8 percent of white
Institute. As a number of employee advocates
commented, and as the Department explained in
section IV.A.iv., we disagree with these employer
commenters, and believe an increased salary level
that will once again serve as a clear and efficient
line of demarcation will reduce litigation.
223 It was not always clear whether the case
involved the EAP exemption; when uncertain the
Department classified the case as not being related
to the EAP exemption to produce a conservative
estimate. For example, in cases with multiple
allegations (including both EAP and non-EAP
issues) the Department classified the case as not
being related to the EAP exemption.
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collar nonhourly workers had earnings
within these ranges. Applying these
findings to the 12 percent of cases
associated with the EAP exemption
yields an estimated 4.3 percent of FLSA
cases may be avoidable.224 The
assumption underlying this method is
that workers who claim they are
misclassified as EAP exempt have a
similar earnings distribution as all white
collar nonhourly workers.225
After estimating the share of cases
that might be avoidable, the Department
quantified the associated benefit
regarding the cost of litigation. The
Department drew on a recent study
conducted by the Court Statistics
Project.226 The study provides estimates
of the costs of litigation related to
employment cases, based on time for the
various steps of the litigation process
(e.g., case initiation, discovery,
settlement, trial, etc.) and the costs of
staff in providing these activities (e.g.,
paralegals, junior and senior attorneys,
etc.). It then provides quartile estimates
(25th percentile, median, and 75th
percentile) based on the survey data.
The study finds that the median cost for
employment litigation is $88,000.
Applying this figure, the Department
estimated avoided litigation costs
resulting from the rule may total
approximately $31.2 million per year.227
3. Uncertainty About Future Overtime
Hours and Pay
This Final Rule may have an impact
on newly overtime-protected employees
who are not currently working much or
any overtime, but who will now be
entitled to minimum wage and overtime
pay protections. These workers may face
a lower risk of being asked to work
overtime in the future, because they are
224 If we use the pool of all exempt workers as
the reference group, then 32.8 percent of salaried
workers earn within these income ranges and an
estimated 3.9 percent of FLSA cases may be
avoidable (32.8 percent × 12 percent).
225 There are several reasons why this assumption
may not hold. First, workers with lower earnings
are less likely to pass the duties test, and thus may
be more likely to be misclassified. This may result
in an underestimate of the share of cases associated
with workers earning between $455 and $913.
Conversely, workers with higher earnings may be
more likely to bring a lawsuit because lawyers may
be more likely to take the case. This may result in
an overestimate of the share of cases associated
with workers earning between $455 and $913.
226 Hannaford-Agor, P. and Waters, N. L. (2013).
Estimating the Cost of Civil Litigation. Court
Statistics Project, 20(1), 1–8. Additional data on the
distribution of litigation costs can be found at
www.ncsc.org/clcm.
227 The cost of litigation is estimated to be
$53,680 if the case does not go to trial; according
to Court Statistics Project, 39 percent of litigation
costs are associated with trials ($88,000×(1¥0.39)).
Conversely, litigation costs might be significantly
higher than estimated here since 25 percent of trial
cases exceed costs of $210,800.
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now entitled to an overtime premium,
which could reduce their uncertainty
and improve their welfare if they do not
desire to work overtime. Additionally, if
they are asked to work overtime, they
will be compensated for the
inconvenience with an overtime
premium.228
Economic theory suggests that
workers tend to assign monetary values
to risk or undesirable job characteristics,
as evidenced by the presence of
compensating wage differentials for
undesirable jobs, relative to other jobs
the worker can perform in the
marketplace.229 To the extent a
compensating wage differential exists,
compensation may decrease with the
reduction in uncertainty.230 For this
reason, overall compensation would be
expected to decrease for workers whose
uncertainty decreases. Employees who
prefer the reduced uncertainty to the
wage premium would experience a net
benefit of the rule, and employees who
prefer the wage premium to the reduced
uncertainty would experience a net
detriment as a result of the rule. The
Department believes that attempting to
model the net monetary value of
changes in uncertainty is not feasible
due to its heavy reliance on data that are
not readily available, and the potentially
questionable nature of the resulting
estimates.
4. Work-Life Balance
Due to the increase in marginal cost
for overtime hours for newly overtimeeligible workers, employers will
demand fewer hours from some of the
workers affected by this rule.231 The
estimated transfer payment does not
take into account the benefit to some
workers of working fewer hours in
exchange for more (or equal) pay.
Therefore, an additional potential
benefit of this Final Rule is the increase
in time off for some affected EAP
workers. On average, affected EAP
workers were estimated to work 4.7
minutes less per week after the Final
228 Although this statement holds as a comparison
between work hours below and above 40 per week,
it is not universally valid as a comparison between
the state of the world with the rule and the state
of the world without the rule.
229 For a discussion of compensating wage
differentials, see Gronberg, T. J., & Reed, W. R.
(1994). Estimating Workers’ Marginal Willingness to
Pay for Job Attributes using Duration Data. Journal
of Human Resources, 29(3), 911–931.
230 In this case, the size of the compensating wage
differential is a function of the likelihood of
working overtime and the amount of overtime
worked. If the probability of working overtime is
small then the wage differential may not exist.
231 The Department recognizes that not all
workers would prefer to work fewer hours and thus
some of these workers might experience an adverse
impact. The Department has no basis for estimating
this potential negative impact.
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Rule. The effect is much more
pronounced when limited to just those
workers whose hours are adjusted in a
given week (the 50 percent of Type 2
workers who work occasional overtime
and are identified in the CPS data and
all Type 3 workers); they would on
average work 24.0 minutes less per
week after the Final Rule. The
additional time off may potentially
make these workers better off.
However, employers may respond to
the rule by increasing hours of work for
some other employees—especially those
who pass the duties test and whose
salaries are either already over the
proposed threshold or will be adjusted
to be so. For these employees, work-life
balance may be harmed by the rule, in
some cases without increased pay. For
EAP employees whose work hours and
pay are both reduced, they may seek
second jobs in order to restore pay to its
original level, thus similarly impacting
work-life balance. The impact of this
possible effect is unquantified.
Several commenters stated that by
reducing excessive overtime the rule
will improve work-life balance for
employees. The Coalition on Human
Needs asserted that one outcome of the
proposed rule would be that
‘‘[e]mployers . . . will have to
acknowledge the value of the 40-hour
workweek by . . . limiting workers[’]
[hours], thus giving them more time
with their families.’’ See also Center for
American Progress; EPI. According to
the Center for Effective Government
‘‘[the] proposed rule would provide
more time protections to the parents of
over an estimated 9 million
children.’’ 232
Empirical evidence shows that
workers in the United States typically
work more than workers in other
comparatively wealthy countries.233
Although estimates of the actual level of
overwork vary considerably, executive,
administrative, and professional
occupations have the highest percentage
of workers who would prefer to work
fewer hours compared to other
occupational categories.234 Therefore,
232 Conversely, some commenters believe the rule
will hurt work-life balance because workers who
become nonexempt may lose flexibility in setting
their schedules (see section IV.A.iv.)
233 For more information, see OECD series,
average annual hours actually worked per worker,
available at: https://stats.oecd.org/
index.aspx?DataSetCode=ANHRS.
234 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.
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the Department believes that the Final
Rule may result in increased time off for
a group of workers who may prefer such
an outcome. However, the empirical
evidence does not allow us to estimate
how many workers would prefer fewer
hours or how much workers value this
additional time off, so it is difficult to
monetize the benefit they may receive.
Furthermore, not all workers would
prefer to work fewer hours and thus
some of these workers might experience
an adverse impact. In addition, the
estimated work loss represents an
average over all affected workers, and
some workers may experience a larger
reduction in hours.235
5. Health
Working long hours is correlated with
an increased risk of injury or health
problems.236 Therefore, by reducing
overtime hours, some affected EAP
workers’ health may improve. This
would benefit the workers’ welfare,
their families’ welfare, and society since
fewer resources would need to be spent
on health. Health has also been shown
to be highly correlated with
productivity.237 Some affected
employees who work large amounts of
overtime may see a significant health
impact; for example, workers at the 75th
and 90th percentiles of hours worked
report working 15 and 20 hours of
overtime hours per week, respectively.
On average, 25 percent of currently
exempt employees who work overtime
work at least 10 hours of overtime per
week. EPI, NELP, and other commenters
noted the poor health effects of working
long hours. The beneficial health effects
of reduced hours for some newly
Hamermesh, D.S. (2014). Not Enough Time?
American Economist, 59(2).
235 It is possible that some employers may choose
to eliminate all overtime for affected workers and
hire additional workers or spread the work to
existing employees to replace the lost hours. The
potential for this adjustment is uncertain, and the
Department has found no studies that estimate the
potential magnitude of this effect. In addition, an
employer may be limited in his or her ability to
make such adjustments; many affected employees
work only a few hours of overtime each week;
affected employees’ tasks may not be easily
divisible; and hiring new workers and/or managing
different work flows will impose additional costs
on the employer that will offset the savings from
avoiding paying the overtime premium.
236 Keller, S. M. (2009). Effects of Extended Work
Shifts and Shift Work on Patient Safety,
Productivity, and Employee Health. AAOHN
¨
Journal, 57(12), 497–502. Kivimaki, M. (2015). Long
Working Hours and Risk of Coronary Heart Disease
and Stroke: A Systematic Review and MetaAnalysis of Published and Unpublished Data for
603,838 Individuals. The Lancet, 386(10005), 1739–
1746.
237 Loeppke, R., Taitel, M., Richling, D., Parry, T.,
Kessler, R., Hymel, P., et al. (2007). Health and
Productivity as a Business Strategy. Journal of
Occupational and Environmental Medicine, 49(7),
712–721.
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overtime-eligible employees may be
partially offset to the extent that hours
worked by other employees, especially
those who are overtime exempt,
increase. These effects have not been
quantified.
6. Increased Productivity
This Final Rule is expected to
increase the marginal cost of some
workers’ labor, predominately due to
the overtime pay requirement since
almost all affected EAP workers already
earn the federal minimum wage. In light
of the increased marginal cost of labor
for newly overtime-eligible workers,
employers may organize workers’ time
more efficiently, thus increasing
productivity. Other channels that may
increase marginal productivity include:
Worker health (which was addressed
above), reduced turnover, and other
effects described by efficiency wage
theory. Any such net gains would
benefit both employers and workers.
Efficiency wages: By increasing
earnings this Final Rule may increase a
worker’s productivity by incentivizing
the worker to work harder. Thus the
additional cost to firms may be partially
offset by higher productivity. In
particular, the estimated managerial
costs associated with greater monitoring
effort may be offset due to this effect. A
strand of economic research, commonly
referred to as ‘‘efficiency wages,’’
considers how an increase in wages may
be met with greater productivity.238
However, this literature tends to focus
on firms voluntarily paying higher
wages, and thus distinguishing
themselves from other firms. Because
employer response to this rulemaking
will result in wage increases,
extrapolating from efficiency wage
theory may not be appropriate to
estimate the likely effects of the rule.
Some commenters discussed
increased productivity as a benefit of
the rulemaking, including the AFL–CIO,
the American Federation of Teachers,
and the IAFF. Individual comments
submitted by the National Women’s
Law Center asserted that paying workers
well ‘‘will lead to increased
productivity, employee loyalty and less
worker turn-over’’ and stated that ‘‘the
better you treat employees the better the
quality of the work they produced.’’
Conversely, there are channels
through which increasing overtime pay
may reduce productivity. For example,
some overtime hours may be spread to
other workers. If the work requires
significant project-specific knowledge or
238 Akerlof, G. A. (1982). Labor Contracts as
Partial Gift Exchange. The Quarterly Journal of
Economics, 97(4), 543–569.
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skills, then the new worker receiving
these transferred hours may be less
productive than the first worker,
especially if there is a steep learning
curve. However, having another worker
versed in the project may be beneficial
to the firm if the first worker leaves the
firm or is temporarily absent (e.g., sick)
or by providing benefits of teamwork
(e.g., facilitating information
exchange).239 The relative magnitudes
of rule-induced increases and decreases
in productivity have not been
quantified.
Reduction in turnover: Research
demonstrates a correlation between
earnings and employee turnover—as
earnings increase, employee turnover
decreases.240 241 Reducing turnover may
increase productivity, at least partially
because new employees have less firmspecific capital (i.e., skills and
knowledge that have productive value
in only one particular company) and
thus are less productive and require
additional supervision and training.242
In short, replacing experienced workers
with new workers decreases
productivity, and avoiding that will
increase productivity. Reduced turnover
should also reduce firms’ hiring and
training costs. As a result, even though
marginal labor costs rise, they may rise
by less than the amount of the wage
change because the higher wages may be
offset by lower turnover rates, increased
productivity, and reduced hiring costs
for firms.
It is difficult to estimate the impact of
reduced turnover on worker
productivity and firm hiring costs. The
potential reduction in turnover is a
function of several variables: the current
wage, hours worked, turnover rate,
industry, and occupation. Additionally,
estimates of the cost of replacing a
worker who quits vary significantly.
Therefore, the Department does not
quantify the potential benefit associated
with a decrease in turnover attributed to
this Final Rule.
239 Some commenters believe productivity would
decline. See section VI.D.iii.
240 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.
241 Note that this literature tends to focus on
changes in earnings for a specific sector or subset
of the labor force. The impact on turnover when
earnings increase across sectors (as would be the
case with this regulation) may be smaller.
242 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.
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7. Reduction in Social Assistance
Expenditures
The transfer of income resulting from
this Final Rule may result in reduced
need for social assistance (and by
extension reduced social assistance
expenditures by the government). A
worker earning the current salary level
of $455 per week earns $23,660
annually. If this worker resides in a
family of four and is the sole earner,
then the family will be considered
impoverished. This makes the family
eligible for many social assistance
programs. Thus, transferring income to
these workers may reduce eligibility for
government social assistance programs
and government expenditures. Several
commenters, including Court Appointed
Special Advocates and some individual
commenters, agreed that the rulemaking
would reduce unemployment insurance
and social welfare costs.
Benefits for which currently exempt
EAP workers may qualify include
Medicaid, the Supplemental Nutrition
Assistance Program (SNAP), the
Temporary Assistance for Needy
Families (TANF) program, the Special
Supplemental Nutrition Program for
Women, Infants, and Children (WIC),
and school breakfasts and lunches.243
Quantifying the impact of this Final
Rule on government expenditures is
complex and thus not estimated here. In
order to conduct such an analysis, the
Department would need estimates of the
transfer per worker, (as noted earlier in
this analysis, these estimates average
$13.91 per week across affected workers
who work overtime and $5.48 across all
affected workers), his or her current
income level, other sources of family
income, number of family members,
state of residence, and receipt of aid.
8. Employment Spreading
Because employers will have an
incentive to reallocate excessive
overtime hours in some cases (for
instance, amongst employees who work
so many hours that any increase would
lead to minimum wage violations), the
Final Rule may result in expanded
employment opportunities. Several
commenters predicted such an
expansion. The Society of St. Vincent de
Paul stated that that there will be
positive spillover effects that will result
in ‘‘opportunities for new employment
for others to fill the hours previously
treated as non-compensable but
mandatory managerial duties.’’ The
Washington Center for Equitable Growth
243 Earned Income Tax Credit (EITC) expenditures
could either increase or decrease depending on
whether workers are on the ‘‘phase-in’’ or the
‘‘phase-out’’ portion of the EITC-eligibility profile.
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commented that the Department
understated the benefits of the
rulemaking ‘‘by failing to account for
employers’ tendency to hire additional
workers and to schedule non-overtime
work in response to the rule change.’’
