Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 10900-10969 [2019-04514]

Download as PDF 10900 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules DEPARTMENT OF LABOR Wage and Hour Division 29 CFR Part 541 RIN 1235–AA20 Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees FOR FURTHER INFORMATION CONTACT: Wage and Hour Division, Department of Labor. ACTION: Proposed rule and request for comments. AGENCY: Using a longstanding and commonsense methodology and based on broad-based input, the Department of Labor (Department) proposes to update and revise the regulations issued under the Fair Labor Standards Act (FLSA or Act) implementing the exemption from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees. DATES: Submit written comments on or before May 21, 2019. ADDRESSES: You may submit comments, identified by Regulatory Information Number (RIN) 1235–AA20, by either of the following methods: Electronic Comments: Submit comments through the Federal eRulemaking Portal http:// www.regulations.gov. Follow the instructions for submitting comments. Mail: Address written submissions to Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S– 3502, 200 Constitution Avenue NW, Washington, DC 20210. Instructions: Please submit only one copy of your comments by only one method. All submissions must include the agency name and RIN, identified above, for this rulemaking. Please be advised that comments received will become a matter of public record and will be posted without change to http:// www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on the date indicated for consideration in this rulemaking. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period as the Department continues to experience delays in the receipt of mail in our area. For additional information on submitting comments and the rulemaking process, see the ‘‘Public Participation’’ heading of the SUPPLEMENTARY INFORMATION section of SUMMARY: VerDate Sep<11>2014 19:26 Mar 21, 2019 Jkt 247001 this document. For questions concerning the interpretation and enforcement of labor standards related to the FLSA, individuals may contact the Wage and Hour Division (WHD) local district offices (see contact information below). Docket: For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at http:// www.regulations.gov. Robert Waterman, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S– 3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693–0406 (this is not a toll-free number). Copies of this proposed rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693–0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1–877–889–5627 to obtain information or request materials in alternative formats. Questions of interpretation and/or enforcement of the agency’s regulations may be directed to the nearest WHD district office. Locate the nearest office by calling WHD’s toll-free help line at (866) 4US–WAGE ((866) 487–9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD’s website for a nationwide listing of WHD district and area offices at http://www.dol.gov/ whd/america2.htm. Electronic Access and Filing Comments Public Participation: This proposed rule is available through the Federal Register and the http:// www.regulations.gov website. You may also access this document via WHD’s website at http://www.dol.gov/whd/. To comment electronically on Federal rulemakings, go to the Federal eRulemaking Portal at http:// www.regulations.gov, which will allow you to find, review, and submit comments on Federal documents that are open for comment and published in the Federal Register. You must identify all comments submitted by including ‘‘RIN 1235–AA20’’ in your submission. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period (11:59 p.m. on the date identified above in the DATES section); comments received after the comment period closes will not be considered. Submit only one copy of your comments by only one method. Please be advised that all comments received will be posted without change PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 to http://www.regulations.gov, including any personal information provided. SUPPLEMENTARY INFORMATION: Table of Contents I. Executive Summary II. Background A. The FLSA B. Regulatory History C. Overview of Existing Regulatory Requirements III. Need for Rulemaking IV. Proposed Regulatory Revisions A. Standard Salary Level B. Special Salary Tests C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement D. Highly Compensated Employees E. Future Updates to the Earnings Thresholds V. Paperwork Reduction Act VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory Review A. Introduction B. Methodology To Determine the Number of Potentially Affected EAP Workers C. Determining the Revised Salary and Compensation Levels D. Effects of Revised Salary and Compensation Levels VII. Initial Regulatory Flexibility Analysis (IRFA) A. Reasons Why Action by the Agency Is Being Considered B. Statement of Objectives and Legal Basis for the Proposed Rule C. Description of the Number of Small Entities To Which the Proposed Rule Will Apply D. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule E. Identification, to the Extent Practicable, of All Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule VIII. Unfunded Mandates Reform Act Analysis A. Authorizing Legislation B. Assessment of Costs and Benefits C. Least Burdensome Option or Explanation Required IX. Executive Order 13132, Federalism X. Executive Order 13175, Indian Tribal Governments Proposed Amendments to Regulatory Text I. Executive Summary The Fair Labor Standards Act (FLSA or Act) requires covered employers to pay employees a minimum wage and, for employees who work more than 40 hours in a week, overtime premium pay at least 1.5-times their regular rate of pay. The FLSA provides a number of exemptions to these two requirements. Section 13(a)(1) of the FLSA, commonly referred to as the ‘‘white collar’’ or ‘‘EAP’’ exemption, exempts ‘‘bona fide’’ executive, administrative, E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules professional, outside sales, and computer employees from the minimum wage and overtime requirements of the FLSA. The statute delegates to the Secretary of Labor (the Secretary) the authority to define and delimit the terms of this white collar exemption. Since 1940, the regulations implementing the exemption generally have required three things: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the ‘‘salary basis test’’); (2) the amount of salary paid must meet a minimum specified amount (the ‘‘salary level test’’); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the ‘‘duties test’’). The Department has long used the salary level test as a tool to help define the white collar exemption on the basis that employees paid less than the salary level are unlikely to be bona fide executives, administrators, or professionals, and, conversely, that nearly all bona fide executives, administrators, and professionals are paid at least that much. The salary level test provides certainty for employers and employees, as well as efficiency for government enforcement agencies. The salary level test’s usefulness, however, diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls. The Department increased the weekly salary level from $455 ($23,660 per year) to $913 ($47,476 per year) in a final rule published May 23, 2016 (‘‘2016 final rule’’). That rulemaking was challenged in court, and on November 22, 2016, the U.S. District Court for the Eastern District of Texas enjoined the Department from implementing and enforcing the rule. On August 31, 2017, the court granted summary judgment against the Department, invalidating the 2016 final rule. An appeal of that decision to the United States Court of Appeals for the Fifth Circuit, based on the salary threshold, is being held in abeyance. Currently, the Department is enforcing the regulations in effect on November 30, 2016, including the $455 per week standard salary level, which is the same level set in place during the 2004 final rule. The Department has reconsidered the $913 per week standard salary level set in the 2016 final rule in light of the district court’s decisions, public comments received in response to a July 26, 2017 Request for Information (RFI), and feedback received at public VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 listening sessions the Department held around the country to receive additional public input on issues related to the salary level test.1 The Department agrees with the vast majority of RFI commenters that the standard salary level needs to exceed $455 per week to more effectively serve its purpose. But the Department now also believes that increasing the standard salary level to $913 per week was inappropriate. The increase excluded from exemption 4.2 million employees whose duties would have otherwise qualified them for exemption, a result in significant tension with the text of section 13(a)(1). As the district court noted in its decision invalidating the 2016 final rule, the increase also untethered the salary level test from its historical justification: Setting a dividing line between nonexempt and potentially exempt employees by screening out from exemption a swath of employees who are unlikely to be bona fide executives, administrators, or professionals because of their compensation level. To address the district court’s and the Department’s concerns with the 2016 final rule and set a more appropriate salary level, the Department proposes to rescind formally the 2016 final rule and simply to update the 2004 standard salary level by applying the same methodology to current data. The 2004 final rule set the standard salary level at approximately the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South) and in the retail sector. This proposed rule would do the same. When this method is applied to 2017 data, and projected forward to January 2020 (the approximate date this rule is anticipated to be effective), it results in a proposed standard salary level of $679 per week ($35,308 per year). The Department anticipates using 2018 data in development of the final rule. The Department estimates that in 2020, 1.1 million currently exempt employees who earn at least $455 per week but less than the proposed standard salary level of $679 per week would, without some intervening action by their employers,2 gain overtime eligibility.3 In an attempt 1 Timely comments and listening session records may be reviewed at www.regulations.gov, docket ID: WHD–2017–0002. 2 Employers may opt to raise salary levels, reorganize workloads, adjust work schedules, or spread work hours in order to avoid payment of overtime pay. 3 The Department also estimates that an additional 2.0 million white collar workers who are currently nonexempt because they do not satisfy the EAP duties tests and currently earn at least $455 per week but less than $679 per week would have their overtime-eligible status strengthened in 2020 PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 10901 to align the regulations better with modern pay practices, the Department also proposes to allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test, provided such bonuses are paid annually or more frequently. The Department is not proposing any changes to the standard duties test. The Department believes that the proposed update to the standard salary level will maintain the traditional purposes of the salary level test, and will help employers more readily identify exempt employees. In proposing a new salary level, the Department considered the district court’s conclusion that the salary level set in the 2016 final rule exceeded the Department’s authority by ‘‘exclud[ing] so many employees who perform exempt duties’’ thereby making ‘‘salary rather than an employee’s duties determinative’’ of the applicability of the EAP exemption.4 The Department has also considered the comments received in response to the RFI and those presented by interested parties at the nationwide listening sessions. The Department considered other methods for setting the standard salary level, as described in sections IV.A.v and VI.C. The Department seeks comments on these or other methods that would update the standard salary level to reflect wage growth, are consistent with the salary level’s purposes, and are reasonable considering the interests of employers and employees. In the 2004 final rule, the Department for the first time incorporated a Highly Compensated Employee (HCE) test, which paired a reduced duties requirement with a higher compensation level ($100,000). To update the HCE total annual compensation level (set to $100,000 in the 2004 final rule and increased to $134,004 in the 2016 final rule), the Department is adopting the same methodology used in the 2016 final rule. The Department proposes to set the level equivalent to the 90th percentile of full-time salaried workers nationally, similarly projected forward to 2020, which results in an increase in the annual compensation level to $147,414 per year. Without intervening action by their employers, an estimated 201,100 currently exempt workers who earn at least $100,000 per year but less than the because these employees would now fail both the salary level and duties tests. 4 Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795, 807 (E.D. Tex. 2017). E:\FR\FM\22MRP2.SGM 22MRP2 10902 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules proposed HCE annual compensation level of $147,414 per year, and who meet the HCE duties test but not the standard duties test, would also gain overtime eligibility. Additionally, the Department is proposing special salary levels for certain U.S. territories and an updated base rate for employees in the motion picture producing industry. Furthermore, to prevent the earnings threshold levels from becoming significantly outdated in the future and to provide predictability and certainty for the benefit of workers and employers, the Department intends to propose updates to these levels every four years through notice-and-comment rulemaking, and solicits comment from the public regarding that intention. This proposed rule is expected to be an Executive Order 13771 deregulatory action. When the Department uses a perpetual time horizon to allow for cost comparisons under Executive Order 13771, and using the 2016 rule as the baseline, the annualized cost savings of this proposed rule is $224.0 million with 7 percent discounting. The net present value of the cost savings is $3.2 billion using a perpetual time horizon and a 7 percent discount rate. Because the Department is currently enforcing the 2004 salary level, the economic analysis uses the 2004 rule as the baseline for calculating costs and transfers. The economic analysis quantifies three direct costs resulting from the proposal: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. The Department estimates that annualized direct employer costs in the first 10 years following the rule’s effective date will be $120.5 million, including $464.2 million in Year 1 and $67.8 million in Year 10. This proposed rulemaking will also give employees higher earnings in the form of transfers of income from employers to employees. Annualized transfers are estimated to be $429.4 million over the first ten years, including $526.9 million in Year 1. Details on the estimated reduced burdens and cost savings of this proposed rule are in the rule’s economic analysis. II. Background A. The FLSA On June 25, 1938, the FLSA was signed into law. The FLSA generally requires covered employers to pay their employees at least the federal minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of at least 1.5-times the regular rate VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 of pay for all hours worked over 40 in a workweek.5 The FLSA exempts certain employees from its minimum wage and overtime requirements. Section 13(a)(1) exempts EAP employees from the minimum wage provisions of section 206 6 and the overtime pay provisions of section 207, and delegates to the Secretary the authority to define and delimit the terms of the exemption in regulations.7 Pursuant to Congress’ grant of rulemaking authority, in 1938 the Department issued the first regulations at 29 CFR part 541, defining the scope of the section 13(a)(1) exemptions. Since 1940, the implementing regulations have generally imposed three requirements for the exemption to apply: (1) An employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the ‘‘salary basis test’’); (2) the amount of salary paid must meet a minimum specified amount (the ‘‘salary level test’’); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the ‘‘duties test’’). B. Regulatory History The first version of part 541, establishing the criteria for exempt status under section 13(a)(1), was promulgated in October 1938.8 The Department revised its regulations in 1940,9 1949,10 1954, 1958,11 1961, 1963, 1967, 1970, 1973, and 1975.12 A final 5 29 U.S.C. 201, et seq. subsection (d) in the case of paragraph (1) of this subsection . . . .’’ 29 U.S.C. 213(a). 7 Id. 8 3 FR 2518 (Oct. 20, 1938). 9 5 FR 4077 (Oct. 15, 1940). The 1940 regulations were informed by what has come to be known as the Stein Report. See Executive, Administrative, Professional . . . Outside Salesman Redefined, Wage and Hour Division, U.S. Department of Labor, Report and Recommendations of the Presiding Officer [Harold Stein] at Hearings Preliminary to Redefinition (Oct. 10, 1940) (‘‘Stein Report’’). 10 14 FR 7705 (Dec. 24, 1949); 14 FR 7730 (Dec. 28, 1949). The 1949 regulations were informed by what has come to be known as the Weiss Report. See Report and Recommendations on Proposed Revisions of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) (‘‘Weiss Report’’). 11 23 FR 8962 (Nov. 18, 1958). The 1958 regulations were informed by what has come to be known at the Kantor Report. See Report and Recommendations on Proposed Revision of Regulations, Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, Assistant Administrator, Office of Regulations and Research, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (‘‘Kantor Report’’). 12 See 19 FR 4405 (July 17, 1954); 26 FR 8635 (Sept. 15, 1961); 28 FR 9505 (Aug. 30, 1963); 32 FR 6 ‘‘[E]xcept PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 rule increasing the salary levels was published on January 13, 1981, but was stayed indefinitely on February 12, 1981.13 In 1985, the Department published an Advance Notice of Proposed Rulemaking that was never finalized.14 In 1992, the Department twice revised the part 541 regulations. First, the Department created a limited exception from the salary basis test for public employees.15 The Department then implemented the 1990 law exempting employees in certain computer-related occupations.16 From 1949 until 2004, the part 541 regulations contained two different tests for exemption—a ‘‘long’’ test that paired a more rigorous duties test with a lower salary level, and a ‘‘short’’ test that paired a more flexible duties test with a higher salary level. On April 23, 2004, the Department issued a final rule (2004 final rule), which replaced the ‘‘long’’ and ‘‘short’’ test system for determining exemption status with a single ‘‘standard’’ salary level paired with a ‘‘standard’’ duties test. The Department set the standard salary level at $455 per week.17 On May 23, 2016, the Department issued another final rule (2016 final rule), which raised the standard salary level to $913 per week and instituted a mechanism to automatically update the salary level every three years.18 The 2016 final rule also permitted employers, for the first time, to satisfy up to 10 percent of the standard salary requirement with nondiscretionary bonuses and incentive payments (including commissions), provided that those forms of compensation were paid at least quarterly. The rule set an effective date of December 1, 2016. On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, enjoining the Department from implementing and enforcing the 2016 final rule, pending further review.19 On August 31, 2017, the district court granted summary judgment against the Department of Labor.20 The court held that the 2016 final rule’s salary level exceeded the Department’s authority and that the 7823 (May 30, 1967); 35 FR 883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); 40 FR 7091 (Feb. 19, 1975). 13 46 FR 11972 (Feb. 12, 1981). 14 50 FR 47696 (Nov. 19, 1985). 15 57 FR 37677 (Aug. 19, 1992). 16 57 FR 46742 (Oct. 9, 1992); see Sec. 2, Public Law 101–583, 104 Stat. 2871 (Nov. 15, 1990), codified at 29 U.S.C. 213 Note. 17 69 FR 22122 (Apr. 23, 2004). 18 81 FR 32391 (May 23, 2016). 19 See Nevada v. U.S. Dep’t of Labor, 218 F. Supp. 3d 520 (E.D. Tex. 2016). 20 See Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795 (E.D. Tex. 2017). E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules entire final rule was therefore invalid. The court determined that a salary level that excludes from exemption an unusually high number of employees who pass the duties test stands in tension with Congress’s command to exempt bona fide EAP employees. On July 26, 2017, the Department published a Request for Information (RFI) asking for public input on what changes the Department should propose in a new NPRM on the EAP exemption.21 The Department received over 200,000 comments on the RFI, which are discussed below. On October 30, 2017, the Government appealed the district court’s summary judgment decision to the United States Court of Appeals for the Fifth Circuit. On November 6, 2017, the Fifth Circuit granted the Government’s motion to hold that appeal in abeyance while the Department undertook further rulemaking to redetermine the salary level. Further, between September 7 and October 17, 2018, the Department held listening sessions in all five Wage and Hour regions throughout the country to supplement feedback received as part of the RFI.22 C. Overview of Existing Regulatory Requirements The regulations in part 541 contain specific criteria that define each category of exemption provided by section 13(a)(1) for bona fide executive, administrative, professional, and outside sales employees, as well as teachers and academic administrative personnel. The regulations also define those computer employees who are exempt under section 13(a)(1) and section 13(a)(17). The employer bears the burden of establishing the applicability of any exemption from the FLSA’s pay requirements.23 Job titles, job descriptions, or the payment of salary instead of an hourly rate are insufficient, standing alone, to confer exempt status on an employee. To qualify for the EAP exemption, employees must meet certain tests regarding their job duties 24 and generally must be paid on a salary basis at least the amount specified in the regulations.25 Some employees, such as 21 82 FR 34616 (July 26, 2017). Session transcripts may be viewed at www.regulations.gov, docket ID WHD–2017–0002. 23 See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547–48 (1947). 24 See §§ 541.100 (executive employees); 541.200 (administrative employees); 541.300, 541.303–.304 (teachers and professional employees); 541.400 (computer employees); 541.500 (outside sales employees). 25 Alternatively, administrative and professional employees may be paid on a ‘‘fee basis’’ for a single 22 Listening VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 doctors, lawyers, teachers, and outside sales employees, are not subject to salary tests.26 Others, such as academic administrative personnel and computer employees, are subject to special, contingent earning thresholds.27 In 2004, the standard salary level for EAP employees was set at $455 per week (equivalent to $23,660 per year for a full-time worker), and the total annual compensation level for highly compensated employees was set at $100,000.28 In light of the district court’s decision invalidating the 2016 final rule, these are the salary levels currently enforced by the Department.29 The 2004 final rule created the ‘‘highly compensated employee’’ (HCE) test for exemption. Under the HCE test, employees who receive at least a specified total annual compensation (which must include at least the standard salary amount per week paid on a salary or fee basis) are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.30 The HCE test applies only to employees whose primary duty includes performing office or non-manual work.31 Nonmanagement production line workers and employees who perform work involving repetitive operations with their hands, physical skill, and energy are not exempt under this section.32 Finally, the FLSA does not preempt stricter state standards. If a State establishes a stricter standard to qualify for exemption from state overtime standards than the corresponding FLSA standard (e.g., higher earnings thresholds or more rigorous duties job regardless of the time required for its completion as long as the hourly rate for work performed (i.e., the fee payment divided by the number of hours worked) would total at least the weekly amount specified in the regulation if the employee worked 40 hours. See § 541.605. 26 See §§ 541.303(d); 541.304(d); 541.500(c); 541.600(e). Such employees are also not subject to a fee-basis test. 27 See § 541.600(c)–(d). 28 69 FR 22123. 29 The current text of the Code of Federal Regulations (CFR) reflects the updates made in the 2016 final rule. Therefore, unless otherwise indicated, citations to part 541 refer to the current CFR, and the proposed amendments to the regulatory text reflect the current CFR’s inclusion of the 2016 updates. However, because the Department is currently enforcing the 2004 standard salary and total annual compensation levels, the NPRM references the 2004 standard salary and total annual compensation levels. 30 § 541.601. 31 § 541.601(d). 32 Id. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 10903 tests), the stricter standard continues to apply for state law purposes.33 III. Need for Rulemaking The primary goal of this rulemaking is to update the weekly salary amounts used by the Department to help define and delimit the EAP exemption, as required by the Act. In light of the district court’s decision ruling that the 2016 final rule was invalid, the Department is currently enforcing the $455 per week standard salary level from the 2004 final rule. The Department recognizes that the $455 per week standard salary level, which the Department has enforced for nearly a decade and a half, should be updated to reflect current wages. Therefore, the Department’s proposed approach for this rulemaking is simple. It proposes to apply the same method used to calculate the salary threshold in 2004 to current data. The Department expects that this method will keep the standard salary level aligned with the intervening years’ growth in wages. This approach has withstood the test of time, is familiar to employees and employers, and can be used without causing significant hardship or disruption to employers or the economy, while ensuring overtime-eligible workers continue to receive the protections intended by Congress. The Department’s proposed approach would also address concerns with the 2016 final rule identified by the district court. The salary level test has historically served as a dividing line between nonexempt and potentially exempt employees, excluding from exemption a large swath of employees on the reasoning that employees compensated below the salary level are very unlikely to be employed ‘‘in a bona fide executive, administrative, or professional capacity.’’ 34 Given these purposes, the salary level cannot be set too high, or it would unduly deny exemption to bona fide executive, administrative, and professional employees who, Congress has instructed, ‘‘shall not’’ be subject to the FLSA’s overtime and minimum wage requirements.35 The 2016 final rule went beyond the limited traditional purpose of setting a salary ‘‘floor’’ to identify certain obviously nonexempt employees, and instead excluded from exemption many employees who had previously been, and should have continued to be, exempt by reference to their duties. The Department’s proposed 33 See 29 U.S.C. 218. U.S.C. 213(a)(1). 35 29 U.S.C. 213(a). 34 29 E:\FR\FM\22MRP2.SGM 22MRP2 10904 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules approach in this rulemaking would address that concern. The proposed rule includes several additional updates. The Department proposes updating the HCE total annual compensation threshold to an amount of $147,414. The Department also proposes to allow the inclusion of nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more-frequent basis to satisfy up to 10 percent of the standard salary level, and to revise the special salary levels provided under part 541. The Department intends to propose an update to the part 541 earnings thresholds every four years to prevent the levels from becoming outdated. More regular updates would promote greater stability, avoiding the disruptive salary level increases that can result from lengthy gaps between updates, and provide appropriate wage protection for those under the threshold. Summary of Comments on the Request for Information and at the Listening Sessions On July 26, 2017, WHD published an RFI to solicit public input to inform the Department’s work in developing a proposal to revise the part 541 regulations. The RFI solicited feedback on questions related to the salary level test, the duties test, the possibility of multiple salary levels, the inclusion of nondiscretionary bonuses and incentive payments to satisfy a portion of the salary level, the annual compensation test for highly compensated employees, and the automatic updating of the standard salary and HCE annual compensation level tests. The RFI was published in the Federal Register with a 60-day public comment period.36 Over 200,000 comments were received from a broad array of stakeholders, including small business owners, large companies, employer and employee associations, state and local governments, unions, higher education institutions, non-profit organizations, law firms, workers, and other interested members of the public. In the RFI, the Department asked several questions about the standard salary level, seeking input on the appropriate level to fulfill the salary level’s historical role in determining exemption status. In particular, the Department asked whether updating the 2004 salary level for inflation or applying the 2004 methodology to current salary data would be appropriate, whether differing standard salary levels should be set for different regions or employer sizes, and whether 36 82 FR 34616. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 the Department should set different standard salary levels for the executive, administrative, and professional exemptions. The Department also sought information about the actions taken by employers in anticipation of the 2016 final rule, as well as the effect of increased salary levels on particular occupations. Commenters expressed diverse views about the standard salary level, but mostly favored increasing the salary level above $455 per week, with only a small minority requesting that the salary level be eliminated or kept at its current amount. Nearly all commenters representing employers opposed the standard salary level of $913 per week set in the 2016 final rule. Many expressed the view that this level conflicted with the salary level’s longstanding role of screening out obviously nonexempt employees, and would improperly deny exemption for millions of employees who passed the duties test. Several employers expressed concern that raising the standard salary level as high as $913 per week could lead to significant costs for employers. Many of these commenters also expressed concern that the salary level should account for salaries paid in lower-wage regions and industries. Commenters representing employers offered varied methodologies for setting the salary level, including adjusting the $455-per-week threshold to account for inflation since 2004 and applying the 2004 final rule’s salary-setting methodology to contemporary earnings data. In contrast, most commenters who were employees or represented employees urged the Department to implement the $913 per week level adopted in the 2016 final rule, although some commenters urged an even higher threshold. For example, some commenters representing employee interests favored applying the pre-2004 short test methodology, or setting the salary level at the 50th percentile of earnings among full-time salaried workers nationwide. Most commenters supported the continuation of a single nationwide salary level, and expressed concern that introducing multiple standard salary levels—whether differing by region, industry, employer size, or between the executive, administrative, and professional categories—would complicate the regulations. Some commenters representing employers supported region-specific salary levels, and some stated that regional salary levels would be appropriate if the alternative is a single salary level that is too high in low-wage regions or industries. Relatedly, the Department PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 sought views on whether there should be multiple annual compensation levels (by region or by size of employer) for the HCE exemption. The Department received few comments on this subject, but those that addressed it generally favored a single HCE annual compensation level given its simplicity, and some stated that adding additional levels would increase litigation costs. The Department also inquired whether it should periodically update the standard salary level and the HCE total annual compensation levels. Most commenters representing employers opposed automatic updating. Commenters in favor of periodic automatic updates, including most commenters representing employees, asserted that updating is needed to preserve a ‘‘meaningful’’ standard salary level. Commenters that opined on the frequency of potential periodic updates generally offered a range of 3 to 5 years for the updates, although some suggested more frequent updates. In addition to questions regarding the salary level, the Department asked whether it should, as it did with the 2016 final rule, permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of an employee’s salary for purposes of the salary level test, and whether this was an appropriate limit. Many commenters supported including at least a portion of nondiscretionary bonuses and incentive payments in the standard salary threshold calculation, but there was some disagreement among commenters about the amount of such payments that should be included and the frequency of the relevant bonus payments. Many commenters representing employees supported a 10percent cap on inclusion of nondiscretionary bonuses (the same cap was part of the 2016 final rule), or alternatively, not counting bonuses toward the salary level at all. Conversely, many commenters representing employers advocated that a higher percentage of nondiscretionary bonuses, or all types of bonuses and incentive payments, should be counted, in part because they asserted that such a cap disadvantages industries that rely on incentive compensation. But not all employers agreed. In particular, some public sector employers and smaller non-profits, whose funding restrictions may preclude them from awarding nondiscretionary bonuses and incentive payments, expressed their view that permitting nondiscretionary bonuses to count toward an employee’s salary creates a competitive disadvantage for them. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules Finally, the Department inquired whether a test for exemption based solely on employee duties is preferable to the current standard test. Most commenters opposed instituting a duties-only test for the section 13(a)(1) exemptions or returning to the long and short duties test combination that existed before the 2004 final rule. Some of these commenters worried that a duties-only test would result in a more rigid test that includes quantitative limits on the performance of nonexempt work, which they felt would unduly burden business operations and increase litigation costs. As follow-up to the RFI, between September 7 and October 17, 2018, the Department broadened its outreach and conducted listening sessions in diverse locations around the country.37 A wide range of stakeholders attended the listening sessions, including higher education, employees, employers, business associations, non-profit organizations, small businesses, employee advocates, unions, state and local government representatives, and members of Congress. At the listening sessions, the Department requested input on the following issues: 1. What is the appropriate salary level (or range of salary levels) above which the overtime exemptions for bona fide executive, administrative, or professional employees may apply? Why? 2. What benefits and costs to employees and employers might accompany an increased salary level? How would an increased salary level affect real wages (e.g., increasing overtime pay for employees whose current salaries are below a new level but above the current threshold)? Could an increased salary level reduce litigation costs by reducing the number of employees whose exemption status is unclear? Could this additional certainty produce other benefits for employees and employers? 3. What is the best methodology to determine an updated salary level? Should the update derive from wage growth, cost-of-living increases, actual wages paid to employees, or some other measure? 4. Should the Department more regularly update the standard salary level and the total-annual-compensation level for highly compensated employees? If so, how should these updates be made? How frequently should updates occur? What benefits, if 37 The Department conducted listening sessions in a representative city from each of WHD’s five regions to get diverse input from stakeholders across the country and assess the impact to each region. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 10905 any, could result from more frequent updates? 38 For the most part, feedback provided at the listening sessions was consistent with and reinforced the comments received in response to the RFI. Stakeholders expressed a wide variety of views on the appropriate salary level and salary level methodology, timing for implementing changes, review of the duties tests, and potential impacts of the Department’s rulemaking. Stakeholders overwhelmingly supported increasing the salary level. Many commenters expressed concerns about the size of the increase in the 2016 final rule, while others supported the level set in that rule. While the HCE exemption was not a primary focus of any of the listening sessions, a number of business stakeholders supported retaining the $100,000 total annual compensation requirement set in the 2004 final rule. The Department appreciates and has considered the views of all those who submitted comments in response to the RFI and participated in the listening sessions, and welcomes further input from the public in response to this NPRM. The comments to the RFI and the input from the listening sessions have informed the development of this NPRM and the Department’s understanding of the effect of the part 541 regulations in the workplace. these levels continue to provide useful tests for exemption. The Department believes that this proposal addresses the legal concerns that led to the invalidation of the 2016 final rule, and appropriately updates the part 541 regulations. Given the recent history of litigation in this area, the Department here explains for the benefit of commenters the operative effects of the proposed rule. If finalized, the proposed rule would replace the 2016 final rule functionally by revising the part 541 regulatory text in the Code of Federal Regulations. But a final rule based on this proposal would also formally rescind the 2016 final rule. That rescission would operate independently of the new content in the final rule, as the Department intends it to be severable from the substantive proposal for revising part 541. As explained more fully below, the Department believes that rescission of the 2016 final rule is appropriate, regardless of the new content proposed for its replacement. Thus, even if the substantive provisions of a new final rule revising part 541 were invalidated, enjoined, or otherwise not put into effect, the Department would intend the 2004 final rule to remain operative, not the enjoined 2016 final rule that it now proposes to rescind. IV. Proposed Regulatory Revisions The Department proposes to rescind formally the 2016 final rule, replacing it with a new rule that updates the standard salary and HCE annual compensation levels under part 541 by setting the standard salary level using the 2004 methodology applied to current data and setting the HCE annual compensation level using the 2016 methodology applied to current data, and projecting both levels to January 2020. In addition, the Department proposes to apply a special salary level to Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands, a separate special salary level to American Samoa, and an updated special weekly ‘‘base rate’’ to the motion picture producing industry. The Department also proposes that nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level. Finally, moving forward, the Department intends to propose updates to the salary and compensation levels every four years to ensure that A. Standard Salary Level 38 83 FR 49869 (Oct. 3, 2018); 83 FR 43825 (Aug. 28, 2018). PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 i. History of the Standard Salary Level The first version of part 541, issued in October 1938, set a salary level of $30 per week for executive and administrative employees.39 The Department updated the salary levels in 1940, maintaining the salary level for executive employees, increasing the salary level for administrative employees, and establishing a salary level for professional employees. In setting those rates, the Department considered surveys of private industry by federal and state government agencies, experience gained under the National Industrial Recovery Act, and Federal Government salaries to identify a salary level that reflected a reasonable ‘‘dividing line’’ between employees performing exempt and nonexempt work.40 The Department set the salary level for each exemption slightly below the average salary dividing exempt from nonexempt employees, taking into account salaries paid in numerous industries and the percentage of employees earning below these amounts. 39 3 FR 2518 (Oct. 20, 1938). Report at 9, 20–21, 31–32. 40 Stein E:\FR\FM\22MRP2.SGM 22MRP2 10906 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules In 1949, the Department evaluated salary data from state and federal agencies, including the Bureau of Labor Statistics (BLS). The Department considered wages in small towns and low-wage industries, wages of federal employees, average weekly earnings for exempt employees, starting salaries for college graduates, and salary ranges for different occupations such as bookkeepers, accountants, chemists, and mining engineers.41 The Department also looked at data showing increases in exempt employee salaries since 1940, and supplemented it with nonexempt employee earnings data to approximate the ‘‘prevailing minimum salaries of exempt employees.’’ 42 Recognizing that the ‘‘increase in wage rates and salary levels’’ since 1940 had ‘‘gradually weakened the effectiveness of the present salary tests as a dividing line between exempt and nonexempt employees,’’ the Department considered the increase in weekly earnings from 1940 to 1949 for various industries, and then adopted new salary levels at ‘‘figure slightly lower than might be indicated by the data’’ to protect small businesses.43 Also in 1949, the Department established a second, lessstringent duties test for each exemption, which applied to employees paid at or above a higher ‘‘short test’’ salary level. The original, more-rigorous duties test became known as the ‘‘long test.’’ Apart from the differing salary requirements, the most significant difference between the short test and the long test was that the long test limited the amount of time an exempt employee could spend on nonexempt duties.44 The short duties tests did not include a specific limit on nonexempt work. In 1958, the Department set the long test salary levels using data collected by WHD on salaries paid to employees who met the applicable salary and duties tests, grouped by geographic region, broad industry groups, number of employees, and city size, and supplemented with BLS and Census data to reflect income increases for white collar and manufacturing employees during the period not 41 Weiss Report at 10, 14–17, 19–20. at 12. 43 Id. at 8, 14–20. The Department also justified its modest increases by noting evidence of slow wage growth for executive employees ‘‘in some areas and some industries.’’ Id. at 14. 44 The Department instituted a 20 percent cap on nonexempt work as part of the long duties test for executive and professional employees in 1940, and for administrative employees in 1949. By statute, beginning in 1961, retail employees could spend up to 40 percent of their hours worked performing nonexempt work and still be found to meet the duties tests for the EAP exemption. See 29 U.S.C. 213(a)(1). 42 Id. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 covered by the Department’s investigations.45 The Department then set the long test salary levels for exempt employees ‘‘at about the levels at which no more than about 10 percent of those in the lowest-wage region, or in the smallest size establishment group, or in the smallest-sized city group, or in the lowest-wage industry of each of the categories would fail to meet the tests.’’ 46 Thus, the Department set the long test salary levels so that about 10 percent of workers performing EAP duties in the lowest-wage regions and industries would not meet the salary level test and would therefore be nonexempt based on their salary level alone. The Department followed a similar methodology when determining the salary level increase in 1963. The Department examined data on salaries paid to exempt workers collected in a 1961 WHD survey.47 The salary level for executive and administrative employees was increased to $100 per week, for example, when the 1961 survey data showed that 13 percent of establishments paid one or more exempt executives less than $100 per week, and 4 percent of establishments paid one or more exempt administrative employees less than $100 per week.48 The professional salary level was increased to $115 per week when the 1961 survey data showed that 12 percent of establishments surveyed paid one or more professional employees less than $115 per week.49 The Department noted that these salary levels approximated the same percentages used to update the salary level in 1958.50 The Department applied a similar methodology when adopting salary level increases in 1970. After examining data from WHD investigations, BLS wage data, and information provided in a report issued by the Department in 1969 that included salary data for executive, administrative, and professional employees, the Department increased the long test salary level for executive employees to $125 per week when the salary level data showed that 20 percent of executive employees from all regions and 12 percent of executive employees in the West earned less than $130 a week.51 The Department also increased the long test salary levels for administrative and professional 45 Kantor Report at 6. at 6–7. 47 28 FR 7002 (July 9, 1963). 48 Id. at 7004. 49 Id. 50 See id. 51 35 FR 884–85. 46 Id. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 employees to $125 and $140 per week, respectively. In 1975, rather than follow the prior approaches, the Department updated the 1970 salary levels based on increases in the Consumer Price Index, but adjusted downward ‘‘to eliminate any inflationary impact.’’ 52 This resulted in a long test salary level for the executive and administrative exemptions of $155 per week, and $170 per week for the professional exemption. The short test salary level increased to $250 per week in 1975.53 The salary levels adopted were intended as interim levels ‘‘pending the completion and analysis of a study by [BLS] covering a six-month period in 1975.’’ 54 Although the Department intended to increase the salary levels based on that study of actual salaries paid to employees, the process was never completed, and the ‘‘interim’’ salary levels remained in effect for the next 29 years. In 2004, the Department replaced the separate long and short tests with a single ‘‘standard’’ salary level test of $455 per week, which was paired with a ‘‘standard’’ duties test for executive, administrative, and professional employees, respectively. The Department noted, in accord with numerous comments received during that rulemaking, that as a result of the outdated salary level, ‘‘the ‘long’ duties tests [had], as a practical matter, become effectively dormant’’ because relatively few salaried employees earned below the short test salary level.55 The Department estimated that 1.3 million workers earning between $155 and $455 per week would become nonexempt under the new standard salary level.56 In setting the new standard salary level in 2004, the Department used Current Population Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by BLS that encompassed most salaried employees, including nonexempt salaried employees. The Department selected a standard salary level roughly equivalent to earnings at the 20th percentile of two subpopulations: (1) Salaried employees in the South and (2) salaried employees in the retail industry nationwide. Although prior salary levels had been based on salaries of approximately the lowest 10 percent of exempt salaried employees in low-wage regions and industries, the Department explained that the change in methodology was 52 40 FR 7091. time the short test was increased between 1949 and 1975, it was set significantly higher than the long test salary levels. 54 Id. 55 69 FR 22126. 56 Id. at 22123. 53 Each E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules warranted in part to account for the elimination of the short and long tests, and because the data sample included nonexempt salaried employees, as opposed to only exempt salaried employees.57 As in the past, the Department used lower-salary data sets to accommodate businesses for which salaries were generally lower due to geographic- or industry-specific reasons. The Department published a final rule updating the salary level twelve years later, in 2016.58 The Department set the standard salary level at an amount that would exclude from exemption the bottom 40 percent of full-time salaried workers (exempt and nonexempt) in the lowest-wage Census Region (the South).59 The Department estimated that increasing the standard salary level from $455 per week to $913 per week would make 4.2 million workers earning between those levels newly nonexempt, absent other changes by their employers.60 The Department made no changes to the standard duties test. As previously discussed, on August 31, 2017, the U.S. District Court for Eastern District of Texas declared the 2016 final rule invalid, and the Department’s appeal of that decision has been held in abeyance. Until the Department issues a new final rule, it is enforcing the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level. ii. Purpose of the Salary Level Requirement The FLSA states that its minimum wage and overtime requirements ‘‘shall not apply with respect to . . . any employee employed in a bona fide executive, administrative, or professional capacity . . . (as such terms are defined and delimited from time to time by regulations of the Secretary . . .).’’ 61 The Department has long used a salary level test as part of its method for defining and delimiting that exemption. In 1949, the Department summarized the role of the salary level tests over the preceding decade. The Department explained: In this long experience, the salary tests, even though too low in the later years to serve their purpose fully, have amply proved their effectiveness in preventing the misclassification by employers of obviously nonexempt employees, thus tending to reduce litigation. They have simplified 57 Id. at 22167. FR 32391. 59 Id. at 32408. 60 Id. at 32393. 61 29 U.S.C. 213(a)–(a)(1). 58 81 VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 enforcement by providing a ready method of screening out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary. The salary requirements also have furnished a practical guide to the inspector as well as to employers and employees in borderline cases. In an overwhelming majority of cases, it has been found by careful inspection that personnel who did not meet the salary requirements would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.62 The Department again referenced these principles in the Kantor Report, reiterating, for example, that the salary level tests ‘‘provide[ ] a ready method of screening out the obviously nonexempt employees,’’ and that employees ‘‘who do not meet the salary test are generally also found not to meet the other requirements of the regulations.’’ 63 The Department’s 2004 final rule likewise referenced these principles.64 The Department now proposes to update the standard salary level in light of increased employee earnings, so that it maintains its usefulness in ‘‘screening out the obviously nonexempt employees.’’ For over 75 years the Department has used a salary level test as a criterion for identifying bona fide executive, administrative, and professional employees. Some statements in the Department’s regulatory history have at times, however, suggested a greater role for the salary level test. The statements include, for instance, from the 1940 Stein Report, that salary is ‘‘ ‘the best single test of the employer’s good faith in characterizing the employment as of a professional nature.’ ’’ 65 The Stein Report even went so far as to state that ‘‘if an employer states that a particular employee is of sufficient importance . . . to be classified as an ‘executive’ employee and thereby exempt from the protection of the [A]ct, the best single test of the employer’s good faith in attributing importance to the employee’s services is the amount he pays for them.’’ 66 62 Weiss Report at 8. Report at 2–3; see also U.S. Dep’t of Labor, 28th Annual Report of the Secretary of Labor for the Fiscal Year Ended June 30, 1940 (1940), at 236 (‘‘the power to define is the power to exclude’’). 64 See 69 FR 22165; 2003 NPRM, 68 FR 15560, 15570 (Mar. 31, 2003). 65 81 FR 32413 (quoting Stein Report at 42); see also 69 FR 22165 (quoting Stein Report at 42). 66 Stein Report at 19; see also id. at 5 (‘‘the good faith specifically required by the [A]ct is best shown by the salary paid’’); id. at 19 (salary provides ‘‘a valuable and easily applied index to the ‘bona fide’ character of the employment for which exemption is claimed’’); cf. Weiss Report at 9 (‘‘salary is the 63 Kantor PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 10907 The district court’s invalidation of the 2016 final rule has prompted the Department to clarify these and similar statements in light of the salary level test’s purposes and regulatory history. The concept of a ‘‘dividing line’’ should not be misconstrued to suggest that the Department views the salary level test as an effort to divide all exempt white collar employees from all nonexempt employees. A salary level is helpful to determine who is not an exempt executive, administrative or professional employee—the employees who fall beneath it. But the salary level has significantly less probative value for the employees above it. They may be exempt or nonexempt. Above the threshold, the Department evaluates an employee’s status as exempt or nonexempt based on an assessment of the duties that employee performs. An approach that emphasizes salary alone, irrespective of employee duties, would stand in significant tension with the Act. Section 13(a)(1) directs the Department to define and delimit employees based on the ‘‘capacity’’ in which they are employed. Salary is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees. But it is not ‘‘capacity’’ in and of itself. The district court’s summary judgment decision endorsed the Department’s historical approach to setting the salary level and held the 2016 final rule unlawful because it departed from it. The district court approvingly cited the Weiss Report and explained that setting ‘‘the minimum salary level as a floor to ‘screen[ ] out the obviously nonexempt employees’ ’’ is ‘‘consistent with Congress’s intent.’’ 67 Further endorsing the Department’s earlier rulemakings, the district court stated that prior to the 2016 final rule, ‘‘the Department ha[d] used a permissible minimum salary level as a test for identifying categories of employees Congress intended to exempt.’’ 68 The court then explained that in contrast to these acceptable past practices, the 2016 standard salary level of $913 per week was unlawful because best single indicator of the degree of importance involved in a particular employee’s job’’); Kantor Report at 2 (‘‘[Salary] is an index of the status that sets off the bona fide executive from the working squad-leader, and distinguishes the clerk or subprofessional from one who is performing administrative or professional work.’’). The Department ‘‘is not bound by the [Stein, Weiss, and Kantor] reports,’’ though they have been carefully considered. 69 FR 22124. 67 275 F. Supp. 3d at 806 (quoting Weiss Report at 7–8); see also id. at 807 at n.6 (supporting salary level that operates ‘‘as more of a floor’’) (internal quotation marks and citation omitted). 68 Id. at 806 (emphasis in opinion). E:\FR\FM\22MRP2.SGM 22MRP2 10908 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules it would exclude from exemption ‘‘so many employees who perform exempt duties.’’ 69 In support, the court cited the Department’s estimate that, without some intervening action by their employers, the new salary level would result in 4.2 million workers becoming nonexempt.70 The court also emphasized the magnitude of the salary level increase, stating that the 2016 final rule ‘‘more than double[d] the previous minimum salary level’’ and that ‘‘[b]y raising the salary level in this manner, the Department effectively eliminate[d] a consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity duties.’ ’’ 71 The district court declared the final rule invalid because the Department had unlawfully excluded from exemption ‘‘entire categories of previously exempt employees who perform ‘bona fide executive, administrative, or professional capacity’ duties.’’ 72 The Department has reexamined the 2016 final rule in light of the district court’s decision. That rule contained language suggesting that the salary level test had a greater role to play than its modest historical function. For example, the Department stated that in light of the new, single standard duties test, ‘‘the salary threshold must play a greater role in protecting overtime-eligible employees,’’ and specifically that ‘‘it is necessary to set the salary level higher . . . because the salary level must perform more of the screening function previously performed by the long duties test.’’ 73 Such language is inconsistent with the salary level’s historical purpose of setting a floor for exemption. The 2016 final rule’s approach— under which salary alone would determine exempt status in many more instances—also led to a result in tension with the Act. As the district court recognized, the 2016 final rule removed the EAP exemption from 4.2 million workers who would have otherwise been exempt because they passed the salary basis and duties tests established under the 2004 final rule. In contrast, had the Department simply applied the 2004 methodology to set the standard salary level, the 2016 final rule would have resulted in approximately 683,000 workers who satisfied the duties test becoming nonexempt.74 The Department has long recognized that the salary level test is ‘‘a dividing line [that] 69 Id. at 807. at 806. 71 Id. at 807 (quoting 29 U.S.C. 213(a)(1)). 72 Id. at 806 (quoting 29 U.S.C. 213(a)(1)). 73 81 FR 32412, 32465–66. 74 See 81 FR 32504 (Table 32). 70 Id. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 cannot be drawn with great precision but can at best be only approximate,’’ 75 and so any salary level set by the Department will exclude from exemption some employees who pass the duties test. But a salary level that exempts an unusually high number of those employees—as occurred with the 2016 final rule 76—stands in tension with Congress’s command to exempt bona fide EAP employees. A salary level set that high does not further the purpose of the Act, and is inconsistent with the salary level test’s useful, but limited, role in defining the EAP exemption. The Department justified the change in the 2016 final rule in part by explaining that when the salary level increases, ‘‘it is inevitable that ‘some employees who have been classified as exempt under the present salary tests will no longer be within the exemption under any new tests adopted.’ ’’ 77 However, this consequence (which follows any salary level increase) does not itself inform what salary level the Department should set. The Department also stated in 2016 that the new salary level would narrow the gap between the number of workers who are nonexempt because they fail only the salary level test and those who are nonexempt because they fail only the duties test.78 But the Department has never compared the number of employees who are nonexempt based exclusively on the salary or duties tests, respectively, to determine the effectiveness of the salary level. To the contrary, parity between these groups would create tension with the salary level’s historical purpose of ‘‘screening out the obviously nonexempt employees.’’ The Department also justified the 2016 final rule’s salary level by stating that it was correcting a ‘‘mismatch’’ between the 2004 final rule’s salary level and the standard duties test. The Department stated that while it historically had paired a more rigorous duties test (the long test) with a lower 75 Weiss Report at 11. Department explained that (at the time of the analysis) 12.2 million salaried white collar workers earned more than $455 per week but were overtime eligible because they failed the duties test, while 838,000 salaried white collar workers were overtime eligible because even though they passed the standard duties test they earned below $455 per week. The Department then estimated that a $913per-week salary level would result in 6.5 million salaried white collar workers who failed only the duties test, and increase to 5.0 million the number of salaried white collar workers who passed the duties test but would be overtime eligible because they failed the salary level test. See 81 FR 32464– 65; see also id. at 32413. 77 Id. at 32413 (quoting Kantor Report at 5). 78 See supra n.76 (citing 81 FR 32464–65; 81 FR 32413). 76 The PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 salary level and a less rigorous duties test (the short test) with a higher salary level, the 2004 final rule paired a less rigorous duties test with a lower salary level: Because the long duties test included a limit on the amount of nonexempt work that could be performed, it could be paired with a low salary that excluded few employees performing EAP duties. In the absence of such a limitation in the duties test, it is necessary to set the salary level higher (resulting in the exclusion of more employees performing EAP duties) because the salary level must perform more of the screening function previously performed by the long duties test. Accordingly the salary level set in this Final Rule corrects for the mismatch in the 2004 Final Rule between a low salary threshold and a less rigorous duties test.79 The Department’s solution to the purported mismatch, however, introduced a new issue. The 2016 final rule’s salary level, which was ‘‘at the low end of the historical salary range of short test salary levels,’’ 80 failed to account for the absence of a long test that employers could use to claim the exemption for lower-paid white collar workers who were traditionally exempt. The Department’s analysis did not sufficiently account for this change, and as a result, the $913 per week standard salary level deviated from the Department’s longstanding policy of setting a salary level that does not ‘‘disqualify[ ] any substantial number of’’ bona fide executive, administrative, and professional employees from exemption.81 More fundamentally, except at the relatively low levels of compensation where EAP employees are unlikely to be found, the salary level is not a substitute for an analysis of an employee’s duties. It is, at most, an indicator of those duties. For most white collar, salaried employees, the exemption should turn on an analysis of their actual functions, not their salaries, as Congress commanded. The salary level test’s primary and modest purpose is to identify potentially exempt employees by screening out obviously nonexempt employees. The mismatch rationale also failed to account fully for the Department’s part 541 exemption history. The standard duties test was introduced by the 2004 final rule and has been in effect for 15 years. The short duties test, which it is similar to, was functionally the 79 81 FR 32409. at 32414. 81 Kantor Report at 5. 80 Id. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules predominant test in use for the preceding 13 years, since the 1975 long test salary levels were equaled or surpassed by the FLSA minimum wage in 1991.82 Altogether, most employers and employees have effectively been covered by this one-test system for over 25 years. This practice is highly relevant to any update by the Department’s approach. In light of the considerations above, the Department concludes that, while an increase in the standard salary level from $455 per week was warranted, the increase to $913 per week was inappropriate. As the district court stated, that increase departed from the salary level’s purpose as a floor to ‘‘ ‘screen[ ] out the obviously nonexempt employees.’ ’’ 83 The Department is engaging in this rulemaking to realign the salary level with its appropriate limited purpose, to address the concerns about the 2016 final rule identified by the district court, and to update the salary level in light of increased employee earnings. iii. Salary Level Methodology The Department, nearly all RFI commenters, and almost all those who spoke during the Department’s listening sessions agree that the salary level must exceed $455 per week to achieve its intended purpose. Most commenters to the RFI and in the listening sessions favored the simplicity of a single nationwide salary level over varying region-specific levels, and urged the Department not to return to its past practice of setting different salary levels for executive, administrative, and professional employees. However, some commenters representing employers supported establishing multiple salary levels based on region, industry, or employer size. Nearly all commenters opposed reinstating separate long and short tests with corresponding salary levels and duties tests. After considering the issues at length, reviewing public comments responding to the RFI, and considering comments provided in the listening sessions, the Department is proposing simply to update the standard salary level set in 2004 using current data. The Department believes that adherence to the 2004 final rule’s methodology is reasonable and appropriate. The 82 In 1975, the Department set a long test salary level of $155 per week for executive and administrative employees, and of $170 per week for professional employees. See 40 FR 7092. On April 1, 1991, the federal minimum wage increased to $4.25 per hour, which equals $170 for a 40-hour workweek. See Sec. 2, Public Law 101–157, 103 Stat. 938 (Nov. 17, 1989). 83 Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d at 806 (quoting Weiss Report at 7–8). VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Department has enforced the 2004 final rule’s salary level for nearly 15 years— the second-longest period (after the salary levels set in 1975) for any part 541 salary level. The Department paired that level with the standard duties test when it was enacted, and revisions to the standard duties test are not proposed as part of this rulemaking. After so many years, workers and employers are familiar with a single standard weekly salary level and a single standard duties test. Notably, the 2004 final rule has never been challenged in court. Using the 2004 salary level methodology as the basis for determining an updated salary level thus promotes familiarity and stability for the workplace, ensures workers the important wage protections contained in the Act, and minimizes the uncertainty and potential legal vulnerabilities that could accompany a novel and untested approach. There are other reasons for this simple approach. The method proposed here is straightforward and avoids new regulatory burdens. It is consistent with the Department’s established belief that adopting different salary levels for different areas of the country would create significant administrative difficulties ‘‘because of the large number of different salary levels this would require,’’ 84 and would create undue regulatory complexity. Furthermore, as discussed below, the Department believes that the proposed salary level accounts for nationwide differences in employee earnings and would work appropriately with the standard duties test.The proposed standard salary level also addresses the concerns raised in the district court’s summary judgment decision. The $913 per week standard salary level set in the 2016 final rule more than doubled the 2004 final rule’s salary level of $455 per week, which the district court concluded resulted in ‘‘entire categories of previously exempt employees’’ being disqualified from exemption ‘‘based on salary alone.’’ 85 The Department proposes to address this problem by setting a salary level that would more appropriately identify obviously nonexempt employees, without including too great a proportion of employees who would otherwise be exempt. This is consistent with the Department’s understanding that salary may be used to identify a category of employees who are not bona fide executive, administrative, and 84 69 FR 22171. F. Supp. 3d at 806. Moreover, the Department estimated in the 2016 final rule that the salary level would rise to $984 per week in January 2020. 81 FR 32393. 85 275 PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 10909 professional employees without unduly excluding employees from the exemption. The proposed $679 per week standard salary level would preserve the 2004 methodology—which was based on salaries in the South and in the low-wage retail industry—while updating that salary level to reflect the growth of nominal wages and salaries. The appropriateness of the proposed salary level is further supported by the number of workers it would affect—i.e., the number of employees who currently pass the standard duties test and earn between $455 and $679 per week, and thus would become nonexempt absent some intervening action by their employers. The district court’s decision raised concerns regarding the large number of exempt workers—4.2 million—who earned between $455 and $913 per week and thus would ‘‘automatically become eligible’’ for overtime under the $913 per week standard salary level.86 The district court noted that this relatively high number indicated that the salary level was displacing the role of the duties test in determining exemption status. The Department acknowledges these concerns and, additionally, in this proposal seeks to update the standard salary level in a manner that does not unduly disrupt employers’ operations; dramatically shift employee salaries, hours, or morale; or result in adverse economic effects. As for the details of the methodology, the Department has followed the methodology it used in 2004. In 2004, the Department set the standard salary level at approximately the 20th percentile of earnings for full-time salaried workers in the lowest-wage Census region (the South) and in the retail sector. The Department set the salary level using the 2002 CPS MORG dataset (the most recent CPS dataset practically available), after excluding from the dataset certain classes of workers that are exempt from the FLSA or its salary-level test.87 In this proposed rulemaking, the Department used pooled CPS MORG data for 2015–2017, adjusted to reflect 2017 (hereafter referred to as pooled CPS MORG data; see Section VI.B.ii for full description). This is the most recently available data. If this approach is adopted in the final rule, the Department anticipates using 2018 CPS data. The Department believes the CPS dataset would be the most appropriate dataset to use to ascertain worker earnings because of its size (approximately 60,000 households 86 275 87 See E:\FR\FM\22MRP2.SGM F. Supp. 3d at 806–07. 69 FR 22168. 22MRP2 10910 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules monthly; 15,000 in the MORG dataset) and its breadth of detail (e.g., occupation classifications, salary, hours worked, and industry). Consistent with its proposal to update the salary levels for workers subject to them, the Department analyzed a subset of this CPS MORG data, composed of employed workers age 16 years and older who are covered by the FLSA; subject to the part 541 salary tests; not in ‘‘named occupations’’ 88; and not exempt from the FLSA due to the agricultural or transportation exemptions. Thus, the subset excluded 27.9 million workers. Using this subset of the CPS MORG data, the Department proposes to set the standard salary level at approximately the 20th percentile of earnings for fulltime salaried workers in the lowestwage Census region, again the South in this case, and/or in the retail sector.89 Normally, this would result in a weekly salary level of $641 per week ($33,332 annually), which is also approximately the 20th percentile of both: (1) Earnings for full-time salaried workers in the South, and (2) earnings for full-time salaried workers in the retail sector. However, the Department proposes to inflate this figure to reflect anticipated wage growth through January 2020. This results in the standard salary level proposed in this NPRM, which is $679 per week ($35,308 annually). The Department proposes this small adjustment to better reflect employees’ anticipated compensation at the time the rule becomes effective. In the 2004 final rule, the Department set the salary level using earning percentiles as they were two years earlier (2002) than the rule’s effective date (2004), since the 2002 data was the most recent practically available data. In contrast, this proposed rule would set its salary level with a projection to January 2020, the approximate date this proposed rule is expected to become effective. The projection would ensure that the 88 This includes teachers, physicians, lawyers, judges, and outside sales workers who pass the standard duties test. 89 In the 2004 final rule the Department selected a standard salary level roughly equivalent to earnings at the 20th percentile of two subpopulations: (1) Full-time salaried employees in the South and (2) full-time salaried employees in the retail industry nationwide. In this rulemaking, the Department is setting the standard salary level at the 20th percentile of the combined subpopulations of full-time salaried employees in the South and full-time salaried employees in the retail industry nationwide. This is a change from how the Department modeled the 2004 methodology in the 2016 final rule, when it used combined subpopulations of full-time salaried employees in the South and full-time salaried employees in leisure and hospitality, other services, and public administration. 81 FR 32462. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 standard salary level reflects the 20th percentile of salaried workers in the South and/or in retail when the rule becomes effective, rather than the 20th percentile as of a year or two earlier. The Department acknowledges that the projected number may differ slightly from the results of comprehensive salary data when that data becomes available, but the Department believes that a modest projection is preferable to relying on data that could be a year or two old by the time the final rule becomes effective. The Department has inflated the salary level by estimating the compound annual growth rate from the standard salary level set in 2004 ($455) to the standard salary level as it would be using the same methodology in 2017 ($641), then used that growth rate to project the standard salary level forward to January 2020. The Department considered alternative indices for inflation. The reasons for not using them are described below. v. Alternatives Considered In determining a proposed salary level, the Department considered the methodologies applied in past rulemakings and other alternatives such as using an index to inflate the 2004 salary level to 2017 and to project it forward to 2020. The Department considered using price indices such as the Personal Consumption Expenditures Price Index (PCEPI), the Consumer Price Index for All Urban Consumers (CPI–U), and the Chained CPI–U; as well as a wage-based measure such as the Employment Cost Index (ECI). The PCEPI measures the change in the nominal prices of goods and services (1) purchased directly by U.S. households and by nonprofit institutions serving U.S. households and (2) purchased by firms and governments on behalf of U.S. households (e.g., medical expenditures paid by Medicare, Medicaid, or private insurance plans). The Consumer Price Index for All Urban Consumers (CPI–U) measures the change in nominal prices for a constantquality market basket of goods and services purchased by urban consumers, who represent 93 percent of the U.S. population.90 The Bureau of Labor Statistics also developed the Chained CPI–U in 2002 as an alternative to the CPI–U that would provide a better approximation of cost-of-living for all 90 See the Bureau of Labor Statistics Handbook of Methods, updated February 14, 2018, p. 2, at https://www.bls.gov/opub/hom/pdf/homch17.pdf (‘‘A unifying framework for dealing with practical questions that arise in the construction of the CPI is provided by the concept of the cost-of-living index (COLI).’’). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 urban consumers by accounting for a substitution effect.91 The Department considered the Employment Cost Index (ECI) for wages and salaries of either all civilian workers or just for private sector workers.92 The ECI is calculated on a quarterly basis by the BLS using the results of the National Compensation Survey (NCS), a survey of non-Federal employers that gathers comprehensive data on employee salaries, wages, and benefits.93 The ECI measures changes over time in wages and salaries across the overall non-Federal civilian workforce generally and among different subgroups. The Department has decided against proposing these alternatives for three reasons. The paramount reason is that none is as straightforward, consistent, or accurate as using current salary data. Each is a projection of what current costs are likely to be; however, such costs can be more readily ascertained simply by measuring them. Second, each is a cost index, (albeit to measure wages) rather than a measure of actual salaries. Third, each of the alternatives (and this would hold for any other alternative as well) would be a significant departure from the methodology that served well in 2004— the methodology the Department is proposing to employ again here with minor adjustments and improvements. For the reasons stated earlier—including familiarity, stability, and the standard duties test that accompanied the standard salary level set in 2004—the Department believes an approach that simply updates the 2004 level with current data is preferable to an entirely new methodology. The Department also considered these same indices for inflating a 2017 salary level (set using the 2004 final rule’s methodology and current data) to January 2020. So used, PCEPI would result in a salary level of $671 per week, the C–CPI–U would result in $671 per week, the CPI–U would result in $675 per week, the ECI for civilian workers would result in $678 per week, and the ECI for private sector workers would result in $679 per week. The Department did not choose to propose any of these alternatives for two reasons. First, the approach being proposed is the most straightforward 91 See Cage et al., Introducing the Chained Consumer Price Index. https://www.bls.gov/cpi/ additional-resources/chained-cpi-introduction.pdf. 92 See generally Bureau of Labor Statistics, Employment Cost Trends, How to Use the Employment Cost Index for Escalation, https:// www.bls.gov/ncs/ect/escalator.htm. 93 See Bureau of Labor Statistics, National Compensation Survey, https://www.bls.gov/ncs/. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules and consistent using current salary data. It measures the actual wage growth between the 2004 final rule salary level and the 2017 salary level and applies that growth rate to current data; essentially assuming that wage growth will continue at the same pace. Second, there are disadvantages to some of the other indices described above. The PCEPI, CPI–U, and Chained CPI–U, for example, measure the nominal prices of goods and services to consumers, whereas the standard salary level is meant to demarcate worker salaries. It seems more sensible to use data that measures worker compensation than consumers’ cost of living to set such a level. Additionally, the Department notes that use of the ECI for all private sector workers comes to the same result as the methodology chosen. The salary level increase proposed here would, as discussed in detail in the economic analysis, section VI, result in approximately 1.1 million affected workers losing exempt status (absent other action from their employers). The Department recognizes that any increase to the standard salary level would increase the number of workers who pass the duties test but are paid below the standard salary level; however, the $679-per-week salary level, while necessarily imprecise, would identify a large number of obviously nonexempt employees ‘‘without disqualifying any substantial number of’’ bona fide executive, administrative, and professional employees from exemption.94 Additionally, the 1.1 million workers likely to be affected by this rule’s proposed increase to the standard salary level is close to the 1.3 million workers who were affected by the 2004 final rule’s salary level increase.95 The Department also anticipates that 3.6 million employees paid between $455 and $679 per week who fail the standard duties test (i.e., that are and will remain nonexempt)— 2.0 million salaried white collar workers and 1.6 million salaried blue collar workers—will have their nonexempt status made clearer because their salary will fall below the proposed threshold. vi. Summary of Standard Salary Level Proposal For the reasons discussed above, the Department proposes to set the standard salary level to qualify for exemption from the FLSA’s minimum wage and overtime requirements as an executive, 94 Kantor Report at 5. FR 22213. The 2004 rule estimated that 1,297,855 workers would, without some intervening action by their employers, lose exempt status as a result of the $455 standard salary level set at that time. See 69 FR 22213, 22253. 95 69 VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 administrative, or professional employee at $679 per week. The Department believes that the proposed standard salary level would help employers identify a large group of employees who perform nonexempt duties, would aid in identifying bona fide EAP employees, and would address the legal concerns that led to the invalidation of the salary level set in the 2016 final rule. The Department invites comments on this proposed salary level and on any alternative salary level or methodology, including but not limited to whether the use of the indices described above, would be more appropriate. B. Special Salary Tests i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands 96 Since 2004, the Department has applied the standard salary level to Puerto Rico.97 After the Department published the 2016 final rule, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).98 Section 404 of PROMESA states that ‘‘any final regulations issued related to’’ the Department’s 2015 overtime rule NPRM—i.e., the 2016 final rule—‘‘shall have no force or effect’’ in Puerto Rico until the Comptroller General of the Unites States completes and transmits a report to Congress assessing the impact of applying the final regulations to Puerto Rico, and the Secretary of Labor, ‘‘taking into account the assessment and report of the Comptroller General, provides a written determination to Congress that applying such rule to Puerto Rico would not have a negative impact on the economy of Puerto Rico.’’ 99 The Department believes that PROMESA does not apply to this NPRM because it is a new rulemaking and thus is not ‘‘related to’’ the 2015 overtime rule NPRM within the meaning of PROMESA. Nonetheless, section 404 reflects Congress’ concern with increasing the salary level in Puerto Rico, and Puerto Rico’s current economic climate reinforces the importance of the Department 96 Under the proposal, the special salary tests would not apply to employees of the Federal government employed in Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa. 97 See 69 FR 22172. 98 See Public Law 114–187, 130 Stat. 549 (June 30, 2016). 99 See 48 U.S.C. 2193(a)–(b). The Comptroller General’s report was published on June 29, 2018 and is available at: https://www.gao.gov/products/ GAO-18-483. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 10911 exercising caution on this issue. Accordingly, the Department proposes to set a special salary level in Puerto Rico of $455 per week—the level that currently applies under PROMESA. The Department seeks comments on this proposal. The Department currently applies the standard salary level to the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands (CNMI).100 The Department understands that U.S. territories face their own economic challenges and that an increase in the salary level affects them differently than the States. In recognition of these challenges and to promote special salary level consistency across U.S. territories, the Department is proposing to also set a special salary level of $455 per week for the Virgin Islands, Guam, and the CNMI. The Department seeks comment on whether this special salary level is appropriate, or whether instead the Department should continue applying the standard salary level to these U.S. territories. ii. American Samoa The Department has historically applied a special salary level test to employees in American Samoa because minimum wage rates there have remained lower than the federal minimum wage.101 The Fair Minimum Wage Act of 2007, as amended, provides that industry-specific minimum wages rates in American Samoa will increase every three years until each equals the federal minimum wage.102 The disparity with the federal minimum wage is expected to remain for the foreseeable future. Accordingly, the Department proposes to maintain a special salary level for employees in American Samoa. The special salary level test for employees in American Samoa has historically equaled approximately 84 percent of the standard salary level.103 The Department proposes to maintain this percentage and considered whether to set the special salary level in American Samoa equal to 84 percent of the proposed standard salary level ($679 per week)—resulting in a special salary level of $570 per week—or to set it equal to approximately 84 percent of the proposed special salary level applicable to the other U.S. territories ($455 per week)—resulting in a special salary 100 In Guam and the CNMI, the Department has applied the salary level test(s) applicable to the States. In the Virgin Islands, the Department applied a special salary level test prior to 2004, but applied the standard salary level beginning in 2004. 101 See 69 FR 22172. 102 See Sec. 1, Public Law 114–61, 129 Stat. 545 (Oct. 7, 2015). 103 See, e.g., 69 FR 22172. E:\FR\FM\22MRP2.SGM 22MRP2 10912 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules level of $380 per week. The Department is proposing to set a special salary level of $380 per week in American Samoa. This approach not only maintains the special salary level that the Department is currently enforcing in American Samoa, but also ensures that American Samoa, which has a lower minimum wage than the other U.S. territories, does not have a higher special salary level. The Department seeks comments on this proposal. iii. Motion Picture Producing Industry The Department has permitted employers to classify as exempt employees in the motion picture producing industry who are paid a specified base rate per week (or a proportionate amount based on the number of days worked), so long as they meet the duties tests for the EAP exemption.104 This exception from the ‘‘salary basis’’ requirement was created in 1953 to address the ‘‘peculiar employment conditions existing in the [motion picture producing] industry,’’ and applies, for example, when a motion picture producing industry employee works less than a full workweek and is paid a daily base rate that would yield the weekly base rate if 6 days were worked.105 Consistent with its practice since the 2004 final rule, the Department proposes to increase the required base rate proportionally to the proposed increase in the standard salary level test, resulting in a proposed base rate of $1,036 per week (or a proportionate amount based on the number of days worked).106 The Department seeks comments on this proposal. C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement Since 1940, the part 541 regulations have required that exempt EAP employees be paid on a salary basis. Historically, the Department assessed compliance with the salary level test by looking only at the salary or fee payments made to employees and, with the exception of the total annual compensation requirement of the highly compensated employee (HCE) test introduced in 2004, did not include bonus payments of any kind in this calculation. The Department’s longstanding position has been to allow employers to pay additional compensation in the form of bonuses, but those payments did not count toward the payment of the required minimum salary. During public listening sessions held by the Department prior to issuing the 2015 proposal, stakeholders encouraged the Department to consider including nondiscretionary bonuses in determining whether the salary level is met.107 The stakeholders noted that such bonuses can be a significant part of exempt employees’ compensation, and therefore supported the inclusion of bonuses in determining whether the salary level is met.108 In the 2016 final rule, the Department for the first time allowed employers to use nondiscretionary bonuses and incentive payments that were paid quarterly or more frequently to satisfy up to 10 percent of the standard salary level.109 Although the 2016 final rule was invalidated,110 the Department believes that there are benefits to this approach because such bonuses and incentives are an important part of many employers’ compensation systems. In the 2017 RFI and the listening sessions, many commenters reiterated the view that nondiscretionary bonuses and incentive payments should count toward the salary threshold to some degree, although commenters disagreed about the percentage allowance, and some opposed counting such payments toward the salary level at all. Some RFI commenters also expressed concern about the 2016 final rule’s requirement that such bonuses be paid at least quarterly to count toward the salary level. These commenters explained that annual bonuses can be substantial, and employers would be penalized if those bonuses were only creditable in the quarter in which they were paid. Having considered these comments, and consistent with its goal of modernizing the part 541 regulations, the Department proposes to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test for the executive, administrative, and professional exemptions, provided that such bonuses or payments are paid annually or more frequently.111 Such 104 See 107 80 105 18 108 Id. § 541.709. FR 2881 (May 19, 1953). 106 The Department calculated this figure by dividing the proposed weekly salary level ($679) by $455, and then multiplying this result (rounded to the nearest hundredth) by the base rate set in the 2004 final rule ($695 per week). This produces a new base rate of $1,036 (per week), when rounded to the nearest whole dollar. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 FR 38516, 38521 (July 6, 2015). 109 81 FR 32423–27. 275 F. Supp. 3d at 808. The nondiscretionary bonuses provision was not discussed in the decision. 111 The employer may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary of the hire year. The Department 110 See PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability.112 The Department believes this approach is appropriate because such payments have become associated with EAP duties, such as the exercise of independent judgment and management skills. However, the Department received information during the 2016 rulemaking from State and local governments and nonprofits stating that they do not traditionally use such pay methods and might be at a competitive disadvantage if the overtime rule allowed a significant portion of the salary level to be met through such bonus payments. The Department accordingly determined that limiting the amount of the salary requirement that may be satisfied through such payments to 10 percent would help maintain parity between industries that use such pay methods and those that traditionally have not done so, such as nonprofit organizations, and ensure that exempt employees are paid regularly, as required by regulation. The Department did receive comments in the 2016 rulemaking that bonuses are an important part of compensation for some exempt employees. But the standard salary level test is meant to identify a class of nonexempt employees. The Department believes that employees with wages below the proposed standard salary level, who would be nonexempt by definition, also do not typically receive a substantial portion of their wages through bonuses. While the Department proposes to allow employers up to one year to apply nondiscretionary bonus or incentive payments to satisfy 10 percent of the standard salary level, the remaining 90 percent must be paid on a salary or fee basis in accordance with the regulations. Finally, the Department proposes to permit employers to make a final ‘‘catch-up’’ payment within one pay period after the end of each 52-week period to bring an employee’s recognizes that some businesses pay significantly larger bonuses. Where larger bonuses are paid, the amount attributable toward the EAP standard salary level requirement would be capped at 10 percent of the salary level. 112 The Department notes that nonexempt employees may also receive such bonuses. Where nondiscretionary bonuses or incentive payments are made to nonexempt employees, the payments must be included in the regular rate when calculating overtime pay. The Department’s regulations at §§ 778.208—.210 explain how to include nondiscretionary bonuses in the regular rate calculation. One way to calculate and pay such bonuses is as a percentage of the employee’s total earnings. Under this method, the payment of the bonus includes the simultaneous payment of overtime due on the bonus payment. See § 778.210. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules compensation up to the required level. Under the proposal, each pay period an employer must pay the exempt executive, administrative, or professional employee 90 percent of the standard salary level ($611.10 per week), and if at the end of the 52-week period the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10 percent of the standard salary level, $3,530.80). Any such catch-up payment would count only toward the prior year’s salary amount and not toward the salary amount in the year in which it was paid.113 The Department seeks comments on its proposal to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy part of the standard salary level. The Department further requests comment on whether the proposed 10 percent cap is appropriate, or if a higher or lower cap is preferable.114 D. Highly Compensated Employees The 2004 final rule created a new test under the EAP exemption, known as the highly compensated employee (HCE) test. The HCE test is based on the rationale that it is unnecessary to apply the standard duties test to employees who earn at least a certain amount annually—an amount substantially higher than the annual equivalent of the weekly standard salary level—because such employees ‘‘have almost invariably been found to meet all the other requirements of the regulations for exemption.’’ 115 Thus, the HCE test combines a high compensation requirement with a less-stringent, moreflexible duties test. To be exempt under the HCE test, an employee must earn at least the amount specified in the regulations in total 113 Because employers may use nondiscretionary bonuses to satisfy the vast majority of the total annual compensation paid to HCEs, such bonuses will not be permitted to satisfy the standard salary level portion of their compensation. 114 The Department is not considering changing the exclusion of board, lodging, or other facilities from the salary calculation, a position that it has held consistently since the salary requirement was first adopted. See § 541.600. Similarly, the Department also declines to consider including in the salary requirement payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits. See § 541.601(b)(1). 115 69 FR 22174 (quoting Weiss Report at 22); see § 541.601(c) (‘‘A high level of compensation is a strong indicator of an employee’s exempt status, thus eliminating the need for a detailed analysis of the employee’s job duties.’’). VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 annual compensation and must customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.116 The HCE test applies ‘‘only to employees whose primary duty includes performing office or nonmanual work.’’ 117 Additionally, such an employee must receive at least the standard salary level per week on a salary or fee basis, while the remainder of the employee’s total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.118 Total annual compensation does not include board, lodging, and other facilities, and does not include payments for medical insurance, life insurance, retirement plans, or other fringe benefits.119 An employer is permitted to make a final ‘‘catch-up’’ payment ‘‘during the last pay period or within one month after the end of the 52-week period’’ to bring an employee’s compensation up to the required level.120 If an employee works for less than a full year, the employee may still qualify for exemption under the HCE test if the employee receives a pro rata portion of the required annual compensation, based upon the number of weeks of employment.121 The 2004 final rule set the HCE total annual compensation amount at $100,000. In the 2016 final rule, the Department reaffirmed the appropriateness of the HCE test, and increased the total annual compensation requirement to reflect increases in salaries.122 The Department explained that like the standard salary level, the 2004 HCE total annual compensation value had ‘‘eroded over time’’ and that the share of full-time salaried workers with salaries exceeding $100,000 in fiscal year 2017 was predicted to be about three times the share who earned that amount in 2004.123 In response, the Department increased the total annual compensation requirement for the HCE test to the annualized weekly earnings 116 § 541.601(a). 117 § 541.601(d). 118 § 541.601(b)(1). 119 Id. 120 § 541.601(b)(2). 121 § 541.601(b)(3). Similar to employees who work for a full year, one final ‘‘catch-up’’ payment may be made ‘‘within one month after the end of employment.’’ Id. 122 81 FR 32428–29. 123 Id. at 32429. Whereas approximately 6.3 percent of full-time salaried workers had salaries exceeding $100,000 in 2004, see 69 FR 22169, this number was predicted to be approximately 20 percent by fiscal year 2017, see 81 FR 32429. By January 2021, this number is expected to be approximately 26 percent. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 10913 of the 90th percentile of full-time salaried workers nationally, which was $134,004 based on the fourth quarter of 2015.124 As a result of the district court’s decision invalidating the 2016 final rule, the Department is currently enforcing the 2004 final rule, including its $100,000 total annual compensation level and the requirement that $455 per week must be paid on a salary or fee basis.125 The Department continues to believe that the HCE test is a useful alternative to the standard salary level and duties tests for highly compensated employees. The Department also believes that the HCE compensation level set in 2004, $100,000 per year, was an appropriate level at the time, given that only roughly 10 percent of likely exempt employees who were subject to the salary tests earned at least that amount annually.126 However, as with the standard salary level, the HCE total annual compensation level must be updated to ensure that it remains a meaningful and appropriate standard when paired with the more-flexible HCE duties test. In 2004, the Department concluded that the HCE compensation level was appropriate because ‘‘white collar’’ employees who earn such high salaries would nearly always satisfy any duties test, and ‘‘in the rare instances when these employees do not meet all other requirements of the regulations, a determination that such employees are exempt would not defeat the objectives of section 13(a)(1) of the Act.’’ 127 Accordingly, it is important to ensure that the HCE total annual compensation level keeps pace with growth in nominal wages and salaries so that it applies only to those employees for whom it was originally intended, namely, those ‘‘at the very top of [the] economic ladder.’’ 128 Additionally, setting an appropriately high total annual compensation level for highly compensated employees ensures that employers continue to apply the standard duties test to employees whose exemption status is less clear. The Department proposes to update the HCE test by setting it at the 90th percentile of all full-time salaried workers nationally using 2017 CPS data, then inflated to January 2020. This is similar to the method used in the 2016 final rule, which likewise set the HCE threshold at the 90th percentile of all full-time salaried workers. The inflation 124 81 FR 32429. district court’s decision did not specifically discuss the HCE test; however, the decision invalidated the entire 2016 final rule. 126 69 FR 22174. 127 Id. (quoting Weiss Report at 22–23). 128 Id. 125 The E:\FR\FM\22MRP2.SGM 22MRP2 10914 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules to January 2020 is proposed for the same reason as inflating the standard salary level: To more accurately reflect the salaries of employees at the time the rule becomes effective, rather than at the time data was collected. This results in a proposed HCE total annual compensation level of $147,414, of which $679 must be paid weekly on a salary or fee basis.129 Notably, this proposed HCE threshold is slightly lower in relative terms than when the HCE threshold was initially adopted in 2004, when it covered 93.7 percent of all full-time salaried workers.130 But the Department continues to believe that this simpler approach—i.e., pegging the HCE threshold to the 90th percentile of all full-time salaried earnings nationwide—would result in a threshold high enough to ‘‘ensure that virtually every salaried white collar employee [above it] would satisfy any duties test.’’ 131 Additionally, as with the standard salary level, to ensure that the Department regularly reviews the appropriateness of the HCE total annual compensation amount, the Department intends to propose an update to the level every four years, as discussed further in section IV.E below. The Department estimates that 201,100 workers—those who earn between $100,000 and the proposed HCE total annual compensation level and pass the HCE duties test, but not the standard duties test—would, without some intervening action by their employers, be affected by the increase in the HCE compensation level. E. Future Updates to the Earnings Thresholds Congress has instructed the Department to define and delimit the overtime and minimum wage 129 Although the Department is proposing that employers may use nondiscretionary bonuses to satisfy up to 10 percent of the weekly standard salary level when applying the standard salary and duties tests, the Department’s proposal does not permit employers to use nondiscretionary bonuses to satisfy the weekly standard salary level requirement for HCE workers. Employers may use commissions, nondiscretionary bonuses, and other nondiscretionary compensation to satisfy the remaining portion of the HCE total annual compensation amount. Because employers may use nondiscretionary bonuses to satisfy the vast majority of the total annual compensation paid to HCE employees, it is not necessary to permit the use of such bonuses to satisfy the standard salary level portion of their compensation. 130 The $100,000 annual compensation level set in 2004 corresponded to approximately 89.8 percent of likely exempt employees and 93.7 percent of full-time salaried workers. See 69 FR 22169–70 (Tables 3 and 4). 131 81 FR 32429. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 exemptions ‘‘from time to time.’’ 132 The rationale for updating the standard salary and HCE total compensation levels is straightforward: As employees’ earnings rise over time, they begin surpassing the earnings thresholds set in the past; the earnings thresholds thus become a less useful measure of employees’ relative earnings, and a less useful method for identifying exempt employees. As the Department noted in 2004, outdated regulations ‘‘allow unscrupulous employers to avoid their overtime obligations and can serve as a trap for the unwary but well-intentioned employer’’; they can also lead increasing numbers of nonexempt employees to ‘‘resort to lengthy court battles to receive their overtime pay.’’ 133 Moreover, lengthy delays between updates to the earnings thresholds may necessitate disruptively large increases when the thresholds are updated. While the need to update the part 541 earnings thresholds on a regular basis is clear, the method and frequency of doing so has been contested. The Department has historically used noticeand-comment rulemaking to update the salary level tests, but various stakeholders throughout the years have submitted comments asking the Department to establish a mechanism to update the thresholds automatically. In the 1970 final rule, the Department remarked that one commenter’s suggestion to implement automatic annual updates to the salary tests based on BLS earnings data ‘‘appear[ed] to have some merit’’ given the delays between some of the Department’s earlier updates, but ultimately concluded that ‘‘such a proposal [would] require further study.’’ 134 In the 2004 final rule, the Department declined commenter requests to create an automatic updating mechanism. Instead, the Department expressed its intent ‘‘in the future to update the salary levels on a more regular basis.’’ 135 When the Department next revisited the part 541 regulations in 2016, however, it adopted a mechanism to automatically update the earnings thresholds every three years, applying the same methodology used to initially set each threshold in that rulemaking.136 132 29 U.S.C. 213(a)(1); see also FLSA Amendments of 1961, Public Law 87–30; 75 Stat. 65 (May 5, 1961). 133 69 FR 22122. 134 35 FR 884. 135 69 FR 22171–72. 136 Specifically, the mechanism provided for using the 40th percentile of non-hourly earnings in the lowest-wage Census Region to automatically update the standard salary level, the 90th percentile of non-hourly earnings nationwide to automatically update the HCE total annual compensation threshold, and making proportionate increases to PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 The stated purpose of the 2016 final rule’s updating mechanism was to ‘‘ensure that the salary test level is based on the best available data (and thus remains a meaningful, bright-line test), produce more predictable and incremental changes in the salary required for the EAP exemption, and therefore provide certainty to employers, and promote government efficiency.’’ 