Two estimates of job creation were
referenced by commenters. The
Washington Center for Equitable Growth
referenced an analysis by Goldman
Sachs estimating the impact of the
proposed change in the standard salary
level on employment.244 Goldman
Sachs concluded that an increase in the
salary threshold from $455 to $970
would result in a total of 120,000 new
hires.245 Legal Aid Society-Employment
Law Center referenced a publication by
the NRF which, relying on data from
Oxford Economics, estimated that a
salary threshold of $970 per week
would create 117,100 part-time jobs in
the retail industry alone.246 While the
Department has some concerns with
Oxford Economics’ analysis, as
discussed in section VI.D.iii., we agree
that in some instances employers may
hire additional employees to work hours
previously worked by newly nonexempt
employees. However, as noted earlier, to
the extent the individuals hired for the
new jobs are already employed
elsewhere, the number of individuals
who are employed may not increase by
as much as the number of jobs increases.
Further, to the extent that employers
shift overtime hours of newly overtimeeligible employees to part-time or
overtime exempt employees who are
already on staff, hiring will not increase.
9. Macroeconomic Benefits
Several commenters asserted that the
regulations will benefit the economy as
a whole. United Steel Workers stated
that ‘‘[w]hen the workers have more
money to spend, businesses have more
customers and more incentive to hire
and invest.’’ Democracy for America
commented the proposed rule ‘‘would
go a long way in addressing [wage]
disparity, strengthening our economy by
providing more income to households
that they can turn around and spend at
businesses, creating new jobs and
growing our GDP.’’ There are potential
244 Goldman Sachs. (2015). US Daily: The New
Federal Overtime Rules: A Greater Effect on
Payrolls than Pay.
245 Goldman Sachs based its analysis on a
difference-in-difference-in-difference (DDD)
estimate of the impact of the 2004 regulation. This
method assumes the 2004 salary level change is
comparable to the proposed salary level change, the
short duties test is similar to the standard duties
test, and all reduced hours will be transferred to
new hires. Accordingly, the Department did not
conduct a similar analysis in this Final Rule.
246 National Retail Federation. (2015). The
Hidden Cost Of Overtime Expansion.
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secondary effects (both costs and
benefits) of the transfer due to the
potential difference in the marginal
utility of income and the marginal
propensity to consume between workers
and business owners. The transfer may
result in societal gain during periods
when the economy is operating below
potential to the extent that transferring
income to workers with a relatively high
marginal propensity to consume results
in a larger multiplier effect and impact
on GDP. The Department did not
attempt to quantify these potential
impacts.
viii. Regulatory Alternatives
The Department has chosen to update
the standard salary level to the 40th
percentile of weekly earnings of all fulltime salaried workers in the South. As
previously discussed, the Department
considered a range of alternatives before
selecting this methodology and data set.
Table 32 presents the alternative salary
and compensation levels, the number of
affected workers, and the associated
costs and transfers. Regulatory
familiarization costs are not included
because they do not vary over the
alternatives.
Alternative 1 inflates the 2004
standard salary level ($455) to FY2015
dollars using the CPI–U. This is $570
per week. At this salary level 538,000
workers would be affected in Year 1,
imposing direct adjustment and
managerial costs of $47.9 million,
transferring $111.4 million in earnings
from employers to employees, and
resulting in DWL of $0.4 million.
Alternative 2 sets the salary level using
the 2004 Final Rule method (the 20th
percentile of weekly earnings of fulltime salaried workers in the South and
retail), resulting in a salary level of $596
per week. At this salary level 683,000
workers would be affected in Year 1,
imposing direct adjustment and
managerial costs of $61.3 million,
transferring $145.4 million in earnings
from employers to employees, and
resulting in DWL of $0.5 million.
Alternative 3 uses the salary level based
on the Kantor method for the long
duties test, resulting in a level of $684
per week. At this salary level 1.4 million
workers would be affected in Year 1,
imposing direct adjustment and
managerial costs of $133.7 million,
transferring $318.1 million in earnings
from employers to employees, and
resulting in DWL of $1.6 million.
Alternative 4 uses the methodology
proposed in the NPRM, setting the
standard salary level at the 40th
percentile of weekly earnings of fulltime salaried workers nationally. For the
fourth quarter of 2015 this yields a
salary level of $972 per week. At this
salary level 4.8 million workers would
be affected; Year 1 adjustment and
managerial costs would equal $470.1
million, with transfers of $1.5 billion,
while DWL would equal $7.3 million.
Alternative 5 sets the salary level using
the Kantor long test method but
generates a level more appropriate to the
short duties test by multiplying the
result times the average historical ratio
between the short and long test salary
levels (as explained in section VI.C.iii.).
This results in a salary level of $1,019
per week. At this salary level, 5.6
million workers are affected, Year 1
adjustment and managerial costs are
$541.2 million; Year 1 transfers are $1.8
billion; and Year 1 DWL is $8.4 million.
Alternative 6 inflates the 1975 short
duties test salary level using the CPI–U
to $1,100 per week in FY2015 dollars.
At this salary level, 6.7 million workers
are affected; Year 1 adjustment and
managerial costs are $665.4 million;
Year 1 transfers are $2.4 billion; and
Year 1 DWL is $11.7 million.
The Department also examined
alternatives to the HCE compensation
level. HCE alternative 1 left the current
$100,000 annual compensation level
unchanged. Therefore, no employer
costs, transfers, or DWL are associated
with this alternative. HCE alternative 2
inflates the 2004 level using the CPI–U
and sets the HCE annual compensation
level at $125,320 per year. This
compensation level would affect 56,000
workers in Year 1 (compared to 65,000
at the chosen compensation level),
impose adjustment and managerial costs
on employers of $6.7 million, transfer
$72.2 million in earnings from
employers to employees, and generate
$400,000 in DWL. HCE alternative 3 sets
the HCE annual compensation level at
$149,894 per year, based upon using the
same percentile of full-time salaried
workers as in the 2004 Final Rule. This
compensation level would affect 72,000
workers in Year 1, impose adjustment
and managerial costs on employers of
$9.4 million, transfer $123.0 million in
earnings from employers to employees,
and generate $800,000 in DWL.
TABLE 32—UPDATED STANDARD SALARY AND HCE COMPENSATION LEVELS AND ALTERNATIVES, AFFECTED EAP
WORKERS, COSTS, AND TRANSFERS, FY2017
Alternative
Affected EAP
workers
(1,000s)
Salary level
Year 1 impacts
(millions)
Adj. & managerial costs a
Transfers
DWL b
Standard Salary Level (Weekly)
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Alt. #1: Inflate 2004 level .....................................................
Alt. #2: 2004 method ...........................................................
Alt. #3: Kantor long test level ..............................................
Final .....................................................................................
Alt. #4: Proposed .................................................................
Alt. #5: Kantor short test ......................................................
Alt. #6: Inflate 1975 short test level .....................................
$570
596
684
913
972
1,019
1,100
538
683
1,444
4,163
4,837
5,636
6,684
$47.9
61.3
133.7
397.0
470.1
541.2
665.4
$111.4
145.4
318.1
1,186.6
1,476.8
1,779.3
2,418.8
$0.4
0.5
1.6
5.8
7.3
8.4
11.7
........................
6.7
8.4
9.4
........................
72.2
98.5
123.0
........................
0.4
0.6
0.8
HCE Compensation Level (Annually)
Alt. #1: No change ...............................................................
Alt. #2: Inflate 2004 level .....................................................
Final .....................................................................................
Alt. #3: 2004 percentile ........................................................
$100,000
125,320
134,004
149,894
0
56
65
72
Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.
a Regulatory familiarization costs are excluded because they do not vary based on the selected values of the salary levels.
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b DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated
with the minimum wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.
2. Updating Methods Considered
1. Background
Between periodic updates to the
salary level, nominal wages typically
increase, resulting in an increase in the
number of workers qualifying for the
EAP exemption, even if there has been
no change in their duties or real
earnings. Thus, workers whom Congress
intended to be covered by the minimum
wage and overtime pay provisions of the
FLSA may lose those protections.
Automatically updating the standard
salary level allows this threshold to
keep pace with changes in earnings,
allowing it to continue to serve as an
effective dividing line between
potentially exempt and nonexempt
workers. Furthermore, automatically
updating the standard salary level and
the HCE compensation level will
provide employers more certainty in
knowing that these levels will change by
a small amount 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 this Final Rule, the Department is
including in the regulations a
mechanism for automatically updating
the salary levels every three years. The
Department will reset the standard
salary level to keep it at the 40th
percentile of weekly wages of full-time
salaried workers in the lowest-wage
Census Region (currently the South).
The HCE annual compensation level
will be updated to keep it at the 90th
percentile of weekly wages of full-time
salaried workers nationally.
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ix. Automatic Updates
In the NPRM the Department sought
comments on whether to automatically
update the standard salary level and
HCE total compensation level using the
Consumer Price Index for All Urban
Consumers (CPI–U), or using a fixed
percentile of earnings. The CPI–U is the
most commonly used price index in the
U.S. and is calculated monthly by BLS.
The CPI–U is the primary index used by
the government to index benefit
payments, program eligibility levels,
and tax payments. The CPI–U holds
quantities constant at base levels while
allowing prices to change. The
quantities are fixed to represent a
‘‘basket of goods and services’’ bought
by the average consumer.
Updating the salary levels based upon
the growth rate of earnings at a specified
percentile of the weekly earnings
distribution is consistent with the
Department’s historical practice of using
salary level as a key criterion for the
exemption. The growth rate of earnings
reflecting labor market conditions is an
appropriate measure of the relative
status, responsibility, and independence
that characterize exempt workers. While
earnings and prices generally mirror one
another over time, they do not change
in tandem.
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3. Comparison of Indices and Decision
To Use Earnings Percentiles
As previously discussed, see section
IV.E.iii., the Department believes setting
and updating the salary level using the
same methodology will best ensure that
the salary level test effectively
differentiates between overtime-eligible
white collar workers and workers who
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may be bona fide EAP employees who
are not entitled to overtime and
continues to work effectively with the
duties test. Accordingly, the Final Rule
provides for updating both the standard
salary level and the HCE total
compensation requirement using a fixed
percentile of weekly earnings (40th
percentile of full-time workers in the
lowest-wage Census Region for the
standard salary level; the annualized
value of the 90th percentile of full-time
salaried workers nationally for the HCE
total compensation level).
While the Department has decided
not to automatically update the salary
level using the CPI–U, we note that in
recent years the CPI–U has grown at a
rate closely aligned with the 40th
percentile of earnings of full-time
salaried workers in the South. Between
FY2006 and FY2015 the average annual
growth rates for the 40th percentile in
the South and the CPI–U have been 2.1
percent and 1.8 percent, respectively.
The average growth rate at the 90th
percentile of full-time salaried earnings
nationwide during the same period was
3.0 percent.
The Department compared the
standard salary levels that would have
resulted from 1995 to 2015 if (1) the
standard salary level was set each year
to the 40th percentile of weekly
earnings of full-time salaried workers in
the South, and (2) the standard salary
level was set using the growth in the
CPI–U (and setting the level in 2014 to
match the 40th percentile earnings level
in the South, i.e., $913 per week) (Figure
5). While not identical, the data show
that these two methods produced
similar results.
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4. Concerns With Use of Fixed Earnings
Percentile as Automatic Updating
Methodology
As discussed in detail in section
IV.E.iii., some commenters expressed
concern that automatically 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., American Bankers Association;
AIA–PCI ; Chamber. Specifically, these
commenters stated that if the standard
salary level is set at a fixed percentile
of earnings of full-time salaried workers,
and some or all of the newly nonexempt
workers are converted to hourly status
and thus removed from the data set,
earnings at that 40th percentile of
salaried workers will quickly rise solely
due to the exclusion of these hourly
workers (an effect many commenters
representing employers referred to as
‘‘ratcheting’’). Commenters asserted that
this may cause growth in the 40th
percentile of full-time salaried workers
to no longer reflect prevailing economic
conditions.
Claims that automatic updating 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
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because many affected EAP workers
who are reclassified as nonexempt are
likely to remain salaried as: (1) An
analysis of the 2004 salary level updates
did not indicate significant numbers of
workers were converted to hourly pay;
and (2) an analysis of updates in
California’s higher salary level did not
indicate significant numbers of workers
were reclassified as hourly. In any
event, the Department’s modeling of the
impact of automatic 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 below are based on CPS
MORG data. As acknowledged in the
NPRM, 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, we 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 some
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way other than salaried or hourly.247
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.
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
conversation 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 overtime. Also, employers
may have other incentives to maintain
workers’ salary status; for example, they
247 This question is only asked of ‘‘heads’’ and
‘‘wives’’ in the PSID (i.e., heads of households and
their spouses). However, in the 2013 PSID, ‘‘heads’’
and ‘‘wives’’ composed 88 percent of workers.
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may offer salaried positions to attract
talent. Commenters 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
employee morale. Using the CPS MORG
data pooled for FY2013–FY2015 and
projected to FY2017, the Department
estimated that 18.6 percent of white
collar workers earning below $455 per
week are nonhourly; based on findings
from the PSID, the Department believes
most of these nonhourly workers are
salaried.
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Previous Salary Level Updates Did Not
Indicate Workers Being Converted to
Hourly
The Department analyzed employer
responses to the 2004 Final 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 are reclassified as
nonexempt are more likely to be paid on
an hourly basis. These analyses allow
the identification of any potential
regulatory impact while controlling for
time trends and a broad range of other
relevant factors (education, occupation,
industry, geographic location, etc.). 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 Final Rule or the California salary
level updates. See section VI.D.iii.5 for
discussion of the applicability of these
results to this Final Rule.
2004 Final Rule. In 2004, the salary
level required to be eligible for
exemption increased from $250 per
week (short salary level) to $455 (the
standard salary level).248 To estimate
the effect of this salary level update on
the share of full-time, white collar
workers paid hourly, the Department
conducted a difference-in-differences
(DD) analysis of the 2004 part 541 salary
level revisions. The Department
modeled two types of differences to
include in the analysis:
Difference #1 (pre- versus postrulemaking): January–March 2004
versus January–March 2005,249
248 The 2004 Final Rule increased the salary level
from the previous long test level of $155 per week
(executive and administrative exemptions) or $170
per week (professional exemption) to $455 per
week. For purposes of this analysis, the Department
compared the increase from the short test salary
level ($250 per week) since the long test was no
longer operative due to increases in the minimum
wage.
249 The 2004 Final Rule was published April 23,
2004 and went into effect August 23, 2004.
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Difference #2 (workers exempt before,
but not after rule compared to workers
exempt both before and after the rule):
Workers earning between $250 and $455
per week versus those earning at least
$455 but less than $600.250
Using this DD analysis, 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 the 2004 Final
Rule.251 This can also be demonstrated
by looking directly at the share of
workers paid hourly; the Department
found that following the 2004 Final
Rule, the percent of full-time white
collar workers who were paid hourly
decreased from 74.6 percent to 73.6
percent in the affected earnings range
($250–$455), while it increased from
60.9 percent to 63.6 percent in the
earnings range where there were no
changes to EAP exemption eligibility. In
other words, 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.
California. The exempt salary level in
California is set by statute as equal to
twice the state minimum wage for 40
hours worked per week. The salary level
has been updated four times in recent
years when California raised the state
minimum wage: In 2007 (from $540 to
$600), 2008 (from $600 to $640), 2014
(from $640 to $720), and 2016 (from
$720 to $800). To estimate the effect of
250 In order to isolate the potential effect on
earnings due to the 2004 salary changes, we
excluded workers in states where the state EAP
salary level was higher than the FLSA short salary
level (i.e., Alaska, California, Connecticut, Maine
and New York).
251 The shares provided in the text do not control
for other covariates. However, using a DD regression
approach that includes a full complement of
controls (age, education, gender, race, ethnicity,
occupation, industry, state of residence, working
overtime, multiple job holding), the relevant
marginal effect is ¥0.033 (i.e., the amount the
likelihood of being paid hourly changes post
rulemaking for workers earning between $250 and
$455 per week relative to the change for workers
earning $455 or above) and the p-value is 0.118,
which is not statistically significant at conventional
thresholds for significance. The difference-indifferences model used can be written as where Hi
is equal to 1 if worker i is paid by the hour and
0 otherwise, Ti is equal to 1 if worker i earns at least
$250 but less than $455 and 0 if she earns between
$455 and $600, Pi is equal to 1 for the post-change
period (Jan.–Mar. 2005) and 0 for the pre-change
period (Jan.–Mar. 2004), and Ci is the set of workerspecific controls. The model was estimated using a
probit regression.
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32507
the salary level update on the share of
white collar workers paid hourly, the
Department conducted difference-indifferences-in-differences (DDD)
analyses of the revisions to the
California exempt salary level for which
CPS data were available (2007–2008,
and 2014).252
The Department modeled three types
of differences to include in the analyses:
Difference #1 (pre- versus postrulemaking):
2007–2008: January–March 2006
versus January–March 2008, and 2014:
January–March 2014 versus January–
March 2015.253
Difference #2 (workers exempt before,
but not after rule compared to workers
exempt both before and after the rule):
2007–2008: Workers earning between
$540 and $640 versus those earning at
least $640 but less than $740, and
2014: Workers earning between $640
and $720 versus workers earning at least
$720 but less than $800.
Difference #3: California workers
versus workers in other states where the
salary level was not increased.254
Using this DDD analysis, 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.255 This can also be
252 California raised the state minimum wage in
January of both 2007 and 2008. These changes were
announced jointly in September 2006. Because
employers knew that a second increase in the
exempt salary level would occur one year after the
2007 increase, the Department expected that they
planned their adjustments accordingly rather than
treat the two increases as isolated independent
events. Therefore the Department considered the
combined effects of the 2007 and 2008 changes.
253 The minimum wage update took place in July
2014.
254 We excluded Alaska, Connecticut and New
York because the state EAP salary levels either: (1)
Were above the FLSA standard salary level; (2)
differed in the time periods considered; or (3) both
(1) and (2).
255 The shares provided in the text do not control
for other covariates. However, using a DDD
regression approach that includes a full
complement of controls (age, education, gender,
race, ethnicity, occupation, industry, state of
residence, working overtime, multiple job holding),
the relevant marginal effect for 2007–2008 is 0.018
and the p-value is 0.612. The marginal effect of the
triple difference for 2014 is ¥0.057 and the p-value
is 0.103. Neither of these are statistically significant
at conventional thresholds for significance. The
difference-in-difference-in-differences model used
can be written as
where Hi is equal to 1 if worker i is paid by the
hour and 0 otherwise, Ti is equal to 1 if worker i
earns between the old threshold and the new
threshold and 0 if she earns just above the new
threshold, Pi is equal to 1 for the post-change period
and 0 for the pre-change period, Si is equal to 1 if
worker i is in California and 0 if she is in other
states where the salary level was not increased, and
Ci is the set of worker-specific controls. The model
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demonstrated by looking directly at the
share of workers paid hourly (using
differences one and three). After the
2007–2008 California update, among
Californians earning between the old
and new salary levels, the share of fulltime white collar workers being paid
hourly decreased slightly from 73.4
percent to 73.1 percent. Among fulltime white collar workers earning
comparable amounts in states where the
salary level did not change, the share of
workers being paid hourly increased
from 66.2 percent to 67.5 percent. After
the 2014 California update, the values
increased from 72.0 percent to 74.0
percent in California, and increased
from 68.2 percent to 69.4 percent in
other states.256 Neither of these results
suggests that the salary updates resulted
in a significantly greater percent of
affected workers being converted to
hourly pay in California as compared to
the rest of the United States.
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The Department’s Modeling of Possible
‘‘Ratcheting’’ Indicates Any Effect
Would Be Negligible
In a study submitted by the PPWO,
Edgeworth Economics estimated the
impact that automatic updating using
the fixed percentile approach would
have on the salary level. They found
that ‘‘[i]f just one quarter of the full-time
non-hourly workers earning less than
$49,400 per year ($950 per week) were
reclassified as hourly workers, the pay
distribution among the remaining nonhourly workers would shift so that the
40th percentile of the 2016 pay
distribution would be $54,184 ($1,042
per week), about 9.6 percent higher than
it was in 2015.’’ Their estimate was
based on the key assumption that one
quarter of all full-time nonhourly
employees would be converted to
hourly pay each year. Accordingly,
based on the Department’s reading of
the Edgeworth Economics’ analysis, it
appears they converted one quarter of
all full-time nonhourly employees
earning below the salary level to hourly
status. This modeling is inappropriate
because it fails to account for whether
the employees perform white collar
work and are subject to the EAP
was estimated using a probit regression. The
Department also performed alternative analyses to
check whether these results hold, including (1) a
comparison of California and other states looking
only at workers with earnings below the revised
salary level (i.e., eliminating Difference #2 from the
DDD model), and (2) running simplified models
without individual controls. None of these checks
found a significant increase in the percentage of
workers paid on an hourly basis.
256 The increase in the proportion of workers paid
on an hourly basis in the relevant salary range in
California is not statistically different from the
increase in the proportion for workers in other
states.
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exemption, and ignores that, at most,
employers will only have an incentive
to convert affected workers (a small
share of all full-time nonhourly
employees).
Oxford Economics also considered
how converting salaried workers to
hourly status could influence
automatically updated salary levels. In
one analysis, they assumed that
employers will convert the lowest 40
percent of full-time salaried workers to
hourly status in 2016, and that by Year
2 the 40th percentile of the new
distribution of salaried workers would
be equivalent to the 64th percentile of
the original distribution. The
Department believes this model is
clearly unrealistic. Like Edgeworth
Economics, Oxford Economics
erroneously assumes that workers who
are not affected by the new salary would
nonetheless be converted to hourly
status.
In another analysis, Oxford
Economics estimated employer response
to updating the threshold to $970 in
2016. According to their analysis,
approximately 695,000, or nearly one
third, of the 2,189,000 affected workers
will be converted from ‘‘salaried
exempt’’ to ‘‘hourly nonexempt.’’
Oxford Economics concluded that about
two-thirds of these converted employees
will have their hourly rates decreased to
leave their earnings unchanged, and one
third will have their hours reduced to
38 per week. However, neither analysis
appears to account for the possibility
that employers may continue to pay
some newly nonexempt employees on a
salary basis, and thus both predictions
likely overestimate the number of
workers converted to hourly status.
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 this
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 make up more than 60
percent of the affected workers) are
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 are
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converted to hourly status to generate a
realistic upper bound of the magnitude
of any possible ratcheting effect. The
Department estimated that the salary
level in 2026, after three updates, 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, we believe our estimate is
an overestimate because it assumes
employers convert all Type 2 and Type
3 workers to hourly status, which, for
the reasons discussed above and in
section IV.E.iii. of the preamble, the
Department believes is a highly unlikely
outcome.
x. Projections
1. Methodology
The Department projected affected
workers, costs, and transfers forward for
ten years. This involved several steps.
First, past growth in the earnings
distribution was used to estimate future
salary levels. Second, workers’ earnings,
absent a change in the salary levels,
were predicted. Third, predicted salary
levels and earnings were used to
estimate affected workers. Fourth,
employment adjustments were
estimated and adjusted earnings were
calculated. Lastly, costs and transfers
were calculated.
First, in years when the salary level is
updated, the predicted salary levels are
estimated using the historic geometric
growth rate between FY2005 and
FY2015 in (1) the 40th earnings
percentile of full-time salaried workers
in the South for the standard salary
level and (2) the 90th earnings
percentile of full-time salaried workers
nationally for the HCE compensation
level, projected to the second quarter of
the respective years before the updated
levels go into effect. Second, the
Department calculated workers’
projected earnings in future years by
applying the annual projected wage
growth rate in the workers’ industryoccupation to current earnings, as
described in section VI.B.ii. Third, we
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 in FY2017
absent the rule change but have
projected earnings in the future year
that are less than the relevant salary
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32509
The Department estimated that in
Year 1, 4.2 million EAP workers will be
affected, with about 65,000 of these
attributable to the revised HCE
compensation level. In Year 10, the
number of affected EAP workers was
estimated to equal 5.3 million with
217,000 attributed to the HCE
exemption. The projected number of
affected EAP workers accounts for
anticipated employment growth by
increasing the number of workers
represented by the affected EAP workers
(i.e., increasing sampling weights).
The projected number of affected
workers includes workers who were not
EAP exempt in the base year but would
have become exempt in the absence of
this Final Rule in Years 2 through 10.
For example, a worker may earn less
than $455 in FY2017 but between $455
and $913 in subsequent years; such a
worker would be counted as an affected
worker. In the absence of this Final Rule
he or she would likely have become
exempt at some point during the 9
projected years; however, as a result of
the Final Rule, this worker remains
nonexempt, and is thus affected by the
Final Rule. In the NPRM the Department
considered these workers separately
from affected workers and did not
estimate costs and transfers associated
with these workers.259
The Department quantified three
types of direct employer costs in the
ten-year projections: (1) Regulatory
familiarization costs; (2) adjustment
costs; and (3) managerial costs.
Regulatory familiarization costs only
occur in Year 1 and years when the
salary levels are automatically updated.
Thus, in addition to Year 1, some
regulatory familiarization costs are
expected to occur in Year 4 (FY2020),
Year 7 (FY2023), and Year 10
(FY2026).260 Specifically, the
Department added 5 minutes per
establishment for regulatory
familiarization time to access and read
the published notice in the Federal
Register with the updated standard
salary level and HCE compensation
level in years when the salary level is
updated. In each of these three years
(FY2020, FY2023, and FY2026)
regulatory familiarization costs are
approximately $23 million (see section
VI.D.iii. for details on the methodology
for estimating costs).
Although start-up firms must still
become familiar with the FLSA
following Year 1, the difference between
the time necessary for familiarization
with the current part 541 exemptions
and those exemptions as modified by
the Final Rule is essentially zero.
Therefore, projected regulatory
familiarization costs for new entrants
over the next nine years are zero
(although these new entrants will incur
regulatory familiarization costs in years
when the salary and compensation
levels are updated).
Adjustment costs and managerial
costs are a function of the number of
affected EAP workers and thus will be
higher with automatic updating.
Adjustment costs will occur in any year
in which workers are newly affected.
After Year 1, these costs are estimated
to be relatively small since the majority
of workers affected by this rulemaking
are affected in Year 1, and the costs
occur almost exclusively in years when
the salary is automatically updated.
Management costs recur each year for
all affected EAP workers whose hours
are adjusted. Therefore, managerial
costs increase modestly over time as the
number of affected EAP workers
increases. The Department estimated
that Year 1 managerial costs would be
$214.0 million (section VI.D.iii.); by
Year 10 these costs would grow slightly
to $255.1 million. In years without
automatic updates managerial costs fall
slightly since earnings growth will
cause some workers to no longer be
affected in those years. In all years
between 94 and 98 percent of costs are
attributable to the revised standard
salary level (Table 33).
The Department projected two types
of transfers from employers to
employees associated with workers
affected by the regulation: (1) Transfers
due to the minimum wage provision
and (2) transfers due to the overtime pay
provision. Transfers to workers from
employers due to the minimum wage
provision, estimated to be $34.3 million
in Year 1, are projected to decline to
$17.8 million in Year 10 as increased
earnings over time move workers’
regular rate of pay above the minimum
wage.261 Transfers due to overtime pay
should grow slightly over time because
the number of affected workers will
increase, although transfers fall in years
between automatic updates. Transfers to
workers from employers due to the
overtime pay provision increase from
$1,250.8 million in Year 1 to $1,589.4
million in Year 10. Workers affected by
the revised standard salary level
account for between 80 and 92 percent
of overtime transfers in all years.
257 This elasticity estimate is based on the
Department’s analysis of the following paper:
Lichter, A., Peichl, A. & Siegloch, A. (2014). The
Own-Wage Elasticity of Labor Demand: A MetaRegression Analysis. IZA DP No. 7958.
258 Goldbeck, D. (2015). ‘‘White Collar’’ Overtime
Expansion. Regulation Review.
259 These workers were not considered in the
NPRM because their work patterns are known when
they are nonexempt (because they earn less than
$455), but those patterns might change if they
become exempt (e.g., they may work more hours).
However, because a significant number of
additional workers are projected to remain
nonexempt through this process, the Department
chose to include them in the analysis for this Final
Rule. To do so, we assume their exempt work
patterns will be similar to their nonexempt work
patterns.
260 The first update will go into effect January 1,
2020. However, for this economic analysis, the
Department modeled the first automatic update to
occur at the beginning of FY2020. This is because
the analysis is conducted by fiscal year and
modeling the update as going into effect a quarter
before allows simplification of the analysis with
only a negligible impact on estimates.
261 State minimum wages above the federal level
as of January 1, 2016 were incorporated and used
for projected years. Increases in minimum wages
were not projected. If state or federal minimum
wages increase between January 1, 2016 and
FY2026, then estimated projected minimum wage
transfers may be underestimated.
level. Sampling weights were also
adjusted to reflect employment growth
as explained in section VI.B.ii.
Adjusted hours for workers affected in
Year 1 were re-estimated in Year 2 using
a long-run elasticity of labor demand of
¥0.4.257 For workers newly affected in
Year 2 through Year 10, employers’
wage and hour adjustments due to the
rulemaking are estimated in that year, as
described in section VI.D.iv., except the
long-run elasticity of labor demand of
¥0.4 is used. Employer adjustments are
made in the first year the worker is
affected and then applied to all future
years in which the worker continues to
be affected (unless the worker switches
to a Type 4 worker). Workers’ earnings
in predicted years are earnings post
employer adjustments, with overtime
pay, and with ongoing wage growth
based on historical growth rates (as
described above).
Very few commenters discussed the
Department’s projections for Year 2
through Year 10 in the NPRM’s analysis.
Dan Goldbeck 258 stated, in an article
cited by the Association of Energy
Service Companies, that in the NPRM,
the Department reported only Year 2
and Year 10 projected estimates, making
it ‘‘difficult to know the accuracy of this
calculation.’’ See also International
Bancshares Corporation. In the Final
Rule, the Department has included
projected costs in each of the nine
projected years.
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2. Estimated Projections
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TABLE 33—PROJECTED COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS
Affected
EAP
workers
(millions)
Fiscal year
(year #)
Costs
Transfers
DWL b
Adjustment a
Reg. Fam.
Managerial
Total
Due to MW
Due to OT
Total
(Millions FY2017$)
Year:
2017 (1) ..............................
2018 (2) ..............................
2019 (3) ..............................
2020 (4) ..............................
2021 (5) ..............................
2022 (6) ..............................
2023 (7) ..............................
2024 (8) ..............................
2025 (9) ..............................
2026 (10) ............................
Average Annualized:
3% real rate .......................
7% real rate .......................