137 The district court’s summary judgment decision invalidating the 2016 final rule stated that because the standard salary level established by the 2016 final rule was unlawful, the mechanism to automatically update that standard salary level was ‘‘similarly . . . unlawful.’’ 138 In light of the district court’s decision and the concerns about lengthy delays between updates to the part 541 earnings thresholds, the Department asked for feedback in the 2017 RFI on how the salary and compensation levels should be updated going forward.139 Responses to this question were mixed. Proponents of an automatic updating mechanism cited lengthy delays between earlier salary level updates, disruptively large increases necessitated by such delays, and the desire for added certainty. Other stakeholders, however, argued that the Department lacked the authority to update the salary level automatically, that an automatic updating mechanism might not be sufficiently flexible to account for unique economic circumstances, and that affected members of the public would not have any influence over the magnitude or timing of future salary level updates. Commenters generally agreed that the earning thresholds should be updated more frequently than to date, but some commenters were concerned that frequent updating would be unduly disruptive. After considering the feedback provided in response to the RFI and at the listening sessions, the Department is committing to evaluate more frequently the part 541 earnings thresholds going forward. Specifically, the Department believes that the standard salary level and the HCE total annual compensation threshold should be proposed to be updated on a quadrennial basis (i.e., once every four years) through an NPRM published in the Federal Register, followed by notice-and-comment rulemaking. The Department intends to propose such updates using the same the special salary levels provided elsewhere in part 541. 137 81 FR 32430. 138 275 F. Supp. 3d at 808. 139 82 FR 34619. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules methodology as the most recent final rule, meaning, in the first instance, the methodology employed by the final rule for which this NPRM is providing notice and opportunity to comment. In these future rulemakings, the Department also intends to seek comment on whether to update the special salary levels that apply to the U.S. territories. Proposed quadrennial updates would ensure public input on how earning thresholds could continue to be up-to-date, while giving businesses sufficient time to adjust to these more frequent (and thus smaller) increases. The Secretary, however, may forestall proposing updates if economic or other factors so indicate. Accordingly, the Department proposes to delete the current (though not enforced) § 541.607, while affirming its intention to propose increasing the earnings thresholds every four years.140 The Department seeks comment from the public regarding this proposal. V. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, require the Department to consider the agency’s need for its information collections, their practical utility, as well as the impact of paperwork and other information collection burdens imposed on the public, and how to minimize those burdens. The PRA typically requires an agency to provide notice and seek public comments on any proposed collection of information contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8. Persons are not required to respond to the information collection requirements until the Office of Management and Budget (OMB) approves them under the PRA. This NPRM would revise the existing information collection requirement previously approved under OMB control number 1235–0018 (Records to be Kept by Employers—Fair Labor Standards Act) and OMB control number 1235–0021 (Employment 140 Were the Department to codify this commitment in the final rule, the codified provision could have the following two features. First, it could provide that the Department publish a Notice of Proposed Rulemaking in the Federal Register in January 2023, and every four years thereafter, proposing an update to the standard salary level and highly compensated employee threshold in accord with the same methodology in the Department’s most recent final rule establishing that salary level and threshold (the Notice would propose to retain the most recent levels set for the special salary levels applicable to U.S. territories, while inviting comment on whether to change them). And second, it could provide that the Secretary may, in his or her sole discretion, decline to publish the Notice of Proposed Rulemaking due to economic or other factors, with an accompanying notice published in the Federal Register giving the reason or reasons for declining. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Information Form) in that employers would need to maintain records of hours worked for more employees and more employees may file complaints to recover back wages under the overtime pay provision. As required by the PRA, the Department has submitted the information collection revisions to OMB for review to reflect changes that would result from this proposed rule were it to be adopted. Summary: FLSA section 11(c) requires all employers covered by the FLSA to make, keep, and preserve records of employees and of wages, hours, and other conditions of employment. An FLSA-covered employer must maintain the records for such period of time and make such reports as prescribed by regulations issued by the Secretary of Labor. The Department has promulgated regulations at 29 CFR part 516 to establish the basic FLSA recordkeeping requirements. This NPRM, if adopted, would not impose any new information collection requirements; rather, using the currently enforced 2004 salary level as the baseline, burdens under existing requirements are expected to increase as more employees receive minimum wage and overtime protections. More specifically, the proposed changes in this NPRM may cause an increase in burden on employers because they will have additional employees to whom certain long-established recordkeeping requirements apply (e.g., maintaining daily records of hours worked by employees who are not exempt from the both minimum wage and overtime provisions). Additionally, the proposed changes in this NPRM may cause an increase in burden if more employees file a complaint with WHD to collect back wages under the overtime pay requirements. The Department anticipates that this increased burden will wane over time as employers adjust to the new rule. Purpose and Use: WHD and employees use employer records to determine whether covered employers have complied with various FLSA requirements. Employers use the records to document compliance with the FLSA, including showing qualification for various FLSA exemptions. Additionally, WHD uses the Employment Information form to document allegations of noncompliance with labor standards the agency administers. Technology: The regulations prescribe no particular order or form of records, and employers may preserve records in forms of their choosing provided that facilities are available for inspection and transcription of the records. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 10915 Minimizing Small Entity Burden: Although the FLSA recordkeeping requirements do involve small businesses, including small state and local government agencies, the Department minimizes respondent burden by requiring no specific order or form of records in responding to this information collection. Burden is reduced on complainants by providing a template to guide answers. Public Comments: As part of its continuing effort to reduce paperwork and respondent burden, the Department conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance with the PRA. This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. The Department seeks public comments regarding the burdens imposed by the information collections associated with this NPRM. Commenters may send their views about this information collection to the Department in the same manner as all other comments (e.g., through the regulations.gov website). All comments received will be made a matter of public record and posted without change to http://www.regulations.gov, including any personal information provided. As previously noted, an agency may not conduct an information collection unless it has a currently valid OMB approval, and the Department has submitted information collection requests under OMB control numbers 1235–0018 and 1235–0021 in order to update them to reflect this rulemaking and provide interested parties a specific opportunity to comment under the PRA. See 44 U.S.C. 3507(d); 5 CFR 1320.11. Interested parties may receive a copy of the full supporting statements by sending a written request to the mailing address shown in the ADDRESSES section at the beginning of this preamble. In addition to having an opportunity to file comments with the Department, comments about the paperwork implications may be addressed to OMB. Comments to OMB should be directed to: Office of Information and Regulatory Affairs, Attention OMB Desk Officer for the Wage and Hour Division, Office of Management and Budget, Room 10235, 725 17th Street NW, Washington, DC 20503; Telephone: 202–395–5806 (this is not a toll-free number). OMB will consider all written comments that the E:\FR\FM\22MRP2.SGM 22MRP2 10916 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules agency receives within 30 days of publication of this proposed rule. Commenters are encouraged, but not required, to send the Department a courtesy copy of any comments sent to OMB. The courtesy copy may be sent via the same channels as comments on the rule. OMB and the Department are particularly interested in comments that: • Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; • Evaluate the accuracy of the agency’s estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; • Enhance the quality, utility, and clarity of the information to be collected; and • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses. Total annual burden estimates, which reflect both the existing and new responses for the recordkeeping and complaint process information collections, are summarized as follows: Type of Review: Revisions to currently approved information collections. Agency: Wage and Hour Division, Department of Labor. Title: Records to be Kept by Employers—Fair Labor Standards Act. OMB Control Number: 1235–0018. Affected Public: Private sector businesses or other for-profits, farms, not-for-profit institutions, state, local and tribal governments, and individuals or households. Estimated Number of Respondents: 5,588,627 (unaffected by this rulemaking). Estimated Number of Responses: 48,101,522 (2,583,333 added by this rulemaking). Estimated Burden Hours: 3,631,819 hours (2,583,333 added by this rulemaking). Estimated Time per Response: Various (unaffected by this rulemaking). Frequency: Various (unaffected by this rulemaking). Other Burden Cost: 0. Title: Employment Information Form. OMB Control Number: 1235–0021. Affected Public: Businesses or other for-profit, farms, not-for-profit VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 institutions, state, local and tribal governments, and individuals or households. Total Respondents: 35,819 (242 added by this rulemaking). Estimated Number of Responses: 35,819 (242 added by this rulemaking). Estimated Burden Hours: 11,940 (81 hours added by this rulemaking). Estimated Time per Response: 20 minutes (unaffected by this rulemaking). Frequency: Once. Other Burden Cost: 0. VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory Review Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of a regulation and to adopt a regulation only upon a reasoned determination that the regulation’s net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity) justify its costs. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Under Executive Order 12866, the Office of Management and Budget (OMB) must determine whether a regulatory action is a ‘‘significant regulatory action,’’ which includes an action that has an annual effect of $100 million or more on the economy. Significant regulatory actions are subject to review by OMB. As described below, this proposed rule is economically significant. Therefore, the Department has prepared a Preliminary Regulatory Impact Analysis (RIA) 141 in connection with this NPRM as required under section 6(a)(3) of Executive Order 12866, and OMB has reviewed the rule. When the Department uses a perpetual time horizon to allow for cost comparisons under Executive Order 13771,142 the annualized cost savings of the proposed rule is $224.0 million with 7 percent discounting. This proposed rule is accordingly expected to be an Executive Order 13771 deregulatory action. A. Introduction i. Background The FLSA requires covered employers to: (1) Pay employees who are covered and not exempt from the Act’s requirements not less than the federal 141 The terms ‘‘regulatory impact analysis’’ and ‘‘economic impact analysis’’ are used interchangeably throughout this Proposed Rule. 142 82 FR 9339 (Feb. 3, 2017). PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 minimum wage for all hours worked and overtime premium pay at a rate of not less than one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek, and (2) make, keep, and preserve records of their employees and of the wages, hours, and other conditions and practices of employment. It is widely recognized that the general requirement that employers pay a premium rate of pay for all hours worked over 40 in a workweek is a cornerstone of the Act, grounded in two policy objectives. The first policy objective is to reduce overwork and its detrimental effect on the health and well-being of workers. The second is to spread employment (or, in other words, reduce involuntary unemployment) by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours. The FLSA provides a number of exemptions from the Act’s minimum wage and overtime pay provisions, including one for bona fide executive, administrative, and professional (EAP) employees. Such employees perform work that cannot easily be spread to other workers after 40 hours in a week and that is difficult to standardize to any timeframe. They also typically receive more monetary and 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 to outside sales employees, as those terms are ‘‘defined and delimited’’ by the Department.143 The Department’s regulations implementing these ‘‘white collar’’ exemptions are codified at 29 CFR part 541. In 2004, the Department determined that two earnings level tests should be used to help employers distinguish nonexempt employees from exempt employees: The standard salary test, which it set at $455 a week, and the highly compensated employee (HCE) total-compensation test, which it set at $100,000 per year (see II.C. for further discussion). In 2016, the Department published a final rule setting the standard salary level at $913 per week and the HCE annual compensation level at $134,004. As previously discussed, the U.S. District Court for Eastern District of Texas declared the 2016 final rule invalid. The standard salary level should be an appropriate dividing-line between employees who are nonexempt and employees who may be performing exempt duties. The threshold essentially 143 29 E:\FR\FM\22MRP2.SGM U.S.C. 213(a)(1). 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules screens out obviously nonexempt employees whom Congress intended the FLSA’s minimum wage and overtime provisions to protect. Therefore, employers are not burdened with conducting a duties analysis to determine nonexempt status for the employees who fall below the threshold, as those employees are unlikely to pass the duties test for exemption. 10917 since 1938, organized by exemption and long/short/standard duties tests.144 The Department has revised the levels once in the 44 years since 1975.145 In contrast, in the 37 years between 1938 and 1975, the Department increased salary test levels approximately every five to nine years. ii. Need for Rulemaking The Department has updated the salary level test seven times since its implementation in 1938. Table 1 presents the weekly salary levels associated with the EAP exemptions TABLE 1—HISTORICAL SALARY LEVELS FOR THE EAP EXEMPTIONS 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 ................................................................................. $455 Since the update in 2004, the purchasing power, or real value, of the standard-salary level test has eroded substantially, and as a result, increasingly more workers earn above the salary threshold. Between 2004 and 2017, the real value of the standardsalary level declined 22.9 percent, calculated using the Consumer Price Index for all urban consumers (CPI–U).146 As a result of the erosion of the real value of the standard-salary level, more and more workers earn above the standard salary level. Each year that the salary level is not updated, its utility as a distinguishing mechanism between nonexempt and potentially exempt workers declines. For example, the annualized equivalent of the standard salary level set in 2004 ($23,660, or $455 per week for 52 weeks) is now below the 2017 poverty threshold for a family of four ($24,858).147 Similarly, in 2017, approximately 23 percent of fulltime salaried workers earned at least $100,000 annually, more than three times the share who earned that amount (6.3 percent) when the HCE test was created in 2004.148 In the 2004 rulemaking, the Department stated the intention to ‘‘update the salary levels on a more regular basis, as it did prior to 1975,’’ and added that the ‘‘salary levels should be adjusted when wage survey data and other policy concerns support such a change.’’ 149 In the 2016 final rule, the Department recognized that the salary level had become outdated and that an update was needed. As previously discussed, the U.S. District Court for Eastern District of Texas declared the 2016 final rule invalid because the standard salary level excluded from exemption too many employees who perform exempt duties. Now, to restore the value of the standard salary level as a line of demarcation between those workers for whom Congress clearly intended to provide minimum wage and overtime protections and other workers who may be bona fide EAPs, and to maintain the salary level’s continued validity, the Department proposes to update standard salary level using the 2004 methodology with current CPS data. Using pooled 2017 CPS MORG data, a salary level of $641 ($33,332 annually) corresponds to the 20th percentile of earnings for fulltime salaried workers in the South Census region and/or in the retail industry.150 To account for expected changes between 2017 and January 2020, and to make it so that the salary level will accurately reflect compensation at the approximate effective date, the salary level was inflated using the compound annual growth rate that increased the standard salary level from $455 to $641 over 15 years (2.31 percent = (($641/ $455)1/15¥1).151 Applying this growth rate for an additional 2.5 years (assuming 2017 data represents mid2017 on average) results in a January 2020 salary level of $679 ($641 × 1.02312.5). Similarly, to update the HCE total compensation requirement, the Department used CPS MORG data to ascertain the 90th percentile of all fulltime salaried workers in 2017 ($139,464), calculated the compound annual growth rate from 2002 to 2017 (2.24 percent), then applied that rate over 2.5 years to inflate the 2017 level to $147,414 for January 2020. Additionally, as just discussed, in this proposed rule the Department commits 144 From 1949 until 2004 the regulations contained two different tests for exemption—a long test for employees paid a lower salary that included a more rigorous examination of employees’ duties, and a short test for employees paid at a higher salary level that included a more flexible duties test. 145 The Department revised the EAP salary levels in 2004. In 2016, the Department also issued a final rule revising the EAP salary levels; however, on August 31, 2017, the U.S. District Court for Eastern District of Texas held that the 2016 final rule’s standard salary level exceeded the Department’s authority and was therefore invalid. See Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795 (E.D. Tex. 2017). Until the Department issues a new final rule, it is enforcing the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level set in the 2004 final rule. 146 CPI–U data available at: https://www.bls.gov/ data/inflation_calculator.htm. 147 This is the 2017 poverty threshold for a family of four with two related people under 18 in the household. Available at: https://www.census.gov/ data/tables/time-series/demo/income-poverty/ historical-poverty-thresholds.html. 148 Calculated using pooled CPS MORG data. 149 69 FR 22171. 150 Excluding workers who are not subject to FLSA, not subject to the salary level test, or in agriculture or transportation. 151 The standard salary level of $455 per week became effective in 2004. However, this level was determined using 2002 CPS MORG data. We therefore calculated the compound annual growth rate over 15 years, from 2002 to 2017. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10918 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules to evaluate more frequently the part 541 earnings thresholds going forward. Specifically, the Department intends to update the earnings thresholds once every four years (see section IV.E for further discussion). Such proposed quadrennial updates would preserve the effectiveness of the salary level as a dividing line between nonexempt workers and workers who may be exempt, eliminate the volatility associated with previous changes in the thresholds, and increase certainty for employers with respect to future changes. iii. Summary of Affected Workers, Costs, Benefits, and Transfers The Department estimated the number of affected workers and quantified costs and transfer payments associated with this proposed rule, using the currently enforced 2004 salary level as the baseline. To produce these estimates, the Department used data from the pooled CPS MORG data. See section VI.B. Most critically, the Department estimates that 1.1 million workers who would otherwise be exempt under the currently enforced standard salary level of $455 per week would become eligible for overtime, and that 3.6 million employees paid between $455 and $679 per week who fail the standard duties test (i.e., that are and will remain nonexempt) would have their overtime eligibility made clearer because their salary would fall below the proposed threshold. The Department estimated that in Year 1, there would be 46.2 million white collar salaried employees whom a change to the Department’s part 541 regulations may affect.152 Of these workers, the Department estimated that 31.9 million would be exempt from the minimum wage and overtime pay provisions under the part 541 EAP regulations promulgated in 2004 (i.e., in the baseline scenario without the rule taking effect). The other 14.3 million workers would not satisfy the duties tests for EAP exemption and/or earn less than $455 per week.153 However, of the 152 This excludes workers who are exempt under another FLSA exemption and thus would remain exempt from minimum wage and overtime pay protections without qualifying for the EAP exemption. 153 Here and elsewhere in this analysis, numbers are reported at varying levels of aggregation, and are VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 31.9 million workers, 7.6 million were in ‘‘named occupations’’ and thus only needed to pass the duties tests to be subject to the standard EAP exemptions.154 Therefore, these workers were not considered in the analysis, leaving 24.3 million EAP exempt workers potentially affected by this proposed rule. In Year 1, an estimated 1.1 million workers would be affected by the proposed increase in the standard salary level test (Table 2). This figure consists of currently exempt workers subject to the salary level test who earn at least $455 per week but less than $641 per week (the Department analyzed the economic effects of a standard salary level of $641 per week using pooled 2017 CPS MORG data as the best representation of the likely economic effects of the proposed standard salary level of $679 per week taking effect in 2020).155 Additionally, an estimated 201,100 workers would be affected by the increase in the HCE compensation test from $100,000 per year to $139,464 per year (the Department analyzed the economic effects of an HCE compensation level of $139,464 per year using pooled 2017 CPS MORG data as the best representation of the likely economic effects of the proposed HCE compensation level of $147,414 per year taking effect in 2020). By Year 10,156 the generally rounded to a single decimal point. However, calculations are performed using exact numbers. Therefore, some numbers may not match the reported total or the calculation shown due to rounding of components. 154 Workers not subject to the EAP salary level test include teachers, physicians, lawyers, judges, and outside sales workers. Additionally, academic administrative personnel are not subject to the EAP salary level test if they are paid on a salary basis equivalent to an entry level teacher in their institution. 155 The Department performed a preliminary check of an analogous three-year gap that indicates that 2014 data would yield a prediction of more potentially affected workers than the 2017 data. This result may be driven by the late 2016 and 2017 data showing the effects of employers adjusting workers’ salaries, implicit wages, and hourly/ salaried status in anticipation of the 2016 rule taking effect. 156 Although the Department anticipates proposing to update the standard salary and HCE compensation level requirements periodically, the proposed updates are not required under this rulemaking and therefore are not included in this RIA. Future updates will be proposed and promulgated through notice and comment rulemaking and will be accompanied by their own RIA. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 Department estimates that 625,000 workers would be affected by the change in the standard salary level test and 426,000 workers would be affected by the change in the HCE total annual compensation test, compared to a baseline assuming the currently enforced earnings thresholds (i.e., $455 per week and $100,000 per year) remain unchanged.157 This analysis quantifies three direct costs to employers: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs (see section VI.D.iii for further discussion on costs). The costs presented here are the combined costs for both the change in the standard salary level test and the HCE total compensation level (these will be disaggregated in section VI.D.iii). Total annualized direct employer costs over the first 10 years were estimated to be $120.5 million, assuming a 7 percent discount rate 158 (Table 2). In addition to the costs described above, this proposed rule will also transfer income from employers to employees in the form of wages. The Department estimated annualized transfers would be $429.4 million. The majority of these transfers would be attributable to the FLSA’s overtime provision; a smaller share would be attributable to the FLSA’s minimum wage requirement. Transfers also include salary increases for some affected EAP workers to preserve their exempt status. Employers may incur additional costs, such as hiring new workers. These other potential costs are discussed in section VI.D.iii. The proposed rulemaking could provide some benefits; however, these benefits could not be quantified due to data limitations, requiring the Department to discuss such benefits qualitatively. See VI.D.v. 157 In later years, earnings growth will cause some workers to no longer be affected because their earnings will exceed the new salary threshold. Additionally, some workers will become newly affected because their earnings will exceed $455 per week, and in the absence of this Proposed Rule would have lost their overtime protections. To estimate the total number of affected workers over time, the Department accounts for both of these effects. 158 Hereafter, unless otherwise specified, annualized values will be presented using the 7 percent real discount rate. E:\FR\FM\22MRP2.SGM 22MRP2 10919 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 2—SUMMARY OF REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS [Millions in 2017$] Future years a Impact Annualized value Year 1 Year 2 Year 10 3% Real discount rate 7% Real discount rate Affected Workers (1,000s) Standard ....................................................................... HCE .............................................................................. 1,070 201 1,027 215 625 426 ............................ ............................ ............................ ............................ Total ...................................................................... 1,271 1,241 1,051 ............................ ............................ $67.8 447.1 $112.6 428.0 $120.5 429.4 Costs and Transfers (Millions in Direct employer costs .................................................. Transfers c .................................................................... $464.2 526.9 2017$) b $74.2 421.3 a These cost and transfer figures 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 from employers to workers. There may also be transfers of hours and income from some workers to others. b Costs iv. Terminology and Abbreviations The following terminology and abbreviations will be used throughout this RIA. Affected EAP workers: The population of potentially affected EAP workers who either pass the standard duties test and earn at least $455 but less than the new salary level (for this analysis modeled as $641 in Year 1), or pass only the HCE duties test and earn at least $100,000 but less than the new HCE compensation level (for this analysis modeled as $139,464 in Year 1). This was estimated to be 1.3 million workers. Baseline EAP exempt workers: The projected number of workers who would be EAP exempt if the rulemaking did not take effect. BLS: Bureau of Labor Statistics. CPI–U: Consumer Price Index for all urban consumers. CPS: Current Population Survey. Duties test: To be exempt from the FLSA’s minimum wage and overtime requirements under section 13(a)(1), the employee’s primary job duty must involve bona fide executive, administrative, or professional duties as defined by the regulations. The Department distinguishes among four such tests: Standard duties test: The duties test used in conjunction with the standard salary level test, as set in 2004 and applied to date, to determine eligibility for the EAP exemptions. It replaced the short and long tests in effect from 1949 to 2004, but its criteria closely follow those of the former short test. HCE duties test: The duties test used in conjunction with the HCE total annual compensation requirement, as set in 2004 and applied to date, to determine eligibility for the HCE exemption. It is much less stringent VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 than the standard and short duties tests to reflect that very highly paid employees are much more likely to be properly classified as exempt. Long duties test: One of two duties tests used from 1949 until 2004; this more restrictive duties test had a greater number of requirements, including a limit on the amount of nonexempt work that could be performed, and was used in conjunction with a lower salary level to determine eligibility for the EAP exemptions (see Table 1). Short duties test: One of two duties tests used from 1949 to 2004; this less restrictive duties test had fewer requirements, did not limit the amount of nonexempt work that could be performed, and was used in conjunction with a higher salary level to determine eligibility for the EAP exemptions (see Table 1). EAP: Executive, administrative, and professional. HCE: Highly compensated employee; a category of EAP exempt employee, established in 2004 and characterized by high earnings and a minimal duties test. Hourly wage: For the purpose of this PRIA, the amount an employee is paid for an hour of work. Base hourly wage: The hourly wage excluding any overtime payments. Also used to express the wage rate without accounting for benefits. Implicit hourly wage: Hourly wage calculated by dividing reported weekly earnings by reported hours worked. Straight time wage: Another term for the hourly wage excluding any overtime payments. MORG: Merged Outgoing Rotation Group supplement to the CPS. Conducted on approximately one-fourth of the CPS sample monthly to obtain PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 information on weekly hours worked and earnings. Named occupations: Workers in named occupations are not subject to the salary level or salary basis tests. These occupations include teachers, academic administrative personnel,159 physicians,160 lawyers, judges,161 and outside sales workers. Overtime workers: The Department distinguishes between two types of overtime workers in this analysis. Occasional overtime workers: The Department uses two steps to identify occasional overtime workers. First, all workers who report they usually work 40 hours or less per week (identified with variable PEHRUSL1 in CPS MORG) but in the survey (or reference) week worked more than 40 hours (variable PEHRACT1 in CPS MORG) are classified as occasional overtime workers. Second, some additional workers who do not report usually working overtime and did not report working overtime in the reference week 159 Academic administrative personnel (including admissions counselors and academic counselors) need to be paid either (1) the salary level or (2) a salary that is at least equal to the entrance salary for teachers in the educational establishment at which they are employed. See § 541.204(a)(1). Entrance salaries at the educational establishment of employment cannot be distinguished in the data and so this alternative is not considered (thus these employees were excluded from the analysis, the same as was done in the 2004 final rule). 160 The term physician includes medical doctors including general practitioners and specialists, osteopathic physicians (doctors of osteopathy), podiatrists, dentists (doctors of dental medicine), and optometrists (doctors of optometry or with a Bachelor of Science in optometry). See § 541.304(b). 161 Judges may not be considered ‘‘employees’’ under the FLSA definition. However, since this distinction cannot be made in the data, all judges are excluded (the same as was done in the 2004 final rule). Including these workers in the model as FLSA employees would not impact the estimate of affected workers. E:\FR\FM\22MRP2.SGM 22MRP2 10920 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules are randomly selected to be classified as occasional overtime workers so that the proportion of workers who work overtime in our sample matches the proportion of workers, measured using SIPP data, who work overtime at some point in the year. Regular overtime workers: Workers who report they usually work more than 40 hours per week (identified with variable PEHRUSL1 in CPS MORG). Pooled 2017 CPS MORG data: CPS MORG data from 2015–2017 with earnings inflated to 2017 dollars and sample observations weighted to reflect employment in 2017. Pooled data were used to increase sample size. The analytic database will be updated to pool CPS MORG data from 2016–2018 for the final rulemaking. Potentially affected EAP workers: EAP exempt workers who are not in named occupations and are included in the analysis (i.e., white collar, salaried, not eligible for another (non-EAP) overtime pay exemption). This is estimated to be 24.3 million workers. Price elasticity of demand (with respect to wage): The percentage change in labor hours demanded in response to a one percent change in wages. Real dollars (2017$): Dollars adjusted using the CPI–U to estimate the purchasing power they would have in 2017. Salary basis test: The EAP exemptions’ requirement that workers be paid on a salary basis, that is, a predetermined amount that cannot be reduced because of variations in the quality or quantity of the employee’s work. Salary level test: The salary a worker must earn to be subject to the EAP exemptions. The Department distinguishes among four such tests: Standard salary level: The weekly salary level associated with the standard duties test that determines eligibility for the EAP exemptions. The standard salary level was set at $455 per week in the 2004 final rule. HCE compensation level: Workers who meet the standard salary level requirement but not the standard duties test nevertheless are exempt if they pass a minimal duties test and earn at least the HCE total annual compensation required amount. The HCE required compensation level was set at $100,000 per year in the 2004 final rule, of which at least $455 per week must be paid on a salary or fee basis. Short test salary level: The weekly salary level associated with the short duties test (eliminated in 2004). Long test salary level: The weekly salary level associated with the long duties test (eliminated in 2004). VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 SIPP: Survey of Income and Program Participation. Workers covered by the FLSA and subject to the Department’s part 541 regulations: Includes all workers except those excluded from the analysis because they are not covered by the FLSA or subject to the Department’s requirements. Excluded workers include: Members of the military, unpaid volunteers, the self-employed, many religious workers, and federal employees (with a few exceptions).162 The Department also notes that the terms employee and worker are used interchangeably throughout this analysis. B. Methodology To Determine the Number of Potentially Affected EAP Workers i. Overview This section explains the methodology used to estimate the number of workers who are subject to the part 541 regulations and the number of potentially affected EAP workers. In this proposed rule, as in the 2004 final rule, the Department estimated the number of EAP exempt workers because there is no data source that identifies workers as EAP exempt. Employers are not required to report EAP exempt workers to any central agency or as part of any employee or establishment survey.163 The methodology described here is largely based on the approach the Department used in the 2004 and 2016 final rules.164 ii. Data The estimates of EAP exempt workers were based on data drawn from the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and the BLS. The CPS is a large, nationally representative sample of the labor force. Households are surveyed for four 162 Employees of firms with annual revenue less than $500,000 who are not engaged in interstate commerce are also not covered by the FLSA. However, these workers are not excluded from this analysis because the Department has no reliable way of estimating the size of this worker population, although the Department believes it composes a small percent of workers. These workers were also not excluded from the 2004 final rule. 163 In 2015, RAND released results from a survey conducted to estimate EAP exempt workers. However, this survey does not have the variables or sample size necessary for the Department to base the RIA on this analysis. Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor Standards Act: Worker Misclassification and the Hours and Earnings Effects of Expanded Coverage. RAND Labor and Population. 164 See 69 FR 22196–209; 81 FR 32453–60. Where the proposal follows the methodology used to determine affected workers in both the 2004 and 2016 final rules citations to both rules are not always included. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 months, excluded from the survey for eight months, surveyed for an additional four months, then permanently dropped from the sample. During the last month of each rotation in the sample (month 4 and month 16), employed respondents complete a supplementary questionnaire in addition to the regular survey.165 This supplement contains the detailed information on earnings necessary to estimate a worker’s exemption status. Responses are based on the reference week, which is always the week that includes the 12th day of the month. Although the CPS MORG is a large scale survey, administered to approximately 15,000 households monthly representing the entire nation, it is still possible to have relatively few observations when looking at subsets of employees, such as exempt workers in a specific occupation employed in a specific industry, or workers in a specific geographic location. To increase the sample size, the Department pooled together three years of CPS MORG data (2015 through 2017). Earnings for each 2015 and 2016 observation were inflated to 2017 dollars using the CPI–U. The Department requests comments on whether there are better options for projecting salary growth than the application of a broad inflation index, and if a broad index is used, whether it should be CPI–U, or whether another inflation measure such as the GDP Deflator or the Personal Consumption Expenditures (PCE) price index would be more appropriate. The weight of each observation was adjusted so that the total number of potentially affected EAP workers in the pooled sample remained the same as the number for the 2017 CPS MORG. Thus, the pooled CPS MORG sample uses roughly three times as many observations to represent the same total number of workers in 2017. The additional observations allow the Department to better characterize certain attributes of the potentially affected labor force. This pooled dataset is used to estimate all impacts of the proposed rulemaking. For the analyses supporting the final rule, the Department anticipates using pooled CPS–MORG data updated to include 2016 through 2018. Some assumptions were necessary to use these data as the basis for the analysis. For example, the Department eliminated workers who reported that their weekly hours vary and provided no additional information on hours 165 This is the outgoing rotation group (ORG); however, this analysis uses the data merged over twelve months and thus will be referred to as MORG. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules worked. This was done because the Department cannot estimate effects for these workers since it is unknown whether they work overtime and therefore unknown whether there would be any need to pay for overtime if their status changed from exempt to nonexempt. The Department reweighted the rest of the sample to account for this change (i.e., to keep the same total employment estimates).166 This adjustment assumes that the distribution of hours worked by workers whose hours do not vary is representative of hours worked by workers whose hours do vary. The Department believes that without more information this is an appropriate assumption.167 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 166 The Department also reweighted for workers reporting zero earnings. In addition, the Department eliminated, without reweighting, workers who both reported usually working zero hours and working zero hours in the past week. 167 This is justifiable because demographic and employment characteristics are similar across these two populations (e.g., age, gender, education, distribution across industries, share paid nonhourly). The share of all workers who stated that their hours vary (but provided no additional information) is 5.2 percent. To the extent these excluded workers are exempt, if they tend to work more overtime than other workers, then transfer payments and costs may be underestimated. Conversely, if they work fewer overtime hours, then transfer payments and costs may be overestimated. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Department’s part 541 regulations, the Department excluded workers who are not subject to its regulations or whom the FLSA does not cover. This may happen, for instance, if a worker is not an employee under the FLSA. These workers include military personnel, unpaid volunteers, self-employed individuals, clergy and other religious workers, and federal employees (with a few exceptions described below). Many of these workers are excluded from the CPS MORG, including members of the military on active duty and unpaid volunteers. Self-employed and unpaid workers are included in the CPS MORG, but have no earnings data reported and thus are excluded from the analysis. The analysis excluded religious workers identified by their occupation codes: ‘clergy’ (Census occupational code 2040), ‘directors, religious activities and education’ (2050), and ‘religious workers, all other’ (2060). Most employees of the federal government are covered by the FLSA but not the Department’s part 541 regulations because the Office of Personnel Management (OPM) regulates their entitlement to minimum wage and overtime pay.168 Exceptions exist for U.S. Postal Service employees, Tennessee Valley Authority employees, and Library of Congress employees.169 The analysis identified and included 168 See 29 U.S.C. 204(f). Federal workers are identified in the CPS MORG with the class of worker variable PEIO1COW. 169 See id. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 10921 these covered federal workers using occupation and/or industry codes.170 The FLSA also does not cover employees of firms that have annual revenue of less than $500,000 and who are not engaged in interstate commerce. The Department does not exclude them from the analysis, however, because it has no reliable way of estimating the size of this worker population, although the Department believes it is a small percentage of workers. The 2004 final rule analysis similarly did not adjust for these workers. The Department estimated that in Year 1 there would be 160.7 million wage and salary workers in the United States (Figure 1). Of these, 135.9 million would be covered by the FLSA and subject to the Department’s regulations (84.6 percent). The remaining 24.8 million workers would be excluded from FLSA coverage for the reasons described above. Figure 1 illustrates how the Department analyzed the U.S. civilian workforce through successive stages to estimate the number of potentially affected EAP workers. 170 Postal Service employees were identified with the Census industry classification for postal service (6370). Tennessee Valley Authority employees were identified as federal workers employed in the electric power generation, transmission, and distribution industry (570) and in Kentucky, Tennessee, Mississippi, Alabama, Georgia, North Carolina, or Virginia. Library of Congress employees were identified as federal workers under Census industry ‘libraries and archives’ (6770) and residing in Washington DC. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules iv. Number of Workers in the Analysis After limiting the analysis to workers covered by the FLSA and subject to the Department’s part 541 regulations, several other groups of workers were identified and excluded from further analysis since this proposed rule is unlikely to affect them. These include blue collar workers, workers paid on an hourly basis, and workers who are exempt under certain other (non-EAP) exemptions. The Department excluded a total of 89.7 million workers from the analysis for one or more of these reasons, which often overlapped (e.g., many blue collar workers are also paid hourly). The Department estimated that in 2017 there were 49.0 million blue collar workers. These workers were identified in the CPS MORG data following the methodology from the U.S. Government Accountability Office’s (GAO) 1999 white collar exemptions report 171 and the Department’s 2004 regulatory impact analysis. See 69 FR 22240–44. Supervisors in traditionally blue collar industries were classified as white 171 GAO/HEHS. (1999). Fair Labor Standards Act: White Collar Exemptions in the Modern Work Place. GAO/HEHS–99–164, 40–41. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 collar workers because their duties are generally managerial or administrative, and therefore they were not excluded as blue collar workers. Using the CPS variable indicating a respondent’s hourly wage status, the Department determined that 79.9 million workers were paid on an hourly basis in 2017.172 Also excluded from further analysis were workers who were exempt under certain other (non-EAP) exemptions. Although some of these workers may also be exempt under the EAP exemptions, they would independently remain exempt from the minimum wage and/or overtime pay provisions based on the non-EAP exemptions. The Department excluded an estimated 4.9 million workers, including some agricultural and transportation workers, from further analysis because they would be subject to another (non-EAP) overtime exemption. See Appendix A: Methodology for Estimating Exemption Status, contained in the rulemaking docket, for details on how this population was identified. Agricultural and transportation workers are two of the largest groups of workers excluded from the population 172 CPS PO 00000 MORG variable PEERNHRY. Frm 00024 Fmt 4701 Sfmt 4702 of potentially affected EAP workers in the current analysis, and with some exceptions, they were similarly excluded in 2004. The 2004 final rule excluded all workers in agricultural industries from the analysis,173 while the current analysis, similar to the 2016 analysis, only excludes agricultural workers from specified occupationalindustry combinations since not all workers in agricultural industries qualify for the agricultural overtime pay exemptions. The exclusion of transportation workers matched the method for the 2004 final rule. Transportation workers were defined as those who are subject to the following FLSA exemptions: Section 13(b)(1), section 13(b)(2), section 13(b)(3), section 13(b)(6), or section 13(b)(10). The Department excluded 1.0 million agricultural workers and 2.1 million transportation workers from the analysis. In addition, the Department excluded another 1.8 million workers who fall within one or more other FLSA minimum wage and overtime exemptions. The criteria for determining exempt status for agricultural and transportation workers are detailed in 173 69 E:\FR\FM\22MRP2.SGM FR 22197. 22MRP2 EP22MR19.000</GPH> 10922 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules Appendix A. However, of these 1.8 million workers, all but 23,700 are either blue collar or hourly, and thus the effect of excluding these workers is negligible. when the HCE compensation level exceeds $150,000.175 176 Earnings were not imputed for previous rulemakings because the HCE salary level was significantly below the topcoded value. v. Number of Potentially Affected EAP Workers After excluding workers not subject to the Department’s FLSA regulations and workers who are unlikely to be affected by this proposed rule (i.e., blue collar workers, workers paid hourly, workers who are subject to another (non-EAP) overtime exemption), the Department estimated there would be 46.2 million salaried white collar workers for whom employers might claim either the standard EAP exemption or the HCE exemption. To be exempt under the standard EAP test, the employee must: • Be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); 174 • earn at least a designated salary amount (the 2004 final rule set the salary level at $455 per week (the standard salary level test)); and • primarily perform exempt work, as defined by the regulations (the standard duties test). The 2004 final rule’s HCE test allows certain highly-paid employees to qualify for exemption as long as they customarily and regularly perform one or more exempt job duties. The HCE annual compensation level set in the 2004 final rule was $100,000, including at least $455 per week paid on a salary or fee basis. The CPS annual earnings variable is topcoded at $150,000 (i.e., workers earning above $2,884.61 ($150,000/52 weeks) per week are reported as earning $2,884.61 per week). Topcoding helps protect respondent confidentiality. Because the proposed HCE salary level is close to the topcoded value, the Department imputed earnings for topcoded workers in the CPS data to adequately estimate affected workers Salary Basis The Department included only nonhourly workers in the analysis based on CPS data.177 For this rulemaking, the Department considered data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers. The Department notes that it made the same assumption regarding nonhourly workers in the 2004 final rule.178 The CPS population of ‘‘nonhourly’’ workers includes workers who are paid on a piece-rate, a day-rate, or largely on bonuses or commissions. Data in the CPS are not available to distinguish between salaried workers and these other nonhourly workers. However, the Panel Study of Income Dynamics (PSID) provides additional information on how nonhourly workers are paid. In the PSID, respondents are asked how they are paid on their main job and are also asked for more detail if their response is other than salaried or hourly. Possible responses include piecework, commission, self-employed/farmer/ profits, and by the job/day/mile. The Department analyzed the PSID data and found that relatively few nonhourly workers were paid by methods other than salaried. The Department is not aware of any statistically robust source that more closely reflects salary as defined in its regulations. 174 Some computer employees may be exempt even if they are not paid on a salary basis. Hourly computer employees who earn at least $27.63 per hour and perform certain duties are exempt under section 13(a)(17) of the FLSA. These workers are considered part of the EAP exemptions but were excluded from the analysis because they are paid hourly and will not be affected by this Proposed Rule (these workers were similarly excluded in the 2004 analysis). Salaried computer workers are exempt if they meet the salary and duties tests applicable to the EAP exemptions, and are included in the analysis since they will be impacted by this Proposed Rule. Additionally, administrative and professional employees may be paid on a fee basis, as opposed to a salary basis. § 541.605(a). Although, the CPS MORG does not identify workers paid on a fee basis, they are considered nonhourly workers in the CPS and consequently are correctly classified as ‘‘salaried’’ (as was done in the 2004 final rule). VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Salary Level Weekly earnings are available in the CPS MORG data, which allowed the Department to estimate how many nonhourly workers pass the salary level tests.179 However, the CPS earnings variable does not perfectly reflect the Department’s definition of earnings. First, the CPS includes all nondiscretionary bonuses and commissions, which may be used to satisfy up to 10 percent of the new standard salary level under this 175 We used the standard Pareto distribution approach to impute earnings above the topcoded value as described in Armour, P. and Burkhauser, R. (2013). Using the Pareto Distribution to Improve Estimates of Topcoded Earnings. Center for Economic Studies (CES). 176 Earnings exceeding the topcoded value only affect the analyses regarding potential updates. 177 The CPS variable PEERNHRY identifies workers as either hourly or nonhourly. 178 See 69 FR 22197. 179 The CPS MORG variable PRERNWA, which measures weekly earnings, is used to identify weekly salary. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 10923 proposed rule. This discrepancy between the earnings variable used and the FLSA definition of salary may cause a slight overestimation of the number of workers estimated to meet the standard salary level test. Second, CPS earnings data includes overtime pay, commissions, and tips. The Department notes that employers may factor into an employee’s salary a premium for expected overtime hours worked. To the extent they do so, that premium would be reflected in the data. Similarly, the Department believes tips will be an uncommon form of payment for these workers since tips are uncommon for white collar workers. The Department also believes that commissions make up a relatively small share of earnings among nonhourly employees.180 Duties The CPS MORG data do not capture information about job duties; therefore, the Department used occupational titles, combined with probability estimates of passing the duties test by occupational title, to estimate the number of workers passing the duties test. This methodology is very similar to the methodology used in the 2004 rulemaking, and the Department believes it is the best available methodology. In 2004, to determine whether a worker met the duties test, the Department used an analysis performed by WHD in 1998 in response to a request from the GAO. Because WHD enforces the FLSA’s overtime requirements and regularly assesses workers’ exempt status, WHD was uniquely qualified to provide the analysis. The analysis was used in both the GAO’s 1999 white collar exemptions report 181 and the Department’s 2004 regulatory impact analysis.182 WHD examined 499 occupational codes, excluding nine that were not relevant to the analysis for various reasons (one code was assigned to unemployed persons whose last job was in the Armed Forces, some codes were assigned to workers who are not FLSA covered, others had no observations). Of the remaining occupational codes, WHD 180 In the PSID, relatively few nonhourly workers were paid by commission. Additionally, according to the BLS ECI, about 5 percent of the private workforce is incentive-paid workers (incentive pay is defined as payment that relates earnings to actual individual or group production). See William J. Wiatrowski, Bureau of Labor Statistics, The Effect of Incentive Pay on Rates of Change in Wages and Salaries (November 24, 2009), http://www.bls.gov/ opub/mlr/cwc/the-effect-of-incentive-pay-on-ratesof-change-in-wages-and-salaries.pdf, at 1. 181 Fair Labor Standards Act: White Collar Exemptions in the Modern Work Place, supra note 171, at 40–41, https://www.gao.gov/assets/230/ 228036.pdf. 182 See 69 FR 22198. E:\FR\FM\22MRP2.SGM 22MRP2 10924 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules determined that 251 occupational codes likely included EAP exempt workers and assigned one of four probability codes reflecting the estimated likelihood, expressed as ranges, that a worker in a specific occupation would perform duties required to meet the EAP duties tests. The Department supplemented this analysis in the 2004 final rule regulatory impact analysis when the HCE exemption was introduced. The Department modified the four probability codes for highly paid workers based upon our analysis of the provisions of the highly compensated test relative to the standard duties test (Table 3). To illustrate, WHD assigned exempt probability code 4 to the occupation ‘‘first-line supervisors/managers of construction trades and extraction workers’’ (Census code 6200), which indicates that a worker in this occupation has a 0 to 10 percent likelihood of meeting the standard EAP duties test. However, if that worker earned at least $100,000 annually, he or she was assigned a 15 percent probability of passing the shorter HCE duties test. The occupations identified in GAO’s 1999 report and used by the Department in the 2004 final rule map to an earlier occupational classification scheme (the 1990 Census occupational codes). For this proposed rule, the Department used occupational crosswalks to map the previous occupational codes to the 2002 Census occupational codes and then to the 2010 Census occupational codes, which are used in the CPS MORG 2015 through 2017 data.183 If a new occupation comprises more than one previous occupation, then the new occupation’s probability code is the weighted average of the previous occupations’ probability codes, rounded to the closest probability code. TABLE 3—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 (%) Upper bound (%) 0 100 94 58.4 15 0 100 96 60 15 These codes provide information on the likelihood that an employee in a category met the duties test but they do not identify the workers in the CPS MORG who actually passed the test. Therefore, the Department designated workers as exempt or nonexempt based on the probabilities. For example, for every ten public relations managers, between five and nine were estimated to pass the standard duties test (based on probability category 2). However, it is unknown which of these ten workers are exempt; therefore, the Department must determine the status for these workers. Exemption status could be randomly assigned with equal probability, but this would ignore the earnings of the worker as a factor in determining the probability of exemption. The probability of qualifying for the exemption increases with earnings because higher paid workers are more likely to perform the required duties, an assumption to which both the Department in the 2004 final rule and the GAO in its 1999 Report adhered.184 The Department estimated the probability of exemption for each worker as a function of both earnings and the occupation’s exempt probability category using a gamma distribution.185 Based on these revised probabilities, each worker was assigned exempt or nonexempt status based on a random draw from a binomial distribution using the worker’s revised probability as the probability of success. Thus, if this method is applied to ten workers who each have a 60 percent probability of being exempt, six workers would be expected to be designated as exempt.186 However, which particular workers are designated as exempt may vary with each set of ten random draws. For details see Appendix A, (in the rulemaking docket). The Department acknowledges that the probability codes used to determine the share of workers in an occupation who are EAP exempt are 21-years old. However, the Department believes the probability codes continue to estimate exemption status accurately given the fact that the standard duties test is not substantively different from the former short duties tests reflected in the codes. For the 2016 rulemaking, the Department looked at O*NET 187 to determine the extent to which the 1998 probability codes reflected current occupational duties. The Department’s review of O*NET verified the continued appropriateness of the 1998 probability codes. 183 References to occupational codes in this analysis refer to the 2002 Census occupational codes. Crosswalks and methodology available at: https://www.census.gov/topics/employment/ industry-occupation/guidance/code-lists.html. 184 For the standard exemption, the relationship between earnings and exemption status is not linear and is better represented with a gamma distribution. For the HCE exemption, the relationship between earnings and exemption can be well represented with a linear function because the relationship is linear at high salary levels (as determined by the Department in the 2004 final rule). Therefore, the gamma model and the linear model would produce similar results. See 69 FR 22204–08, 22215–16. 185 The gamma distribution was chosen because, during the 2004 revision, this non-linear distribution best fit the data compared to the other non-linear distributions considered (i.e., normal and lognormal). A gamma distribution is a general type of statistical distribution that is based on two parameters that control the scale (alpha) and shape (in this context, called the rate parameter, beta). 186 A binominal distribution is frequently used for a dichotomous variable where there are two possible outcomes; for example, whether one owns a home (outcome of 1) or does not own a home (outcome of 0). Taking a random draw from a binomial distribution results in either a zero or a one based on a probability of ‘‘success’’ (outcome of 1). This methodology assigns exempt status to the appropriate share of workers without biasing the results with manual assignment. 187 The O*NET database contains hundreds of standardized and occupation-specific descriptions. See http://www.onetcenter.org. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 Potentially Affected Exempt EAP Workers The Department estimated that of the 46.2 million salaried white collar workers considered in the analysis, 31.9 million qualified for the EAP exemption under the current regulations. Some of these workers were excluded from further analysis because the proposed rule would not affect them. This excluded group contains workers in named occupations who are not required to pass the salary requirements E:\FR\FM\22MRP2.SGM 22MRP2 10925 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules (although they must still pass a duties test) and therefore whose exemption status does not depend on their earnings. These occupations include physicians (identified with Census occupation codes 3010, 3040, 3060, 3120), lawyers (2100), teachers (occupations 2200–2550 and industries 7860 or 7870), academic administrative personnel (school counselors (occupation 2000 and industries 7860 or 7870) and educational administrators (occupation 0230 and industries 7860 or 7870)), and outside sales workers (a subset of occupation 4950). Out of the 31.9 million workers who were EAP exempt, 7.6 million, or 23.9 percent, were expected to be in named occupations in 2017. Thus, changes in the standard salary level and HCE compensation tests would not affect these workers. The 24.3 million EAP exempt workers remaining in the analysis are referred to in this proposed rule as ‘‘potentially affected.’’ Based on analysis of the occupational codes and CPS earnings data (described above), the Department has concluded that in Year 1, in the baseline scenario in which the rule does not change, of the 24.3 million potentially affected EAP workers, approximately 15.8 million will pass only the standard EAP test, 8.2 million will pass both the standard and the HCE tests, and approximately 310,000 will pass only the HCE test. C. Determining the Revised Salary and Compensation Levels For the reasons discussed in section IV.A.iii, the Department has decided to update the 2004 standard salary level by reapplying the 2004 methodology. Using pooled 2017 CPS MORG data, the 20th percentile of earnings for full-time salaried workers in the South and/or in the retail industry roughly corresponds to a standard salary level of $641.188 The proposed rule then inflates this standard salary level to January 2020 by applying 2.5 years of growth, calculated as the compound annual growth rate between a weekly salary level of $455 (based on 2002 data) and a weekly salary level of $641 (based on 2017 data) (2.31 percent).189 Applying this rate to the $641 salary level results in a January 2020 salary level of $679. For the HCE compensation level, the Department used 2017 CPS MORG data to ascertain the earnings for the 90th percentile of all full-time salaried workers ($139,464),190 which, when inflated to January 2020 using the compound annual growth rate between 2002 and 2017 in the HCE compensation level (2.24 percent), results in a proposed HCE annual compensation level of $147,414.191 i. Rationale for the Methodologies Chosen As explained in greater detail earlier in sections IV.A.iii and IV.D, upon further consideration, the Department believes that the earnings thresholds and methodology established in the 2004 final rule—i.e., the $455 per week standard salary level and the $100,000 per year HCE total annual compensation requirement—were appropriate at the time they were adopted. Those thresholds have never been challenged in court, and their use promotes familiarity and stability. The Department accordingly believes that reapplying the 2004 method to update the salary levels set in 2004 to account for earnings growth in the intervening years is also appropriate. The Department proposes to use the same methodology used in 2004 for the standard salary level, setting it at the 20th percentile of full-time salaried workers in the South and/or in the retail sector nationally. The Department proposes to set the HCE total annual compensation requirement using the 2016 final rule methodology, i.e., equivalent to the earnings of the 90th percentile of all full-time salaried workers nationally. The Department proposes to then inflate the salary levels to their anticipated value in January 2020. As an alternative, the Department also considered setting the standard salary level by adjusting the 2004 earnings threshold levels for inflation, that is, a sustained increase in the general price level of goods and services over time that can undermine the effectiveness of the part 541 earnings thresholds. The Department considered using price indices such as the Personal Consumption Expenditures Price Index (PCEPI), the Consumer Price Index for All Urban Consumers (CPI–U), and the Chained CPI–U; as well as a wage-based measure such as the Employment Cost Index (ECI). The Department decided against using an index to adjust the 2004 salary level for inflation, because it is not as straightforward, consistent, or accurate as using current salary data. The Department believes that an approach that simply updates the 2004 methodology with current data is preferable to an entirely new methodology. Table 4 presents possible 2017 standard salary levels as calculated using each alternative approach considered: • Alternative 0: Maintain the average minimum wage protection in place since 2004. • Alternative 1: Inflate the 2004 weekly salary level using the PCEPI. • Alternative 2: Inflate the 2004 weekly salary level using Chained CPI– U. • Alternative 3: Inflate the 2004 weekly salary level using CPI–U. • Alternative 4: Inflate the 2004 weekly salary level using the ECI for wages and salaries for civilian workers. • Alternative 5: Inflate the 2004 weekly salary level using the ECI for wages and salaries for private sector workers. Table 5 projects the selected 2017 standard salary level of $641 to January 2020 using each of the inflation indices considered above. Section VI.D details the transfers, costs, and benefits of the proposed new salary level and the above alternatives. TABLE 4—STANDARD SALARY LEVEL AND ALTERNATIVES IN 2017 2017 salary level (weekly/annually) Alternative Alt. #0: Maintain average minimum wage protection since 2004 d ............................................. Alt. #1: Inflate 2004 level using PCEPI b ..................................................................................... Alt. #2: Inflate 2004 level using Chained CPI b ........................................................................... 188 Excluding workers who are not subject to FLSA, not subject to the salary level test, or in some agriculture or transportation occupations. 189 The standard salary level of $641 per week was calculated from 2017 CPS MORG data that included the entire 2017 calendar year. Thus, the VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 value reflects an average over the entire calendar year, and is best characterized as representing the salary level at the midpoint of 2017 (i.e., July 1). Therefore, the Department inflated both the 2017 standard salary and HCE earnings levels 2.5 years to estimate the value for January 1, 2020. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 $503/$26,156 597/31,044 599/31,148 Total increase a $ % 48 142 144 10.5 31.2 31.6 190 BLS. Available at: https://www.bls.gov/cps/ research_nonhourly_earnings_2017.htm. 191 The Department used 2002 data to determine the 2004 HCE earnings level. E:\FR\FM\22MRP2.SGM 22MRP2 10926 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 4—STANDARD SALARY LEVEL AND ALTERNATIVES IN 2017—Continued Total increase a 2017 salary level (weekly/annually) Alternative Alt. #3: Inflate 2004 level using CPI–U b ..................................................................................... Alt. #4: Inflate 2004 level using ECI civilian b .............................................................................. Proposed rule: 2004 method c ..................................................................................................... Alt. #5: Inflate 2004 level using ECI private b .............................................................................. $ 620/32,240 639/33,228 641/$33,332 643/$33,436 % 165 184 186 188 36.3 40.4 40.9 41.3 a Change between salary level or alternative and the salary level set in 2004 ($455 per week). using growth in the index from 2002 to 2017. c Calculated using pooled 2015–2017 CPS MORG data. d When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary threshold was equivalent to the earnings of an employee working 72.2 hours at the minimum wage (including time-and-a-half for hours beyond the fortieth in a week). That amount fell with increases in the minimum wage and is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is 59.6 hours, and a threshold that would provide 59.6 hours of $7.25 minimum wage protection and overtime pay for hours over 40 would be $503. b Inflated TABLE 5—ALTERNATIVES FOR PROJECTING THE 2017 EARNINGS LEVELS TO JANUARY 2020 Standard salary level Alternative January 2020 levels Inflate 2017 levels using PCEPI ...................................................................... Inflate 2017 levels using Chained CPI–U ........................................................ Inflate 2017 levels using CPI–U ...................................................................... Inflate 2017 levels using ECI civilian ............................................................... Proposed rule: Inflate 2017 levels using growth in earnings levels ................ Inflate 2017 levels using ECI private ............................................................... iii. Methodology for the HCE Total Annual Compensation Level and Alternative Methods For the reasons described above, the Department proposes to update the HCE compensation level using earnings for the 90th percentile of all full-time salaried workers nationally ($139,464 in 2017), inflated to January 2020 by applying the average growth in the HCE compensation levels between 2002 and 2017 (2.24 percent annually). The Annual growth rate (%) $671 671 675 678 679 679 proposed HCE compensation level is $147,414 in January 2020. The Department also evaluated the following alternative HCE compensation levels: • HCE alternative 1: Leave the HCE compensation level unchanged at $100,000 per year. • HCE alternative 2: Inflate the 2004 level using the PCEPI. • HCE alternative 3: Inflate the 2004 level using Chained CPI–U HCE level January 2020 levels 1.83 1.86 2.08 2.29 2.31 2.33 Annual growth rate (%) $145,919 146,023 146,843 147,593 147,414 147,742 1.83 1.86 2.08 2.29 2.24 2.33 • HCE alternative 4: Inflate the 2004 level using CPI–U. • HCE alternative 5: Inflate the 2004 level using the ECI for wages and salaries for civilian workers. • HCE alternative 6: Inflate the 2004 level using the ECI for wages and salaries for private sector workers. Table 6 presents possible 2017 HCE levels as calculated using each alternative approach considered. TABLE 6—HCE COMPENSATION LEVELS AND ALTERNATIVES IN 2017 Salary level (weekly/ annually) Alternative HCE alt. #1: No change .............................................................................................................. HCE alt. #2: Inflate 2004 level using PCEPI b ............................................................................ HCE alt. #3: Inflate 2004 level using Chained CPI b ................................................................... HCE alt. #4: Inflate 2004 level using CPI–U b ............................................................................. Proposed rule: 90th percentile of full-time salaried workers c ..................................................... HCE alt. #5: Inflate 2004 level using ECI civilian ....................................................................... HCE alt. #6: Inflate 2004 level using ECI private ....................................................................... $1,923/$100,000 2,523/131,189 2,534/131,750 2,620/136,253 2,682/139,464 2,702/140,480 2,718/141,337 a Change between updated/alternative compensation level and the compensation level set in 2004 ($100,000 annually). using growth in the index from 2002 to 2017. salary level available at: https://www.bls.gov/cps/research_nonhourly_earnings_2017.htm. b Inflated c 2017 VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 Total increase a $ 0 31,189 31,750 36,253 39,464 40,480 41,337 % 0.0 31.2 31.8 36.3 39.5 40.5 41.3 10927 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules D. Effects of Revised Salary and Compensation Levels i. Overview and Summary of Quantified Effects The economic effects of increasing the EAP salary and compensation levels will depend on how employers respond. Employer response is expected to vary by the characteristics of the affected EAP workers. Transfers from employers to employees and between employees, and direct employer costs depend on how employers respond to finalization of the proposed rule. The Department anticipates that the proposed rule, once finalized, will become effective in 2020. Its proposed standard salary level is derived using the 2004 methodology, and the HCE compensation level is derived using the 2016 methodology, in both cases using 2017 CPS data, then projecting these levels to January 2020. Given that the Department is using 2017 CPS MORG employment and earnings data—the most recent data available at the time of analysis—to estimate the economic effects of the proposed rule taking effect in 2020, and given that such data will change between now and 2020, there are two options to measure the economic effects of the proposed rule upon taking effect. One option would be to use the proposed standard salary and HCE total compensation levels and project the CPS MORG data forward to 2020. However, such a projection would add ‘‘noise’’ to the CPS MORG data, making an analysis using such projections less accurate. A second option would be to measure the economic effects of the proposed rule by using the most recent CPS MORG data to determine the 2017 standard salary and HCE compensation levels as if the rule were to be promulgated in 2017. The potential impacts of the rule are then assessed using 2017 population characteristics. When measuring the number of workers affected, using a 2017 salary level on the 2017 CPS MORG data is a good approximation of a 2020 level on the earnings data of workers in 2020, so the second option better reflects the economic effects of the proposed rule than the first option. Therefore, the Department chose to analyze the economic effects of a standard salary level of $641 per week and an annual HCE compensation level of $139,464 using 2017 CPS MORG data as the best representation of likely economic effects of the proposed standard salary level of $679 per week and an annual HCE compensation level of $147,414 taking effect in 2020. Table 7 presents the estimated number of affected workers, costs, and transfers associated with increasing the salary and compensation levels. The Department estimated that the direct employer costs of this proposed rule would total $464.2 million in the first year, with 10-year annualized direct costs of $112.6 million per year using a 3 percent real discount rate and $120.5 million per year using a 7 percent real rate. In addition to these direct costs, this proposed rule would transfer income from employers to employees. Year 1 transfers would equal $526.9 million, with annualized transfers estimated at $428.0 million and $429.4 million per year using the 3-percent and 7-percent real discount rates, respectively. Potential employer costs due to reduced profits and additional hiring were not quantified but are discussed in section VI.D.iii. TABLE 7—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE EARNINGS THRESHOLDS Future years b Impact a Annualized value Year 1 Year 2 Year 10 3% Real Discount Rate 7% Real Discount Rate Affected Workers (1000s) Standard ............................................................................... HCE ...................................................................................... 1,070 201 1,027 215 625 426 ........................ ........................ ........................ ........................ Total .............................................................................. 1,271 1,241 1,051 ........................ ........................ Direct Employer Costs (Millions in 2017$) Regulatory familiarization ..................................................... Adjustment c ......................................................................... Managerial ........................................................................... $324.9 66.6 72.7 $0.0 1.5 72.7 $0.0 3.6 64.2 $37.0 10.0 65.6 $43.2 11.2 66.0 Total direct costs d ........................................................ 464.2 74.2 67.8 112.6 120.5 Transfers from Employers to Workers (Millions in 2017) e Due to minimum wage ......................................................... Due to overtime pay ............................................................ 57.0 469.9 30.4 390.9 17.6 429.5 27.7 400.3 28.6 400.7 Total transfers d ............................................................. 526.9 421.3 447.1 428.0 429.4 a Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the text. costs/transfers represent a range over the nine-year span. c Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in years without updated earnings thresholds because some workers’ projected earnings are estimated using negative earnings growth. d Components may not add to total due to rounding. e This is the net transfer from employers to workers. There may also be transfers between workers. b These VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules The Department estimated there are 24.3 million potentially affected EAP workers—that is, EAP workers who either (1) passed the salary basis test, the standard salary level test, and the standard duties test, or (2) passed the salary basis test, the standard salary level test, the HCE total compensation level test, and the HCE duties test (but not the standard duties test). This number excluded workers in named occupations, who are not subject to the salary tests, or those who qualify for another (non-EAP) exemption. Using the proposed method described above, the Department estimated that if the rule were promulgated today, the standard salary level would increase from $455 per week to $641 per week and would affect 1.1 million exempt workers in Year 1 (Figure 2).192 Based on currently available data, the Department projects that if the final rule becomes effective in 2020, the standard salary level will be $679 per week. The Department also estimated that the HCE annual compensation level would increase from $100,000 to $139,464 if the rule went into effect today, and 201,100 workers would be affected in Year 1 (the number of workers who earn at least $100,000 but less than $139,464 and pass the minimal HCE duties test but not the standard duties test).193 The Department projects that if the final rule takes effect in 2020, the HCE compensation level will be $147,414. In total, the Department expects that 1.3 million workers will be affected in Year 1 by the proposed earnings threshold increases, composing about 5.2 percent of the pool of potentially affected EAP workers. Table 8 presents the number of affected EAP workers, the mean number of overtime hours they work per week, and their average weekly earnings. The 1.1 million workers affected by the increase in the standard salary level work on average 1.6 usual hours of overtime per week and earn on average $564 per week.194 However, the majority of these workers (about 86 percent) work zero usual hours of overtime. The 14 percent of affected workers who regularly work overtime average 11.4 hours of overtime per week. The 201,100 EAP workers affected by the change in the HCE compensation level average 4.9 hours of overtime per week and earn an average of $2,179 per week ($113,327 per year). About 60 percent of these workers work zero usual hours of overtime while the 40 percent who work usual hours of overtime average 12.4 hours of overtime per week. Although most affected EAP workers who typically do not work overtime are unlikely to experience significant changes in their daily work routine, those who regularly work overtime may experience significant changes. Moreover, affected EAP workers who routinely work overtime and earn less than the minimum wage are most likely to experience significant changes because of the revised standard salary level.195 Employers might respond by paying overtime premiums; reducing or eliminating overtime hours; reducing employees’ regular wage rates (provided that the reduced rates still exceed the minimum wage); increasing employees’ salary to the updated salary level to preserve their exempt status (although this will be less common for affected workers earning below the minimum wage); or using some combination of these responses. 192 This group includes workers who may currently be nonexempt under more protective state EAP laws and regulations, such as some workers in Alaska, California, and New York. 193 The 2016 final rule applied joint probabilities to estimate the number of affected HCE workers (i.e., the number of HCE workers who pass the HCE duties test but fail the standard duties test). In order to provide a more accurate estimate, this NPRM applies conditional probabilities to determine the number of affected HCE workers. 194 CPS defines ‘‘usual hours’’ as hours worked 50 percent or more of the time. 195 A small proportion (1.4 percent) of affected EAP workers earn implicit hourly wages that are less than the applicable minimum wage (the higher of the state or federal minimum wage). The implicit hourly wage is calculated as an affected EAP employee’s total weekly earnings divided by total weekly hours worked. For example, workers earning the currently enforced $455 per week standard salary level would earn less than the federal minimum wage if they work 63 or more hours in a week ($455/63 hours = $7.22 per hour). ii. Affected EAP Workers 1. Overview VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 EP22MR19.001</GPH> 10928 10929 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 8—NUMBER OF AFFECTED EAP WORKERS, MEAN OVERTIME HOURS, AND MEAN WEEKLY EARNINGS, YEAR 1 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 ......................................... 1,070 15 152 41 100 1.4 14.2 3.8 1.6 24.1 11.4 8.2 $564 516 562 566 100 ........................ 39.8 4.9 4.9 ........................ 12.4 9.3 2,179 .................................................. 2,198 2,140 HCE Compensation Level All affected EAP workers ....................................................... Earn less than the minimum wage b ...................................... Regularly work overtime ........................................................ CPS occasionally work overtime c ......................................... 201 ........................ 80 10 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). b The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE workers will not be affected by the minimum wage provision. These workers all regularly work overtime and are also included in that row. c Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These workers are identified later. The Department considered two types of overtime workers in this analysis: Regular overtime workers and occasional overtime workers.196 Regular overtime workers typically worked more than 40 hours per week. Occasional overtime workers typically worked 40 hours or less per week, but they worked more than 40 hours in the week they were surveyed. The Department considered these two populations separately in the analysis because labor market responses to overtime pay requirements may differ for these two types of workers. In a representative week, the increases in the standard salary level and the HCE compensation level affected an estimated 51,000 occasional overtime workers (4.0 percent of all affected EAP workers). They averaged 8.4 hours of overtime in the weeks they worked overtime. This group represents the number of workers with occasional overtime hours in the week the CPS MORG survey was conducted. Because the survey week is a representative week, the Department believes the prevalence of occasional overtime in the survey week, and the characteristics of these workers, is representative of other weeks (even though a different group of workers would be identified as occasional overtime workers in a different week). 2. Characteristics of Affected EAP Workers In this section, the Department examined the characteristics of EAP workers whom the proposed rule would affect. Table 9 presents the distribution of affected EAP workers by industry and occupation, using Census industry and occupation codes. The industry with the most affected EAP workers would be education and health services (293,000), while the industry with the highest percentage of affected EAP workers would be leisure and hospitality (about 10 percent). The occupation category with the most affected EAP workers would be management, business, and financial (484,000), while the occupation category with the highest percentage of affected EAP workers would be in services (about 14 percent). Finally, approximately 7 percent of potentially affected workers in private nonprofits would be affected compared with about 5 percent in private for-profit firms. However, as discussed in section VI.B.iii, our estimates of workers subject to the FLSA include workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating that population. Although failing to exclude workers who work for non-covered enterprises would only affect a small percentage of workers generally, it may have a larger effect (and result in a larger overestimate) for workers in nonprofits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, is included. TABLE 9—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY AND OCCUPATION, YEAR 1 Workers subject to FLSA (millions) Industry/occupation/nonprofit Total ..................................................................................... Potentially affected EAP workers (millions) a 135.92 Not-affected (millions) b Affected (millions) c Affected as share of potentially affected (%) 24.29 23.02 1.27 5.2 0.04 0.04 0.00 5.7 By Industry d Agriculture, forestry, fishing, & hunting ................................ 196 Regular overtime workers were identified in the CPS MORG with variable PEHRUSL1. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 1.28 Occasional overtime workers were identified with variables PEHRUSL1 and PEHRACT1. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10930 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 9—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY AND OCCUPATION, YEAR 1—Continued Workers subject to FLSA (millions) Industry/occupation/nonprofit Mining ................................................................................... Construction ......................................................................... Manufacturing ...................................................................... Wholesale & retail trade ...................................................... Transportation & utilities ...................................................... Information ........................................................................... Financial activities ................................................................ Professional & business services ........................................ Education & health services ................................................ Leisure & hospitality ............................................................. Other services ...................................................................... Public administration ............................................................ Potentially affected EAP workers (millions) a 0.81 7.92 15.34 19.18 7.30 2.73 9.46 15.02 33.26 12.96 5.44 5.24 Not-affected (millions) b Affected (millions) c Affected as share of potentially affected (%) 0.21 0.91 3.50 2.55 0.88 0.95 3.65 5.24 3.98 0.86 0.61 0.90 0.20 0.88 3.39 2.37 0.84 0.90 3.48 5.05 3.69 0.78 0.56 0.84 0.01 0.04 0.11 0.18 0.05 0.05 0.17 0.19 0.293 0.08 0.05 0.05 2.7 4.2 3.1 6.9 5.3 5.2 4.6 3.7 7.4 9.5 8.5 6.1 12.23 8.34 0.20 2.34 0.96 0.00 0.02 0.04 0.10 0.04 11.75 7.93 0.18 2.13 0.84 0.00 0.02 0.04 0.09 0.03 0.48 0.41 0.03 0.21 0.12 0.00 0.00 0.00 0.01 0.01 4.0 4.9 14.5 9.0 12.3 0.0 6.8 7.5 8.0 13.3 1.80 19.35 1.86 0.13 1.01 0.13 6.6 5.0 6.6 By Occupation d Management, business, & financial ..................................... Professional & related .......................................................... Services ............................................................................... Sales and related ................................................................. Office & administrative support ............................................ Farming, fishing, & forestry .................................................. Construction & extraction ..................................................... Installation, maintenance, & repair ...................................... Production ............................................................................ Transportation & material moving ........................................ 20.29 31.48 23.71 13.77 17.72 0.96 6.41 4.58 8.43 8.57 By Nonprofit and Government Status Nonprofit, private .................................................................. For profit, private .................................................................. Government (state, local, and federal) ................................ 9.46 107.97 18.49 1.93 20.36 2.00 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). d Census industry and occupation categories. Table 10 presents the distribution of affected EAP workers based on Census Regions and divisions, and metropolitan statistical area (MSA) status. The region with the most affected workers would be the South (544,000), but the South’s percentage of affected workers is similar to other regions (6.4 percent as compared to 4.4 to 5.0 percent elsewhere). Although 89 percent of affected EAP workers would reside in MSAs (1.14 of 1.27 million), so do a corresponding 88 percent of all workers subject to the FLSA.197 Employers in low-wage industries, regions, and non-metropolitan areas may be more affected because they typically pay lower wages and salaries. However, the Department believes the salary level adopted in this proposed rule is appropriate for these lower-wage sectors because the methodology used in 2004, and applied for this rulemaking, used earnings data in the low-wage retail industry and the lowwage Southern region. Effects by region and industry are considered in section VI.D.vi. TABLE 10—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY REGION, DIVISION, AND MSA STATUS, YEAR 1 Workers subject to FLSA (millions) Region/division/metropolitan status Total ..................................................................................... Potentially affected EAP workers (millions) a 135.92 Not-affected (millions) b 24.29 23.02 197 Identified with CPS MORG variable GTMETSTA. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 Affected (millions) c 1.27 Affected as share of potentially affected 5.2 10931 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 10—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY REGION, DIVISION, AND MSA STATUS, YEAR 1—Continued Workers subject to FLSA (millions) Region/division/metropolitan status Potentially affected EAP workers (millions) a Not-affected (millions) b Affected (millions) c Affected as share of potentially affected 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 ........................................................................... 24.99 6.81 18.18 30.05 20.38 9.67 49.36 25.88 7.38 16.10 31.52 9.93 21.59 5.09 1.46 3.63 5.03 3.43 1.60 8.53 4.80 0.99 2.74 5.64 1.66 3.98 4.86 1.40 3.46 4.78 3.26 1.51 7.99 4.49 0.92 2.58 5.39 1.57 3.82 0.23 0.06 0.17 0.25 0.17 0.08 0.54 0.31 0.07 0.16 0.25 0.09 0.16 4.4 3.9 4.7 5.0 5.0 5.0 6.4 6.4 7.5 6.0 4.5 5.3 4.1 22.66 1.52 0.10 21.53 1.40 0.09 1.14 0.13 0.01 5.0 8.3 8.9 By Metropolitan Status Metropolitan ......................................................................... Non-metropolitan .................................................................. Not identified ........................................................................ 118.99 15.94 0.99 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). iii. Costs 1. Summary The Department quantified three direct costs to employers in this analysis: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. The Department estimated costs for Year 1 assuming that the rule will go into effect in 2020 (Table 11). The Department estimated that in Year 1, regulatory familiarization costs would be $324.9 million, adjustment costs would be $66.6 million, and managerial costs would be $72.7 million. Total direct employer costs in Year 1 would be $464.2 million. TABLE 11—SUMMARY OF YEAR 1 DIRECT EMPLOYER COSTS [Millions] Direct employer costs Standard salary level HCE compensation level Regulatory familiarization a .......................................................................................................... Adjustment ................................................................................................................................... Managerial ................................................................................................................................... Total direct costs .................................................................................................................. ........................ $56.1 55.4 111.4 ........................ $10.5 17.3 27.9 a Regulatory $324.9 $66.6 72.7 464.2 familiarization costs are assessed jointly for the change in the standard salary level and the HCE compensation level. Adjustment costs and management costs are recurring, so we also projected them for years 2 through 10 in section VI.D.viii. The Department discusses costs that are not quantified in section VI.D.iii.5. 2. Regulatory Familiarization Costs Changing the standard salary level and the HCE total compensation level will impose direct costs on firms by requiring them to review the regulation. To estimate these ‘‘regulatory familiarization costs,’’ three pieces of information must be estimated: (1) The VerDate Sep<11>2014 Total 18:00 Mar 21, 2019 Jkt 247001 number of affected establishments; (2) a wage level for the employees reviewing the rule; and (3) the amount of time employees spend reviewing the rule. It is unclear whether regulatory familiarization costs are a function of the number of establishments or the number of firms. To avoid underestimating these costs, the Department assumed that regulatory familiarization occurs at a decentralized level and used the number of establishments in its cost estimate; this results in a higher estimate than would result from using the number of firms. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 The most recent data on private sector establishments at the time this NPRM was drafted are from the 2015 Statistics of U.S. Businesses (SUSB), which reports 7.66 million establishments with paid employees.198 Additionally, there were an estimated 90,106 state and local governments in 2012, the most recent 198 Statistics of U.S. Businesses 2015, https:// www.census.gov/programs-surveys/susb.html. E:\FR\FM\22MRP2.SGM 22MRP2 10932 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules data available.199 We thus estimated 7.75 million establishments altogether. The Department believes that all establishments will incur some regulatory familiarization costs, even if they do not employ exempt workers, because all establishments will need to confirm whether this proposed rule includes any provisions that may affect their employees. Firms with more affected EAP workers will likely spend more time reviewing the regulation than firms with fewer or no affected EAP workers (since a careful reading of the regulation will probably follow the initial decision that the firm is affected). However, the Department did not know the distribution of affected EAP workers across firms, so it used an average cost per establishment. The Department believes one hour per establishment is appropriate because the EAP exemptions have existed in one form or another since 1938. The most significant change proposed by this rulemaking is setting a new standard salary level for exempt workers, and the proposed changed regulatory text is only a few pages. The Department thus believes that one hour is an appropriate average estimate for the time each establishment will spend reviewing the changes made by this rulemaking. Time spent to implement the necessary changes was included in adjustment costs. The Department invites comments and data on the time required for regulatory familiarization. The Department’s analysis assumed that mid-level human resource workers with a median wage of $25.64 per hour will review the proposed rule.200 The Department also assumed that benefits are paid at a rate of 46 percent of the base wage 201 and overhead costs are paid at a rate of 17 percent of the base wage,202 resulting in an hourly rate of 199 2012 Census of Governments: Government Organization Summary Report, http:// www2.census.gov/govs/cog/g12_org.pdf. 200 The median wage in the pooled 2017 CPS data for workers with the Census 2010 occupations ‘‘human resources workers’’ (0630); ‘‘compensation, benefits, and job analysis specialists’’ (0640); and ‘‘training and development specialists’’ (0650). The Department determined these occupations include most of the workers who would conduct these tasks. See Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook. 201 The benefits-earnings ratio is derived from the BLS’s Employer Costs for Employee Compensation data using variables CMU1020000000000D and CMU1030000000000D. This fringe benefit rate includes some fixed costs such as health insurance. 202 The Department believes that the overhead costs associated with this rule are small because existing systems maintained by employers to track currently hourly employees can be used for newly overtime eligible workers. However, acknowledging that there might be additional overhead costs, we have included an overhead rate of 17 percent. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 $41.91. The Department thus estimates regulatory familiarization costs in Year 1 would be $324.9 million ($41.91 per hour × 1 hour × 7.75 million establishments).203 3. Adjustment Costs Changes in the standard salary level and HCE compensation level would also impose direct costs on firms by requiring them to evaluate the exemption status of employees, update and adapt overtime policies, notify employees of policy changes, and adjust their payroll systems.204 The Department believes the size of these ‘‘adjustment costs’’ will depend on the number of affected EAP workers and will occur in any year when exemption status is changed for any workers. To estimate adjustment costs, three pieces of information must be estimated: (1) A wage level for the employees making the adjustments; (2) the amount of time spent making the adjustments; and (3) the estimated number of newly affected EAP workers. The Department again estimated that the average wage with benefits and overhead costs for a midlevel human resource worker would be $41.91 per hour (as explained above). The Department estimated that it will take establishments an average of 75 minutes per affected worker to make the necessary adjustments. Little applicable data were identified from which to estimate the amount of time required to make these adjustments.205 Therefore, the Department used the estimate of 1.25 hours from the 2016 final rule after reviewing public comments on the 2015 NPRM. The estimated number of Because the 2016 final rule did not include overhead costs in its cost and transfer estimates, estimated costs and transfers associated with the 2016 final rule have been recalculated for comparison purposes in section VI.D.ix. 203 As previously noted, the Department used the number of establishments rather than the number of firms, which results in a higher estimate of the regulatory familiarization cost. Using the number of firms, 6.0 million, would result in a reduced regulatory familiarization cost estimate of $251.1 million in Year 1. 204 While some companies may need to reconfigure information technology systems to include both exempt and overtime-protected workers, the Department notes that most organizations affected by the rule already employ overtime-eligible workers and have in place payroll systems and personnel practices (e.g., requiring advance authorization for overtime hours) so that additional costs associated with the rule should be relatively small in the short run. 205 Costs from the 2004 final rule were considered, but because that revision included changes to the duties test, the cost estimates are not directly applicable; in addition, the 2004 final rule did not separately account for managerial costs. The 2015 NPRM separately accounted for managerial costs. Some commenters responded with higher time estimates, but these estimates were not substantiated with data or were considered excessive. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 affected EAP workers in Year 1 is 1.3 million (as discussed in section VI.D.ii). Therefore, total Year 1 adjustment costs would be $66.6 million ($41.91 × 1.25 hours × 1.3 million workers). A reduction in the cost to employers of determining employees’ exempt status may partially offset adjustment costs. Currently, to determine whether an employee is exempt, employers must apply the duties test to salaried workers who earn at least $455 per week. If finalized as proposed, firms will no longer be required to apply the potentially time-consuming duties test to employees earning less than the proposed standard salary level. This will be a clear cost savings to employers for the approximately 3.6 million salaried employees (2.0 million in white collar occupations and 1.6 million in blue collar occupations) who do not pass the duties test and earn at least $455 per week but less than the updated salary level. The Department did not estimate the potential size of this cost savings. 4. Managerial Costs If employers reclassify employees as overtime-eligible due to the changes in the salary levels, then firms may incur ongoing managerial costs because the employer may spend more time developing work schedules and closely monitoring an employee’s hours to minimize or avoid overtime. For example, the manager of a reclassified worker may have to assess whether the marginal benefit of scheduling the worker for more than 40 hours exceeds the marginal cost of paying the overtime premium. Additionally, the manager may have to spend more time monitoring the employee’s work and productivity since the marginal cost of employing the worker per hour has increased. Unlike regulatory familiarization and adjustment costs, which occur primarily in Year 1, managerial costs are incurred more uniformly every year. There was little precedent or data to aid in evaluating these costs. With the exception of the 2016 rulemaking, prior part 541 rulemakings did not estimate managerial costs. The Department likewise found no estimates of managerial costs after reviewing the literature. We thus used the same methodology as the 2016 final rule, which the Department adopted after considering comments on the 2015 NPRM. The Department applied managerial costs to workers who (1) are reclassified as nonexempt, overtime-protected and (2) either regularly work overtime or occasionally work overtime, but on a E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules predictable basis—an estimated 344,300 workers (see Table 14 and accompanying explanation). The Department estimated these costs assuming that management spends an additional five minutes per week scheduling and monitoring each affected worker expected to be reclassified as nonexempt, overtimeeligible as a result of this rule, and whose hours are adjusted. As discussed in detail below, most affected workers do not currently work overtime, and there is no reason to expect their hours worked to change when their status changes from exempt to nonexempt. For that group of workers, management will have little or no need to increase their monitoring of hours worked; therefore, these workers are not included in the managerial cost calculation. Under these assumptions, the additional managerial hours worked per week would be 28,700 hours ((5 minutes/60 minutes) × 344,300 workers). The median hourly wage in 2017 for a manager was $29.81 and benefits were estimated to be paid at a rate of 46 percent of the base wage.206 Together with the 17 percent overhead costs used for this analysis, this totals $48.72 per hour. Thus, the Year 1 managerial costs would total $72.7 million (28,700 hours/ week × 52 weeks × $48.72/hour). Although the exact magnitude would vary with the number of affected EAP workers each year, employers would incur managerial costs annually. The Department believes that most companies already manage a mix of exempt and nonexempt employees and have policies and recordkeeping systems in place for nonexempt employees. Thus, most companies would be unlikely to purchase systems or hire additional monitoring personnel as a result of this rulemaking. Moreover, this rulemaking would not impose any new recordkeeping requirements. 