4.2
4.0
3.9
4.6
4.4
4.3
5.0
4.8
4.6
5.3
272.5
0.0
0.0
22.8
0.0
0.0
23.0
0.0
0.0
23.1
191.4
1.5
1.9
10.4
2.8
2.8
7.3
2.5
2.2
5.9
214.0
206.6
200.6
232.5
223.7
217.6
243.4
236.1
230.9
255.1
677.9
208.0
202.6
265.7
226.5
220.5
273.7
238.6
233.1
284.2
34.3
28.5
27.7
25.8
24.6
20.5
18.0
15.2
14.4
17.8
1,250.8
907.9
883.9
1,221.2
1,134.7
1,017.3
1,404.6
1,290.0
1,193.2
1,589.4
1,285.2
936.5
911.6
1,247.0
1,159.2
1,037.8
1,422.6
1,305.3
1,207.6
1,607.2
6.4
8.7
8.5
9.8
9.6
9.4
10.2
10.0
10.1
11.1
....................
....................
37.6
42.4
25.4
29.0
225.0
223.6
288.0
295.1
23.2
23.8
1,178.5
1,165.3
1,201.6
1,189.1
9.3
9.2
a Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs may occur in
years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth.
b DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum
wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.
Table 33 also summarizes average
annualized costs and transfers over the
ten-year projection period, using 3
percent and 7 percent real discount
rates. The Department estimated that
total direct employer costs have an
average annualized value of $295.1
million per year over ten years when
using a 7 percent real discount rate. Of
this total, average annualized regulatory
familiarization costs were estimated to
be $42.4 million. Average annualized
adjustment costs were estimated to be
$29.0 million. The remaining $223.6
million in average annualized direct
costs were accounted for by managerial
costs. The average annualized value of
total transfers was estimated to equal
$1,189.1 million. The largest component
of this was the transfer from employers
to workers due to overtime pay, which
was $1,165.3 million per year, while
average annualized transfers due to the
minimum wage totaled $23.8 million
per year.
The cost to society of fewer hours of
labor demanded, expressed as DWL,
was estimated to be $6.4 million in Year
1. DWL increases over time and in Year
10 it is projected to equal $11.1 million.
DWL increases sharply between Year 1
and Year 2 because the Department
assumes the market has had time to
fully adjust to the revised standard
salary and HCE annual compensation
levels by Year 2. In Year 1 employers
may not be able to fully adjust wages
and hours in response to the
rulemaking, so the Department used a
short run wage elasticity of labor
demand to reflect this constrained
response; in Year 2 employers have
sufficient time to fully adjust, and a
long-run wage elasticity is used.
Therefore, the decrease in hours worked
is larger in Year 2 than Year 1, and the
DWL is also larger. Finally, the
Department estimated that average
annualized DWL was $9.2 million per
year.
A summary of the estimates used in
calculating DWL for years 1, 2 and 10
is presented in Table 34. The size of the
DWL depends on the change in average
hourly wages, the change in average
hours, and the number of affected EAP
workers with changes in their hours
worked. While the change in average
hourly wages generally tends to be fairly
similar over time, the number of
affected EAP workers increases in years
with updated salary levels and falls in
other years; together these lead to a
slight increase in annual DWL over
time.
TABLE 34—SUMMARY OF PROJECTED DEADWEIGHT LOSS COMPONENT VALUES
Future years
Component
Year 1
Year 2
Year 10
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Standard salary
Average hourly wages (holding hours constant)
Pre ........................................................................................................................................
Post a ....................................................................................................................................
Change .................................................................................................................................
Change in average overtime hours .............................................................................................
Affected EAP workers (1,000s) ...................................................................................................
DWL
Per worker per week ............................................................................................................
Nominal annual (millions) .....................................................................................................
Real annual (millions of FY2017$) .......................................................................................
$14.86
$15.55
$0.69
¥0.40
803
$14.94
$15.45
$0.51
¥0.76
778
$17.59
$18.20
$0.61
¥0.79
903
$0.14
$5.8
$5.8
$0.20
$7.9
$7.9
$0.24
$11.3
$9.2
HCE
Average hourly wages (holding hours constant)
Pre ........................................................................................................................................
Post a ....................................................................................................................................
Change .................................................................................................................................
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$42.84
$44.85
$2.01
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$42.51
$43.96
$1.45
$45.03
$46.56
$1.53
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TABLE 34—SUMMARY OF PROJECTED DEADWEIGHT LOSS COMPONENT VALUES—Continued
Future years
Component
Year 1
Year 2
Change in average overtime hours .............................................................................................
Affected EAP workers (1,000s) ...................................................................................................
DWL
Per worker per week ............................................................................................................
Nominal annual (millions) .....................................................................................................
Real annual (millions of FY2017$) .......................................................................................
Year 10
¥0.37
31
¥0.69
34
¥0.68
83
$0.38
$0.61
$0.61
$0.50
$0.88
$0.87
$0.52
$2.25
$1.85
Note: DWL analysis is limited to workers in Types 2 and 3 who experience hour adjustments.
a Despite general growth in wages, the average wage may fall slightly from Year 1 to Year 2 because the population has changed.
3. Comparison to Projections With
Alternative Methods
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This section presents estimated
projected impacts without automatic
updating and using the CPI–U to
automatically update salary levels.
Projections without automatic updating
are shown so impacts of the initial
increase and subsequent increases can
be disaggregated. Projections using the
CPI–U are included because this
alternative was proposed as a potential
method in the NPRM.
For the CPI–U method, the
Department used the predicted change
in annual CPI–U values for FY2017
through FY2026 from the Congressional
Budget Office.262 For example, inflation
based on the CPI–U for FY2017,
FY2018, and FY2019 is predicted to be
2.2, 2.4, and 2.4 percent, respectively;
therefore, the projected salary level for
Year 4 (the year of the first salary level
update) is $978 ($913 × 1.022 × 1.024 ×
1.024). In other years, predicted
inflation based on the CPI–U was
projected to be 2.4 percent.
Table 35 shows projected numbers of
affected workers, costs, and transfers
with these alternative methods. With
triennial automatic updating as adopted
in this Final Rule, the number of
affected EAP workers would increase
from 4.2 million to 5.3 million over 10
years. With triennial automatic updating
using the CPI–U, the number of affected
EAP workers would increase from 4.2
million to 5.4 million over 10 years.
Conversely, in the absence of automatic
updating, the number of affected EAP
workers is projected to decline from 4.2
to 3.0 million.
The three costs to employers
previously considered are (1) regulatory
familiarization costs, (2) adjustment
costs, and (3) managerial costs.
Regulatory familiarization costs do not
vary depending on whether the fixed
percentile method or the CPI–U method
is used for automatic updating, and are
only slightly lower without automatic
updating. Adjustment costs and
managerial costs are a function of the
number of affected EAP workers and so
will be higher with automatic updating.
Average annualized direct costs were
projected to be very similar with the
fixed percentile method and the CPI–U
method: $295.1 million and $294.7
million, respectively. Average
annualized direct costs are lower
without automatic updating because
fewer workers will be affected ($249.8
million).
Average annualized transfers and
DWL follow a similar pattern: estimates
are very similar for the fixed percentile
method and the CPI–U method, but are
lower without automatic updating.
Average annualized transfers are
$1,189.1 million with the fixed earnings
percentile, $1,172.6 million with the
CPI–U method, and $873.5 million
without automatic updating. Average
annualized DWL is $9.2 million with
the fixed earnings percentile, $9.2
million with the CPI–U method, and
$7.7 million without automatic
updating.
262 Congressional Budget Office. (2016). The
Budget and Economic Outlook: 2016 to 2026. Pub.
No. 51129. Table E–2.
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32512
Fiscal Year Fixed Without CPI(Year#)
Perc. Updates
u
Fixed
Perc.
Without
Updates
CPI-U
Frm 00124
unknown. It is neither reported by
employers to any central agency nor
asked in either an employee or
PO 00000
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Fmt 4701
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establishment survey.263 The
23MYR2
263 RAND recently released results from a survey
conducted to estimate EAP exempt workers.
Rohwedder, S. and Wenger, J.B. (2015). The Fair
Labor Standards Act: Worker Misclassification and
E:\FR\FM\23MYR2.SGM
ER23MY16.009</GPH>
Fixed
Perc.
Without
Updates
CPI-U
Fixed Without
Perc. Updates
CPI-
u
(Millions FY20 17$)
Year
2017 (1)
2018 (2)
2019 (3)
2020 (4)
2021 (5)
2022 (6)
2023 (7)
2024 (8)
2025 (9)
2026
(10)
Average
Annualized
3% real
rate
7% real
rate
4.2
4.0
3.9
4.6
4.4
4.3
5.0
4.8
4.6
4.2
4.0
3.9
3.8
3.6
3.5
3.3
3.2
3.1
4.2
4.0
3.9
4.5
4.4
4.2
5.0
4.8
4.6
$677.9
$208.0
$202.6
$265.7
$226.5
$220.5
$273.7
$238.6
$233.1
$677.9
$208.0
$202.6
$197.8
$190.4
$181.7
$173.4
$164.9
$157.6
$677.9
$208.0
$202.6
$258.7
$222.6
$218.8
$278.1
$239.5
$232.8
$1,285.2 $1,285.2 $1,285.2 $6.4
$936.5
$936.5
$936.5
$8.7
$911.6
$911.6
$911.6
$8.5
$1,247.0 $878.7 $1,176.1 $9.8
$1,159.2 $834.9 $1,079.4 $9.6
$1,037.8 $793.2 $1,006.7 $9.4
$1,422.6 $753.3 $1,416.7 $10.2
$1,305.3 $711.9 $1,306.4 $10.0
$1,207.6 $669.7 $1,175.1 $10.1
$6.4
$8.7
$8.5
$8.4
$8.1
$7.7
$7.5
$7.3
$7.2
$6.4
$8.7
$8.5
$9.6
$9.4
$9.4
$10.3
$10.1
$10.1
5.3
3.0
5.4
$284.2
$150.7
$292.1
$1,607.2
$649.2
$1,678.0 $11.1
$7.3
$11.3
--
--
--
$288.0
$238.7
$287.9 $1,201.6
$855.9
$1,185.9
$9.3
$7.7
$9.3
--
--
--
$295.1
$249.8
$294.7 $1,189.1
$873.5
$1,172.6
$9.2
$7.7
$9.2
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Appendix A: Methodology for
Estimating Exemption Status
23:22 May 20, 2016
The number of workers exempt under
the FLSA’s part 541 regulations is
VerDate Sep<11>2014
Table 35: Comparison of Projected Costs and Transfers with Alternative Methods, Standard and HCE Salary Levels
Affected EAP
Costs
Transfers
DWL
Workers
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
Department estimated the number of
exempt workers using the following
methodology. This methodology is
based largely on the approach used
during the 2004 revisions.264 This
appendix expands on the methodology
description in the Final Rule.
A.1
The Duties Tests Probability Codes
The CPS MORG data do not include
information about job duties. To
determine whether a worker meets the
duties test the Department employs the
methodology it used in the 2004 Final
Rule. Each occupation is assigned a
probability representing the odds that a
worker in that occupation would pass
the duties test. For the EAP duties test,
the five probability intervals are:
• Category 0: Occupations not likely
to include any workers eligible for the
EAP exemptions.
• Category 1: Occupations with
probabilities between 90 and 100
percent.
• Category 2: Occupations with
probabilities between 50 and 90 percent.
• Category 3: Occupations with
probabilities between 10 and 50 percent.
• Category 4: Occupations with
probabilities between 0 and 10
percent.265
The occupations identified in this
classification system represent an earlier
occupational classification scheme (the
1990 Census Codes). Therefore, an
occupational crosswalk was used to
map the previous occupational codes to
the 2002 Census occupational codes
which are used in the CPS MORG 2002
through 2010 data.266 267 When the new
occupational category was comprised of
more than one previous occupation, the
Department assigned a probability
category using the weighted average of
the previous occupations’ probabilities,
rounded to the closest category code.
Next, the Department must determine
which workers to classify as exempt.
For example, the probability codes
indicate that out of every ten public
relation managers between five and nine
are exempt; however, the Department
does not know which five to nine
workers are exempt. Exemption status
could be randomly assigned but this
would bias the earnings of exempt
workers downward, since higher paid
workers are more likely to perform the
required duties. Therefore, the
probability of being classified as exempt
should increase with earnings. First, the
Department assigned the upper bound
of the probability range in each
32513
exemption category to workers with topcoded weekly earnings. For all other
white collar salaried workers earning at
least $455 per week in each exemption
category,268 the Department estimated
the probability of exemption for each
worker in the data based on both
occupation and earnings using a gamma
distribution.269 For the gamma
distribution, the shape parameter alpha
was set to the squared quotient of the
sample mean divided by the sample
standard deviation, and the scale
parameter beta was set to the sample
variance divided by the sample mean.
These parameter calculations are based
on the method described in the 2004
rulemaking, except for the use of the
standard deviation instead of the
standard error.270 Table A1 shows that
the expected number of exempt workers
is similar when using a gamma
distribution method and assigning the
midpoint of each probability code range
to all workers in that probability code.
After determining the probabilities of
exemption for each worker in the data
(dependent on both occupation and
earnings), the Department randomly
assigns exemption status to each
worker, conditional on the worker’s
probability of exemption.
TABLE A1—COMPARISON OF EAP-EXEMPT WORKER ESTIMATES A
Midpoint
probability
Probability code category
Gamma
distribution
model
High probability of exemption (1) ................................................................................................................
Probably exempt (2) ....................................................................................................................................
Probably not exempt (3) ..............................................................................................................................
Low or no probability of exemption (4) ........................................................................................................
23,134,055
4,808,003
1,675,615
277,473
23,165,165
4,792,536
1,644,144
287,310
Total ......................................................................................................................................................
29,895,146
29,889,154
a Numbers
shown are the expected value of the number of workers exempt in each of the four probability code categories.
mstockstill on DSK3G9T082PROD with RULES2
The 2004 Final Rule assigned
probabilities for whether workers in
each occupation would pass the HCE
abbreviated duties test if they earned
$100,000 or more in total annual
compensation; these probabilities are:
• Category 0: Occupations not likely
to include any workers eligible for the
HCE exemption.
• Category 1: Occupations with a
probability of 100 percent.
• Category 2: Occupations with
probabilities between 94 and 96 percent.
• Category 3: Occupations with
probabilities between 58.4 and 60
percent.
• Category 4: Occupations with a
probability of 15 percent.
Like under the standard test, there is
a positive relationship between earnings
and exemption status; however, unlike
the standard test, the relationship for
the HCE analysis can be represented
the Hours and Earnings Effects of Expanded
Coverage. RAND Labor and Population.
264 69 FR 22196–22209 (Apr. 23, 2004).
265 Table A2 lists the probability codes by
occupation used to estimate exemption status.
266 To match 1990 Census Codes to the
corresponding 2000 Census Codes see: https://
www.census.gov/people/io/methodology/. To
translate the 2000 Census Codes into the 2002
Census Codes each code is multiplied by 10.
267 Beginning January 2011, the MORG data use
the 2010 Census Codes. The Department translates
these codes into the equivalent 2002 Census Codes
to create continuity. The crosswalk is available at:
https://www.census.gov/people/io/methodology/.
268 Also included are all workers who are in
occupational categories associated with named
occupations.
269 A gamma distribution is a general type of
statistical distribution that is based on two
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well with a linear earnings function.
Once individual probabilities are
determined, workers are randomly
assigned to exemption status.
A.2
Other Exemptions
There are many other exemptions to
the minimum wage and overtime pay
provisions of the FLSA. Accordingly, in
the 2004 Final Rule, the Department
excluded workers in agriculture and
certain transportation occupations from
parameters, in this case alpha and beta. The gamma
distribution was chosen because during the 2004
revision it fit the data the best of the non-linear
distributions considered, which included normal,
lognormal, and gamma. 69 FR 22204–08.
270 Since the sample standard deviation is much
larger than the standard error, using the sample
standard deviation to calculate the shape and
location parameters resulted in probabilities that
vary more with earnings.
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the analysis. The Department now is, in
addition, estimating those workers who
fall under one of the other exemptions
in section 13(a) of the FLSA, because
such workers are exempt from both
minimum wage and overtime pay under
the relevant section and would remain
exempt regardless of any changes to the
EAP exemption. In fact, many of the
workers estimated below as falling
within one of the section 13(a)
exemptions will already have been
excluded from the analysis because they
are paid on an hourly basis or are in a
blue collar occupation. The
methodology for identifying the workers
who fall under the section 13(a)
exemptions is explained here and is
based generally on the methodology the
Department used in 1998 when it issued
its last report under section 4(d) of the
FLSA.
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A.2.1 Section 13(a)(1) Outside Sales
Workers
Outside sales workers are a subset of
the section 13(a)(1) exemptions, but
since they are not affected by the salary
regulations they are not discussed in
detail in the preamble. Outside sales
workers are included in occupational
category ‘‘door-to-door sales workers,
news and street vendors, and related
workers’’ (Census code 4950). This
category is composed of workers who
both would and would not qualify for
the outside sales worker exemption; for
example, street vendors would not
qualify. Therefore, the percentage of
these workers that qualify for the
exemption was estimated. The
Department believes that, under the
1990 Census Codes system, outside
sales workers were more or less
uniquely identified with occupational
category ‘‘street & door-to-door sales
workers’’ (277). Therefore, the
Department exempts the share of
workers in category 4950 who would
have been classified as code 277 (43
percent) under the old classification
system.
A.2.2 Agricultural Workers
Similar to the 2004 analysis, the
Department excluded agricultural
workers from the universe of affected
employees. In the 2004 Final Rule all
workers in agricultural industries were
excluded; however, here only workers
also in select occupations were
excluded since not all workers in
agricultural industries qualify for the
agricultural overtime pay exemptions.
This method better approximates the
true number of exempt agricultural
workers and provides a more
conservative estimate of the number of
affected workers. Industry categories
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include: ‘‘crop production’’ (0170),
‘‘animal production’’ (0180), and
‘‘support activities for agriculture and
forestry’’ (0290). Occupational
categories include all blue collar
occupations (identified with the
probability codes), ‘‘farm, ranch, and
other agricultural managers’’ (0200),
‘‘general and operations managers’’
(0020), and ‘‘first-line supervisors/
managers of farming, fishing, and
forestry workers’’ (6000).
A.2.3
Other Section 13(a) Exemptions
The following methodology relies
mainly on CPS MORG data but also
incorporates alternative data sources
when necessary.
Section 13(a)(3): Seasonal amusement
and recreational establishment
Any employee of an amusement or
recreational establishment may be
exempt from minimum wage and
overtime pay if the establishment meets
either of the following tests: (a) It
operates for seven months or less during
any calendar year, or (b) its revenue for
the six lowest months of the year is less
than one-third of the other six months
of such year. Amusement and
recreational establishments are defined
as ‘‘establishments frequented by the
public for its amusement or recreation,’’
and ‘‘typical examples of such are the
concessionaires at amusement parks and
beaches.’’ 271 In the CPS MORG data the
Department identifies general
amusement and recreation in the
following industry categories:
• ‘‘independent artists, performing
arts, spectator sports, and related
industries’’ (8560),
• ‘‘museums, art galleries, historical
sites, and similar institutions’’ (8570),
• ‘‘bowling centers’’ (8580),
• ‘‘other amusement, gambling, and
recreation industries’’ (8590), and
• ‘‘recreational vehicle parks and
camps, and rooming and boarding
houses’’ (8670).272
The CPS MORG data does not provide
information on employers’ operating
information or revenue. Using Business
Employment Dynamics (BED) data, the
Department estimated the share of
leisure and hospitality employees
working for establishments that are
closed for at least one quarter a year.273
271 § 779.385.
272 The Department does not believe that all
employees in this industry category would qualify
for this exemption. However, we had no way to
segregate in the data employees who would and
would not qualify for exemption.
273 Seasonal employment was calculated by
taking the difference in employment between
establishment openings (all establishments that are
either opening for the first time or reopening) and
establishment births (establishments that are
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Although not technically the same as
the FLSA definition of ‘‘seasonal,’’ this
is the best available approximation of
‘‘seasonal’’ employees. The Department
estimated that 2.8 percent of amusement
and recreational workers will be
exempt.
The 1998 section 4(d) report
estimated the number of exempt
workers by applying an estimate
determined in 1987 by a detailed report
from the Employment Standards
Administration. The Department chose
not to use this estimate because it is
outdated.
Section 13(a)(3) also exempts
employees of seasonal religious or nonprofit educational centers, but many of
these workers have already been
excluded from the analysis either as
religious workers (not covered by the
FLSA) or as teachers (professional
exemption) and so are not estimated.
Section 13(a)(5): Fishermen
Any employee, such as a fisherman,
employed in the catching, harvesting, or
farming of fish or other aquatic life
forms, is exempt from minimum wage
and overtime pay. Fishermen are
identified in occupational categories
‘‘fishers and related fishing workers’’
(6100) and ‘‘ship and boat captains and
operators’’ (9310) and the industry
category ‘‘fishing, hunting, and
trapping’’ (0280). Workers identified in
both these occupational and industry
categories are considered exempt.
Section 13(a)(8): Small, local
newspapers
This exemption from minimum wage
and overtime pay applies to any
employee employed by a newspaper
with circulation of less than 4,000 and
circulated mainly within the county
where published. Newspaper employees
are identified in the following
occupational categories:
• ‘‘news analysts, reporters and
correspondents’’ (2810),
• ‘‘editors’’ (2830),
• ‘‘technical writers’’ (2840),
• ‘‘writers and authors’’ (2850), and
• ‘‘miscellaneous media and
communication workers’’ (2860).
opening for the first time)—resulting in
employment in only establishments reopening.
Similarly, seasonal employment was estimated by
taking the difference in employment between
establishment closings and establishment deaths.
These two estimates were then averaged. The
analysis is limited to the leisure and hospitality
industry. Since the exemption is limited to workers
in ‘‘establishments frequented by the public for its
amusement or recreation’’ the Department must
assume the rate of employment in seasonal
establishments, relative to all establishments, is
equivalent across these amusement or recreation
establishments and all leisure and hospitality
establishments.
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The exemption is limited to the
industry category ‘‘newspaper
publishers’’ (6470). To limit the
exemption to small, local papers, the
Department limits the exemption to
employees in rural areas. Although
employment in a rural area is not
synonymous with employment at a
small newspaper, this is the best
approach currently available.
Alternatively, the Department could use
data from Dun and Bradstreet (D&B) as
was done in the 1998 section 4(d)
report. This data would provide
information on which establishments
are in rural areas; from this the
Department could estimate the share of
employment in rural areas. This
approach would be much more time
intensive but would not necessarily
provide a better result.
Section 13(a)(10): Switchboard
operators
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An independently owned public
telephone company that has not more
than 750 stations may claim the
minimum wage and overtime pay
exemption for its switchboard operators.
‘‘Switchboard operators, including
answering service’’, are exempt under
occupation code 5010 and industry
classifications ‘‘wired
telecommunications carriers’’ (6680)
and ‘‘other telecommunications
carriers’’ (6690). Using the 2012
Economic Census, the Department
estimated that 1.6 percent of employees
in the telecommunication industry
(NAICS 517) are employed by firms
with fewer than ten employees (the
estimated level of employment
necessary to service seven hundred and
fifty stations). According to the 1998
section 4(d) report, fewer than 10,000
workers were exempt in 1987 and so at
that time the Department did not
develop a methodology for estimating
the number exempt.
Section 13(a)(12): Seamen on foreign
vessels
Any employee employed as a seaman
on a vessel other than an American
vessel is exempt from minimum wage
and overtime pay. Seamen are identified
by occupational categories:
• ‘‘sailors and marine oilers’’ (9300),
• ‘‘ship and boat captains and
operators’’ (9310), and
• ‘‘ship engineers’’ (9570).
The CPS MORG data do not identify
whether the vessel is foreign or
domestic. The best approach the
Department has devised is to assume
that the number of workers in the
occupation ‘‘deep sea foreign
transportation of freight’’ (SIC 441) in
2000 is roughly equivalent to the
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number of workers on foreign vessels.274
The 2001 Occupational Employment
Statistics estimates there were 13,290
workers in this occupation and thus that
number of seamen are assigned exempt
status on a random basis.
Section 13(a)(15): Companions
Domestic service workers employed
to provide ‘‘companionship services’’
for an elderly person or a person with
an illness, injury, or disability are not
required to be paid the minimum wage
or overtime pay. Companions are
classified under occupational categories:
• ‘‘nursing, psychiatric, and home
health aides’’ (3600) and
• ‘‘personal and home care aides’’
(4610).
And industry categories:
• ‘‘home health care services’’ (8170),
• ‘‘individual and family services’’
(8370), and
• ‘‘private households’’ (9290).
All the workers who fall within these
occupational and industry categories
were previously excluded from the
analysis because they are in occupations
where workers have no likelihood of
qualifying for the section 13(a)(1)
exemption.
Section 13(a)(16): Criminal investigators
The criminal investigator must be
employed by the federal government
and paid ‘‘availability pay.’’ 275 Criminal
investigators are identified in
occupational categories:
• ‘‘detectives and criminal
investigators’’ (3820),
• ‘‘fish and game wardens’’ (3830),
and
• ‘‘private detectives and
investigators’’ (3910).
This exemption was not mentioned in
the 1998 section 4(d) report. The
Department exempts all workers in the
occupations identified above and
employed by the federal government
(PEIO1COW value equal to one).
Section 13(a)(17): Computer workers
Computer workers who meet the
duties test are exempt under two
sections of the FLSA. Salaried computer
workers who earn a weekly salary of not
less than $455 are exempt under section
13(a)(1) and computer workers who are
paid hourly are exempt under section
13(a)(17) if they earn at least $27.63 an
hour. Occupations that may be
considered exempt include: ‘‘Computer
and information systems managers’’
274 The SIC classification system has been
replaced with NAICS; thus, more recent data are not
available.
275 Availability pay is compensation for hours
when the agent must be available to perform work
over and above the standard 40 hours per week. See
https://www.opm.gov/oca/pay/HTML/AP.HTM.
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32515
(110), ‘‘computer scientists and systems
analysts’’ (1000), ‘‘computer
programmers’’ (1010), ‘‘computer
software engineers’’ (1020), ‘‘computer
support specialists’’ (1040), ‘‘database
administrators’’ (1060), ‘‘network and
computer systems administrators’’
(1100), ‘‘network systems and data
communications analysts’’ (1110),
‘‘computer operators’’ (5800), and
‘‘computer control programmers and
operators’’ (7900).
To identify computer workers exempt
under section 13(a)(17), the Department
restricts the population to workers who
are paid on an hourly basis and who
earn at least $27.63 per hour. To
determine which of these workers pass
the computer duties test, we use the
probabilities of exemption assigned to
these occupations by the Department
and assume a linear relationship
between earnings and exemption status.
Note that none of these workers are
impacted by the rulemaking because
they are paid on an hourly basis.
A.2.4
Section 13(b) Exemptions
Section 13(b)(1): Motor carrier
employees
This exemption eliminated overtime
pay for ‘‘any employee with respect to
whom the Secretary of Transportation
has power to establish qualifications
and maximum hours of service pursuant
to the provisions of Section 31502 of
Title 49.’’ 276 In essence, these are motor
carrier workers, identified by industry
category ‘‘truck transportation’’ (6170).
To be exempt, these workers must
engage in ‘‘safety affecting activities.’’
Examples of exempt occupations
include: ‘‘driver, driver’s helper, loader,
or mechanic.’’ 277 The relevant
occupational categories are:
• ‘‘electronic equipment installers
and repairers, motor vehicles’’ (7110),
• ‘‘automotive service technicians
and mechanics’’ (7200),
• ‘‘bus and truck mechanics and
diesel engine specialists’’ (7210),
• ‘‘heavy vehicle and mobile
equipment service technicians and
mechanics’’ (7220), and
• ‘‘driver/sales workers and truck
drivers’’ (9130).278
Section 13(b)(2): Rail carrier employees
276 49 U.S.C. 31502. The text of the law is
available at: https://www.gpo.gov/fdsys/pkg/
USCODE-2011-title49/html/USCODE-2011-title49subtitleVI-partB-chap315-sec31502.htm.
277 Fact Sheet #19: The Motor Carrier Exemption
under the Fair Labor Standards Act (FLSA).
278 The 2004 methodology used 1990 Census
codes 505, 507, and 804 which crosswalk to these
occupations. However, occupations 605, 613, and
914 (included in the 1990 Census code 804) were
excluded because under the new classification
system they were deemed irrelevant.
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Section 13(b)(2) exempts ‘‘any
employee of an employer engaged in the
operation of a rail carrier subject to part
A of subtitle IV of Title 49.’’ 279 This
includes industrial category ‘‘rail
transportation’’ (6080). The 1998
methodology did not include
occupational requirements but the 2004
methodology did, so this restriction was
included. Occupations are limited to:
• ‘‘locomotive engineers and
operators’’ (9200),
• ‘‘railroad brake, signal, and switch
operators’’ (9230),
• ‘‘railroad conductors and
yardmasters’’ (9240), and
• ‘‘subway, streetcar, and other rail
transportation workers’’ (9260).
Section 13(b)(3): Air carrier employees
This section exempts employees
subject to the ‘‘provisions of title II of
the Railway Labor Act.’’ 280 In essence,
this exempts air carrier employees,
identified by industry category ‘‘air
transportation’’ (6070). The 1998
methodology did not include
occupational requirements but the 2004
methodology did, so this restriction was
included. Occupations are limited to
‘‘aircraft pilots and flight engineers’’
(9030) and ‘‘aircraft mechanics and
service technicians’’ (7140).
Section 13(b)(6): Seamen
Occupational categories include
‘‘sailors and marine oilers’’ (9300),
‘‘ship and boat captains and operators’’
(9310), and ‘‘ship engineers’’ (9570).281
The exemption is limited to the ‘‘water
transportation’’ industry (6090).
Section 13(b)(10): Salesmen, partsmen,
or mechanics
The Department limited this
exemption to workers employed in a
‘‘nonmanufacturing establishment
primarily engaged in the business of
selling such vehicles or implements to
ultimate purchasers.’’ Industry
classifications include: ‘‘automobile
dealers’’ (4670) and ‘‘other motor
vehicle dealers’’ (4680). In the 2004
Final Rule, the industry was limited to
1990 Census code 612 which became
Census code ‘‘automobile dealers’’
(4670). Category 4680 (‘‘other motor
vehicle dealers’’) is also included here
in keeping with the 1998 section 4(d)
report methodology.
The 1998 methodology did not
include an occupational restriction;
however, the 2004 methodology limited
the exemption to automobiles, trucks, or
farm implement sales workers and
mechanics.