5. Other Potential Costs In addition to the costs discussed above, the proposed rule may impose additional costs that have not been quantified. These costs are discussed qualitatively below, but we note that in some cases (e.g., schedule flexibility, salaried status) these costs may directly affect workers’ wages because they face a tradeoff in the labor market between 206 Calculated as the projected median wage in the CPS for workers in management occupations (excluding chief executives) in 2015–2017, adjusted to reflect 2017. The adjustment ratio is derived from the BLS’ Employer Costs for Employee Compensation data using variables CMU1020000000000D and CMU1030000000000D. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 cash wages and the nonpecuniary aspects of jobs.207 Reduced Scheduling Flexibility Exempt workers may enjoy more scheduling flexibility because their hours are less likely to be monitored than nonexempt workers. If so, the proposed rule could impose costs on newly nonexempt, overtime-eligible workers by, for example, limiting their ability to adjust their schedules to meet personal and family obligations. But the proposed rule does not require employers to reduce scheduling flexibility. Employers can continue to offer flexible schedules and require workers to monitor their own hours and to follow the employers’ timekeeping rules. Additionally, some exempt workers already monitor their hours for billing purposes. For these reasons, and because there is little data or literature on these costs, the Department did not quantify potential costs regarding scheduling flexibility. Preference for Salaried Status Some of the workers that become nonexempt as a result of the proposed rule and are changed by their employer from salaried to hourly status may have preferred to remain salaried. Research has shown that salaried workers are more likely than hourly workers to receive benefits such as paid vacation time and health insurance,208 and are more satisfied with their benefits.209 Additionally, when employer demand for labor decreases, hourly workers tend to see their hours cut before salaried workers, making earnings for hourly workers less predictable.210 However, this literature generally does not control for differences between salaried and hourly workers such as education, job title, or earnings; therefore, this correlation is not necessarily attributable to hourly status. If workers are reclassified as hourly, and hourly workers have fewer benefits 207 See, e.g., Ashenfelter, O. & Layard, R. (1986). Handbook of Labor Economics. Volume 1. 641–92. https://www.sciencedirect.com/science/article/abs/ pii/S1573446386010155. 208 Lambert, S. J. (2007). Making a Difference for Hourly Employees. In A. Booth, & A. C. Crouter, Work-Life Policies that Make a Real Difference for Individuals, Families, and Communities. Washington, DC: Urban Institute Press. 209 Balkin, D. B., & Griffeth, R. W. (1993). The Determinants of Employee Benefits Satisfaction. Journal of Business and Psychology, 7(3), 323–339. 210 Lambert, S. J., & Henly, J. R. (2009). Scheduling in Hourly Jobs: Promising Practices for the Twenty-First Century Economy. The Mobility Agenda. Lambert, S. J. (2007). Making a Difference for Hourly Employees. In A. Booth, & A. C. Crouter, Work-Life Policies that Make a Real Difference for Individuals, Families, and Communities. Washington, DC: Urban Institute Press. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 10933 than salaried workers, this could reduce workers’ benefits. But the Department notes that this rule does not require such reclassification. These workers may continue to be paid a salary, as long as that salary is equivalent to a base wage at least equal to the minimum wage rate for every hour worked, and the employee receives a 50 percent premium on that base wage for any overtime hours each week.211 Quality of Services To the extent that employers respond to this rule by restricting employee work hours, this rulemaking could negatively affect the quality of public services provided by local governments and nonprofits. However, the Department believes the effect of the rule on public services will be small. The Department acknowledges that some employees who work overtime providing public services may see a reduction in hours as an effect of the rulemaking. But if the services are in demand, the Department believes additional workers may be hired, as funding availability allows, to make up some of these hours, and productivity increases may offset some reduction in services. In addition, the Department expects many employers will adjust base wages downward to some degree so that even after paying the overtime premium, overall pay and hours of work for many employees will be relatively minimally impacted. Additionally, as noted above, many nonprofits are noncovered enterprises because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included. Increased Prices Business firms may pass along increased labor costs to consumers through higher prices. The Department anticipates that some firms may offset part of the additional labor costs through charging higher prices for the firms’ goods and services. However, because costs and transfers are, on average, small relative to payroll and revenues, the Department does not expect the proposed rule to have a significant effect on prices. The Department estimated that, on average, costs and transfers make up less than 0.02 percent of payroll and less than 0.003 percent of revenues, although for specific industries and firms this percentage may be larger. Therefore, any potential change in prices would be modest. Further, any significant price increases would not represent a separate category of effects from those estimated 211 §§ 778.113–.114. E:\FR\FM\22MRP2.SGM 22MRP2 10934 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules in this economic analysis; rather, such price increases (where they occur) would be the channel through which consumers, rather than employers or employees, bear rule-induced costs (including transfers). Reduced Profits The increase in workers’ earnings resulting from the revised salary level is a transfer of income from firms to workers, not a cost. The Department acknowledges that the increased employer costs and transfer payments as a result of this proposed rule may reduce the profits of business firms, although (1) some firms may offset some of these costs and transfers by making payroll adjustments, and (2) some firms may mitigate their reduced profits due to these costs and transfers through increased prices.212 To the extent that the proposed rule would reduce profits at business firms after all these adjustments are made, these firms would have marginally lower after-tax returns on new investments in equipment, structures, and intellectual property and would therefore make fewer such investments going forward. All else equal, less business investment slows economic growth and reduces employment. However, the Department expects that any anti-growth effects of the proposed rule would be minimal. Hiring Costs To the extent that firms respond to an update to the salary level test by reducing overtime, they may do so by spreading hours to other workers, including current workers employed for less than 40 hours per week by that employer, current workers who retain their exempt status, and newly hired workers. If new workers are hired to absorb these transferred hours, then the associated hiring costs are a cost of this proposed rule. iv. Transfers to another. The Department has quantified two transfers from employers to employees that would likely result from the proposed rule: (1) Transfers to ensure compliance with the FLSA minimum wage provision; and (2) transfers to ensure compliance with the FLSA overtime pay provision. Transfers in Year 1 due to the minimum wage provision were estimated to be $57.0 million. The increase in the HCE compensation level does not affect minimum wage transfers because workers eligible for the HCE exemption earn well above the minimum wage. Transfers due to the overtime pay provision would be $469.9 million: $195.5 million from the increased standard salary level and $274.3 million from the increased HCE compensation level. Total Year 1 transfers would be $526.9 million (Table 12). 1. Overview Transfer payments occur when income is redistributed from one party TABLE 12—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 .................................................................................................................... $57.0 195.5 $0.0 274.3 $57.0 469.9 Total transfers ....................................................................................................................... 252.5 274.3 526.9 Because the overtime premium depends on the base wage, the estimates of minimum wage transfers and overtime transfers are linked. This can be considered a two-step approach. The Department first identified affected EAP workers with an implicit regular hourly wage lower than the minimum wage, and then calculated the wage increase necessary to reach the minimum wage. 2. Transfers Due to the Minimum Wage Provision For purposes of this analysis, the hourly rate of pay was calculated as usual weekly earnings divided by usual weekly hours worked. To earn less than the federal or state minimum wage, this set of workers must work many hours per week. For example, a worker paid $455 per week must work 62.8 hours to earn less than the federal minimum wage of $7.25 per hour ($455/$7.25 = 62.8).213 The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage as of January 1, 2017. Most affected EAP workers already receive at least the minimum wage; only an estimated 1.4 percent of them (15,100 in total) earn an implicit hourly rate of pay less than the minimum wage. The Department estimated transfers due to payment of the minimum wage by calculating the change in earnings if wages rose to the minimum wage for workers who become nonexempt.214 In response to an increase in the regular rate of pay to the minimum wage, employers may reduce the workers’ hours. Since the quantity of labor hours demanded is inversely related to wages, a higher mandated wage will result in fewer hours of labor demanded. The Department estimated the potential disemployment effects (i.e., the estimated reduction in hours) of the transfer attributed to the minimum wage by multiplying the percent change in the regular rate of pay by a labor demand elasticity of ¥0.2.215 At the new standard salary level, the Department estimated that 15,100 affected EAP workers would, on average, see an hourly wage increase of $1.45, work 3.2 fewer hours per week, and receive an increase in weekly earnings of $72.68 as a result of 212 Because costs and transfers compose on average less than 0.003 percent of revenues, the Department expects any such price increases to be minor. 213 Workers in states with minimum wages higher than the federal minimum wage could earn less than the state minimum wage working fewer hours. 214 Because these workers’ hourly wages will be set at the minimum wage after this Proposed Rule, their employers will not be able to adjust their wages downward to offset part of the cost of paying the overtime pay premium (which will be discussed in the following section). Therefore, these workers will generally receive larger transfers attributed to the overtime pay provision than other workers. 215 This elasticity estimate represents a short run demand elasticity for general labor, and is based on the Department’s analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP No. 7958. We selected a general labor demand elasticity because employers will adjust their demand based on the cumulative change in employees’ earnings, not on a conceptual differentiation between increases attributable to the minimum wage and the overtime provisions of the FLSA. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules coverage by the minimum wage provisions (Table 13). The total change in weekly earnings due to the payment of the minimum wage was estimated to 10935 be $1.1 million per week ($72.68 × 15,100) or $57.0 million in Year 1. TABLE 13—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL OVERTIME HOURS, AND WEEKLY EARNINGS FOR AFFECTED EAP WORKERS, YEAR 1 Hourly wage a Before Proposed Rule ..................................................................................... After Proposed Rule ........................................................................................ Change ............................................................................................................ Usual weekly hours $8.29 9.75 1.45 64.1 61.0 ¥3.2 Usual weekly earnings $515.88 588.56 72.68 Total weekly transfer (1,000s) ........................ ........................ $1,097 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. 3. Transfers Due to the Overtime Pay Provision Introduction The proposed rule will transfer income to affected workers who work in excess of 40 hours per week. Requiring an overtime premium increases the marginal cost of labor, which employers will likely try to offset by adjusting wages and/or hours of affected workers. The size of the transfer will depend largely on how employers respond to the updated salary levels. Employers may respond by: (1) Paying overtime premiums to affected workers; (2) reducing overtime hours of affected workers and potentially transferring some of these hours to other workers; (3) reducing the regular rate of pay for affected workers working overtime (provided that the reduced rates still exceed the minimum wage); (4) increasing affected workers’ salaries to the updated salary or compensation level to preserve their exempt status; or (5) using some combination of these responses. How employers will respond depends on many factors, including the relative costs of each of these alternatives; in turn, the relative costs of each of these alternatives are a function of workers’ earnings and hours worked. Literature on Employer Adjustments Two conceptual models are useful for thinking about how employers may respond to reclassifying certain employees as overtime-eligible: (1) The ‘‘fixed-wage’’ or ‘‘labor demand’’ model, and (2) the ‘‘fixed-job’’ or ‘‘employment contract’’ model.216 These models make different assumptions about the demand for overtime hours and the structure of the employment agreement, which 216 See Trejo, S. J. (1991). The Effects of Overtime Pay Regulation on Worker Compensation. American Economic Review, 81(4), 719–740, and Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128–142. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 result in different implications for predicting employer responses. The fixed-wage model assumes that the standard hourly wage is independent of the statutory overtime premium. Under the fixed-wage model, a reclassification of workers from overtime exempt to overtime nonexempt would cause a reduction in overtime hours for affected workers, an increase in the prevalence of a 40-hour workweek among affected workers, and an increase in the earnings of affected workers who continue to work overtime. In contrast, the fixed job model assumes that the standard hourly wage is affected by the statutory overtime premium. Thus, employers can neutralize any reclassification of workers from overtime exempt to overtime non-exempt by reducing the standard hourly wage of affected workers so that their weekly earnings and hours worked are unchanged, except when minimum wage laws prevent employers from lowering the standard hourly wage below the minimum wage. Under the fixed-job model, a reclassification of workers from overtime exempt to overtime nonexempt would have differential effects on minimum-wage workers and aboveminimum-wage workers. Similar to the fixed-wage model, minimum-wage workers would experience a reduction in overtime hours, an increase in the prevalence of a 40-hour workweek at a given employer (though not necessarily overall), and an increase in earnings for the portion of minimum-wage workers that continue to work overtime for a given employer. Unlike the fixed-wage model, however, above-minimum-wage workers would experience no change. The Department conducted a literature review to evaluate studies of how labor markets adjust to a change in the requirement to pay overtime. In general, these studies are supportive of the fixed-job model of labor market adjustment, in that wages adjust to offset the requirement to pay an PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 overtime premium as predicted by the fixed-job model, but do not adjust enough to completely offset the overtime premium as predicted by the model. The Department believes the two most important papers in this literature are the studies by Trejo (1991) and Barkume (2010). Analyzing the economic effects of the overtime pay provisions of the FLSA, Trejo (1991) found ‘‘the data analyzed here suggest the wage adjustments occur to mitigate the purely demand-driven effects predicted by the fixed-wage model, but these adjustments are not large enough to neutralize the overtime pay regulations completely.’’ Trejo noted, ‘‘In accordance with the fixed job model, the overtime law appears to have a greater impact on minimum-wage workers.’’ He also stated, ‘‘[T]he finding that overtime pay coverage status systematically influences the hours-ofwork distribution for non-minimum wage works is supportive of the fixedwage model. No significant differences in weekly earnings were discovered between the covered and non-covered sectors, which is consistent with the fixed-job model.’’ However, ‘‘overtime pay compliance is higher for union than for nonunion workers, a result that is more easily reconciled with the fixed wage model.’’ Trejo’s findings are supportive of the fixed-wage model whose adjustment is incomplete largely due to the minimum-wage requirement.217 A second paper by Trejo (2003) took a different approach to testing the consistency of the fixed-wage adjustment models with overtime coverage and data on hours worked. In this paper, he examined time-series data on employee hours by industry. After controlling for underlying trends in hours worked over 20 years, he found changes in overtime coverage had no 217 Trejo, S. J. (1991). The Effects of Overtime Pay Regulation on Worker Compensation. American Economic Review, 81(4), 719–740. E:\FR\FM\22MRP2.SGM 22MRP2 10936 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules impact on the prevalence of overtime hours worked. This result supports the fixed-job model. Unlike the 1991 paper, however, he did not examine impacts of overtime coverage on employees’ weekly or hourly earnings, so this finding in support of the fixed-job model only analyzes one implication of the model.218 Barkume (2010) built on the analytic method used in Trejo (1991).219 However, Barkume observed that Trejo did not account for ‘‘quasi-fixed’’ employment costs (e.g., benefits) that do not vary with hours worked, and therefore affect employers’ decisions on overtime hours worked. After incorporating these quasi-fixed costs in the model, Barkume found results consistent with those of Trejo (1991): ‘‘though wage rates in otherwise similar jobs declined with greater overtime hours, they were not enough to prevent the FLSA overtime provisions from increasing labor costs.’’ Barkume also determined that the 1991 model did not account for evidence that in the absence of regulation some employers may voluntarily pay workers some overtime premium to entice them to work longer hours, to compensate workers for unexpected changes in their schedules, or as a result of collective bargaining.220 Barkume found that how much wages and hours worked adjusted in response to the overtime pay requirement depended on what overtime pay would be in absence of regulation. In addition, Bell and Hart (2003) examined the standard hourly wage, average hourly earnings (including overtime), the overtime premium, and overtime hours worked in the United Kingdom. Unlike the United States, the United Kingdom does not have national labor laws regulating overtime compensation. Bell and Hart found that after accounting for overtime, average hourly earnings are generally uniform in a given industry because firms paying below-market level straight-time wages tend to pay above-market overtime premiums and firms paying abovemarket level straight-time wages tend to pay below-market overtime premiums. 218 Trejo, S. J. (2003). Does the Statutory Overtime Premium Discourage Long Workweeks? Industrial and Labor Relations Review, 56(3), 375–392. 219 Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128–142. 220 Barzel, Y. (1973). The Determination of Daily Hours and Wages. The Quarterly Journal of Economics, 87(2), 220–238 demonstrated that modest fluctuations in labor demand could justify substantial overtime premiums in the employment contract model. Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA Discussion Paper No. 163, showed that establishing an overtime premium in an employment contract can reduce inefficiencies. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Bell and Hart concluded ‘‘this is consistent with a model in which workers and firms enter into an implicit contract that specifies total hours at a constant, market-determined, hourly wage rate.221 Their research is also consistent with studies showing that employers may pay overtime premiums either in the absence of a regulatory mandate (e.g., Britain), or when the mandate exists but the requirements are not met (e.g., United States).222 On balance, the Department finds strong support for the fixed-job model as the best approximation for the likely effects of a reclassification of aboveminimum-wage workers from overtime exempt to overtime non-exempt and the fixed-wage model as the best approximation of the likely effects of a reclassification of minimum-wage workers from overtime exempt to overtime non-exempt. In addition, the studies suggest that although observed wage adjustment patterns are consistent with the fixed-job model, this evidence also suggests that the actual wage adjustment is less than 100 percent as predicted by the fixed-job model. Thus, the hybrid model used in this analysis may be described as a substantial, but incomplete fixed-job model. To determine the magnitude of the adjustment, the Departments accounted for the following findings. Earlier research had demonstrated that in the absence of regulation some employers may voluntarily pay workers some overtime premium to entice them to work longer hours, to compensate workers for unexpected changes in their schedules, or as a result of collective bargaining.223 Barkume (2010) found that the measured adjustment of wages and hours to overtime premium requirements depended on what overtime premium might be paid in absence of any requirement to do so. Thus, when Barkume assumed that workers would receive an average voluntary overtime pay premium of 28 percent in the absence of an overtime pay regulation, which is the average overtime premium that Bell and Hart 221 Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and Overtime Premia: Evidence from the British Labor Market, Industrial and Labor Relations Review, 56(3), 470–480. 222 Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA Discussion Paper No. 163 223 Barzel, Y. (1973). The Determination of Daily Hours and Wages. The Quarterly Journal of Economics, 87(2), 220–238 demonstrated that modest fluctuations in labor demand could justify substantial overtime premiums in the employment contract model. Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA Discussion Paper No. 163, showed that establishing an overtime premium in an employment contract can reduce inefficiencies. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 (2003) found British employers paid in the absence of any overtime regulations, the straight time hourly wage adjusted downward by 80 percent of the amount that would occur with the fixed-job model. When Barkume assumed workers would receive no voluntary overtime pay premium in the absence of an overtime pay regulation, the results were more consistent with Trejo’s (1991) findings that the adjustment was a smaller percentage. The Department modeled an adjustment process between these two findings. Although it seemed reasonable that some premium was paid for overtime in the absence of regulation, Barkume’s assumption of a 28 percent initial overtime premium is likely too high for the salaried workers potentially affected by a change in the salary and compensation level requirements for the EAP exemptions because this assumption is based on a study of workers in Britain. British workers were likely paid a larger voluntary overtime premium than American workers because Britain did not have a required overtime pay regulation and so collective bargaining played a larger role in implementing overtime pay.224 The Department requests comment on this analysis, and how employers would likely respond to an increase in the salary level. Identifying Types of Affected Workers The Department identified four types of workers whose work characteristics affect how it modeled employers’ responses to the changes in both the standard and HCE salary levels: • Type 1: Workers who do not work overtime. • Type 2: Workers who do not regularly work overtime but occasionally work overtime. • Type 3: Workers who regularly work overtime and become overtime eligible (nonexempt). • Type 4: Workers who regularly work overtime and remain exempt, because it is less expensive for the employer to pay the updated salary level than to pay overtime and incur additional managerial costs.225 224 Bell, D. and Hart, R. (2003). Wages, Hours, and Overtime Premia: Evidence from the British Labor Market. Industrial and Labor Relations Review, 56(3), 470–480. 225 There is some evidence that employers will respond in this manner. In response to the RFI, one employer association reported that when making adjustments in anticipation of the 2016 final rule, more than 40 percent of its members raised the salaries of at least one worker above the 2016 final rule salary level. Similarly, it is possible that employers will increase the salaries paid to some ‘‘occasional’’ overtime workers to maintain the exemption for the worker, but the Department has no way of identifying these workers. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules The Department began by identifying the number of workers in each type. After modeling employer adjustments, it estimated transfer payments. Type 3 and 4 workers were identified as those who regularly work overtime (CPS variable PEHRUSL1 greater than 40). Distinguishing Type 3 workers from Type 4 workers involved a four-step process. First, the Department identified all workers who regularly work overtime. Then the Department estimated each worker’s weekly earnings if they became nonexempt, to which it added weekly managerial costs for each affected worker of $4.06 ($48.72 per hour × (5 minutes/60 minutes)).226 Last, the Department identified as Type 4 those workers whose expected nonexempt earnings plus weekly managerial costs exceeds the updated standard salary level, and, conversely, as Type 3 those whose expected nonexempt earnings plus weekly managerial costs are less than the new standard salary.227 The Department assumed that firms will include incremental managerial costs in their determination of whether to treat an affected employee as a Type 3 or Type 4 worker because those costs are only incurred if the employee is a Type 3 worker. Identifying Type 2 workers involved two steps. First, using CPS MORG data, the Department identified those who do not usually work overtime but did work overtime in the survey week (the week referred to in the CPS questionnaire, variable PEHRACT1 greater than 40). Next, the Department supplemented the CPS data with data from the Survey of Income and Program Participation (SIPP) to look at likelihood of working some overtime during the year. Based on 2012 data, the most recent available, the Department found that 39.4 percent of non-hourly workers worked overtime at some point in a year. Therefore, the Department classified a share of workers who reported they do not usually work overtime, and did not work overtime in the reference week (previously identified as Type 1 workers), as Type 2 workers such that a total of approximately 39.4 percent of affected workers were Type 2, 3, or 4. Modeling Changes in Wages and Hours The substantial, but incomplete fixedjob model (hereafter referred to as the 226 See supra § VI.D.iii.4 (managerial costs). analyzing impacts of increasing the standard salary level, Rohwedder and Wenger conducted a similar analysis; however, they use straight-time pay rather than overtime pay to calculate earnings in the absence of a pay raise to remain exempt. Rohwedder, S. and Wenger, supra note 163. 227 When VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 incomplete fixed-job model) predicts that employers will adjust wages of regular overtime workers but not to the full extent indicated by fixed-job model, and thus some employees may receive a small increase in weekly earnings due to overtime pay coverage. Therefore, when modeling employer responses with respect to the adjustment to the regular rate of pay, the Department used the incomplete fixed-job model. The Department determined that an appropriate estimate of the effect on the implicit hourly rate of pay for regular overtime workers should be determined using the average of two estimates of the incomplete fixed-job model adjustments: Trejo’s (1991) estimate that the overtime-induced wage change is 40 percent of the adjustment toward the amount predicted by the fixed-job model, assuming an initial zero overtime pay premium, and Barkume’s (2010) estimate that the wage change is 80 percent of the predicted adjustment assuming an initial 28 percent overtime pay premium.228 This is approximately equivalent to assuming that salaried overtime workers implicitly receive the equivalent of a 14 percent overtime premium in the absence of regulation (the midpoint between 0 and 28 percent). Modeling changes in wages, hours, and earnings for Type 1 and Type 4 workers was relatively straightforward. Type 1 affected EAP workers will become overtime-eligible, but because they do not work overtime, they will see no change in their weekly earnings. Type 4 workers will remain exempt because their earnings will be raised to at least the updated EAP level (either the standard salary level or HCE compensation level). These workers’ earnings will increase by the difference between their current earnings and the amount necessary to satisfy the new salary or compensation level. It is possible employers will increase these workers’ hours in response to paying them a higher salary, but the Department did not have enough information to model this potential change.229 228 Both studies considered a population that included hourly workers. Evidence is not available on how the adjustment towards the employment contract model differs between salaried and hourly workers. The employment contract model may be more likely to hold for salaried workers than for hourly workers since salaried workers directly observe their weekly total earnings, not their implicit equivalent hourly wage. Thus, applying the partial adjustment to the employment contract model as estimated by these studies may overestimate the transfers from employers to salaried workers. We do not attempt to quantify the magnitude of this potential overestimate. 229 Cherry, Monica, ‘‘Are Salaried Workers Compensated for Overtime Hours?’’ Journal of PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 10937 Modeling changes in wages, hours, and earnings for Type 2 and Type 3 workers was more complex. The Department distinguished those who regularly work overtime (Type 3 workers) from those who occasionally work overtime (Type 2 workers) because employer adjustment to the proposed rule may differ accordingly. Employers are more likely to adjust hours worked and wages for regular overtime workers because their hours are predictable. However, in response to a transient, perhaps unpredicted, shift in market demand for the good or service such employers provide, employers are more likely to pay for occasional overtime rather than adjust hours worked and pay. The Department treated Type 2 affected workers in two ways due to the uncertainty of the nature of these occasional overtime hours. The Department assumed that 50 percent of these occasional overtime workers worked expected overtime hours and the other 50 percent worked unexpected overtime. Workers were randomly assigned to these two groups. Workers with expected occasional overtime hours were treated like Type 3 affected workers (incomplete fixed-job model adjustments). Workers with unexpected occasional overtime hours were assumed to receive a 50 percent pay premium for the overtime hours worked and receive no change in base wage or hours (full overtime premium model).230 When modeling Type 2 workers’ hour and wage adjustments, the Department treated those identified as Type 2 using the CPS data as representative of all Type 2 workers. The Department estimated employer adjustments and transfers assuming that the patterns observed in the CPS reference week are representative of an average week in the year. Thus, the Department assumes total transfers for the year are equal to 52-times the transfers estimated for the single representative week for which the Department has CPS data. However, these transfers are spread over a larger group including those who occasionally Labor Research 25(3): 485–494, September 2004, found that exempt full-time salaried employees earn more when they work more hours, but her results do not lend themselves to the quantification of the effect on hours of an increase in earnings. 230 We use the term ‘‘full overtime premium’’ to describe the adjustment process as modeled. The full overtime premium model is a special case of the general fixed-wage model in that the Department assumes the demand for labor under these circumstances is completely inelastic. That is, employers make no changes to employees’ hours in response to these temporary, unanticipated changes in demand. E:\FR\FM\22MRP2.SGM 22MRP2 10938 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules work overtime but did not do so in the CPS reference week.231 Since employers must now pay more for the same number of labor hours, for Type 2 and Type 3 EAP workers, the quantity of labor hours demanded by employers will decrease. It is the net effect of these two changes that will determine the final weekly earnings for affected EAP workers. The reduction in hours is calculated using the elasticity of labor demand with respect to wages. The Department used a short-term demand elasticity of ¥0.20 to estimate the percentage decrease in hours 231 If a different week was chosen as the survey week, then likely some of these workers would not have worked overtime. However, because the data are representative of both the population and all twelve months in a year, the Department believes the share of Type 2 workers identified in the CPS data in the given week is representative of an average week in the year. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 worked in Year 1 and a long-term elasticity of ¥0.4 to estimate the percentage decrease in hours worked in Years 2–10.232 The Department acknowledges that the academic literature on elasticity can be interpreted in multiple ways, and invites comment on the appropriate elasticity to use. 232 This elasticity estimate is based on the Department’s analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP No. 7958. Some researchers have estimated larger impacts on the number of overtime hours worked (Hamermesh, D. and S. Trejo. (2000). The Demand for Hours of Labor: Direct Evidence from California. The Review of Economics and Statistics, 82(1), 38–47 concludes the price elasticity of demand for overtime hours is at least ¥0.5. The Department decided to use a general measure of elasticity applied to the average change in wages since the increase in the overtime wage is somewhat offset by a decrease in the non-overtime wage as indicated in the fixed-job model. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 For Type 3 affected workers, and the 50 percent of Type 2 affected workers who worked expected overtime, the Department estimated adjusted total hours worked after making wage adjustments using the incomplete fixedjob model. To estimate adjusted hours worked, the Department set the percent change in total hours worked equal to the percent change in average wages multiplied by the wage elasticity of labor demand.233 Figure 3 is a flow chart summarizing the four types of affected EAP workers. Also shown are the effects on exempt status, weekly earnings, and hours worked for each type of affected worker. 233 In this equation, the only unknown is adjusted total hours worked. Since adjusted total hours worked is in the denominator of the left side of the equation and is also in the numerator of the right side of the equation, solving for adjusted total hours worked requires solving a quadratic equation. E:\FR\FM\22MRP2.SGM 22MRP2 10939 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules Figure 3: Flow Chart of Proposed Rule's Effect on Earnings and Hours Worked .... ........................................................ Affected workers [a] : ,------:..------, I I I I Regular hourly wages~ MW I I Do not work occasional OT I I Hourly wages adjust downward to offset some OT compensation [c] I Decreased weekly earnings [f] I I Weekly earnings increase on average [e] Weekly earnings increase on average I I Hours decrease on average Type 1 Remain exempt I Weekly earnings increase on average [e] I I Gain MW/OT protection I No change in weekly earnings Weekly earnings increase to new salary level [d] I Gain MW/OT protection I No change in hours /~ Work occasional OT [b] Gain MW/OT protection Hourly wages increase to MW Regularly work OT ~ I Regular hourly wages< MW ,.------.&.------, .......................................,. Do not usually work OT / ~ Hours decrease Type 2 Hours decrease on average No change in hours [g] Type 3 Type4 VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4725 E:\FR\FM\22MRP2.SGM 22MRP2 EP22MR19.002</GPH> [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 PEHRUSL 1 in CPS MORG) but in the reference week worked more than 40 hours (variable PEHRACT1 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. [c] The amount wages are adjusted downwards depends on whether the fixed-job model or the fixed-wage model holds. The Department's preferred method uses a combination of the two. 10940 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules In response to the Department’s RFI and at the listening sessions, some commenters provided information concerning their proposed wage and hour adjustments in anticipation of an increase to the standard salary level and HCE total compensation level. Employers indicated they would respond by making a variety of adjustments to wages, hours worked, or both. Estimated Number of and Effects on Affected EAP Workers The Department estimated the proposed rule would affect 1.3 million workers (Table 14), of which 760,100 were Type 1 workers (59.8 percent of all affected EAP workers), 279,500 were estimated to be Type 2 workers (22.0 percent of all affected EAP workers), 204,600 were Type 3 workers (16.1 percent of all affected EAP workers), and 27,100 were estimated to be Type 4 workers (2.1 percent of all affected workers). All Type 3 workers and half of Type 2 employees (344,300) are assumed to work predictable overtime. TABLE 14—AFFECTED EAP WORKERS BY TYPE (1,000S), YEAR 1 Regular overtime No overtime (T1) Total Occasional overtime (T2) Newly nonexempt (T3) Remain exempt (T4) Standard salary level ........................................................... HCE compensation level ..................................................... 1,070.2 201.1 648.9 111.2 269.6 9.9 127.4 77.2 24.3 2.8 Total .............................................................................. 1,271.3 760.1 279.5 204.6 27.1 Note: Pooled data for 2015–2017 adjusted to reflect 2017. * Type 1: Workers without regular OT and without occasional OT and become overtime eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). Type 1 workers would have no change in wages, hours, or earnings.234 234 It is possible that these workers may experience an increase in hours and weekly earnings because of transfers of hours from overtime workers. Due to the high level of uncertainty in employers’ responses regarding the transfer of hours, the Department did not have credible VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Employers were assumed to be unable to adjust the hours or regular rate of pay for the occasional overtime workers whose overtime is irregularly scheduled and unpredictable. The Department used the incomplete fixed-job model to estimate changes in the regular rate of pay for Type 3 workers and the 50 percent of Type 2 workers who regularly work occasional overtime. As a group, Type 2 workers would see a decrease in their average regular hourly wage; however, because workers would now receive a 50 percent premium on their regular hourly wage for each hour worked in excess of 40 hours per week, evidence to support an estimation of the number of hours transferred to other workers. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 average weekly earnings for Type 2 workers would increase.235 Similarly, Type 3 workers would also receive decreases in their regular hourly wage as predicted by the incomplete fixed-job model but an increase in weekly earnings because these workers would now be eligible for the overtime premium. Type 4 workers’ implicit hourly rates of pay would increase to meet the updated standard salary level or HCE annual compensation level. 235 Type 2 workers do not see increases in regular earnings to the new salary level (as Type 4 workers do) even if their new earnings in this week exceed that new level. This is because the estimated new earnings only reflect their earnings in that week when overtime is worked; their earnings in typical weeks that they do not work overtime do not exceed the salary level. E:\FR\FM\22MRP2.SGM 22MRP2 EP22MR19.003</GPH> The proposed rule would affect some affected workers’ hourly wages, hours, and weekly earnings. Predicted changes in implicit wage rates are outlined in Table 15, changes in hours in Table 16, and changes in weekly earnings in Table 17. How these would change depends on the type of worker, but on average weekly earnings would be unchanged or increase while hours worked would be unchanged or decrease. 10941 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 15—AVERAGE REGULAR RATE OF PAY BY TYPE OF AFFECTED EAP WORKER, YEAR 1 Regular overtime No overtime (T1) Total Occasional overtime (T2) Newly nonexempt (T3) Remain exempt (T4) Standard Salary Level Before Proposed Rule ......................................................... After Proposed Rule ............................................................ Change ($) ........................................................................... Change (%) .......................................................................... $15.70 $15.65 ¥$0.06 ¥0.4% $16.74 $16.74 $0.00 0.0% $15.78 $15.72 ¥$0.05 ¥0.3% $11.32 $10.83 ¥$0.49 ¥4.3% $10.35 $11.01 $0.66 6.3% $54.41 $54.41 $0.00 0.0% $53.51 $50.70 ¥$2.81 ¥5.2% $42.66 $40.04 ¥$2.61 ¥6.1% $44.21 $45.08 $0.87 2.0% HCE Compensation Level Before Proposed Rule ......................................................... After Proposed Rule ............................................................ Change ($) ........................................................................... Change (%) .......................................................................... $49.71 $48.58 ¥$1.13 ¥2.3% Note: Pooled data for 2015–2017 adjusted to reflect 2017. * Type 1: Workers without regular OT and without occasional OT and become overtime-eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime-eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). Hours for Type 1 workers would not change. Similarly, hours would not change for the half of Type 2 workers who work irregular overtime. Half of Type 2 and all Type 3 workers would see a small decrease in their hours of overtime worked. This reduction in hours is relatively small and is due to the effect on labor demand from the increase in the average hourly wage as predicted by the incomplete fixed-job model (Table 16). Type 4 workers’ hours may increase, but due to lack of data, the Department assumed hours would not change. TABLE 16—AVERAGE WEEKLY HOURS FOR AFFECTED EAP WORKERS BY TYPE, YEAR 1 Regular OT No overtime worked (T1) Total Occasional OT (T2) Newly nonexempt (T3) Remain exempt (T4) Standard Salary Level a Before Proposed Rule ......................................................... After Proposed Rule ............................................................ Change (hours) .................................................................... Change (%) .......................................................................... 39.7 39.6 ¥0.1 ¥0.2% 37.2 37.2 0.0 0.0% 39.2 39.2 0.0 ¥0.1% 49.6 49.1 ¥0.5 ¥0.9% 60.5 60.5 0.0 0.0% 39.5 39.5 0.0 0.0% 49.3 49.0 ¥0.3 ¥0.6% 52.1 51.7 ¥0.4 ¥0.7% 61.3 61.3 0.0 0.0% HCE Compensation Level a Before Proposed Rule ......................................................... After Proposed Rule ............................................................ Change (hours) .................................................................... Change (%) .......................................................................... 45.1 44.9 ¥0.2 ¥0.4% Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG. * Type 1: Workers without regular OT and without occasional OT and become overtime eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). Because Type 1 workers would not experience a change in their regular rate of pay or hours, they would have no change in earnings due to the proposed rule (Table 17). Although both Type 2 and Type 3 workers would, on average, experience a decrease in both their VerDate Sep<11>2014 19:26 Mar 21, 2019 Jkt 247001 regular rate of pay and hours worked, their weekly earnings would increase as a result of the overtime premium. Weekly earnings after the standard salary level increased were estimated using the new wage (i.e., the incomplete fixed-job model wage) and the reduced PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 number of overtime hours worked. Type 4 workers’ salaries would increase to the new standard salary level or the HCE compensation level. E:\FR\FM\22MRP2.SGM 22MRP2 10942 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 17—AVERAGE WEEKLY EARNINGS FOR AFFECTED EAP WORKERS BY TYPE, YEAR 1 Regular overtime No overtime (T1) Total Occasional overtime (T2) Newly nonexempt (T3) Remain exempt (T4) Standard Salary Level a Before Proposed Rule ......................................................... After Proposed Rule ............................................................ Change ($) ........................................................................... Change (%) .......................................................................... $563.76 $568.30 $4.54 0.8% $558.32 $558.32 $0.00 0.0% $577.87 $583.34 $5.47 0.9% $555.45 $573.43 $17.98 3.2% $596.04 $641.00 $44.96 7.5% $2,623.44 $2,683.14 $59.70 2.3% $2,182.02 $2,240.70 $58.68 2.7% $2,627.16 $2,682.00 $54.84 2.1% HCE Compensation Level a Before Proposed Rule ......................................................... After Proposed Rule ............................................................ Change ($) ........................................................................... Change (%) .......................................................................... $2,179.37 $2,205.61 $26.23 1.2% $2,126.62 $2,126.62 $0.00 0.0% Note: Pooled data for 2015–2017 adjusted to reflect 2017. a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the weekly earnings because the product of two averages is not necessarily equal to the average of the product. * Type 1: Workers without regular OT and without occasional OT and become overtime eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). At the new standard salary level, the average weekly earnings of all affected workers would increase $4.54 (0.8 percent), from $563.76 to $568.30. Multiplying the average change of $4.54 by the 1.1 million affected standard EAP workers and 52 weeks equals an increase in earnings of $252.5 million in the first year (Table 18). For workers affected by the change in the HCE compensation level, average weekly earnings would increase by $26.23. When multiplied by 201,100 affected workers and 52 weeks, the national increase would be $274.3 million in the first year. Thus, total Year 1 transfer payments attributable to this proposed rule would total $526.9 million. TABLE 18—TOTAL CHANGE IN WEEKLY AND ANNUAL EARNINGS FOR AFFECTED EAP WORKERS BY PROVISION, YEAR 1 Annual change in earnings (1,000s) Provision Total ..................................................................................................................................................................................................... Standard salary level: Total .............................................................................................................................................................................................. Minimum wage only ...................................................................................................................................................................... Overtime pay only a ...................................................................................................................................................................... HCE compensation level: Total .............................................................................................................................................................................................. Minimum wage only ...................................................................................................................................................................... Overtime pay only a ...................................................................................................................................................................... a Estimated 252,546 57,041 195,505 274,348 ........................ 274,348 by subtracting the minimum wage transfer from the total transfer. Rohwedder and Wenger (2015) analyzed the effects of increasing the standard salary level.236 They compared hourly and salaried workers in the CPS using quantile treatment effects. This methodology estimates the effect of a worker becoming nonexempt by comparing similar workers who are hourly and salaried. They found no statistically significant change in hours or wages on average. However, their point estimates, averaged across all affected workers, show small increases in earnings and decreases in hours, similar to our analysis. For example, 236 Rohwedder VerDate Sep<11>2014 $526,894 and Wenger, supra note 163. 18:00 Mar 21, 2019 Jkt 247001 using a salary level of $750, they estimated weekly earnings may increase between $2 and $22 and weekly hours may decrease by approximately 0.4 hours. The Department estimated weekly earnings for workers affected by the standard salary level would increase by $4.54 and hours would decrease by 0.1 hours. 4. Potential Transfers Not Quantified There may be additional transfers attributable to this proposed rule; however, the magnitude of these other transfers could not be quantified and therefore are discussed only qualitatively. PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 Reduced Earnings for Some Workers Holding regular rate of pay and work hours constant, payment of an overtime premium will increase weekly earnings for workers who work overtime. However, as discussed previously, employers may try to mitigate cost increases by reducing the number of overtime hours worked, either by transferring these hours to other workers or monitoring hours more closely. Depending on how hours are adjusted, a specific worker may earn less pay after this proposed rule. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules Additional Work for Some Workers Affected workers who remain exempt would see an increase in pay but may also see an increase in workload. The Department estimated the net changes in hours, but due to the data limitations as noted in section VI.D.iv.3, did not estimate changes in hours for affected workers whose salary is increased to the new threshold so they remain overtime exempt. Reduction in Bonuses and Benefits for Some Workers Employers may offset increased labor costs by reducing bonuses or benefits instead of reducing base wages or hours worked. Due to data limitations, the Department has not modeled this effect separately. The Department observes that any reductions in bonuses or benefits would be likely accompanied by smaller reductions in base wages or hours worked. v. Benefits and Cost Savings Potential Benefits and Effects Not Discussed Elsewhere The Department has determined that the proposed rulemaking would provide some benefits; however, these benefits could not be quantified due to data limitations, requiring the Department to discuss such benefits only qualitatively. 1. Reduce Employee Misclassification The revised salary level reduces the likelihood of workers being misclassified as exempt from overtime pay, providing an additional measure of the effectiveness of the salary level as a bright-line test delineating exempt and nonexempt workers. The Department’s analysis of misclassification drew on CPS data and looked at workers who are white collar, salaried, subject to the FLSA and covered by part 541 regulations, earn at least $455 but less than $641 per week, and fail the duties test. Because only workers who work overtime may receive overtime pay, when determining the share of workers who are misclassified the sample was limited to those who usually work overtime. Workers were considered misclassified if they did not receive overtime pay.237 The Department estimated that 9.3 percent of workers in this analysis who usually worked overtime did not receive overtime compensation and are therefore misclassified as exempt. Applying this estimate to the sample of white collar salaried workers who fail the duties test 237 Overtime pay status was based on worker responses to the CPS MORG question concerning whether they receive overtime pay, tips, or commissions at their job (‘‘PEERNUOT’’ variable). VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 and earn at least $455 but less than $641 (the 2017 proposed salary level used for the RIA), the Department estimated that there are approximately 188,100 white collar salaried workers who are overtime-eligible but whose employers do not recognize them as such.238 These employees’ entitlement to overtime pay will now be abundantly evident. RAND has conducted a survey to identify the number of workers who may be misclassified as EAP exempt. The survey, a special module to the American Life Panel, asks respondents: (1) Their hours worked, (2) whether they are paid on an hourly or salary basis, (3) their typical earnings, (4) whether they perform certain job responsibilities that are treated as proxies for whether they would justify exempt status, and (5) whether they receive any overtime pay. Using these data, Susann Rohwedder and Jeffrey B. Wenger 239 found ‘‘11.5 percent of salaried workers were classified as exempt by their employer although they did not meet the criteria for being so.’’ Using RAND’s estimate of the rate of misclassification (11.5 percent), the Department estimated that approximately 232,400 salaried workers earning between $455 and $641 per week who fail the standard duties test are currently misclassified as exempt.240 By raising the salary level the proposed rule will increase the likelihood that these workers will be correctly classified as nonexempt. 2. Reduced Litigation One result of enforcing the 2004 standard salary level for 14 years is that the established ‘‘dividing line’’ between EAP workers who are exempt and not exempt has gradually eroded and no longer holds the same relative position in the distribution of nominal wages and salaries. Therefore, as nominal wages and salaries for workers have increased over time, while the standard salary level has remained constant, more workers earn above the ‘‘dividing line’’ and have moved from nonexempt 238 The Department applies the misclassification estimate derived here to both the group of workers who usually work more than 40 hours and to those who do not. 239 Rohwedder and Wenger, supra note 163. 240 The number of misclassified workers estimated based on the RAND research cannot be directly compared to the Department’s estimates because of differences in data, methodology, and assumptions. Although it is impossible to reconcile the two different approaches without further information, by calculating misclassified workers as a percent of all salaried workers in its sample, RAND uses a larger denominator than the Department. If calculated on a more directly comparable basis, the Department expects the RAND estimate of the misclassification rate would still be higher than the Department’s estimate. PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 10943 to potentially exempt. The Department’s enforcement of the 2004 salary levels has burdened employers with performing duties tests to determine overtime exemption status of white collar workers for a larger proportion of workers than in 2004 and has created uncertainty regarding the correct classification of workers as nonexempt or exempt. This may have contributed to an increase in FLSA lawsuits since 2004,241 much of which has involved cases regarding whether workers who satisfy the salary level test also meet the duties test for exemption. Updating the standard salary level should restore the relative position of the standard salary level in the overall distribution of nominal wages and salaries as set forth in the 2004 rule. Additionally, proposed regular updates to the standard salary level would maintain its desired position within the distribution of nominal wages and salaries and therefore would keep the standard salary test’s effectiveness as a ‘‘dividing line’’ for separating nonexempt and potentially exempt EAP workers. Increasing the standard salary level from $455 per week to the proposed level of $679 per week would increase the number of white collar workers for whom the standard salarylevel test is determinative of their nonexempt status, and employers would no longer have to perform a duties analysis for these employees. This would reduce the burden on employers and may reduce legal challenges and the overall cost of litigation faced by employers in FLSA overtime lawsuits, specifically litigation that turns on whether workers earning above the current standard salary level ($455 per week) pass the duties test. The size of the potential social benefit from fewer legal challenges and the corresponding decline in overall litigation costs is difficult to quantify, but a reduction in litigation costs would be beneficial to both employers and workers. To provide a general estimate of the size of the potential benefits from reducing litigation, the Department used data from the federal courts’ Public Access to Court Electronic Records (PACER) system and the CPS to estimate the number and percentage of FLSA cases that concern EAP exemptions and are likely to be affected by the proposed rule. For this step of the analysis, to avoid using data that could reflect changed behavior in anticipation of the 2016 final rule, the Department used the 241 See https://www.washingtonpost.com/news/ wonk/wp/2015/11/25/people-are-suing-more-thanever-over-wages-and-hours/?utm_ term=.c8dcc2783351; https://www.bna.com/uptickflsa-litigation-n57982064020/. E:\FR\FM\22MRP2.SGM 22MRP2 10944 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules data gathered during the 2016 rulemaking. As explained in that rule, to determine the potential number of cases that would likely be affected by the proposed rule, the Department obtained a list of all FLSA cases closed in 2014 from PACER (8,256 cases).242 From this list, the Department selected a random sample of 500 cases. The Department identified the cases within this sample that were associated with the EAP exemption. The Department found that 12.0 percent of these FLSA cases (60 of 500) were related to the EAP exemptions. Next the Department determined what share of these cases could potentially be avoided by an increase in the standard salary and HCE compensation levels. The Department estimated the share of EAP cases that may be avoided due to the proposed rule by using data on the salaried earnings distribution from the 2017 CPS MORG to determine the share of EAP cases in which workers earn at least $455 but less than $641 per week or at least $100,000 but less than $139,464 annually. From CPS, the Department selected white collar, nonhourly workers as the appropriate reference group for defining the earnings distribution rather than exempt workers because if a worker is litigating his or her exempt status, then we do not know if that worker is exempt or not. Based on this analysis, the Department determined that 21.3 percent of white collar nonhourly workers had earnings within these ranges. Applying these findings to the 12 percent of cases associated with the EAP exemption yields an estimated 2.6 percent of FLSA cases, or about 211 cases, that may be avoidable. The assumption underlying this method is that workers who claim they are misclassified as EAP exempt have a similar earnings distribution as all white collar nonhourly workers. After determining the potential number of EAP cases that the proposed rule may avoid, the Department examined a selection of 56 FLSA cases concluded between 2012 and 2015 that contained litigation cost information to estimate the average costs of litigation to assign to the potentially avoided EAP cases.243 To calculate average litigation 242 See 81 FR 32501. 56 cases used for this analysis were retrieved from Westlaw’s Case Evaluator database using a keyword search for case summaries between 2012 and 2015 mentioning the terms ‘‘FLSA’’ and ‘‘fees.’’ Although the initial search yielded 64 responsive cases, the Department excluded one duplicate case, one case resolving litigation costs through a confidential settlement agreement, and six cases where the defendant employer(s) ultimately prevailed. Because the FLSA only entitles prevailing plaintiffs to litigation cost awards, information about litigation costs was only 243 The VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 costs associated with these cases, the Department looked at records of court filings in the Westlaw Case Evaluator tool and on PACER to ascertain how much plaintiffs in these cases were paid for attorney fees, administrative fees, and/or other costs, apart from any monetary damages attributable to the alleged FLSA violations. (The FLSA provides for successful plaintiffs to be awarded reasonable attorney’s fees and costs, so this data is available in some FLSA cases.) After determining the plaintiff’s total litigation costs for each case, the Department then doubled the figures to account for litigation costs that the defendant employers incurred.244 According to this analysis, the average litigation cost for FLSA cases concluded between 2012 and 2015 was $654,182.245 Applying this figure to approximately 211 EAP cases that could be prevented as a consequence of this rulemaking, the Department estimated that avoided litigation costs resulting from the rule may total approximately $138.2 million per year. The Department believes these totals may underestimate total litigation costs because some FLSA overtime cases are heard in state court and thus were not captured by PACER; some FLSA overtime matters are resolved before litigation or by alternative dispute resolution; and some attorneys representing FLSA overtime plaintiffs may take a contingency fee atop their statutorily awarded fees and costs. 3. Benefits of Transparency and Certainty The proposed rule also affirms the Department’s intention to update the part 541 earnings thresholds every four years going forward. This would help maintain the relative position of the standard salary and HCE compensation levels in the overall distribution of nominal wages and salaries over time. Proposing to adjust the standard salary level and HCE compensation test every four years may provide social benefits from increased transparency and certainty for employers. The Department believes an update to the salary level tests is long overdue. Long periods between adjustments result in large changes in the salary levels to restore the appropriate relative available for the remaining 56 FLSA cases that ended in settlement agreements or court verdicts favoring the plaintiff employees. 244 This is likely a conservative approach to estimate the total litigation costs for each FLSA lawsuit, as defendant employers tend to incur greater litigation costs than plaintiff employees because of, among other things, typically higher discovery costs. 245 The median cost was $111,835 per lawsuit. PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 position of the ‘‘dividing line’’ between nonexempt and potentially exempt workers. The size and unpredictability of these changes in the past are challenging and costly to employers, because there are significant familiarization, adjustment, and managerial costs associated with infrequent updates. The Department hopes to increase transparency and certainty by proposing to update the salary levels routinely. Adjustments that are more frequent would be smaller and make compliance easier and less costly to employers, compared to large adjustments, which are more disruptive. Employers would be aware of the timing of proposed updates and would be able to anticipate the increase beforehand. The increased transparency and certainty in regards to future proposed adjustments would help employers make more effective short- and long-term employment decisions, as well as improve their estimates of future costs. vi. Sensitivity Analysis This section includes estimated costs and transfers using either different assumptions or segments of the population. First, the Department presents bounds on transfer payments estimated using alternative assumptions. Second, the Department considers costs and transfers by region and by industry. 1. Bounds on Transfer Payments Because the Department cannot predict employers’ precise reaction to the proposed rule, the Department calculated bounds on the size of the estimated transfers from employers to workers. These bounds on transfers do not generate bounded estimates for costs. For a reasonable upper bound on transfer payments, the Department assumed that all occasional overtime workers and half of regular overtime workers would receive the full overtime premium (i.e., such workers would work the same number of hours but be paid 1.5 times their implicit initial hourly wage for all overtime hours) (Table 19). The full overtime premium model is a special case of the fixed-wage model where there is no change in hours. For the other half of regular overtime workers, the Department assumed in the upper-bound method that they would have their implicit hourly wage adjusted as predicted by the incomplete fixed-job model (wage rates fall and hours are reduced but total earnings continue to increase, as in the preferred method). In the preferred model, the Department assumed that E:\FR\FM\22MRP2.SGM 22MRP2 10945 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules only 50 percent of occasional overtime workers and no regular overtime workers would receive the full overtime premium. The plausible lower-transfer bound also depends on whether employees work regular overtime or occasional overtime. For those who regularly work overtime hours and half of those who work occasional overtime, the Department assumes the employees’ wages will fully adjust as predicted by the fixed-job model.246 For the other half of employees with occasional overtime hours, the lower bound assumes they will be paid one and onehalf times their implicit hourly wage for overtime hours worked (full overtime premium). TABLE 19—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% fixed-job model .......................................... 50% full overtime premium ................................ 50% incomplete fixed-job model ...................... 50% full overtime premium .............................. 100% full overtime premium. Regular Overtime Workers (Type 3) 100% fixed-job model ........................................ 100% incomplete fixed-job model .................... 50% incomplete fixed-job model. 50% full overtime premium. * Full overtime premium model: Regular rate of pay equals the implicit hourly wage prior to the regulation (with no adjustments); workers are paid 1.5 times this base wage for the same number of overtime hours worked prior to the regulation. * Fixed-job model: Base wages are set at the higher of: (1) A rate such that total earnings and hours remain the same before and after the regulation; thus the base wage falls, and workers are paid 1.5 times the new base wage for overtime hours (the fixed-job model) or (2) the minimum wage. * Incomplete fixed-job model: Regular rates of pay are partially adjusted to the wage implied by the fixed-job model. The cost and transfer payment estimates associated with the bounds are presented in Table 20. Regulatory familiarization costs and adjustment costs do not vary across the scenarios. Managerial costs are lower under these alternative employer response assumptions because fewer workers’ hours are adjusted by employers and thus managerial costs, which depend in part on the number of workers whose hours change, will be smaller.247 Depending on how employers adjust the implicit regular hourly wage, estimated transfers may range from $234.7 million to $1,053.9 million, with the preferred estimate equal to $526.9 million. TABLE 20—BOUNDS ON YEAR 1 COST AND TRANSFER PAYMENT ESTIMATES, YEAR 1 (MILLIONS) Lower transfer estimate Cost/transfer Direct employer costs ...................................................................................................... Reg. familiarization ................................................................................................... Adjustment costs ...................................................................................................... Managerial costs ...................................................................................................... Transfers .......................................................................................................................... Preferred estimate $394.7 324.9 66.6 3.2 234.7 $464.2 324.9 66.6 72.7 526.9 Upper transfer estimate $409.7 324.9 66.6 18.1 1,053.9 Note 1: Pooled data for 2015–2017 adjusted to reflect 2017. 2. Effects by Regions and Industries This section presents estimates of the effects of this proposed rule by region and by industry. The Department analyzed effects on low-wage regions by comparing the number of affected workers, costs, and transfers across the 246 The straight-time wage adjusts to a level that keeps weekly earnings constant when overtime hours are paid at 1.5 times the straight-time wage. In cases where adjusting the straight-time wage VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 four Census Regions. The region with the largest number of affected workers would be the South (544,000). However, as a share of potentially affected workers in the region, the South would not be significantly more affected relative to other regions (6.4 percent are affected compared with 4.4 to 5.0 percent in other regions). As a share of all workers in the region, the South would also not be particularly affected relative to other regions (1.1 percent are affected compared with 0.8 to 0.9 percent in other regions). results in a wage less than the minimum wage, the straight-time wage is set to the minimum wage. 247 In the lower transfer estimate, managerial costs are for employees whose hours change because their hourly rate increased to the minimum wage. PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10946 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 21—POTENTIALLY AFFECTED AND AFFECTED WORKERS, BY REGION, YEAR 1 Affected workers Region All ..................................... Northeast .......................... Midwest ............................ South ................................ West ................................. Workers subject to FLSA (millions) Potentially affected workers (millions) a 135.9 25.0 30.1 49.4 31.5 24.3 5.1 5.0 8.5 5.6 Percent of potentially affected workers in region Percent of total affected (%) Number (millions) b 1.271 0.226 0.251 0.544 0.251 100 17.7 19.7 42.8 19.7 Percent of all workers in region 5.2 4.4 5.0 6.4 4.5 0.9 0.9 0.8 1.1 0.8 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). Total transfers in the first year were estimated to be $526.9 million (Table 22). As expected, the transfers in the South would be the largest portion because the largest number of affected workers would be in the South; however, transfers per affected worker would be the lowest in the South. Annual transfers per worker would be $336 in the South, but $437 to $511 in other regions. TABLE 22—TRANSFERS BY REGION, YEAR 1 Total change in earnings (millions) Region All ..................................................................................................................................... Northeast ......................................................................................................................... Midwest ............................................................................................................................ South ................................................................................................................................ West ................................................................................................................................. Percent of total (%) $526.9 115.3 109.6 182.7 119.3 Per affected worker 100 21.9 20.8 34.7 22.6 $414.44 511.25 437.34 335.63 475.47 Note: Pooled data for 2015–2017 adjusted to reflect 2017. Direct employer costs are composed of regulatory familiarization costs, adjustment costs, and managerial costs. Total first year direct employer costs would be $464.2 million (Table 23). Total direct employer costs would be the highest in the South ($172.2 million) and lowest in the Northeast ($87.0 million). While the three components of direct employer costs vary as a percent of these total costs by region, the percentage of total direct costs in each region would be fairly consistent with the share of all workers in a region. Direct employer costs in each region as a percentage of the total direct costs would range from 18.7 percent in the Northeast, to 37.1 percent in the South. Once again, these proportions are almost the same as the proportions of the total workforce in each region: 18.4 percent in the Northeast and 36.3 percent in the South. TABLE 23—DIRECT EMPLOYER COSTS BY REGION, YEAR 1 Regulatory familiarization Region Adjustment Managerial Total direct costs Costs (Millions) All ..................................................................................................................... Northeast ......................................................................................................... Midwest ............................................................................................................ South ................................................................................................................ West ................................................................................................................. $324.9 62.7 71.4 114.2 76.7 $66.6 11.8 13.1 28.5 13.1 $72.7 12.5 16.4 29.5 14.3 $464.2 87.0 100.9 172.2 104.2 100.0 17.7 19.7 42.8 19.7 100.0 17.2 22.5 40.6 19.7 100.0 18.7 21.7 37.1 22.4 Percent of Total Costs by Region All ..................................................................................................................... Northeast ......................................................................................................... Midwest ............................................................................................................ South ................................................................................................................ West ................................................................................................................. 100.0 19.3 22.0 35.1 23.6 Note: Pooled data for 2015–2017 adjusted to reflect 2017. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10947 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules Another way to compare the relative effects of this proposed rule by region is to consider the transfers and costs as a proportion of current payroll and current revenues (Table 24). Nationally, employer costs and transfers would be approximately 0.013 percent of payroll. By region, direct employer costs and transfers as a percent of payroll would be also approximately the same (between 0.012 and 0.014 percent of payroll). Employer costs and transfers as a percent of revenue would be 0.002 percent nationally and in each region. TABLE 24—ANNUAL TRANSFERS AND COSTS AS PERCENT OF PAYROLL AND OF REVENUE BY REGION, YEAR 1 Costs and transfers Payroll (billions) Region All ..................................................................................................................... Northeast ......................................................................................................... Midwest ............................................................................................................ South ................................................................................................................ West ................................................................................................................. $7,461 1,646 1,589 2,483 1,743 Revenue (billions) As percent of payroll $42,832 8,614 9,766 15,308 9,145 0.0133 0.0122 0.0132 0.0143 0.0128 As percent of revenue 0.0023 0.0023 0.0022 0.0023 0.0024 Notes: Pooled data for 2015–2017 adjusted to reflect 2017. Payroll, revenue, costs, and transfers all exclude the federal government. Sources: Private sector payroll and revenue data from 2012 SUSB. State and local payroll data from State and Local Government Finances Summary: FY2015. In order to gauge the effect of the proposed rule on industries, the Department compared estimates of combined direct costs and transfers as a percent of payroll, profit, and revenue for the 13 major industry groups (Table 25).248 This provides a common method of assessing the relative effects of the rule on different industries, and the magnitude of adjustments the rule may require on the part of enterprises in each industry. The relative costs and transfers expressed as a percentage of payroll are particularly useful measures of the relative size of adjustment faced by organizations in an industry because they benchmark against the cost category directly associated with the labor force. Measured in these terms, costs and transfers as a percent of payroll would be highest in agriculture, forestry, fishing, and hunting; leisure and hospitality; and other services. However, the overall magnitude of the relative shares would be small, representing less than 0.1 percent of overall payroll costs across industries. The Department also estimated transfers and costs as a percent of profits.249 Benchmarking against profits is potentially helpful in the sense that it provides a measure of the proposed rule’s effect against returns on investment. However, this metric must be interpreted carefully as it does not account for differences across industries in risk-adjusted rates of return, which are not readily available for this analysis. The ratio of costs and transfers to profits also does not reflect differences in the firm-level adjustment to changes in profits reflecting crossindustry variation in market structure.250 Nonetheless, the overall magnitude of costs and transfers as a percentage of profits would be small, representing in less than 0.3 percent of overall profits in every industry. The range of values of total costs and transfers would vary among industries as a percent of profits ranging from a low of 0.02 percent (financial activities) to a high of 0.28 percent (agriculture, forestry, fishing, and hunting). However, because the share is less than 0.3 percent, even for the industry with the largest impact, we believe this proposed rule would not disproportionately affect any industries. Finally, the Department’s estimates of transfers and costs as a percent of revenue by industry also indicated very small effects (Table 25) of less than 0.02 percent of revenues in any industry. The industries with the largest costs and transfers as a percent of revenue would be agriculture, forestry, fishing, and hunting; and leisure and hospitality. However, the difference between the agriculture, forestry, fishing, and hunting industry, the industry with the highest costs and transfers as a percent of revenue, and the industry with the lowest costs and transfers as a percent of revenue (public administration), would be only 0.011 percentage points. Table 25 illustrates that the actual differences in costs relative to revenues would be quite small across industry groupings. TABLE 25—ANNUAL TRANSFERS, TOTAL COSTS, AND TRANSFERS AND COSTS AS PERCENT OF PAYROLL, REVENUE, AND PROFIT BY INDUSTRY, YEAR 1 Costs and transfers Transfers (millions) Industry All ......................................................................................... Agriculture, forestry, fishing, & hunting ................................ 248 Note that the totals in this table for transfers and direct costs do not match the totals in other sections due to the exclusion of transfers to federal workers and costs to federal entities. Federal costs and transfers are excluded to be consistent with payroll and revenue which exclude the federal government. 249 Internal Revenue Service. (2013). Corporation Income Tax Returns. Available at: https:// www.irs.gov/statistics/soi-tax-stats-corporationcomplete-report. Table 5 of the IRS report provides VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Direct costs (millions) $525.7 3.0 $454.2 1.1 information on total receipts, net income, and deficits. The Department calculated the ratio of net income (column (7)) less any deficit (column (8)) to total receipts (column (3)) for all firms by major industry categories. Costs and transfers as a percent of revenues were divided by the profit to receipts ratios to calculate the costs and transfers as a percent of profit. 250 In particular, a basic model of competitive product markets would predict that highly competitive industries with lower rates of return PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 As percent of payroll 0.013 0.066 As percent of revenue 0.002 0.012 As percent of profit a 0.04 0.28 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. E:\FR\FM\22MRP2.SGM 22MRP2 10948 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 25—ANNUAL TRANSFERS, TOTAL COSTS, AND TRANSFERS AND COSTS AS PERCENT OF PAYROLL, REVENUE, AND PROFIT BY INDUSTRY, YEAR 1—Continued Costs and transfers Transfers (millions) Industry 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) 8.5 13.7 75.8 103.6 21.0 23.3 53.3 71.0 67.6 51.6 14.8 18.58 As percent of payroll 2.1 31.7 25.3 84.5 14.6 11.3 51.2 75.0 68.4 43.7 36.1 9.1 As percent of revenue 0.016 0.015 0.016 0.024 0.014 0.013 0.016 0.011 0.014 0.033 0.032 0.003 As percent of profit a 0.002 0.003 0.002 0.001 0.003 0.003 0.002 0.006 0.005 0.010 0.008 0.001 0.05 0.09 0.03 0.05 0.10 0.03 0.02 0.06 0.10 0.19 0.20 b Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll and revenue data from State and Local Government Finances Summary: FY2015 are used for the Public Administration industry. Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns. a Profit data based on corporations only. b Profit is not applicable for public administration. Although labor market conditions vary by Census Region and industry, the effects from updating the standard salary level and the HCE compensation level would not unduly affect any of the regions or industries. The proportion of total costs and transfers in each region would be fairly consistent with the proportion of total workers in each region. Additionally, although the shares will be larger for some firms and smaller for others, the average estimated costs and transfers from this proposed rule are very small relative to current payroll or current revenue—generally less than a tenth of a percent of payroll and less than two-hundredths of a percent of revenue in each region and in each industry. vii. Regulatory Alternatives As mentioned earlier, the Department considered a range of alternatives before selecting the 2004 methodology for updating the standard salary level and the 2016 methodology for updating the HCE compensation level (see section VI.C.i). As seen in Table 26, the Department has calculated 2017 salary levels, the number of affected workers, and the associated costs and transfers for the alternative methods that the Department considered. Regulatory familiarization costs were not included because they do not vary over the alternatives. As with the regulatory analysis for the proposed levels, we use 2017 salary levels and 2017 earnings data to estimate the effect of January 2020 salary levels and 2020 earnings. TABLE 26—UPDATED STANDARD SALARY AND HCE COMPENSATION LEVELS AND ALTERNATIVES, AFFECTED EAP WORKERS, COSTS, AND TRANSFERS, YEAR 1 2017 salary level a Alternative Year 1 effects (millions) Affected EAP workers (1,000s) Adj. & managerial costs b Transfers Standard Salary Level (Weekly) Alt. #0: Maintain average minimum wage protection since 2004 [c] .............. Alt. #1: Inflate 2004 level using PCEPI ........................................................... Alt. #2: Inflate 2004 level using Chained CPI ................................................. Alt. #3: Inflate 2004 level using CPI–U ........................................................... Alt. #4: Inflate 2004 level using ECI civilan ..................................................... Proposed rule: 2004 method ........................................................................... Alt. #5: Inflate 2004 level using ECI private .................................................... $503 597 599 620 639 641 643 242 786 787 924 1,069 1,070 1,072 $21.5 77.9 78.0 94.1 110.6 111.4 111.8 $35.7 155.2 158.3 207.5 250.1 252.5 255.0 0 186 186 198 201 204 204 ........................ 24.4 24.5 26.2 27.9 28.1 28.3 ........................ 226.4 229.0 257.1 274.3 277.8 280.3 HCE Compensation Level (Annually) HCE alt. #1: No change .................................................................................. HCE alt. #2: Inflate 2004 level using PCEPI ................................................... HCE alt. #3: Inflate 2004 level using Chained CPI ......................................... HCE alt. #4: Inflate 2004 level using CPI–U ................................................... Proposed rule: 90th percentile of full-time salaried workers ........................... HCE alt. #5: Inflate 2004 level using ECI civilian ............................................ HCE alt. #6: Inflate 2004 level using ECI private ............................................ 100,000 131,189 131,750 136,253 139,464 140,480 141,337 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a These salary levels reflect estimated values for 2017 to approximate Year 1 effects. b Regulatory familiarization costs are excluded because they do not vary based on the selected values of the salary levels. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules 10949 c When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary threshold was equivalent to the earnings of an employee working 72.2 hours at the minimum wage (including time-and-a-half for hours beyond the fortieth in a week). That amount fell with increases in the minimum wage and is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is 59.6 hours, and a threshold that would provide 59.6 hours of $7.25 minimum wage protection and overtime pay for hours over 40 would be $503. viii. Projections 1. Methodology The Department projected affected workers, costs, and transfers forward for ten years. This involved several steps. First, the Department calculated workers’ projected earnings in future years. The wage growth rate is calculated as the compound annual growth rate in median wages using the historical CPS MORG data for occupation-industry categories from 2007 to 2016.251 This is the annual growth rate that when compounded (applied to the first year’s wage, then to the resulting second year’s wage, etc.) yields the last historical year’s wage. In occupation-industry categories where the CPS MORG data had an insufficient number of observations to reliably calculate median wages, the Department used the growth rate in median wages calculated from BLS’ Occupational Employment Statistics (OES).252 Any remaining occupation-industry combinations without estimated median growth rates were assigned the median of the growth rates in median wages from the CPS MORG data for all industries and occupations. For projecting costs, we similarly projected wage rates for the human resource and managerial workers whose time is spent on these tasks. Second, the Department compared workers’ counter-factual earnings (i.e., absent any rulemakings) to the earnings levels. If the counter-factual earnings are below the relevant level (i.e., standard or HCE) then the worker is considered affected. In other words, in each year affected EAP workers were identified as those who would be exempt in Year 1 absent any change to the current regulations but have projected earnings in the future year that are less than the relevant salary level. Third, sampling weights were adjusted to reflect employment growth. The employment growth rate is the compound annual growth rate based on the ten-year employment projection 251 To increase the number of observations, three years of data were pooled for each of the endpoint years. Specifically, data from 2006, 2007, and 2008 (converted to 2007 dollars) were used to calculate the 2007 median wage and data from 2015, 2016, and 2017 (converted to 2016 dollars) were used to calculate the 2016 median wage. 252 To lessen small sample bias, this rate was only calculated using CPS MORG data when these data contained at least 30 observations in each period. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 from BLS’ National Employment Matrix (NEM) for 2016 to 2026 within an occupation-industry category. Adjusted hours for workers affected in Year 1 were re-estimated in Year 2 using a long-run elasticity of labor demand of –0.4.253 For workers newly affected in Year 2 through Year 10, employers’ wage and hour adjustments are estimated in that year, as described in section VI.D.iv, except the long-run elasticity of labor demand of –0.4 is used. Employer adjustments are made in the first year the worker is affected and then applied to all future years in which the worker continues to be affected (unless the worker switches to a Type 4 worker). Workers’ earnings in predicted years are earnings post employer adjustments, with overtime pay, and with ongoing wage growth based on historical growth rates (as described above). 2. Estimated Projections The Department estimated that the proposed rule would affect 1.3 million EAP workers in Year 1 and 1.1 million workers in Year 10 (Table 27). The projected number of affected workers includes workers who were not EAP exempt in the base year but would have become exempt in the absence of this proposed rule in Years 2 through 10. For example, a worker who passes the standard duties test may earn less than $455 in Year 1 but between $455 and the new salary level in subsequent years; such a worker would be counted as an affected worker. The Department quantified three types of direct employer costs in the ten-year projections: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Regulatory familiarization costs only occur in Year 1. Although start-up firms must still become familiar with the FLSA following Year 1, the difference between the time necessary for familiarization with the current part 541 regulations and the regulations as modified by the proposed rule is essentially zero. Therefore, projected regulatory familiarization costs for new entrants over the next nine years would be zero. 253 This elasticity estimate is based on the Department’s analysis of the following paper: Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A MetaRegression Analysis. IZA DP No. 7958. PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 Adjustment costs would occur in any year in which workers are newly affected. After Year 1, these costs would be relatively small since the majority of workers would be affected in Year 1. Management costs would recur each year for all affected EAP workers whose hours are adjusted. However, managerial costs generally decrease over time as the number of affected EAP workers decreases. The Department estimated that Year 1 managerial costs would be $72.7 million; by Year 10 these costs decline to $64.2 million. The Department projected two types of transfers from employers to employees associated with workers affected by the regulation. Transfers due to the minimum wage provision would be $57.0 million in Year 1 and would fall to $17.6 million in Year 10 as increased earnings over time move workers’ implicit rate of pay above the minimum wage.254 Transfers due to overtime pay decline over time because the number of affected workers decreases. Thus, transfers due to the overtime pay provision would decrease from $469.9 million in Year 1 to $429.5 million in Year 10.255 Projected costs and transfers were deflated to 2017 dollars using the Congressional Budget Office’s projections for the CPI–U.256 254 Increases in minimum wages were not projected. If state or federal minimum wages increase during the projected timeframe, as anticipated, then projected minimum wage transfers may be underestimated. 255 If earnings levels were in fact updated quadrennially as the Department intends, which remains a matter within the Secretary’s sole discretion, then the potential projected costs and transfers would be higher in the Department’s estimation than those shown here, based on the Department’s estimates on future outcomes many years into the future. Because those potential costs and transfers would be the result of any future rulemakings and therefore included in the economic analyses of those rulemakings, they have not been incorporated into this analysis. The Department has estimated these potential costs and transfers, however. With updates in Years 6 and 10, the ten-year annualized costs, based on the Department’s estimates and subject to change given that it relies on future projections and the Secretary’s discretionary actions, would increase from $120.5 million to $135.9 million. Annualized transfers would increase from $429.4 million to $510.0 million. 256 Congressional Budget Office. 2018. The Budget and Economic Outlook: 2018 To 2028. See https://www.cbo.gov/publication/53651. E:\FR\FM\22MRP2.SGM 22MRP2 10950 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 27—PROJECTED COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS Affected EAP workers (millions) Year (year #) Costs Adjustment a Reg. Fam. Transfers Managerial Total Due to MW Due to OT Total (Millions 2017$) Year: Year 1 ........................ Year 2 ........................ Year 3 ........................ Year 4 ........................ Year 5 ........................ Year 6 ........................ Year 7 ........................ Year 8 ........................ Year 9 ........................ Year 10 ...................... Annualized value: 3% real discount rate 7% real discount rate 1.3 1.2 1.2 1.1 1.1 1.0 1.0 1.0 1.0 1.1 $324.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 $66.6 1.5 1.7 2.2 2.9 3.4 3.2 3.3 3.4 3.6 $72.7 72.7 68.5 66.5 63.0 62.5 60.3 60.8 61.8 64.2 $464.2 74.2 70.2 68.7 65.9 65.9 63.6 64.1 65.1 67.8 $57.0 30.4 28.0 25.4 25.8 25.2 21.9 19.2 18.5 17.6 $469.9 390.9 374.9 378.0 380.5 375.5 387.2 401.9 413.4 429.5 $526.9 421.3 402.8 403.4 406.3 400.7 409.1 421.1 431.9 447.1 ........................ ........................ 37.0 43.2 10.0 11.2 65.6 66.0 112.6 120.5 27.7 28.6 400.3 400.7 428.0 429.4 a Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth. Table 27 also summarizes annualized costs and transfers over the ten-year projection period, using 3 percent and 7 percent real discount rates. The Department estimated that total direct employer costs have an annualized value of $120.5 million per year over ten years when using a 7 percent real discount rate. The annualized value of total transfers was estimated to equal $429.4 million. ix. Alternative Regulatory Baseline, Including Calculation of Cost Savings Under Executive Order 13771 Other portions of this regulatory impact analysis contain estimates of the impacts of this proposed rule relative to the 2004 final rule, which is the policy that the Department is currently enforcing. However, Circular A–4 states that multiple regulatory baselines may be analytically relevant. In this case, a second informative baseline is the 2016 final rule, which is currently in the Code of Federal Regulations (CFR).257 Moreover, for purposes of determining whether this proposed rule is deregulatory under E.O. 13771, the economic impacts should be compared to what is currently published in the CFR. As such, most of this section presents an estimate of the cost savings of this proposed rule relative to the 2016 rule, and in addition to estimating annualized cost savings for the proposed rule using a 10-year time horizon, we also estimated annualized costs savings in perpetuity in accordance with E.O. 13771 accounting standards. Later in this section, the Department presents transfer and benefits estimates from the analysis accompanying the 2016 final rule— values that are also relevant to this second regulatory baseline. To ensure the estimated costs of the 2016 final rule can be directly and appropriately compared with the costs estimated for this proposed rule, the Department started with the analytic model for this proposed rule and replaced the proposed salary and compensation thresholds with the thresholds set in the 2016 final rule. The Department assumed that initial regulatory familiarization costs would be identical under adoption of either the proposed rule or the 2016 final rule, because the same number of employers would be potentially affected in Year 1. In addition, the Department added the updated thresholds from the planned triennial updates in years 4, 7 and 10 from the 2016 final rule. Therefore, the only differences in estimated costs presented here between the 2016 final rule and this proposed rule are attributable to the initial difference in earnings thresholds and the effects of the 2016 final rule’s automatic updating mechanism, which updates the thresholds every three years. TABLE 28—WEEKLY EARNINGS THRESHOLDS USED IN COMPARISON OF 2016 FINAL RULE AND 2018 PROPOSED RULE 2016 Final Rule Year Year Year Year Year Standard salary threshold 1 .............................................................................................................. 4 .............................................................................................................. 7 .............................................................................................................. 10 ............................................................................................................ $913 984 1,049 1,118 2018 Proposed Rule HCE compensation threshold $2,577 2,837 3,080 3,345 Standard salary threshold $641 641 641 641 HCE compensation threshold $2,682 2,682 2,682 2,682 Note: Year 1 impacts are calculated using 2017 pooled CPS MORG data (the most recently available data); therefore, the earnings thresholds in Year 1 must correspond to the levels that would have been in effect under each rule had the rule been promulgated in 2017. These figures are the Department’s best approximation for impacts starting in 2020, the earliest year the Department expects the proposed earnings levels to be implemented. However, this approach means that the estimated costs presented here for 257 29 the 2016 final rule are not directly comparable to those published in the Federal Register (81 FR 32391). The differences between the previously CFR part 541 VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10951 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules published 2016 cost estimates and those presented here are primarily due to: An increase in the number of establishments that would incur regulatory familiarization costs to account for economic growth between 2012 (estimates for the 2016 final rule were based on 2012 SUSB data) and 2015 (this proposed rule is based on 2015 SUSB data); the use of more recent CPS MORG data (the 2016 final rule used pooled CPS data for 2013 through 2015 inflated to represent FY 2017); an increase in the wage rates used to value staff time spent on regulatory familiarization, adjustment, and monitoring; incorporating a 17 percent overhead rate in those wage rates; and minor improvements to the model.258 Table 29 presents the estimated number of affected EAP workers, and direct regulatory, adjustment, and managerial costs for the 2016 final rule calculated using the 2018 analytic model. TABLE 29—ADJUSTED 2016 FINAL RULE PROJECTED COSTS AND TRANSFERS, STANDARD SALARY AND HCE COMPENSATION LEVELS Affected EAP workers (millions) Year Costs Reg. Fam. Adjustment a Managerial Total (Millions FY2017$) Year: Year 1 ........................................................................... Year 2 ........................................................................... Year 3 ........................................................................... Year 4 ........................................................................... Year 5 ........................................................................... Year 6 ........................................................................... Year 7 ........................................................................... Year 8 ........................................................................... Year 9 ........................................................................... Year 10 ......................................................................... Annualized value: 3% real rate .................................................................. 7% real rate .................................................................. 4.1 4.0 3.8 4.5 4.4 4.3 4.9 4.8 4.7 5.4 $324.9 0.0 0.0 27.6 0.0 0.0 28.2 0.0 0.0 28.8 $215.2 1.5 1.7 14.3 2.9 3.5 9.4 3.3 3.4 13.7 $241.2 231.6 221.8 262.3 253.7 247.5 279.1 270.5 267.9 303.2 $781.3 233.1 223.5 304.2 256.6 251.0 316.6 273.7 271.2 345.6 ........................ ........................ 45.1 50.8 29.7 33.5 256.2 254.2 331.0 338.6 a Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs may occur in years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth. The Department then subtracted direct regulatory costs expected to have been incurred under the 2016 final rule from the direct costs estimated under this proposed rule (see Table 27). As shown in Table 30, direct employer costs of the proposed rule are estimated to be, on average, $224.0 million lower per year in perpetuity than the 2016 final rule (using a 7 percent discount rate). TABLE 30—DIFFERENCE IN COSTS BETWEEN 2016 FINAL RULE AND THIS PROPOSED RULE Reduction in affected EAP workers (millions) Year Reduction in costs Reg. Fam. Adjustment a Managerial Total (Millions FY2017$) Year: Year Year Year Year Year Year Year Year Year Year 1 ........................................................................... 2 ........................................................................... 3 ........................................................................... 4 ........................................................................... 5 ........................................................................... 6 ........................................................................... 7 ........................................................................... 8 ........................................................................... 9 ........................................................................... 10 ......................................................................... 2.8 2.7 2.6 3.4 3.3 3.2 3.9 3.8 3.6 4.3 $0.0 0.0 0.0 27.6 0.0 0.0 28.2 0.0 0.0 28.8 $148.6 0.0 0.0 12.1 0.0 0.1 6.1 0.0 0.0 10.1 $168.5 158.9 153.3 195.8 190.7 185.1 218.7 209.6 206.1 238.9 $317.1 158.9 153.3 235.5 190.7 185.1 253.1 209.6 206.1 277.8 $19.6 22.4 $190.6 188.2 $218.4 218.2 $7.5 $210.9 $227.4 Annualized Value: 10-Year Time Horizon 3% real discount rate ........................................................... 7% real discount rate ........................................................... ........................ ........................ $8.1 7.6 Annualized Value: Perpetual Time Horizon 3% real discount rate ........................................................... 258 As previously discussed, one such improvement is the Department’s application of VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 ........................ $9.0 conditional probabilities to estimate the number of HCE workers. See supra note 193. PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10952 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 30—DIFFERENCE IN COSTS BETWEEN 2016 FINAL RULE AND THIS PROPOSED RULE—Continued Reduction in affected EAP workers (millions) Year 7% real discount rate ........................................................... Reduction in costs Reg. Fam. ........................ Adjustment a 8.3 12.6 Managerial 203.1 Total 224.0 a Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs may occur in years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth. The cost savings from the proposed rule are primarily attributable to two factors. First, a lower standard salary level will result in fewer affected workers in any given year. If fewer workers are affected, then management must consider and make earnings adjustments for fewer employees, and must monitor hours worked for fewer employees. Second, this analysis does not incorporate automatic updating whereas the 2016 final rule incorporated a triennial automatic updating mechanism. Therefore, regulatory familiarization costs are now only incurred in Year 1 and adjustment costs are primarily incurred in Year 1. Additionally, managerial costs now gradually decrease over time rather than increasing every three years. In the 2016 final rule, the Department estimated average annualized transfers of $1,189.1 million over a ten-year period using a discount rate of 7 percent. The Department also estimated that avoided litigation costs resulting from the rule could total approximately $31.2 million per year.259 The Department includes these values here for reference. VII. Initial Regulatory Flexibility Analysis (IRFA) The Regulatory Flexibility Act of 1980 (RFA) as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), hereafter jointly referred to as the RFA, requires that an agency prepare an initial regulatory flexibility analysis (IRFA) when proposing, and a final regulatory flexibility analysis (FRFA) when issuing, regulations that will have a significant economic impact on a substantial number of small entities. The agency is also required to respond to public comment on the NPRM.260 The Chief Counsel for Advocacy of the Small Business Administration was notified of this proposed rule upon submission of the rule to OMB under 259 In this proposed rule, the Department has revised how it calculates avoided litigation costs so the number referenced here for the 2016 final rule is not directly comparable to the calculation of reduced litigation costs for this proposal. 260 See 5 U.S.C. 604. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 Executive Order 12866. The Department invites commenters to provide input on data analysis and/or methodology used throughout this IRFA. A. Reasons Why Action by the Agency Is Being Considered The standard salary level and HCE total compensation levels have not been updated since 2004 261 and, as described in detail in section VI.A.ii., the standard salary level has declined considerably in real terms relative to the 2004 value. As a result, the standard salary level’s usefulness in identifying nonexempt workers has eroded over time. Similarly, the HCE annual compensation requirement is out of date; more than twice as many workers earn at least $100,000 annually compared to when it was adopted in 2004. Additionally, the Department’s 2016 final rule updating the standard salary level and the HCE annual compensation requirement was declared invalid because the rule would make nonexempt too many employees whose exemption status should have been determined by their duties. Therefore, the Department believes that rulemaking is necessary in order to correct the deficiencies in the 2016 final rule and restore the effectiveness of the salary levels. B. Statement of Objectives and Legal Basis for the Proposed Rule Section 13(a)(1) creates a minimum wage and overtime pay exemption for bona fide executive, administrative, professional, and outside sales employees, and teachers and academic administrative personnel, as those terms are defined and delimited by the Secretary of Labor. The regulations in part 541 contain specific criteria that define each category of exemption. The regulations also define those computer 261 The Department revised the EAP salary levels in 2004. In 2016, the Department also issued a final rule revising the EAP salary levels, however, on August 31, 2017, the U.S. District Court for Eastern District of Texas held that the 2016 final rule’s standard salary level exceeded the Department’s authority and was therefore invalid. See Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795 (E.D. Tex. 2017). Until the Department issues a new final rule, it is enforcing the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level set in the 2004 final rule. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 employees who are exempt under section 13(a)(1) and section 13(a)(17). To qualify for exemption, employees must meet certain tests regarding their job duties and generally must be paid on a salary basis at not less than $455 per week. The Department’s primary objective in this rulemaking is to ensure that the revised salary levels will continue to provide a useful and effective test for exemption. The premise behind the standard salary level is to be an appropriate dividing-line between employees who are nonexempt from employees who may be performing exempt duties. The threshold essentially screens out obviously nonexempt employees whom Congress intended to be protected by the FLSA’s minimum wage and overtime provisions. If left unchanged, the effectiveness of the salary level test as a means of determining exempt status diminishes as nonexempt employee wages increase over time. Given that the 2016 final rule was invalidated, the Department last updated the salary levels in the 2004 final rule, which set the standard test threshold at $455 per week for EAP employees. The 2004 final rule also created a new ‘‘highly compensated’’ test for exemption. Under the HCE exemption, employees who are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the duties or responsibilities of an exempt EAP employee identified in the standard tests for exemption.262 Employees who meet the requirements of part 541 are excluded from the Act’s minimum wage and overtime pay protections. As a result, employees may work any number of hours in the workweek and not be subject to the FLSA’s overtime pay requirements. Some state laws have stricter exemption standards than those described above. The FLSA does not preempt any such stricter state 262 § 541.601. E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules standards. If a state law establishes a higher standard than the provisions of the FLSA, the higher standard applies as a matter of state law in that specific state.263 To restore the function of the standard salary level and the HCE total compensation requirements as appropriate bright-line tests between overtime-protected employees and those who may be bona fide EAP employees, the Department proposes to increase the minimum salary level necessary for exemption from the FLSA minimum wage and overtime requirements as an EAP employee from $455 to $679 a week for the standard salary test, and from $100,000 to $147,414 per year for the HCE test. To ensure that these levels continue to function appropriately in the future, the Department intends to update these levels every four years. C. Description of the Number of Small Entities to Which the Proposed Rule Will Apply i. Definition of Small Entity The RFA defines a ‘‘small entity’’ as a (1) small not-for-profit organization, (2) small governmental jurisdiction, or (3) small business. The Department used the entity size standards defined by SBA, in effect as of October 1, 2017, to classify entities as small.264 SBA establishes separate standards for individual 6-digit NAICS industry codes, and standard cutoffs are typically based on either the average number of employees, or the average annual receipts. For example, small businesses 10953 are generally defined as having fewer than 500, 1,000, or 1,250 employees in manufacturing industries and less than $7.5 million in average annual receipts for nonmanufacturing industries. However, some exceptions do exist, the most notable being that depository institutions (including credit unions, commercial banks, and non-commercial banks) are classified by total assets (small defined as less than $550 million in assets). Small governmental jurisdictions are another noteworthy exception. They are defined as the governments of cities, counties, towns, townships, villages, school districts, or special districts with populations of less than 50,000 people.265 Parameters that are used in the small business cost analysis, and a summary of the effects, are provided in Table 31. TABLE 31—OVERVIEW OF PARAMETERS USED FOR COSTS TO SMALL BUSINESSES Small business costs Cost Direct and Payroll Costs Average total cost per affected entity a ........................................................................................... 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 ........................................................................................ $4,053. $1,146–$100,536. 0.18%. 0.97%. 0.06%. Direct Costs Regulatory familiarization: Time (first year) ........................................................................................................................ Hourly wage ............................................................................................................................. Adjustment: Time (first year affected) .......................................................................................................... Hourly wage ............................................................................................................................. Managerial: Time (weekly) ........................................................................................................................... Hourly wage ............................................................................................................................. 1 hour per establishment. $41.91. 75 minutes per newly affected worker. $41.91. 5 minutes per affected worker. $48.72. Payroll Increases Average payroll increase per affected entity a ................................................................................ Range of payroll increases per affected entity a ............................................................................. $3,187. $0–$92,869. 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. ii. Data Sources and Methods The Department obtained data from several sources to determine the number of small entities and employment in these entities for each industry. However, the Statistics of U.S. Businesses (SUSB, 2012) was used for 263 See 29 U.S.C. 218 https://www.sba.gov/sites/default/files/ files/Size_Standards_Table_2017.pdf. 265 See http://www.sba.gov/advocacy/regulatoryflexibility-act for details. 266 National Credit Union Association. (2012). 2012 Year End Statistics for Federally Insured Credit Unions. https://www.ncua.gov/analysis/ 264 See VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 most industries. Industries for which the Department used alternative sources include credit unions,266 commercial banks and savings institutions,267 agriculture,268 and public administration.269 The Department used the latest available data in each case, so data years differ between sources. For each industry, the SUSB data tabulates total employment, establishment, and firm counts by both enterprise employment size (e.g., 0–4 employees, 5–9 employees) and receipt size (e.g., less than $100,000, $100,000- Pages/call-report-data/reports/chart-pack/chartpack-2018-q1.pdf. 267 Federal Depository Insurance Corporation. (2018). Statistics on Depository Institutions— Compare Banks. Available at: https:// www5.fdic.gov/SDI/index.asp. Data are from 3/31/ 18 for employment and data are from 6/30/2017 for share of firms and establishments that are ‘‘small’’. 268 United States Department of Agriculture. (2014). 2012 Census of Agriculture: United States Summary and State Data: Volume 1, Geographic Area Series, Part 51. Available at: http:// www.agcensus.usda.gov/Publications/2012/Full_ Report/Volume_1,_Chapter_1_US/usv1.pdf. 269 Hogue, C. (2012). Government Organization Summary Report: 2012. Available at: http:// www2.census.gov/govs/cog/g12_org.pdf. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10954 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules $499,999).270 The Department combined these categories with the SBA size standards to estimate the proportion of establishments and employees in each industry that are considered small or employed by a small entity, respectively. The general methodological approach was to classify all establishments or employees in categories below the SBA cutoff as in ‘‘small entity’’ employment.271 If a cutoff fell in the middle of a defined category, a uniform distribution of employees across that bracket was assumed to determine what proportion should be classified as small. The Department assumed that the small entity share of credit card issuing and other depository credit intermediation institutions (which were not separately represented in FDIC asset data), is similar to that of commercial banking and savings institutions. The estimated share of employment in small entities was applied to the CPS data to estimate the number of affected workers in small entities. The Department also estimated the number of small establishments by employer type (nonprofit, for-profit, government). The calculation of the number of establishments by employer type is similar to the calculation of the number of establishments by industry. However, instead of using SUSB data by industry, the Department used SUSB data by Legal Form of Organization for nonprofit and for-profit establishments, and data from the 2012 Census of Governments for small governments. The 2012 Census of Governments report includes a breakdown of state and local governments by the population of their underlying jurisdiction, allowing us to estimate the number of governments that are small. The Department welcomes comments on the data sets used in the analysis and alternative sources of data. iii. Number of Small Entities Affected by the Proposed Rule Table 32 presents the estimated number of establishments and small establishments in the U.S. (hereafter, the terms ‘‘establishment’’ and ‘‘entity’’ are used interchangeably and are considered equivalent for the purposes of this IRFA).272 Based on the methodology described above, the Department found that of the 7.8 million establishments relevant to this analysis, more than 80 percent (6.3 million) are small by SBA standards. These small establishments employ about 51.5 million workers, about 37 percent of workers employed by all establishments (excluding self-employed, unpaid workers, and members of the armed forces), and account for roughly 36 percent of total payroll ($2.6 trillion of $7.4 trillion).273 TABLE 32—NUMBER OF ESTABLISHMENTS AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND EMPLOYER TYPE Workers (1,000s) a Establishments (1,000s) Industry/employer type Total Total ......................................................... Small 7,754.0 Total 6,270.4 Annual payroll (billions) Small business employed Total ($) Small ($) 139,636.5 51,542.2 7,359.5 2,621.7 (c) (c) (c) 7,955.8 (c) 1,636.3 1,267.0 1,211.3 (c) 2,522.2 (c) (c) 1,464.6 1,761.2 (c) 590.2 883.7 (c) 1,377.9 (c) 3,453.2 15,784.9 6,019.2 (c) (c) (c) 5,153.8 (c) 992.3 678.3 562.2 (c) 711.3 (c) (c) 861.7 834.6 (c) 391.1 475.9 (c) 545.5 (c) 1,617.5 5,357.8 1,580.3 (c) (c) (c) 421.2 (c) 87.3 78.1 107.2 (c) 165.9 (c) (c) 86.3 75.1 (c) 25.5 47.8 (c) 109.4 (c) 208.4 582.8 301.8 (c) (c) (c) 271.5 (c) 50.8 41.7 50.3 (c) 43.9 (c) (c) 49.8 34.2 (c) 17.0 24.2 (c) 41.6 (c) 96.5 221.6 74.2 Industry b Agriculture ................................................ Forest., log., fish., hunt., and trap ........... Mining ....................................................... Construction ............................................. Nonmetallic mineral prod. manuf ............. Prim. metals and fab. metal prod ............ Machinery manufacturing ......................... Computer and elect. prod. manuf ............ Electrical equip., appliance manuf ........... Transportation equip. manuf .................... Wood products ......................................... Furniture and fixtures manuf .................... Misc. and not spec. manuf ...................... Food manufacturing ................................. Beverage and tobacco products .............. Textile, app., and leather manuf .............. Paper and printing ................................... Petroleum and coal prod. manuf ............. Chemical manufacturing .......................... Plastics and rubber products ................... Wholesale trade ....................................... Retail trade ............................................... Transport. and warehousing .................... 270 The 9.2 13.1 29.2 682.4 14.7 59.3 23.8 12.7 5.7 11.9 14.1 15.1 26.6 26.8 8.0 16.7 29.9 2.1 13.2 12.3 413.4 1,070.2 228.4 SUSB defines employment as of March 12th. 271 The Department’s estimates of the numbers of affected small entities and affected workers who are employees of small entities are likely overestimates as the Department had no credible way to estimate which enterprises with annual revenues below $500,000 also did not engage in interstate commerce. 272 SUSB reports data by ‘‘enterprise’’ size designations (a business organization consisting of VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 8.5 12.8 23.6 663.0 11.3 55.7 21.7 11.3 4.9 10.2 12.9 14.7 25.6 23.6 7.1 16.2 27.8 1.2 10.5 10.3 329.1 689.6 181.7 one or more domestic establishments that were specified under common ownership or control). However, the number of enterprises is not reported for the size designations. Instead, SUSB reports the number of ‘‘establishments’’ (individual plants, regardless of ownership) and ‘‘firms’’ (a collection of establishments with a single owner within a given state and industry) associated with enterprises size categories. Therefore, numbers in this analysis are for the number of establishments associated with small enterprises, which may exceed the number of small enterprises. We based PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 the analysis on the number of establishments rather than firms for a more conservative estimate (potential overestimate) of the number of small businesses. 273 Since information is not available on employer size in the CPS MORG, respondents were randomly assigned as working in a small business based on the SUSB probability of employment in a small business by detailed Census industry. Annual payroll was estimated based on the CPS weekly earnings of workers by industry size. E:\FR\FM\22MRP2.SGM 22MRP2 10955 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 32—NUMBER OF ESTABLISHMENTS AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND EMPLOYER TYPE—Continued Workers (1,000s) a Establishments (1,000s) Industry/employer type Total Utilities ...................................................... Publishing ind. (ex. internet) .................... Motion picture and sound recording ........ Broadcasting (except internet) ................. Internet publishing and broadcasting ....... Telecommunications ................................ Internet serv. providers and data ............. Other information services ....................... Finance .................................................... Insurance ................................................. Real estate ............................................... Rental and leasing services ..................... Professional and technical services ........ Management of companies and enterprises .................................................... Admin. and support services ................... Waste manag. and remed. 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 & organizations ...................................................... Private households .................................. Public administration (e) ........................... Small Total Annual payroll (billions) Small business employed Total ($) Small ($) 18.0 26.9 25.5 8.4 7.8 53.0 13.6 4.3 291.4 178.7 324.4 53.2 896.0 7.7 20.7 22.3 4.7 6.6 11.9 9.0 3.7 128.0 139.5 275.8 26.5 812.3 (c) 484.9 (c) 577.5 (c) 885.4 (c) (c) 4,446.7 2,702.7 2,015.4 (c) 9,445.1 (c) 208.8 (c) 136.8 (c) 177.7 (c) (c) 818.7 711.2 1,208.9 (c) 4,433.7 (c) 35.4 (c) 39.9 (c) 66.9 (c) (c) 347.4 184.0 112.5 (c) 790.6 (c) 14.3 (c) 8.5 (c) 13.1 (c) (c) 65.0 49.0 66.5 (c) 360.7 53.9 380.4 23.9 102.0 7.0 690.2 178.9 133.6 66.0 621.6 213.5 225.6 33.2 325.0 17.9 89.3 1.6 567.3 145.8 123.0 55.2 488.8 198.6 197.5 (c) 5,029.6 (c) 13,911.5 7,158.8 9,760.5 2,937.6 2,680.8 1,558.4 8,766.3 1,584.2 1,651.7 (c) 2,285.4 (c) 2,916.7 327.9 4,673.4 1,643.5 1,360.4 600.6 2,399.7 1,181.1 1,209.7 (c) 196.3 (c) 737.2 436.3 457.1 104.0 99.7 56.6 217.4 67.1 50.1 (c) 82.6 (c) 145.7 19.4 218.4 54.4 49.7 21.1 59.5 49.2 36.1 307.0 (d ) 90.1 296.2 (d ) 72.8 2,083.4 (c) 7,269.7 1,534.2 (c) 687.0 104.6 (c) 467.3 75.3 (c) 38.3 10,019.23 107,980.07 17,811.69 4,123.0 45,149.1 2,270.1 541.2 5,579.2 960.8 200.5 2,303.6 117.7 Employer Type Nonprofit, private ...................................... For profit, private ...................................... Government (state and local) .................. 579.1 7,084.8 90.1 500.4 5,682.7 72.8 Note: Establishment data are from the Survey of U.S. Businesses 2015; worker and payroll data from CPS MORG using pooled data for 2015–2017 adjusted to reflect 2017. a Excludes the self-employed and unpaid workers. b Summation across industries may not add to the totals reported due to suppressed values and some establishments not reporting an industry. c Data not displayed because sample size of affected workers in small establishments is less than 10 due to reliability concerns. d SUSB does not provide information on private households. e Establishment number represents the total number of governments, including state and local. Data from Government Organization Summary Report: 2012. As discussed in VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of identifying this population. Although not excluding such workers would only affect a small percentage of workers generally, it may have a larger effect (and result in a larger overestimate) for non-profits, because revenue from charitable activities is not included when determining enterprise coverage. iv. Number of Affected Small Entities and Employees To estimate the probability that an exempt EAP worker in the CPS data is employed by a small establishment, the Department assumed this probability is equal to the proportion of all workers employed by small establishments in the corresponding industry. That is, if 50 percent of workers in an industry are employed in small entities, then on average small entities are expected to employ 1 out of every 2 exempt EAP workers in this industry.274 The 274 The Department used CPS microdata to estimate the number of affected workers. This was done individually for each observation in the VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 Department applied these probabilities to the population of exempt EAP workers to find the number of workers (total exempt EAP workers and total affected by the rule) that small entities employ. No data are available to determine whether small businesses (or small businesses in specific industries) are more or less likely than non-small businesses to employ exempt EAP relevant sample by randomly assigning them a small business status based on the best available estimate of the probability of a worker to be employed in a small business in their respective industry (3-digit Census codes). While aggregation to the 262 3-digit Census codes is certainly possible, many of these industry codes contain too few observations to be reliable. E:\FR\FM\22MRP2.SGM 22MRP2 10956 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules workers or affected EAP workers. Therefore, the best assumption available is to assign the same rates to all small and non-small businesses.275 276 The Department estimated that small entities employ 483,400 of the 1.3 million affected workers (38.0 percent) (Table 33). This composes less than 1.0 percent of the 51.5 million workers that small entities employ. The sectors with the highest total number of affected workers employed by small establishments are: Professional and technical services (67,500); health care services, except hospitals (53,000); and retail trade (46,300). The sectors with the largest percent of small business workers who are affected include: Telecommunications (2.9 percent); insurance (2.3 percent); and broadcasting (except internet) (2.0 percent). TABLE 33—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ESTABLISHMENTS, BY INDUSTRY AND EMPLOYER TYPE Affected workers (1,000s) a Workers (1,000s) Industry Total Total ................................................................................................................. Small business employed Total Small business employed 139,636.5 51,542.2 1,271.3 483.4 (c) (c) (c) 7,955.8 (c) 1,636.3 1,267.0 1,211.3 (c) 2,522.2 (c) (c) 1,464.6 1,761.2 (c) 590.2 883.7 (c) 1,377.9 (c) 3,453.2 15,784.9 6,019.2 (c) 484.9 (c) 577.5 (c) 885.4 (c) (c) 4,446.7 2,702.7 2,015.4 (c) 9,445.1 (c) 5,029.6 (c) 13,911.5 7,158.8 9,760.5 2,937.6 2,680.8 1,558.4 8,766.3 1,584.2 1,651.7 (c) (c) (c) 5,153.8 (c) 992.3 678.3 562.2 (c) 711.3 (c) (c) 861.7 834.6 (c) 391.1 475.9 (c) 545.5 (c) 1,617.5 5,357.8 1,580.3 (c) 208.8 (c) 136.8 (c) 177.7 (c) (c) 818.7 711.2 1,208.9 (c) 4,433.7 (c) 2,285.4 (c) 2,916.7 327.9 4,673.4 1,643.5 1,360.4 600.6 2,399.7 1,181.1 1,209.7 (c) (c) (c) 38.1 (c) 7.9 10.2 11.8 (c) 13.3 (c) (c) 10.4 8.2 (c) 4.5 8.4 (c) 10.8 (c) 44.0 132.9 34.7 (c) 9.9 (c) 10.2 (c) 14.9 (c) (c) 80.7 61.6 24.3 (c) 149.4 (c) 38.1 (c) 71.9 67.6 106.2 47.8 48.3 8.0 25.6 8.9 7.6 (c) (c) (c) 27.4 (c) 3.8 4.2 3.6 (c) 4.2 (c) (c) 4.7 3.6 (c) 3.9 5.1 (c) 4.9 (c) 21.6 46.3 7.8 (c) 4.1 (c) 2.7 (c) 5.2 (c) (c) 15.9 16.2 14.1 (c) 67.5 (c) 15.3 (c) 13.9 2.9 53.0 26.1 24.1 3.9 7.2 4.9 5.3 Industry Agriculture ........................................................................................................ Forest., log., fish., hunt., and trap ................................................................... Mining .............................................................................................................. Construction ..................................................................................................... Nonmetallic mineral prod. manuf ..................................................................... Prim. metals and fab. metal prod .................................................................... Machinery manufacturing ................................................................................ Computer and elect. prod. manuf .................................................................... Electrical equip., appliance manuf ................................................................... Transportation equip. manuf ............................................................................ Wood products ................................................................................................. Furniture and fixtures manuf ........................................................................... Misc. and not spec. manuf .............................................................................. Food manufacturing ......................................................................................... Beverage and tobacco products ...................................................................... Textile, app., and leather manuf ...................................................................... Paper and printing ........................................................................................... Petroleum and coal prod. manuf ..................................................................... Chemical manufacturing .................................................................................. Plastics and rubber products ........................................................................... Wholesale trade ............................................................................................... Retail trade ...................................................................................................... Transport. and warehousing ............................................................................ Utilities ............................................................................................................. Publishing ind. (ex. internet) ............................................................................ Motion picture and sound recording ................................................................ Broadcasting (except internet) ......................................................................... Internet publishing and broadcasting .............................................................. Telecommunications ........................................................................................ Internet serv. providers and data .................................................................... Other information services ............................................................................... Finance ............................................................................................................ Insurance ......................................................................................................... Real estate ....................................................................................................... Rental and leasing services ............................................................................ Professional and technical services ................................................................ Management of companies & enterprises ....................................................... Admin. and support services ........................................................................... Waste manag. and remed. 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 ........................................................................ 275 There is a strand of literature that indicates that small establishments tend to pay lower wages than larger establishments. This may imply that workers in small businesses are more likely to be affected than workers in large businesses; however, VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 the literature does not make clear what the appropriate alternative rate for small businesses should be. 276 Workers are designated as employed in a small business based on their industry of employment. PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 The share of workers considered small in nonprofit, for profit, and government entities is therefore the weighted average of the shares for the industries that compose these categories. E:\FR\FM\22MRP2.SGM 22MRP2 10957 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 33—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ESTABLISHMENTS, BY INDUSTRY AND EMPLOYER TYPE—Continued Affected workers (1,000s) a Workers (1,000s) Industry Total Membership associations & organizations ...................................................... Private households .......................................................................................... Public administration b ...................................................................................... Small business employed Small business employed Total 2,083.4 (c) 7,269.7 1,534.2 (c) 687.0 35.4 (c) 54.6 25.5 (c) 6.5 10,019.2 107,980.1 17,811.7 4,123.0 45,149.1 2,270.1 126.5 1,012.3 132.5 60.3 408.1 15.1 Employer Type Nonprofit, private ............................................................................................. For profit, private ............................................................................................. Government (state and local) .......................................................................... Note: Worker data are from CPS MORG using pooled data for 2015–2017 adjusted to reflect 2017. a Estimation of affected workers employed by small establishments was done at the Census 4-digit occupational code and industry level. Therefore, at the more aggregated 51 industry level shown in this table, the ratio of small business employed to total employed does not equal to the ratio of affected small business employed to total affected for each industry, nor does it equal the ratio for the national total because relative industry size, employment, and small business employment differs from industry to industry. b Establishment number represents the total number of state and local governments. Data from Government Organization Summary Report: 2012. c Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. Because no information is available on how affected workers are distributed among small establishments that employ affected workers, the Department estimated a range for effects. At one end of this range, the Department assumed that each small establishment employs no more than one affected worker, meaning that at most 483,400 of the 6.3 million small establishments will employ an affected worker. Thus, these assumptions provide an upper bound estimate of the number of affected small establishments (although it provides a lower bound estimate of the effect per small establishment because costs are spread over a larger number of establishments). The impacts experienced by an establishment would increase as the share of its workers that are affected increases. Establishments that employ only affected workers are most likely to experience the most severe effects. Therefore, to estimate a lower-end estimate for the number of affected establishments (which generates an upper-end estimate for impacts per establishment) the Department assumed that all workers employed by an affected establishment are affected. For the purposes of estimating this lower-range number of affected small VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 establishments, the Department used the average size of a small establishment as the typical size of an affected small establishment.277 The average number of employees in a small establishment is the number of workers that small establishments employ divided by the total number of small establishments in that industry (SUSB 2012). Thus, the number of affected small establishments in an industry, if all employees of an affected establishment are affected, equals the number of affected small establishment employees divided by the average number of employees per small establishment. Table 34 summarizes the estimated number of affected workers that small establishments employ and the expected 277 This is not the true lower bound estimate of the number of affected establishments. Strictly speaking, a true lower bound estimate of the number of affected small establishments would be calculated by assuming all employees in the largest small establishments are affected. For example, if the SBA standard is that establishments with 500 employees are ‘‘small,’’ and 1,350 affected workers are employed by small establishments in that industry, then the smallest number of establishments that could be affected in that industry (the true lower bound) would be three. However, because such an outcome appears implausible, the Department determined a more reasonable lower estimate would be based on average establishment size. PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 range for the number of affected small establishments by industry. The Department estimated that the rule will affect 483,400 workers who are employed by somewhere between 64,100 and 483,400 small establishments; this composes from 1.0 percent to 7.7 percent of all small establishments. It also means that from 5.8 million to 6.2 million small establishments incur no more than minimal regulatory familiarization costs (i.e., 6.3 million minus 483,400 equals 5.8 million; 6.3 million minus 64,100 equals 6.2 million, using rounded values). The table also presents the average number of affected employees per establishment using the method in which all employees at the establishment are affected. For the other method, by definition, there is always one affected employee per establishment. Also displayed is the average payroll per small establishment by industry (based on both affected and non-affected small establishments), calculated by dividing total payroll of small businesses by the number of small businesses (Table 32) (applicable to both methods). E:\FR\FM\22MRP2.SGM 22MRP2 10958 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 34—NUMBER OF SMALL AFFECTED ESTABLISHMENTS AND EMPLOYEES BY INDUSTRY AND EMPLOYER TYPE Number of small affected establishments (1,000s) a Affected workers in small entities (1,000s) Industry Total ..................................................................................... One affected employee per estab. b 483.4 All employees at estab. affected c Per establishment Affected employees a Average annual payroll ($1,000s) 483.4 64.1 7.5 418.1 (d ) ( d) ( d) 27.4 ( d) 3.8 4.2 3.6 ( d) 4.2 ( d) ( d) 4.7 3.6 (d ) 3.9 5.1 (d ) 4.9 ( d) 21.6 46.3 7.8 ( d) 4.1 (d ) 2.7 ( d) 5.2 ( d) ( d) 15.9 16.2 14.1 ( d) 67.5 ( d) 15.3 ( d) 13.9 e 1.2 53.0 26.1 24.1 3.9 7.2 4.9 5.3 25.5 (d ) 6.5 ( d) ( d) ( d) 3.5 ( d) 0.2 0.1 0.1 (d ) 0.1 ( d) ( d) 0.1 0.1 ( d) 0.2 0.3 ( d) 0.1 ( d) 4.4 6.0 0.9 ( d) 0.4 ( d) 0.1 ( d) 0.4 (d ) ( d) 2.5 3.2 3.2 ( d) 12.4 (d ) 2.2 ( d) 0.4 0.0 6.4 2.3 2.2 0.4 1.5 0.8 0.9 4.9 ( d) 0.7 (d ) (d ) (d ) 7.8 (d ) 17.8 31.2 49.8 (d ) 69.6 (d ) (d ) 33.7 35.4 (d ) 24.1 17.1 (d ) 52.1 (d ) 4.9 7.8 8.7 (d ) 10.1 (d ) 29.2 (d ) 14.9 (d ) (d ) 6.4 5.1 4.4 (d ) 5.5 (d ) 7.0 (d ) 32.6 200.9 8.2 11.3 11.1 10.9 4.9 5.9 6.1 5.2 (d ) 9.4 (d ) ( d) ( d) 409.5 (d ) 913.1 1,919.0 4,454.5 (d ) 4,297.1 ( d) ( d) 1,943.5 1,448.9 (d ) 1,046.6 870.6 (d ) 3,973.8 (d ) 293.3 321.3 408.2 (d ) 690.8 (d ) 1,803.8 ( d) 1,096.7 (d ) ( d) 507.9 351.6 240.9 (d ) 444.1 (d ) 254.3 (d ) 1,630.5 11,892.0 384.9 373.0 404.4 381.9 121.8 248.0 183.0 254.4 (d ) 526.1 60.3 408.1 15.1 7.3 51.4 0.5 8.2 7.9 31.2 400.6 405.4 1,615.2 Industry Agriculture ............................................................................ Forest., log., fish., hunt., and trap ....................................... Mining ................................................................................... Construction ......................................................................... Nonmetallic mineral prod. manuf ......................................... Prim. metals and fab. metal prod ........................................ Machinery manufacturing ..................................................... Computer and elect. prod. manuf ........................................ Electrical equip., appliance manuf ....................................... Transportation equip. manuf ................................................ Wood products ..................................................................... Furniture and fixtures manuf ................................................ Misc. and not spec. manuf .................................................. Food manufacturing ............................................................. Beverage and tobacco products .......................................... Textile, app., and leather manuf .......................................... Paper and printing ............................................................... Petroleum and coal prod. manuf ......................................... Chemical manufacturing ...................................................... Plastics and rubber products ............................................... Wholesale trade ................................................................... Retail trade ........................................................................... Transport. and warehousing ................................................ Utilities .................................................................................. Publishing ind. (ex. internet) ................................................ Motion picture and sound recording .................................... Broadcasting (except internet) ............................................. Internet publishing and broadcasting ................................... Telecommunications ............................................................ Internet serv. providers and data ......................................... Other information services ................................................... Finance ................................................................................ Insurance ............................................................................. Real estate ........................................................................... Rental and leasing services ................................................. Professional and technical services .................................... Management of companies and enterprises ....................... Admin. and support services ............................................... Waste manag. and remed. 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 & organizations .......................... Private households .............................................................. Public administration f .......................................................... (d) (d) (d) 27.4 (d) 3.8 4.2 3.6 (d) 4.2 (d) (d) 4.7 3.6 (d) 3.9 5.1 (d) 4.9 (d) 21.6 46.3 7.8 (d) 4.1 (d) 2.7 (d) 5.2 (d) (d) 15.9 16.2 14.1 (d) 67.5 (d) 15.3 (d) 13.9 2.9 53.0 26.1 24.1 3.9 7.2 4.9 5.3 25.5 (d) 6.5 Employer Type Nonprofit, private .................................................................. For profit, private .................................................................. Government (state and local) .............................................. 60.3 408.1 15.1 Note: Establishment data are from the Survey of U.S. Businesses 2012; worker and payroll data from CPS MORG using pooled data for 2015–2017 adjusted to reflect 2017. a Estimation of both affected small establishment employees and affected small establishments was done at the most detailed industry level available. Therefore, the ratio of affected small establishment employees to total small establishment employees for each industry may not match the ratio of small affected establishments to total small establishments at more aggregated industry level presented in the table, nor will it equal the ratio at the national level because relative industry size, employment, and small business employment differs from industry to industry. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10959 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules b This method may overestimate the number of affected establishments and therefore the ratio of affected workers to affected establishments may be greater than 1-to-1. However, we addressed this issue by also calculating effects based on the assumption that 100 percent of workers at an establishment are affected. c For example, on average, a small establishment in the construction industry employs 7.8 workers (5.2 million employees divided by 663,000 small establishments). This method assumes if an establishment is affected then all 7.8 workers are affected. Therefore, in the construction industry this method estimates there are 3,500 small affected establishments (27,400 affected small workers divided by 7.8). d Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. e Number of establishments is smaller than number of affected employees; thus, total number of establishments reported. f Establishment number represents the total number of state and local governments. D. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule The FLSA sets minimum wage, overtime pay, and recordkeeping requirements for employment subject to its provisions. Unless exempt, covered employees must be paid at least the minimum wage and not less than one and one-half times their regular rates of pay for overtime hours worked. Every covered employer must keep certain records for each nonexempt worker. The regulations at part 516 require employers to maintain records for employees subject to the minimum wage and overtime pay provisions of the FLSA. The recordkeeping requirements are not new requirements; however, employers would need to keep some additional records for additional affected employees if the NPRM became final without change. As indicated in this analysis, the NPRM would expand minimum wage and overtime pay coverage to 1.3 million affected EAP workers (including HCE workers and excluding Type 4 workers who remain exempt). This would result in an increase in employer burden and was estimated in the PRA portion (section V) of this NPRM. Note that the burdens reported for the PRA section of this NPRM include the entire information collection and not merely the additional burden estimated as a result of this NPRM. i. Costs to Small Entities For small entities, the Department projected various types of effects, including regulatory familiarization costs, adjustment costs, managerial costs, and payroll increases to employees. The Department estimated a range for the number of small affected establishments and the impacts they incur. However, few establishments are likely to incur the effects at the upper end of this range because it seems unlikely that the proposed rule would affect all employees at a small firm. While the upper and lower bounds are likely over- and under-estimates, respectively, of effects per small establishment, the Department believes that this range of costs and payroll increases provides the most accurate characterization of the effects of the rule on small employers.278 Furthermore, the smaller estimate of the number of affected establishments (i.e., where all employees are assumed to be affected) will result in the largest costs and payroll increases per entity as a percent of establishment payroll and revenue, and the Department expects that many, if not most, entities will incur smaller costs, payroll increases, and effects relative to establishment size. The Department seeks comments on the estimates for regulatory familiarization, adjustment costs, managerial costs, and transfers, as discussed below. The Department expects total direct employer costs will range from $55.5 million to $72.0 million for affected small establishments (Table 35) in the first year after the proposed rule is finalized. Small establishments that do not employ affected workers will incur an additional $242.5 million to $260.1 million in regulatory familiarization costs. The three industries with the highest costs (professional and technical services; healthcare services, except hospitals; and retail trade) account for about 35 percent of the costs. The hospitals industry is expected to incur the largest cost per establishment ($22,000 using the method where all employees are affected), although the costs are not expected to exceed 0.19 percent of payroll. The food services and drinking places industry is expected to experience the largest effect as a share of payroll (estimated direct costs compose 0.48 percent of average entity payroll). TABLE 35—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE Cost to small entities in year 1 a One affected employee Industry Total (millions) b Total ......................................................... $72.0 All employees affected Percent of annual payroll (%) Cost per affected entity $149 Total (millions) b Cost per affected entity Percent of annual payroll (%) 0.04 $55.5 $867 0.21 (c) (c) (c) 0.04 (c) 0.02 0.01 0.00 (c) (c) (c) (c) 3.2 (c) 0.4 0.5 0.4 (c) (c) (c) (c) 894 (c) 1,994 3,461 5,499 (c) (c) (c) (c) 0.22 (c) 0.22 0.18 0.12 (c) Industry (c) (c) (c) 4.2 (c) 0.6 0.6 0.5 (c) Agriculture ................................................ Forest., log., fish., hunt., and trap ........... Mining ....................................................... Construction ............................................. Nonmetallic mineral prod. manuf ............. Prim. metals and fab. metal prod ............ Machinery manufacturing ......................... Computer and elect. prod. manuf ............ Electrical equip., appliance manuf ........... 278 As noted previously, these are not the true lower and upper bounds. The values presented are VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 (c) (c) (c) 151 (c) 151 151 151 (c) the highest and lowest estimates the Department believes are plausible. PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10960 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 35—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE—Continued Cost to small entities in year 1 a One affected employee Industry Total (millions) b Transportation equip. manuf .................... Wood products ......................................... Furniture and fixtures manuf .................... Misc. and not spec. manuf ...................... Food manufacturing ................................. Beverage and tobacco products .............. Textile, app., and leather manuf .............. Paper and printing ................................... Petroleum and coal prod. manuf ............. Chemical manufacturing .......................... Plastics and rubber products ................... Wholesale trade ....................................... Retail trade ............................................... Transport. and warehousing .................... Utilities ...................................................... Publishing ind. (ex. internet) .................... Motion picture and sound recording ........ Broadcasting (except internet) ................. Internet publishing and broadcasting ....... Telecommunications ................................ Internet serv. providers and data ............. Other information services ....................... Finance .................................................... Insurance ................................................. Real estate ............................................... Rental and leasing services ..................... Professional and technical services ........ Management of companies and enterprises .................................................... Admin. and support services ................... Waste manag. and remed. 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 & organizations ...................................................... Private households .................................. Public administration ................................ All employees affected Percent of annual payroll (%) Cost per affected entity Total (millions) b Cost per affected entity Percent of annual payroll (%) 0.6 (c) (c) 0.7 0.5 (c) 0.6 0.8 (c) 0.7 (c) 3.3 7.0 1.2 (c) 0.6 (c) 0.4 (c) 0.8 (c) (c) 2.4 2.5 2.1 (c) 10.2 151 (c) (c) 151 151 (c) 151 151 (c) 151 (c) 151 1.51 151 (c) 151 (c) 151 (c) 151 (c) (c) 151 151 151 (c) 151 0.00 (c) (c) 0.01 0.01 (c) 0.01 0.02 (c) 0.00 (c) 0.05 0.05 0.04 (c) 0.02 (c) 0.01 (c) 0.01 (c) (c) 0.03 0.04 0.06 (c) 0.03 0.5 (c) (c) 0.5 0.4 (c) 0.4 0.6 (c) 0.5 (c) 2.5 5.3 0.9 (c) 0.5 (c) 0.3 (c) 0.6 (c) (c) 1.8 1.9 1.7 (c) 7.9 7,667 (c) (c) 3,730 3,917 (c) 2,685 1,915 (c) 5,754 (c) 580 893 995 (c) 1,146 (c) 3,237 (c) 1,672 (c) (c) 743 600 522 (c) 640 0.18 (c) (c) 0.19 0.27 (c) 0.26 0.22 (c) 0.14 (c) 0.20 0.28 0.24 (c) 0.17 (c) 0.18 (c) 0.15 (c) (c) 0.15 0.17 0.22 (c) 0.14 (c) 2.3 (c) 2.1 0.4 8.0 4.0 3.7 0.6 1.1 0.7 0.8 (c) 151 (c) 151 151 151 151 151 151 151 151 151 (c) 0.06 (c) 0.01 0.00 0.04 0.04 0.04 0.04 0.12 0.06 0.08 (c) 1.8 (c) 1.5 0.3 6.1 3.0 2.7 0.4 0.9 0.6 0.6 (c) 812 (c) 3,619 22,051 944 1,277 1,254 1,235 580 694 713 (c) 0.32 (c) 0.22 0.19 0.25 0.34 0.31 0.32 0.48 0.28 0.39 3.9 (c) 1.0 151 (c) 151 0.06 (c) 0.03 3.0 (c) 0.7 609 (c) 1,076 0.24 (c) 0.20 0.04 0.04 0.01 6.6 48.0 1.6 898 935 3,339 0.22 0.23 0.21 Employer Type Nonprofit, private ...................................... For profit, private ...................................... Government (state and local) .................. 8.8 63.0 2.2 146 154 148 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Direct costs include regulatory familiarization, adjustment, and managerial costs. b The range of costs per establishment depends on the number of affected establishments. The minimum assumes that each affected establishment has one affected worker (therefore, the number of affected establishments is equal to the number of affected workers). The maximum assumes the share of workers in small entities who are affected is also the share of small entity establishments that are affected. c Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. It is possible that the costs of the proposed rule may be disproportionately large for small entities, especially because small entities often have limited or no human VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 resources personnel on staff. However, the Department expects that small entities will rely upon compliance assistance materials provided by the Department or industry associations to PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 become familiar with the proposed rule. Additionally, the Department notes that the proposed rule is quite limited in scope as it primarily makes changes to the salary component of the part 541 E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules regulations. Finally, the Department believes that most entities have at least some nonexempt employees and, therefore, already have policies and systems in place for monitoring and recording their hours. The Department believes that applying those same policies and systems to the workers whose exemption status changes will not be an unreasonable burden on small businesses. Average weekly earnings for affected EAP workers in small establishments are expected to increase by about $8.12 per week per affected worker, using the incomplete fixed-job model 279 described in section VI.D.iv.280 This would lead to $204.1 million in additional annual wage payments to employees in small entities (less than 0.8 percent of aggregate affected establishment payroll; Table 36). The largest payroll increases per establishment are expected in the sectors of transportation equipment manufacturing (up to $92,900 per 10961 entity); computer and electronic product manufacturing (up to $44,400 per entity); and chemical manufacturing (up to $39,800 per entity). However, average payroll increases per establishment exceed 2 percent of average annual payroll in only three sectors: Food services and drinking places (4.7 percent), primary metals and fabricated metal products (2.3 percent), and transportation equipment manufacturing (2.2 percent). TABLE 36—YEAR 1 SMALL ESTABLISHMENT PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE Increased payroll for small entities in year 1 a One affected employee Industry Total (millions) Total ..................................................................................... Per estab. $204.1 All employees affected Percent of annual payroll (%) Per estab. Percent of annual payroll (%) $422 0.10 $3,187 0.76 (b ) ( b) ( b) 356 ( b) 1,172 1,054 892 ( b) 1,334 ( b) ( b) 1,066 448 (b ) 429 91 (b ) 764 ( b) 957 635 242 ( b) 0 (b ) 6 ( b) 604 ( b) ( b) 442 196 386 ( b) 335 ( b) 245 ( b) 591 ( b) ( b) ( b) 0.09 ( b) 0.13 0.05 0.02 (b ) 0.03 ( b) ( b) 0.05 0.03 ( b) 0.04 0.01 ( b) 0.02 ( b) 0.33 0.20 0.06 ( b) ........................ ( b) 0.00 ( b) 0.06 (b ) ( b) 0.09 0.06 0.16 ( b) 0.08 (b ) 0.10 ( b) 0.04 (b ) (b ) (b ) 2,768 (b ) 20,889 32,885 44,405 (b ) 92,869 (b ) (b ) 35,874 15,837 (b ) 10,355 1,556 (b ) 39,839 (b ) 4,705 4,935 2,104 (b ) 0 (b ) 167 (b ) 8,986 (b ) (b ) 2,829 1,000 1,692 (b ) 1,826 (b ) 1,720 (b ) 19,278 (b ) ( b) ( b) 0.68 (b ) 2.29 1.71 1.00 (b ) 2.16 ( b) ( b) 1.85 1.09 (b ) 0.99 0.18 (b ) 1.00 (b ) 1.60 1.54 0.52 (b ) ........................ (b ) 0.01 ( b) 0.82 (b ) ( b) 0.56 0.28 0.70 (b ) 0.41 (b ) 0.68 (b ) 1.18 Industry Agriculture ............................................................................ Forest., log., fish., hunt., and trap ....................................... Mining ................................................................................... Construction ......................................................................... Nonmetallic mineral prod. manuf ......................................... Prim. metals and fab. metal prod ........................................ Machinery manufacturing ..................................................... Computer and elect. prod. manuf ........................................ Electrical equip., appliance manuf ....................................... Transportation equip. manuf ................................................ Wood products ..................................................................... Furniture and fixtures manuf ................................................ Misc. and not spec. manuf .................................................. Food manufacturing ............................................................. Beverage and tobacco products .......................................... Textile, app., and leather manuf .......................................... Paper and printing ............................................................... Petroleum and coal prod. manuf ......................................... Chemical manufacturing ...................................................... Plastics and rubber products ............................................... Wholesale trade ................................................................... Retail trade ........................................................................... Transport. and warehousing ................................................ Utilities .................................................................................. Publishing ind. (ex. internet) ................................................ Motion picture and sound recording .................................... Broadcasting (except internet) ............................................. Internet publishing and broadcasting ................................... Telecommunications ............................................................ Internet serv. providers and data ......................................... Other information services ................................................... Finance ................................................................................ Insurance ............................................................................. Real estate ........................................................................... Rental and leasing services ................................................. Professional and technical services .................................... Management of companies and enterprises ....................... Admin. and support services ............................................... Waste manag. and remed. services .................................... Educational services ............................................................ 279 As explained in section VI.D.iv., the incomplete fixed-job model reflects the Department’s determination that an appropriate estimate of the impact on the implicit hourly rate of pay for regular overtime workers, if the NPRM is finalized as proposed, should be determined VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 (b) (b) (b) 9.8 (b) 4.4 4.5 3.2 (b) 5.6 (b) (b) 5.0 1.6 (b) 1.7 0.5 (b) 3.8 (b) 20.6 29.4 1.9 (b) ........................ (b) 0.0 (b) 3.1 (b) (b) 7.0 3.2 5.4 (b) 22.6 (b) 3.7 (b) 8.2 using the average of Barkume’s and Trejo’s two estimates of the incomplete fixed-job model adjustments: A wage change that is 40 percent of the adjustment toward the amount predicted by the fixed-job model, assuming an initial zero overtime pay premium, and a wage change that is 80 percent PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 of the adjustment assuming an initial 28 percent overtime pay premium. 280 This is an average increase for all affected workers (both EAP and HCE), and reconciles to the weighted average of individual salary changes discussed in the Transfers section. E:\FR\FM\22MRP2.SGM 22MRP2 10962 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 36—YEAR 1 SMALL ESTABLISHMENT PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE—Continued Increased payroll for small entities in year 1 a One affected employee Industry Total (millions) 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 & organizations .......................... Private households .............................................................. Public administration ............................................................ Percent of annual payroll (%) Per estab. ........................ 8.7 2.8 11.5 1.3 8.4 1.4 0.8 6.4 (b) 2.4 All employees affected Per estab. Percent of annual payroll (%) $0 165 109 475 331 1,168 293 150 252 (b ) 363 ........................ .04 0.03 0.12 0.09 0.96 0.12 0.08 0.10 ( b) 0.07 $0 1,358 1,228 5,259 3,602 5,736 1,742 921 1,307 (b ) 3,426 ........................ 0.35 0.33 1.30 0.94 4.71 0.70 0.50 0.51 (b ) 0.65 353 434 376 0.09 0.11 0.02 2,911 3,449 11,710 0.73 0.85 0.72 Employer Type Nonprofit, private .................................................................. For profit, private .................................................................. Government (state and local) .............................................. 21.3 177.2 5.7 Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Aggregate change in total annual payroll experienced by small entities under the updated salary levels after labor market adjustments. This amount represents the total amount of (wage) transfers from employers to employees. b Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. Table 37 presents estimated first year direct costs and payroll increases combined per establishment and the costs and payroll increases as a percent of average establishment payroll. The Department presents only the results for the upper bound scenario where all workers employed by the establishment are affected. Combined costs and payroll increases per establishment range from $1,150 in publishing industries (except internet) to $100,500 in the transportation equipment manufacturing sector.281 Combined costs and payroll increases compose more than 2 percent of average annual establishment payroll in four sectors: Food services and drinking places (5.2 percent), primary metals and fabricated metal products (2.5 percent), transportation equipment manufacturing (2.3 percent), and miscellaneous and not specified manufacturing (2.0 percent). In all other sectors, they range from 0.2 percent to 1.9 percent of payroll. However, comparing costs and payroll increases to payrolls overstates the effects on establishments because payroll represents only a fraction of the financial resources available to an establishment. The Department approximated revenue per small affected establishment by calculating the ratio of small business revenues to payroll by industry from the 2012 SUSB data then multiplying that ratio by average small entity payroll.282 Using this approximation of annual revenues as a benchmark, only one sector has costs and payroll increases amounting to more than one percent of revenues, food services and drinking places (1.5 percent). TABLE 37—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD Costs and payroll increases for small affected establishments, all employees affected Industry Total (millions) Total ................................................................................................................. Per estab. a Percent of annual payroll (%) Percent of estimated revenues b (%) $259.6 $4,053 0.97 0.18 (c) (c) (c) 12.9 (c) (c) (c) 3,662 (c) (c) (c) 0.89 (c) (c) (c) 0.20 Industry Agriculture ........................................................................................................ Forest., log., fish., hunt., and trap ................................................................... Mining .............................................................................................................. Construction ..................................................................................................... 281 When a single affected worker is employed, combined costs and transfers by industry were estimated to range from $151 (in both the publishing (except internet) and hospitals VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 industries) to $1,500 (in transportation equipment manufacturing) per establishment. 282 The ratio of revenues to payroll for small businesses ranged from 2.15 (social assistance) to 43.40 (petroleum and coal products manufacturing), PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 with an average over all sectors of 5.35. The Department used this estimate of revenue, instead of small business revenue reported directly from the 2012 SUSB so revenue aligned with payrolls in 2017. E:\FR\FM\22MRP2.SGM 22MRP2 10963 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 37—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD—Continued Costs and payroll increases for small affected establishments, all employees affected Industry Total (millions) Nonmetallic mineral prod. manuf ..................................................................... Prim. metals and fab. metal prod .................................................................... Machinery manufacturing ................................................................................ Computer and elect. prod. manuf .................................................................... Electrical equip., appliance manuf ................................................................... Transportation equip. manuf ............................................................................ Wood products ................................................................................................. Furniture and fixtures manuf ........................................................................... Misc. and not spec. manuf .............................................................................. Food manufacturing ......................................................................................... Beverage and tobacco products ...................................................................... Textile, app., and leather manuf ...................................................................... Paper and printing ........................................................................................... Petroleum and coal prod. manuf ..................................................................... Chemical manufacturing .................................................................................. Plastics and rubber products ........................................................................... Wholesale trade ............................................................................................... Retail trade ...................................................................................................... Transport. and warehousing ............................................................................ Utilities ............................................................................................................. Publishing ind. (ex. internet) ............................................................................ Motion picture and sound recording ................................................................ Broadcasting (except internet) ......................................................................... Internet publishing and broadcasting .............................................................. Telecommunications ........................................................................................ Internet serv. providers and data .................................................................... Other information services ............................................................................... Finance ............................................................................................................ Insurance ......................................................................................................... Real estate ....................................................................................................... Rental and leasing services ............................................................................ Professional and technical services ................................................................ Management of companies and enterprises ................................................... Admin. and support services ........................................................................... Waste manag. and remed. 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 & organizations ...................................................... Private households .......................................................................................... Public administration ........................................................................................ Per estab. a Percent of annual payroll (%) Percent of estimated revenues b (%) (c) 4.8 4.9 3.6 (c) 6.1 (c) (c) 5.5 2.0 (c) 2.1 1.0 (c) 4.3 (c) 23.2 34.8 2.8 (c) 0.5 (c) 0.3 (c) 3.7 (c) (c) 8.9 5.1 7.1 (c) 30.5 (c) 5.5 (c) 9.7 0.3 14.8 5.8 14.2 1.7 9.3 2.0 1.4 9.4 (c) 3.1 (c) 22,883 36,346 49,904 (c) 100,536 (c) (c) 39,603 19,753 (c) 13,040 3,471 (c) 45,592 (c) 5,285 5,828 3,098 (c) 1,146 (c) 3,404 (c) 10,658 (c) (c) 3,572 1,600 2,214 (c) 2,466 (c) 2,532 (c) 22,897 22,051 2,302 2,505 6,513 4,836 6,315 2,436 1,634 1,917 (c) 4,501 (c) 2.51 1.89 1.12 (c) 2.34 (c) (c) 2.04 1.36 (c) 1.25 0.40 (c) 1.15 (c) 1.80 1.81 0.76 (c) 0.17 (c) 0.19 (c) 0.97 (c) (c) 0.70 0.46 0.92 (c) 0.56 (c) 1.00 (c) 1.40 0.19 0.60 0.67 1.61 1.27 5.19 0.98 0.89 0.75 (c) 0.86 (c) 0.49 0.39 0.25 (c) 0.34 (c) (c) 0.48 0.12 (c) 0.23 0.08 (c) 0.11 (c) 0.11 0.18 0.17 (c) 0.06 (c) 0.07 (c) 0.14 (c) (c) 0.25 0.10 0.20 (c) 0.22 (c) 0.45 (c) 0.54 0.08 0.25 0.31 0.53 0.32 1.54 0.28 0.31 0.19 (c) 0.23 94.40 585.30 12.20 3,570 3,532 9,264 1.00 1.00 0.60 0.30 0.20 0.20 Employer Type Nonprofit, private ............................................................................................. For profit, private ............................................................................................. Government (state and local) .......................................................................... Note: Pooled data for 2015–2017 adjusted to reflect 2017. a Total direct costs and transfers for small establishments in which all employees are affected. Impacts to small establishments in which one employee is affected will be a fraction of the impacts presented in this table. b Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2012 SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was calculated using revenues and payroll from the 2012 Census of Governments. c Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10964 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules vi. Projected Effects to Affected Small Entities in Year 2 Through Year 10 To determine how small businesses will be affected in future years, the Department projected costs to small business for nine years after Year 1 of the rule. Projected employment and earnings were calculated using the same methodology described in Section VI.B.ii. Affected employees in small firms follow a similar pattern to affected workers in all establishments: The number decreases gradually in projected years. There are 483,400 affected workers in small establishments in Year 1 and 405,200 in Year 10. Table 38 reports affected workers in selected years only. TABLE 38—PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ESTABLISHMENTS, BY INDUSTRY Affected workers in small establishments (1,000s) Industry Year 1 Total ......................................................................................................................................................................... Agriculture ................................................................................................................................................................ Forest., log., fish., hunt., and trap ........................................................................................................................... Mining ...................................................................................................................................................................... Construction ............................................................................................................................................................. Nonmetallic mineral prod. manuf ............................................................................................................................. Prim. metals and fab. metal prod ............................................................................................................................ Machinery manufacturing ........................................................................................................................................ Computer and elect. prod. manuf ............................................................................................................................ Electrical equip., appliance manuf ........................................................................................................................... Transportation equip. manuf .................................................................................................................................... Wood products ......................................................................................................................................................... Furniture and fixtures manuf ................................................................................................................................... Misc. and not spec. manuf ...................................................................................................................................... Food manufacturing ................................................................................................................................................. Beverage and tobacco products .............................................................................................................................. Textile, app., and leather manuf .............................................................................................................................. Paper and printing ................................................................................................................................................... Petroleum and coal prod. manuf ............................................................................................................................. Chemical manufacturing .......................................................................................................................................... Plastics and rubber products ................................................................................................................................... Wholesale trade ....................................................................................................................................................... Retail trade .............................................................................................................................................................. Transport. and warehousing .................................................................................................................................... Utilities ..................................................................................................................................................................... Publishing ind. (ex. internet) .................................................................................................................................... Motion picture and sound recording ........................................................................................................................ Broadcasting (except internet) ................................................................................................................................. Internet publishing and broadcasting ...................................................................................................................... Telecommunications ................................................................................................................................................ Internet serv. providers and data ............................................................................................................................ Other information services ....................................................................................................................................... Finance .................................................................................................................................................................... Insurance ................................................................................................................................................................. Real estate ............................................................................................................................................................... Rental and leasing services .................................................................................................................................... Professional and technical services ........................................................................................................................ Management of companies and enterprises ........................................................................................................... Admin. and support services ................................................................................................................................... Waste manag. and remed. 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 & organizations .............................................................................................................. Private households .................................................................................................................................................. Public administration ................................................................................................................................................ 483.4 (a) (a) (a) 27.4 (a) 3.8 4.2 3.6 (a) 4.2 (a) (a) 4.7 3.6 (a) 3.9 5.1 (a) 4.9 (a) 21.6 46.3 7.8 (a) 4.1 (a) 2.7 (a) 5.2 (a) (a) 15.9 16.2 14.1 (a) 67.5 (a) 15.3 (a) 13.9 2.9 53.0 26.1 24.1 3.9 7.2 4.9 5.3 25.5 (a) 6.5 Year 10 405.2 ( a) (a ) 1.7 22.3 (a ) 3.1 4.0 4.9 (a ) 3.0 (a ) (a ) 5.5 (a) ( a) ( a) (a) ( a) 3.4 (a ) 21.3 34.4 7.3 (a ) 3.8 ( a) ( a) (a ) ( a) (a ) (a ) 14.8 11.9 12.4 (a ) 65.6 (a ) 10.7 (a ) 14.3 (a) 44.4 21.5 18.1 3.1 6.7 4.5 4.2 20.2 ( a) 5.0 Note: Worker data are from CPS MORG using pooled data for 2015–2017 adjusted to reflect 2017. a Data not displayed because sample size of affected workers in small establishments is less than 10. Costs to small establishments vary by year but generally decrease from Year 1 mostly because regulatory familiarization costs are zero in all VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 projected years, and adjustment costs are relatively small. By Year 10, additional costs and payroll to small businesses have decreased from $259.6 PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 million in Year 1 to $210.2 million (Table 39). The Department notes that, due to relatively small sample sizes, the estimates by detailed industry are not E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules precise. This can cause some numbers in the data to vary across years by a 10965 greater amount than they will in the future. TABLE 39—PROJECTED DIRECT COSTS AND PAYROLL INCREASES FOR AFFECTED SMALL ESTABLISHMENTS, BY INDUSTRY, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD Costs and payroll increases for small affected establishments, all employees affected (millions 2017$) Industry Year 1 Total ......................................................................................................................................................................... Agriculture ................................................................................................................................................................ Forest., log., fish., hunt., and trap ........................................................................................................................... Mining ...................................................................................................................................................................... Construction ............................................................................................................................................................. Nonmetallic mineral prod. manuf ............................................................................................................................. Prim. metals and fab. metal prod ............................................................................................................................ Machinery manufacturing ........................................................................................................................................ Computer and elect. prod. manuf ............................................................................................................................ Electrical equip., appliance manuf ........................................................................................................................... Transportation equip. manuf .................................................................................................................................... Wood products ......................................................................................................................................................... Furniture and fixtures manuf ................................................................................................................................... Misc. and not spec. manuf ...................................................................................................................................... Food manufacturing ................................................................................................................................................. Beverage and tobacco products .............................................................................................................................. Textile, app., and leather manuf .............................................................................................................................. Paper and printing ................................................................................................................................................... Petroleum and coal prod. manuf ............................................................................................................................. Chemical manufacturing .......................................................................................................................................... Plastics and rubber products ................................................................................................................................... Wholesale trade ....................................................................................................................................................... Retail trade .............................................................................................................................................................. Transport. and warehousing .................................................................................................................................... Utilities ..................................................................................................................................................................... Publishing ind. (ex. internet) .................................................................................................................................... Motion picture and sound recording ........................................................................................................................ Broadcasting (except internet) ................................................................................................................................. Internet publishing and broadcasting ...................................................................................................................... Telecommunications ................................................................................................................................................ Internet serv. providers and data ............................................................................................................................ Other information services ....................................................................................................................................... Finance .................................................................................................................................................................... Insurance ................................................................................................................................................................. Real estate ............................................................................................................................................................... Rental and leasing services .................................................................................................................................... Professional and technical services ........................................................................................................................ Management of companies and enterprises ........................................................................................................... Admin. and support services ................................................................................................................................... Waste manag. and remed. 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 & organizations .............................................................................................................. Private households .................................................................................................................................................. Public administration ................................................................................................................................................ $259.6 (a) (a) (a) 12.9 (a) 4.8 4.9 3.6 ( a) 6.1 (a) (a) 5.5 2.0 ( a) 2.1 1.0 (a) 4.3 (a) 23.2 34.8 2.8 (a) 0.5 (a) 0.3 (a) 3.7 ( a) (a) 8.9 5.1 7.1 (a) 30.5 (a) 5.5 (a) 9.7 0.3 14.8 5.8 14.2 1.7 9.3 2.0 1.4 9.4 ( a) 3.1 Year 10 $210.2 (a ) ( a) 2.4 12.2 ( a) 1.8 2.5 3.0 (a ) 2.8 ( a) ( a) 0.8 (a) (a ) ( a) [a] (a ) 1.4 ( a) 14.1 25.3 2.4 ( a) 3.6 (a ) ( a) ( a) ( a) (a ) ( a) 15.5 4.0 5.5 ( a) 30.2 (a ) 2.6 ( a) 7.6 (a) 9.7 5.5 8.1 0.2 4.7 1.3 1.0 6.6 (a ) 3.0 Note: pooled data for 2015–2017 adjusted to reflect 2017. a Data not displayed because sample size of affected workers in small establishments is less than 10. ii. Differing Compliance and Reporting Requirements for Small Entities This NPRM provides no differing compliance requirements and reporting requirements for small entities. The VerDate Sep<11>2014 19:26 Mar 21, 2019 Jkt 247001 Department has strived to minimize respondent recordkeeping burden by requiring no specific form or order of records under the FLSA and its corresponding regulations. Moreover, PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 employers would normally maintain the records under usual or customary business practices. E:\FR\FM\22MRP2.SGM 22MRP2 10966 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules iii. Least Burdensome Option or Explanation Required The Department believes it has chosen the most effective option that updates and clarifies the rule and which results in the least burden. Among the options considered by the Department, the least restrictive option was taking no regulatory action. Taking no regulatory action does not address the Department’s concerns discussed above under Need for Regulation. Pursuant to section 603(c) of the RFA, the following alternatives are to be addressed: Differing compliance or reporting requirements that take into account the resources available to small entities. The FLSA creates a level playing field for businesses by setting a floor below which employers may not pay their employees. To establish differing compliance or reporting requirements for small businesses would undermine this important purpose of the FLSA and appears unnecessary given the small annualized cost of the rule. The Year 1 cost of the proposed rule for the average employer that qualifies as small was estimated to range from a minimum of $1,150 (publishing industries, except internet) to a maximum of $100,500 (transportation equipment, manufacturing), using the upper-bound estimates. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance. Therefore, the Department has not proposed differing compliance or reporting requirements for small businesses. The clarification, consolidation, or simplification of compliance and reporting requirements for small entities. The proposed rule imposes no new reporting requirements. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance. The use of performance rather than design standards. Under the proposed rule, employers may achieve compliance through a variety of means. Employers may elect to continue to claim the EAP exemption for affected employees by adjusting salary levels, hire additional workers or spread overtime hours to other employees, or compensate employees for overtime hours worked. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance. VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 An exemption from coverage of the rule, or any part thereof, for such small entities. Creating an exemption from coverage of this rule for businesses with as many as 500 employees, those defined as small businesses under SBA’s size standards, is inconsistent with the FLSA, which applies to all employers that satisfy the enterprise coverage threshold or employ individually covered employees.283 Creating a regulatory exemption for small businesses is beyond the scope of the Department’s statutory authority to define and delimit the meaning of the term ‘‘employed in a bona fide executive, administrative, or professional capacity.’’ 284 E. Identification, to the Extent Practicable, of all Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule The Department is not aware of any federal rules that duplicate, overlap, or conflict with this NPRM. VIII. Unfunded Mandates Reform Act Analysis The Unfunded Mandates Reform Act of 1995 (UMRA),285 requires agencies to prepare a written statement for rules for which a general notice of proposed rulemaking was published and that include any federal mandate that may result in increased expenditures by state, local, and tribal governments, in the aggregate, or by the private sector, of $161 million ($100 million in 1995 dollars adjusted for inflation) or more in at least one year. This statement must: (1) Identify the authorizing legislation; (2) present the estimated costs and benefits of the rule and, to the extent that such estimates are feasible and relevant, its estimated effects on the national economy; (3) summarize and evaluate state, local, and tribal government input; and (4) identify reasonable alternatives and select, or explain the non-selection, of the least costly, most cost-effective, or least burdensome alternative. A. Authorizing Legislation This proposed rule is issued pursuant to section 13(a)(1) of the Fair Labor Standards Act (FLSA or Act), 29 U.S.C. 213(a)(1). The section exempts from the FLSA’s minimum wage and overtime pay requirements ‘‘any employee employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools), or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act]. . .).’’ 286 The requirements of the exemption are contained in part 541 of the Department’s regulations. Section 3(e) of the FLSA 287 defines ‘‘employee’’ to include most individuals employed by a state, political subdivision of a state, or interstate governmental agency. Section 3(x) of the FLSA 288 also defines public agencies to include the government of a state or political subdivision thereof, or any interstate governmental agency. B. Assessment of Costs and Benefits For purposes of the UMRA, this rule includes a federal mandate that is expected to result in increased expenditures by the private sector of more than $161 million in at least one year, but the rule will not result in increased expenditures by state, local and tribal governments, in the aggregate, of $161 million or more in any one year. Costs to state and local governments: Based on the economic impact analysis of this proposed rule, the Department determined that the proposed rule will result in Year 1 costs for state and local governments totaling $59.2 million, of which $17.2 million are direct employer costs and $42.0 million are payroll increases (Table 40). In subsequent years, the Department estimated that state and local governments may experience payroll increases of as much as $38.3 million per year. Costs to the private sector: The Department determined that the proposed rule will result in Year 1 costs to the private sector of approximately $0.9 billion, of which $446.7 million are direct employer costs and $483.7 million are payroll increases. In subsequent years, the Department estimated that the private sector may experience a payroll increase of as much as $407.1 million per year. 283 See 286 29 284 29 287 29 U.S.C. 213(a)(1). U.S.C. 203(e). 288 29 U.S.C. 203(x). 29 U.S.C. 203(s). U.S.C. 213(a)(1). 285 2 U.S.C. 1501. PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 E:\FR\FM\22MRP2.SGM 22MRP2 10967 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules TABLE 40—SUMMARY OF YEAR 1 AFFECTED EAP WORKERS, REGULATORY COSTS, AND TRANSFERS BY TYPE OF EMPLOYER Total Private Government a Affected EAP Workers (1,000s) Number ........................................................................................................................................ 1,271 1,139 128 $324.9 66.6 72.7 464.2 $321.2 59.7 65.9 446.7 $3.8 6.7 6.7 17.2 $526.9 $483.7 $42.0 $991.1 $930.4 $59.2 Direct Employer Costs (Millions) Regulatory familiarization ............................................................................................................ Adjustment ................................................................................................................................... Managerial ................................................................................................................................... Total direct costs ......................................................................................................................... Payroll Increases (Millions) From employers to workers ......................................................................................................... Direct Employer Costs & Transfers (Millions) From employers ........................................................................................................................... a Includes only state, local, and tribal governments. UMRA requires agencies to estimate the effect of a regulation on the national economy if, at its discretion, such estimates are reasonably feasible and the effect is relevant and material.289 However, OMB guidance on this requirement notes that such macroeconomic effects tend to be measurable in nationwide econometric models only if the economic effect of the regulation reaches 0.25 percent to 0.5 percent of GDP, or in the range of $48.5 billion to $97.0 billion (using 2017 GDP). A regulation with smaller aggregate effect is not likely to have a measurable effect in macro-economic terms unless it is highly focused on a particular geographic region or economic sector, which is not the case with this proposed rule. The Department’s RIA estimates that the total first-year costs (direct employer costs and payroll increases from employers to workers) of the proposed rule will be approximately $930.4 million for private employers and $59.2 million for state and local governments. Given OMB’s guidance, the Department has determined that a full macroeconomic analysis is not likely to show any measurable effect on the economy. Therefore, these costs are compared to payroll costs and revenue to demonstrate the feasibility of adapting to these new rules. Total first-year private sector costs compose 0.015 percent of private sector payrolls nationwide.290 Total private 289 2 U.S.C. 1532(a)(4). sector payroll costs nationwide are projected to be $6.4 trillion in 2017. This projection is based on private sector payroll costs in 2012, which were $5.3 trillion using the 2012 Economic Census of the United States. This was inflated to 2017 dollars using the CPI–U. 290 Private VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 sector first-year costs compose 0.002 percent of national private sector revenues (revenues in 2017 are projected to be $38.8 trillion).291 The Department concludes that effects of this magnitude are affordable and will not result in significant disruptions to typical firms in any of the major industry categories. Total first-year state and local government costs compose less than 0.01 percent of state and local government payrolls.292 First-year state and local government costs compose 0.002 percent of state and local government revenues (projected 2017 revenues were estimated to be $3.7 trillion).293 Effects of this magnitude will not result in significant disruptions to typical state and local governments. The $59.2 million in state and local government costs constitutes an average of approximately $657 for each of the approximately 90,106 state and local entities. The Department considers effects of this magnitude to be quite small both in absolute terms and in relation to payrolls and revenue. 291 Private sector revenues in 2012 were $32.3 trillion using the 2012 Economic Census of the United States. This was inflated to 2017 dollars using the CPI–U. 292 State and local payrolls in 2015 were reported as $900 billion. This was inflated to 2017 payroll costs of $962.9 billion using the CPI–U. State and Local Government Finances Summary: FY2015. Available at https://www.census.gov/govs/local/. 293 State and local revenues in 2015 were reported as $3.4 trillion. This was inflated to 2017 dollars using the CPI–U. State and Local Government Finances Summary: FY2015. Available at https:// www.census.gov/govs/local/. PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 C. Least Burdensome Option or Explanation Required This NPRM has described the Department’s consideration of various options throughout the preamble and economic impact analysis (section VI.C.i). The Department believes that it has chosen the least burdensome but still cost-effective methodology to update the salary level consistent with the Department’s statutory obligation. Although some alternative options considered would have set the standard salary level at a rate lower than the updated salary level, that outcome would not necessarily be the most costeffective or least-burdensome alternative for employers. A lower or outdated salary level would result in a less effective bright-line test for separating workers who may be exempt from those nonexempt workers intended to be within the Act’s protection. A low salary level would also increase the burden on the employer to apply the duties test to more employees in determining whether an employee is exempt, which would inherently increase the likelihood of misclassification and, in turn, increase the risk that employees who should receive overtime and minimum wage protections under the FLSA are denied those protections. Selecting a standard salary level inevitably affects both the risk and cost of misclassification of overtime-eligible employees earning above the salary level, as well as the risk and cost of providing overtime protection to employees performing bona fide EAP duties who are paid below the salary level. An unduly low level risks increasing employer liability from E:\FR\FM\22MRP2.SGM 22MRP2 10968 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules unintentionally misclassifying workers as exempt; but an unduly high standard salary level increases labor costs to employers precluded from claiming the exemption for employees performing bona fide EAP duties. Thus, the ultimate cost of the regulation is increased if the standard salary level is set either too low or too high. The Department determined that setting the standard salary level using the level equivalent to the earnings of the 20th percentile of full-time salaried workers in the South and/or in the retail sector, projected forward to January 2020, balances the risks and costs of misclassification of exempt status. IX. Executive Order 13132, Federalism The Department has (1) reviewed this proposed rule in accordance with Executive Order 13132 regarding federalism and (2) determined that it does not have federalism implications. The proposed rule would not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. X. Executive Order 13175, Indian Tribal Governments This proposed rule would not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. List of Subjects in 29 CFR Part 541 Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages. 2. Revise paragraph (a)(1) of § 541.100 to read as follows: ■ § 541.100 General rule for executive employees. (a) * * * (1) Compensated on a salary basis pursuant to § 541.600 at a rate of not less than $679 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities; * * * * * ■ 3. Revise paragraph (a)(1) of § 541.200 to read as follows: § 541.200 General rule for administrative employees. (a) * * * (1) Compensated on a salary or fee basis pursuant to § 541.600 at a rate of not less than $679 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities; * * * * * ■ 4. Revise paragraph (a)(1) of § 541.204 to read as follows: § 541.204 Educational establishments. PART 541—DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES (a) * * * (1) Compensated on a salary or fee basis at a rate of not less than $679 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging, or other facilities; or on a salary basis which is at least equal to the entrance salary for teachers in the educational establishment by which employed; and * * * * * ■ 5. Revise paragraph (a)(1) of § 541.300 to read as follows: ■ 1. The authority citation for part 541 continues to read as follows: § 541.300 General rule for professional employees. Authority: 29 U.S.C. 213; Pub. L. 101–583, 104 Stat. 2871; Reorganization Plan No. 6 of 1950 (3 CFR, 1945–53 Comp., p. 1004); Secretary’s Order 01–2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24, 2014). (a) * * * (1) Compensated on a salary or fee basis pursuant to § 541.600 at a rate of not less than $679 per week (or $455 per week if employed in the Commonwealth Signed at Washington, DC this 7th day of March, 2019. Keith E. Sonderling, Acting Administrator, Wage and Hour Division. For the reasons set out in the preamble, the Department of Labor proposes to amend title 29 of the Code of Federal Regulations part 541 as follows: VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities; and * * * * * ■ 6. Amend § 541.400 by removing the first two sentences of paragraph (b) and adding one sentence in their place to read as follows: § 541.400 General rule for computer employees. * * * * * (b) The section 13(a)(1) exemption applies to any computer employee who is compensated on a salary or fee basis at a rate of not less than $679 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging, or other facilities. * * * * * * * * ■ 7. Amend § 541.600 by: ■ a. Removing the first three sentences of paragraph (a) and adding one sentence in their place; and ■ b. Revising paragraph (b). The revisions and additions read as follows: § 541.600 Amount of salary required. (a) To qualify as an exempt executive, administrative or professional employee under section 13(a)(1) of the Act, an employee must be compensated on a salary basis at a rate of not less than $679 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal Government, or $380 per week if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities. * * * (b) The required amount of compensation per week may be translated into equivalent amounts for periods longer than one week. For example, the $679-per-week requirement will be met if the employee is compensated biweekly on a salary basis of not less than $1,358, semimonthly on a salary basis of not less than $1,471, or monthly on a salary basis of not less than $2,942. However, the shortest period of payment that will E:\FR\FM\22MRP2.SGM 22MRP2 Federal Register / Vol. 84, No. 56 / Friday, March 22, 2019 / Proposed Rules meet this compensation requirement is one week. * * * * * ■ 8. Amend § 541.601 by revising paragraphs (a) and (b) to read as follows: § 541.601 Highly compensated employees. (a) An employee with total annual compensation of at least $147,414 is deemed exempt under section 13(a)(1) of the Act if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee as identified in subparts B, C or D of this part. (b) (1) ‘‘Total annual compensation’’ must include at least $679 per week paid on a salary or fee basis as set forth in §§ 541.602 and 541.605, except that § 541.602(a)(3) shall not apply to highly compensated employees. Total annual compensation may also include commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period. Total annual compensation does not include board, lodging and other facilities as defined in § 541.606, and does not include payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other fringe benefits. (2) If an employee’s total annual compensation does not total at least $147,414 by the last pay period of the 52-week period, the employer may, during the last pay period or within one month after the end of the 52-week period, make one final payment sufficient to achieve the required level. For example, an employee may earn $125,000 in base salary, and the employer may anticipate based upon past sales that the employee also will earn $22,414 in commissions. However, due to poor sales in the final quarter of the year, the employee actually only earns $10,000 in commissions. In this situation, the employer may within one month after the end of the year make a payment of at least $12,414 to the employee. Any such final payment made after the end of the 52-week period may count only toward the prior year’s total annual compensation and not toward the total annual compensation in the year it was paid. If the employer fails to make such a payment, the employee does not qualify as a highly compensated employee, but may still qualify as exempt under subparts B, C, or D of this part. * * * * * § 541.602 Salary basis. 9. Revise paragraph (a) (3) of § 541.602 to read as follows: (a) * * * ■ VerDate Sep<11>2014 18:00 Mar 21, 2019 Jkt 247001 (3) Up to ten percent of the salary amount required by § 541.600(a) may be satisfied by the payment of nondiscretionary bonuses, incentives and commissions, that are paid annually or more frequently. The employer may utilize any 52-week period as the year, such as a calendar year, a fiscal year, or an anniversary of hire year. If the employer does not identify some other year period in advance, the calendar year will apply. If by the last pay period of the 52-week period the sum of the employee’s weekly salary plus nondiscretionary bonus, incentive, and commission payments received does not equal 52 times the weekly salary amount required by § 541.600(a), the employer may make one final payment sufficient to achieve the required level no later than the next pay period after the end of the year. Any such final payment made after the end of the 52week period may count only toward the prior year’s salary amount and not toward the salary amount in the year it was paid. This provision does not apply to highly compensated employees under § 541.601. * * * * * ■ 10. Revise § 541.604 to read as follows: § 541.604 Minimum guarantee plus extras. (a) An employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weeklyrequired amount paid on a salary basis. Thus, for example, an exempt employee guaranteed at least $679 each week paid on a salary basis may also receive additional compensation of a one percent commission on sales. An exempt employee also may receive a percentage of the sales or profits of the employer if the employment arrangement also includes a guarantee of at least $679 each week paid on a salary basis. Similarly, the exemption is not lost if an exempt employee who is guaranteed at least $679 each week paid on a salary basis also receives additional compensation based on hours worked for work beyond the normal workweek. Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off. (b) An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee PO 00000 Frm 00071 Fmt 4701 Sfmt 9990 10969 of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek. Thus, for example, an exempt employee guaranteed compensation of at least $700 for any week in which the employee performs any work, and who normally works four or five shifts each week, may be paid $210 per shift without violating the $679-per-week salary basis requirement. The reasonable relationship requirement applies only if the employee’s pay is computed on an hourly, daily or shift basis. It does not apply, for example, to an exempt store manager paid a guaranteed salary per week that exceeds the current salary level who also receives a commission of one-half percent of all sales in the store or five percent of the store’s profits, which in some weeks may total as much as, or even more than, the guaranteed salary. ■ 11. Revise paragraph (b) of § 541.605 to read as follows: § 541.605 Fee basis. * * * * * (b) To determine whether the fee payment meets the minimum amount of salary required for exemption under these regulations, the amount paid to the employee will be tested by determining the time worked on the job and whether the fee payment is at a rate that would amount to at least the minimum salary per week, as required by §§ 541.600(a) and 541.602(a), if the employee worked 40 hours. Thus, an artist paid $350 for a picture that took 20 hours to complete meets the $679 minimum salary requirement for exemption since earnings at this rate would yield the artist $700 if 40 hours were worked. ■ 12. Amend § 541.709 by revising the first sentence to read as follows: § 541.709 industry. Motion picture producing The requirement that the employee be paid ‘‘on a salary basis’’ does not apply to an employee in the motion picture producing industry who is compensated at a base rate of at least $1,036 per week (exclusive of board, lodging, or other facilities). * * * * * * * * [FR Doc. 2019–04514 Filed 3–21–19; 8:45 am] BILLING CODE 4510–27–P E:\FR\FM\22MRP2.SGM 22MRP2