Automobiles, trucks, or farm implement
sales workers include:
• ‘‘parts salespersons’’ (4750), and
• ‘‘retail salespersons’’ (4760).282
Mechanics include:
• ‘‘electronic equipment installers
and repairers, motor vehicles’’ (7110),
• ‘‘automotive body and related
repairers’’ (7150),
• ‘‘automotive glass installers and
repairers’’ (7160),
• ‘‘automotive service technicians
and mechanics’’ (7200),
• ‘‘bus and truck mechanics and
diesel engine specialists’’ (7210),
• ‘‘heavy vehicle and mobile
equipment service technicians and
mechanics’’ (7220),
• ‘‘small engine mechanics’’ (7240),
and
• ‘‘miscellaneous vehicle and mobile
equipment mechanics, installers, and
repairers’’ (7260).283
TABLE A2—PROBABILITY CODES BY OCCUPATION
Occupation
10 .............................
20 .............................
40 .............................
50 .............................
60 .............................
100 ...........................
110 ...........................
120 ...........................
130 ...........................
140 ...........................
150 ...........................
160 ...........................
200 ...........................
210 ...........................
220 ...........................
230 ...........................
300 ...........................
310 ...........................
320 ...........................
330 ...........................
340 ...........................
350 ...........................
360 ...........................
400 ...........................
410 ...........................
420 ...........................
430 ...........................
500 ...........................
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2002
Census
code
Chief executives ................................................................................................................................................
General and operations managers ...................................................................................................................
Advertising and promotions managers .............................................................................................................
Marketing and sales managers .........................................................................................................................
Public relations managers ................................................................................................................................
Administrative services managers ....................................................................................................................
Computer and information systems managers .................................................................................................
Financial managers ...........................................................................................................................................
Human resources managers .............................................................................................................................
Industrial production managers .........................................................................................................................
Purchasing managers .......................................................................................................................................
Transportation, storage, and distribution managers .........................................................................................
Farm, ranch, and other agricultural managers .................................................................................................
Farmers and ranchers .......................................................................................................................................
Construction managers .....................................................................................................................................
Education administrators ...................................................................................................................................
Engineering managers ......................................................................................................................................
Food service managers ....................................................................................................................................
Funeral directors ...............................................................................................................................................
Gaming managers ............................................................................................................................................
Lodging managers ............................................................................................................................................
Medical and health services managers ............................................................................................................
Natural sciences managers ..............................................................................................................................
Postmasters and mail superintendents .............................................................................................................
Property, real estate, and community association managers ..........................................................................
Social and community service managers .........................................................................................................
Managers, all other ...........................................................................................................................................
Agents and business managers of artists, performers, and athletes ...............................................................
279 49 U.S.C. 10101–11908. Text of the law is
available at: https://www.gpo.gov/fdsys/pkg/
USCODE-2013-title49/pdf/USCODE-2013-title49subtitleIV-partA.pdf.
280 45 U.S.C. 181 et seq. Available at: https://
www.gpo.gov/fdsys/pkg/USCODE-2013-title45/
html/USCODE-2013-title45-chap8-subchapII.htm.
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281 The 2004 methodology used 1990 Census
codes 828, 829, and 833 which crosswalk to these
occupations. However, occupation 952 (dredge,
excavating, and loading machine operators) was
excluded because under the new classification
system it was deemed irrelevant.
282 The 2004 methodology used codes 263 and
269 which crosswalk to these codes plus a few
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others which have been deemed irrelevant and
excluded (4700, 4740, and 4850).
283 The 2004 methodology used codes 505, 506,
507, and 514 which generally crosswalk to these
codes. A few additional codes were added which
were deemed relevant (7240 and 7260).
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1
1
2
1
1
1
1
1
1
1
3
0
1
1
1
3
2
2
3
1
1
0
3
1
1
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32517
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
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2002
Census
code
Occupation
510 ...........................
520 ...........................
530 ...........................
540 ...........................
560 ...........................
600 ...........................
620 ...........................
700 ...........................
710 ...........................
720 ...........................
730 ...........................
800 ...........................
810 ...........................
820 ...........................
830 ...........................
840 ...........................
850 ...........................
860 ...........................
900 ...........................
910 ...........................
930 ...........................
940 ...........................
950 ...........................
1000 .........................
1010 .........................
1020 .........................
1040 .........................
1060 .........................
1100 .........................
1110 .........................
1200 .........................
1210 .........................
1220 .........................
1230 .........................
1240 .........................
1300 .........................
1310 .........................
1320 .........................
1330 .........................
1340 .........................
1350 .........................
1360 .........................
1400 .........................
1410 .........................
1420 .........................
1430 .........................
1440 .........................
1450 .........................
1460 .........................
1500 .........................
1510 .........................
1520 .........................
1530 .........................
1540 .........................
1550 .........................
1560 .........................
1600 .........................
1610 .........................
1640 .........................
1650 .........................
1700 .........................
1710 .........................
1720 .........................
1740 .........................
1760 .........................
1800 .........................
1810 .........................
1820 .........................
1830 .........................
1840 .........................
Purchasing agents and buyers, farm products .................................................................................................
Wholesale and retail buyers, except farm products .........................................................................................
Purchasing agents, except wholesale, retail, and farm products .....................................................................
Claims adjusters, appraisers, examiners, and investigators ............................................................................
Compliance officers, except agriculture, construction, health and safety, and transportation .........................
Cost estimators .................................................................................................................................................
Human resources, training, and labor relations specialists ..............................................................................
Logisticians .......................................................................................................................................................
Management analysts .......................................................................................................................................
Meeting and convention planners .....................................................................................................................
Other business operations specialists ..............................................................................................................
Accountants and auditors .................................................................................................................................
Appraisers and assessors of real estate ..........................................................................................................
Budget analysts ................................................................................................................................................
Credit analysts ..................................................................................................................................................
Financial analysts .............................................................................................................................................
Personal financial advisors ...............................................................................................................................
Insurance underwriters .....................................................................................................................................
Financial examiners ..........................................................................................................................................
Loan counselors and officers ............................................................................................................................
Tax examiners, collectors, and revenue agents ...............................................................................................
Tax preparers ....................................................................................................................................................
Financial specialists, all other ...........................................................................................................................
Computer scientists and systems analysts .......................................................................................................
Computer programmers ....................................................................................................................................
Computer software engineers ...........................................................................................................................
Computer support specialists ............................................................................................................................
Database administrators ...................................................................................................................................
Network and computer systems administrators ................................................................................................
Network systems and data communications analysts ......................................................................................
Actuaries ...........................................................................................................................................................
Mathematicians .................................................................................................................................................
Operations research analysts ...........................................................................................................................
Statisticians .......................................................................................................................................................
Miscellaneous mathematical science occupations ...........................................................................................
Architects, except naval ....................................................................................................................................
Surveyors, cartographers, and photogrammetrists ...........................................................................................
Aerospace engineers ........................................................................................................................................
Agricultural engineers .......................................................................................................................................
Biomedical engineers ........................................................................................................................................
Chemical engineers ..........................................................................................................................................
Civil engineers ..................................................................................................................................................
Computer hardware engineers .........................................................................................................................
Electrical and electronic engineers ...................................................................................................................
Environmental engineers ..................................................................................................................................
Industrial engineers, including health and safety .............................................................................................
Marine engineers and naval architects .............................................................................................................
Materials engineers ...........................................................................................................................................
Mechanical engineers .......................................................................................................................................
Mining and geological engineers, including mining safety engineers ..............................................................
Nuclear engineers .............................................................................................................................................
Petroleum engineers .........................................................................................................................................
Engineers, all other ...........................................................................................................................................
Drafters .............................................................................................................................................................
Engineering technicians, except drafters ..........................................................................................................
Surveying and mapping technicians .................................................................................................................
Agricultural and food scientists .........................................................................................................................
Biological scientists ...........................................................................................................................................
Conservation scientists and foresters ...............................................................................................................
Medical scientists ..............................................................................................................................................
Astronomers and physicists ..............................................................................................................................
Atmospheric and space scientists ....................................................................................................................
Chemists and materials scientists ....................................................................................................................
Environmental scientists and geoscientists ......................................................................................................
Physical scientists, all other ..............................................................................................................................
Economists ........................................................................................................................................................
Market and survey researchers ........................................................................................................................
Psychologists ....................................................................................................................................................
Sociologists .......................................................................................................................................................
Urban and regional planners ............................................................................................................................
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E:\FR\FM\23MYR2.SGM
23MYR2
2
2
2
2
3
1
2
1
2
2
2
1
3
2
2
2
2
1
3
2
1
2
2
1
2
1
1
1
1
1
1
1
1
1
1
1
3
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
4
4
4
1
1
1
1
1
1
1
1
3
2
2
1
2
3
32518
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
mstockstill on DSK3G9T082PROD with RULES2
2002
Census
code
1860
1900
1910
1920
1930
1940
1960
2000
2010
2020
2040
2050
2060
2100
2110
2140
2150
2200
2300
2310
2320
2330
2340
2400
2430
2440
2540
2550
2600
2630
2700
2710
2720
2740
2750
2760
2800
2810
2820
2830
2840
2850
2860
2900
2910
2920
2960
3000
3010
3030
3040
3050
3060
3110
3120
3130
3140
3150
3160
3200
3210
3220
3230
3240
3250
3260
3300
3310
3320
3400
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VerDate Sep<11>2014
Probability
code
Occupation
Miscellaneous social scientists and related workers ........................................................................................
Agricultural and food science technicians ........................................................................................................
Biological technicians ........................................................................................................................................
Chemical technicians ........................................................................................................................................
Geological and petroleum technicians ..............................................................................................................
Nuclear technicians ...........................................................................................................................................
Other life, physical, and social science technicians .........................................................................................
Counselors ........................................................................................................................................................
Social workers ...................................................................................................................................................
Miscellaneous community and social service specialists .................................................................................
Clergy ................................................................................................................................................................
Directors, religious activities and education .....................................................................................................
Religious workers, all other ...............................................................................................................................
Lawyers .............................................................................................................................................................
Judges, magistrates, and other judicial workers ..............................................................................................
Paralegals and legal assistants ........................................................................................................................
Miscellaneous legal support workers ................................................................................................................
Postsecondary teachers ...................................................................................................................................
Preschool and kindergarten teachers ...............................................................................................................
Elementary and middle school teachers ...........................................................................................................
Secondary school teachers ..............................................................................................................................
Special education teachers ...............................................................................................................................
Other teachers and instructors .........................................................................................................................
Archivists, curators, and museum technicians .................................................................................................
Librarians ..........................................................................................................................................................
Library Technicians ...........................................................................................................................................
Teacher assistants ............................................................................................................................................
Other education, training, and library workers ..................................................................................................
Artists and related workers ...............................................................................................................................
Designers ..........................................................................................................................................................
Actors ................................................................................................................................................................
Producers and directors ....................................................................................................................................
Athletes, coaches, umpires, and related workers .............................................................................................
Dancers and choreographers ...........................................................................................................................
Musicians, singers, and related workers ..........................................................................................................
Entertainers and performers, sports and related workers, all other .................................................................
Announcers .......................................................................................................................................................
News analysts, reporters and correspondents .................................................................................................
Public relations specialists ................................................................................................................................
Editors ...............................................................................................................................................................
Technical writers ...............................................................................................................................................
Writers and authors ..........................................................................................................................................
Miscellaneous media and communication workers ..........................................................................................
Broadcast and sound engineering technicians and radio operators ................................................................
Photographers ...................................................................................................................................................
Television, video, and motion picture camera operators and editors ..............................................................
Media and communication equipment workers, all other .................................................................................
Chiropractors .....................................................................................................................................................
Dentists .............................................................................................................................................................
Dietitians and nutritionists .................................................................................................................................
Optometrists ......................................................................................................................................................
Pharmacists ......................................................................................................................................................
Physicians and surgeons ..................................................................................................................................
Physician assistants ..........................................................................................................................................
Podiatrists .........................................................................................................................................................
Registered nurses .............................................................................................................................................
Audiologists .......................................................................................................................................................
Occupational therapists ....................................................................................................................................
Physical therapists ............................................................................................................................................
Radiation therapists ..........................................................................................................................................
Recreational therapists .....................................................................................................................................
Respiratory therapists .......................................................................................................................................
Speech-language pathologists ..........................................................................................................................
Therapists, all other ..........................................................................................................................................
Veterinarians .....................................................................................................................................................
Health diagnosing and treating practitioners, all other .....................................................................................
Clinical laboratory technologists and technicians .............................................................................................
Dental hygienists ...............................................................................................................................................
Diagnostic related technologists and technicians .............................................................................................
Emergency medical technicians and paramedics ............................................................................................
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3
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
32519
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
mstockstill on DSK3G9T082PROD with RULES2
2002
Census
code
3410
3500
3510
3520
3530
3540
3600
3610
3620
3630
3640
3650
3700
3710
3720
3730
3740
3750
3800
3820
3830
3840
3850
3860
3900
3910
3920
3940
3950
4000
4010
4020
4030
4040
4050
4060
4110
4120
4130
4140
4150
4160
4200
4210
4220
4230
4240
4250
4300
4320
4340
4350
4400
4410
4420
4430
4460
4500
4510
4520
4530
4540
4550
4600
4610
4620
4640
4650
4700
4710
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VerDate Sep<11>2014
Probability
code
Occupation
Health diagnosing and treating practitioner support technicians ......................................................................
Licensed practical and licensed vocational nurses ..........................................................................................
Medical records and health information technicians ........................................................................................
Opticians, dispensing ........................................................................................................................................
Miscellaneous health technologists and technicians ........................................................................................
Other healthcare practitioners and technical occupations ................................................................................
Nursing, psychiatric, and home health aides ....................................................................................................
Occupational therapist assistants and aides ....................................................................................................
Physical therapist assistants and aides ............................................................................................................
Massage therapists ...........................................................................................................................................
Dental assistants ...............................................................................................................................................
Medical assistants and other healthcare support occupations .........................................................................
First-line supervisors/managers of correctional officers ...................................................................................
First-line supervisors/managers of police and detectives .................................................................................
First-line supervisors/managers of fire fighting and prevention workers ..........................................................
Supervisors, protective service workers, all other ............................................................................................
Fire fighters .......................................................................................................................................................
Fire inspectors ..................................................................................................................................................
Bailiffs, correctional officers, and jailers ...........................................................................................................
Detectives and criminal investigators ...............................................................................................................
Fish and game wardens ...................................................................................................................................
Parking enforcement workers ...........................................................................................................................
Police and sheriff’s patrol officers .....................................................................................................................
Transit and railroad police ................................................................................................................................
Animal control workers ......................................................................................................................................
Private detectives and investigators .................................................................................................................
Security guards and gaming surveillance officers ............................................................................................
Crossing guards ................................................................................................................................................
Lifeguards and other protective service workers ..............................................................................................
Chefs and head cooks ......................................................................................................................................
First-line supervisors/managers of food preparation and serving workers ......................................................
Cooks ................................................................................................................................................................
Food preparation workers .................................................................................................................................
Bartenders .........................................................................................................................................................
Combined food preparation and serving workers, including fast food .............................................................
Counter attendants, cafeteria, food concession, and coffee shop ...................................................................
Waiters and waitresses .....................................................................................................................................
Food servers, nonrestaurant .............................................................................................................................
Dining room and cafeteria attendants and bartender helpers ..........................................................................
Dishwashers ......................................................................................................................................................
Hosts and hostesses, restaurant, lounge, and coffee shop .............................................................................
Food preparation and serving related workers, all other ..................................................................................
First-line supervisors/managers of housekeeping and janitorial workers .........................................................