Agencies

[Federal Register Volume 84, Number 56 (Friday, March 22, 2019)]
[Proposed Rules]
[Pages 10900-10969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04514]



[[Page 10899]]

Vol. 84

Friday,

No. 56

March 22, 2019

Part II





Department of Labor





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Wage and Hour Division





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29 CFR Part 541





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

Federal Register / Vol. 84 , No. 56 / Friday, March 22, 2019 / 
Proposed Rules

[[Page 10900]]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1235-AA20


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

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Proposed rule and request for comments.

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SUMMARY: Using a longstanding and commonsense methodology and based on 
broad-based input, the Department of Labor (Department) proposes to 
update and revise the regulations issued under the Fair Labor Standards 
Act (FLSA or Act) implementing the exemption from minimum wage and 
overtime pay requirements for executive, administrative, professional, 
outside sales, and computer employees.

DATES: Submit written comments on or before May 21, 2019.

ADDRESSES: You may submit comments, identified by Regulatory 
Information Number (RIN) 1235-AA20, by either of the following methods: 
Electronic Comments: Submit comments through the Federal eRulemaking 
Portal http://www.regulations.gov. Follow the instructions for 
submitting comments. Mail: Address written submissions to Melissa 
Smith, Director of the Division of Regulations, Legislation, and 
Interpretation, Wage and Hour Division, U.S. Department of Labor, Room 
S-3502, 200 Constitution Avenue NW, Washington, DC 20210. Instructions: 
Please submit only one copy of your comments by only one method. All 
submissions must include the agency name and RIN, identified above, for 
this rulemaking. Please be advised that comments received will become a 
matter of public record and will be posted without change to http://www.regulations.gov, including any personal information provided. All 
comments must be received by 11:59 p.m. on the date indicated for 
consideration in this rulemaking. Commenters should transmit comments 
early to ensure timely receipt prior to the close of the comment period 
as the Department continues to experience delays in the receipt of mail 
in our area. For additional information on submitting comments and the 
rulemaking process, see the ``Public Participation'' heading of the 
supplementary information section of this document. For questions 
concerning the interpretation and enforcement of labor standards 
related to the FLSA, individuals may contact the Wage and Hour Division 
(WHD) local district offices (see contact information below). Docket: 
For access to the docket to read background documents or comments, go 
to the Federal eRulemaking Portal at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Robert Waterman, Division of 
Regulations, Legislation, and Interpretation, Wage and Hour Division, 
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, 
Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-
free number). Copies of this proposed rule may be obtained in 
alternative formats (Large Print, Braille, Audio Tape or Disc), upon 
request, by calling (202) 693-0675 (this is not a toll-free number). 
TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information 
or request materials in alternative formats.
    Questions of interpretation and/or enforcement of the agency's 
regulations may be directed to the nearest WHD district office. Locate 
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time 
zone, or log onto WHD's website for a nationwide listing of WHD 
district and area offices at http://www.dol.gov/whd/america2.htm.

Electronic Access and Filing Comments

    Public Participation: This proposed rule is available through the 
Federal Register and the http://www.regulations.gov website. You may 
also access this document via WHD's website at http://www.dol.gov/whd/. 
To comment electronically on Federal rulemakings, go to the Federal 
eRulemaking Portal at http://www.regulations.gov, which will allow you 
to find, review, and submit comments on Federal documents that are open 
for comment and published in the Federal Register. You must identify 
all comments submitted by including ``RIN 1235-AA20'' in your 
submission. Commenters should transmit comments early to ensure timely 
receipt prior to the close of the comment period (11:59 p.m. on the 
date identified above in the DATES section); comments received after 
the comment period closes will not be considered. Submit only one copy 
of your comments by only one method. Please be advised that all 
comments received will be posted without change to http://www.regulations.gov, including any personal information provided.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Executive Summary
II. Background
    A. The FLSA
    B. Regulatory History
    C. Overview of Existing Regulatory Requirements
III. Need for Rulemaking
IV. Proposed Regulatory Revisions
    A. Standard Salary Level
    B. Special Salary Tests
    C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, 
and Commissions in the Salary Level Requirement
    D. Highly Compensated Employees
    E. Future Updates to the Earnings Thresholds
V. Paperwork Reduction Act
VI. Analysis Conducted in Accordance With Executive Order 12866, 
Regulatory Planning and Review, and Executive Order 13563, Improving 
Regulation and Regulatory Review
    A. Introduction
    B. Methodology To Determine the Number of Potentially Affected 
EAP Workers
    C. Determining the Revised Salary and Compensation Levels
    D. Effects of Revised Salary and Compensation Levels
VII. Initial Regulatory Flexibility Analysis (IRFA)
    A. Reasons Why Action by the Agency Is Being Considered
    B. Statement of Objectives and Legal Basis for the Proposed Rule
    C. Description of the Number of Small Entities To Which the 
Proposed Rule Will Apply
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Proposed Rule
    E. Identification, to the Extent Practicable, of All Relevant 
Federal Rules That May Duplicate, Overlap, or Conflict With the 
Proposed Rule
VIII. Unfunded Mandates Reform Act Analysis
    A. Authorizing Legislation
    B. Assessment of Costs and Benefits
    C. Least Burdensome Option or Explanation Required
IX. Executive Order 13132, Federalism
X. Executive Order 13175, Indian Tribal Governments
Proposed Amendments to Regulatory Text

I. Executive Summary

    The Fair Labor Standards Act (FLSA or Act) requires covered 
employers to pay employees a minimum wage and, for employees who work 
more than 40 hours in a week, overtime premium pay at least 1.5-times 
their regular rate of pay. The FLSA provides a number of exemptions to 
these two requirements.
    Section 13(a)(1) of the FLSA, commonly referred to as the ``white 
collar'' or ``EAP'' exemption, exempts ``bona fide'' executive, 
administrative,

[[Page 10901]]

professional, outside sales, and computer employees from the minimum 
wage and overtime requirements of the FLSA. The statute delegates to 
the Secretary of Labor (the Secretary) the authority to define and 
delimit the terms of this white collar exemption. Since 1940, the 
regulations implementing the exemption generally have required three 
things: (1) The employee must be paid a predetermined and fixed salary 
that is not subject to reduction because of variations in the quality 
or quantity of work performed (the ``salary basis test''); (2) the 
amount of salary paid must meet a minimum specified amount (the 
``salary level test''); and (3) the employee's job duties must 
primarily involve executive, administrative, or professional duties as 
defined by the regulations (the ``duties test'').
    The Department has long used the salary level test as a tool to 
help define the white collar exemption on the basis that employees paid 
less than the salary level are unlikely to be bona fide executives, 
administrators, or professionals, and, conversely, that nearly all bona 
fide executives, administrators, and professionals are paid at least 
that much. The salary level test provides certainty for employers and 
employees, as well as efficiency for government enforcement agencies. 
The salary level test's usefulness, however, diminishes as the wages of 
employees entitled to overtime increase and the real value of the 
salary threshold falls.
    The Department increased the weekly salary level from $455 ($23,660 
per year) to $913 ($47,476 per year) in a final rule published May 23, 
2016 (``2016 final rule''). That rulemaking was challenged in court, 
and on November 22, 2016, the U.S. District Court for the Eastern 
District of Texas enjoined the Department from implementing and 
enforcing the rule. On August 31, 2017, the court granted summary 
judgment against the Department, invalidating the 2016 final rule. An 
appeal of that decision to the United States Court of Appeals for the 
Fifth Circuit, based on the salary threshold, is being held in 
abeyance. Currently, the Department is enforcing the regulations in 
effect on November 30, 2016, including the $455 per week standard 
salary level, which is the same level set in place during the 2004 
final rule.
    The Department has reconsidered the $913 per week standard salary 
level set in the 2016 final rule in light of the district court's 
decisions, public comments received in response to a July 26, 2017 
Request for Information (RFI), and feedback received at public 
listening sessions the Department held around the country to receive 
additional public input on issues related to the salary level test.\1\ 
The Department agrees with the vast majority of RFI commenters that the 
standard salary level needs to exceed $455 per week to more effectively 
serve its purpose. But the Department now also believes that increasing 
the standard salary level to $913 per week was inappropriate. The 
increase excluded from exemption 4.2 million employees whose duties 
would have otherwise qualified them for exemption, a result in 
significant tension with the text of section 13(a)(1). As the district 
court noted in its decision invalidating the 2016 final rule, the 
increase also untethered the salary level test from its historical 
justification: Setting a dividing line between nonexempt and 
potentially exempt employees by screening out from exemption a swath of 
employees who are unlikely to be bona fide executives, administrators, 
or professionals because of their compensation level.
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    \1\ Timely comments and listening session records may be 
reviewed at www.regulations.gov, docket ID: WHD-2017-0002.
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    To address the district court's and the Department's concerns with 
the 2016 final rule and set a more appropriate salary level, the 
Department proposes to rescind formally the 2016 final rule and simply 
to update the 2004 standard salary level by applying the same 
methodology to current data. The 2004 final rule set the standard 
salary level at approximately the 20th percentile of earnings of full-
time salaried workers in the lowest-wage census region (then and now 
the South) and in the retail sector. This proposed rule would do the 
same. When this method is applied to 2017 data, and projected forward 
to January 2020 (the approximate date this rule is anticipated to be 
effective), it results in a proposed standard salary level of $679 per 
week ($35,308 per year). The Department anticipates using 2018 data in 
development of the final rule. The Department estimates that in 2020, 
1.1 million currently exempt employees who earn at least $455 per week 
but less than the proposed standard salary level of $679 per week 
would, without some intervening action by their employers,\2\ gain 
overtime eligibility.\3\ In an attempt to align the regulations better 
with modern pay practices, the Department also proposes to allow 
employers to count nondiscretionary bonuses and incentive payments 
(including commissions) to satisfy up to 10 percent of the standard 
salary level test, provided such bonuses are paid annually or more 
frequently. The Department is not proposing any changes to the standard 
duties test.
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    \2\ Employers may opt to raise salary levels, reorganize 
workloads, adjust work schedules, or spread work hours in order to 
avoid payment of overtime pay.
    \3\ The Department also estimates that an additional 2.0 million 
white collar workers who are currently nonexempt because they do not 
satisfy the EAP duties tests and currently earn at least $455 per 
week but less than $679 per week would have their overtime-eligible 
status strengthened in 2020 because these employees would now fail 
both the salary level and duties tests.
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    The Department believes that the proposed update to the standard 
salary level will maintain the traditional purposes of the salary level 
test, and will help employers more readily identify exempt employees. 
In proposing a new salary level, the Department considered the district 
court's conclusion that the salary level set in the 2016 final rule 
exceeded the Department's authority by ``exclud[ing] so many employees 
who perform exempt duties'' thereby making ``salary rather than an 
employee's duties determinative'' of the applicability of the EAP 
exemption.\4\ The Department has also considered the comments received 
in response to the RFI and those presented by interested parties at the 
nationwide listening sessions.
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    \4\ Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d 795, 807 
(E.D. Tex. 2017).
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    The Department considered other methods for setting the standard 
salary level, as described in sections IV.A.v and VI.C. The Department 
seeks comments on these or other methods that would update the standard 
salary level to reflect wage growth, are consistent with the salary 
level's purposes, and are reasonable considering the interests of 
employers and employees.
    In the 2004 final rule, the Department for the first time 
incorporated a Highly Compensated Employee (HCE) test, which paired a 
reduced duties requirement with a higher compensation level ($100,000). 
To update the HCE total annual compensation level (set to $100,000 in 
the 2004 final rule and increased to $134,004 in the 2016 final rule), 
the Department is adopting the same methodology used in the 2016 final 
rule. The Department proposes to set the level equivalent to the 90th 
percentile of full-time salaried workers nationally, similarly 
projected forward to 2020, which results in an increase in the annual 
compensation level to $147,414 per year. Without intervening action by 
their employers, an estimated 201,100 currently exempt workers who earn 
at least $100,000 per year but less than the

[[Page 10902]]

proposed HCE annual compensation level of $147,414 per year, and who 
meet the HCE duties test but not the standard duties test, would also 
gain overtime eligibility.
    Additionally, the Department is proposing special salary levels for 
certain U.S. territories and an updated base rate for employees in the 
motion picture producing industry. Furthermore, to prevent the earnings 
threshold levels from becoming significantly outdated in the future and 
to provide predictability and certainty for the benefit of workers and 
employers, the Department intends to propose updates to these levels 
every four years through notice-and-comment rulemaking, and solicits 
comment from the public regarding that intention.
    This proposed rule is expected to be an Executive Order 13771 
deregulatory action. When the Department uses a perpetual time horizon 
to allow for cost comparisons under Executive Order 13771, and using 
the 2016 rule as the baseline, the annualized cost savings of this 
proposed rule is $224.0 million with 7 percent discounting. The net 
present value of the cost savings is $3.2 billion using a perpetual 
time horizon and a 7 percent discount rate.
    Because the Department is currently enforcing the 2004 salary 
level, the economic analysis uses the 2004 rule as the baseline for 
calculating costs and transfers. The economic analysis quantifies three 
direct costs resulting from the proposal: (1) Regulatory 
familiarization costs; (2) adjustment costs; and (3) managerial costs. 
The Department estimates that annualized direct employer costs in the 
first 10 years following the rule's effective date will be $120.5 
million, including $464.2 million in Year 1 and $67.8 million in Year 
10. This proposed rulemaking will also give employees higher earnings 
in the form of transfers of income from employers to employees. 
Annualized transfers are estimated to be $429.4 million over the first 
ten years, including $526.9 million in Year 1. Details on the estimated 
reduced burdens and cost savings of this proposed rule are in the 
rule's economic analysis.

II. Background

A. The FLSA

    On June 25, 1938, the FLSA was signed into law. The FLSA generally 
requires covered employers to pay their employees at least the federal 
minimum wage (currently $7.25 an hour) for all hours worked, and 
overtime premium pay of at least 1.5-times the regular rate of pay for 
all hours worked over 40 in a workweek.\5\
---------------------------------------------------------------------------

    \5\ 29 U.S.C. 201, et seq.
---------------------------------------------------------------------------

    The FLSA exempts certain employees from its minimum wage and 
overtime requirements. Section 13(a)(1) exempts EAP employees from the 
minimum wage provisions of section 206 \6\ and the overtime pay 
provisions of section 207, and delegates to the Secretary the authority 
to define and delimit the terms of the exemption in regulations.\7\
---------------------------------------------------------------------------

    \6\ ``[E]xcept subsection (d) in the case of paragraph (1) of 
this subsection . . . .'' 29 U.S.C. 213(a).
    \7\ Id.
---------------------------------------------------------------------------

    Pursuant to Congress' grant of rulemaking authority, in 1938 the 
Department issued the first regulations at 29 CFR part 541, defining 
the scope of the section 13(a)(1) exemptions. Since 1940, the 
implementing regulations have generally imposed three requirements for 
the exemption to apply: (1) An employee must be paid a predetermined 
and fixed salary that is not subject to reduction because of variations 
in the quality or quantity of work performed (the ``salary basis 
test''); (2) the amount of salary paid must meet a minimum specified 
amount (the ``salary level test''); and (3) the employee's job duties 
must primarily involve executive, administrative, or professional 
duties as defined by the regulations (the ``duties test'').

B. Regulatory History

    The first version of part 541, establishing the criteria for exempt 
status under section 13(a)(1), was promulgated in October 1938.\8\ The 
Department revised its regulations in 1940,\9\ 1949,\10\ 1954, 
1958,\11\ 1961, 1963, 1967, 1970, 1973, and 1975.\12\ A final rule 
increasing the salary levels was published on January 13, 1981, but was 
stayed indefinitely on February 12, 1981.\13\ In 1985, the Department 
published an Advance Notice of Proposed Rulemaking that was never 
finalized.\14\ In 1992, the Department twice revised the part 541 
regulations. First, the Department created a limited exception from the 
salary basis test for public employees.\15\ The Department then 
implemented the 1990 law exempting employees in certain computer-
related occupations.\16\
---------------------------------------------------------------------------

    \8\ 3 FR 2518 (Oct. 20, 1938).
    \9\ 5 FR 4077 (Oct. 15, 1940). The 1940 regulations were 
informed by what has come to be known as the Stein Report. See 
Executive, Administrative, Professional . . . Outside Salesman 
Redefined, Wage and Hour Division, U.S. Department of Labor, Report 
and Recommendations of the Presiding Officer [Harold Stein] at 
Hearings Preliminary to Redefinition (Oct. 10, 1940) (``Stein 
Report'').
    \10\ 14 FR 7705 (Dec. 24, 1949); 14 FR 7730 (Dec. 28, 1949). The 
1949 regulations were informed by what has come to be known as the 
Weiss Report. See Report and Recommendations on Proposed Revisions 
of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage 
and Hour and Public Contracts Divisions, U.S. Department of Labor 
(June 30, 1949) (``Weiss Report'').
    \11\ 23 FR 8962 (Nov. 18, 1958). The 1958 regulations were 
informed by what has come to be known at the Kantor Report. See 
Report and Recommendations on Proposed Revision of Regulations, Part 
541, Under the Fair Labor Standards Act, by Harry S. Kantor, 
Assistant Administrator, Office of Regulations and Research, Wage 
and Hour and Public Contracts Divisions, U.S. Department of Labor 
(Mar. 3, 1958) (``Kantor Report'').
    \12\ See 19 FR 4405 (July 17, 1954); 26 FR 8635 (Sept. 15, 
1961); 28 FR 9505 (Aug. 30, 1963); 32 FR 7823 (May 30, 1967); 35 FR 
883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); 40 FR 7091 (Feb. 19, 
1975).
    \13\ 46 FR 11972 (Feb. 12, 1981).
    \14\ 50 FR 47696 (Nov. 19, 1985).
    \15\ 57 FR 37677 (Aug. 19, 1992).
    \16\ 57 FR 46742 (Oct. 9, 1992); see Sec. 2, Public Law 101-583, 
104 Stat. 2871 (Nov. 15, 1990), codified at 29 U.S.C. 213 Note.
---------------------------------------------------------------------------

    From 1949 until 2004, the part 541 regulations contained two 
different tests for exemption--a ``long'' test that paired a more 
rigorous duties test with a lower salary level, and a ``short'' test 
that paired a more flexible duties test with a higher salary level. On 
April 23, 2004, the Department issued a final rule (2004 final rule), 
which replaced the ``long'' and ``short'' test system for determining 
exemption status with a single ``standard'' salary level paired with a 
``standard'' duties test. The Department set the standard salary level 
at $455 per week.\17\
---------------------------------------------------------------------------

    \17\ 69 FR 22122 (Apr. 23, 2004).
---------------------------------------------------------------------------

    On May 23, 2016, the Department issued another final rule (2016 
final rule), which raised the standard salary level to $913 per week 
and instituted a mechanism to automatically update the salary level 
every three years.\18\ The 2016 final rule also permitted employers, 
for the first time, to satisfy up to 10 percent of the standard salary 
requirement with nondiscretionary bonuses and incentive payments 
(including commissions), provided that those forms of compensation were 
paid at least quarterly. The rule set an effective date of December 1, 
2016.
---------------------------------------------------------------------------

    \18\ 81 FR 32391 (May 23, 2016).
---------------------------------------------------------------------------

    On November 22, 2016, the United States District Court for the 
Eastern District of Texas issued a preliminary injunction, enjoining 
the Department from implementing and enforcing the 2016 final rule, 
pending further review.\19\ On August 31, 2017, the district court 
granted summary judgment against the Department of Labor.\20\ The court 
held that the 2016 final rule's salary level exceeded the Department's 
authority and that the

[[Page 10903]]

entire final rule was therefore invalid. The court determined that a 
salary level that excludes from exemption an unusually high number of 
employees who pass the duties test stands in tension with Congress's 
command to exempt bona fide EAP employees.
---------------------------------------------------------------------------

    \19\ See Nevada v. U.S. Dep't of Labor, 218 F. Supp. 3d 520 
(E.D. Tex. 2016).
    \20\ See Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d 795 
(E.D. Tex. 2017).
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    On July 26, 2017, the Department published a Request for 
Information (RFI) asking for public input on what changes the 
Department should propose in a new NPRM on the EAP exemption.\21\ The 
Department received over 200,000 comments on the RFI, which are 
discussed below. On October 30, 2017, the Government appealed the 
district court's summary judgment decision to the United States Court 
of Appeals for the Fifth Circuit. On November 6, 2017, the Fifth 
Circuit granted the Government's motion to hold that appeal in abeyance 
while the Department undertook further rulemaking to redetermine the 
salary level. Further, between September 7 and October 17, 2018, the 
Department held listening sessions in all five Wage and Hour regions 
throughout the country to supplement feedback received as part of the 
RFI.\22\
---------------------------------------------------------------------------

    \21\ 82 FR 34616 (July 26, 2017).
    \22\ Listening Session transcripts may be viewed at 
www.regulations.gov, docket ID WHD-2017-0002.
---------------------------------------------------------------------------

C. Overview of Existing Regulatory Requirements

    The regulations in part 541 contain specific criteria that define 
each category of exemption provided by section 13(a)(1) for bona fide 
executive, administrative, professional, and outside sales employees, 
as well as teachers and academic administrative personnel. The 
regulations also define those computer employees who are exempt under 
section 13(a)(1) and section 13(a)(17). The employer bears the burden 
of establishing the applicability of any exemption from the FLSA's pay 
requirements.\23\ Job titles, job descriptions, or the payment of 
salary instead of an hourly rate are insufficient, standing alone, to 
confer exempt status on an employee.
---------------------------------------------------------------------------

    \23\ See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 
190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547-48 
(1947).
---------------------------------------------------------------------------

    To qualify for the EAP exemption, employees must meet certain tests 
regarding their job duties \24\ and generally must be paid on a salary 
basis at least the amount specified in the regulations.\25\ Some 
employees, such as doctors, lawyers, teachers, and outside sales 
employees, are not subject to salary tests.\26\ Others, such as 
academic administrative personnel and computer employees, are subject 
to special, contingent earning thresholds.\27\ In 2004, the standard 
salary level for EAP employees was set at $455 per week (equivalent to 
$23,660 per year for a full-time worker), and the total annual 
compensation level for highly compensated employees was set at 
$100,000.\28\ In light of the district court's decision invalidating 
the 2016 final rule, these are the salary levels currently enforced by 
the Department.\29\
---------------------------------------------------------------------------

    \24\ See Sec. Sec.  541.100 (executive employees); 541.200 
(administrative employees); 541.300, 541.303-.304 (teachers and 
professional employees); 541.400 (computer employees); 541.500 
(outside sales employees).
    \25\ Alternatively, administrative and professional employees 
may be paid on a ``fee basis'' for a single job regardless of the 
time required for its completion as long as the hourly rate for work 
performed (i.e., the fee payment divided by the number of hours 
worked) would total at least the weekly amount specified in the 
regulation if the employee worked 40 hours. See Sec.  
[thinsp]541.605.
    \26\ See Sec. Sec.  [thinsp]541.303(d); 541.304(d); 541.500(c); 
541.600(e). Such employees are also not subject to a fee-basis test.
    \27\ See Sec.  [thinsp]541.600(c)-(d).
    \28\ 69 FR 22123.
    \29\ The current text of the Code of Federal Regulations (CFR) 
reflects the updates made in the 2016 final rule. Therefore, unless 
otherwise indicated, citations to part 541 refer to the current CFR, 
and the proposed amendments to the regulatory text reflect the 
current CFR's inclusion of the 2016 updates. However, because the 
Department is currently enforcing the 2004 standard salary and total 
annual compensation levels, the NPRM references the 2004 standard 
salary and total annual compensation levels.
---------------------------------------------------------------------------

    The 2004 final rule created the ``highly compensated employee'' 
(HCE) test for exemption. Under the HCE test, employees who receive at 
least a specified total annual compensation (which must include at 
least the standard salary amount per week paid on a salary or fee 
basis) are exempt from the FLSA's overtime requirements if they 
customarily and regularly perform at least one of the exempt duties or 
responsibilities of an executive, administrative, or professional 
employee identified in the standard tests for exemption.\30\ The HCE 
test applies only to employees whose primary duty includes performing 
office or non-manual work.\31\ Non-management production line workers 
and employees who perform work involving repetitive operations with 
their hands, physical skill, and energy are not exempt under this 
section.\32\
---------------------------------------------------------------------------

    \30\ Sec.  [thinsp]541.601.
    \31\ Sec.  541.601(d).
    \32\ Id.
---------------------------------------------------------------------------

    Finally, the FLSA does not preempt stricter state standards. If a 
State establishes a stricter standard to qualify for exemption from 
state overtime standards than the corresponding FLSA standard (e.g., 
higher earnings thresholds or more rigorous duties tests), the stricter 
standard continues to apply for state law purposes.\33\
---------------------------------------------------------------------------

    \33\ See 29 U.S.C. 218.
---------------------------------------------------------------------------

III. Need for Rulemaking

    The primary goal of this rulemaking is to update the weekly salary 
amounts used by the Department to help define and delimit the EAP 
exemption, as required by the Act. In light of the district court's 
decision ruling that the 2016 final rule was invalid, the Department is 
currently enforcing the $455 per week standard salary level from the 
2004 final rule. The Department recognizes that the $455 per week 
standard salary level, which the Department has enforced for nearly a 
decade and a half, should be updated to reflect current wages.
    Therefore, the Department's proposed approach for this rulemaking 
is simple. It proposes to apply the same method used to calculate the 
salary threshold in 2004 to current data. The Department expects that 
this method will keep the standard salary level aligned with the 
intervening years' growth in wages. This approach has withstood the 
test of time, is familiar to employees and employers, and can be used 
without causing significant hardship or disruption to employers or the 
economy, while ensuring overtime-eligible workers continue to receive 
the protections intended by Congress.
    The Department's proposed approach would also address concerns with 
the 2016 final rule identified by the district court. The salary level 
test has historically served as a dividing line between nonexempt and 
potentially exempt employees, excluding from exemption a large swath of 
employees on the reasoning that employees compensated below the salary 
level are very unlikely to be employed ``in a bona fide executive, 
administrative, or professional capacity.'' \34\ Given these purposes, 
the salary level cannot be set too high, or it would unduly deny 
exemption to bona fide executive, administrative, and professional 
employees who, Congress has instructed, ``shall not'' be subject to the 
FLSA's overtime and minimum wage requirements.\35\ The 2016 final rule 
went beyond the limited traditional purpose of setting a salary 
``floor'' to identify certain obviously nonexempt employees, and 
instead excluded from exemption many employees who had previously been, 
and should have continued to be, exempt by reference to their duties. 
The Department's proposed

[[Page 10904]]

approach in this rulemaking would address that concern.
---------------------------------------------------------------------------

    \34\ 29 U.S.C. 213(a)(1).
    \35\ 29 U.S.C. 213(a).
---------------------------------------------------------------------------

    The proposed rule includes several additional updates. The 
Department proposes updating the HCE total annual compensation 
threshold to an amount of $147,414. The Department also proposes to 
allow the inclusion of nondiscretionary bonuses and incentive payments 
(including commissions) paid on an annual or more-frequent basis to 
satisfy up to 10 percent of the standard salary level, and to revise 
the special salary levels provided under part 541. The Department 
intends to propose an update to the part 541 earnings thresholds every 
four years to prevent the levels from becoming outdated. More regular 
updates would promote greater stability, avoiding the disruptive salary 
level increases that can result from lengthy gaps between updates, and 
provide appropriate wage protection for those under the threshold.

Summary of Comments on the Request for Information and at the Listening 
Sessions

    On July 26, 2017, WHD published an RFI to solicit public input to 
inform the Department's work in developing a proposal to revise the 
part 541 regulations. The RFI solicited feedback on questions related 
to the salary level test, the duties test, the possibility of multiple 
salary levels, the inclusion of nondiscretionary bonuses and incentive 
payments to satisfy a portion of the salary level, the annual 
compensation test for highly compensated employees, and the automatic 
updating of the standard salary and HCE annual compensation level 
tests. The RFI was published in the Federal Register with a 60-day 
public comment period.\36\
---------------------------------------------------------------------------

    \36\ 82 FR 34616.
---------------------------------------------------------------------------

    Over 200,000 comments were received from a broad array of 
stakeholders, including small business owners, large companies, 
employer and employee associations, state and local governments, 
unions, higher education institutions, non-profit organizations, law 
firms, workers, and other interested members of the public.
    In the RFI, the Department asked several questions about the 
standard salary level, seeking input on the appropriate level to 
fulfill the salary level's historical role in determining exemption 
status. In particular, the Department asked whether updating the 2004 
salary level for inflation or applying the 2004 methodology to current 
salary data would be appropriate, whether differing standard salary 
levels should be set for different regions or employer sizes, and 
whether the Department should set different standard salary levels for 
the executive, administrative, and professional exemptions. The 
Department also sought information about the actions taken by employers 
in anticipation of the 2016 final rule, as well as the effect of 
increased salary levels on particular occupations.
    Commenters expressed diverse views about the standard salary level, 
but mostly favored increasing the salary level above $455 per week, 
with only a small minority requesting that the salary level be 
eliminated or kept at its current amount. Nearly all commenters 
representing employers opposed the standard salary level of $913 per 
week set in the 2016 final rule. Many expressed the view that this 
level conflicted with the salary level's longstanding role of screening 
out obviously nonexempt employees, and would improperly deny exemption 
for millions of employees who passed the duties test. Several employers 
expressed concern that raising the standard salary level as high as 
$913 per week could lead to significant costs for employers. Many of 
these commenters also expressed concern that the salary level should 
account for salaries paid in lower-wage regions and industries. 
Commenters representing employers offered varied methodologies for 
setting the salary level, including adjusting the $455-per-week 
threshold to account for inflation since 2004 and applying the 2004 
final rule's salary-setting methodology to contemporary earnings data. 
In contrast, most commenters who were employees or represented 
employees urged the Department to implement the $913 per week level 
adopted in the 2016 final rule, although some commenters urged an even 
higher threshold. For example, some commenters representing employee 
interests favored applying the pre-2004 short test methodology, or 
setting the salary level at the 50th percentile of earnings among full-
time salaried workers nationwide.
    Most commenters supported the continuation of a single nationwide 
salary level, and expressed concern that introducing multiple standard 
salary levels--whether differing by region, industry, employer size, or 
between the executive, administrative, and professional categories--
would complicate the regulations. Some commenters representing 
employers supported region-specific salary levels, and some stated that 
regional salary levels would be appropriate if the alternative is a 
single salary level that is too high in low-wage regions or industries. 
Relatedly, the Department sought views on whether there should be 
multiple annual compensation levels (by region or by size of employer) 
for the HCE exemption. The Department received few comments on this 
subject, but those that addressed it generally favored a single HCE 
annual compensation level given its simplicity, and some stated that 
adding additional levels would increase litigation costs.
    The Department also inquired whether it should periodically update 
the standard salary level and the HCE total annual compensation levels. 
Most commenters representing employers opposed automatic updating. 
Commenters in favor of periodic automatic updates, including most 
commenters representing employees, asserted that updating is needed to 
preserve a ``meaningful'' standard salary level. Commenters that opined 
on the frequency of potential periodic updates generally offered a 
range of 3 to 5 years for the updates, although some suggested more 
frequent updates.
    In addition to questions regarding the salary level, the Department 
asked whether it should, as it did with the 2016 final rule, permit 
nondiscretionary bonuses and incentive payments (including commissions) 
to satisfy up to 10 percent of an employee's salary for purposes of the 
salary level test, and whether this was an appropriate limit. Many 
commenters supported including at least a portion of nondiscretionary 
bonuses and incentive payments in the standard salary threshold 
calculation, but there was some disagreement among commenters about the 
amount of such payments that should be included and the frequency of 
the relevant bonus payments. Many commenters representing employees 
supported a 10-percent cap on inclusion of nondiscretionary bonuses 
(the same cap was part of the 2016 final rule), or alternatively, not 
counting bonuses toward the salary level at all. Conversely, many 
commenters representing employers advocated that a higher percentage of 
nondiscretionary bonuses, or all types of bonuses and incentive 
payments, should be counted, in part because they asserted that such a 
cap disadvantages industries that rely on incentive compensation. But 
not all employers agreed. In particular, some public sector employers 
and smaller non-profits, whose funding restrictions may preclude them 
from awarding nondiscretionary bonuses and incentive payments, 
expressed their view that permitting nondiscretionary bonuses to count 
toward an employee's salary creates a competitive disadvantage for 
them.

[[Page 10905]]

    Finally, the Department inquired whether a test for exemption based 
solely on employee duties is preferable to the current standard test. 
Most commenters opposed instituting a duties-only test for the section 
13(a)(1) exemptions or returning to the long and short duties test 
combination that existed before the 2004 final rule. Some of these 
commenters worried that a duties-only test would result in a more rigid 
test that includes quantitative limits on the performance of nonexempt 
work, which they felt would unduly burden business operations and 
increase litigation costs.
    As follow-up to the RFI, between September 7 and October 17, 2018, 
the Department broadened its outreach and conducted listening sessions 
in diverse locations around the country.\37\ A wide range of 
stakeholders attended the listening sessions, including higher 
education, employees, employers, business associations, non-profit 
organizations, small businesses, employee advocates, unions, state and 
local government representatives, and members of Congress. At the 
listening sessions, the Department requested input on the following 
issues:
---------------------------------------------------------------------------

    \37\ The Department conducted listening sessions in a 
representative city from each of WHD's five regions to get diverse 
input from stakeholders across the country and assess the impact to 
each region.
---------------------------------------------------------------------------

    1. What is the appropriate salary level (or range of salary levels) 
above which the overtime exemptions for bona fide executive, 
administrative, or professional employees may apply? Why?
    2. What benefits and costs to employees and employers might 
accompany an increased salary level? How would an increased salary 
level affect real wages (e.g., increasing overtime pay for employees 
whose current salaries are below a new level but above the current 
threshold)? Could an increased salary level reduce litigation costs by 
reducing the number of employees whose exemption status is unclear? 
Could this additional certainty produce other benefits for employees 
and employers?
    3. What is the best methodology to determine an updated salary 
level? Should the update derive from wage growth, cost-of-living 
increases, actual wages paid to employees, or some other measure?
    4. Should the Department more regularly update the standard salary 
level and the total-annual-compensation level for highly compensated 
employees? If so, how should these updates be made? How frequently 
should updates occur? What benefits, if any, could result from more 
frequent updates? \38\
---------------------------------------------------------------------------

    \38\ 83 FR 49869 (Oct. 3, 2018); 83 FR 43825 (Aug. 28, 2018).
---------------------------------------------------------------------------

    For the most part, feedback provided at the listening sessions was 
consistent with and reinforced the comments received in response to the 
RFI. Stakeholders expressed a wide variety of views on the appropriate 
salary level and salary level methodology, timing for implementing 
changes, review of the duties tests, and potential impacts of the 
Department's rulemaking. Stakeholders overwhelmingly supported 
increasing the salary level. Many commenters expressed concerns about 
the size of the increase in the 2016 final rule, while others supported 
the level set in that rule. While the HCE exemption was not a primary 
focus of any of the listening sessions, a number of business 
stakeholders supported retaining the $100,000 total annual compensation 
requirement set in the 2004 final rule.
    The Department appreciates and has considered the views of all 
those who submitted comments in response to the RFI and participated in 
the listening sessions, and welcomes further input from the public in 
response to this NPRM. The comments to the RFI and the input from the 
listening sessions have informed the development of this NPRM and the 
Department's understanding of the effect of the part 541 regulations in 
the workplace.

IV. Proposed Regulatory Revisions

    The Department proposes to rescind formally the 2016 final rule, 
replacing it with a new rule that updates the standard salary and HCE 
annual compensation levels under part 541 by setting the standard 
salary level using the 2004 methodology applied to current data and 
setting the HCE annual compensation level using the 2016 methodology 
applied to current data, and projecting both levels to January 2020. In 
addition, the Department proposes to apply a special salary level to 
Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the 
Northern Mariana Islands, a separate special salary level to American 
Samoa, and an updated special weekly ``base rate'' to the motion 
picture producing industry. The Department also proposes that 
nondiscretionary bonuses and incentive payments (including commissions) 
paid on an annual or more frequent basis may be used to satisfy up to 
10 percent of the standard salary level. Finally, moving forward, the 
Department intends to propose updates to the salary and compensation 
levels every four years to ensure that these levels continue to provide 
useful tests for exemption. The Department believes that this proposal 
addresses the legal concerns that led to the invalidation of the 2016 
final rule, and appropriately updates the part 541 regulations.
    Given the recent history of litigation in this area, the Department 
here explains for the benefit of commenters the operative effects of 
the proposed rule. If finalized, the proposed rule would replace the 
2016 final rule functionally by revising the part 541 regulatory text 
in the Code of Federal Regulations. But a final rule based on this 
proposal would also formally rescind the 2016 final rule. That 
rescission would operate independently of the new content in the final 
rule, as the Department intends it to be severable from the substantive 
proposal for revising part 541. As explained more fully below, the 
Department believes that rescission of the 2016 final rule is 
appropriate, regardless of the new content proposed for its 
replacement. Thus, even if the substantive provisions of a new final 
rule revising part 541 were invalidated, enjoined, or otherwise not put 
into effect, the Department would intend the 2004 final rule to remain 
operative, not the enjoined 2016 final rule that it now proposes to 
rescind.

A. Standard Salary Level

i. History of the Standard Salary Level
    The first version of part 541, issued in October 1938, set a salary 
level of $30 per week for executive and administrative employees.\39\ 
The Department updated the salary levels in 1940, maintaining the 
salary level for executive employees, increasing the salary level for 
administrative employees, and establishing a salary level for 
professional employees. In setting those rates, the Department 
considered surveys of private industry by federal and state government 
agencies, experience gained under the National Industrial Recovery Act, 
and Federal Government salaries to identify a salary level that 
reflected a reasonable ``dividing line'' between employees performing 
exempt and nonexempt work.\40\ The Department set the salary level for 
each exemption slightly below the average salary dividing exempt from 
nonexempt employees, taking into account salaries paid in numerous 
industries and the percentage of employees earning below these amounts.
---------------------------------------------------------------------------

    \39\ 3 FR 2518 (Oct. 20, 1938).
    \40\ Stein Report at 9, 20-21, 31-32.

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[[Page 10906]]

    In 1949, the Department evaluated salary data from state and 
federal agencies, including the Bureau of Labor Statistics (BLS). The 
Department considered wages in small towns and low-wage industries, 
wages of federal employees, average weekly earnings for exempt 
employees, starting salaries for college graduates, and salary ranges 
for different occupations such as bookkeepers, accountants, chemists, 
and mining engineers.\41\ The Department also looked at data showing 
increases in exempt employee salaries since 1940, and supplemented it 
with nonexempt employee earnings data to approximate the ``prevailing 
minimum salaries of exempt employees.'' \42\ Recognizing that the 
``increase in wage rates and salary levels'' since 1940 had ``gradually 
weakened the effectiveness of the present salary tests as a dividing 
line between exempt and nonexempt employees,'' the Department 
considered the increase in weekly earnings from 1940 to 1949 for 
various industries, and then adopted new salary levels at ``figure 
slightly lower than might be indicated by the data'' to protect small 
businesses.\43\ Also in 1949, the Department established a second, 
less-stringent duties test for each exemption, which applied to 
employees paid at or above a higher ``short test'' salary level. The 
original, more-rigorous duties test became known as the ``long test.'' 
Apart from the differing salary requirements, the most significant 
difference between the short test and the long test was that the long 
test limited the amount of time an exempt employee could spend on 
nonexempt duties.\44\ The short duties tests did not include a specific 
limit on nonexempt work.
---------------------------------------------------------------------------

    \41\ Weiss Report at 10, 14-17, 19-20.
    \42\ Id. at 12.
    \43\ Id. at 8, 14-20. The Department also justified its modest 
increases by noting evidence of slow wage growth for executive 
employees ``in some areas and some industries.'' Id. at 14.
    \44\ The Department instituted a 20 percent cap on nonexempt 
work as part of the long duties test for executive and professional 
employees in 1940, and for administrative employees in 1949. By 
statute, beginning in 1961, retail employees could spend up to 40 
percent of their hours worked performing nonexempt work and still be 
found to meet the duties tests for the EAP exemption. See 29 U.S.C. 
213(a)(1).
---------------------------------------------------------------------------

    In 1958, the Department set the long test salary levels using data 
collected by WHD on salaries paid to employees who met the applicable 
salary and duties tests, grouped by geographic region, broad industry 
groups, number of employees, and city size, and supplemented with BLS 
and Census data to reflect income increases for white collar and 
manufacturing employees during the period not covered by the 
Department's investigations.\45\ The Department then set the long test 
salary levels for exempt employees ``at about the levels at which no 
more than about 10 percent of those in the lowest-wage region, or in 
the smallest size establishment group, or in the smallest-sized city 
group, or in the lowest-wage industry of each of the categories would 
fail to meet the tests.'' \46\ Thus, the Department set the long test 
salary levels so that about 10 percent of workers performing EAP duties 
in the lowest-wage regions and industries would not meet the salary 
level test and would therefore be nonexempt based on their salary level 
alone.
---------------------------------------------------------------------------

    \45\ Kantor Report at 6.
    \46\ Id. at 6-7.
---------------------------------------------------------------------------

    The Department followed a similar methodology when determining the 
salary level increase in 1963. The Department examined data on salaries 
paid to exempt workers collected in a 1961 WHD survey.\47\ The salary 
level for executive and administrative employees was increased to $100 
per week, for example, when the 1961 survey data showed that 13 percent 
of establishments paid one or more exempt executives less than $100 per 
week, and 4 percent of establishments paid one or more exempt 
administrative employees less than $100 per week.\48\ The professional 
salary level was increased to $115 per week when the 1961 survey data 
showed that 12 percent of establishments surveyed paid one or more 
professional employees less than $115 per week.\49\ The Department 
noted that these salary levels approximated the same percentages used 
to update the salary level in 1958.\50\
---------------------------------------------------------------------------

    \47\ 28 FR 7002 (July 9, 1963).
    \48\ Id. at 7004.
    \49\ Id.
    \50\ See id.
---------------------------------------------------------------------------

    The Department applied a similar methodology when adopting salary 
level increases in 1970. After examining data from WHD investigations, 
BLS wage data, and information provided in a report issued by the 
Department in 1969 that included salary data for executive, 
administrative, and professional employees, the Department increased 
the long test salary level for executive employees to $125 per week 
when the salary level data showed that 20 percent of executive 
employees from all regions and 12 percent of executive employees in the 
West earned less than $130 a week.\51\ The Department also increased 
the long test salary levels for administrative and professional 
employees to $125 and $140 per week, respectively.
---------------------------------------------------------------------------

    \51\ 35 FR 884-85.
---------------------------------------------------------------------------

    In 1975, rather than follow the prior approaches, the Department 
updated the 1970 salary levels based on increases in the Consumer Price 
Index, but adjusted downward ``to eliminate any inflationary impact.'' 
\52\ This resulted in a long test salary level for the executive and 
administrative exemptions of $155 per week, and $170 per week for the 
professional exemption. The short test salary level increased to $250 
per week in 1975.\53\ The salary levels adopted were intended as 
interim levels ``pending the completion and analysis of a study by 
[BLS] covering a six-month period in 1975.'' \54\ Although the 
Department intended to increase the salary levels based on that study 
of actual salaries paid to employees, the process was never completed, 
and the ``interim'' salary levels remained in effect for the next 29 
years.
---------------------------------------------------------------------------

    \52\ 40 FR 7091.
    \53\ Each time the short test was increased between 1949 and 
1975, it was set significantly higher than the long test salary 
levels.
    \54\ Id.
---------------------------------------------------------------------------

    In 2004, the Department replaced the separate long and short tests 
with a single ``standard'' salary level test of $455 per week, which 
was paired with a ``standard'' duties test for executive, 
administrative, and professional employees, respectively. The 
Department noted, in accord with numerous comments received during that 
rulemaking, that as a result of the outdated salary level, ``the `long' 
duties tests [had], as a practical matter, become effectively dormant'' 
because relatively few salaried employees earned below the short test 
salary level.\55\ The Department estimated that 1.3 million workers 
earning between $155 and $455 per week would become nonexempt under the 
new standard salary level.\56\
---------------------------------------------------------------------------

    \55\ 69 FR 22126.
    \56\ Id. at 22123.
---------------------------------------------------------------------------

    In setting the new standard salary level in 2004, the Department 
used Current Population Survey (CPS) Merged Outgoing Rotation Group 
(MORG) data collected by BLS that encompassed most salaried employees, 
including nonexempt salaried employees. The Department selected a 
standard salary level roughly equivalent to earnings at the 20th 
percentile of two subpopulations: (1) Salaried employees in the South 
and (2) salaried employees in the retail industry nationwide. Although 
prior salary levels had been based on salaries of approximately the 
lowest 10 percent of exempt salaried employees in low-wage regions and 
industries, the Department explained that the change in methodology was

[[Page 10907]]

warranted in part to account for the elimination of the short and long 
tests, and because the data sample included nonexempt salaried 
employees, as opposed to only exempt salaried employees.\57\ As in the 
past, the Department used lower-salary data sets to accommodate 
businesses for which salaries were generally lower due to geographic- 
or industry-specific reasons.
---------------------------------------------------------------------------

    \57\ Id. at 22167.
---------------------------------------------------------------------------

    The Department published a final rule updating the salary level 
twelve years later, in 2016.\58\ The Department set the standard salary 
level at an amount that would exclude from exemption the bottom 40 
percent of full-time salaried workers (exempt and nonexempt) in the 
lowest-wage Census Region (the South).\59\ The Department estimated 
that increasing the standard salary level from $455 per week to $913 
per week would make 4.2 million workers earning between those levels 
newly nonexempt, absent other changes by their employers.\60\ The 
Department made no changes to the standard duties test. As previously 
discussed, on August 31, 2017, the U.S. District Court for Eastern 
District of Texas declared the 2016 final rule invalid, and the 
Department's appeal of that decision has been held in abeyance. Until 
the Department issues a new final rule, it is enforcing the part 541 
regulations in effect on November 30, 2016, including the $455 per week 
standard salary level.
---------------------------------------------------------------------------

    \58\ 81 FR 32391.
    \59\ Id. at 32408.
    \60\ Id. at 32393.
---------------------------------------------------------------------------

ii. Purpose of the Salary Level Requirement
    The FLSA states that its minimum wage and overtime requirements 
``shall not apply with respect to . . . any employee employed in a bona 
fide executive, administrative, or professional capacity . . . (as such 
terms are defined and delimited from time to time by regulations of the 
Secretary . . .).'' \61\ The Department has long used a salary level 
test as part of its method for defining and delimiting that exemption.
---------------------------------------------------------------------------

    \61\ 29 U.S.C. 213(a)-(a)(1).
---------------------------------------------------------------------------

    In 1949, the Department summarized the role of the salary level 
tests over the preceding decade. The Department explained:
    In this long experience, the salary tests, even though too low in 
the later years to serve their purpose fully, have amply proved their 
effectiveness in preventing the misclassification by employers of 
obviously nonexempt employees, thus tending to reduce litigation. They 
have simplified enforcement by providing a ready method of screening 
out the obviously nonexempt employees, making an analysis of duties in 
such cases unnecessary. The salary requirements also have furnished a 
practical guide to the inspector as well as to employers and employees 
in borderline cases. In an overwhelming majority of cases, it has been 
found by careful inspection that personnel who did not meet the salary 
requirements would also not qualify under other sections of the 
regulations as the Divisions and the courts have interpreted them.\62\
---------------------------------------------------------------------------

    \62\ Weiss Report at 8.
---------------------------------------------------------------------------

    The Department again referenced these principles in the Kantor 
Report, reiterating, for example, that the salary level tests 
``provide[ ] a ready method of screening out the obviously nonexempt 
employees,'' and that employees ``who do not meet the salary test are 
generally also found not to meet the other requirements of the 
regulations.'' \63\ The Department's 2004 final rule likewise 
referenced these principles.\64\ The Department now proposes to update 
the standard salary level in light of increased employee earnings, so 
that it maintains its usefulness in ``screening out the obviously 
nonexempt employees.''
---------------------------------------------------------------------------

    \63\ Kantor Report at 2-3; see also U.S. Dep't of Labor, 28th 
Annual Report of the Secretary of Labor for the Fiscal Year Ended 
June 30, 1940 (1940), at 236 (``the power to define is the power to 
exclude'').
    \64\ See 69 FR 22165; 2003 NPRM, 68 FR 15560, 15570 (Mar. 31, 
2003).
---------------------------------------------------------------------------

    For over 75 years the Department has used a salary level test as a 
criterion for identifying bona fide executive, administrative, and 
professional employees. Some statements in the Department's regulatory 
history have at times, however, suggested a greater role for the salary 
level test. The statements include, for instance, from the 1940 Stein 
Report, that salary is `` `the best single test of the employer's good 
faith in characterizing the employment as of a professional nature.' '' 
\65\ The Stein Report even went so far as to state that ``if an 
employer states that a particular employee is of sufficient importance 
. . . to be classified as an `executive' employee and thereby exempt 
from the protection of the [A]ct, the best single test of the 
employer's good faith in attributing importance to the employee's 
services is the amount he pays for them.'' \66\
---------------------------------------------------------------------------

    \65\ 81 FR 32413 (quoting Stein Report at 42); see also 69 FR 
22165 (quoting Stein Report at 42).
    \66\ Stein Report at 19; see also id. at 5 (``the good faith 
specifically required by the [A]ct is best shown by the salary 
paid''); id. at 19 (salary provides ``a valuable and easily applied 
index to the `bona fide' character of the employment for which 
exemption is claimed''); cf. Weiss Report at 9 (``salary is the best 
single indicator of the degree of importance involved in a 
particular employee's job''); Kantor Report at 2 (``[Salary] is an 
index of the status that sets off the bona fide executive from the 
working squad-leader, and distinguishes the clerk or sub-
professional from one who is performing administrative or 
professional work.''). The Department ``is not bound by the [Stein, 
Weiss, and Kantor] reports,'' though they have been carefully 
considered. 69 FR 22124.
---------------------------------------------------------------------------

    The district court's invalidation of the 2016 final rule has 
prompted the Department to clarify these and similar statements in 
light of the salary level test's purposes and regulatory history. The 
concept of a ``dividing line'' should not be misconstrued to suggest 
that the Department views the salary level test as an effort to divide 
all exempt white collar employees from all nonexempt employees. A 
salary level is helpful to determine who is not an exempt executive, 
administrative or professional employee--the employees who fall beneath 
it. But the salary level has significantly less probative value for the 
employees above it. They may be exempt or nonexempt. Above the 
threshold, the Department evaluates an employee's status as exempt or 
nonexempt based on an assessment of the duties that employee performs. 
An approach that emphasizes salary alone, irrespective of employee 
duties, would stand in significant tension with the Act. Section 
13(a)(1) directs the Department to define and delimit employees based 
on the ``capacity'' in which they are employed. Salary is a helpful 
indicator of the capacity in which an employee is employed, especially 
among lower-paid employees. But it is not ``capacity'' in and of 
itself.
    The district court's summary judgment decision endorsed the 
Department's historical approach to setting the salary level and held 
the 2016 final rule unlawful because it departed from it. The district 
court approvingly cited the Weiss Report and explained that setting 
``the minimum salary level as a floor to `screen[ ] out the obviously 
nonexempt employees' '' is ``consistent with Congress's intent.'' \67\ 
Further endorsing the Department's earlier rulemakings, the district 
court stated that prior to the 2016 final rule, ``the Department ha[d] 
used a permissible minimum salary level as a test for identifying 
categories of employees Congress intended to exempt.'' \68\ The court 
then explained that in contrast to these acceptable past practices, the 
2016 standard salary level of $913 per week was unlawful because

[[Page 10908]]

it would exclude from exemption ``so many employees who perform exempt 
duties.'' \69\ In support, the court cited the Department's estimate 
that, without some intervening action by their employers, the new 
salary level would result in 4.2 million workers becoming 
nonexempt.\70\ The court also emphasized the magnitude of the salary 
level increase, stating that the 2016 final rule ``more than double[d] 
the previous minimum salary level'' and that ``[b]y raising the salary 
level in this manner, the Department effectively eliminate[d] a 
consideration of whether an employee performs `bona fide executive, 
administrative, or professional capacity duties.' '' \71\ The district 
court declared the final rule invalid because the Department had 
unlawfully excluded from exemption ``entire categories of previously 
exempt employees who perform `bona fide executive, administrative, or 
professional capacity' duties.'' \72\
---------------------------------------------------------------------------

    \67\ 275 F. Supp. 3d at 806 (quoting Weiss Report at 7-8); see 
also id. at 807 at n.6 (supporting salary level that operates ``as 
more of a floor'') (internal quotation marks and citation omitted).
    \68\ Id. at 806 (emphasis in opinion).
    \69\ Id. at 807.
    \70\ Id. at 806.
    \71\ Id. at 807 (quoting 29 U.S.C. 213(a)(1)).
    \72\ Id. at 806 (quoting 29 U.S.C. 213(a)(1)).
---------------------------------------------------------------------------

    The Department has reexamined the 2016 final rule in light of the 
district court's decision. That rule contained language suggesting that 
the salary level test had a greater role to play than its modest 
historical function. For example, the Department stated that in light 
of the new, single standard duties test, ``the salary threshold must 
play a greater role in protecting overtime-eligible employees,'' and 
specifically that ``it is necessary to set the salary level higher . . 
. because the salary level must perform more of the screening function 
previously performed by the long duties test.'' \73\ Such language is 
inconsistent with the salary level's historical purpose of setting a 
floor for exemption.
---------------------------------------------------------------------------

    \73\ 81 FR 32412, 32465-66.
---------------------------------------------------------------------------

    The 2016 final rule's approach--under which salary alone would 
determine exempt status in many more instances--also led to a result in 
tension with the Act. As the district court recognized, the 2016 final 
rule removed the EAP exemption from 4.2 million workers who would have 
otherwise been exempt because they passed the salary basis and duties 
tests established under the 2004 final rule. In contrast, had the 
Department simply applied the 2004 methodology to set the standard 
salary level, the 2016 final rule would have resulted in approximately 
683,000 workers who satisfied the duties test becoming nonexempt.\74\ 
The Department has long recognized that the salary level test is ``a 
dividing line [that] cannot be drawn with great precision but can at 
best be only approximate,'' \75\ and so any salary level set by the 
Department will exclude from exemption some employees who pass the 
duties test. But a salary level that exempts an unusually high number 
of those employees--as occurred with the 2016 final rule \76\--stands 
in tension with Congress's command to exempt bona fide EAP employees. A 
salary level set that high does not further the purpose of the Act, and 
is inconsistent with the salary level test's useful, but limited, role 
in defining the EAP exemption.
---------------------------------------------------------------------------

    \74\ See 81 FR 32504 (Table 32).
    \75\ Weiss Report at 11.
    \76\ The Department explained that (at the time of the analysis) 
12.2 million salaried white collar workers earned more than $455 per 
week but were overtime eligible because they failed the duties test, 
while 838,000 salaried white collar workers were overtime eligible 
because even though they passed the standard duties test they earned 
below $455 per week. The Department then estimated that a $913-per-
week salary level would result in 6.5 million salaried white collar 
workers who failed only the duties test, and increase to 5.0 million 
the number of salaried white collar workers who passed the duties 
test but would be overtime eligible because they failed the salary 
level test. See 81 FR 32464-65; see also id. at 32413.
---------------------------------------------------------------------------

    The Department justified the change in the 2016 final rule in part 
by explaining that when the salary level increases, ``it is inevitable 
that `some employees who have been classified as exempt under the 
present salary tests will no longer be within the exemption under any 
new tests adopted.' '' \77\ However, this consequence (which follows 
any salary level increase) does not itself inform what salary level the 
Department should set. The Department also stated in 2016 that the new 
salary level would narrow the gap between the number of workers who are 
nonexempt because they fail only the salary level test and those who 
are nonexempt because they fail only the duties test.\78\ But the 
Department has never compared the number of employees who are nonexempt 
based exclusively on the salary or duties tests, respectively, to 
determine the effectiveness of the salary level. To the contrary, 
parity between these groups would create tension with the salary 
level's historical purpose of ``screening out the obviously nonexempt 
employees.''
---------------------------------------------------------------------------

    \77\ Id. at 32413 (quoting Kantor Report at 5).
    \78\ See supra n.76 (citing 81 FR 32464-65; 81 FR 32413).
---------------------------------------------------------------------------

    The Department also justified the 2016 final rule's salary level by 
stating that it was correcting a ``mismatch'' between the 2004 final 
rule's salary level and the standard duties test. The Department stated 
that while it historically had paired a more rigorous duties test (the 
long test) with a lower salary level and a less rigorous duties test 
(the short test) with a higher salary level, the 2004 final rule paired 
a less rigorous duties test with a lower salary level:
    Because the long duties test included a limit on the amount of 
nonexempt work that could be performed, it could be paired with a low 
salary that excluded few employees performing EAP duties. In the 
absence of such a limitation in the duties test, it is necessary to set 
the salary level higher (resulting in the exclusion of more employees 
performing EAP duties) because the salary level must perform more of 
the screening function previously performed by the long duties test. 
Accordingly the salary level set in this Final Rule corrects for the 
mismatch in the 2004 Final Rule between a low salary threshold and a 
less rigorous duties test.\79\
---------------------------------------------------------------------------

    \79\ 81 FR 32409.
---------------------------------------------------------------------------

    The Department's solution to the purported mismatch, however, 
introduced a new issue. The 2016 final rule's salary level, which was 
``at the low end of the historical salary range of short test salary 
levels,'' \80\ failed to account for the absence of a long test that 
employers could use to claim the exemption for lower-paid white collar 
workers who were traditionally exempt. The Department's analysis did 
not sufficiently account for this change, and as a result, the $913 per 
week standard salary level deviated from the Department's longstanding 
policy of setting a salary level that does not ``disqualify[ ] any 
substantial number of'' bona fide executive, administrative, and 
professional employees from exemption.\81\
---------------------------------------------------------------------------

    \80\ Id. at 32414.
    \81\ Kantor Report at 5.
---------------------------------------------------------------------------

    More fundamentally, except at the relatively low levels of 
compensation where EAP employees are unlikely to be found, the salary 
level is not a substitute for an analysis of an employee's duties. It 
is, at most, an indicator of those duties. For most white collar, 
salaried employees, the exemption should turn on an analysis of their 
actual functions, not their salaries, as Congress commanded. The salary 
level test's primary and modest purpose is to identify potentially 
exempt employees by screening out obviously nonexempt employees.
    The mismatch rationale also failed to account fully for the 
Department's part 541 exemption history. The standard duties test was 
introduced by the 2004 final rule and has been in effect for 15 years. 
The short duties test, which it is similar to, was functionally the

[[Page 10909]]

predominant test in use for the preceding 13 years, since the 1975 long 
test salary levels were equaled or surpassed by the FLSA minimum wage 
in 1991.\82\ Altogether, most employers and employees have effectively 
been covered by this one-test system for over 25 years. This practice 
is highly relevant to any update by the Department's approach.
---------------------------------------------------------------------------

    \82\ In 1975, the Department set a long test salary level of 
$155 per week for executive and administrative employees, and of 
$170 per week for professional employees. See 40 FR 7092. On April 
1, 1991, the federal minimum wage increased to $4.25 per hour, which 
equals $170 for a 40-hour workweek. See Sec. 2, Public Law 101-157, 
103 Stat. 938 (Nov. 17, 1989).
---------------------------------------------------------------------------

    In light of the considerations above, the Department concludes 
that, while an increase in the standard salary level from $455 per week 
was warranted, the increase to $913 per week was inappropriate. As the 
district court stated, that increase departed from the salary level's 
purpose as a floor to `` `screen[ ] out the obviously nonexempt 
employees.' '' \83\ The Department is engaging in this rulemaking to 
realign the salary level with its appropriate limited purpose, to 
address the concerns about the 2016 final rule identified by the 
district court, and to update the salary level in light of increased 
employee earnings.
---------------------------------------------------------------------------

    \83\ Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d at 806 
(quoting Weiss Report at 7-8).
---------------------------------------------------------------------------

iii. Salary Level Methodology
    The Department, nearly all RFI commenters, and almost all those who 
spoke during the Department's listening sessions agree that the salary 
level must exceed $455 per week to achieve its intended purpose. Most 
commenters to the RFI and in the listening sessions favored the 
simplicity of a single nationwide salary level over varying region-
specific levels, and urged the Department not to return to its past 
practice of setting different salary levels for executive, 
administrative, and professional employees. However, some commenters 
representing employers supported establishing multiple salary levels 
based on region, industry, or employer size. Nearly all commenters 
opposed reinstating separate long and short tests with corresponding 
salary levels and duties tests.
    After considering the issues at length, reviewing public comments 
responding to the RFI, and considering comments provided in the 
listening sessions, the Department is proposing simply to update the 
standard salary level set in 2004 using current data. The Department 
believes that adherence to the 2004 final rule's methodology is 
reasonable and appropriate. The Department has enforced the 2004 final 
rule's salary level for nearly 15 years--the second-longest period 
(after the salary levels set in 1975) for any part 541 salary level. 
The Department paired that level with the standard duties test when it 
was enacted, and revisions to the standard duties test are not proposed 
as part of this rulemaking. After so many years, workers and employers 
are familiar with a single standard weekly salary level and a single 
standard duties test. Notably, the 2004 final rule has never been 
challenged in court. Using the 2004 salary level methodology as the 
basis for determining an updated salary level thus promotes familiarity 
and stability for the workplace, ensures workers the important wage 
protections contained in the Act, and minimizes the uncertainty and 
potential legal vulnerabilities that could accompany a novel and 
untested approach.
    There are other reasons for this simple approach. The method 
proposed here is straightforward and avoids new regulatory burdens. It 
is consistent with the Department's established belief that adopting 
different salary levels for different areas of the country would create 
significant administrative difficulties ``because of the large number 
of different salary levels this would require,'' \84\ and would create 
undue regulatory complexity. Furthermore, as discussed below, the 
Department believes that the proposed salary level accounts for 
nationwide differences in employee earnings and would work 
appropriately with the standard duties test.The proposed standard 
salary level also addresses the concerns raised in the district court's 
summary judgment decision. The $913 per week standard salary level set 
in the 2016 final rule more than doubled the 2004 final rule's salary 
level of $455 per week, which the district court concluded resulted in 
``entire categories of previously exempt employees'' being disqualified 
from exemption ``based on salary alone.'' \85\ The Department proposes 
to address this problem by setting a salary level that would more 
appropriately identify obviously nonexempt employees, without including 
too great a proportion of employees who would otherwise be exempt. This 
is consistent with the Department's understanding that salary may be 
used to identify a category of employees who are not bona fide 
executive, administrative, and professional employees without unduly 
excluding employees from the exemption. The proposed $679 per week 
standard salary level would preserve the 2004 methodology--which was 
based on salaries in the South and in the low-wage retail industry--
while updating that salary level to reflect the growth of nominal wages 
and salaries.
---------------------------------------------------------------------------

    \84\ 69 FR 22171.
    \85\ 275 F. Supp. 3d at 806. Moreover, the Department estimated 
in the 2016 final rule that the salary level would rise to $984 per 
week in January 2020. 81 FR 32393.
---------------------------------------------------------------------------

    The appropriateness of the proposed salary level is further 
supported by the number of workers it would affect--i.e., the number of 
employees who currently pass the standard duties test and earn between 
$455 and $679 per week, and thus would become nonexempt absent some 
intervening action by their employers. The district court's decision 
raised concerns regarding the large number of exempt workers--4.2 
million--who earned between $455 and $913 per week and thus would 
``automatically become eligible'' for overtime under the $913 per week 
standard salary level.\86\ The district court noted that this 
relatively high number indicated that the salary level was displacing 
the role of the duties test in determining exemption status. The 
Department acknowledges these concerns and, additionally, in this 
proposal seeks to update the standard salary level in a manner that 
does not unduly disrupt employers' operations; dramatically shift 
employee salaries, hours, or morale; or result in adverse economic 
effects.
---------------------------------------------------------------------------

    \86\ 275 F. Supp. 3d at 806-07.
---------------------------------------------------------------------------

    As for the details of the methodology, the Department has followed 
the methodology it used in 2004. In 2004, the Department set the 
standard salary level at approximately the 20th percentile of earnings 
for full-time salaried workers in the lowest-wage Census region (the 
South) and in the retail sector. The Department set the salary level 
using the 2002 CPS MORG dataset (the most recent CPS dataset 
practically available), after excluding from the dataset certain 
classes of workers that are exempt from the FLSA or its salary-level 
test.\87\
---------------------------------------------------------------------------

    \87\ See 69 FR 22168.
---------------------------------------------------------------------------

    In this proposed rulemaking, the Department used pooled CPS MORG 
data for 2015-2017, adjusted to reflect 2017 (hereafter referred to as 
pooled CPS MORG data; see Section VI.B.ii for full description). This 
is the most recently available data. If this approach is adopted in the 
final rule, the Department anticipates using 2018 CPS data. The 
Department believes the CPS dataset would be the most appropriate 
dataset to use to ascertain worker earnings because of its size 
(approximately 60,000 households

[[Page 10910]]

monthly; 15,000 in the MORG dataset) and its breadth of detail (e.g., 
occupation classifications, salary, hours worked, and industry). 
Consistent with its proposal to update the salary levels for workers 
subject to them, the Department analyzed a subset of this CPS MORG 
data, composed of employed workers age 16 years and older who are 
covered by the FLSA; subject to the part 541 salary tests; not in 
``named occupations'' \88\; and not exempt from the FLSA due to the 
agricultural or transportation exemptions. Thus, the subset excluded 
27.9 million workers.
---------------------------------------------------------------------------

    \88\ This includes teachers, physicians, lawyers, judges, and 
outside sales workers who pass the standard duties test.
---------------------------------------------------------------------------

    Using this subset of the CPS MORG data, the Department proposes to 
set the standard salary level at approximately the 20th percentile of 
earnings for full-time salaried workers in the lowest-wage Census 
region, again the South in this case, and/or in the retail sector.\89\ 
Normally, this would result in a weekly salary level of $641 per week 
($33,332 annually), which is also approximately the 20th percentile of 
both: (1) Earnings for full-time salaried workers in the South, and (2) 
earnings for full-time salaried workers in the retail sector. However, 
the Department proposes to inflate this figure to reflect anticipated 
wage growth through January 2020. This results in the standard salary 
level proposed in this NPRM, which is $679 per week ($35,308 annually).
---------------------------------------------------------------------------

    \89\ In the 2004 final rule the Department selected a standard 
salary level roughly equivalent to earnings at the 20th percentile 
of two subpopulations: (1) Full-time salaried employees in the South 
and (2) full-time salaried employees in the retail industry 
nationwide. In this rulemaking, the Department is setting the 
standard salary level at the 20th percentile of the combined 
subpopulations of full-time salaried employees in the South and 
full-time salaried employees in the retail industry nationwide. This 
is a change from how the Department modeled the 2004 methodology in 
the 2016 final rule, when it used combined subpopulations of full-
time salaried employees in the South and full-time salaried 
employees in leisure and hospitality, other services, and public 
administration. 81 FR 32462.
---------------------------------------------------------------------------

    The Department proposes this small adjustment to better reflect 
employees' anticipated compensation at the time the rule becomes 
effective. In the 2004 final rule, the Department set the salary level 
using earning percentiles as they were two years earlier (2002) than 
the rule's effective date (2004), since the 2002 data was the most 
recent practically available data. In contrast, this proposed rule 
would set its salary level with a projection to January 2020, the 
approximate date this proposed rule is expected to become effective. 
The projection would ensure that the standard salary level reflects the 
20th percentile of salaried workers in the South and/or in retail when 
the rule becomes effective, rather than the 20th percentile as of a 
year or two earlier. The Department acknowledges that the projected 
number may differ slightly from the results of comprehensive salary 
data when that data becomes available, but the Department believes that 
a modest projection is preferable to relying on data that could be a 
year or two old by the time the final rule becomes effective.
    The Department has inflated the salary level by estimating the 
compound annual growth rate from the standard salary level set in 2004 
($455) to the standard salary level as it would be using the same 
methodology in 2017 ($641), then used that growth rate to project the 
standard salary level forward to January 2020. The Department 
considered alternative indices for inflation. The reasons for not using 
them are described below.
v. Alternatives Considered
    In determining a proposed salary level, the Department considered 
the methodologies applied in past rulemakings and other alternatives 
such as using an index to inflate the 2004 salary level to 2017 and to 
project it forward to 2020.
    The Department considered using price indices such as the Personal 
Consumption Expenditures Price Index (PCEPI), the Consumer Price Index 
for All Urban Consumers (CPI-U), and the Chained CPI-U; as well as a 
wage-based measure such as the Employment Cost Index (ECI). The PCEPI 
measures the change in the nominal prices of goods and services (1) 
purchased directly by U.S. households and by nonprofit institutions 
serving U.S. households and (2) purchased by firms and governments on 
behalf of U.S. households (e.g., medical expenditures paid by Medicare, 
Medicaid, or private insurance plans). The Consumer Price Index for All 
Urban Consumers (CPI-U) measures the change in nominal prices for a 
constant-quality market basket of goods and services purchased by urban 
consumers, who represent 93 percent of the U.S. population.\90\ The 
Bureau of Labor Statistics also developed the Chained CPI-U in 2002 as 
an alternative to the CPI-U that would provide a better approximation 
of cost-of-living for all urban consumers by accounting for a 
substitution effect.\91\
---------------------------------------------------------------------------

    \90\ See the Bureau of Labor Statistics Handbook of Methods, 
updated February 14, 2018, p. 2, at https://www.bls.gov/opub/hom/pdf/homch17.pdf (``A unifying framework for dealing with practical 
questions that arise in the construction of the CPI is provided by 
the concept of the cost-of-living index (COLI).'').
    \91\ See Cage et al., Introducing the Chained Consumer Price 
Index. https://www.bls.gov/cpi/additional-resources/chained-cpi-introduction.pdf.
---------------------------------------------------------------------------

    The Department considered the Employment Cost Index (ECI) for wages 
and salaries of either all civilian workers or just for private sector 
workers.\92\ The ECI is calculated on a quarterly basis by the BLS 
using the results of the National Compensation Survey (NCS), a survey 
of non-Federal employers that gathers comprehensive data on employee 
salaries, wages, and benefits.\93\ The ECI measures changes over time 
in wages and salaries across the overall non-Federal civilian workforce 
generally and among different subgroups.
---------------------------------------------------------------------------

    \92\ See generally Bureau of Labor Statistics, Employment Cost 
Trends, How to Use the Employment Cost Index for Escalation, https://www.bls.gov/ncs/ect/escalator.htm.
    \93\ See Bureau of Labor Statistics, National Compensation 
Survey, https://www.bls.gov/ncs/.
---------------------------------------------------------------------------

    The Department has decided against proposing these alternatives for 
three reasons. The paramount reason is that none is as straightforward, 
consistent, or accurate as using current salary data. Each is a 
projection of what current costs are likely to be; however, such costs 
can be more readily ascertained simply by measuring them. Second, each 
is a cost index, (albeit to measure wages) rather than a measure of 
actual salaries. Third, each of the alternatives (and this would hold 
for any other alternative as well) would be a significant departure 
from the methodology that served well in 2004--the methodology the 
Department is proposing to employ again here with minor adjustments and 
improvements. For the reasons stated earlier--including familiarity, 
stability, and the standard duties test that accompanied the standard 
salary level set in 2004--the Department believes an approach that 
simply updates the 2004 level with current data is preferable to an 
entirely new methodology.
    The Department also considered these same indices for inflating a 
2017 salary level (set using the 2004 final rule's methodology and 
current data) to January 2020. So used, PCEPI would result in a salary 
level of $671 per week, the C-CPI-U would result in $671 per week, the 
CPI-U would result in $675 per week, the ECI for civilian workers would 
result in $678 per week, and the ECI for private sector workers would 
result in $679 per week.
    The Department did not choose to propose any of these alternatives 
for two reasons. First, the approach being proposed is the most 
straightforward

[[Page 10911]]

and consistent using current salary data. It measures the actual wage 
growth between the 2004 final rule salary level and the 2017 salary 
level and applies that growth rate to current data; essentially 
assuming that wage growth will continue at the same pace. Second, there 
are disadvantages to some of the other indices described above. The 
PCEPI, CPI-U, and Chained CPI-U, for example, measure the nominal 
prices of goods and services to consumers, whereas the standard salary 
level is meant to demarcate worker salaries. It seems more sensible to 
use data that measures worker compensation than consumers' cost of 
living to set such a level. Additionally, the Department notes that use 
of the ECI for all private sector workers comes to the same result as 
the methodology chosen.
    The salary level increase proposed here would, as discussed in 
detail in the economic analysis, section VI, result in approximately 
1.1 million affected workers losing exempt status (absent other action 
from their employers). The Department recognizes that any increase to 
the standard salary level would increase the number of workers who pass 
the duties test but are paid below the standard salary level; however, 
the $679-per-week salary level, while necessarily imprecise, would 
identify a large number of obviously nonexempt employees ``without 
disqualifying any substantial number of'' bona fide executive, 
administrative, and professional employees from exemption.\94\ 
Additionally, the 1.1 million workers likely to be affected by this 
rule's proposed increase to the standard salary level is close to the 
1.3 million workers who were affected by the 2004 final rule's salary 
level increase.\95\ The Department also anticipates that 3.6 million 
employees paid between $455 and $679 per week who fail the standard 
duties test (i.e., that are and will remain nonexempt)--2.0 million 
salaried white collar workers and 1.6 million salaried blue collar 
workers--will have their nonexempt status made clearer because their 
salary will fall below the proposed threshold.
---------------------------------------------------------------------------

    \94\ Kantor Report at 5.
    \95\ 69 FR 22213. The 2004 rule estimated that 1,297,855 workers 
would, without some intervening action by their employers, lose 
exempt status as a result of the $455 standard salary level set at 
that time. See 69 FR 22213, 22253.
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vi. Summary of Standard Salary Level Proposal
    For the reasons discussed above, the Department proposes to set the 
standard salary level to qualify for exemption from the FLSA's minimum 
wage and overtime requirements as an executive, administrative, or 
professional employee at $679 per week. The Department believes that 
the proposed standard salary level would help employers identify a 
large group of employees who perform nonexempt duties, would aid in 
identifying bona fide EAP employees, and would address the legal 
concerns that led to the invalidation of the salary level set in the 
2016 final rule. The Department invites comments on this proposed 
salary level and on any alternative salary level or methodology, 
including but not limited to whether the use of the indices described 
above, would be more appropriate.

B. Special Salary Tests

i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the 
Northern Mariana Islands \96\
---------------------------------------------------------------------------

    \96\ Under the proposal, the special salary tests would not 
apply to employees of the Federal government employed in Puerto 
Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the 
Northern Mariana Islands, and American Samoa.
---------------------------------------------------------------------------

    Since 2004, the Department has applied the standard salary level to 
Puerto Rico.\97\ After the Department published the 2016 final rule, 
Congress passed the Puerto Rico Oversight, Management, and Economic 
Stability Act (PROMESA).\98\ Section 404 of PROMESA states that ``any 
final regulations issued related to'' the Department's 2015 overtime 
rule NPRM--i.e., the 2016 final rule--``shall have no force or effect'' 
in Puerto Rico until the Comptroller General of the Unites States 
completes and transmits a report to Congress assessing the impact of 
applying the final regulations to Puerto Rico, and the Secretary of 
Labor, ``taking into account the assessment and report of the 
Comptroller General, provides a written determination to Congress that 
applying such rule to Puerto Rico would not have a negative impact on 
the economy of Puerto Rico.'' \99\
---------------------------------------------------------------------------

    \97\ See 69 FR 22172.
    \98\ See Public Law 114-187, 130 Stat. 549 (June 30, 2016).
    \99\ See 48 U.S.C. 2193(a)-(b). The Comptroller General's report 
was published on June 29, 2018 and is available at: https://www.gao.gov/products/GAO-18-483.
---------------------------------------------------------------------------

    The Department believes that PROMESA does not apply to this NPRM 
because it is a new rulemaking and thus is not ``related to'' the 2015 
overtime rule NPRM within the meaning of PROMESA. Nonetheless, section 
404 reflects Congress' concern with increasing the salary level in 
Puerto Rico, and Puerto Rico's current economic climate reinforces the 
importance of the Department exercising caution on this issue. 
Accordingly, the Department proposes to set a special salary level in 
Puerto Rico of $455 per week--the level that currently applies under 
PROMESA. The Department seeks comments on this proposal.
    The Department currently applies the standard salary level to the 
Virgin Islands, Guam, and the Commonwealth of the Northern Mariana 
Islands (CNMI).\100\ The Department understands that U.S. territories 
face their own economic challenges and that an increase in the salary 
level affects them differently than the States. In recognition of these 
challenges and to promote special salary level consistency across U.S. 
territories, the Department is proposing to also set a special salary 
level of $455 per week for the Virgin Islands, Guam, and the CNMI. The 
Department seeks comment on whether this special salary level is 
appropriate, or whether instead the Department should continue applying 
the standard salary level to these U.S. territories.
---------------------------------------------------------------------------

    \100\ In Guam and the CNMI, the Department has applied the 
salary level test(s) applicable to the States. In the Virgin 
Islands, the Department applied a special salary level test prior to 
2004, but applied the standard salary level beginning in 2004.
---------------------------------------------------------------------------

ii. American Samoa
    The Department has historically applied a special salary level test 
to employees in American Samoa because minimum wage rates there have 
remained lower than the federal minimum wage.\101\ The Fair Minimum 
Wage Act of 2007, as amended, provides that industry-specific minimum 
wages rates in American Samoa will increase every three years until 
each equals the federal minimum wage.\102\ The disparity with the 
federal minimum wage is expected to remain for the foreseeable future. 
Accordingly, the Department proposes to maintain a special salary level 
for employees in American Samoa.
---------------------------------------------------------------------------

    \101\ See 69 FR 22172.
    \102\ See Sec. 1, Public Law 114-61, 129 Stat. 545 (Oct. 7, 
2015).
---------------------------------------------------------------------------

    The special salary level test for employees in American Samoa has 
historically equaled approximately 84 percent of the standard salary 
level.\103\ The Department proposes to maintain this percentage and 
considered whether to set the special salary level in American Samoa 
equal to 84 percent of the proposed standard salary level ($679 per 
week)--resulting in a special salary level of $570 per week--or to set 
it equal to approximately 84 percent of the proposed special salary 
level applicable to the other U.S. territories ($455 per week)--
resulting in a special salary

[[Page 10912]]

level of $380 per week. The Department is proposing to set a special 
salary level of $380 per week in American Samoa. This approach not only 
maintains the special salary level that the Department is currently 
enforcing in American Samoa, but also ensures that American Samoa, 
which has a lower minimum wage than the other U.S. territories, does 
not have a higher special salary level. The Department seeks comments 
on this proposal.
---------------------------------------------------------------------------

    \103\ See, e.g., 69 FR 22172.
---------------------------------------------------------------------------

iii. Motion Picture Producing Industry
    The Department has permitted employers to classify as exempt 
employees in the motion picture producing industry who are paid a 
specified base rate per week (or a proportionate amount based on the 
number of days worked), so long as they meet the duties tests for the 
EAP exemption.\104\ This exception from the ``salary basis'' 
requirement was created in 1953 to address the ``peculiar employment 
conditions existing in the [motion picture producing] industry,'' and 
applies, for example, when a motion picture producing industry employee 
works less than a full workweek and is paid a daily base rate that 
would yield the weekly base rate if 6 days were worked.\105\ Consistent 
with its practice since the 2004 final rule, the Department proposes to 
increase the required base rate proportionally to the proposed increase 
in the standard salary level test, resulting in a proposed base rate of 
$1,036 per week (or a proportionate amount based on the number of days 
worked).\106\ The Department seeks comments on this proposal.
---------------------------------------------------------------------------

    \104\ See Sec.  541.709.
    \105\ 18 FR 2881 (May 19, 1953).
    \106\ The Department calculated this figure by dividing the 
proposed weekly salary level ($679) by $455, and then multiplying 
this result (rounded to the nearest hundredth) by the base rate set 
in the 2004 final rule ($695 per week). This produces a new base 
rate of $1,036 (per week), when rounded to the nearest whole dollar.
---------------------------------------------------------------------------

C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and 
Commissions in the Salary Level Requirement

    Since 1940, the part 541 regulations have required that exempt EAP 
employees be paid on a salary basis. Historically, the Department 
assessed compliance with the salary level test by looking only at the 
salary or fee payments made to employees and, with the exception of the 
total annual compensation requirement of the highly compensated 
employee (HCE) test introduced in 2004, did not include bonus payments 
of any kind in this calculation. The Department's longstanding position 
has been to allow employers to pay additional compensation in the form 
of bonuses, but those payments did not count toward the payment of the 
required minimum salary.
    During public listening sessions held by the Department prior to 
issuing the 2015 proposal, stakeholders encouraged the Department to 
consider including nondiscretionary bonuses in determining whether the 
salary level is met.\107\ The stakeholders noted that such bonuses can 
be a significant part of exempt employees' compensation, and therefore 
supported the inclusion of bonuses in determining whether the salary 
level is met.\108\ In the 2016 final rule, the Department for the first 
time allowed employers to use nondiscretionary bonuses and incentive 
payments that were paid quarterly or more frequently to satisfy up to 
10 percent of the standard salary level.\109\ Although the 2016 final 
rule was invalidated,\110\ the Department believes that there are 
benefits to this approach because such bonuses and incentives are an 
important part of many employers' compensation systems.
---------------------------------------------------------------------------

    \107\ 80 FR 38516, 38521 (July 6, 2015).
    \108\ Id.
    \109\ 81 FR 32423-27.
    \110\ See 275 F. Supp. 3d at 808. The nondiscretionary bonuses 
provision was not discussed in the decision.
---------------------------------------------------------------------------

    In the 2017 RFI and the listening sessions, many commenters 
reiterated the view that nondiscretionary bonuses and incentive 
payments should count toward the salary threshold to some degree, 
although commenters disagreed about the percentage allowance, and some 
opposed counting such payments toward the salary level at all. Some RFI 
commenters also expressed concern about the 2016 final rule's 
requirement that such bonuses be paid at least quarterly to count 
toward the salary level. These commenters explained that annual bonuses 
can be substantial, and employers would be penalized if those bonuses 
were only creditable in the quarter in which they were paid. Having 
considered these comments, and consistent with its goal of modernizing 
the part 541 regulations, the Department proposes to permit 
nondiscretionary bonuses and incentive payments (including commissions) 
to satisfy up to 10 percent of the standard salary level test for the 
executive, administrative, and professional exemptions, provided that 
such bonuses or payments are paid annually or more frequently.\111\ 
Such payments may include, for example, nondiscretionary incentive 
bonuses tied to productivity and profitability.\112\
---------------------------------------------------------------------------

    \111\ The employer may use any 52-week period, such as a 
calendar year, a fiscal year, or an anniversary of the hire year. 
The Department recognizes that some businesses pay significantly 
larger bonuses. Where larger bonuses are paid, the amount 
attributable toward the EAP standard salary level requirement would 
be capped at 10 percent of the salary level.
    \112\ The Department notes that nonexempt employees may also 
receive such bonuses. Where nondiscretionary bonuses or incentive 
payments are made to nonexempt employees, the payments must be 
included in the regular rate when calculating overtime pay. The 
Department's regulations at Sec. Sec.  778.208--.210 explain how to 
include nondiscretionary bonuses in the regular rate calculation. 
One way to calculate and pay such bonuses is as a percentage of the 
employee's total earnings. Under this method, the payment of the 
bonus includes the simultaneous payment of overtime due on the bonus 
payment. See Sec.  778.210.
---------------------------------------------------------------------------

    The Department believes this approach is appropriate because such 
payments have become associated with EAP duties, such as the exercise 
of independent judgment and management skills. However, the Department 
received information during the 2016 rulemaking from State and local 
governments and nonprofits stating that they do not traditionally use 
such pay methods and might be at a competitive disadvantage if the 
overtime rule allowed a significant portion of the salary level to be 
met through such bonus payments. The Department accordingly determined 
that limiting the amount of the salary requirement that may be 
satisfied through such payments to 10 percent would help maintain 
parity between industries that use such pay methods and those that 
traditionally have not done so, such as nonprofit organizations, and 
ensure that exempt employees are paid regularly, as required by 
regulation. The Department did receive comments in the 2016 rulemaking 
that bonuses are an important part of compensation for some exempt 
employees. But the standard salary level test is meant to identify a 
class of nonexempt employees. The Department believes that employees 
with wages below the proposed standard salary level, who would be 
nonexempt by definition, also do not typically receive a substantial 
portion of their wages through bonuses. While the Department proposes 
to allow employers up to one year to apply nondiscretionary bonus or 
incentive payments to satisfy 10 percent of the standard salary level, 
the remaining 90 percent must be paid on a salary or fee basis in 
accordance with the regulations.
    Finally, the Department proposes to permit employers to make a 
final ``catch-up'' payment within one pay period after the end of each 
52-week period to bring an employee's

[[Page 10913]]

compensation up to the required level. Under the proposal, each pay 
period an employer must pay the exempt executive, administrative, or 
professional employee 90 percent of the standard salary level ($611.10 
per week), and if at the end of the 52-week period the salary paid plus 
the nondiscretionary bonuses and incentive payments (including 
commissions) paid does not equal the standard salary level for 52 weeks 
($35,308), the employer would have one pay period to make up for the 
shortfall (up to 10 percent of the standard salary level, $3,530.80). 
Any such catch-up payment would count only toward the prior year's 
salary amount and not toward the salary amount in the year in which it 
was paid.\113\
---------------------------------------------------------------------------

    \113\ Because employers may use nondiscretionary bonuses to 
satisfy the vast majority of the total annual compensation paid to 
HCEs, such bonuses will not be permitted to satisfy the standard 
salary level portion of their compensation.
---------------------------------------------------------------------------

    The Department seeks comments on its proposal to permit 
nondiscretionary bonuses and incentive payments (including commissions) 
to satisfy part of the standard salary level. The Department further 
requests comment on whether the proposed 10 percent cap is appropriate, 
or if a higher or lower cap is preferable.\114\
---------------------------------------------------------------------------

    \114\ The Department is not considering changing the exclusion 
of board, lodging, or other facilities from the salary calculation, 
a position that it has held consistently since the salary 
requirement was first adopted. See Sec.  541.600. Similarly, the 
Department also declines to consider including in the salary 
requirement payments for medical, disability, or life insurance, or 
contributions to retirement plans or other fringe benefits. See 
Sec.  541.601(b)(1).
---------------------------------------------------------------------------

D. Highly Compensated Employees

    The 2004 final rule created a new test under the EAP exemption, 
known as the highly compensated employee (HCE) test. The HCE test is 
based on the rationale that it is unnecessary to apply the standard 
duties test to employees who earn at least a certain amount annually--
an amount substantially higher than the annual equivalent of the weekly 
standard salary level--because such employees ``have almost invariably 
been found to meet all the other requirements of the regulations for 
exemption.'' \115\ Thus, the HCE test combines a high compensation 
requirement with a less-stringent, more-flexible duties test.
---------------------------------------------------------------------------

    \115\ 69 FR 22174 (quoting Weiss Report at 22); see Sec.  
541.601(c) (``A high level of compensation is a strong indicator of 
an employee's exempt status, thus eliminating the need for a 
detailed analysis of the employee's job duties.'').
---------------------------------------------------------------------------

    To be exempt under the HCE test, an employee must earn at least the 
amount specified in the regulations in total annual compensation and 
must customarily and regularly perform any one or more of the exempt 
duties or responsibilities of an executive, administrative, or 
professional employee.\116\ The HCE test applies ``only to employees 
whose primary duty includes performing office or non-manual work.'' 
\117\ Additionally, such an employee must receive at least the standard 
salary level per week on a salary or fee basis, while the remainder of 
the employee's total annual compensation may include commissions, 
nondiscretionary bonuses, and other nondiscretionary compensation.\118\ 
Total annual compensation does not include board, lodging, and other 
facilities, and does not include payments for medical insurance, life 
insurance, retirement plans, or other fringe benefits.\119\ An employer 
is permitted to make a final ``catch-up'' payment ``during the last pay 
period or within one month after the end of the 52-week period'' to 
bring an employee's compensation up to the required level.\120\ If an 
employee works for less than a full year, the employee may still 
qualify for exemption under the HCE test if the employee receives a pro 
rata portion of the required annual compensation, based upon the number 
of weeks of employment.\121\
---------------------------------------------------------------------------

    \116\ Sec.  541.601(a).
    \117\ Sec.  541.601(d).
    \118\ Sec.  541.601(b)(1).
    \119\ Id.
    \120\ Sec.  541.601(b)(2).
    \121\ Sec.  541.601(b)(3). Similar to employees who work for a 
full year, one final ``catch-up'' payment may be made ``within one 
month after the end of employment.'' Id.
---------------------------------------------------------------------------

    The 2004 final rule set the HCE total annual compensation amount at 
$100,000. In the 2016 final rule, the Department reaffirmed the 
appropriateness of the HCE test, and increased the total annual 
compensation requirement to reflect increases in salaries.\122\ The 
Department explained that like the standard salary level, the 2004 HCE 
total annual compensation value had ``eroded over time'' and that the 
share of full-time salaried workers with salaries exceeding $100,000 in 
fiscal year 2017 was predicted to be about three times the share who 
earned that amount in 2004.\123\ In response, the Department increased 
the total annual compensation requirement for the HCE test to the 
annualized weekly earnings of the 90th percentile of full-time salaried 
workers nationally, which was $134,004 based on the fourth quarter of 
2015.\124\ As a result of the district court's decision invalidating 
the 2016 final rule, the Department is currently enforcing the 2004 
final rule, including its $100,000 total annual compensation level and 
the requirement that $455 per week must be paid on a salary or fee 
basis.\125\
---------------------------------------------------------------------------

    \122\ 81 FR 32428-29.
    \123\ Id. at 32429. Whereas approximately 6.3 percent of full-
time salaried workers had salaries exceeding $100,000 in 2004, see 
69 FR 22169, this number was predicted to be approximately 20 
percent by fiscal year 2017, see 81 FR 32429. By January 2021, this 
number is expected to be approximately 26 percent.
    \124\ 81 FR 32429.
    \125\ The district court's decision did not specifically discuss 
the HCE test; however, the decision invalidated the entire 2016 
final rule.
---------------------------------------------------------------------------

    The Department continues to believe that the HCE test is a useful 
alternative to the standard salary level and duties tests for highly 
compensated employees. The Department also believes that the HCE 
compensation level set in 2004, $100,000 per year, was an appropriate 
level at the time, given that only roughly 10 percent of likely exempt 
employees who were subject to the salary tests earned at least that 
amount annually.\126\ However, as with the standard salary level, the 
HCE total annual compensation level must be updated to ensure that it 
remains a meaningful and appropriate standard when paired with the 
more-flexible HCE duties test. In 2004, the Department concluded that 
the HCE compensation level was appropriate because ``white collar'' 
employees who earn such high salaries would nearly always satisfy any 
duties test, and ``in the rare instances when these employees do not 
meet all other requirements of the regulations, a determination that 
such employees are exempt would not defeat the objectives of section 
13(a)(1) of the Act.'' \127\ Accordingly, it is important to ensure 
that the HCE total annual compensation level keeps pace with growth in 
nominal wages and salaries so that it applies only to those employees 
for whom it was originally intended, namely, those ``at the very top of 
[the] economic ladder.'' \128\ Additionally, setting an appropriately 
high total annual compensation level for highly compensated employees 
ensures that employers continue to apply the standard duties test to 
employees whose exemption status is less clear.
---------------------------------------------------------------------------

    \126\ 69 FR 22174.
    \127\ Id. (quoting Weiss Report at 22-23).
    \128\ Id.
---------------------------------------------------------------------------

    The Department proposes to update the HCE test by setting it at the 
90th percentile of all full-time salaried workers nationally using 2017 
CPS data, then inflated to January 2020. This is similar to the method 
used in the 2016 final rule, which likewise set the HCE threshold at 
the 90th percentile of all full-time salaried workers. The inflation

[[Page 10914]]

to January 2020 is proposed for the same reason as inflating the 
standard salary level: To more accurately reflect the salaries of 
employees at the time the rule becomes effective, rather than at the 
time data was collected. This results in a proposed HCE total annual 
compensation level of $147,414, of which $679 must be paid weekly on a 
salary or fee basis.\129\ Notably, this proposed HCE threshold is 
slightly lower in relative terms than when the HCE threshold was 
initially adopted in 2004, when it covered 93.7 percent of all full-
time salaried workers.\130\ But the Department continues to believe 
that this simpler approach--i.e., pegging the HCE threshold to the 90th 
percentile of all full-time salaried earnings nationwide--would result 
in a threshold high enough to ``ensure that virtually every salaried 
white collar employee [above it] would satisfy any duties test.'' \131\
---------------------------------------------------------------------------

    \129\ Although the Department is proposing that employers may 
use nondiscretionary bonuses to satisfy up to 10 percent of the 
weekly standard salary level when applying the standard salary and 
duties tests, the Department's proposal does not permit employers to 
use nondiscretionary bonuses to satisfy the weekly standard salary 
level requirement for HCE workers. Employers may use commissions, 
nondiscretionary bonuses, and other nondiscretionary compensation to 
satisfy the remaining portion of the HCE total annual compensation 
amount. Because employers may use nondiscretionary bonuses to 
satisfy the vast majority of the total annual compensation paid to 
HCE employees, it is not necessary to permit the use of such bonuses 
to satisfy the standard salary level portion of their compensation.
    \130\ The $100,000 annual compensation level set in 2004 
corresponded to approximately 89.8 percent of likely exempt 
employees and 93.7 percent of full-time salaried workers. See 69 FR 
22169-70 (Tables 3 and 4).
    \131\ 81 FR 32429.
---------------------------------------------------------------------------

    Additionally, as with the standard salary level, to ensure that the 
Department regularly reviews the appropriateness of the HCE total 
annual compensation amount, the Department intends to propose an update 
to the level every four years, as discussed further in section IV.E 
below. The Department estimates that 201,100 workers--those who earn 
between $100,000 and the proposed HCE total annual compensation level 
and pass the HCE duties test, but not the standard duties test--would, 
without some intervening action by their employers, be affected by the 
increase in the HCE compensation level.

E. Future Updates to the Earnings Thresholds

    Congress has instructed the Department to define and delimit the 
overtime and minimum wage exemptions ``from time to time.'' \132\ The 
rationale for updating the standard salary and HCE total compensation 
levels is straightforward: As employees' earnings rise over time, they 
begin surpassing the earnings thresholds set in the past; the earnings 
thresholds thus become a less useful measure of employees' relative 
earnings, and a less useful method for identifying exempt employees. As 
the Department noted in 2004, outdated regulations ``allow unscrupulous 
employers to avoid their overtime obligations and can serve as a trap 
for the unwary but well-intentioned employer''; they can also lead 
increasing numbers of nonexempt employees to ``resort to lengthy court 
battles to receive their overtime pay.'' \133\ Moreover, lengthy delays 
between updates to the earnings thresholds may necessitate disruptively 
large increases when the thresholds are updated.
---------------------------------------------------------------------------

    \132\ 29 U.S.C. 213(a)(1); see also FLSA Amendments of 1961, 
Public Law 87-30; 75 Stat. 65 (May 5, 1961).
    \133\ 69 FR 22122.
---------------------------------------------------------------------------

    While the need to update the part 541 earnings thresholds on a 
regular basis is clear, the method and frequency of doing so has been 
contested. The Department has historically used notice-and-comment 
rulemaking to update the salary level tests, but various stakeholders 
throughout the years have submitted comments asking the Department to 
establish a mechanism to update the thresholds automatically. In the 
1970 final rule, the Department remarked that one commenter's 
suggestion to implement automatic annual updates to the salary tests 
based on BLS earnings data ``appear[ed] to have some merit'' given the 
delays between some of the Department's earlier updates, but ultimately 
concluded that ``such a proposal [would] require further study.'' \134\ 
In the 2004 final rule, the Department declined commenter requests to 
create an automatic updating mechanism. Instead, the Department 
expressed its intent ``in the future to update the salary levels on a 
more regular basis.'' \135\
---------------------------------------------------------------------------

    \134\ 35 FR 884.
    \135\ 69 FR 22171-72.
---------------------------------------------------------------------------

    When the Department next revisited the part 541 regulations in 
2016, however, it adopted a mechanism to automatically update the 
earnings thresholds every three years, applying the same methodology 
used to initially set each threshold in that rulemaking.\136\ The 
stated purpose of the 2016 final rule's updating mechanism was to 
``ensure that the salary test level is based on the best available data 
(and thus remains a meaningful, bright-line test), produce more 
predictable and incremental changes in the salary required for the EAP 
exemption, and therefore provide certainty to employers, and promote 
government efficiency.'' \137\ The district court's summary judgment 
decision invalidating the 2016 final rule stated that because the 
standard salary level established by the 2016 final rule was unlawful, 
the mechanism to automatically update that standard salary level was 
``similarly . . . unlawful.'' \138\
---------------------------------------------------------------------------

    \136\ Specifically, the mechanism provided for using the 40th 
percentile of non-hourly earnings in the lowest-wage Census Region 
to automatically update the standard salary level, the 90th 
percentile of non-hourly earnings nationwide to automatically update 
the HCE total annual compensation threshold, and making 
proportionate increases to the special salary levels provided 
elsewhere in part 541.
    \137\ 81 FR 32430.
    \138\ 275 F. Supp. 3d at 808.
---------------------------------------------------------------------------

    In light of the district court's decision and the concerns about 
lengthy delays between updates to the part 541 earnings thresholds, the 
Department asked for feedback in the 2017 RFI on how the salary and 
compensation levels should be updated going forward.\139\ Responses to 
this question were mixed. Proponents of an automatic updating mechanism 
cited lengthy delays between earlier salary level updates, disruptively 
large increases necessitated by such delays, and the desire for added 
certainty. Other stakeholders, however, argued that the Department 
lacked the authority to update the salary level automatically, that an 
automatic updating mechanism might not be sufficiently flexible to 
account for unique economic circumstances, and that affected members of 
the public would not have any influence over the magnitude or timing of 
future salary level updates. Commenters generally agreed that the 
earning thresholds should be updated more frequently than to date, but 
some commenters were concerned that frequent updating would be unduly 
disruptive.
---------------------------------------------------------------------------

    \139\ 82 FR 34619.
---------------------------------------------------------------------------

    After considering the feedback provided in response to the RFI and 
at the listening sessions, the Department is committing to evaluate 
more frequently the part 541 earnings thresholds going forward. 
Specifically, the Department believes that the standard salary level 
and the HCE total annual compensation threshold should be proposed to 
be updated on a quadrennial basis (i.e., once every four years) through 
an NPRM published in the Federal Register, followed by notice-and-
comment rulemaking. The Department intends to propose such updates 
using the same

[[Page 10915]]

methodology as the most recent final rule, meaning, in the first 
instance, the methodology employed by the final rule for which this 
NPRM is providing notice and opportunity to comment. In these future 
rulemakings, the Department also intends to seek comment on whether to 
update the special salary levels that apply to the U.S. territories. 
Proposed quadrennial updates would ensure public input on how earning 
thresholds could continue to be up-to-date, while giving businesses 
sufficient time to adjust to these more frequent (and thus smaller) 
increases. The Secretary, however, may forestall proposing updates if 
economic or other factors so indicate. Accordingly, the Department 
proposes to delete the current (though not enforced) Sec.  541.607, 
while affirming its intention to propose increasing the earnings 
thresholds every four years.\140\ The Department seeks comment from the 
public regarding this proposal.
---------------------------------------------------------------------------

    \140\ Were the Department to codify this commitment in the final 
rule, the codified provision could have the following two features. 
First, it could provide that the Department publish a Notice of 
Proposed Rulemaking in the Federal Register in January 2023, and 
every four years thereafter, proposing an update to the standard 
salary level and highly compensated employee threshold in accord 
with the same methodology in the Department's most recent final rule 
establishing that salary level and threshold (the Notice would 
propose to retain the most recent levels set for the special salary 
levels applicable to U.S. territories, while inviting comment on 
whether to change them). And second, it could provide that the 
Secretary may, in his or her sole discretion, decline to publish the 
Notice of Proposed Rulemaking due to economic or other factors, with 
an accompanying notice published in the Federal Register giving the 
reason or reasons for declining.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
and its attendant regulations, 5 CFR part 1320, require the Department 
to consider the agency's need for its information collections, their 
practical utility, as well as the impact of paperwork and other 
information collection burdens imposed on the public, and how to 
minimize those burdens. The PRA typically requires an agency to provide 
notice and seek public comments on any proposed collection of 
information contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B); 
5 CFR 1320.8. Persons are not required to respond to the information 
collection requirements until the Office of Management and Budget (OMB) 
approves them under the PRA. This NPRM would revise the existing 
information collection requirement previously approved under OMB 
control number 1235-0018 (Records to be Kept by Employers--Fair Labor 
Standards Act) and OMB control number 1235-0021 (Employment Information 
Form) in that employers would need to maintain records of hours worked 
for more employees and more employees may file complaints to recover 
back wages under the overtime pay provision. As required by the PRA, 
the Department has submitted the information collection revisions to 
OMB for review to reflect changes that would result from this proposed 
rule were it to be adopted.
    Summary: FLSA section 11(c) requires all employers covered by the 
FLSA to make, keep, and preserve records of employees and of wages, 
hours, and other conditions of employment. An FLSA-covered employer 
must maintain the records for such period of time and make such reports 
as prescribed by regulations issued by the Secretary of Labor. The 
Department has promulgated regulations at 29 CFR part 516 to establish 
the basic FLSA recordkeeping requirements. This NPRM, if adopted, would 
not impose any new information collection requirements; rather, using 
the currently enforced 2004 salary level as the baseline, burdens under 
existing requirements are expected to increase as more employees 
receive minimum wage and overtime protections. More specifically, the 
proposed changes in this NPRM may cause an increase in burden on 
employers because they will have additional employees to whom certain 
long-established recordkeeping requirements apply (e.g., maintaining 
daily records of hours worked by employees who are not exempt from the 
both minimum wage and overtime provisions). Additionally, the proposed 
changes in this NPRM may cause an increase in burden if more employees 
file a complaint with WHD to collect back wages under the overtime pay 
requirements. The Department anticipates that this increased burden 
will wane over time as employers adjust to the new rule.
    Purpose and Use: WHD and employees use employer records to 
determine whether covered employers have complied with various FLSA 
requirements. Employers use the records to document compliance with the 
FLSA, including showing qualification for various FLSA exemptions. 
Additionally, WHD uses the Employment Information form to document 
allegations of non-compliance with labor standards the agency 
administers.
    Technology: The regulations prescribe no particular order or form 
of records, and employers may preserve records in forms of their 
choosing provided that facilities are available for inspection and 
transcription of the records.
    Minimizing Small Entity Burden: Although the FLSA recordkeeping 
requirements do involve small businesses, including small state and 
local government agencies, the Department minimizes respondent burden 
by requiring no specific order or form of records in responding to this 
information collection. Burden is reduced on complainants by providing 
a template to guide answers.
    Public Comments: As part of its continuing effort to reduce 
paperwork and respondent burden, the Department conducts a preclearance 
consultation program to provide the general public and Federal agencies 
with an opportunity to comment on proposed and continuing collections 
of information in accordance with the PRA. This program helps to ensure 
that requested data can be provided in the desired format, reporting 
burden (time and financial resources) is minimized, collection 
instruments are clearly understood, and the impact of collection 
requirements on respondents can be properly assessed. The Department 
seeks public comments regarding the burdens imposed by the information 
collections associated with this NPRM. Commenters may send their views 
about this information collection to the Department in the same manner 
as all other comments (e.g., through the regulations.gov website). All 
comments received will be made a matter of public record and posted 
without change to http://www.regulations.gov, including any personal 
information provided.
    As previously noted, an agency may not conduct an information 
collection unless it has a currently valid OMB approval, and the 
Department has submitted information collection requests under OMB 
control numbers 1235-0018 and 1235-0021 in order to update them to 
reflect this rulemaking and provide interested parties a specific 
opportunity to comment under the PRA. See 44 U.S.C. 3507(d); 5 CFR 
1320.11. Interested parties may receive a copy of the full supporting 
statements by sending a written request to the mailing address shown in 
the ADDRESSES section at the beginning of this preamble. In addition to 
having an opportunity to file comments with the Department, comments 
about the paperwork implications may be addressed to OMB. Comments to 
OMB should be directed to: Office of Information and Regulatory 
Affairs, Attention OMB Desk Officer for the Wage and Hour Division, 
Office of Management and Budget, Room 10235, 725 17th Street NW, 
Washington, DC 20503; Telephone: 202-395-5806 (this is not a toll-free 
number). OMB will consider all written comments that the

[[Page 10916]]

agency receives within 30 days of publication of this proposed rule. 
Commenters are encouraged, but not required, to send the Department a 
courtesy copy of any comments sent to OMB. The courtesy copy may be 
sent via the same channels as comments on the rule.
    OMB and the Department are particularly interested in comments 
that:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
agency, including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Total annual burden estimates, which reflect both the existing and 
new responses for the recordkeeping and complaint process information 
collections, are summarized as follows:
    Type of Review: Revisions to currently approved information 
collections.
    Agency: Wage and Hour Division, Department of Labor.
    Title: Records to be Kept by Employers--Fair Labor Standards Act.
    OMB Control Number: 1235-0018.
    Affected Public: Private sector businesses or other for-profits, 
farms, not-for-profit institutions, state, local and tribal 
governments, and individuals or households.
    Estimated Number of Respondents: 5,588,627 (unaffected by this 
rulemaking).
    Estimated Number of Responses: 48,101,522 (2,583,333 added by this 
rulemaking).
    Estimated Burden Hours: 3,631,819 hours (2,583,333 added by this 
rulemaking).
    Estimated Time per Response: Various (unaffected by this 
rulemaking).
    Frequency: Various (unaffected by this rulemaking).
    Other Burden Cost: 0.
    Title: Employment Information Form.
    OMB Control Number: 1235-0021.
    Affected Public: Businesses or other for-profit, farms, not-for-
profit institutions, state, local and tribal governments, and 
individuals or households.
    Total Respondents: 35,819 (242 added by this rulemaking).
    Estimated Number of Responses: 35,819 (242 added by this 
rulemaking).
    Estimated Burden Hours: 11,940 (81 hours added by this rulemaking).
    Estimated Time per Response: 20 minutes (unaffected by this 
rulemaking).
    Frequency: Once.
    Other Burden Cost: 0.

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

    Executive Orders 12866 and 13563 direct agencies to assess the 
costs and benefits of a regulation and to adopt a regulation only upon 
a reasoned determination that the regulation's net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity) justify its costs. Executive Order 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility.
    Under Executive Order 12866, the Office of Management and Budget 
(OMB) must determine whether a regulatory action is a ``significant 
regulatory action,'' which includes an action that has an annual effect 
of $100 million or more on the economy. Significant regulatory actions 
are subject to review by OMB. As described below, this proposed rule is 
economically significant. Therefore, the Department has prepared a 
Preliminary Regulatory Impact Analysis (RIA) \141\ in connection with 
this NPRM as required under section 6(a)(3) of Executive Order 12866, 
and OMB has reviewed the rule.
---------------------------------------------------------------------------

    \141\ The terms ``regulatory impact analysis'' and ``economic 
impact analysis'' are used interchangeably throughout this Proposed 
Rule.
---------------------------------------------------------------------------

    When the Department uses a perpetual time horizon to allow for cost 
comparisons under Executive Order 13771,\142\ the annualized cost 
savings of the proposed rule is $224.0 million with 7 percent 
discounting. This proposed rule is accordingly expected to be an 
Executive Order 13771 deregulatory action.
---------------------------------------------------------------------------

    \142\ 82 FR 9339 (Feb. 3, 2017).
---------------------------------------------------------------------------

A. Introduction

i. Background
    The FLSA requires covered employers to: (1) Pay employees who are 
covered and not exempt from the Act's requirements not less than the 
federal minimum wage for all hours worked and overtime premium pay at a 
rate of not less than one and one-half times the employee's regular 
rate of pay for all hours worked over 40 in a workweek, and (2) make, 
keep, and preserve records of their employees and of the wages, hours, 
and other conditions and practices of employment. It is widely 
recognized that the general requirement that employers pay a premium 
rate of pay for all hours worked over 40 in a workweek is a cornerstone 
of the Act, grounded in two policy objectives. The first policy 
objective is to reduce overwork and its detrimental effect on the 
health and well-being of workers. The second is to spread employment 
(or, in other words, reduce involuntary unemployment) by incentivizing 
employers to hire more employees rather than requiring existing 
employees to work longer hours.
    The FLSA provides a number of exemptions from the Act's minimum 
wage and overtime pay provisions, including one for bona fide 
executive, administrative, and professional (EAP) employees. Such 
employees perform work that cannot easily be spread to other workers 
after 40 hours in a week and that is difficult to standardize to any 
timeframe. They also typically receive more monetary and non-monetary 
benefits than most blue collar and lower-level office workers. The 
exemption applies to employees employed in a bona fide executive, 
administrative, or professional capacity and to outside sales 
employees, as those terms are ``defined and delimited'' by the 
Department.\143\ The Department's regulations implementing these 
``white collar'' exemptions are codified at 29 CFR part 541.
---------------------------------------------------------------------------

    \143\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

    In 2004, the Department determined that two earnings level tests 
should be used to help employers distinguish nonexempt employees from 
exempt employees: The standard salary test, which it set at $455 a 
week, and the highly compensated employee (HCE) total-compensation 
test, which it set at $100,000 per year (see II.C. for further 
discussion). In 2016, the Department published a final rule setting the 
standard salary level at $913 per week and the HCE annual compensation 
level at $134,004. As previously discussed, the U.S. District Court for 
Eastern District of Texas declared the 2016 final rule invalid.
    The standard salary level should be an appropriate dividing-line 
between employees who are nonexempt and employees who may be performing 
exempt duties. The threshold essentially

[[Page 10917]]

screens out obviously nonexempt employees whom Congress intended the 
FLSA's minimum wage and overtime provisions to protect. Therefore, 
employers are not burdened with conducting a duties analysis to 
determine nonexempt status for the employees who fall below the 
threshold, as those employees are unlikely to pass the duties test for 
exemption.
ii. Need for Rulemaking
    The Department has updated the salary level test seven times since 
its implementation in 1938. Table 1 presents the weekly salary levels 
associated with the EAP exemptions since 1938, organized by exemption 
and long/short/standard duties tests.\144\ The Department has revised 
the levels once in the 44 years since 1975.\145\ In contrast, in the 37 
years between 1938 and 1975, the Department increased salary test 
levels approximately every five to nine years.
---------------------------------------------------------------------------

    \144\ From 1949 until 2004 the regulations contained two 
different tests for exemption--a long test for employees paid a 
lower salary that included a more rigorous examination of employees' 
duties, and a short test for employees paid at a higher salary level 
that included a more flexible duties test.
    \145\ The Department revised the EAP salary levels in 2004. In 
2016, the Department also issued a final rule revising the EAP 
salary levels; however, on August 31, 2017, the U.S. District Court 
for Eastern District of Texas held that the 2016 final rule's 
standard salary level exceeded the Department's authority and was 
therefore invalid. See Nevada v. U.S. Dep't of Labor, 275 F. Supp. 
3d 795 (E.D. Tex. 2017). Until the Department issues a new final 
rule, it is enforcing the part 541 regulations in effect on November 
30, 2016, including the $455 per week standard salary level set in 
the 2004 final rule.

                            Table 1--Historical Salary Levels for the EAP Exemptions
----------------------------------------------------------------------------------------------------------------
                                                           Long test
          Date enacted           ------------------------------------------------------------  Short test (all)
                                       Executive        Administrative       Professional
----------------------------------------------------------------------------------------------------------------
1938............................                 $30                 $30  ..................  ..................
1940............................                  30                  50                 $50  ..................
1949............................                  55                  75                  75                $100
1958............................                  80                  95                  95                 125
1963............................                 100                 100                 115                 150
1970............................                 125                 125                 140                 200
1975............................                 155                 155                 170                 250
----------------------------------------------------------------------------------------------------------------
                                                  Standard Test
----------------------------------------------------------------------------------------------------------------
2004............................                                       $455
----------------------------------------------------------------------------------------------------------------

    Since the update in 2004, the purchasing power, or real value, of 
the standard-salary level test has eroded substantially, and as a 
result, increasingly more workers earn above the salary threshold. 
Between 2004 and 2017, the real value of the standard-salary level 
declined 22.9 percent, calculated using the Consumer Price Index for 
all urban consumers (CPI-U).\146\
---------------------------------------------------------------------------

    \146\ CPI-U data available at: https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

    As a result of the erosion of the real value of the standard-salary 
level, more and more workers earn above the standard salary level. Each 
year that the salary level is not updated, its utility as a 
distinguishing mechanism between nonexempt and potentially exempt 
workers declines. For example, the annualized equivalent of the 
standard salary level set in 2004 ($23,660, or $455 per week for 52 
weeks) is now below the 2017 poverty threshold for a family of four 
($24,858).\147\ Similarly, in 2017, approximately 23 percent of full-
time salaried workers earned at least $100,000 annually, more than 
three times the share who earned that amount (6.3 percent) when the HCE 
test was created in 2004.\148\
---------------------------------------------------------------------------

    \147\ This is the 2017 poverty threshold for a family of four 
with two related people under 18 in the household. Available at: 
https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-thresholds.html.
    \148\ Calculated using pooled CPS MORG data.
---------------------------------------------------------------------------

    In the 2004 rulemaking, the Department stated the intention to 
``update the salary levels on a more regular basis, as it did prior to 
1975,'' and added that the ``salary levels should be adjusted when wage 
survey data and other policy concerns support such a change.'' \149\ In 
the 2016 final rule, the Department recognized that the salary level 
had become outdated and that an update was needed. As previously 
discussed, the U.S. District Court for Eastern District of Texas 
declared the 2016 final rule invalid because the standard salary level 
excluded from exemption too many employees who perform exempt duties.
---------------------------------------------------------------------------

    \149\ 69 FR 22171.
---------------------------------------------------------------------------

    Now, to restore the value of the standard salary level as a line of 
demarcation between those workers for whom Congress clearly intended to 
provide minimum wage and overtime protections and other workers who may 
be bona fide EAPs, and to maintain the salary level's continued 
validity, the Department proposes to update standard salary level using 
the 2004 methodology with current CPS data. Using pooled 2017 CPS MORG 
data, a salary level of $641 ($33,332 annually) corresponds to the 20th 
percentile of earnings for full-time salaried workers in the South 
Census region and/or in the retail industry.\150\ To account for 
expected changes between 2017 and January 2020, and to make it so that 
the salary level will accurately reflect compensation at the 
approximate effective date, the salary level was inflated using the 
compound annual growth rate that increased the standard salary level 
from $455 to $641 over 15 years (2.31 percent = (($641/
$455)1/15-1).\151\ Applying this growth rate for an 
additional 2.5 years (assuming 2017 data represents mid-2017 on 
average) results in a January 2020 salary level of $679 ($641 x 
1.0231\2.5\). Similarly, to update the HCE total compensation 
requirement, the Department used CPS MORG data to ascertain the 90th 
percentile of all full-time salaried workers in 2017 ($139,464), 
calculated the compound annual growth rate from 2002 to 2017 (2.24 
percent), then applied that rate over 2.5 years to inflate the 2017 
level to $147,414 for January 2020.
---------------------------------------------------------------------------

    \150\ Excluding workers who are not subject to FLSA, not subject 
to the salary level test, or in agriculture or transportation.
    \151\ The standard salary level of $455 per week became 
effective in 2004. However, this level was determined using 2002 CPS 
MORG data. We therefore calculated the compound annual growth rate 
over 15 years, from 2002 to 2017.
---------------------------------------------------------------------------

    Additionally, as just discussed, in this proposed rule the 
Department commits

[[Page 10918]]

to evaluate more frequently the part 541 earnings thresholds going 
forward. Specifically, the Department intends to update the earnings 
thresholds once every four years (see section IV.E for further 
discussion). Such proposed quadrennial updates would preserve the 
effectiveness of the salary level as a dividing line between nonexempt 
workers and workers who may be exempt, eliminate the volatility 
associated with previous changes in the thresholds, and increase 
certainty for employers with respect to future changes.
iii. Summary of Affected Workers, Costs, Benefits, and Transfers
    The Department estimated the number of affected workers and 
quantified costs and transfer payments associated with this proposed 
rule, using the currently enforced 2004 salary level as the baseline. 
To produce these estimates, the Department used data from the pooled 
CPS MORG data. See section VI.B. Most critically, the Department 
estimates that 1.1 million workers who would otherwise be exempt under 
the currently enforced standard salary level of $455 per week would 
become eligible for overtime, and that 3.6 million employees paid 
between $455 and $679 per week who fail the standard duties test (i.e., 
that are and will remain nonexempt) would have their overtime 
eligibility made clearer because their salary would fall below the 
proposed threshold.
    The Department estimated that in Year 1, there would be 46.2 
million white collar salaried employees whom a change to the 
Department's part 541 regulations may affect.\152\ Of these workers, 
the Department estimated that 31.9 million would be exempt from the 
minimum wage and overtime pay provisions under the part 541 EAP 
regulations promulgated in 2004 (i.e., in the baseline scenario without 
the rule taking effect). The other 14.3 million workers would not 
satisfy the duties tests for EAP exemption and/or earn less than $455 
per week.\153\ However, of the 31.9 million workers, 7.6 million were 
in ``named occupations'' and thus only needed to pass the duties tests 
to be subject to the standard EAP exemptions.\154\ Therefore, these 
workers were not considered in the analysis, leaving 24.3 million EAP 
exempt workers potentially affected by this proposed rule.
---------------------------------------------------------------------------

    \152\ This excludes workers who are exempt under another FLSA 
exemption and thus would remain exempt from minimum wage and 
overtime pay protections without qualifying for the EAP exemption.
    \153\ Here and elsewhere in this analysis, numbers are reported 
at varying levels of aggregation, and are generally rounded to a 
single decimal point. However, calculations are performed using 
exact numbers. Therefore, some numbers may not match the reported 
total or the calculation shown due to rounding of components.
    \154\ Workers not subject to the EAP salary level test include 
teachers, physicians, lawyers, judges, and outside sales workers. 
Additionally, academic administrative personnel are not subject to 
the EAP salary level test if they are paid on a salary basis 
equivalent to an entry level teacher in their institution.
---------------------------------------------------------------------------

    In Year 1, an estimated 1.1 million workers would be affected by 
the proposed increase in the standard salary level test (Table 2). This 
figure consists of currently exempt workers subject to the salary level 
test who earn at least $455 per week but less than $641 per week (the 
Department analyzed the economic effects of a standard salary level of 
$641 per week using pooled 2017 CPS MORG data as the best 
representation of the likely economic effects of the proposed standard 
salary level of $679 per week taking effect in 2020).\155\ 
Additionally, an estimated 201,100 workers would be affected by the 
increase in the HCE compensation test from $100,000 per year to 
$139,464 per year (the Department analyzed the economic effects of an 
HCE compensation level of $139,464 per year using pooled 2017 CPS MORG 
data as the best representation of the likely economic effects of the 
proposed HCE compensation level of $147,414 per year taking effect in 
2020). By Year 10,\156\ the Department estimates that 625,000 workers 
would be affected by the change in the standard salary level test and 
426,000 workers would be affected by the change in the HCE total annual 
compensation test, compared to a baseline assuming the currently 
enforced earnings thresholds (i.e., $455 per week and $100,000 per 
year) remain unchanged.\157\
---------------------------------------------------------------------------

    \155\ The Department performed a preliminary check of an 
analogous three-year gap that indicates that 2014 data would yield a 
prediction of more potentially affected workers than the 2017 data. 
This result may be driven by the late 2016 and 2017 data showing the 
effects of employers adjusting workers' salaries, implicit wages, 
and hourly/salaried status in anticipation of the 2016 rule taking 
effect.
    \156\ Although the Department anticipates proposing to update 
the standard salary and HCE compensation level requirements 
periodically, the proposed updates are not required under this 
rulemaking and therefore are not included in this RIA. Future 
updates will be proposed and promulgated through notice and comment 
rulemaking and will be accompanied by their own RIA.
    \157\ In later years, earnings growth will cause some workers to 
no longer be affected because their earnings will exceed the new 
salary threshold. Additionally, some workers will become newly 
affected because their earnings will exceed $455 per week, and in 
the absence of this Proposed Rule would have lost their overtime 
protections. To estimate the total number of affected workers over 
time, the Department accounts for both of these effects.
---------------------------------------------------------------------------

    This analysis quantifies three direct costs to employers: (1) 
Regulatory familiarization costs; (2) adjustment costs; and (3) 
managerial costs (see section VI.D.iii for further discussion on 
costs). The costs presented here are the combined costs for both the 
change in the standard salary level test and the HCE total compensation 
level (these will be disaggregated in section VI.D.iii). Total 
annualized direct employer costs over the first 10 years were estimated 
to be $120.5 million, assuming a 7 percent discount rate \158\ (Table 
2).
---------------------------------------------------------------------------

    \158\ Hereafter, unless otherwise specified, annualized values 
will be presented using the 7 percent real discount rate.
---------------------------------------------------------------------------

    In addition to the costs described above, this proposed rule will 
also transfer income from employers to employees in the form of wages. 
The Department estimated annualized transfers would be $429.4 million. 
The majority of these transfers would be attributable to the FLSA's 
overtime provision; a smaller share would be attributable to the FLSA's 
minimum wage requirement. Transfers also include salary increases for 
some affected EAP workers to preserve their exempt status. Employers 
may incur additional costs, such as hiring new workers. These other 
potential costs are discussed in section VI.D.iii. The proposed 
rulemaking could provide some benefits; however, these benefits could 
not be quantified due to data limitations, requiring the Department to 
discuss such benefits qualitatively. See VI.D.v.

[[Page 10919]]



               Table 2--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
                                               [Millions in 2017$]
----------------------------------------------------------------------------------------------------------------
                                                     Future years \a\                  Annualized value
                                             -------------------------------------------------------------------
           Impact                 Year 1                                      3% Real discount  7% Real discount
                                                  Year 2          Year 10           rate              rate
----------------------------------------------------------------------------------------------------------------
                                            Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard....................           1,070           1,027             625  ................  ................
HCE.........................             201             215             426  ................  ................
                             -----------------------------------------------------------------------------------
    Total...................           1,271           1,241           1,051  ................  ................
----------------------------------------------------------------------------------------------------------------
                                    Costs and Transfers (Millions in 2017$)
----------------------------------------------------------------------------------------------------------------
Direct employer costs.......          $464.2           $74.2           $67.8            $112.6            $120.5
Transfers \c\...............           526.9           421.3           447.1             428.0             429.4
----------------------------------------------------------------------------------------------------------------
\a\ These cost and transfer figures represent a range over the nine-year span.
\b\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\c\ This is the net transfer from employers to workers. There may also be transfers of hours and income from
  some workers to others.

iv. Terminology and Abbreviations
    The following terminology and abbreviations will be used throughout 
this RIA.
    Affected EAP workers: The population of potentially affected EAP 
workers who either pass the standard duties test and earn at least $455 
but less than the new salary level (for this analysis modeled as $641 
in Year 1), or pass only the HCE duties test and earn at least $100,000 
but less than the new HCE compensation level (for this analysis modeled 
as $139,464 in Year 1). This was estimated to be 1.3 million workers.
    Baseline EAP exempt workers: The projected number of workers who 
would be EAP exempt if the rulemaking did not take effect.
    BLS: Bureau of Labor Statistics.
    CPI-U: Consumer Price Index for all urban consumers.
    CPS: Current Population Survey.
    Duties test: To be exempt from the FLSA's minimum wage and overtime 
requirements under section 13(a)(1), the employee's primary job duty 
must involve bona fide executive, administrative, or professional 
duties as defined by the regulations. The Department distinguishes 
among four such tests:
    Standard duties test: The duties test used in conjunction with the 
standard salary level test, as set in 2004 and applied to date, to 
determine eligibility for the EAP exemptions. It replaced the short and 
long tests in effect from 1949 to 2004, but its criteria closely follow 
those of the former short test.
    HCE duties test: The duties test used in conjunction with the HCE 
total annual compensation requirement, as set in 2004 and applied to 
date, to determine eligibility for the HCE exemption. It is much less 
stringent than the standard and short duties tests to reflect that very 
highly paid employees are much more likely to be properly classified as 
exempt.
    Long duties test: One of two duties tests used from 1949 until 
2004; this more restrictive duties test had a greater number of 
requirements, including a limit on the amount of nonexempt work that 
could be performed, and was used in conjunction with a lower salary 
level to determine eligibility for the EAP exemptions (see Table 1).
    Short duties test: One of two duties tests used from 1949 to 2004; 
this less restrictive duties test had fewer requirements, did not limit 
the amount of nonexempt work that could be performed, and was used in 
conjunction with a higher salary level to determine eligibility for the 
EAP exemptions (see Table 1).
    EAP: Executive, administrative, and professional.
    HCE: Highly compensated employee; a category of EAP exempt 
employee, established in 2004 and characterized by high earnings and a 
minimal duties test.
    Hourly wage: For the purpose of this PRIA, the amount an employee 
is paid for an hour of work.
    Base hourly wage: The hourly wage excluding any overtime payments. 
Also used to express the wage rate without accounting for benefits.
    Implicit hourly wage: Hourly wage calculated by dividing reported 
weekly earnings by reported hours worked.
    Straight time wage: Another term for the hourly wage excluding any 
overtime payments.
    MORG: Merged Outgoing Rotation Group supplement to the CPS. 
Conducted on approximately one-fourth of the CPS sample monthly to 
obtain information on weekly hours worked and earnings.
    Named occupations: Workers in named occupations are not subject to 
the salary level or salary basis tests. These occupations include 
teachers, academic administrative personnel,\159\ physicians,\160\ 
lawyers, judges,\161\ and outside sales workers.
---------------------------------------------------------------------------

    \159\ Academic administrative personnel (including admissions 
counselors and academic counselors) need to be paid either (1) the 
salary level or (2) a salary that is at least equal to the entrance 
salary for teachers in the educational establishment at which they 
are employed. See Sec.  541.204(a)(1). Entrance salaries at the 
educational establishment of employment cannot be distinguished in 
the data and so this alternative is not considered (thus these 
employees were excluded from the analysis, the same as was done in 
the 2004 final rule).
    \160\ The term physician includes medical doctors including 
general practitioners and specialists, osteopathic physicians 
(doctors of osteopathy), podiatrists, dentists (doctors of dental 
medicine), and optometrists (doctors of optometry or with a Bachelor 
of Science in optometry). See Sec.  541.304(b).
    \161\ Judges may not be considered ``employees'' under the FLSA 
definition. However, since this distinction cannot be made in the 
data, all judges are excluded (the same as was done in the 2004 
final rule). Including these workers in the model as FLSA employees 
would not impact the estimate of affected workers.
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    Overtime workers: The Department distinguishes between two types of 
overtime workers in this analysis.
    Occasional overtime workers: The Department uses two steps to 
identify occasional overtime workers. First, all workers who report 
they usually work 40 hours or less per week (identified with variable 
PEHRUSL1 in CPS MORG) but in the survey (or reference) week worked more 
than 40 hours (variable PEHRACT1 in CPS MORG) are classified as 
occasional overtime workers. Second, some additional workers who do not 
report usually working overtime and did not report working overtime in 
the reference week

[[Page 10920]]

are randomly selected to be classified as occasional overtime workers 
so that the proportion of workers who work overtime in our sample 
matches the proportion of workers, measured using SIPP data, who work 
overtime at some point in the year.
    Regular overtime workers: Workers who report they usually work more 
than 40 hours per week (identified with variable PEHRUSL1 in CPS MORG).
    Pooled 2017 CPS MORG data: CPS MORG data from 2015-2017 with 
earnings inflated to 2017 dollars and sample observations weighted to 
reflect employment in 2017. Pooled data were used to increase sample 
size. The analytic database will be updated to pool CPS MORG data from 
2016-2018 for the final rulemaking.
    Potentially affected EAP workers: EAP exempt workers who are not in 
named occupations and are included in the analysis (i.e., white collar, 
salaried, not eligible for another (non-EAP) overtime pay exemption). 
This is estimated to be 24.3 million workers.
    Price elasticity of demand (with respect to wage): The percentage 
change in labor hours demanded in response to a one percent change in 
wages.
    Real dollars (2017$): Dollars adjusted using the CPI-U to estimate 
the purchasing power they would have in 2017.
    Salary basis test: The EAP exemptions' requirement that workers be 
paid on a salary basis, that is, a pre-determined amount that cannot be 
reduced because of variations in the quality or quantity of the 
employee's work.
    Salary level test: The salary a worker must earn to be subject to 
the EAP exemptions. The Department distinguishes among four such tests:
    Standard salary level: The weekly salary level associated with the 
standard duties test that determines eligibility for the EAP 
exemptions. The standard salary level was set at $455 per week in the 
2004 final rule.
    HCE compensation level: Workers who meet the standard salary level 
requirement but not the standard duties test nevertheless are exempt if 
they pass a minimal duties test and earn at least the HCE total annual 
compensation required amount. The HCE required compensation level was 
set at $100,000 per year in the 2004 final rule, of which at least $455 
per week must be paid on a salary or fee basis.
    Short test salary level: The weekly salary level associated with 
the short duties test (eliminated in 2004).
    Long test salary level: The weekly salary level associated with the 
long duties test (eliminated in 2004).
    SIPP: Survey of Income and Program Participation.
    Workers covered by the FLSA and subject to the Department's part 
541 regulations: Includes all workers except those excluded from the 
analysis because they are not covered by the FLSA or subject to the 
Department's requirements. Excluded workers include: Members of the 
military, unpaid volunteers, the self-employed, many religious workers, 
and federal employees (with a few exceptions).\162\
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    \162\ Employees of firms with annual revenue less than $500,000 
who are not engaged in interstate commerce are also not covered by 
the FLSA. However, these workers are not excluded from this analysis 
because the Department has no reliable way of estimating the size of 
this worker population, although the Department believes it composes 
a small percent of workers. These workers were also not excluded 
from the 2004 final rule.
---------------------------------------------------------------------------

    The Department also notes that the terms employee and worker are 
used interchangeably throughout this analysis.

B. Methodology To Determine the Number of Potentially Affected EAP 
Workers

i. Overview
    This section explains the methodology used to estimate the number 
of workers who are subject to the part 541 regulations and the number 
of potentially affected EAP workers. In this proposed rule, as in the 
2004 final rule, the Department estimated the number of EAP exempt 
workers because there is no data source that identifies workers as EAP 
exempt. Employers are not required to report EAP exempt workers to any 
central agency or as part of any employee or establishment survey.\163\ 
The methodology described here is largely based on the approach the 
Department used in the 2004 and 2016 final rules.\164\
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    \163\ In 2015, RAND released results from a survey conducted to 
estimate EAP exempt workers. However, this survey does not have the 
variables or sample size necessary for the Department to base the 
RIA on this analysis. Rohwedder, S. and Wenger, J.B. (2015). The 
Fair Labor Standards Act: Worker Misclassification and the Hours and 
Earnings Effects of Expanded Coverage. RAND Labor and Population.
    \164\ See 69 FR 22196-209; 81 FR 32453-60. Where the proposal 
follows the methodology used to determine affected workers in both 
the 2004 and 2016 final rules citations to both rules are not always 
included.
---------------------------------------------------------------------------

ii. Data
    The estimates of EAP exempt workers were based on data drawn from 
the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and 
the BLS. The CPS is a large, nationally representative sample of the 
labor force. Households are surveyed for four months, excluded from the 
survey for eight months, surveyed for an additional four months, then 
permanently dropped from the sample. During the last month of each 
rotation in the sample (month 4 and month 16), employed respondents 
complete a supplementary questionnaire in addition to the regular 
survey.\165\ This supplement contains the detailed information on 
earnings necessary to estimate a worker's exemption status. Responses 
are based on the reference week, which is always the week that includes 
the 12th day of the month.
---------------------------------------------------------------------------

    \165\ This is the outgoing rotation group (ORG); however, this 
analysis uses the data merged over twelve months and thus will be 
referred to as MORG.
---------------------------------------------------------------------------

    Although the CPS MORG is a large scale survey, administered to 
approximately 15,000 households monthly representing the entire nation, 
it is still possible to have relatively few observations when looking 
at subsets of employees, such as exempt workers in a specific 
occupation employed in a specific industry, or workers in a specific 
geographic location. To increase the sample size, the Department pooled 
together three years of CPS MORG data (2015 through 2017). Earnings for 
each 2015 and 2016 observation were inflated to 2017 dollars using the 
CPI-U. The Department requests comments on whether there are better 
options for projecting salary growth than the application of a broad 
inflation index, and if a broad index is used, whether it should be 
CPI-U, or whether another inflation measure such as the GDP Deflator or 
the Personal Consumption Expenditures (PCE) price index would be more 
appropriate. The weight of each observation was adjusted so that the 
total number of potentially affected EAP workers in the pooled sample 
remained the same as the number for the 2017 CPS MORG. Thus, the pooled 
CPS MORG sample uses roughly three times as many observations to 
represent the same total number of workers in 2017. The additional 
observations allow the Department to better characterize certain 
attributes of the potentially affected labor force. This pooled dataset 
is used to estimate all impacts of the proposed rulemaking. For the 
analyses supporting the final rule, the Department anticipates using 
pooled CPS-MORG data updated to include 2016 through 2018.
    Some assumptions were necessary to use these data as the basis for 
the analysis. For example, the Department eliminated workers who 
reported that their weekly hours vary and provided no additional 
information on hours

[[Page 10921]]

worked. This was done because the Department cannot estimate effects 
for these workers since it is unknown whether they work overtime and 
therefore unknown whether there would be any need to pay for overtime 
if their status changed from exempt to nonexempt. The Department 
reweighted the rest of the sample to account for this change (i.e., to 
keep the same total employment estimates).\166\ This adjustment assumes 
that the distribution of hours worked by workers whose hours do not 
vary is representative of hours worked by workers whose hours do vary. 
The Department believes that without more information this is an 
appropriate assumption.\167\
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    \166\ The Department also reweighted for workers reporting zero 
earnings. In addition, the Department eliminated, without 
reweighting, workers who both reported usually working zero hours 
and working zero hours in the past week.
    \167\ This is justifiable because demographic and employment 
characteristics are similar across these two populations (e.g., age, 
gender, education, distribution across industries, share paid 
nonhourly). The share of all workers who stated that their hours 
vary (but provided no additional information) is 5.2 percent. To the 
extent these excluded workers are exempt, if they tend to work more 
overtime than other workers, then transfer payments and costs may be 
underestimated. Conversely, if they work fewer overtime hours, then 
transfer payments and costs may be overestimated.
---------------------------------------------------------------------------

iii. Number of Workers Covered by the Department's Part 541 Regulations
    To estimate the number of workers covered by the FLSA and subject 
to the Department's part 541 regulations, the Department excluded 
workers who are not subject to its regulations or whom the FLSA does 
not cover. This may happen, for instance, if a worker is not an 
employee under the FLSA. These workers include military personnel, 
unpaid volunteers, self-employed individuals, clergy and other 
religious workers, and federal employees (with a few exceptions 
described below).
    Many of these workers are excluded from the CPS MORG, including 
members of the military on active duty and unpaid volunteers. Self-
employed and unpaid workers are included in the CPS MORG, but have no 
earnings data reported and thus are excluded from the analysis. The 
analysis excluded religious workers identified by their occupation 
codes: `clergy' (Census occupational code 2040), `directors, religious 
activities and education' (2050), and `religious workers, all other' 
(2060). Most employees of the federal government are covered by the 
FLSA but not the Department's part 541 regulations because the Office 
of Personnel Management (OPM) regulates their entitlement to minimum 
wage and overtime pay.\168\ Exceptions exist for U.S. Postal Service 
employees, Tennessee Valley Authority employees, and Library of 
Congress employees.\169\ The analysis identified and included these 
covered federal workers using occupation and/or industry codes.\170\ 
The FLSA also does not cover employees of firms that have annual 
revenue of less than $500,000 and who are not engaged in interstate 
commerce. The Department does not exclude them from the analysis, 
however, because it has no reliable way of estimating the size of this 
worker population, although the Department believes it is a small 
percentage of workers. The 2004 final rule analysis similarly did not 
adjust for these workers.
---------------------------------------------------------------------------

    \168\ See 29 U.S.C. 204(f). Federal workers are identified in 
the CPS MORG with the class of worker variable PEIO1COW.
    \169\ See id.
    \170\ Postal Service employees were identified with the Census 
industry classification for postal service (6370). Tennessee Valley 
Authority employees were identified as federal workers employed in 
the electric power generation, transmission, and distribution 
industry (570) and in Kentucky, Tennessee, Mississippi, Alabama, 
Georgia, North Carolina, or Virginia. Library of Congress employees 
were identified as federal workers under Census industry `libraries 
and archives' (6770) and residing in Washington DC.
---------------------------------------------------------------------------

    The Department estimated that in Year 1 there would be 160.7 
million wage and salary workers in the United States (Figure 1). Of 
these, 135.9 million would be covered by the FLSA and subject to the 
Department's regulations (84.6 percent). The remaining 24.8 million 
workers would be excluded from FLSA coverage for the reasons described 
above. Figure 1 illustrates how the Department analyzed the U.S. 
civilian workforce through successive stages to estimate the number of 
potentially affected EAP workers.

[[Page 10922]]

[GRAPHIC] [TIFF OMITTED] TP22MR19.000

iv. Number of Workers in the Analysis
    After limiting the analysis to workers covered by the FLSA and 
subject to the Department's part 541 regulations, several other groups 
of workers were identified and excluded from further analysis since 
this proposed rule is unlikely to affect them. These include blue 
collar workers, workers paid on an hourly basis, and workers who are 
exempt under certain other (non-EAP) exemptions.
    The Department excluded a total of 89.7 million workers from the 
analysis for one or more of these reasons, which often overlapped 
(e.g., many blue collar workers are also paid hourly). The Department 
estimated that in 2017 there were 49.0 million blue collar workers. 
These workers were identified in the CPS MORG data following the 
methodology from the U.S. Government Accountability Office's (GAO) 1999 
white collar exemptions report \171\ and the Department's 2004 
regulatory impact analysis. See 69 FR 22240-44. Supervisors in 
traditionally blue collar industries were classified as white collar 
workers because their duties are generally managerial or 
administrative, and therefore they were not excluded as blue collar 
workers. Using the CPS variable indicating a respondent's hourly wage 
status, the Department determined that 79.9 million workers were paid 
on an hourly basis in 2017.\172\
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    \171\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar 
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41.
    \172\ CPS MORG variable PEERNHRY.
---------------------------------------------------------------------------

    Also excluded from further analysis were workers who were exempt 
under certain other (non-EAP) exemptions. Although some of these 
workers may also be exempt under the EAP exemptions, they would 
independently remain exempt from the minimum wage and/or overtime pay 
provisions based on the non-EAP exemptions. The Department excluded an 
estimated 4.9 million workers, including some agricultural and 
transportation workers, from further analysis because they would be 
subject to another (non-EAP) overtime exemption. See Appendix A: 
Methodology for Estimating Exemption Status, contained in the 
rulemaking docket, for details on how this population was identified.
    Agricultural and transportation workers are two of the largest 
groups of workers excluded from the population of potentially affected 
EAP workers in the current analysis, and with some exceptions, they 
were similarly excluded in 2004. The 2004 final rule excluded all 
workers in agricultural industries from the analysis,\173\ while the 
current analysis, similar to the 2016 analysis, only excludes 
agricultural workers from specified occupational-industry combinations 
since not all workers in agricultural industries qualify for the 
agricultural overtime pay exemptions. The exclusion of transportation 
workers matched the method for the 2004 final rule. Transportation 
workers were defined as those who are subject to the following FLSA 
exemptions: Section 13(b)(1), section 13(b)(2), section 13(b)(3), 
section 13(b)(6), or section 13(b)(10). The Department excluded 1.0 
million agricultural workers and 2.1 million transportation workers 
from the analysis. In addition, the Department excluded another 1.8 
million workers who fall within one or more other FLSA minimum wage and 
overtime exemptions. The criteria for determining exempt status for 
agricultural and transportation workers are detailed in

[[Page 10923]]

Appendix A. However, of these 1.8 million workers, all but 23,700 are 
either blue collar or hourly, and thus the effect of excluding these 
workers is negligible.
---------------------------------------------------------------------------

    \173\ 69 FR 22197.
---------------------------------------------------------------------------

v. Number of Potentially Affected EAP Workers
    After excluding workers not subject to the Department's FLSA 
regulations and workers who are unlikely to be affected by this 
proposed rule (i.e., blue collar workers, workers paid hourly, workers 
who are subject to another (non-EAP) overtime exemption), the 
Department estimated there would be 46.2 million salaried white collar 
workers for whom employers might claim either the standard EAP 
exemption or the HCE exemption. To be exempt under the standard EAP 
test, the employee must:
     Be paid a predetermined and fixed salary that is not 
subject to reduction because of variations in the quality or quantity 
of work performed (the salary basis test); \174\
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    \174\ Some computer employees may be exempt even if they are not 
paid on a salary basis. Hourly computer employees who earn at least 
$27.63 per hour and perform certain duties are exempt under section 
13(a)(17) of the FLSA. These workers are considered part of the EAP 
exemptions but were excluded from the analysis because they are paid 
hourly and will not be affected by this Proposed Rule (these workers 
were similarly excluded in the 2004 analysis). Salaried computer 
workers are exempt if they meet the salary and duties tests 
applicable to the EAP exemptions, and are included in the analysis 
since they will be impacted by this Proposed Rule. Additionally, 
administrative and professional employees may be paid on a fee 
basis, as opposed to a salary basis. Sec.  541.605(a). Although, the 
CPS MORG does not identify workers paid on a fee basis, they are 
considered nonhourly workers in the CPS and consequently are 
correctly classified as ``salaried'' (as was done in the 2004 final 
rule).
---------------------------------------------------------------------------

     earn at least a designated salary amount (the 2004 final 
rule set the salary level at $455 per week (the standard salary level 
test)); and
     primarily perform exempt work, as defined by the 
regulations (the standard duties test).
    The 2004 final rule's HCE test allows certain highly-paid employees 
to qualify for exemption as long as they customarily and regularly 
perform one or more exempt job duties. The HCE annual compensation 
level set in the 2004 final rule was $100,000, including at least $455 
per week paid on a salary or fee basis. The CPS annual earnings 
variable is topcoded at $150,000 (i.e., workers earning above $2,884.61 
($150,000/52 weeks) per week are reported as earning $2,884.61 per 
week). Topcoding helps protect respondent confidentiality. Because the 
proposed HCE salary level is close to the topcoded value, the 
Department imputed earnings for topcoded workers in the CPS data to 
adequately estimate affected workers when the HCE compensation level 
exceeds $150,000.175 176 Earnings were not imputed for 
previous rulemakings because the HCE salary level was significantly 
below the topcoded value.
---------------------------------------------------------------------------

    \175\ We used the standard Pareto distribution approach to 
impute earnings above the topcoded value as described in Armour, P. 
and Burkhauser, R. (2013). Using the Pareto Distribution to Improve 
Estimates of Topcoded Earnings. Center for Economic Studies (CES).
    \176\ Earnings exceeding the topcoded value only affect the 
analyses regarding potential updates.
---------------------------------------------------------------------------

Salary Basis
    The Department included only nonhourly workers in the analysis 
based on CPS data.\177\ For this rulemaking, the Department considered 
data representing compensation paid to nonhourly workers to be an 
appropriate proxy for compensation paid to salaried workers. The 
Department notes that it made the same assumption regarding nonhourly 
workers in the 2004 final rule.\178\
---------------------------------------------------------------------------

    \177\ The CPS variable PEERNHRY identifies workers as either 
hourly or nonhourly.
    \178\ See 69 FR 22197.
---------------------------------------------------------------------------

    The CPS population of ``nonhourly'' workers includes workers who 
are paid on a piece-rate, a day-rate, or largely on bonuses or 
commissions. Data in the CPS are not available to distinguish between 
salaried workers and these other nonhourly workers. However, the Panel 
Study of Income Dynamics (PSID) provides additional information on how 
nonhourly workers are paid. In the PSID, respondents are asked how they 
are paid on their main job and are also asked for more detail if their 
response is other than salaried or hourly. Possible responses include 
piecework, commission, self-employed/farmer/profits, and by the job/
day/mile. The Department analyzed the PSID data and found that 
relatively few nonhourly workers were paid by methods other than 
salaried. The Department is not aware of any statistically robust 
source that more closely reflects salary as defined in its regulations.
Salary Level
    Weekly earnings are available in the CPS MORG data, which allowed 
the Department to estimate how many nonhourly workers pass the salary 
level tests.\179\ However, the CPS earnings variable does not perfectly 
reflect the Department's definition of earnings. First, the CPS 
includes all nondiscretionary bonuses and commissions, which may be 
used to satisfy up to 10 percent of the new standard salary level under 
this proposed rule. This discrepancy between the earnings variable used 
and the FLSA definition of salary may cause a slight overestimation of 
the number of workers estimated to meet the standard salary level test. 
Second, CPS earnings data includes overtime pay, commissions, and tips. 
The Department notes that employers may factor into an employee's 
salary a premium for expected overtime hours worked. To the extent they 
do so, that premium would be reflected in the data. Similarly, the 
Department believes tips will be an uncommon form of payment for these 
workers since tips are uncommon for white collar workers. The 
Department also believes that commissions make up a relatively small 
share of earnings among nonhourly employees.\180\
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    \179\ The CPS MORG variable PRERNWA, which measures weekly 
earnings, is used to identify weekly salary.
    \180\ In the PSID, relatively few nonhourly workers were paid by 
commission. Additionally, according to the BLS ECI, about 5 percent 
of the private workforce is incentive-paid workers (incentive pay is 
defined as payment that relates earnings to actual individual or 
group production). See William J. Wiatrowski, Bureau of Labor 
Statistics, The Effect of Incentive Pay on Rates of Change in Wages 
and Salaries (November 24, 2009), http://www.bls.gov/opub/mlr/cwc/the-effect-of-incentive-pay-on-rates-of-change-in-wages-and-salaries.pdf, at 1.
---------------------------------------------------------------------------

Duties
    The CPS MORG data do not capture information about job duties; 
therefore, the Department used occupational titles, combined with 
probability estimates of passing the duties test by occupational title, 
to estimate the number of workers passing the duties test. This 
methodology is very similar to the methodology used in the 2004 
rulemaking, and the Department believes it is the best available 
methodology. In 2004, to determine whether a worker met the duties 
test, the Department used an analysis performed by WHD in 1998 in 
response to a request from the GAO. Because WHD enforces the FLSA's 
overtime requirements and regularly assesses workers' exempt status, 
WHD was uniquely qualified to provide the analysis. The analysis was 
used in both the GAO's 1999 white collar exemptions report \181\ and 
the Department's 2004 regulatory impact analysis.\182\
---------------------------------------------------------------------------

    \181\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, supra note 171, at 40-41, https://www.gao.gov/assets/230/228036.pdf.
    \182\ See 69 FR 22198.
---------------------------------------------------------------------------

    WHD examined 499 occupational codes, excluding nine that were not 
relevant to the analysis for various reasons (one code was assigned to 
unemployed persons whose last job was in the Armed Forces, some codes 
were assigned to workers who are not FLSA covered, others had no 
observations). Of the remaining occupational codes, WHD

[[Page 10924]]

determined that 251 occupational codes likely included EAP exempt 
workers and assigned one of four probability codes reflecting the 
estimated likelihood, expressed as ranges, that a worker in a specific 
occupation would perform duties required to meet the EAP duties tests. 
The Department supplemented this analysis in the 2004 final rule 
regulatory impact analysis when the HCE exemption was introduced. The 
Department modified the four probability codes for highly paid workers 
based upon our analysis of the provisions of the highly compensated 
test relative to the standard duties test (Table 3). To illustrate, WHD 
assigned exempt probability code 4 to the occupation ``first-line 
supervisors/managers of construction trades and extraction workers'' 
(Census code 6200), which indicates that a worker in this occupation 
has a 0 to 10 percent likelihood of meeting the standard EAP duties 
test. However, if that worker earned at least $100,000 annually, he or 
she was assigned a 15 percent probability of passing the shorter HCE 
duties test.
    The occupations identified in GAO's 1999 report and used by the 
Department in the 2004 final rule map to an earlier occupational 
classification scheme (the 1990 Census occupational codes). For this 
proposed rule, the Department used occupational crosswalks to map the 
previous occupational codes to the 2002 Census occupational codes and 
then to the 2010 Census occupational codes, which are used in the CPS 
MORG 2015 through 2017 data.\183\ If a new occupation comprises more 
than one previous occupation, then the new occupation's probability 
code is the weighted average of the previous occupations' probability 
codes, rounded to the closest probability code.
---------------------------------------------------------------------------

    \183\ References to occupational codes in this analysis refer to 
the 2002 Census occupational codes. Crosswalks and methodology 
available at: https://www.census.gov/topics/employment/industry-occupation/guidance/code-lists.html.