First-line supervisors/managers of landscaping, lawn service, and groundskeeping workers ........................
Janitors and building cleaners ..........................................................................................................................
Maids and housekeeping cleaners ...................................................................................................................
Pest control workers .........................................................................................................................................
Grounds maintenance workers .........................................................................................................................
First-line supervisors/managers of gaming workers .........................................................................................
First-line supervisors/managers of personal service workers ..........................................................................
Animal trainers ..................................................................................................................................................
Nonfarm animal caretakers ...............................................................................................................................
Gaming services workers ..................................................................................................................................
Motion picture projectionists .............................................................................................................................
Ushers, lobby attendants, and ticket takers .....................................................................................................
Miscellaneous entertainment attendants and related workers .........................................................................
Funeral service workers ....................................................................................................................................
Barbers ..............................................................................................................................................................
Hairdressers, hairstylists, and cosmetologists ..................................................................................................
Miscellaneous personal appearance workers ...................................................................................................
Baggage porters, bellhops, and concierges .....................................................................................................
Tour and travel guides ......................................................................................................................................
Transportation attendants .................................................................................................................................
Child care workers ............................................................................................................................................
Personal and home care aides .........................................................................................................................
Recreation and fitness workers ........................................................................................................................
Residential advisors ..........................................................................................................................................
Personal care and service workers, all other ...................................................................................................
First-line supervisors/managers of retail sales workers ...................................................................................
First-line supervisors/managers of non-retail sales workers ............................................................................
23:22 May 20, 2016
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2
32520
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
mstockstill on DSK3G9T082PROD with RULES2
2002
Census
code
4720
4740
4750
4760
4800
4810
4820
4830
4840
4850
4900
4920
4930
4940
4950
4960
5000
5010
5020
5030
5100
5110
5120
5130
5140
5150
5160
5200
5210
5220
5230
5240
5250
5260
5300
5310
5320
5330
5340
5350
5360
5400
5410
5420
5500
5510
5520
5530
5540
5550
5560
5600
5610
5620
5630
5700
5800
5810
5820
5830
5840
5850
5860
5900
5910
5920
5930
6000
6010
6020
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VerDate Sep<11>2014
Probability
code
Occupation
Cashiers ............................................................................................................................................................
Counter and rental clerks .................................................................................................................................
Parts salespersons ...........................................................................................................................................
Retail salespersons ...........................................................................................................................................
Advertising sales agents ...................................................................................................................................
Insurance sales agents .....................................................................................................................................
Securities, commodities, and financial services sales agents ..........................................................................
Travel agents ....................................................................................................................................................
Sales representatives, services, all other .........................................................................................................
Sales representatives, wholesale and manufacturing ......................................................................................
Models, demonstrators, and product promoters ...............................................................................................
Real estate brokers and sales agents ..............................................................................................................
Sales engineers ................................................................................................................................................
Telemarketers ...................................................................................................................................................
Door-to-door sales workers, news and street vendors, and related workers ..................................................
Sales and related workers, all other .................................................................................................................
First-line supervisors/managers of office and administrative support workers ................................................
Switchboard operators, including answering service ........................................................................................
Telephone operators .........................................................................................................................................
Communications equipment operators, all other ..............................................................................................
Bill and account collectors ................................................................................................................................
Billing and posting clerks and machine operators ............................................................................................
Bookkeeping, accounting, and auditing clerks .................................................................................................
Gaming cage workers .......................................................................................................................................
Payroll and timekeeping clerks .........................................................................................................................
Procurement clerks ...........................................................................................................................................
Tellers ...............................................................................................................................................................
Brokerage clerks ...............................................................................................................................................
Correspondence clerks .....................................................................................................................................
Court, municipal, and license clerks .................................................................................................................
Credit authorizers, checkers, and clerks ..........................................................................................................
Customer service representatives ....................................................................................................................
Eligibility interviewers, government programs ..................................................................................................
File Clerks .........................................................................................................................................................
Hotel, motel, and resort desk clerks .................................................................................................................
Interviewers, except eligibility and loan ............................................................................................................
Library assistants, clerical .................................................................................................................................
Loan interviewers and clerks ............................................................................................................................
New accounts clerks .........................................................................................................................................
Order clerks ......................................................................................................................................................
Human resources assistants, except payroll and timekeeping ........................................................................
Receptionists and information clerks ................................................................................................................
Reservation and transportation ticket agents and travel clerks .......................................................................
Information and record clerks, all other ............................................................................................................
Cargo and freight agents ..................................................................................................................................
Couriers and messengers .................................................................................................................................
Dispatchers .......................................................................................................................................................
Meter readers, utilities ......................................................................................................................................
Postal service clerks .........................................................................................................................................
Postal service mail carriers ...............................................................................................................................
Postal service mail sorters, processors, and processing machine operators ..................................................
Production, planning, and expediting clerks .....................................................................................................
Shipping, receiving, and traffic clerks ...............................................................................................................
Stock clerks and order fillers ............................................................................................................................
Weighers, measurers, checkers, and samplers, recordkeeping ......................................................................
Secretaries and administrative assistants ........................................................................................................
Computer operators ..........................................................................................................................................
Data entry keyers ..............................................................................................................................................
Word processors and typists ............................................................................................................................
Desktop publishers ...........................................................................................................................................
Insurance claims and policy processing clerks ................................................................................................
Mail clerks and mail machine operators, except postal service .......................................................................
Office clerks, general ........................................................................................................................................
Office machine operators, except computer .....................................................................................................
Proofreaders and copy markers .......................................................................................................................
Statistical assistants ..........................................................................................................................................
Office and administrative support workers, all other ........................................................................................
First-line supervisors/managers of farming, fishing, and forestry workers .......................................................
Agricultural inspectors .......................................................................................................................................
Animal breeders ................................................................................................................................................
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3
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
32521
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
mstockstill on DSK3G9T082PROD with RULES2
2002
Census
code
6040
6050
6100
6110
6120
6130
6200
6210
6220
6230
6240
6250
6260
6300
6310
6320
6330
6350
6360
6400
6420
6430
6440
6460
6500
6510
6520
6530
6600
6660
6700
6710
6720
6730
6740
6750
6760
6800
6820
6830
6840
6910
6920
6930
6940
7000
7010
7020
7030
7040
7050
7100
7110
7120
7130
7140
7150
7160
7200
7210
7220
7240
7260
7300
7310
7320
7330
7340
7350
7360
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VerDate Sep<11>2014
Probability
code
Occupation
Graders and sorters, agricultural products .......................................................................................................
Miscellaneous agricultural workers ...................................................................................................................
Fishers and related fishing workers ..................................................................................................................
Hunters and trappers ........................................................................................................................................
Forest and conservation workers ......................................................................................................................
Logging workers ................................................................................................................................................
First-line supervisors/managers of construction trades and extraction workers ..............................................
Boilermakers .....................................................................................................................................................
Brickmasons, blockmasons, and stonemasons ................................................................................................
Carpenters ........................................................................................................................................................
Carpet, floor, and tile installers and finishers ...................................................................................................
Cement masons, concrete finishers, and terrazzo workers .............................................................................
Construction laborers ........................................................................................................................................
Paving, surfacing, and tamping equipment operators ......................................................................................
Pile-driver operators ..........................................................................................................................................
Operating engineers and other construction equipment operators ..................................................................
Drywall installers, ceiling tile installers, and tapers ..........................................................................................
Electricians ........................................................................................................................................................
Glaziers .............................................................................................................................................................
Insulation workers .............................................................................................................................................
Painters, construction and maintenance ..........................................................................................................
Paperhangers ....................................................................................................................................................
Pipelayers, plumbers, pipefitters, and steamfitters ...........................................................................................
Plasterers and stucco masons .........................................................................................................................
Reinforcing iron and rebar workers ..................................................................................................................
Roofers ..............................................................................................................................................................
Sheet metal workers .........................................................................................................................................
Structural iron and steel workers ......................................................................................................................
Helpers, construction trades .............................................................................................................................
Construction and building inspectors ................................................................................................................
Elevator installers and repairers .......................................................................................................................
Fence erectors ..................................................................................................................................................
Hazardous materials removal workers .............................................................................................................
Highway maintenance workers .........................................................................................................................
Rail-track laying and maintenance equipment operators .................................................................................
Septic tank servicers and sewer pipe cleaners ................................................................................................
Miscellaneous construction and related workers ..............................................................................................
Derrick, rotary drill, and service unit operators, oil, gas, and mining ...............................................................
Earth drillers, except oil and gas ......................................................................................................................
Explosives workers, ordnance handling experts, and blasters ........................................................................
Mining machine operators ................................................................................................................................
Roof bolters, mining ..........................................................................................................................................
Roustabouts, oil and gas ..................................................................................................................................
Helpers—extraction workers .............................................................................................................................
Other extraction workers ...................................................................................................................................
First-line supervisors/managers of mechanics, installers, and repairers .........................................................
Computer, automated teller, and office machine repairers ..............................................................................
Radio and telecommunications equipment installers and repairers .................................................................
Avionics technicians ..........................................................................................................................................
Electric motor, power tool, and related repairers .............................................................................................
Electrical and electronics installers and repairers, transportation equipment ..................................................
Electrical and electronics repairers, industrial and utility ..................................................................................
Electronic equipment installers and repairers, motor vehicles .........................................................................
Electronic home entertainment equipment installers and repairers .................................................................
Security and fire alarm systems installers ........................................................................................................
Aircraft mechanics and service technicians ......................................................................................................
Automotive body and related repairers .............................................................................................................
Automotive glass installers and repairers .........................................................................................................
Automotive service technicians and mechanics ...............................................................................................
Bus and truck mechanics and diesel engine specialists ..................................................................................
Heavy vehicle and mobile equipment service technicians and mechanics .....................................................
Small engine mechanics ...................................................................................................................................
Miscellaneous vehicle and mobile equipment mechanics, installers, and repairers ........................................
Control and valve installers and repairers ........................................................................................................
Heating, air conditioning, and refrigeration mechanics and installers ..............................................................
Home appliance repairers .................................................................................................................................
Industrial and refractory machinery mechanics ................................................................................................
Maintenance and repair workers, general ........................................................................................................
Maintenance workers, machinery .....................................................................................................................
Millwrights .........................................................................................................................................................
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0
0
0
0
0
0
0
0
0
0
0
3
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
3
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
32522
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
mstockstill on DSK3G9T082PROD with RULES2
2002
Census
code
7410
7420
7430
7510
7520
7540
7550
7560
7600
7610
7620
7700
7710
7720
7730
7740
7750
7800
7810
7830
7840
7850
7900
7920
7930
7940
7950
7960
8000
8010
8020
8030
8040
8060
8100
8120
8130
8140
8150
8160
8200
8210
8220
8230
8240
8250
8260
8300
8310
8320
8330
8340
8350
8360
8400
8410
8420
8430
8440
8450
8460
8500
8510
8520
8530
8540
8550
8600
8610
8620
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
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.........................
.........................
.........................
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.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
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.........................
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.........................
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VerDate Sep<11>2014
Probability
code
Occupation
Electrical power-line installers and repairers ....................................................................................................
Telecommunications line installers and repairers .............................................................................................
Precision instrument and equipment repairers .................................................................................................
Coin, vending, and amusement machine servicers and repairers ...................................................................
Commercial divers ............................................................................................................................................
Locksmiths and safe repairers ..........................................................................................................................
Manufactured building and mobile home installers ..........................................................................................
Riggers ..............................................................................................................................................................
Signal and track switch repairers ......................................................................................................................
Helpers—installation, maintenance, and repair workers ..................................................................................
Other installation, maintenance, and repair workers ........................................................................................
First-line supervisors/managers of production and operating workers .............................................................
Aircraft structure, surfaces, rigging, and systems assemblers .........................................................................
Electrical, electronics, and electromechanical assemblers ..............................................................................
Engine and other machine assemblers ............................................................................................................
Structural metal fabricators and fitters ..............................................................................................................
Miscellaneous assemblers and fabricators .......................................................................................................
Bakers ...............................................................................................................................................................
Butchers and other meat, poultry, and fish processing workers ......................................................................
Food and tobacco roasting, baking, and drying machine operators and tenders ............................................
Food batchmakers ............................................................................................................................................
Food cooking machine operators and tenders .................................................................................................
Computer control programmers and operators ................................................................................................
Extruding and drawing machine setters, operators, and tenders, metal and plastic .......................................
Forging machine setters, operators, and tenders, metal and plastic ...............................................................
Rolling machine setters, operators, and tenders, metal and plastic ................................................................
Cutting, punching, and press machine setters, operators, and tenders, metal and plastic .............................
Drilling and boring machine tool setters, operators, and tenders, metal and plastic .......................................
Grinding, lapping, polishing, and buffing machine tool setters, operators, and tenders, metal and plastic ....
Lathe and turning machine tool setters, operators, and tenders, metal and plastic ........................................
Milling and planing machine setters, operators, and tenders, metal and plastic .............................................
Machinists .........................................................................................................................................................
Metal furnace and kiln operators and tenders ..................................................................................................
Model makers and patternmakers, metal and plastic .......................................................................................
Molders and molding machine setters, operators, and tenders, metal and plastic .........................................
Multiple machine tool setters, operators, and tenders, metal and plastic ........................................................
Tool and die makers .........................................................................................................................................
Welding, soldering, and brazing workers ..........................................................................................................
Heat treating equipment setters, operators, and tenders, metal and plastic ...................................................
Lay-out workers, metal and plastic ...................................................................................................................
Plating and coating machine setters, operators, and tenders, metal and plastic ............................................
Tool grinders, filers, and sharpeners ................................................................................................................
Metalworkers and plastic workers, all other .....................................................................................................
Bookbinders and bindery workers ....................................................................................................................
Job printers .......................................................................................................................................................
Prepress technicians and workers ....................................................................................................................
Printing machine operators ...............................................................................................................................
Laundry and dry-cleaning workers ....................................................................................................................
Pressers, textile, garment, and related materials .............................................................................................
Sewing machine operators ...............................................................................................................................
Shoe and leather workers and repairers ..........................................................................................................
Shoe machine operators and tenders ..............................................................................................................
Tailors, dressmakers, and sewers ....................................................................................................................
Textile bleaching and dyeing machine operators and tenders .........................................................................
Textile cutting machine setters, operators, and tenders ..................................................................................
Textile knitting and weaving machine setters, operators, and tenders ............................................................
Textile winding, twisting, and drawing out machine setters, operators, and tenders ......................................
Extruding and forming machine setters, operators, and tenders, synthetic and glass fibers ..........................
Fabric and apparel patternmakers ....................................................................................................................
Upholsterers ......................................................................................................................................................
Textile, apparel, and furnishings workers, all other ..........................................................................................
Cabinetmakers and bench carpenters ..............................................................................................................
Furniture finishers .............................................................................................................................................
Model makers and patternmakers, wood .........................................................................................................
Sawing machine setters, operators, and tenders, wood ..................................................................................
Woodworking machine setters, operators, and tenders, except sawing ..........................................................
Woodworkers, all other .....................................................................................................................................
Power plant operators, distributors, and dispatchers .......................................................................................
Stationary engineers and boiler operators ........................................................................................................
Water and liquid waste treatment plant and system operators ........................................................................
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Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
32523
TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued
2002
Census
code
mstockstill on DSK3G9T082PROD with RULES2
8630
8640
8650
8710
8720
8730
8740
8750
8760
8800
8810
8830
8840
8850
8860
8900
8910
8920
8930
8940
8950
8960
9000
9030
9040
9110
9120
9130
9140
9150
9200
9230
9240
9260
9300
9310
9570
9340
9350
9360
9410
9420
9500
9510
9520
9560
9600
9610
9620
9630
9640
9650
9720
9730
9740
9750
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Probability
code
Occupation
Miscellaneous plant and system operators ......................................................................................................
Chemical processing machine setters, operators, and tenders .......................................................................
Crushing, grinding, polishing, mixing, and blending workers ...........................................................................
Cutting workers .................................................................................................................................................
Extruding, forming, pressing, and compacting machine setters, operators, and tenders ................................
Furnace, kiln, oven, drier, and kettle operators and tenders ...........................................................................
Inspectors, testers, sorters, samplers, and weighers .......................................................................................
Jewelers and precious stone and metal workers .............................................................................................
Medical, dental, and ophthalmic laboratory technicians ...................................................................................
Packaging and filling machine operators and tenders .....................................................................................
Painting workers ...............................................................................................................................................
Photographic process workers and processing machine operators .................................................................
Semiconductor processors ...............................................................................................................................
Cementing and gluing machine operators and tenders ...................................................................................
Cleaning, washing, and metal pickling equipment operators and tenders .......................................................
Cooling and freezing equipment operators and tenders ..................................................................................
Etchers and engravers ......................................................................................................................................
Molders, shapers, and casters, except metal and plastic ................................................................................
Paper goods machine setters, operators, and tenders ....................................................................................
Tire builders ......................................................................................................................................................
Helpers—production workers ............................................................................................................................
Production workers, all other ............................................................................................................................
Supervisors, transportation and material moving workers ...............................................................................
Aircraft pilots and flight engineers ....................................................................................................................
Air traffic controllers and airfield operations specialists ...................................................................................
Ambulance drivers and attendants, except emergency medical technicians ...................................................
Bus drivers ........................................................................................................................................................
Driver/sales workers and truck drivers .............................................................................................................
Taxi drivers and chauffeurs ..............................................................................................................................
Motor vehicle operators, all other .....................................................................................................................
Locomotive engineers and operators ...............................................................................................................
Railroad brake, signal, and switch operators ...................................................................................................
Railroad conductors and yardmasters ..............................................................................................................
Subway, streetcar, and other rail transportation workers .................................................................................
Sailors and marine oilers ..................................................................................................................................
Ship and boat captains and operators .............................................................................................................
Ship engineers ..................................................................................................................................................
Bridge and lock tenders ....................................................................................................................................
Parking lot attendants .......................................................................................................................................
Service station attendants ................................................................................................................................
Transportation inspectors .................................................................................................................................
Other transportation workers ............................................................................................................................
Conveyor operators and tenders ......................................................................................................................
Crane and tower operators ...............................................................................................................................
Dredge, excavating, and loading machine operators .......................................................................................
Hoist and winch operators ................................................................................................................................
Industrial truck and tractor operators ................................................................................................................
Cleaners of vehicles and equipment ................................................................................................................
Laborers and freight, stock, and material movers, hand ..................................................................................
Machine feeders and offbearers .......................................................................................................................
Packers and packagers, hand ..........................................................................................................................
Pumping station operators ................................................................................................................................
Refuse and recyclable material collectors ........................................................................................................
Shuttle car operators ........................................................................................................................................
Tank car, truck, and ship loaders .....................................................................................................................
Material moving workers, all other ....................................................................................................................
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Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
Appendix B. Additional Tables
TABLE B1—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY
LEVELS, BY DETAILED INDUSTRY, PROJECTED FOR FY2017
Potentially
affected EAP
workers
(millions) a
Industry
mstockstill on DSK3G9T082PROD with RULES2
Total d ...............................................................................................................
Agriculture ........................................................................................................
Forestry, logging, fishing, hunting, and trapping .............................................
Mining ..............................................................................................................
Construction .....................................................................................................
Nonmetallic mineral product manufacturing ....................................................
Primary metals and fabricated metal products ................................................
Machinery manufacturing ................................................................................
Computer and electronic product manufacturing ............................................
Electrical equipment, appliance manufacturing ...............................................
Transportation equipment manufacturing ........................................................
Wood products .................................................................................................
Furniture and fixtures manufacturing ...............................................................
Miscellaneous and not specified manufacturing ..............................................
Food manufacturing .........................................................................................
Beverage and tobacco products ......................................................................
Textile, apparel, and leather manufacturing ....................................................
Paper and printing ...........................................................................................
Petroleum and coal products manufacturing ...................................................
Chemical manufacturing ..................................................................................
Plastics and rubber products ...........................................................................
Wholesale trade ...............................................................................................
Retail trade ......................................................................................................
Transportation and warehousing .....................................................................
Utilities .............................................................................................................
Publishing industries (except internet) .............................................................
Motion picture and sound recording ................................................................
Broadcasting (except internet) .........................................................................
Internet publishing and broadcasting ..............................................................
Telecommunications ........................................................................................
Internet service providers and data processing services ................................
Other information services ...............................................................................
Finance ............................................................................................................
Insurance .........................................................................................................
Real estate .......................................................................................................
Rental and leasing services ............................................................................
Professional and technical services ................................................................
Management of companies and enterprises ...................................................
Administrative and support services ................................................................
Waste management and remediation services ...............................................
Educational services ........................................................................................
Hospitals ..........................................................................................................
Health care services, except hospitals ............................................................
Social assistance .............................................................................................
Arts, entertainment, and recreation .................................................................
Accommodation ...............................................................................................
Food services and drinking places ..................................................................
Repair and maintenance .................................................................................
Personal and laundry services ........................................................................
Membership associations and organizations ...................................................
Private households ..........................................................................................
Public administration ........................................................................................
Not-affected
(millions) b
22.5
0.0
0.0
0.2
0.8
0.1
0.2
0.3
0.6
0.1
0.6
0.0
0.0
0.3
0.2
0.1
0.1
0.1
0.1
0.4
0.1
0.8
1.6
0.5
0.3
0.2
0.0
0.2
0.1
0.4
0.0
0.1
2.0
1.1
0.3
0.1
4.0
0.1
0.5
0.1
0.9
1.1
1.3
0.4
0.4
0.1
0.3
0.1
0.1
0.4
0.0
0.8
18.3
0.0
0.0
0.2
0.7
0.1
0.2
0.3
0.5
0.1
0.5
0.0
0.0
0.3
0.1
0.1
0.1
0.1
0.1
0.4
0.1
0.7
1.2
0.4
0.2
0.2
0.0
0.1
0.0
0.3
0.0
0.0
1.7
0.9
0.3
0.0
3.5
0.1
0.4
0.0
0.7
0.9
1.0
0.2
0.3
0.1
0.2
0.1
0.0
0.3
0.0
0.6
Affected
(millions) c
4.2
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.4
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.2
0.1
0.0
0.5
0.0
0.1
0.0
0.2
0.2
0.3
0.2
0.1
0.0
0.1
0.0
0.0
0.1
0.0
0.2
Affected as
share of
potentially
affected
(percent)
19
19
6
10
16
11
13
10
8
9
8
18
19
14
17
9
19
20
9
9
15
17
26
20
11
15
54
21
10
13
20
31
14
19
24
26
13
24
26
23
26
22
25
38
33
21
30
35
37
29
21
24
Note: Pooled data for FY2013 through FY2015.
a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to
the new salary level).
c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
d Columns may not sum to total due to rounding.
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Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
VII. Final Regulatory Flexibility
Analysis (FRFA)
The Regulatory Flexibility Act of 1980
(RFA) as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA),
hereafter jointly referred to as the RFA,
requires that an agency prepare an
initial regulatory flexibility analysis
(IRFA) when proposing and a final
regulatory flexibility analysis (FRFA)
when issuing regulations that will have
a significant economic impact on a
substantial number of small entities.
The agency is also required to respond
to public comment on the NPRM. See 5
U.S.C. 604. If the rule is not expected to
have a significant economic impact on
a substantial number of small entities,
the RFA allows an agency to certify
such, in lieu of preparing an analysis.
See 5 U.S.C. 605. The Chief Counsel for
Advocacy of the Small Business
Administration was notified of this
Final Rule upon submission of the rule
to OMB under E.O. 12866.
Based on commenters’ concerns that
the IRFA did not clearly explain the
32525
Department’s analysis of costs and
payroll increases for small businesses,
the Department reorganized and
expanded on our analysis from that
included in the NPRM. Commenters
also requested that the Department
include more detailed industry-specific
information. In response, the
Department has expanded the industry
breakdown to the Census’s 51 industries
categorization. The Department was not
able to provide more granular data due
to small sample sizes causing imprecise
estimates.
TABLE 36—OVERVIEW OF COSTS TO SMALL BUSINESSES, ALL EMPLOYEES AT ESTABLISHMENT AFFECTED METHODOLOGY
Small business costs
Cost
Direct and Payroll Costs
Average total cost per affected entity a ....................................................
Range of total costs per affected entity a .................................................
Average percent of revenue per affected entity a ....................................
Average percent of payroll per affected entity a .......................................
Average percent of small business profit .................................................
$3,265.
$847–$75,059.
0.17%.
0.87%.
0.14%.
Direct Costs
Regulatory familiarization:
Time (first year) .................................................................................
Time (update years) ..........................................................................
Hourly wage ......................................................................................
Adjustment:
Time (first year affected) ...................................................................
Hourly wage ......................................................................................
Managerial:
Time (weekly) ....................................................................................
Hourly wage ......................................................................................
1 hour per establishment.
5 minutes per establishment.
$36.22.
75 minutes per newly affected worker.
$36.22.
5 minutes per affected worker.
$42.31.
Payroll Increases
Average payroll increase per affected entity a .........................................
Range of payroll increases per affected entity a ......................................
$2,516.
$647–$54,430.
mstockstill on DSK3G9T082PROD with RULES2
a Using the methodology where all employees at an affected small firm are affected. This assumption generates upper-end estimates. Lowerend cost estimates are significantly smaller.
A. Objectives of, and Need for, the Final
Rule
The Fair Labor Standards Act (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. It is widely
recognized that the general requirement
that employers pay a premium rate of
pay for all hours worked over 40 in a
workweek is a cornerstone of the Act,
grounded in two policy objectives. The
first is to spread employment (or in
other words, reduce involuntary
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Jkt 238001
unemployment) by incentivizing
employers to hire more employees
rather than requiring existing employees
to work longer hours. The second policy
objective is to reduce overwork and its
detrimental effect on the health and
well-being of workers.
The FLSA provides a number of
exemptions from the Act’s minimum
wage and overtime pay provisions,
including one for bona fide executive,
administrative, and professional (EAP)
employees. Such employees typically
receive more monetary and nonmonetary benefits than most blue collar
and lower-level office workers. The
exemption applies to employees
employed in a bona fide executive,
administrative, or professional capacity
and for outside sales employees, as
those terms are ‘‘defined and delimited’’
by the Department. 29 U.S.C. 213(a)(1).
The Department’s regulations
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implementing these ‘‘white collar’’
exemptions are codified at 29 CFR part
541.
For an employer to exclude an
employee from minimum wage and
overtime protection pursuant to the EAP
exemption, the employee generally must
meet three criteria: (1) The employee
must be paid a predetermined and fixed
salary that is not subject to reduction
because of variations in the quality or
quantity of work performed (the ‘‘salary
basis test’’); (2) the amount of salary
paid must meet a minimum specified
amount (the ‘‘salary level test’’); and (3)
the employee’s job duties must
primarily involve executive,
administrative, or professional duties as
defined by the regulations (the ‘‘duties
test’’). The salary level requirement was
created to identify the dividing line
distinguishing workers who may be
performing exempt duties from the
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32526
Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Rules and Regulations
nonexempt workers whom Congress
intended to be protected by the FLSA’s
minimum wage and overtime
provisions. Throughout the regulatory
history of the FLSA, the Department has
considered the salary level test the ‘‘best
single test’’ of exempt status. Stein
Report at 19. This bright-line test is
easily observed, objective, and clear. Id.
The Department has periodically
updated the regulations governing these
tests since the FLSA’s enactment in
1938, most recently in 2004 when,
among other revisions, the Department
created the standard duties test and
paired it with a salary level test of $455
per week. As a result of inflation, the
real value of the salary threshold has
fallen significantly since its last update,
making it inconsistent with Congress’
intent to exempt only ‘‘bona fide’’ EAP
workers.
The standard salary level and the total
compensation level required for highly
compensated employees (HCE) have not
been updated since 2004. As a result,
the standard salary level has declined
considerably in real terms relative to
both its 2004 and 1975 values (see
section VI.A.ii.). This is problematic
because the exemption now covers
workers who were never intended to be
within the exemption, removing them
from minimum wage and overtime
protection. Similarly, the HCE annual
compensation requirement is out of
date; by the Final Rule’s effective date
the share of workers earning above
$100,000 annually will have more than
tripled since it was adopted in 2004.
Therefore, the Department believes this
rulemaking is necessary in order to
restore the effectiveness of these levels.
The Department’s primary objective
in this rulemaking is to ensure that the
revised salary levels will continue to
provide a useful and effective test for
exemption. The salary levels were
designed to operate as a ready guide to
assist employers in deciding which
employees were more likely to meet the
duties tests for the exemptions. If left
unchanged, however, the effectiveness
of the salary level test as a means of
determining exempt status diminishes
as employees’ wages increase over time.
In order to restore the ability of the
standard salary level and the HCE
compensation requirements to serve as
appropriate bright-line tests between
overtime protected employees and those
who may be bona fide EAP employees,
this rulemaking increases the minimum
salary level to come within the
exemption from the FLSA minimum
wage and overtime requirements as an
EAP employee from $455 to the 40th
percentile of weekly earnings of fulltime salaried workers in the lowest-
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wage Census Region (currently the
South, $913 a week) for the standard
test, and from $100,000 to the
annualized value of the 90th percentile
of weekly earnings of full-time salaried
workers nationally ($134,004 per year)
for the HCE test. The Department
reached the final standard salary and
HCE total compensation levels after
considering available data on actual
salary levels currently being paid in the
economy, publishing a proposed rule,
reviewing more than 270,000 timely
comments, and considering a range of
alternatives. In order to ensure that
these levels continue to function
appropriately in the future, the rule also
includes a provision to automatically
update these salary levels every three
years.
B. The Agency’s Response to the Public
Comments
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 we incorporate herein.
Nevertheless, the significant issues
raised by representatives of small
businesses and the U.S. Small Business
Administration’s Office of Advocacy
(Advocacy) are repeated here.
Most of the comments received
concerning small businesses centered
on the burden that the proposed salary
level would impose on small entities.
Some commenters expressed concern
that the expected cost increase from the
rule would disproportionately affect
small entities. For example, the
Wisconsin Agri-Business Association
stated that the proposed rule’s increased
labor costs ‘‘will be felt most by small
businesses’’ because they do not have
the ability to adjust to increased costs
‘‘without detriment to their business or
the people they employ.’’ Similarly, the
Small Business Legislative Council
(SBLC) explained that small businesses
(and especially new business) tend to
operate on very narrow margins, and so
such businesses would be
disproportionately affected by this rule.
Other comments stated more generally
that the proposed salary level would
impose significant burdens on small
businesses. See, e.g., Nebraska Chamber
of Commerce and Industry,
Northeastern Retail Lumber Association.
Accordingly, many commenters
suggested the Department adopt some
forms of differential treatment for small
entities. The Greater Philadelphia
Chamber of Commerce urged that ‘‘a
lower compensation threshold be
extended to small businesses and
nonprofits, which