                         Table 3--Probability Worker in Category Passes the Duties Test
----------------------------------------------------------------------------------------------------------------
                                                       The standard EAP test               The HCE test
                                                 ---------------------------------------------------------------
                Probability code                    Lower bound     Upper bound     Lower bound     Upper bound
                                                        (%)             (%)             (%)             (%)
----------------------------------------------------------------------------------------------------------------
0...............................................               0               0               0               0
1...............................................              90             100             100             100
2...............................................              50              90              94              96
3...............................................              10              50            58.4              60
4...............................................               0              10              15              15
----------------------------------------------------------------------------------------------------------------

    These codes provide information on the likelihood that an employee 
in a category met the duties test but they do not identify the workers 
in the CPS MORG who actually passed the test. Therefore, the Department 
designated workers as exempt or nonexempt based on the probabilities. 
For example, for every ten public relations managers, between five and 
nine were estimated to pass the standard duties test (based on 
probability category 2). However, it is unknown which of these ten 
workers are exempt; therefore, the Department must determine the status 
for these workers. Exemption status could be randomly assigned with 
equal probability, but this would ignore the earnings of the worker as 
a factor in determining the probability of exemption. The probability 
of qualifying for the exemption increases with earnings because higher 
paid workers are more likely to perform the required duties, an 
assumption to which both the Department in the 2004 final rule and the 
GAO in its 1999 Report adhered.\184\
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    \184\ For the standard exemption, the relationship between 
earnings and exemption status is not linear and is better 
represented with a gamma distribution. For the HCE exemption, the 
relationship between earnings and exemption can be well represented 
with a linear function because the relationship is linear at high 
salary levels (as determined by the Department in the 2004 final 
rule). Therefore, the gamma model and the linear model would produce 
similar results. See 69 FR 22204-08, 22215-16.
---------------------------------------------------------------------------

    The Department estimated the probability of exemption for each 
worker as a function of both earnings and the occupation's exempt 
probability category using a gamma distribution.\185\ Based on these 
revised probabilities, each worker was assigned exempt or nonexempt 
status based on a random draw from a binomial distribution using the 
worker's revised probability as the probability of success. Thus, if 
this method is applied to ten workers who each have a 60 percent 
probability of being exempt, six workers would be expected to be 
designated as exempt.\186\ However, which particular workers are 
designated as exempt may vary with each set of ten random draws. For 
details see Appendix A, (in the rulemaking docket).
---------------------------------------------------------------------------

    \185\ The gamma distribution was chosen because, during the 2004 
revision, this non-linear distribution best fit the data compared to 
the other non-linear distributions considered (i.e., normal and 
lognormal). A gamma distribution is a general type of statistical 
distribution that is based on two parameters that control the scale 
(alpha) and shape (in this context, called the rate parameter, 
beta).
    \186\ A binominal distribution is frequently used for a 
dichotomous variable where there are two possible outcomes; for 
example, whether one owns a home (outcome of 1) or does not own a 
home (outcome of 0). Taking a random draw from a binomial 
distribution results in either a zero or a one based on a 
probability of ``success'' (outcome of 1). This methodology assigns 
exempt status to the appropriate share of workers without biasing 
the results with manual assignment.
---------------------------------------------------------------------------

    The Department acknowledges that the probability codes used to 
determine the share of workers in an occupation who are EAP exempt are 
21-years old. However, the Department believes the probability codes 
continue to estimate exemption status accurately given the fact that 
the standard duties test is not substantively different from the former 
short duties tests reflected in the codes. For the 2016 rulemaking, the 
Department looked at O*NET \187\ to determine the extent to which the 
1998 probability codes reflected current occupational duties. The 
Department's review of O*NET verified the continued appropriateness of 
the 1998 probability codes.
---------------------------------------------------------------------------

    \187\ The O*NET database contains hundreds of standardized and 
occupation-specific descriptions. See http://www.onetcenter.org.
---------------------------------------------------------------------------

Potentially Affected Exempt EAP Workers
    The Department estimated that of the 46.2 million salaried white 
collar workers considered in the analysis, 31.9 million qualified for 
the EAP exemption under the current regulations. Some of these workers 
were excluded from further analysis because the proposed rule would not 
affect them. This excluded group contains workers in named occupations 
who are not required to pass the salary requirements

[[Page 10925]]

(although they must still pass a duties test) and therefore whose 
exemption status does not depend on their earnings. These occupations 
include physicians (identified with Census occupation codes 3010, 3040, 
3060, 3120), lawyers (2100), teachers (occupations 2200-2550 and 
industries 7860 or 7870), academic administrative personnel (school 
counselors (occupation 2000 and industries 7860 or 7870) and 
educational administrators (occupation 0230 and industries 7860 or 
7870)), and outside sales workers (a subset of occupation 4950). Out of 
the 31.9 million workers who were EAP exempt, 7.6 million, or 23.9 
percent, were expected to be in named occupations in 2017. Thus, 
changes in the standard salary level and HCE compensation tests would 
not affect these workers. The 24.3 million EAP exempt workers remaining 
in the analysis are referred to in this proposed rule as ``potentially 
affected.''
    Based on analysis of the occupational codes and CPS earnings data 
(described above), the Department has concluded that in Year 1, in the 
baseline scenario in which the rule does not change, of the 24.3 
million potentially affected EAP workers, approximately 15.8 million 
will pass only the standard EAP test, 8.2 million will pass both the 
standard and the HCE tests, and approximately 310,000 will pass only 
the HCE test.

C. Determining the Revised Salary and Compensation Levels

    For the reasons discussed in section IV.A.iii, the Department has 
decided to update the 2004 standard salary level by reapplying the 2004 
methodology. Using pooled 2017 CPS MORG data, the 20th percentile of 
earnings for full-time salaried workers in the South and/or in the 
retail industry roughly corresponds to a standard salary level of 
$641.\188\ The proposed rule then inflates this standard salary level 
to January 2020 by applying 2.5 years of growth, calculated as the 
compound annual growth rate between a weekly salary level of $455 
(based on 2002 data) and a weekly salary level of $641 (based on 2017 
data) (2.31 percent).\189\ Applying this rate to the $641 salary level 
results in a January 2020 salary level of $679.
---------------------------------------------------------------------------

    \188\ Excluding workers who are not subject to FLSA, not subject 
to the salary level test, or in some agriculture or transportation 
occupations.
    \189\ The standard salary level of $641 per week was calculated 
from 2017 CPS MORG data that included the entire 2017 calendar year. 
Thus, the value reflects an average over the entire calendar year, 
and is best characterized as representing the salary level at the 
midpoint of 2017 (i.e., July 1). Therefore, the Department inflated 
both the 2017 standard salary and HCE earnings levels 2.5 years to 
estimate the value for January 1, 2020.
---------------------------------------------------------------------------

    For the HCE compensation level, the Department used 2017 CPS MORG 
data to ascertain the earnings for the 90th percentile of all full-time 
salaried workers ($139,464),\190\ which, when inflated to January 2020 
using the compound annual growth rate between 2002 and 2017 in the HCE 
compensation level (2.24 percent), results in a proposed HCE annual 
compensation level of $147,414.\191\
---------------------------------------------------------------------------

    \190\ BLS. Available at: https://www.bls.gov/cps/research_nonhourly_earnings_2017.htm.
    \191\ The Department used 2002 data to determine the 2004 HCE 
earnings level.
---------------------------------------------------------------------------

i. Rationale for the Methodologies Chosen
    As explained in greater detail earlier in sections IV.A.iii and 
IV.D, upon further consideration, the Department believes that the 
earnings thresholds and methodology established in the 2004 final 
rule--i.e., the $455 per week standard salary level and the $100,000 
per year HCE total annual compensation requirement--were appropriate at 
the time they were adopted. Those thresholds have never been challenged 
in court, and their use promotes familiarity and stability. The 
Department accordingly believes that reapplying the 2004 method to 
update the salary levels set in 2004 to account for earnings growth in 
the intervening years is also appropriate. The Department proposes to 
use the same methodology used in 2004 for the standard salary level, 
setting it at the 20th percentile of full-time salaried workers in the 
South and/or in the retail sector nationally. The Department proposes 
to set the HCE total annual compensation requirement using the 2016 
final rule methodology, i.e., equivalent to the earnings of the 90th 
percentile of all full-time salaried workers nationally. The Department 
proposes to then inflate the salary levels to their anticipated value 
in January 2020.
    As an alternative, the Department also considered setting the 
standard salary level by adjusting the 2004 earnings threshold levels 
for inflation, that is, a sustained increase in the general price level 
of goods and services over time that can undermine the effectiveness of 
the part 541 earnings thresholds. The Department considered using price 
indices such as the Personal Consumption Expenditures Price Index 
(PCEPI), the Consumer Price Index for All Urban Consumers (CPI-U), and 
the Chained CPI-U; as well as a wage-based measure such as the 
Employment Cost Index (ECI).
    The Department decided against using an index to adjust the 2004 
salary level for inflation, because it is not as straightforward, 
consistent, or accurate as using current salary data. The Department 
believes that an approach that simply updates the 2004 methodology with 
current data is preferable to an entirely new methodology. Table 4 
presents possible 2017 standard salary levels as calculated using each 
alternative approach considered:
     Alternative 0: Maintain the average minimum wage 
protection in place since 2004.
     Alternative 1: Inflate the 2004 weekly salary level using 
the PCEPI.
     Alternative 2: Inflate the 2004 weekly salary level using 
Chained CPI-U.
     Alternative 3: Inflate the 2004 weekly salary level using 
CPI-U.
     Alternative 4: Inflate the 2004 weekly salary level using 
the ECI for wages and salaries for civilian workers.
     Alternative 5: Inflate the 2004 weekly salary level using 
the ECI for wages and salaries for private sector workers.
    Table 5 projects the selected 2017 standard salary level of $641 to 
January 2020 using each of the inflation indices considered above.
    Section VI.D details the transfers, costs, and benefits of the 
proposed new salary level and the above alternatives.

                             Table 4--Standard Salary Level and Alternatives in 2017
----------------------------------------------------------------------------------------------------------------
                                                                                           Total increase \a\
                            Alternative                              2017 salary level -------------------------
                                                                     (weekly/annually)       $            %
----------------------------------------------------------------------------------------------------------------
Alt. #0: Maintain average minimum wage protection since 2004 \d\..        $503/$26,156           48         10.5
Alt. #1: Inflate 2004 level using PCEPI \b\.......................          597/31,044          142         31.2
Alt. #2: Inflate 2004 level using Chained CPI \b\.................          599/31,148          144         31.6

[[Page 10926]]

 
Alt. #3: Inflate 2004 level using CPI-U \b\.......................          620/32,240          165         36.3
Alt. #4: Inflate 2004 level using ECI civilian \b\................          639/33,228          184         40.4
Proposed rule: 2004 method \c\....................................         641/$33,332          186         40.9
Alt. #5: Inflate 2004 level using ECI private \b\.................         643/$33,436          188         41.3
----------------------------------------------------------------------------------------------------------------
\a\ Change between salary level or alternative and the salary level set in 2004 ($455 per week).
\b\ Inflated using growth in the index from 2002 to 2017.
\c\ Calculated using pooled 2015-2017 CPS MORG data.
\d\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
  threshold was equivalent to the earnings of an employee working 72.2 hours at the minimum wage (including time-
  and-a-half for hours beyond the fortieth in a week). That amount fell with increases in the minimum wage and
  is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is
  59.6 hours, and a threshold that would provide 59.6 hours of $7.25 minimum wage protection and overtime pay
  for hours over 40 would be $503.


                  Table 5--Alternatives for Projecting the 2017 Earnings Levels to January 2020
----------------------------------------------------------------------------------------------------------------
                                                       Standard salary level                 HCE level
                                                 ---------------------------------------------------------------
                   Alternative                     January 2020    Annual growth   January 2020    Annual growth
                                                      levels         rate (%)         levels         rate (%)
----------------------------------------------------------------------------------------------------------------
Inflate 2017 levels using PCEPI.................            $671            1.83        $145,919            1.83
Inflate 2017 levels using Chained CPI-U.........             671            1.86         146,023            1.86
Inflate 2017 levels using CPI-U.................             675            2.08         146,843            2.08
Inflate 2017 levels using ECI civilian..........             678            2.29         147,593            2.29
Proposed rule: Inflate 2017 levels using growth              679            2.31         147,414            2.24
 in earnings levels.............................
Inflate 2017 levels using ECI private...........             679            2.33         147,742            2.33
----------------------------------------------------------------------------------------------------------------

iii. Methodology for the HCE Total Annual Compensation Level and 
Alternative Methods
    For the reasons described above, the Department proposes to update 
the HCE compensation level using earnings for the 90th percentile of 
all full-time salaried workers nationally ($139,464 in 2017), inflated 
to January 2020 by applying the average growth in the HCE compensation 
levels between 2002 and 2017 (2.24 percent annually). The proposed HCE 
compensation level is $147,414 in January 2020.
    The Department also evaluated the following alternative HCE 
compensation levels:
     HCE alternative 1: Leave the HCE compensation level 
unchanged at $100,000 per year.
     HCE alternative 2: Inflate the 2004 level using the PCEPI.
     HCE alternative 3: Inflate the 2004 level using Chained 
CPI-U
     HCE alternative 4: Inflate the 2004 level using CPI-U.
     HCE alternative 5: Inflate the 2004 level using the ECI 
for wages and salaries for civilian workers.
     HCE alternative 6: Inflate the 2004 level using the ECI 
for wages and salaries for private sector workers.
    Table 6 presents possible 2017 HCE levels as calculated using each 
alternative approach considered.

                            Table 6--HCE Compensation Levels and Alternatives in 2017
----------------------------------------------------------------------------------------------------------------
                                                                                           Total increase \a\
                            Alternative                                Salary level    -------------------------
                                                                    (weekly/ annually)       $            %
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change............................................     $1,923/$100,000            0          0.0
HCE alt. #2: Inflate 2004 level using PCEPI \b\...................       2,523/131,189       31,189         31.2
HCE alt. #3: Inflate 2004 level using Chained CPI \b\.............       2,534/131,750       31,750         31.8
HCE alt. #4: Inflate 2004 level using CPI-U \b\...................       2,620/136,253       36,253         36.3
Proposed rule: 90th percentile of full-time salaried workers \c\..       2,682/139,464       39,464         39.5
HCE alt. #5: Inflate 2004 level using ECI civilian................       2,702/140,480       40,480         40.5
HCE alt. #6: Inflate 2004 level using ECI private.................       2,718/141,337       41,337         41.3
----------------------------------------------------------------------------------------------------------------
\a\ Change between updated/alternative compensation level and the compensation level set in 2004 ($100,000
  annually).
\b\ Inflated using growth in the index from 2002 to 2017.
\c\ 2017 salary level available at: https://www.bls.gov/cps/research_nonhourly_earnings_2017.htm.


[[Page 10927]]

D. Effects of Revised Salary and Compensation Levels

i. Overview and Summary of Quantified Effects
    The economic effects of increasing the EAP salary and compensation 
levels will depend on how employers respond. Employer response is 
expected to vary by the characteristics of the affected EAP workers. 
Transfers from employers to employees and between employees, and direct 
employer costs depend on how employers respond to finalization of the 
proposed rule.
    The Department anticipates that the proposed rule, once finalized, 
will become effective in 2020. Its proposed standard salary level is 
derived using the 2004 methodology, and the HCE compensation level is 
derived using the 2016 methodology, in both cases using 2017 CPS data, 
then projecting these levels to January 2020.
    Given that the Department is using 2017 CPS MORG employment and 
earnings data--the most recent data available at the time of analysis--
to estimate the economic effects of the proposed rule taking effect in 
2020, and given that such data will change between now and 2020, there 
are two options to measure the economic effects of the proposed rule 
upon taking effect. One option would be to use the proposed standard 
salary and HCE total compensation levels and project the CPS MORG data 
forward to 2020. However, such a projection would add ``noise'' to the 
CPS MORG data, making an analysis using such projections less accurate. 
A second option would be to measure the economic effects of the 
proposed rule by using the most recent CPS MORG data to determine the 
2017 standard salary and HCE compensation levels as if the rule were to 
be promulgated in 2017. The potential impacts of the rule are then 
assessed using 2017 population characteristics. When measuring the 
number of workers affected, using a 2017 salary level on the 2017 CPS 
MORG data is a good approximation of a 2020 level on the earnings data 
of workers in 2020, so the second option better reflects the economic 
effects of the proposed rule than the first option. Therefore, the 
Department chose to analyze the economic effects of a standard salary 
level of $641 per week and an annual HCE compensation level of $139,464 
using 2017 CPS MORG data as the best representation of likely economic 
effects of the proposed standard salary level of $679 per week and an 
annual HCE compensation level of $147,414 taking effect in 2020.
    Table 7 presents the estimated number of affected workers, costs, 
and transfers associated with increasing the salary and compensation 
levels. The Department estimated that the direct employer costs of this 
proposed rule would total $464.2 million in the first year, with 10-
year annualized direct costs of $112.6 million per year using a 3 
percent real discount rate and $120.5 million per year using a 7 
percent real rate.
    In addition to these direct costs, this proposed rule would 
transfer income from employers to employees. Year 1 transfers would 
equal $526.9 million, with annualized transfers estimated at $428.0 
million and $429.4 million per year using the 3-percent and 7-percent 
real discount rates, respectively. Potential employer costs due to 
reduced profits and additional hiring were not quantified but are 
discussed in section VI.D.iii.

  Table 7--Summary of Affected Workers and Regulatory Costs and Transfers, Standard and HCE Earnings Thresholds
----------------------------------------------------------------------------------------------------------------
                                                         Future years \b\                Annualized value
                                                 ---------------------------------------------------------------
           Impact \a\                 Year 1                                          3% Real         7% Real
                                                      Year 2          Year 10      Discount Rate   Discount Rate
----------------------------------------------------------------------------------------------------------------
                                            Affected Workers (1000s)
----------------------------------------------------------------------------------------------------------------
Standard........................           1,070           1,027             625  ..............  ..............
HCE.............................             201             215             426  ..............  ..............
                                 -------------------------------------------------------------------------------
    Total.......................           1,271           1,241           1,051  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                    Direct Employer Costs (Millions in 2017$)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization......          $324.9            $0.0            $0.0           $37.0           $43.2
Adjustment \c\..................            66.6             1.5             3.6            10.0            11.2
Managerial......................            72.7            72.7            64.2            65.6            66.0
                                 -------------------------------------------------------------------------------
    Total direct costs \d\......           464.2            74.2            67.8           112.6           120.5
----------------------------------------------------------------------------------------------------------------
                            Transfers from Employers to Workers (Millions in 2017) e
----------------------------------------------------------------------------------------------------------------
Due to minimum wage.............            57.0            30.4            17.6            27.7            28.6
Due to overtime pay.............           469.9           390.9           429.5           400.3           400.7
                                 -------------------------------------------------------------------------------
    Total transfers \d\.........           526.9           421.3           447.1           428.0           429.4
----------------------------------------------------------------------------------------------------------------
\a\ Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the
  text.
\b\ These costs/transfers represent a range over the nine-year span.
\c\ Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in
  years without updated earnings thresholds because some workers' projected earnings are estimated using
  negative earnings growth.
\d\ Components may not add to total due to rounding.
\e\ This is the net transfer from employers to workers. There may also be transfers between workers.


[[Page 10928]]

ii. Affected EAP Workers
1. Overview
    The Department estimated there are 24.3 million potentially 
affected EAP workers--that is, EAP workers who either (1) passed the 
salary basis test, the standard salary level test, and the standard 
duties test, or (2) passed the salary basis test, the standard salary 
level test, the HCE total compensation level test, and the HCE duties 
test (but not the standard duties test). This number excluded workers 
in named occupations, who are not subject to the salary tests, or those 
who qualify for another (non-EAP) exemption.
    Using the proposed method described above, the Department estimated 
that if the rule were promulgated today, the standard salary level 
would increase from $455 per week to $641 per week and would affect 1.1 
million exempt workers in Year 1 (Figure 2).\192\ Based on currently 
available data, the Department projects that if the final rule becomes 
effective in 2020, the standard salary level will be $679 per week. The 
Department also estimated that the HCE annual compensation level would 
increase from $100,000 to $139,464 if the rule went into effect today, 
and 201,100 workers would be affected in Year 1 (the number of workers 
who earn at least $100,000 but less than $139,464 and pass the minimal 
HCE duties test but not the standard duties test).\193\ The Department 
projects that if the final rule takes effect in 2020, the HCE 
compensation level will be $147,414. In total, the Department expects 
that 1.3 million workers will be affected in Year 1 by the proposed 
earnings threshold increases, composing about 5.2 percent of the pool 
of potentially affected EAP workers.
---------------------------------------------------------------------------

    \192\ This group includes workers who may currently be nonexempt 
under more protective state EAP laws and regulations, such as some 
workers in Alaska, California, and New York.
    \193\ The 2016 final rule applied joint probabilities to 
estimate the number of affected HCE workers (i.e., the number of HCE 
workers who pass the HCE duties test but fail the standard duties 
test). In order to provide a more accurate estimate, this NPRM 
applies conditional probabilities to determine the number of 
affected HCE workers.
[GRAPHIC] [TIFF OMITTED] TP22MR19.001

    Table 8 presents the number of affected EAP workers, the mean 
number of overtime hours they work per week, and their average weekly 
earnings. The 1.1 million workers affected by the increase in the 
standard salary level work on average 1.6 usual hours of overtime per 
week and earn on average $564 per week.\194\ However, the majority of 
these workers (about 86 percent) work zero usual hours of overtime. The 
14 percent of affected workers who regularly work overtime average 11.4 
hours of overtime per week. The 201,100 EAP workers affected by the 
change in the HCE compensation level average 4.9 hours of overtime per 
week and earn an average of $2,179 per week ($113,327 per year). About 
60 percent of these workers work zero usual hours of overtime while the 
40 percent who work usual hours of overtime average 12.4 hours of 
overtime per week.
---------------------------------------------------------------------------

    \194\ CPS defines ``usual hours'' as hours worked 50 percent or 
more of the time.
---------------------------------------------------------------------------

    Although most affected EAP workers who typically do not work 
overtime are unlikely to experience significant changes in their daily 
work routine, those who regularly work overtime may experience 
significant changes. Moreover, affected EAP workers who routinely work 
overtime and earn less than the minimum wage are most likely to 
experience significant changes because of the revised standard salary 
level.\195\ Employers might respond by paying overtime premiums; 
reducing or eliminating overtime hours; reducing employees' regular 
wage rates (provided that the reduced rates still exceed the minimum 
wage); increasing employees' salary to the updated salary level to 
preserve their exempt status (although this will be less common for 
affected workers earning below the minimum wage); or using some 
combination of these responses.
---------------------------------------------------------------------------

    \195\ A small proportion (1.4 percent) of affected EAP workers 
earn implicit hourly wages that are less than the applicable minimum 
wage (the higher of the state or federal minimum wage). The implicit 
hourly wage is calculated as an affected EAP employee's total weekly 
earnings divided by total weekly hours worked. For example, workers 
earning the currently enforced $455 per week standard salary level 
would earn less than the federal minimum wage if they work 63 or 
more hours in a week ($455/63 hours = $7.22 per hour).

[[Page 10929]]



         Table 8--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, Year 1
----------------------------------------------------------------------------------------------------------------
                                       Affected EAP Workers \a\
                                   --------------------------------  Mean overtime
    Type of affected EAP worker         Number                           hours       Mean usual weekly earnings
                                       (1,000s)       % of total
----------------------------------------------------------------------------------------------------------------
                                              Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers..........           1,070             100             1.6                          $564
Earn less than the minimum wage                 15             1.4            24.1                           516
 \b\..............................
Regularly work overtime...........             152            14.2            11.4                           562
CPS occasionally work overtime \c\              41             3.8             8.2                           566
----------------------------------------------------------------------------------------------------------------
                                             HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers..........             201             100             4.9                         2,179
Earn less than the minimum wage     ..............  ..............  ..............  ............................
 \b\..............................
Regularly work overtime...........              80            39.8            12.4                         2,198
CPS occasionally work overtime \c\              10             4.9             9.3                         2,140
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\b\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE
  workers will not be affected by the minimum wage provision. These workers all regularly work overtime and are
  also included in that row.
\c\ Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual
  overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These
  workers are identified later.

    The Department considered two types of overtime workers in this 
analysis: Regular overtime workers and occasional overtime 
workers.\196\ Regular overtime workers typically worked more than 40 
hours per week. Occasional overtime workers typically worked 40 hours 
or less per week, but they worked more than 40 hours in the week they 
were surveyed. The Department considered these two populations 
separately in the analysis because labor market responses to overtime 
pay requirements may differ for these two types of workers.
---------------------------------------------------------------------------

    \196\ Regular overtime workers were identified in the CPS MORG 
with variable PEHRUSL1. Occasional overtime workers were identified 
with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------

    In a representative week, the increases in the standard salary 
level and the HCE compensation level affected an estimated 51,000 
occasional overtime workers (4.0 percent of all affected EAP workers). 
They averaged 8.4 hours of overtime in the weeks they worked overtime. 
This group represents the number of workers with occasional overtime 
hours in the week the CPS MORG survey was conducted. Because the survey 
week is a representative week, the Department believes the prevalence 
of occasional overtime in the survey week, and the characteristics of 
these workers, is representative of other weeks (even though a 
different group of workers would be identified as occasional overtime 
workers in a different week).
2. Characteristics of Affected EAP Workers
    In this section, the Department examined the characteristics of EAP 
workers whom the proposed rule would affect. Table 9 presents the 
distribution of affected EAP workers by industry and occupation, using 
Census industry and occupation codes. The industry with the most 
affected EAP workers would be education and health services (293,000), 
while the industry with the highest percentage of affected EAP workers 
would be leisure and hospitality (about 10 percent). The occupation 
category with the most affected EAP workers would be management, 
business, and financial (484,000), while the occupation category with 
the highest percentage of affected EAP workers would be in services 
(about 14 percent).
    Finally, approximately 7 percent of potentially affected workers in 
private nonprofits would be affected compared with about 5 percent in 
private for-profit firms. However, as discussed in section VI.B.iii, 
our estimates of workers subject to the FLSA include workers employed 
by enterprises that do not meet the enterprise coverage requirements 
because there is no reliable way of estimating that population. 
Although failing to exclude workers who work for non-covered 
enterprises would only affect a small percentage of workers generally, 
it may have a larger effect (and result in a larger overestimate) for 
workers in nonprofits because when determining enterprise coverage only 
revenue derived from business operations, not charitable activities, is 
included.

     Table 9--Estimated Number of Exempt Workers with the Current and Updated Salary Levels, by Industry and
                                               Occupation, Year 1
----------------------------------------------------------------------------------------------------------------
                                      Workers       Potentially                                     Affected as
                                    subject to     affected EAP    Not-affected      Affected        share of
  Industry/occupation/nonprofit        FLSA           workers     (millions) \b\  (millions) \c\    potentially
                                    (millions)    (millions) \a\                                   affected (%)
----------------------------------------------------------------------------------------------------------------
Total...........................          135.92           24.29           23.02            1.27             5.2
----------------------------------------------------------------------------------------------------------------
                                                 By Industry \d\
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing,             1.28            0.04            0.04            0.00             5.7
 & hunting......................

[[Page 10930]]

 
Mining..........................            0.81            0.21            0.20            0.01             2.7
Construction....................            7.92            0.91            0.88            0.04             4.2
Manufacturing...................           15.34            3.50            3.39            0.11             3.1
Wholesale & retail trade........           19.18            2.55            2.37            0.18             6.9
Transportation & utilities......            7.30            0.88            0.84            0.05             5.3
Information.....................            2.73            0.95            0.90            0.05             5.2
Financial activities............            9.46            3.65            3.48            0.17             4.6
Professional & business services           15.02            5.24            5.05            0.19             3.7
Education & health services.....           33.26            3.98            3.69           0.293             7.4
Leisure & hospitality...........           12.96            0.86            0.78            0.08             9.5
Other services..................            5.44            0.61            0.56            0.05             8.5
Public administration...........            5.24            0.90            0.84            0.05             6.1
----------------------------------------------------------------------------------------------------------------
                                                By Occupation \d\
----------------------------------------------------------------------------------------------------------------
Management, business, &                    20.29           12.23           11.75            0.48             4.0
 financial......................
Professional & related..........           31.48            8.34            7.93            0.41             4.9
Services........................           23.71            0.20            0.18            0.03            14.5
Sales and related...............           13.77            2.34            2.13            0.21             9.0
Office & administrative support.           17.72            0.96            0.84            0.12            12.3
Farming, fishing, & forestry....            0.96            0.00            0.00            0.00             0.0
Construction & extraction.......            6.41            0.02            0.02            0.00             6.8
Installation, maintenance, &                4.58            0.04            0.04            0.00             7.5
 repair.........................
Production......................            8.43            0.10            0.09            0.01             8.0
Transportation & material moving            8.57            0.04            0.03            0.01            13.3
----------------------------------------------------------------------------------------------------------------
                                       By Nonprofit and Government Status
----------------------------------------------------------------------------------------------------------------
Nonprofit, private..............            9.46            1.93            1.80            0.13             6.6
For profit, private.............          107.97           20.36           19.35            1.01             5.0
Government (state, local, and              18.49            2.00            1.86            0.13             6.6
 federal).......................
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and
  not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
  weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\d\ Census industry and occupation categories.

    Table 10 presents the distribution of affected EAP workers based on 
Census Regions and divisions, and metropolitan statistical area (MSA) 
status. The region with the most affected workers would be the South 
(544,000), but the South's percentage of affected workers is similar to 
other regions (6.4 percent as compared to 4.4 to 5.0 percent 
elsewhere). Although 89 percent of affected EAP workers would reside in 
MSAs (1.14 of 1.27 million), so do a corresponding 88 percent of all 
workers subject to the FLSA.\197\
---------------------------------------------------------------------------

    \197\ Identified with CPS MORG variable GTMETSTA.
---------------------------------------------------------------------------

    Employers in low-wage industries, regions, and non-metropolitan 
areas may be more affected because they typically pay lower wages and 
salaries. However, the Department believes the salary level adopted in 
this proposed rule is appropriate for these lower-wage sectors because 
the methodology used in 2004, and applied for this rulemaking, used 
earnings data in the low-wage retail industry and the low-wage Southern 
region. Effects by region and industry are considered in section 
VI.D.vi.

  Table 10--Estimated Number of Potentially Affected EAP Workers with the Current and Updated Salary Levels, by
                                    Region, Division, and MSA Status, Year 1
----------------------------------------------------------------------------------------------------------------
                                      Workers       Potentially                                     Affected as
  Region/division/metropolitan      subject to     affected EAP    Not-affected      Affected        share of
             status                    FLSA           workers     (millions) \b\  (millions) \c\    potentially
                                    (millions)    (millions) \a\                                     affected
----------------------------------------------------------------------------------------------------------------
Total...........................          135.92           24.29           23.02            1.27             5.2
----------------------------------------------------------------------------------------------------------------

[[Page 10931]]

 
                                               By Region/Division
----------------------------------------------------------------------------------------------------------------
Northeast.......................           24.99            5.09            4.86            0.23             4.4
    New England.................            6.81            1.46            1.40            0.06             3.9
    Middle Atlantic.............           18.18            3.63            3.46            0.17             4.7
Midwest.........................           30.05            5.03            4.78            0.25             5.0
    East North Central..........           20.38            3.43            3.26            0.17             5.0
    West North Central..........            9.67            1.60            1.51            0.08             5.0
South...........................           49.36            8.53            7.99            0.54             6.4
    South Atlantic..............           25.88            4.80            4.49            0.31             6.4
    East South Central..........            7.38            0.99            0.92            0.07             7.5
    West South Central..........           16.10            2.74            2.58            0.16             6.0
West............................           31.52            5.64            5.39            0.25             4.5
    Mountain....................            9.93            1.66            1.57            0.09             5.3
    Pacific.....................           21.59            3.98            3.82            0.16             4.1
----------------------------------------------------------------------------------------------------------------
                                             By Metropolitan Status
----------------------------------------------------------------------------------------------------------------
Metropolitan....................          118.99           22.66           21.53            1.14             5.0
Non-metropolitan................           15.94            1.52            1.40            0.13             8.3
Not identified..................            0.99            0.10            0.09            0.01             8.9
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and
  not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
  weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).

iii. Costs
1. Summary
    The Department quantified three direct costs to employers in this 
analysis: (1) Regulatory familiarization costs; (2) adjustment costs; 
and (3) managerial costs. The Department estimated costs for Year 1 
assuming that the rule will go into effect in 2020 (Table 11). The 
Department estimated that in Year 1, regulatory familiarization costs 
would be $324.9 million, adjustment costs would be $66.6 million, and 
managerial costs would be $72.7 million. Total direct employer costs in 
Year 1 would be $464.2 million.

                                Table 11--Summary of Year 1 Direct Employer Costs
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                                        HCE
                      Direct employer costs                          Standard      compensation        Total
                                                                   salary level        level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\..................................  ..............  ..............          $324.9
Adjustment......................................................           $56.1           $10.5           $66.6
Managerial......................................................            55.4            17.3            72.7
    Total direct costs..........................................           111.4            27.9           464.2
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the
  HCE compensation level.

    Adjustment costs and management costs are recurring, so we also 
projected them for years 2 through 10 in section VI.D.viii. The 
Department discusses costs that are not quantified in section 
VI.D.iii.5.
2. Regulatory Familiarization Costs
    Changing the standard salary level and the HCE total compensation 
level will impose direct costs on firms by requiring them to review the 
regulation. To estimate these ``regulatory familiarization costs,'' 
three pieces of information must be estimated: (1) The number of 
affected establishments; (2) a wage level for the employees reviewing 
the rule; and (3) the amount of time employees spend reviewing the 
rule.
    It is unclear whether regulatory familiarization costs are a 
function of the number of establishments or the number of firms. To 
avoid underestimating these costs, the Department assumed that 
regulatory familiarization occurs at a decentralized level and used the 
number of establishments in its cost estimate; this results in a higher 
estimate than would result from using the number of firms. The most 
recent data on private sector establishments at the time this NPRM was 
drafted are from the 2015 Statistics of U.S. Businesses (SUSB), which 
reports 7.66 million establishments with paid employees.\198\ 
Additionally, there were an estimated 90,106 state and local 
governments in 2012, the most recent

[[Page 10932]]

data available.\199\ We thus estimated 7.75 million establishments 
altogether.
---------------------------------------------------------------------------

    \198\ Statistics of U.S. Businesses 2015, https://www.census.gov/programs-surveys/susb.html.
    \199\ 2012 Census of Governments: Government Organization 
Summary Report, http://www2.census.gov/govs/cog/g12_org.pdf.
---------------------------------------------------------------------------

    The Department believes that all establishments will incur some 
regulatory familiarization costs, even if they do not employ exempt 
workers, because all establishments will need to confirm whether this 
proposed rule includes any provisions that may affect their employees. 
Firms with more affected EAP workers will likely spend more time 
reviewing the regulation than firms with fewer or no affected EAP 
workers (since a careful reading of the regulation will probably follow 
the initial decision that the firm is affected). However, the 
Department did not know the distribution of affected EAP workers across 
firms, so it used an average cost per establishment.
    The Department believes one hour per establishment is appropriate 
because the EAP exemptions have existed in one form or another since 
1938. The most significant change proposed by this rulemaking is 
setting a new standard salary level for exempt workers, and the 
proposed changed regulatory text is only a few pages. The Department 
thus believes that one hour is an appropriate average estimate for the 
time each establishment will spend reviewing the changes made by this 
rulemaking. Time spent to implement the necessary changes was included 
in adjustment costs. The Department invites comments and data on the 
time required for regulatory familiarization.
    The Department's analysis assumed that mid-level human resource 
workers with a median wage of $25.64 per hour will review the proposed 
rule.\200\ The Department also assumed that benefits are paid at a rate 
of 46 percent of the base wage \201\ and overhead costs are paid at a 
rate of 17 percent of the base wage,\202\ resulting in an hourly rate 
of $41.91. The Department thus estimates regulatory familiarization 
costs in Year 1 would be $324.9 million ($41.91 per hour x 1 hour x 
7.75 million establishments).\203\
---------------------------------------------------------------------------

    \200\ The median wage in the pooled 2017 CPS data for workers 
with the Census 2010 occupations ``human resources workers'' (0630); 
``compensation, benefits, and job analysis specialists'' (0640); and 
``training and development specialists'' (0650). The Department 
determined these occupations include most of the workers who would 
conduct these tasks. See Bureau of Labor Statistics, U.S. Department 
of Labor, Occupational Outlook Handbook.
    \201\ The benefits-earnings ratio is derived from the BLS's 
Employer Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate 
includes some fixed costs such as health insurance.
    \202\ The Department believes that the overhead costs associated 
with this rule are small because existing systems maintained by 
employers to track currently hourly employees can be used for newly 
overtime eligible workers. However, acknowledging that there might 
be additional overhead costs, we have included an overhead rate of 
17 percent. Because the 2016 final rule did not include overhead 
costs in its cost and transfer estimates, estimated costs and 
transfers associated with the 2016 final rule have been recalculated 
for comparison purposes in section VI.D.ix.
    \203\ As previously noted, the Department used the number of 
establishments rather than the number of firms, which results in a 
higher estimate of the regulatory familiarization cost. Using the 
number of firms, 6.0 million, would result in a reduced regulatory 
familiarization cost estimate of $251.1 million in Year 1.
---------------------------------------------------------------------------

3. Adjustment Costs
    Changes in the standard salary level and HCE compensation level 
would also impose direct costs on firms by requiring them to evaluate 
the exemption status of employees, update and adapt overtime policies, 
notify employees of policy changes, and adjust their payroll 
systems.\204\ The Department believes the size of these ``adjustment 
costs'' will depend on the number of affected EAP workers and will 
occur in any year when exemption status is changed for any workers. To 
estimate adjustment costs, three pieces of information must be 
estimated: (1) A wage level for the employees making the adjustments; 
(2) the amount of time spent making the adjustments; and (3) the 
estimated number of newly affected EAP workers. The Department again 
estimated that the average wage with benefits and overhead costs for a 
mid-level human resource worker would be $41.91 per hour (as explained 
above).
---------------------------------------------------------------------------

    \204\ While some companies may need to reconfigure information 
technology systems to include both exempt and overtime-protected 
workers, the Department notes that most organizations affected by 
the rule already employ overtime-eligible workers and have in place 
payroll systems and personnel practices (e.g., requiring advance 
authorization for overtime hours) so that additional costs 
associated with the rule should be relatively small in the short 
run.
---------------------------------------------------------------------------

    The Department estimated that it will take establishments an 
average of 75 minutes per affected worker to make the necessary 
adjustments. Little applicable data were identified from which to 
estimate the amount of time required to make these adjustments.\205\ 
Therefore, the Department used the estimate of 1.25 hours from the 2016 
final rule after reviewing public comments on the 2015 NPRM. The 
estimated number of affected EAP workers in Year 1 is 1.3 million (as 
discussed in section VI.D.ii). Therefore, total Year 1 adjustment costs 
would be $66.6 million ($41.91 x 1.25 hours x 1.3 million workers).
---------------------------------------------------------------------------

    \205\ Costs from the 2004 final rule were considered, but 
because that revision included changes to the duties test, the cost 
estimates are not directly applicable; in addition, the 2004 final 
rule did not separately account for managerial costs. The 2015 NPRM 
separately accounted for managerial costs. Some commenters responded 
with higher time estimates, but these estimates were not 
substantiated with data or were considered excessive.
---------------------------------------------------------------------------

    A reduction in the cost to employers of determining employees' 
exempt status may partially offset adjustment costs. Currently, to 
determine whether an employee is exempt, employers must apply the 
duties test to salaried workers who earn at least $455 per week. If 
finalized as proposed, firms will no longer be required to apply the 
potentially time-consuming duties test to employees earning less than 
the proposed standard salary level. This will be a clear cost savings 
to employers for the approximately 3.6 million salaried employees (2.0 
million in white collar occupations and 1.6 million in blue collar 
occupations) who do not pass the duties test and earn at least $455 per 
week but less than the updated salary level. The Department did not 
estimate the potential size of this cost savings.
4. Managerial Costs
    If employers reclassify employees as overtime-eligible due to the 
changes in the salary levels, then firms may incur ongoing managerial 
costs because the employer may spend more time developing work 
schedules and closely monitoring an employee's hours to minimize or 
avoid overtime. For example, the manager of a reclassified worker may 
have to assess whether the marginal benefit of scheduling the worker 
for more than 40 hours exceeds the marginal cost of paying the overtime 
premium. Additionally, the manager may have to spend more time 
monitoring the employee's work and productivity since the marginal cost 
of employing the worker per hour has increased. Unlike regulatory 
familiarization and adjustment costs, which occur primarily in Year 1, 
managerial costs are incurred more uniformly every year.
    There was little precedent or data to aid in evaluating these 
costs. With the exception of the 2016 rulemaking, prior part 541 
rulemakings did not estimate managerial costs. The Department likewise 
found no estimates of managerial costs after reviewing the literature. 
We thus used the same methodology as the 2016 final rule, which the 
Department adopted after considering comments on the 2015 NPRM.
    The Department applied managerial costs to workers who (1) are 
reclassified as nonexempt, overtime-protected and (2) either regularly 
work overtime or occasionally work overtime, but on a

[[Page 10933]]

predictable basis--an estimated 344,300 workers (see Table 14 and 
accompanying explanation). The Department estimated these costs 
assuming that management spends an additional five minutes per week 
scheduling and monitoring each affected worker expected to be 
reclassified as nonexempt, overtime-eligible as a result of this rule, 
and whose hours are adjusted. As discussed in detail below, most 
affected workers do not currently work overtime, and there is no reason 
to expect their hours worked to change when their status changes from 
exempt to nonexempt. For that group of workers, management will have 
little or no need to increase their monitoring of hours worked; 
therefore, these workers are not included in the managerial cost 
calculation. Under these assumptions, the additional managerial hours 
worked per week would be 28,700 hours ((5 minutes/60 minutes) x 344,300 
workers).
    The median hourly wage in 2017 for a manager was $29.81 and 
benefits were estimated to be paid at a rate of 46 percent of the base 
wage.\206\ Together with the 17 percent overhead costs used for this 
analysis, this totals $48.72 per hour. Thus, the Year 1 managerial 
costs would total $72.7 million (28,700 hours/week x 52 weeks x $48.72/
hour). Although the exact magnitude would vary with the number of 
affected EAP workers each year, employers would incur managerial costs 
annually.
---------------------------------------------------------------------------

    \206\ Calculated as the projected median wage in the CPS for 
workers in management occupations (excluding chief executives) in 
2015-2017, adjusted to reflect 2017. The adjustment ratio is derived 
from the BLS' Employer Costs for Employee Compensation data using 
variables CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------

    The Department believes that most companies already manage a mix of 
exempt and nonexempt employees and have policies and recordkeeping 
systems in place for nonexempt employees. Thus, most companies would be 
unlikely to purchase systems or hire additional monitoring personnel as 
a result of this rulemaking. Moreover, this rulemaking would not impose 
any new recordkeeping requirements.
5. Other Potential Costs
    In addition to the costs discussed above, the proposed rule may 
impose additional costs that have not been quantified. These costs are 
discussed qualitatively below, but we note that in some cases (e.g., 
schedule flexibility, salaried status) these costs may directly affect 
workers' wages because they face a tradeoff in the labor market between 
cash wages and the nonpecuniary aspects of jobs.\207\
---------------------------------------------------------------------------

    \207\ See, e.g., Ashenfelter, O. & Layard, R. (1986). Handbook 
of Labor Economics. Volume 1. 641-92. https://www.sciencedirect.com/science/article/abs/pii/S1573446386010155.
---------------------------------------------------------------------------

Reduced Scheduling Flexibility
    Exempt workers may enjoy more scheduling flexibility because their 
hours are less likely to be monitored than nonexempt workers. If so, 
the proposed rule could impose costs on newly nonexempt, overtime-
eligible workers by, for example, limiting their ability to adjust 
their schedules to meet personal and family obligations. But the 
proposed rule does not require employers to reduce scheduling 
flexibility. Employers can continue to offer flexible schedules and 
require workers to monitor their own hours and to follow the employers' 
timekeeping rules. Additionally, some exempt workers already monitor 
their hours for billing purposes. For these reasons, and because there 
is little data or literature on these costs, the Department did not 
quantify potential costs regarding scheduling flexibility.
Preference for Salaried Status
    Some of the workers that become nonexempt as a result of the 
proposed rule and are changed by their employer from salaried to hourly 
status may have preferred to remain salaried. Research has shown that 
salaried workers are more likely than hourly workers to receive 
benefits such as paid vacation time and health insurance,\208\ and are 
more satisfied with their benefits.\209\ Additionally, when employer 
demand for labor decreases, hourly workers tend to see their hours cut 
before salaried workers, making earnings for hourly workers less 
predictable.\210\ However, this literature generally does not control 
for differences between salaried and hourly workers such as education, 
job title, or earnings; therefore, this correlation is not necessarily 
attributable to hourly status.
---------------------------------------------------------------------------

    \208\ Lambert, S. J. (2007). Making a Difference for Hourly 
Employees. In A. Booth, & A. C. Crouter, Work-Life Policies that 
Make a Real Difference for Individuals, Families, and Communities. 
Washington, DC: Urban Institute Press.
    \209\ Balkin, D. B., & Griffeth, R. W. (1993). The Determinants 
of Employee Benefits Satisfaction. Journal of Business and 
Psychology, 7(3), 323-339.
    \210\ Lambert, S. J., & Henly, J. R. (2009). Scheduling in 
Hourly Jobs: Promising Practices for the Twenty-First Century 
Economy. The Mobility Agenda. Lambert, S. J. (2007). Making a 
Difference for Hourly Employees. In A. Booth, & A. C. Crouter, Work-
Life Policies that Make a Real Difference for Individuals, Families, 
and Communities. Washington, DC: Urban Institute Press.
---------------------------------------------------------------------------

    If workers are reclassified as hourly, and hourly workers have 
fewer benefits than salaried workers, this could reduce workers' 
benefits. But the Department notes that this rule does not require such 
reclassification. These workers may continue to be paid a salary, as 
long as that salary is equivalent to a base wage at least equal to the 
minimum wage rate for every hour worked, and the employee receives a 50 
percent premium on that base wage for any overtime hours each 
week.\211\
---------------------------------------------------------------------------

    \211\ Sec. Sec.  778.113-.114.
---------------------------------------------------------------------------

Quality of Services
    To the extent that employers respond to this rule by restricting 
employee work hours, this rulemaking could negatively affect the 
quality of public services provided by local governments and 
nonprofits. However, the Department believes the effect of the rule on 
public services will be small. The Department acknowledges that some 
employees who work overtime providing public services may see a 
reduction in hours as an effect of the rulemaking. But if the services 
are in demand, the Department believes additional workers may be hired, 
as funding availability allows, to make up some of these hours, and 
productivity increases may offset some reduction in services. In 
addition, the Department expects many employers will adjust base wages 
downward to some degree so that even after paying the overtime premium, 
overall pay and hours of work for many employees will be relatively 
minimally impacted. Additionally, as noted above, many nonprofits are 
non-covered enterprises because when determining enterprise coverage 
only revenue derived from business operations, not charitable 
activities, are included.
Increased Prices
    Business firms may pass along increased labor costs to consumers 
through higher prices. The Department anticipates that some firms may 
offset part of the additional labor costs through charging higher 
prices for the firms' goods and services. However, because costs and 
transfers are, on average, small relative to payroll and revenues, the 
Department does not expect the proposed rule to have a significant 
effect on prices. The Department estimated that, on average, costs and 
transfers make up less than 0.02 percent of payroll and less than 0.003 
percent of revenues, although for specific industries and firms this 
percentage may be larger. Therefore, any potential change in prices 
would be modest. Further, any significant price increases would not 
represent a separate category of effects from those estimated

[[Page 10934]]

in this economic analysis; rather, such price increases (where they 
occur) would be the channel through which consumers, rather than 
employers or employees, bear rule-induced costs (including transfers).
Reduced Profits
    The increase in workers' earnings resulting from the revised salary 
level is a transfer of income from firms to workers, not a cost. The 
Department acknowledges that the increased employer costs and transfer 
payments as a result of this proposed rule may reduce the profits of 
business firms, although (1) some firms may offset some of these costs 
and transfers by making payroll adjustments, and (2) some firms may 
mitigate their reduced profits due to these costs and transfers through 
increased prices.\212\ To the extent that the proposed rule would 
reduce profits at business firms after all these adjustments are made, 
these firms would have marginally lower after-tax returns on new 
investments in equipment, structures, and intellectual property and 
would therefore make fewer such investments going forward. All else 
equal, less business investment slows economic growth and reduces 
employment. However, the Department expects that any anti-growth 
effects of the proposed rule would be minimal.
---------------------------------------------------------------------------

    \212\ Because costs and transfers compose on average less than 
0.003 percent of revenues, the Department expects any such price 
increases to be minor.
---------------------------------------------------------------------------

Hiring Costs
    To the extent that firms respond to an update to the salary level 
test by reducing overtime, they may do so by spreading hours to other 
workers, including current workers employed for less than 40 hours per 
week by that employer, current workers who retain their exempt status, 
and newly hired workers. If new workers are hired to absorb these 
transferred hours, then the associated hiring costs are a cost of this 
proposed rule.
iv. Transfers
1. Overview
    Transfer payments occur when income is redistributed from one party 
to another. The Department has quantified two transfers from employers 
to employees that would likely result from the proposed rule: (1) 
Transfers to ensure compliance with the FLSA minimum wage provision; 
and (2) transfers to ensure compliance with the FLSA overtime pay 
provision. Transfers in Year 1 due to the minimum wage provision were 
estimated to be $57.0 million. The increase in the HCE compensation 
level does not affect minimum wage transfers because workers eligible 
for the HCE exemption earn well above the minimum wage. Transfers due 
to the overtime pay provision would be $469.9 million: $195.5 million 
from the increased standard salary level and $274.3 million from the 
increased HCE compensation level. Total Year 1 transfers would be 
$526.9 million (Table 12).

                                Table 12--Summary of Year 1 Regulatory Transfers
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                                        HCE
               Transfer from employers to workers                    Standard      compensation        Total
                                                                   salary level        level
----------------------------------------------------------------------------------------------------------------
Due to minimum wage.............................................           $57.0            $0.0           $57.0
Due to overtime pay.............................................           195.5           274.3           469.9
                                                                 -----------------------------------------------
    Total transfers.............................................           252.5           274.3           526.9
----------------------------------------------------------------------------------------------------------------

    Because the overtime premium depends on the base wage, the 
estimates of minimum wage transfers and overtime transfers are linked. 
This can be considered a two-step approach. The Department first 
identified affected EAP workers with an implicit regular hourly wage 
lower than the minimum wage, and then calculated the wage increase 
necessary to reach the minimum wage.
2. Transfers Due to the Minimum Wage Provision
    For purposes of this analysis, the hourly rate of pay was 
calculated as usual weekly earnings divided by usual weekly hours 
worked. To earn less than the federal or state minimum wage, this set 
of workers must work many hours per week. For example, a worker paid 
$455 per week must work 62.8 hours to earn less than the federal 
minimum wage of $7.25 per hour ($455/$7.25 = 62.8).\213\ The applicable 
minimum wage is the higher of the federal minimum wage and the state 
minimum wage as of January 1, 2017. Most affected EAP workers already 
receive at least the minimum wage; only an estimated 1.4 percent of 
them (15,100 in total) earn an implicit hourly rate of pay less than 
the minimum wage. The Department estimated transfers due to payment of 
the minimum wage by calculating the change in earnings if wages rose to 
the minimum wage for workers who become nonexempt.\214\
---------------------------------------------------------------------------

    \213\ Workers in states with minimum wages higher than the 
federal minimum wage could earn less than the state minimum wage 
working fewer hours.
    \214\ Because these workers' hourly wages will be set at the 
minimum wage after this Proposed Rule, their employers will not be 
able to adjust their wages downward to offset part of the cost of 
paying the overtime pay premium (which will be discussed in the 
following section). Therefore, these workers will generally receive 
larger transfers attributed to the overtime pay provision than other 
workers.
---------------------------------------------------------------------------

    In response to an increase in the regular rate of pay to the 
minimum wage, employers may reduce the workers' hours. Since the 
quantity of labor hours demanded is inversely related to wages, a 
higher mandated wage will result in fewer hours of labor demanded. The 
Department estimated the potential disemployment effects (i.e., the 
estimated reduction in hours) of the transfer attributed to the minimum 
wage by multiplying the percent change in the regular rate of pay by a 
labor demand elasticity of -0.2.\215\
---------------------------------------------------------------------------

    \215\ This elasticity estimate represents a short run demand 
elasticity for general labor, and is based on the Department's 
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP 
No. 7958. We selected a general labor demand elasticity because 
employers will adjust their demand based on the cumulative change in 
employees' earnings, not on a conceptual differentiation between 
increases attributable to the minimum wage and the overtime 
provisions of the FLSA.
---------------------------------------------------------------------------

    At the new standard salary level, the Department estimated that 
15,100 affected EAP workers would, on average, see an hourly wage 
increase of $1.45, work 3.2 fewer hours per week, and receive an 
increase in weekly earnings of $72.68 as a result of

[[Page 10935]]

coverage by the minimum wage provisions (Table 13). The total change in 
weekly earnings due to the payment of the minimum wage was estimated to 
be $1.1 million per week ($72.68 x 15,100) or $57.0 million in Year 1.

   Table 13--Minimum Wage Only: Mean Hourly Wages, Usual Overtime Hours, and Weekly Earnings for Affected EAP
                                                 Workers, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                                   Total weekly
                                                    Hourly wage    Usual weekly    Usual weekly      transfer
                                                        \a\            hours         earnings        (1,000s)
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............................           $8.29            64.1         $515.88  ..............
After Proposed Rule.............................            9.75            61.0          588.56  ..............
Change..........................................            1.45            -3.2           72.68          $1,097
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.

3. Transfers Due to the Overtime Pay Provision
Introduction
    The proposed rule will transfer income to affected workers who work 
in excess of 40 hours per week. Requiring an overtime premium increases 
the marginal cost of labor, which employers will likely try to offset 
by adjusting wages and/or hours of affected workers. The size of the 
transfer will depend largely on how employers respond to the updated 
salary levels. Employers may respond by: (1) Paying overtime premiums 
to affected workers; (2) reducing overtime hours of affected workers 
and potentially transferring some of these hours to other workers; (3) 
reducing the regular rate of pay for affected workers working overtime 
(provided that the reduced rates still exceed the minimum wage); (4) 
increasing affected workers' salaries to the updated salary or 
compensation level to preserve their exempt status; or (5) using some 
combination of these responses. How employers will respond depends on 
many factors, including the relative costs of each of these 
alternatives; in turn, the relative costs of each of these alternatives 
are a function of workers' earnings and hours worked.
Literature on Employer Adjustments
    Two conceptual models are useful for thinking about how employers 
may respond to reclassifying certain employees as overtime-eligible: 
(1) The ``fixed-wage'' or ``labor demand'' model, and (2) the ``fixed-
job'' or ``employment contract'' model.\216\ These models make 
different assumptions about the demand for overtime hours and the 
structure of the employment agreement, which result in different 
implications for predicting employer responses.
---------------------------------------------------------------------------

    \216\ See Trejo, S. J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740, and Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
---------------------------------------------------------------------------

    The fixed-wage model assumes that the standard hourly wage is 
independent of the statutory overtime premium. Under the fixed-wage 
model, a reclassification of workers from overtime exempt to overtime 
non-exempt would cause a reduction in overtime hours for affected 
workers, an increase in the prevalence of a 40-hour workweek among 
affected workers, and an increase in the earnings of affected workers 
who continue to work overtime.
    In contrast, the fixed job model assumes that the standard hourly 
wage is affected by the statutory overtime premium. Thus, employers can 
neutralize any reclassification of workers from overtime exempt to 
overtime non-exempt by reducing the standard hourly wage of affected 
workers so that their weekly earnings and hours worked are unchanged, 
except when minimum wage laws prevent employers from lowering the 
standard hourly wage below the minimum wage. Under the fixed-job model, 
a reclassification of workers from overtime exempt to overtime non-
exempt would have differential effects on minimum-wage workers and 
above-minimum-wage workers. Similar to the fixed-wage model, minimum-
wage workers would experience a reduction in overtime hours, an 
increase in the prevalence of a 40-hour workweek at a given employer 
(though not necessarily overall), and an increase in earnings for the 
portion of minimum-wage workers that continue to work overtime for a 
given employer. Unlike the fixed-wage model, however, above-minimum-
wage workers would experience no change.
    The Department conducted a literature review to evaluate studies of 
how labor markets adjust to a change in the requirement to pay 
overtime. In general, these studies are supportive of the fixed-job 
model of labor market adjustment, in that wages adjust to offset the 
requirement to pay an overtime premium as predicted by the fixed-job 
model, but do not adjust enough to completely offset the overtime 
premium as predicted by the model.
    The Department believes the two most important papers in this 
literature are the studies by Trejo (1991) and Barkume (2010). 
Analyzing the economic effects of the overtime pay provisions of the 
FLSA, Trejo (1991) found ``the data analyzed here suggest the wage 
adjustments occur to mitigate the purely demand-driven effects 
predicted by the fixed-wage model, but these adjustments are not large 
enough to neutralize the overtime pay regulations completely.'' Trejo 
noted, ``In accordance with the fixed job model, the overtime law 
appears to have a greater impact on minimum-wage workers.'' He also 
stated, ``[T]he finding that overtime pay coverage status 
systematically influences the hours-of-work distribution for non-
minimum wage works is supportive of the fixed-wage model. No 
significant differences in weekly earnings were discovered between the 
covered and non-covered sectors, which is consistent with the fixed-job 
model.'' However, ``overtime pay compliance is higher for union than 
for nonunion workers, a result that is more easily reconciled with the 
fixed wage model.'' Trejo's findings are supportive of the fixed-wage 
model whose adjustment is incomplete largely due to the minimum-wage 
requirement.\217\
---------------------------------------------------------------------------

    \217\ Trejo, S. J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740.
---------------------------------------------------------------------------

    A second paper by Trejo (2003) took a different approach to testing 
the consistency of the fixed-wage adjustment models with overtime 
coverage and data on hours worked. In this paper, he examined time-
series data on employee hours by industry. After controlling for 
underlying trends in hours worked over 20 years, he found changes in 
overtime coverage had no

[[Page 10936]]

impact on the prevalence of overtime hours worked. This result supports 
the fixed-job model. Unlike the 1991 paper, however, he did not examine 
impacts of overtime coverage on employees' weekly or hourly earnings, 
so this finding in support of the fixed-job model only analyzes one 
implication of the model.\218\
---------------------------------------------------------------------------

    \218\ Trejo, S. J. (2003). Does the Statutory Overtime Premium 
Discourage Long Workweeks? Industrial and Labor Relations Review, 
56(3), 375-392.
---------------------------------------------------------------------------

    Barkume (2010) built on the analytic method used in Trejo 
(1991).\219\ However, Barkume observed that Trejo did not account for 
``quasi-fixed'' employment costs (e.g., benefits) that do not vary with 
hours worked, and therefore affect employers' decisions on overtime 
hours worked. After incorporating these quasi-fixed costs in the model, 
Barkume found results consistent with those of Trejo (1991): ``though 
wage rates in otherwise similar jobs declined with greater overtime 
hours, they were not enough to prevent the FLSA overtime provisions 
from increasing labor costs.'' Barkume also determined that the 1991 
model did not account for evidence that in the absence of regulation 
some employers may voluntarily pay workers some overtime premium to 
entice them to work longer hours, to compensate workers for unexpected 
changes in their schedules, or as a result of collective 
bargaining.\220\ Barkume found that how much wages and hours worked 
adjusted in response to the overtime pay requirement depended on what 
overtime pay would be in absence of regulation.
---------------------------------------------------------------------------

    \219\ Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
    \220\ Barzel, Y. (1973). The Determination of Daily Hours and 
Wages. The Quarterly Journal of Economics, 87(2), 220-238 
demonstrated that modest fluctuations in labor demand could justify 
substantial overtime premiums in the employment contract model. 
Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime 
Premium? IZA Discussion Paper No. 163, showed that establishing an 
overtime premium in an employment contract can reduce 
inefficiencies.
---------------------------------------------------------------------------

    In addition, Bell and Hart (2003) examined the standard hourly 
wage, average hourly earnings (including overtime), the overtime 
premium, and overtime hours worked in the United Kingdom. Unlike the 
United States, the United Kingdom does not have national labor laws 
regulating overtime compensation. Bell and Hart found that after 
accounting for overtime, average hourly earnings are generally uniform 
in a given industry because firms paying below-market level straight-
time wages tend to pay above-market overtime premiums and firms paying 
above-market level straight-time wages tend to pay below-market 
overtime premiums. Bell and Hart concluded ``this is consistent with a 
model in which workers and firms enter into an implicit contract that 
specifies total hours at a constant, market-determined, hourly wage 
rate.\221\ Their research is also consistent with studies showing that 
employers may pay overtime premiums either in the absence of a 
regulatory mandate (e.g., Britain), or when the mandate exists but the 
requirements are not met (e.g., United States).\222\
---------------------------------------------------------------------------

    \221\ Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and 
Overtime Premia: Evidence from the British Labor Market, Industrial 
and Labor Relations Review, 56(3), 470-480.
    \222\ Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an 
Overtime Premium? IZA Discussion Paper No. 163
---------------------------------------------------------------------------

    On balance, the Department finds strong support for the fixed-job 
model as the best approximation for the likely effects of a 
reclassification of above-minimum-wage workers from overtime exempt to 
overtime non-exempt and the fixed-wage model as the best approximation 
of the likely effects of a reclassification of minimum-wage workers 
from overtime exempt to overtime non-exempt. In addition, the studies 
suggest that although observed wage adjustment patterns are consistent 
with the fixed-job model, this evidence also suggests that the actual 
wage adjustment is less than 100 percent as predicted by the fixed-job 
model. Thus, the hybrid model used in this analysis may be described as 
a substantial, but incomplete fixed-job model.
    To determine the magnitude of the adjustment, the Departments 
accounted for the following findings. Earlier research had demonstrated 
that in the absence of regulation some employers may voluntarily pay 
workers some overtime premium to entice them to work longer hours, to 
compensate workers for unexpected changes in their schedules, or as a 
result of collective bargaining.\223\ Barkume (2010) found that the 
measured adjustment of wages and hours to overtime premium requirements 
depended on what overtime premium might be paid in absence of any 
requirement to do so. Thus, when Barkume assumed that workers would 
receive an average voluntary overtime pay premium of 28 percent in the 
absence of an overtime pay regulation, which is the average overtime 
premium that Bell and Hart (2003) found British employers paid in the 
absence of any overtime regulations, the straight time hourly wage 
adjusted downward by 80 percent of the amount that would occur with the 
fixed-job model. When Barkume assumed workers would receive no 
voluntary overtime pay premium in the absence of an overtime pay 
regulation, the results were more consistent with Trejo's (1991) 
findings that the adjustment was a smaller percentage. The Department 
modeled an adjustment process between these two findings. Although it 
seemed reasonable that some premium was paid for overtime in the 
absence of regulation, Barkume's assumption of a 28 percent initial 
overtime premium is likely too high for the salaried workers 
potentially affected by a change in the salary and compensation level 
requirements for the EAP exemptions because this assumption is based on 
a study of workers in Britain. British workers were likely paid a 
larger voluntary overtime premium than American workers because Britain 
did not have a required overtime pay regulation and so collective 
bargaining played a larger role in implementing overtime pay.\224\
---------------------------------------------------------------------------

    \223\ Barzel, Y. (1973). The Determination of Daily Hours and 
Wages. The Quarterly Journal of Economics, 87(2), 220-238 
demonstrated that modest fluctuations in labor demand could justify 
substantial overtime premiums in the employment contract model. 
Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime 
Premium? IZA Discussion Paper No. 163, showed that establishing an 
overtime premium in an employment contract can reduce 
inefficiencies.
    \224\ Bell, D. and Hart, R. (2003). Wages, Hours, and Overtime 
Premia: Evidence from the British Labor Market. Industrial and Labor 
Relations Review, 56(3), 470-480.
---------------------------------------------------------------------------

    The Department requests comment on this analysis, and how employers 
would likely respond to an increase in the salary level.
Identifying Types of Affected Workers
    The Department identified four types of workers whose work 
characteristics affect how it modeled employers' responses to the 
changes in both the standard and HCE salary levels:
     Type 1: Workers who do not work overtime.
     Type 2: Workers who do not regularly work overtime but 
occasionally work overtime.
     Type 3: Workers who regularly work overtime and become 
overtime eligible (nonexempt).
     Type 4: Workers who regularly work overtime and remain 
exempt, because it is less expensive for the employer to pay the 
updated salary level than to pay overtime and incur additional 
managerial costs.\225\
---------------------------------------------------------------------------

    \225\ There is some evidence that employers will respond in this 
manner. In response to the RFI, one employer association reported 
that when making adjustments in anticipation of the 2016 final rule, 
more than 40 percent of its members raised the salaries of at least 
one worker above the 2016 final rule salary level. Similarly, it is 
possible that employers will increase the salaries paid to some 
``occasional'' overtime workers to maintain the exemption for the 
worker, but the Department has no way of identifying these workers.

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

[[Page 10937]]

    The Department began by identifying the number of workers in each 
type. After modeling employer adjustments, it estimated transfer 
payments. Type 3 and 4 workers were identified as those who regularly 
work overtime (CPS variable PEHRUSL1 greater than 40). Distinguishing 
Type 3 workers from Type 4 workers involved a four-step process. First, 
the Department identified all workers who regularly work overtime. Then 
the Department estimated each worker's weekly earnings if they became 
nonexempt, to which it added weekly managerial costs for each affected 
worker of $4.06 ($48.72 per hour x (5 minutes/60 minutes)).\226\ Last, 
the Department identified as Type 4 those workers whose expected 
nonexempt earnings plus weekly managerial costs exceeds the updated 
standard salary level, and, conversely, as Type 3 those whose expected 
nonexempt earnings plus weekly managerial costs are less than the new 
standard salary.\227\ The Department assumed that firms will include 
incremental managerial costs in their determination of whether to treat 
an affected employee as a Type 3 or Type 4 worker because those costs 
are only incurred if the employee is a Type 3 worker.
---------------------------------------------------------------------------

    \226\ See supra Sec.  VI.D.iii.4 (managerial costs).
    \227\ When analyzing impacts of increasing the standard salary 
level, Rohwedder and Wenger conducted a similar analysis; however, 
they use straight-time pay rather than overtime pay to calculate 
earnings in the absence of a pay raise to remain exempt. Rohwedder, 
S. and Wenger, supra note 163.
---------------------------------------------------------------------------

    Identifying Type 2 workers involved two steps. First, using CPS 
MORG data, the Department identified those who do not usually work 
overtime but did work overtime in the survey week (the week referred to 
in the CPS questionnaire, variable PEHRACT1 greater than 40). Next, the 
Department supplemented the CPS data with data from the Survey of 
Income and Program Participation (SIPP) to look at likelihood of 
working some overtime during the year. Based on 2012 data, the most 
recent available, the Department found that 39.4 percent of non-hourly 
workers worked overtime at some point in a year. Therefore, the 
Department classified a share of workers who reported they do not 
usually work overtime, and did not work overtime in the reference week 
(previously identified as Type 1 workers), as Type 2 workers such that 
a total of approximately 39.4 percent of affected workers were Type 2, 
3, or 4.
Modeling Changes in Wages and Hours
    The substantial, but incomplete fixed-job model (hereafter referred 
to as the incomplete fixed-job model) predicts that employers will 
adjust wages of regular overtime workers but not to the full extent 
indicated by fixed-job model, and thus some employees may receive a 
small increase in weekly earnings due to overtime pay coverage. 
Therefore, when modeling employer responses with respect to the 
adjustment to the regular rate of pay, the Department used the 
incomplete fixed-job model.
    The Department determined that an appropriate estimate of the 
effect on the implicit hourly rate of pay for regular overtime workers 
should be determined using the average of two estimates of the 
incomplete fixed-job model adjustments: Trejo's (1991) estimate that 
the overtime-induced wage change is 40 percent of the adjustment toward 
the amount predicted by the fixed-job model, assuming an initial zero 
overtime pay premium, and Barkume's (2010) estimate that the wage 
change is 80 percent of the predicted adjustment assuming an initial 28 
percent overtime pay premium.\228\ This is approximately equivalent to 
assuming that salaried overtime workers implicitly receive the 
equivalent of a 14 percent overtime premium in the absence of 
regulation (the midpoint between 0 and 28 percent).
---------------------------------------------------------------------------

    \228\ Both studies considered a population that included hourly 
workers. Evidence is not available on how the adjustment towards the 
employment contract model differs between salaried and hourly 
workers. The employment contract model may be more likely to hold 
for salaried workers than for hourly workers since salaried workers 
directly observe their weekly total earnings, not their implicit 
equivalent hourly wage. Thus, applying the partial adjustment to the 
employment contract model as estimated by these studies may 
overestimate the transfers from employers to salaried workers. We do 
not attempt to quantify the magnitude of this potential 
overestimate.
---------------------------------------------------------------------------

    Modeling changes in wages, hours, and earnings for Type 1 and Type 
4 workers was relatively straightforward. Type 1 affected EAP workers 
will become overtime-eligible, but because they do not work overtime, 
they will see no change in their weekly earnings. Type 4 workers will 
remain exempt because their earnings will be raised to at least the 
updated EAP level (either the standard salary level or HCE compensation 
level). These workers' earnings will increase by the difference between 
their current earnings and the amount necessary to satisfy the new 
salary or compensation level. It is possible employers will increase 
these workers' hours in response to paying them a higher salary, but 
the Department did not have enough information to model this potential 
change.\229\
---------------------------------------------------------------------------

    \229\ Cherry, Monica, ``Are Salaried Workers Compensated for 
Overtime Hours?'' Journal of Labor Research 25(3): 485-494, 
September 2004, found that exempt full-time salaried employees earn 
more when they work more hours, but her results do not lend 
themselves to the quantification of the effect on hours of an 
increase in earnings.
---------------------------------------------------------------------------

    Modeling changes in wages, hours, and earnings for Type 2 and Type 
3 workers was more complex. The Department distinguished those who 
regularly work overtime (Type 3 workers) from those who occasionally 
work overtime (Type 2 workers) because employer adjustment to the 
proposed rule may differ accordingly. Employers are more likely to 
adjust hours worked and wages for regular overtime workers because 
their hours are predictable. However, in response to a transient, 
perhaps unpredicted, shift in market demand for the good or service 
such employers provide, employers are more likely to pay for occasional 
overtime rather than adjust hours worked and pay.
    The Department treated Type 2 affected workers in two ways due to 
the uncertainty of the nature of these occasional overtime hours. The 
Department assumed that 50 percent of these occasional overtime workers 
worked expected overtime hours and the other 50 percent worked 
unexpected overtime. Workers were randomly assigned to these two 
groups. Workers with expected occasional overtime hours were treated 
like Type 3 affected workers (incomplete fixed-job model adjustments). 
Workers with unexpected occasional overtime hours were assumed to 
receive a 50 percent pay premium for the overtime hours worked and 
receive no change in base wage or hours (full overtime premium 
model).\230\ When modeling Type 2 workers' hour and wage adjustments, 
the Department treated those identified as Type 2 using the CPS data as 
representative of all Type 2 workers. The Department estimated employer 
adjustments and transfers assuming that the patterns observed in the 
CPS reference week are representative of an average week in the year. 
Thus, the Department assumes total transfers for the year are equal to 
52-times the transfers estimated for the single representative week for 
which the Department has CPS data. However, these transfers are spread 
over a larger group including those who occasionally

[[Page 10938]]

work overtime but did not do so in the CPS reference week.\231\
---------------------------------------------------------------------------

    \230\ We use the term ``full overtime premium'' to describe the 
adjustment process as modeled. The full overtime premium model is a 
special case of the general fixed-wage model in that the Department 
assumes the demand for labor under these circumstances is completely 
inelastic. That is, employers make no changes to employees' hours in 
response to these temporary, unanticipated changes in demand.
    \231\ If a different week was chosen as the survey week, then 
likely some of these workers would not have worked overtime. 
However, because the data are representative of both the population 
and all twelve months in a year, the Department believes the share 
of Type 2 workers identified in the CPS data in the given week is 
representative of an average week in the year.
---------------------------------------------------------------------------

    Since employers must now pay more for the same number of labor 
hours, for Type 2 and Type 3 EAP workers, the quantity of labor hours 
demanded by employers will decrease. It is the net effect of these two 
changes that will determine the final weekly earnings for affected EAP 
workers. The reduction in hours is calculated using the elasticity of 
labor demand with respect to wages. The Department used a short-term 
demand elasticity of -0.20 to estimate the percentage decrease in hours 
worked in Year 1 and a long-term elasticity of -0.4 to estimate the 
percentage decrease in hours worked in Years 2-10.\232\ The Department 
acknowledges that the academic literature on elasticity can be 
interpreted in multiple ways, and invites comment on the appropriate 
elasticity to use.
---------------------------------------------------------------------------

    \232\ This elasticity estimate is based on the Department's 
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP 
No. 7958. Some researchers have estimated larger impacts on the 
number of overtime hours worked (Hamermesh, D. and S. Trejo. (2000). 
The Demand for Hours of Labor: Direct Evidence from California. The 
Review of Economics and Statistics, 82(1), 38-47 concludes the price 
elasticity of demand for overtime hours is at least -0.5. The 
Department decided to use a general measure of elasticity applied to 
the average change in wages since the increase in the overtime wage 
is somewhat offset by a decrease in the non-overtime wage as 
indicated in the fixed-job model.
---------------------------------------------------------------------------

    For Type 3 affected workers, and the 50 percent of Type 2 affected 
workers who worked expected overtime, the Department estimated adjusted 
total hours worked after making wage adjustments using the incomplete 
fixed-job model. To estimate adjusted hours worked, the Department set 
the percent change in total hours worked equal to the percent change in 
average wages multiplied by the wage elasticity of labor demand.\233\
---------------------------------------------------------------------------

    \233\ In this equation, the only unknown is adjusted total hours 
worked. Since adjusted total hours worked is in the denominator of 
the left side of the equation and is also in the numerator of the 
right side of the equation, solving for adjusted total hours worked 
requires solving a quadratic equation.
---------------------------------------------------------------------------

    Figure 3 is a flow chart summarizing the four types of affected EAP 
workers. Also shown are the effects on exempt status, weekly earnings, 
and hours worked for each type of affected worker.

[[Page 10939]]

[GRAPHIC] [TIFF OMITTED] TP22MR19.002


[[Page 10940]]


[GRAPHIC] [TIFF OMITTED] TP22MR19.003

    In response to the Department's RFI and at the listening sessions, 
some commenters provided information concerning their proposed wage and 
hour adjustments in anticipation of an increase to the standard salary 
level and HCE total compensation level. Employers indicated they would 
respond by making a variety of adjustments to wages, hours worked, or 
both.
Estimated Number of and Effects on Affected EAP Workers
    The Department estimated the proposed rule would affect 1.3 million 
workers (Table 14), of which 760,100 were Type 1 workers (59.8 percent 
of all affected EAP workers), 279,500 were estimated to be Type 2 
workers (22.0 percent of all affected EAP workers), 204,600 were Type 3 
workers (16.1 percent of all affected EAP workers), and 27,100 were 
estimated to be Type 4 workers (2.1 percent of all affected workers). 
All Type 3 workers and half of Type 2 employees (344,300) are assumed 
to work predictable overtime.

                             Table 14--Affected EAP Workers by Type (1,000s), Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                    No overtime     Occasional   -------------------------------
                                       Total           (T1)        overtime (T2)       Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
Standard salary level...........         1,070.2           648.9           269.6           127.4            24.3
HCE compensation level..........           201.1           111.2             9.9            77.2             2.8
                                 -------------------------------------------------------------------------------
    Total.......................         1,271.3           760.1           279.5           204.6            27.1
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    The proposed rule would affect some affected workers' hourly wages, 
hours, and weekly earnings. Predicted changes in implicit wage rates 
are outlined in Table 15, changes in hours in Table 16, and changes in 
weekly earnings in Table 17. How these would change depends on the type 
of worker, but on average weekly earnings would be unchanged or 
increase while hours worked would be unchanged or decrease.
    Type 1 workers would have no change in wages, hours, or 
earnings.\234\ Employers were assumed to be unable to adjust the hours 
or regular rate of pay for the occasional overtime workers whose 
overtime is irregularly scheduled and unpredictable. The Department 
used the incomplete fixed-job model to estimate changes in the regular 
rate of pay for Type 3 workers and the 50 percent of Type 2 workers who 
regularly work occasional overtime. As a group, Type 2 workers would 
see a decrease in their average regular hourly wage; however, because 
workers would now receive a 50 percent premium on their regular hourly 
wage for each hour worked in excess of 40 hours per week, average 
weekly earnings for Type 2 workers would increase.\235\
---------------------------------------------------------------------------

    \234\ It is possible that these workers may experience an 
increase in hours and weekly earnings because of transfers of hours 
from overtime workers. Due to the high level of uncertainty in 
employers' responses regarding the transfer of hours, the Department 
did not have credible evidence to support an estimation of the 
number of hours transferred to other workers.
    \235\ Type 2 workers do not see increases in regular earnings to 
the new salary level (as Type 4 workers do) even if their new 
earnings in this week exceed that new level. This is because the 
estimated new earnings only reflect their earnings in that week when 
overtime is worked; their earnings in typical weeks that they do not 
work overtime do not exceed the salary level.
---------------------------------------------------------------------------

    Similarly, Type 3 workers would also receive decreases in their 
regular hourly wage as predicted by the incomplete fixed-job model but 
an increase in weekly earnings because these workers would now be 
eligible for the overtime premium. Type 4 workers' implicit hourly 
rates of pay would increase to meet the updated standard salary level 
or HCE annual compensation level.

[[Page 10941]]



                  Table 15--Average Regular Rate of Pay by Type of Affected EAP Worker, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                    No overtime     Occasional   -------------------------------
                                       Total           (T1)        overtime (T2)       Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
                                              Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............          $15.70          $16.74          $15.78          $11.32          $10.35
After Proposed Rule.............          $15.65          $16.74          $15.72          $10.83          $11.01
Change ($)......................          -$0.06           $0.00          -$0.05          -$0.49           $0.66
Change (%)......................           -0.4%            0.0%           -0.3%           -4.3%            6.3%
----------------------------------------------------------------------------------------------------------------
                                             HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............          $49.71          $54.41          $53.51          $42.66          $44.21
After Proposed Rule.............          $48.58          $54.41          $50.70          $40.04          $45.08
Change ($)......................          -$1.13           $0.00          -$2.81          -$2.61           $0.87
Change (%)......................           -2.3%            0.0%           -5.2%           -6.1%            2.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
* Type 1: Workers without regular OT and without occasional OT and become overtime-eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime-eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    Hours for Type 1 workers would not change. Similarly, hours would 
not change for the half of Type 2 workers who work irregular overtime. 
Half of Type 2 and all Type 3 workers would see a small decrease in 
their hours of overtime worked. This reduction in hours is relatively 
small and is due to the effect on labor demand from the increase in the 
average hourly wage as predicted by the incomplete fixed-job model 
(Table 16). Type 4 workers' hours may increase, but due to lack of 
data, the Department assumed hours would not change.

                     Table 16--Average Weekly Hours for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                            Regular OT
                                                    No overtime    Occasional OT -------------------------------
                                       Total        worked (T1)        (T2)            Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
                                             Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............            39.7            37.2            39.2            49.6            60.5
After Proposed Rule.............            39.6            37.2            39.2            49.1            60.5
Change (hours)..................            -0.1             0.0             0.0            -0.5             0.0
Change (%)......................           -0.2%            0.0%           -0.1%           -0.9%            0.0%
----------------------------------------------------------------------------------------------------------------
                                            HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............            45.1            39.5            49.3            52.1            61.3
After Proposed Rule.............            44.9            39.5            49.0            51.7            61.3
Change (hours)..................            -0.2             0.0            -0.3            -0.4             0.0
Change (%)......................           -0.4%            0.0%           -0.6%           -0.7%            0.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    Because Type 1 workers would not experience a change in their 
regular rate of pay or hours, they would have no change in earnings due 
to the proposed rule (Table 17). Although both Type 2 and Type 3 
workers would, on average, experience a decrease in both their regular 
rate of pay and hours worked, their weekly earnings would increase as a 
result of the overtime premium. Weekly earnings after the standard 
salary level increased were estimated using the new wage (i.e., the 
incomplete fixed-job model wage) and the reduced number of overtime 
hours worked. Type 4 workers' salaries would increase to the new 
standard salary level or the HCE compensation level.

[[Page 10942]]



                   Table 17--Average Weekly Earnings for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                    No overtime     Occasional   -------------------------------
                                       Total           (T1)        overtime (T2)       Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
                                             Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............         $563.76         $558.32         $577.87         $555.45         $596.04
After Proposed Rule.............         $568.30         $558.32         $583.34         $573.43         $641.00
Change ($)......................           $4.54           $0.00           $5.47          $17.98          $44.96
Change (%)......................            0.8%            0.0%            0.9%            3.2%            7.5%
----------------------------------------------------------------------------------------------------------------
                                            HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Proposed Rule............       $2,179.37       $2,126.62       $2,623.44       $2,182.02       $2,627.16
After Proposed Rule.............       $2,205.61       $2,126.62       $2,683.14       $2,240.70       $2,682.00
Change ($)......................          $26.23           $0.00          $59.70          $58.68          $54.84
Change (%)......................            1.2%            0.0%            2.3%            2.7%            2.1%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the
  weekly earnings because the product of two averages is not necessarily equal to the average of the product.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    At the new standard salary level, the average weekly earnings of 
all affected workers would increase $4.54 (0.8 percent), from $563.76 
to $568.30. Multiplying the average change of $4.54 by the 1.1 million 
affected standard EAP workers and 52 weeks equals an increase in 
earnings of $252.5 million in the first year (Table 18). For workers 
affected by the change in the HCE compensation level, average weekly 
earnings would increase by $26.23. When multiplied by 201,100 affected 
workers and 52 weeks, the national increase would be $274.3 million in 
the first year. Thus, total Year 1 transfer payments attributable to 
this proposed rule would total $526.9 million.

  Table 18--Total Change in Weekly and Annual Earnings for Affected EAP
                      Workers by Provision, Year 1
------------------------------------------------------------------------
                                                           Annual change
                        Provision                           in earnings
                                                             (1,000s)
------------------------------------------------------------------------
Total...................................................        $526,894
Standard salary level:
    Total...............................................         252,546
    Minimum wage only...................................          57,041
    Overtime pay only a.................................         195,505
HCE compensation level:
    Total...............................................         274,348
    Minimum wage only...................................  ..............
    Overtime pay only a.................................         274,348
------------------------------------------------------------------------
a Estimated by subtracting the minimum wage transfer from the total
  transfer.

    Rohwedder and Wenger (2015) analyzed the effects of increasing the 
standard salary level.\236\ They compared hourly and salaried workers 
in the CPS using quantile treatment effects. This methodology estimates 
the effect of a worker becoming nonexempt by comparing similar workers 
who are hourly and salaried. They found no statistically significant 
change in hours or wages on average. However, their point estimates, 
averaged across all affected workers, show small increases in earnings 
and decreases in hours, similar to our analysis. For example, using a 
salary level of $750, they estimated weekly earnings may increase 
between $2 and $22 and weekly hours may decrease by approximately 0.4 
hours. The Department estimated weekly earnings for workers affected by 
the standard salary level would increase by $4.54 and hours would 
decrease by 0.1 hours.
---------------------------------------------------------------------------

    \236\ Rohwedder and Wenger, supra note 163.
---------------------------------------------------------------------------

4. Potential Transfers Not Quantified
    There may be additional transfers attributable to this proposed 
rule; however, the magnitude of these other transfers could not be 
quantified and therefore are discussed only qualitatively.
Reduced Earnings for Some Workers
    Holding regular rate of pay and work hours constant, payment of an 
overtime premium will increase weekly earnings for workers who work 
overtime. However, as discussed previously, employers may try to 
mitigate cost increases by reducing the number of overtime hours 
worked, either by transferring these hours to other workers or 
monitoring hours more closely. Depending on how hours are adjusted, a 
specific worker may earn less pay after this proposed rule.

[[Page 10943]]

Additional Work for Some Workers
    Affected workers who remain exempt would see an increase in pay but 
may also see an increase in workload. The Department estimated the net 
changes in hours, but due to the data limitations as noted in section 
VI.D.iv.3, did not estimate changes in hours for affected workers whose 
salary is increased to the new threshold so they remain overtime 
exempt.
Reduction in Bonuses and Benefits for Some Workers
    Employers may offset increased labor costs by reducing bonuses or 
benefits instead of reducing base wages or hours worked. Due to data 
limitations, the Department has not modeled this effect separately. The 
Department observes that any reductions in bonuses or benefits would be 
likely accompanied by smaller reductions in base wages or hours worked.
v. Benefits and Cost Savings
Potential Benefits and Effects Not Discussed Elsewhere
    The Department has determined that the proposed rulemaking would 
provide some benefits; however, these benefits could not be quantified 
due to data limitations, requiring the Department to discuss such 
benefits only qualitatively.
1. Reduce Employee Misclassification
    The revised salary level reduces the likelihood of workers being 
misclassified as exempt from overtime pay, providing an additional 
measure of the effectiveness of the salary level as a bright-line test 
delineating exempt and nonexempt workers. The Department's analysis of 
misclassification drew on CPS data and looked at workers who are white 
collar, salaried, subject to the FLSA and covered by part 541 
regulations, earn at least $455 but less than $641 per week, and fail 
the duties test. Because only workers who work overtime may receive 
overtime pay, when determining the share of workers who are 
misclassified the sample was limited to those who usually work 
overtime. Workers were considered misclassified if they did not receive 
overtime pay.\237\ The Department estimated that 9.3 percent of workers 
in this analysis who usually worked overtime did not receive overtime 
compensation and are therefore misclassified as exempt. Applying this 
estimate to the sample of white collar salaried workers who fail the 
duties test and earn at least $455 but less than $641 (the 2017 
proposed salary level used for the RIA), the Department estimated that 
there are approximately 188,100 white collar salaried workers who are 
overtime-eligible but whose employers do not recognize them as 
such.\238\ These employees' entitlement to overtime pay will now be 
abundantly evident.
---------------------------------------------------------------------------

    \237\ Overtime pay status was based on worker responses to the 
CPS MORG question concerning whether they receive overtime pay, 
tips, or commissions at their job (``PEERNUOT'' variable).
    \238\ The Department applies the misclassification estimate 
derived here to both the group of workers who usually work more than 
40 hours and to those who do not.
---------------------------------------------------------------------------

    RAND has conducted a survey to identify the number of workers who 
may be misclassified as EAP exempt. The survey, a special module to the 
American Life Panel, asks respondents: (1) Their hours worked, (2) 
whether they are paid on an hourly or salary basis, (3) their typical 
earnings, (4) whether they perform certain job responsibilities that 
are treated as proxies for whether they would justify exempt status, 
and (5) whether they receive any overtime pay. Using these data, Susann 
Rohwedder and Jeffrey B. Wenger \239\ found ``11.5 percent of salaried 
workers were classified as exempt by their employer although they did 
not meet the criteria for being so.'' Using RAND's estimate of the rate 
of misclassification (11.5 percent), the Department estimated that 
approximately 232,400 salaried workers earning between $455 and $641 
per week who fail the standard duties test are currently misclassified 
as exempt.\240\ By raising the salary level the proposed rule will 
increase the likelihood that these workers will be correctly classified 
as nonexempt.
---------------------------------------------------------------------------

    \239\ Rohwedder and Wenger, supra note 163.
    \240\ The number of misclassified workers estimated based on the 
RAND research cannot be directly compared to the Department's 
estimates because of differences in data, methodology, and 
assumptions. Although it is impossible to reconcile the two 
different approaches without further information, by calculating 
misclassified workers as a percent of all salaried workers in its 
sample, RAND uses a larger denominator than the Department. If 
calculated on a more directly comparable basis, the Department 
expects the RAND estimate of the misclassification rate would still 
be higher than the Department's estimate.
---------------------------------------------------------------------------

2. Reduced Litigation
    One result of enforcing the 2004 standard salary level for 14 years 
is that the established ``dividing line'' between EAP workers who are 
exempt and not exempt has gradually eroded and no longer holds the same 
relative position in the distribution of nominal wages and salaries. 
Therefore, as nominal wages and salaries for workers have increased 
over time, while the standard salary level has remained constant, more 
workers earn above the ``dividing line'' and have moved from nonexempt 
to potentially exempt. The Department's enforcement of the 2004 salary 
levels has burdened employers with performing duties tests to determine 
overtime exemption status of white collar workers for a larger 
proportion of workers than in 2004 and has created uncertainty 
regarding the correct classification of workers as nonexempt or exempt. 
This may have contributed to an increase in FLSA lawsuits since 
2004,\241\ much of which has involved cases regarding whether workers 
who satisfy the salary level test also meet the duties test for 
exemption.
---------------------------------------------------------------------------

    \241\ See https://www.washingtonpost.com/news/wonk/wp/2015/11/25/people-are-suing-more-than-ever-over-wages-and-hours/?utm_term=.c8dcc2783351; https://www.bna.com/uptick-flsa-litigation-n57982064020/.
---------------------------------------------------------------------------

    Updating the standard salary level should restore the relative 
position of the standard salary level in the overall distribution of 
nominal wages and salaries as set forth in the 2004 rule. Additionally, 
proposed regular updates to the standard salary level would maintain 
its desired position within the distribution of nominal wages and 
salaries and therefore would keep the standard salary test's 
effectiveness as a ``dividing line'' for separating nonexempt and 
potentially exempt EAP workers. Increasing the standard salary level 
from $455 per week to the proposed level of $679 per week would 
increase the number of white collar workers for whom the standard 
salary-level test is determinative of their nonexempt status, and 
employers would no longer have to perform a duties analysis for these 
employees. This would reduce the burden on employers and may reduce 
legal challenges and the overall cost of litigation faced by employers 
in FLSA overtime lawsuits, specifically litigation that turns on 
whether workers earning above the current standard salary level ($455 
per week) pass the duties test. The size of the potential social 
benefit from fewer legal challenges and the corresponding decline in 
overall litigation costs is difficult to quantify, but a reduction in 
litigation costs would be beneficial to both employers and workers.
    To provide a general estimate of the size of the potential benefits 
from reducing litigation, the Department used data from the federal 
courts' Public Access to Court Electronic Records (PACER) system and 
the CPS to estimate the number and percentage of FLSA cases that 
concern EAP exemptions and are likely to be affected by the proposed 
rule. For this step of the analysis, to avoid using data that could 
reflect changed behavior in anticipation of the 2016 final rule, the 
Department used the

[[Page 10944]]

data gathered during the 2016 rulemaking. As explained in that rule, to 
determine the potential number of cases that would likely be affected 
by the proposed rule, the Department obtained a list of all FLSA cases 
closed in 2014 from PACER (8,256 cases).\242\ From this list, the 
Department selected a random sample of 500 cases. The Department 
identified the cases within this sample that were associated with the 
EAP exemption. The Department found that 12.0 percent of these FLSA 
cases (60 of 500) were related to the EAP exemptions. Next the 
Department determined what share of these cases could potentially be 
avoided by an increase in the standard salary and HCE compensation 
levels.
---------------------------------------------------------------------------

    \242\ See 81 FR 32501.
---------------------------------------------------------------------------

    The Department estimated the share of EAP cases that may be avoided 
due to the proposed rule by using data on the salaried earnings 
distribution from the 2017 CPS MORG to determine the share of EAP cases 
in which workers earn at least $455 but less than $641 per week or at 
least $100,000 but less than $139,464 annually. From CPS, the 
Department selected white collar, nonhourly workers as the appropriate 
reference group for defining the earnings distribution rather than 
exempt workers because if a worker is litigating his or her exempt 
status, then we do not know if that worker is exempt or not. Based on 
this analysis, the Department determined that 21.3 percent of white 
collar nonhourly workers had earnings within these ranges. Applying 
these findings to the 12 percent of cases associated with the EAP 
exemption yields an estimated 2.6 percent of FLSA cases, or about 211 
cases, that may be avoidable. The assumption underlying this method is 
that workers who claim they are misclassified as EAP exempt have a 
similar earnings distribution as all white collar nonhourly workers.
    After determining the potential number of EAP cases that the 
proposed rule may avoid, the Department examined a selection of 56 FLSA 
cases concluded between 2012 and 2015 that contained litigation cost 
information to estimate the average costs of litigation to assign to 
the potentially avoided EAP cases.\243\ To calculate average litigation 
costs associated with these cases, the Department looked at records of 
court filings in the Westlaw Case Evaluator tool and on PACER to 
ascertain how much plaintiffs in these cases were paid for attorney 
fees, administrative fees, and/or other costs, apart from any monetary 
damages attributable to the alleged FLSA violations. (The FLSA provides 
for successful plaintiffs to be awarded reasonable attorney's fees and 
costs, so this data is available in some FLSA cases.) After determining 
the plaintiff's total litigation costs for each case, the Department 
then doubled the figures to account for litigation costs that the 
defendant employers incurred.\244\ According to this analysis, the 
average litigation cost for FLSA cases concluded between 2012 and 2015 
was $654,182.\245\ Applying this figure to approximately 211 EAP cases 
that could be prevented as a consequence of this rulemaking, the 
Department estimated that avoided litigation costs resulting from the 
rule may total approximately $138.2 million per year. The Department 
believes these totals may underestimate total litigation costs because 
some FLSA overtime cases are heard in state court and thus were not 
captured by PACER; some FLSA overtime matters are resolved before 
litigation or by alternative dispute resolution; and some attorneys 
representing FLSA overtime plaintiffs may take a contingency fee atop 
their statutorily awarded fees and costs.
---------------------------------------------------------------------------

    \243\ The 56 cases used for this analysis were retrieved from 
Westlaw's Case Evaluator database using a keyword search for case 
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and 
``fees.'' Although the initial search yielded 64 responsive cases, 
the Department excluded one duplicate case, one case resolving 
litigation costs through a confidential settlement agreement, and 
six cases where the defendant employer(s) ultimately prevailed. 
Because the FLSA only entitles prevailing plaintiffs to litigation 
cost awards, information about litigation costs was only available 
for the remaining 56 FLSA cases that ended in settlement agreements 
or court verdicts favoring the plaintiff employees.
    \244\ This is likely a conservative approach to estimate the 
total litigation costs for each FLSA lawsuit, as defendant employers 
tend to incur greater litigation costs than plaintiff employees 
because of, among other things, typically higher discovery costs.
    \245\ The median cost was $111,835 per lawsuit.
---------------------------------------------------------------------------

3. Benefits of Transparency and Certainty
    The proposed rule also affirms the Department's intention to update 
the part 541 earnings thresholds every four years going forward. This 
would help maintain the relative position of the standard salary and 
HCE compensation levels in the overall distribution of nominal wages 
and salaries over time. Proposing to adjust the standard salary level 
and HCE compensation test every four years may provide social benefits 
from increased transparency and certainty for employers.
    The Department believes an update to the salary level tests is long 
overdue. Long periods between adjustments result in large changes in 
the salary levels to restore the appropriate relative position of the 
``dividing line'' between nonexempt and potentially exempt workers. The 
size and unpredictability of these changes in the past are challenging 
and costly to employers, because there are significant familiarization, 
adjustment, and managerial costs associated with infrequent updates.
    The Department hopes to increase transparency and certainty by 
proposing to update the salary levels routinely. Adjustments that are 
more frequent would be smaller and make compliance easier and less 
costly to employers, compared to large adjustments, which are more 
disruptive. Employers would be aware of the timing of proposed updates 
and would be able to anticipate the increase beforehand. The increased 
transparency and certainty in regards to future proposed adjustments 
would help employers make more effective short- and long-term 
employment decisions, as well as improve their estimates of future 
costs.
vi. Sensitivity Analysis
    This section includes estimated costs and transfers using either 
different assumptions or segments of the population. First, the 
Department presents bounds on transfer payments estimated using 
alternative assumptions. Second, the Department considers costs and 
transfers by region and by industry.
1. Bounds on Transfer Payments
    Because the Department cannot predict employers' precise reaction 
to the proposed rule, the Department calculated bounds on the size of 
the estimated transfers from employers to workers. These bounds on 
transfers do not generate bounded estimates for costs.
    For a reasonable upper bound on transfer payments, the Department 
assumed that all occasional overtime workers and half of regular 
overtime workers would receive the full overtime premium (i.e., such 
workers would work the same number of hours but be paid 1.5 times their 
implicit initial hourly wage for all overtime hours) (Table 19). The 
full overtime premium model is a special case of the fixed-wage model 
where there is no change in hours. For the other half of regular 
overtime workers, the Department assumed in the upper-bound method that 
they would have their implicit hourly wage adjusted as predicted by the 
incomplete fixed-job model (wage rates fall and hours are reduced but 
total earnings continue to increase, as in the preferred method). In 
the preferred model, the Department assumed that

[[Page 10945]]

only 50 percent of occasional overtime workers and no regular overtime 
workers would receive the full overtime premium.
    The plausible lower-transfer bound also depends on whether 
employees work regular overtime or occasional overtime. For those who 
regularly work overtime hours and half of those who work occasional 
overtime, the Department assumes the employees' wages will fully adjust 
as predicted by the fixed-job model.\246\ For the other half of 
employees with occasional overtime hours, the lower bound assumes they 
will be paid one and one-half times their implicit hourly wage for 
overtime hours worked (full overtime premium).
---------------------------------------------------------------------------

    \246\ The straight-time wage adjusts to a level that keeps 
weekly earnings constant when overtime hours are paid at 1.5 times 
the straight-time wage. In cases where adjusting the straight-time 
wage results in a wage less than the minimum wage, the straight-time 
wage is set to the minimum wage.

    Table 19--Summary of the Assumptions Used to Calculate the Lower
      Estimate, Preferred Estimate, and Upper Estimate of Transfers
------------------------------------------------------------------------
                                                        Upper transfer
     Lower transfer estimate      Preferred estimate       estimate
------------------------------------------------------------------------
                  Occasional Overtime Workers (Type 2)
------------------------------------------------------------------------
50% fixed-job model.............  50% incomplete      100% full overtime
                                   fixed-job model.    premium.
50% full overtime premium.......  50% full overtime
                                   premium.
------------------------------------------------------------------------
                    Regular Overtime Workers (Type 3)
------------------------------------------------------------------------
100% fixed-job model............  100% incomplete     50% incomplete
                                   fixed-job model.    fixed-job model.
                                                      50% full overtime
                                                       premium.
------------------------------------------------------------------------
* Full overtime premium model: Regular rate of pay equals the implicit
  hourly wage prior to the regulation (with no adjustments); workers are
  paid 1.5 times this base wage for the same number of overtime hours
  worked prior to the regulation.
* Fixed-job model: Base wages are set at the higher of: (1) A rate such
  that total earnings and hours remain the same before and after the
  regulation; thus the base wage falls, and workers are paid 1.5 times
  the new base wage for overtime hours (the fixed-job model) or (2) the
  minimum wage.
* Incomplete fixed-job model: Regular rates of pay are partially
  adjusted to the wage implied by the fixed-job model.

    The cost and transfer payment estimates associated with the bounds 
are presented in Table 20. Regulatory familiarization costs and 
adjustment costs do not vary across the scenarios. Managerial costs are 
lower under these alternative employer response assumptions because 
fewer workers' hours are adjusted by employers and thus managerial 
costs, which depend in part on the number of workers whose hours 
change, will be smaller.\247\ Depending on how employers adjust the 
implicit regular hourly wage, estimated transfers may range from $234.7 
million to $1,053.9 million, with the preferred estimate equal to 
$526.9 million.
---------------------------------------------------------------------------

    \247\ In the lower transfer estimate, managerial costs are for 
employees whose hours change because their hourly rate increased to 
the minimum wage.

                Table 20--Bounds on Year 1 Cost and Transfer Payment Estimates, Year 1 (Millions)
----------------------------------------------------------------------------------------------------------------
                                                             Lower transfer       Preferred      Upper transfer
                       Cost/transfer                            estimate          estimate          estimate
----------------------------------------------------------------------------------------------------------------
Direct employer costs.....................................            $394.7            $464.2            $409.7
    Reg. familiarization..................................             324.9             324.9             324.9
    Adjustment costs......................................              66.6              66.6              66.6
    Managerial costs......................................               3.2              72.7              18.1
Transfers.................................................             234.7             526.9           1,053.9
----------------------------------------------------------------------------------------------------------------
Note 1: Pooled data for 2015-2017 adjusted to reflect 2017.

2. Effects by Regions and Industries
    This section presents estimates of the effects of this proposed 
rule by region and by industry. The Department analyzed effects on low-
wage regions by comparing the number of affected workers, costs, and 
transfers across the four Census Regions. The region with the largest 
number of affected workers would be the South (544,000). However, as a 
share of potentially affected workers in the region, the South would 
not be significantly more affected relative to other regions (6.4 
percent are affected compared with 4.4 to 5.0 percent in other 
regions). As a share of all workers in the region, the South would also 
not be particularly affected relative to other regions (1.1 percent are 
affected compared with 0.8 to 0.9 percent in other regions).

[[Page 10946]]



                                         Table 21--Potentially Affected and Affected Workers, by Region, Year 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Affected workers
                                                                                 -----------------------------------------------------------------------
                                               Workers subject     Potentially                                           Percent of
                   Region                          to FLSA      affected workers       Number       Percent of total     potentially     Percent of all
                                                 (millions)      (millions) \a\    (millions) \b\     affected (%)    affected workers     workers in
                                                                                                                          in region          region
--------------------------------------------------------------------------------------------------------------------------------------------------------
All.........................................             135.9              24.3             1.271               100               5.2               0.9
Northeast...................................              25.0               5.1             0.226              17.7               4.4               0.9
Midwest.....................................              30.1               5.0             0.251              19.7               5.0               0.8
South.......................................              49.4               8.5             0.544              42.8               6.4               1.1
West........................................              31.5               5.6             0.251              19.7               4.5               0.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not
  in a named occupation.
\b\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their
  weekly earnings do not increase to the new salary levels).

    Total transfers in the first year were estimated to be $526.9 
million (Table 22). As expected, the transfers in the South would be 
the largest portion because the largest number of affected workers 
would be in the South; however, transfers per affected worker would be 
the lowest in the South. Annual transfers per worker would be $336 in 
the South, but $437 to $511 in other regions.

                                      Table 22--Transfers by Region, Year 1
----------------------------------------------------------------------------------------------------------------
                                                             Total change in
                          Region                                earnings      Percent of total    Per affected
                                                               (millions)            (%)             worker
----------------------------------------------------------------------------------------------------------------
All.......................................................            $526.9               100           $414.44
Northeast.................................................             115.3              21.9            511.25
Midwest...................................................             109.6              20.8            437.34
South.....................................................             182.7              34.7            335.63
West......................................................             119.3              22.6            475.47
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.

    Direct employer costs are composed of regulatory familiarization 
costs, adjustment costs, and managerial costs. Total first year direct 
employer costs would be $464.2 million (Table 23). Total direct 
employer costs would be the highest in the South ($172.2 million) and 
lowest in the Northeast ($87.0 million). While the three components of 
direct employer costs vary as a percent of these total costs by region, 
the percentage of total direct costs in each region would be fairly 
consistent with the share of all workers in a region. Direct employer 
costs in each region as a percentage of the total direct costs would 
range from 18.7 percent in the Northeast, to 37.1 percent in the South. 
Once again, these proportions are almost the same as the proportions of 
the total workforce in each region: 18.4 percent in the Northeast and 
36.3 percent in the South.

                                Table 23--Direct Employer Costs by Region, Year 1
----------------------------------------------------------------------------------------------------------------
                                                    Regulatory                                     Total direct
                     Region                      familiarization    Adjustment      Managerial         costs
----------------------------------------------------------------------------------------------------------------
                                                Costs (Millions)
----------------------------------------------------------------------------------------------------------------
All............................................           $324.9           $66.6           $72.7          $464.2
Northeast......................................             62.7            11.8            12.5            87.0
Midwest........................................             71.4            13.1            16.4           100.9
South..........................................            114.2            28.5            29.5           172.2
West...........................................             76.7            13.1            14.3           104.2
----------------------------------------------------------------------------------------------------------------
                                        Percent of Total Costs by Region
----------------------------------------------------------------------------------------------------------------
All............................................            100.0           100.0           100.0           100.0
Northeast......................................             19.3            17.7            17.2            18.7
Midwest........................................             22.0            19.7            22.5            21.7
South..........................................             35.1            42.8            40.6            37.1
West...........................................             23.6            19.7            19.7            22.4
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.


[[Page 10947]]

    Another way to compare the relative effects of this proposed rule 
by region is to consider the transfers and costs as a proportion of 
current payroll and current revenues (Table 24). Nationally, employer 
costs and transfers would be approximately 0.013 percent of payroll. By 
region, direct employer costs and transfers as a percent of payroll 
would be also approximately the same (between 0.012 and 0.014 percent 
of payroll). Employer costs and transfers as a percent of revenue would 
be 0.002 percent nationally and in each region.

           Table 24--Annual Transfers and Costs as Percent of Payroll and of Revenue by Region, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                        Costs and transfers
                                                      Payroll         Revenue    -------------------------------
                     Region                         (billions)      (billions)     As percent of   As percent of
                                                                                      payroll         revenue
----------------------------------------------------------------------------------------------------------------
All.............................................          $7,461         $42,832          0.0133          0.0023
Northeast.......................................           1,646           8,614          0.0122          0.0023
Midwest.........................................           1,589           9,766          0.0132          0.0022
South...........................................           2,483          15,308          0.0143          0.0023
West............................................           1,743           9,145          0.0128          0.0024
----------------------------------------------------------------------------------------------------------------
Notes: Pooled data for 2015-2017 adjusted to reflect 2017. Payroll, revenue, costs, and transfers all exclude
  the federal government.
Sources: Private sector payroll and revenue data from 2012 SUSB. State and local payroll data from State and
  Local Government Finances Summary: FY2015.

    In order to gauge the effect of the proposed rule on industries, 
the Department compared estimates of combined direct costs and 
transfers as a percent of payroll, profit, and revenue for the 13 major 
industry groups (Table 25).\248\ This provides a common method of 
assessing the relative effects of the rule on different industries, and 
the magnitude of adjustments the rule may require on the part of 
enterprises in each industry. The relative costs and transfers 
expressed as a percentage of payroll are particularly useful measures 
of the relative size of adjustment faced by organizations in an 
industry because they benchmark against the cost category directly 
associated with the labor force. Measured in these terms, costs and 
transfers as a percent of payroll would be highest in agriculture, 
forestry, fishing, and hunting; leisure and hospitality; and other 
services. However, the overall magnitude of the relative shares would 
be small, representing less than 0.1 percent of overall payroll costs 
across industries.
---------------------------------------------------------------------------

    \248\ Note that the totals in this table for transfers and 
direct costs do not match the totals in other sections due to the 
exclusion of transfers to federal workers and costs to federal 
entities. Federal costs and transfers are excluded to be consistent 
with payroll and revenue which exclude the federal government.
---------------------------------------------------------------------------

    The Department also estimated transfers and costs as a percent of 
profits.\249\ Benchmarking against profits is potentially helpful in 
the sense that it provides a measure of the proposed rule's effect 
against returns on investment. However, this metric must be interpreted 
carefully as it does not account for differences across industries in 
risk-adjusted rates of return, which are not readily available for this 
analysis. The ratio of costs and transfers to profits also does not 
reflect differences in the firm-level adjustment to changes in profits 
reflecting cross-industry variation in market structure.\250\ 
Nonetheless, the overall magnitude of costs and transfers as a 
percentage of profits would be small, representing in less than 0.3 
percent of overall profits in every industry. The range of values of 
total costs and transfers would vary among industries as a percent of 
profits ranging from a low of 0.02 percent (financial activities) to a 
high of 0.28 percent (agriculture, forestry, fishing, and hunting). 
However, because the share is less than 0.3 percent, even for the 
industry with the largest impact, we believe this proposed rule would 
not disproportionately affect any industries.
---------------------------------------------------------------------------

    \249\ Internal Revenue Service. (2013). Corporation Income Tax 
Returns. Available at: https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report. Table 5 of the IRS report provides 
information on total receipts, net income, and deficits. The 
Department calculated the ratio of net income (column (7)) less any 
deficit (column (8)) to total receipts (column (3)) for all firms by 
major industry categories. Costs and transfers as a percent of 
revenues were divided by the profit to receipts ratios to calculate 
the costs and transfers as a percent of profit.
    \250\ In particular, a basic model of competitive product 
markets would predict that highly competitive industries with lower 
rates of return would adjust to increases in the marginal cost of 
labor arising from the rule through an overall, industry-level 
increase in prices and a reduction in quantity demanded based on the 
relative elasticities of supply and demand. Alternatively, more 
concentrated markets with higher rates of return would be more 
likely to adjust through some combination of price increases and 
profit reductions based on elasticities as well as interfirm pricing 
responses.
---------------------------------------------------------------------------

    Finally, the Department's estimates of transfers and costs as a 
percent of revenue by industry also indicated very small effects (Table 
25) of less than 0.02 percent of revenues in any industry. The 
industries with the largest costs and transfers as a percent of revenue 
would be agriculture, forestry, fishing, and hunting; and leisure and 
hospitality. However, the difference between the agriculture, forestry, 
fishing, and hunting industry, the industry with the highest costs and 
transfers as a percent of revenue, and the industry with the lowest 
costs and transfers as a percent of revenue (public administration), 
would be only 0.011 percentage points. Table 25 illustrates that the 
actual differences in costs relative to revenues would be quite small 
across industry groupings.

 Table 25--Annual Transfers, Total Costs, and Transfers and Costs as Percent of Payroll, Revenue, and Profit by
                                                Industry, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                Costs and transfers
                                     Transfers     Direct costs  -----------------------------------------------
            Industry                (millions)      (millions)     As percent of   As percent of   As percent of
                                                                      payroll         revenue       profit \a\
----------------------------------------------------------------------------------------------------------------
All.............................          $525.7          $454.2           0.013           0.002            0.04
Agriculture, forestry, fishing,              3.0             1.1           0.066           0.012            0.28
 & hunting......................

[[Page 10948]]

 
Mining..........................             8.5             2.1           0.016           0.002            0.05
Construction....................            13.7            31.7           0.015           0.003            0.09
Manufacturing...................            75.8            25.3           0.016           0.002            0.03
Wholesale & retail trade........           103.6            84.5           0.024           0.001            0.05
Transportation & utilities......            21.0            14.6           0.014           0.003            0.10
Information.....................            23.3            11.3           0.013           0.003            0.03
Financial activities............            53.3            51.2           0.016           0.002            0.02
Professional & business services            71.0            75.0           0.011           0.006            0.06
Education & health services.....            67.6            68.4           0.014           0.005            0.10
Leisure & hospitality...........            51.6            43.7           0.033           0.010            0.19
Other services..................            14.8            36.1           0.032           0.008            0.20
Public administration...........           18.58             9.1           0.003           0.001             \b\
----------------------------------------------------------------------------------------------------------------
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll and revenue
  data from State and Local Government Finances Summary: FY2015 are used for the Public Administration industry.
  Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns.
\a\ Profit data based on corporations only.
\b\ Profit is not applicable for public administration.

    Although labor market conditions vary by Census Region and 
industry, the effects from updating the standard salary level and the 
HCE compensation level would not unduly affect any of the regions or 
industries. The proportion of total costs and transfers in each region 
would be fairly consistent with the proportion of total workers in each 
region. Additionally, although the shares will be larger for some firms 
and smaller for others, the average estimated costs and transfers from 
this proposed rule are very small relative to current payroll or 
current revenue--generally less than a tenth of a percent of payroll 
and less than two-hundredths of a percent of revenue in each region and 
in each industry.
vii. Regulatory Alternatives
    As mentioned earlier, the Department considered a range of 
alternatives before selecting the 2004 methodology for updating the 
standard salary level and the 2016 methodology for updating the HCE 
compensation level (see section VI.C.i). As seen in Table 26, the 
Department has calculated 2017 salary levels, the number of affected 
workers, and the associated costs and transfers for the alternative 
methods that the Department considered. Regulatory familiarization 
costs were not included because they do not vary over the alternatives. 
As with the regulatory analysis for the proposed levels, we use 2017 
salary levels and 2017 earnings data to estimate the effect of January 
2020 salary levels and 2020 earnings.

Table 26--Updated Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs, and
                                                Transfers, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                     Year 1 effects (millions)
                                                                   Affected EAP  -------------------------------
                   Alternative                      2017 salary       workers         Adj. &
                                                     level \a\       (1,000s)       managerial       Transfers
                                                                                     costs \b\
----------------------------------------------------------------------------------------------------------------
                                         Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Alt. #0: Maintain average minimum wage                      $503             242           $21.5           $35.7
 protection since 2004 [c]......................
Alt. #1: Inflate 2004 level using PCEPI.........             597             786            77.9           155.2
Alt. #2: Inflate 2004 level using Chained CPI...             599             787            78.0           158.3
Alt. #3: Inflate 2004 level using CPI-U.........             620             924            94.1           207.5
Alt. #4: Inflate 2004 level using ECI civilan...             639           1,069           110.6           250.1
Proposed rule: 2004 method......................             641           1,070           111.4           252.5
Alt. #5: Inflate 2004 level using ECI private...             643           1,072           111.8           255.0
----------------------------------------------------------------------------------------------------------------
                                        HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change..........................         100,000               0  ..............  ..............
HCE alt. #2: Inflate 2004 level using PCEPI.....         131,189             186            24.4           226.4
HCE alt. #3: Inflate 2004 level using Chained            131,750             186            24.5           229.0
 CPI............................................
HCE alt. #4: Inflate 2004 level using CPI-U.....         136,253             198            26.2           257.1
Proposed rule: 90th percentile of full-time              139,464             201            27.9           274.3
 salaried workers...............................
HCE alt. #5: Inflate 2004 level using ECI                140,480             204            28.1           277.8
 civilian.......................................
HCE alt. #6: Inflate 2004 level using ECI                141,337             204            28.3           280.3
 private........................................
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ These salary levels reflect estimated values for 2017 to approximate Year 1 effects.
\b\ Regulatory familiarization costs are excluded because they do not vary based on the selected values of the
  salary levels.

[[Page 10949]]

 
\c\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
  threshold was equivalent to the earnings of an employee working 72.2 hours at the minimum wage (including time-
  and-a-half for hours beyond the fortieth in a week). That amount fell with increases in the minimum wage and
  is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is
  59.6 hours, and a threshold that would provide 59.6 hours of $7.25 minimum wage protection and overtime pay
  for hours over 40 would be $503.

viii. Projections
1. Methodology
    The Department projected affected workers, costs, and transfers 
forward for ten years. This involved several steps.
    First, the Department calculated workers' projected earnings in 
future years. The wage growth rate is calculated as the compound annual 
growth rate in median wages using the historical CPS MORG data for 
occupation-industry categories from 2007 to 2016.\251\ This is the 
annual growth rate that when compounded (applied to the first year's 
wage, then to the resulting second year's wage, etc.) yields the last 
historical year's wage. In occupation-industry categories where the CPS 
MORG data had an insufficient number of observations to reliably 
calculate median wages, the Department used the growth rate in median 
wages calculated from BLS' Occupational Employment Statistics 
(OES).\252\ Any remaining occupation-industry combinations without 
estimated median growth rates were assigned the median of the growth 
rates in median wages from the CPS MORG data for all industries and 
occupations. For projecting costs, we similarly projected wage rates 
for the human resource and managerial workers whose time is spent on 
these tasks.
---------------------------------------------------------------------------

    \251\ To increase the number of observations, three years of 
data were pooled for each of the endpoint years. Specifically, data 
from 2006, 2007, and 2008 (converted to 2007 dollars) were used to 
calculate the 2007 median wage and data from 2015, 2016, and 2017 
(converted to 2016 dollars) were used to calculate the 2016 median 
wage.
    \252\ To lessen small sample bias, this rate was only calculated 
using CPS MORG data when these data contained at least 30 
observations in each period.
---------------------------------------------------------------------------

    Second, the Department compared workers' counter-factual earnings 
(i.e., absent any rulemakings) to the earnings levels. If the counter-
factual earnings are below the relevant level (i.e., standard or HCE) 
then the worker is considered affected. In other words, in each year 
affected EAP workers were identified as those who would be exempt in 
Year 1 absent any change to the current regulations but have projected 
earnings in the future year that are less than the relevant salary 
level.
    Third, sampling weights were adjusted to reflect employment growth. 
The employment growth rate is the compound annual growth rate based on 
the ten-year employment projection from BLS' National Employment Matrix 
(NEM) for 2016 to 2026 within an occupation-industry category.
    Adjusted hours for workers affected in Year 1 were re-estimated in 
Year 2 using a long-run elasticity of labor demand of -0.4.\253\ For 
workers newly affected in Year 2 through Year 10, employers' wage and 
hour adjustments are estimated in that year, as described in section 
VI.D.iv, except the long-run elasticity of labor demand of -0.4 is 
used. Employer adjustments are made in the first year the worker is 
affected and then applied to all future years in which the worker 
continues to be affected (unless the worker switches to a Type 4 
worker). Workers' earnings in predicted years are earnings post 
employer adjustments, with overtime pay, and with ongoing wage growth 
based on historical growth rates (as described above).
---------------------------------------------------------------------------

    \253\ This elasticity estimate is based on the Department's 
analysis of the following paper: Lichter, A., Peichl, A. & Siegloch, 
A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-
Regression Analysis. IZA DP No. 7958.
---------------------------------------------------------------------------

2. Estimated Projections
    The Department estimated that the proposed rule would affect 1.3 
million EAP workers in Year 1 and 1.1 million workers in Year 10 (Table 
27). The projected number of affected workers includes workers who were 
not EAP exempt in the base year but would have become exempt in the 
absence of this proposed rule in Years 2 through 10. For example, a 
worker who passes the standard duties test may earn less than $455 in 
Year 1 but between $455 and the new salary level in subsequent years; 
such a worker would be counted as an affected worker.
    The Department quantified three types of direct employer costs in 
the ten-year projections: (1) Regulatory familiarization costs; (2) 
adjustment costs; and (3) managerial costs. Regulatory familiarization 
costs only occur in Year 1. Although start-up firms must still become 
familiar with the FLSA following Year 1, the difference between the 
time necessary for familiarization with the current part 541 
regulations and the regulations as modified by the proposed rule is 
essentially zero. Therefore, projected regulatory familiarization costs 
for new entrants over the next nine years would be zero.
    Adjustment costs would occur in any year in which workers are newly 
affected. After Year 1, these costs would be relatively small since the 
majority of workers would be affected in Year 1. Management costs would 
recur each year for all affected EAP workers whose hours are adjusted. 
However, managerial costs generally decrease over time as the number of 
affected EAP workers decreases. The Department estimated that Year 1 
managerial costs would be $72.7 million; by Year 10 these costs decline 
to $64.2 million.
    The Department projected two types of transfers from employers to 
employees associated with workers affected by the regulation. Transfers 
due to the minimum wage provision would be $57.0 million in Year 1 and 
would fall to $17.6 million in Year 10 as increased earnings over time 
move workers' implicit rate of pay above the minimum wage.\254\ 
Transfers due to overtime pay decline over time because the number of 
affected workers decreases. Thus, transfers due to the overtime pay 
provision would decrease from $469.9 million in Year 1 to $429.5 
million in Year 10.\255\
---------------------------------------------------------------------------

    \254\ Increases in minimum wages were not projected. If state or 
federal minimum wages increase during the projected timeframe, as 
anticipated, then projected minimum wage transfers may be 
underestimated.
    \255\ If earnings levels were in fact updated quadrennially as 
the Department intends, which remains a matter within the 
Secretary's sole discretion, then the potential projected costs and 
transfers would be higher in the Department's estimation than those 
shown here, based on the Department's estimates on future outcomes 
many years into the future. Because those potential costs and 
transfers would be the result of any future rulemakings and 
therefore included in the economic analyses of those rulemakings, 
they have not been incorporated into this analysis. The Department 
has estimated these potential costs and transfers, however. With 
updates in Years 6 and 10, the ten-year annualized costs, based on 
the Department's estimates and subject to change given that it 
relies on future projections and the Secretary's discretionary 
actions, would increase from $120.5 million to $135.9 million. 
Annualized transfers would increase from $429.4 million to $510.0 
million.
---------------------------------------------------------------------------

    Projected costs and transfers were deflated to 2017 dollars using 
the Congressional Budget Office's projections for the CPI-U.\256\
---------------------------------------------------------------------------

    \256\ Congressional Budget Office. 2018. The Budget and Economic 
Outlook: 2018 To 2028. See https://www.cbo.gov/publication/53651.

[[Page 10950]]



                                                             Table 27--Projected Costs and Transfers, Standard and HCE Salary Levels
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Affected EAP                                Costs                                                 Transfers
                          Year (year #)                               workers    ---------------------------------------------------------------------------------------------------------------
                                                                    (millions)       Reg. Fam.    Adjustment \a\    Managerial         Total         Due to MW       Due to OT         Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  ..............                                                 (Millions 2017$)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Year:                                                             ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
    Year 1......................................................             1.3          $324.9           $66.6           $72.7          $464.2           $57.0          $469.9          $526.9
    Year 2......................................................             1.2             0.0             1.5            72.7            74.2            30.4           390.9           421.3
    Year 3......................................................             1.2             0.0             1.7            68.5            70.2            28.0           374.9           402.8
    Year 4......................................................             1.1             0.0             2.2            66.5            68.7            25.4           378.0           403.4
    Year 5......................................................             1.1             0.0             2.9            63.0            65.9            25.8           380.5           406.3
    Year 6......................................................             1.0             0.0             3.4            62.5            65.9            25.2           375.5           400.7
    Year 7......................................................             1.0             0.0             3.2            60.3            63.6            21.9           387.2           409.1
    Year 8......................................................             1.0             0.0             3.3            60.8            64.1            19.2           401.9           421.1
    Year 9......................................................             1.0             0.0             3.4            61.8            65.1            18.5           413.4           431.9
    Year 10.....................................................             1.1             0.0             3.6            64.2            67.8            17.6           429.5           447.1
Annualized value:
    3% real discount rate.......................................  ..............            37.0            10.0            65.6           112.6            27.7           400.3           428.0
    7% real discount rate.......................................  ..............            43.2            11.2            66.0           120.5            28.6           400.7           429.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in years without updated salary levels because some workers' projected earnings are
  estimated using negative earnings growth.

    Table 27 also summarizes annualized costs and transfers over the 
ten-year projection period, using 3 percent and 7 percent real discount 
rates. The Department estimated that total direct employer costs have 
an annualized value of $120.5 million per year over ten years when 
using a 7 percent real discount rate. The annualized value of total 
transfers was estimated to equal $429.4 million.
ix. Alternative Regulatory Baseline, Including Calculation of Cost 
Savings Under Executive Order 13771
    Other portions of this regulatory impact analysis contain estimates 
of the impacts of this proposed rule relative to the 2004 final rule, 
which is the policy that the Department is currently enforcing. 
However, Circular A-4 states that multiple regulatory baselines may be 
analytically relevant. In this case, a second informative baseline is 
the 2016 final rule, which is currently in the Code of Federal 
Regulations (CFR).\257\ Moreover, for purposes of determining whether 
this proposed rule is deregulatory under E.O. 13771, the economic 
impacts should be compared to what is currently published in the CFR. 
As such, most of this section presents an estimate of the cost savings 
of this proposed rule relative to the 2016 rule, and in addition to 
estimating annualized cost savings for the proposed rule using a 10-
year time horizon, we also estimated annualized costs savings in 
perpetuity in accordance with E.O. 13771 accounting standards. Later in 
this section, the Department presents transfer and benefits estimates 
from the analysis accompanying the 2016 final rule--values that are 
also relevant to this second regulatory baseline.
---------------------------------------------------------------------------

    \257\ 29 CFR part 541
---------------------------------------------------------------------------

    To ensure the estimated costs of the 2016 final rule can be 
directly and appropriately compared with the costs estimated for this 
proposed rule, the Department started with the analytic model for this 
proposed rule and replaced the proposed salary and compensation 
thresholds with the thresholds set in the 2016 final rule. The 
Department assumed that initial regulatory familiarization costs would 
be identical under adoption of either the proposed rule or the 2016 
final rule, because the same number of employers would be potentially 
affected in Year 1. In addition, the Department added the updated 
thresholds from the planned triennial updates in years 4, 7 and 10 from 
the 2016 final rule. Therefore, the only differences in estimated costs 
presented here between the 2016 final rule and this proposed rule are 
attributable to the initial difference in earnings thresholds and the 
effects of the 2016 final rule's automatic updating mechanism, which 
updates the thresholds every three years.

        Table 28--Weekly Earnings Thresholds Used in Comparison of 2016 Final Rule and 2018 Proposed Rule
----------------------------------------------------------------------------------------------------------------
                                                          2016 Final Rule               2018 Proposed Rule
                                                 ---------------------------------------------------------------
                      Year                           Standard           HCE          Standard           HCE
                                                      salary       compensation       salary       compensation
                                                     threshold       threshold       threshold       threshold
----------------------------------------------------------------------------------------------------------------
Year 1..........................................            $913          $2,577            $641          $2,682
Year 4..........................................             984           2,837             641           2,682
Year 7..........................................           1,049           3,080             641           2,682
Year 10.........................................           1,118           3,345             641           2,682
----------------------------------------------------------------------------------------------------------------
Note: Year 1 impacts are calculated using 2017 pooled CPS MORG data (the most recently available data);
  therefore, the earnings thresholds in Year 1 must correspond to the levels that would have been in effect
  under each rule had the rule been promulgated in 2017. These figures are the Department's best approximation
  for impacts starting in 2020, the earliest year the Department expects the proposed earnings levels to be
  implemented.

    However, this approach means that the estimated costs presented 
here for the 2016 final rule are not directly comparable to those 
published in the Federal Register (81 FR 32391). The differences 
between the previously

[[Page 10951]]

published 2016 cost estimates and those presented here are primarily 
due to: An increase in the number of establishments that would incur 
regulatory familiarization costs to account for economic growth between 
2012 (estimates for the 2016 final rule were based on 2012 SUSB data) 
and 2015 (this proposed rule is based on 2015 SUSB data); the use of 
more recent CPS MORG data (the 2016 final rule used pooled CPS data for 
2013 through 2015 inflated to represent FY 2017); an increase in the 
wage rates used to value staff time spent on regulatory 
familiarization, adjustment, and monitoring; incorporating a 17 percent 
overhead rate in those wage rates; and minor improvements to the 
model.\258\
---------------------------------------------------------------------------

    \258\ As previously discussed, one such improvement is the 
Department's application of conditional probabilities to estimate 
the number of HCE workers. See supra note 193.
---------------------------------------------------------------------------

    Table 29 presents the estimated number of affected EAP workers, and 
direct regulatory, adjustment, and managerial costs for the 2016 final 
rule calculated using the 2018 analytic model.

  Table 29--Adjusted 2016 Final Rule Projected Costs and Transfers, Standard Salary and HCE Compensation Levels
----------------------------------------------------------------------------------------------------------------
                                   Affected EAP                                Costs
              Year                    workers    ---------------------------------------------------------------
                                    (millions)       Reg. Fam.    Adjustment \a\    Managerial         Total
----------------------------------------------------------------------------------------------------------------
                                  ..............                        (Millions FY2017$)
                                                 ---------------------------------------------------------------
Year:
    Year 1......................             4.1          $324.9          $215.2          $241.2          $781.3
    Year 2......................             4.0             0.0             1.5           231.6           233.1
    Year 3......................             3.8             0.0             1.7           221.8           223.5
    Year 4......................             4.5            27.6            14.3           262.3           304.2
    Year 5......................             4.4             0.0             2.9           253.7           256.6
    Year 6......................             4.3             0.0             3.5           247.5           251.0
    Year 7......................             4.9            28.2             9.4           279.1           316.6
    Year 8......................             4.8             0.0             3.3           270.5           273.7
    Year 9......................             4.7             0.0             3.4           267.9           271.2
    Year 10.....................             5.4            28.8            13.7           303.2           345.6
Annualized value:
    3% real rate................  ..............            45.1            29.7           256.2           331.0
    7% real rate................  ..............            50.8            33.5           254.2           338.6
----------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers, including years when the salary
  level is not updated. Adjustment costs may occur in years without updated salary levels because some workers'
  projected earnings are estimated using negative earnings growth.

    The Department then subtracted direct regulatory costs expected to 
have been incurred under the 2016 final rule from the direct costs 
estimated under this proposed rule (see Table 27). As shown in Table 
30, direct employer costs of the proposed rule are estimated to be, on 
average, $224.0 million lower per year in perpetuity than the 2016 
final rule (using a 7 percent discount rate).

                  Table 30--Difference in Costs between 2016 Final Rule and this Proposed Rule
----------------------------------------------------------------------------------------------------------------
                                   Reduction in                         Reduction in costs
                                   affected EAP  ---------------------------------------------------------------
              Year                    workers
                                    (millions)       Reg. Fam.    Adjustment \a\    Managerial         Total
----------------------------------------------------------------------------------------------------------------
                                  ..............                        (Millions FY2017$)
                                                 ---------------------------------------------------------------
Year:
    Year 1......................             2.8            $0.0          $148.6          $168.5          $317.1
    Year 2......................             2.7             0.0             0.0           158.9           158.9
    Year 3......................             2.6             0.0             0.0           153.3           153.3
    Year 4......................             3.4            27.6            12.1           195.8           235.5
    Year 5......................             3.3             0.0             0.0           190.7           190.7
    Year 6......................             3.2             0.0             0.1           185.1           185.1
    Year 7......................             3.9            28.2             6.1           218.7           253.1
    Year 8......................             3.8             0.0             0.0           209.6           209.6
    Year 9......................             3.6             0.0             0.0           206.1           206.1
    Year 10.....................             4.3            28.8            10.1           238.9           277.8
----------------------------------------------------------------------------------------------------------------
                                     Annualized Value: 10-Year Time Horizon
----------------------------------------------------------------------------------------------------------------
3% real discount rate...........  ..............            $8.1           $19.6          $190.6          $218.4
7% real discount rate...........  ..............             7.6            22.4           188.2           218.2
----------------------------------------------------------------------------------------------------------------
                                    Annualized Value: Perpetual Time Horizon
----------------------------------------------------------------------------------------------------------------
3% real discount rate...........  ..............            $9.0            $7.5          $210.9          $227.4

[[Page 10952]]

 
7% real discount rate...........  ..............             8.3            12.6           203.1           224.0
----------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers, including years when the salary
  level is not updated. Adjustment costs may occur in years without updated salary levels because some workers'
  projected earnings are estimated using negative earnings growth.

    The cost savings from the proposed rule are primarily attributable 
to two factors. First, a lower standard salary level will result in 
fewer affected workers in any given year. If fewer workers are 
affected, then management must consider and make earnings adjustments 
for fewer employees, and must monitor hours worked for fewer employees. 
Second, this analysis does not incorporate automatic updating whereas 
the 2016 final rule incorporated a triennial automatic updating 
mechanism. Therefore, regulatory familiarization costs are now only 
incurred in Year 1 and adjustment costs are primarily incurred in Year 
1. Additionally, managerial costs now gradually decrease over time 
rather than increasing every three years.
    In the 2016 final rule, the Department estimated average annualized 
transfers of $1,189.1 million over a ten-year period using a discount 
rate of 7 percent. The Department also estimated that avoided 
litigation costs resulting from the rule could total approximately 
$31.2 million per year.\259\ The Department includes these values here 
for reference.
---------------------------------------------------------------------------

    \259\ In this proposed rule, the Department has revised how it 
calculates avoided litigation costs so the number referenced here 
for the 2016 final rule is not directly comparable to the 
calculation of reduced litigation costs for this proposal.
---------------------------------------------------------------------------

VII. Initial Regulatory Flexibility Analysis (IRFA)

    The Regulatory Flexibility Act of 1980 (RFA) as amended by the 
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 
hereafter jointly referred to as the RFA, requires that an agency 
prepare an initial regulatory flexibility analysis (IRFA) when 
proposing, and a final regulatory flexibility analysis (FRFA) when 
issuing, regulations that will have a significant economic impact on a 
substantial number of small entities. The agency is also required to 
respond to public comment on the NPRM.\260\ The Chief Counsel for 
Advocacy of the Small Business Administration was notified of this 
proposed rule upon submission of the rule to OMB under Executive Order 
12866. The Department invites commenters to provide input on data 
analysis and/or methodology used throughout this IRFA.
---------------------------------------------------------------------------

    \260\ See 5 U.S.C. 604.
---------------------------------------------------------------------------

A. Reasons Why Action by the Agency Is Being Considered

    The standard salary level and HCE total compensation levels have 
not been updated since 2004 \261\ and, as described in detail in 
section VI.A.ii., the standard salary level has declined considerably 
in real terms relative to the 2004 value. As a result, the standard 
salary level's usefulness in identifying nonexempt workers has eroded 
over time. Similarly, the HCE annual compensation requirement is out of 
date; more than twice as many workers earn at least $100,000 annually 
compared to when it was adopted in 2004. Additionally, the Department's 
2016 final rule updating the standard salary level and the HCE annual 
compensation requirement was declared invalid because the rule would 
make nonexempt too many employees whose exemption status should have 
been determined by their duties. Therefore, the Department believes 
that rulemaking is necessary in order to correct the deficiencies in 
the 2016 final rule and restore the effectiveness of the salary levels.
---------------------------------------------------------------------------

    \261\ The Department revised the EAP salary levels in 2004. In 
2016, the Department also issued a final rule revising the EAP 
salary levels, however, on August 31, 2017, the U.S. District Court 
for Eastern District of Texas held that the 2016 final rule's 
standard salary level exceeded the Department's authority and was 
therefore invalid. See Nevada v. U.S. Dep't of Labor, 275 F. Supp. 
3d 795 (E.D. Tex. 2017). Until the Department issues a new final 
rule, it is enforcing the part 541 regulations in effect on November 
30, 2016, including the $455 per week standard salary level set in 
the 2004 final rule.
---------------------------------------------------------------------------

B. Statement of Objectives and Legal Basis for the Proposed Rule

    Section 13(a)(1) creates a minimum wage and overtime pay exemption 
for bona fide executive, administrative, professional, and outside 
sales employees, and teachers and academic administrative personnel, as 
those terms are defined and delimited by the Secretary of Labor. The 
regulations in part 541 contain specific criteria that define each 
category of exemption. The regulations also define those computer 
employees who are exempt under section 13(a)(1) and section 13(a)(17). 
To qualify for exemption, employees must meet certain tests regarding 
their job duties and generally must be paid on a salary basis at not 
less than $455 per week.
    The Department's primary objective in this rulemaking is to ensure 
that the revised salary levels will continue to provide a useful and 
effective test for exemption. The premise behind the standard salary 
level is to be an appropriate dividing-line between employees who are 
nonexempt from employees who may be performing exempt duties. The 
threshold essentially screens out obviously nonexempt employees whom 
Congress intended to be protected by the FLSA's minimum wage and 
overtime provisions. If left unchanged, the effectiveness of the salary 
level test as a means of determining exempt status diminishes as 
nonexempt employee wages increase over time.
    Given that the 2016 final rule was invalidated, the Department last 
updated the salary levels in the 2004 final rule, which set the 
standard test threshold at $455 per week for EAP employees. The 2004 
final rule also created a new ``highly compensated'' test for 
exemption. Under the HCE exemption, employees who are paid total annual 
compensation of at least $100,000 (which must include at least $455 per 
week paid on a salary or fee basis) are exempt from the FLSA's overtime 
requirements if they customarily and regularly perform at least one of 
the duties or responsibilities of an exempt EAP employee identified in 
the standard tests for exemption.\262\
---------------------------------------------------------------------------

    \262\ Sec.  541.601.
---------------------------------------------------------------------------

    Employees who meet the requirements of part 541 are excluded from 
the Act's minimum wage and overtime pay protections. As a result, 
employees may work any number of hours in the workweek and not be 
subject to the FLSA's overtime pay requirements. Some state laws have 
stricter exemption standards than those described above. The FLSA does 
not preempt any such stricter state

[[Page 10953]]

standards. If a state law establishes a higher standard than the 
provisions of the FLSA, the higher standard applies as a matter of 
state law in that specific state.\263\
---------------------------------------------------------------------------

    \263\ See 29 U.S.C. 218
---------------------------------------------------------------------------

    To restore the function of the standard salary level and the HCE 
total compensation requirements as appropriate bright-line tests 
between overtime-protected employees and those who may be bona fide EAP 
employees, the Department proposes to increase the minimum salary level 
necessary for exemption from the FLSA minimum wage and overtime 
requirements as an EAP employee from $455 to $679 a week for the 
standard salary test, and from $100,000 to $147,414 per year for the 
HCE test. To ensure that these levels continue to function 
appropriately in the future, the Department intends to update these 
levels every four years.

C. Description of the Number of Small Entities to Which the Proposed 
Rule Will Apply

i. Definition of Small Entity
    The RFA defines a ``small entity'' as a (1) small not-for-profit 
organization, (2) small governmental jurisdiction, or (3) small 
business. The Department used the entity size standards defined by SBA, 
in effect as of October 1, 2017, to classify entities as small.\264\ 
SBA establishes separate standards for individual 6-digit NAICS 
industry codes, and standard cutoffs are typically based on either the 
average number of employees, or the average annual receipts. For 
example, small businesses are generally defined as having fewer than 
500, 1,000, or 1,250 employees in manufacturing industries and less 
than $7.5 million in average annual receipts for nonmanufacturing 
industries. However, some exceptions do exist, the most notable being 
that depository institutions (including credit unions, commercial 
banks, and non-commercial banks) are classified by total assets (small 
defined as less than $550 million in assets). Small governmental 
jurisdictions are another noteworthy exception. They are defined as the 
governments of cities, counties, towns, townships, villages, school 
districts, or special districts with populations of less than 50,000 
people.\265\
---------------------------------------------------------------------------

    \264\ See https://www.sba.gov/sites/default/files/files/Size_Standards_Table_2017.pdf.
    \265\ See http://www.sba.gov/advocacy/regulatory-flexibility-act 
for details.
---------------------------------------------------------------------------

    Parameters that are used in the small business cost analysis, and a 
summary of the effects, are provided in Table 31.

   Table 31--Overview of Parameters Used for Costs to Small Businesses
------------------------------------------------------------------------
             Small business costs                         Cost
------------------------------------------------------------------------
                        Direct and Payroll Costs
------------------------------------------------------------------------
Average total cost per affected entity a.....  $4,053.
Range of total costs per affected entity a...  $1,146-$100,536.
Average percent of revenue per affected        0.18%.
 entity a.
Average percent of payroll per affected        0.97%.
 entity a.
Average percent of small business profit.....  0.06%.
------------------------------------------------------------------------
                              Direct Costs
------------------------------------------------------------------------
Regulatory familiarization:
    Time (first year)........................  1 hour per establishment.
    Hourly wage..............................  $41.91.
Adjustment:
    Time (first year affected)...............  75 minutes per newly
                                                affected worker.
    Hourly wage..............................  $41.91.
Managerial:
    Time (weekly)............................  5 minutes per affected
                                                worker.
------------------------------------------------------------------------
    Hourly wage..............................  $48.72.
------------------------------------------------------------------------
                            Payroll Increases
------------------------------------------------------------------------
Average payroll increase per affected entity   $3,187.
 a.
Range of payroll increases per affected        $0-$92,869.
 entity a.
------------------------------------------------------------------------
a Using the methodology where all employees at an affected small firm
  are affected. This assumption generates upper-end estimates. Lower-end
  cost estimates are significantly smaller.

ii. Data Sources and Methods
    The Department obtained data from several sources to determine the 
number of small entities and employment in these entities for each 
industry. However, the Statistics of U.S. Businesses (SUSB, 2012) was 
used for most industries. Industries for which the Department used 
alternative sources include credit unions,\266\ commercial banks and 
savings institutions,\267\ agriculture,\268\ and public 
administration.\269\ The Department used the latest available data in 
each case, so data years differ between sources.
---------------------------------------------------------------------------

    \266\ National Credit Union Association. (2012). 2012 Year End 
Statistics for Federally Insured Credit Unions. https://www.ncua.gov/analysis/Pages/call-report-data/reports/chart-pack/chart-pack-2018-q1.pdf.
    \267\ Federal Depository Insurance Corporation. (2018). 
Statistics on Depository Institutions--Compare Banks. Available at: 
https://www5.fdic.gov/SDI/index.asp. Data are from 3/31/18 for 
employment and data are from 6/30/2017 for share of firms and 
establishments that are ``small''.
    \268\ United States Department of Agriculture. (2014). 2012 
Census of Agriculture: United States Summary and State Data: Volume 
1, Geographic Area Series, Part 51. Available at: http://www.agcensus.usda.gov/Publications/2012/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
    \269\ Hogue, C. (2012). Government Organization Summary Report: 
2012. Available at: http://www2.census.gov/govs/cog/g12_org.pdf.
---------------------------------------------------------------------------

    For each industry, the SUSB data tabulates total employment, 
establishment, and firm counts by both enterprise employment size 
(e.g., 0-4 employees, 5-9 employees) and receipt size (e.g., less than 
$100,000, $100,000-

[[Page 10954]]

$499,999).\270\ The Department combined these categories with the SBA 
size standards to estimate the proportion of establishments and 
employees in each industry that are considered small or employed by a 
small entity, respectively. The general methodological approach was to 
classify all establishments or employees in categories below the SBA 
cutoff as in ``small entity'' employment.\271\ If a cutoff fell in the 
middle of a defined category, a uniform distribution of employees 
across that bracket was assumed to determine what proportion should be 
classified as small. The Department assumed that the small entity share 
of credit card issuing and other depository credit intermediation 
institutions (which were not separately represented in FDIC asset 
data), is similar to that of commercial banking and savings 
institutions. The estimated share of employment in small entities was 
applied to the CPS data to estimate the number of affected workers in 
small entities.
---------------------------------------------------------------------------

    \270\ The SUSB defines employment as of March 12th.
    \271\ The Department's estimates of the numbers of affected 
small entities and affected workers who are employees of small 
entities are likely overestimates as the Department had no credible 
way to estimate which enterprises with annual revenues below 
$500,000 also did not engage in interstate commerce.
---------------------------------------------------------------------------

    The Department also estimated the number of small establishments by 
employer type (nonprofit, for-profit, government). The calculation of 
the number of establishments by employer type is similar to the 
calculation of the number of establishments by industry. However, 
instead of using SUSB data by industry, the Department used SUSB data 
by Legal Form of Organization for nonprofit and for-profit 
establishments, and data from the 2012 Census of Governments for small 
governments. The 2012 Census of Governments report includes a breakdown 
of state and local governments by the population of their underlying 
jurisdiction, allowing us to estimate the number of governments that 
are small. The Department welcomes comments on the data sets used in 
the analysis and alternative sources of data.
iii. Number of Small Entities Affected by the Proposed Rule
    Table 32 presents the estimated number of establishments and small 
establishments in the U.S. (hereafter, the terms ``establishment'' and 
``entity'' are used interchangeably and are considered equivalent for 
the purposes of this IRFA).\272\ Based on the methodology described 
above, the Department found that of the 7.8 million establishments 
relevant to this analysis, more than 80 percent (6.3 million) are small 
by SBA standards. These small establishments employ about 51.5 million 
workers, about 37 percent of workers employed by all establishments 
(excluding self-employed, unpaid workers, and members of the armed 
forces), and account for roughly 36 percent of total payroll ($2.6 
trillion of $7.4 trillion).\273\
---------------------------------------------------------------------------

    \272\ SUSB reports data by ``enterprise'' size designations (a 
business organization consisting of one or more domestic 
establishments that were specified under common ownership or 
control). However, the number of enterprises is not reported for the 
size designations. Instead, SUSB reports the number of 
``establishments'' (individual plants, regardless of ownership) and 
``firms'' (a collection of establishments with a single owner within 
a given state and industry) associated with enterprises size 
categories. Therefore, numbers in this analysis are for the number 
of establishments associated with small enterprises, which may 
exceed the number of small enterprises. We based the analysis on the 
number of establishments rather than firms for a more conservative 
estimate (potential overestimate) of the number of small businesses.
    \273\ Since information is not available on employer size in the 
CPS MORG, respondents were randomly assigned as working in a small 
business based on the SUSB probability of employment in a small 
business by detailed Census industry. Annual payroll was estimated 
based on the CPS weekly earnings of workers by industry size.

                          Table 32--Number of Establishments and Employees by SBA Size Standards, by Industry and Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Establishments (1,000s)          Workers (1,000s) \a\          Annual payroll (billions)
                                                         -----------------------------------------------------------------------------------------------
                 Industry/employer type                                                                   Small business
                                                               Total           Small           Total         employed        Total ($)       Small ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...................................................         7,754.0         6,270.4       139,636.5        51,542.2         7,359.5         2,621.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Industry \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture.............................................             9.2             8.5           (\c\)           (\c\)           (\c\)           (\c\)
Forest., log., fish., hunt., and trap...................            13.1            12.8           (\c\)           (\c\)           (\c\)           (\c\)
Mining..................................................            29.2            23.6           (\c\)           (\c\)           (\c\)           (\c\)
Construction............................................           682.4           663.0         7,955.8         5,153.8           421.2           271.5
Nonmetallic mineral prod. manuf.........................            14.7            11.3           (\c\)           (\c\)           (\c\)           (\c\)
Prim. metals and fab. metal prod........................            59.3            55.7         1,636.3           992.3            87.3            50.8
Machinery manufacturing.................................            23.8            21.7         1,267.0           678.3            78.1            41.7
Computer and elect. prod. manuf.........................            12.7            11.3         1,211.3           562.2           107.2            50.3
Electrical equip., appliance manuf......................             5.7             4.9           (\c\)           (\c\)           (\c\)           (\c\)
Transportation equip. manuf.............................            11.9            10.2         2,522.2           711.3           165.9            43.9
Wood products...........................................            14.1            12.9           (\c\)           (\c\)           (\c\)           (\c\)
Furniture and fixtures manuf............................            15.1            14.7           (\c\)           (\c\)           (\c\)           (\c\)
Misc. and not spec. manuf...............................            26.6            25.6         1,464.6           861.7            86.3            49.8
Food manufacturing......................................            26.8            23.6         1,761.2           834.6            75.1            34.2
Beverage and tobacco products...........................             8.0             7.1           (\c\)           (\c\)           (\c\)           (\c\)
Textile, app., and leather manuf........................            16.7            16.2           590.2           391.1            25.5            17.0
Paper and printing......................................            29.9            27.8           883.7           475.9            47.8            24.2
Petroleum and coal prod. manuf..........................             2.1             1.2           (\c\)           (\c\)           (\c\)           (\c\)
Chemical manufacturing..................................            13.2            10.5         1,377.9           545.5           109.4            41.6
Plastics and rubber products............................            12.3            10.3           (\c\)           (\c\)           (\c\)           (\c\)
Wholesale trade.........................................           413.4           329.1         3,453.2         1,617.5           208.4            96.5
Retail trade............................................         1,070.2           689.6        15,784.9         5,357.8           582.8           221.6
Transport. and warehousing..............................           228.4           181.7         6,019.2         1,580.3           301.8            74.2

[[Page 10955]]

 
Utilities...............................................            18.0             7.7           (\c\)           (\c\)           (\c\)           (\c\)
Publishing ind. (ex. internet)..........................            26.9            20.7           484.9           208.8            35.4            14.3
Motion picture and sound recording......................            25.5            22.3           (\c\)           (\c\)           (\c\)           (\c\)
Broadcasting (except internet)..........................             8.4             4.7           577.5           136.8            39.9             8.5
Internet publishing and broadcasting....................             7.8             6.6           (\c\)           (\c\)           (\c\)           (\c\)
Telecommunications......................................            53.0            11.9           885.4           177.7            66.9            13.1
Internet serv. providers and data.......................            13.6             9.0           (\c\)           (\c\)           (\c\)           (\c\)
Other information services..............................             4.3             3.7           (\c\)           (\c\)           (\c\)           (\c\)
Finance.................................................           291.4           128.0         4,446.7           818.7           347.4            65.0
Insurance...............................................           178.7           139.5         2,702.7           711.2           184.0            49.0
Real estate.............................................           324.4           275.8         2,015.4         1,208.9           112.5            66.5
Rental and leasing services.............................            53.2            26.5           (\c\)           (\c\)           (\c\)           (\c\)
Professional and technical services.....................           896.0           812.3         9,445.1         4,433.7           790.6           360.7
Management of companies and enterprises.................            53.9            33.2           (\c\)           (\c\)           (\c\)           (\c\)
Admin. and support services.............................           380.4           325.0         5,029.6         2,285.4           196.3            82.6
Waste manag. and remed. services........................            23.9            17.9           (\c\)           (\c\)           (\c\)           (\c\)
Educational services....................................           102.0            89.3        13,911.5         2,916.7           737.2           145.7
Hospitals...............................................             7.0             1.6         7,158.8           327.9           436.3            19.4
Health care services, except hospitals..................           690.2           567.3         9,760.5         4,673.4           457.1           218.4
Social assistance.......................................           178.9           145.8         2,937.6         1,643.5           104.0            54.4
Arts, entertainment, and recreation.....................           133.6           123.0         2,680.8         1,360.4            99.7            49.7
Accommodation...........................................            66.0            55.2         1,558.4           600.6            56.6            21.1
Food services and drinking places.......................           621.6           488.8         8,766.3         2,399.7           217.4            59.5
Repair and maintenance..................................           213.5           198.6         1,584.2         1,181.1            67.1            49.2
Personal and laundry services...........................           225.6           197.5         1,651.7         1,209.7            50.1            36.1
Membership associations & organizations.................           307.0           296.2         2,083.4         1,534.2           104.6            75.3
Private households......................................           (\d\)           (\d\)           (\c\)           (\c\)           (\c\)           (\c\)
Public administration (\e\).............................            90.1            72.8         7,269.7           687.0           467.3            38.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private......................................           579.1           500.4       10,019.23         4,123.0           541.2           200.5
For profit, private.....................................         7,084.8         5,682.7      107,980.07        45,149.1         5,579.2         2,303.6
Government (state and local)............................            90.1            72.8       17,811.69         2,270.1           960.8           117.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Establishment data are from the Survey of U.S. Businesses 2015; worker and payroll data from CPS MORG using pooled data for 2015-2017 adjusted to
  reflect 2017.
\a\ Excludes the self-employed and unpaid workers.
\b\ Summation across industries may not add to the totals reported due to suppressed values and some establishments not reporting an industry.
\c\ Data not displayed because sample size of affected workers in small establishments is less than 10 due to reliability concerns.
\d\ SUSB does not provide information on private households.
\e\ Establishment number represents the total number of governments, including state and local.
Data from Government Organization Summary Report: 2012.

    As discussed in VI.B.iii, estimates of workers subject to the FLSA 
do not exclude workers employed by enterprises that do not meet the 
enterprise coverage requirements because there is no reliable way of 
identifying this population. Although not excluding such workers would 
only affect a small percentage of workers generally, it may have a 
larger effect (and result in a larger overestimate) for non-profits, 
because revenue from charitable activities is not included when 
determining enterprise coverage.
iv. Number of Affected Small Entities and Employees
    To estimate the probability that an exempt EAP worker in the CPS 
data is employed by a small establishment, the Department assumed this 
probability is equal to the proportion of all workers employed by small 
establishments in the corresponding industry. That is, if 50 percent of 
workers in an industry are employed in small entities, then on average 
small entities are expected to employ 1 out of every 2 exempt EAP 
workers in this industry.\274\ The Department applied these 
probabilities to the population of exempt EAP workers to find the 
number of workers (total exempt EAP workers and total affected by the 
rule) that small entities employ. No data are available to determine 
whether small businesses (or small businesses in specific industries) 
are more or less likely than non-small businesses to employ exempt EAP

[[Page 10956]]

workers or affected EAP workers. Therefore, the best assumption 
available is to assign the same rates to all small and non-small 
businesses.\275\ \276\
---------------------------------------------------------------------------

    \274\ The Department used CPS microdata to estimate the number 
of affected workers. This was done individually for each observation 
in the relevant sample by randomly assigning them a small business 
status based on the best available estimate of the probability of a 
worker to be employed in a small business in their respective 
industry (3-digit Census codes). While aggregation to the 262 3-
digit Census codes is certainly possible, many of these industry 
codes contain too few observations to be reliable.
    \275\ There is a strand of literature that indicates that small 
establishments tend to pay lower wages than larger establishments. 
This may imply that workers in small businesses are more likely to 
be affected than workers in large businesses; however, the 
literature does not make clear what the appropriate alternative rate 
for small businesses should be.
    \276\ Workers are designated as employed in a small business 
based on their industry of employment. The share of workers 
considered small in nonprofit, for profit, and government entities 
is therefore the weighted average of the shares for the industries 
that compose these categories.
---------------------------------------------------------------------------

    The Department estimated that small entities employ 483,400 of the 
1.3 million affected workers (38.0 percent) (Table 33). This composes 
less than 1.0 percent of the 51.5 million workers that small entities 
employ. The sectors with the highest total number of affected workers 
employed by small establishments are: Professional and technical 
services (67,500); health care services, except hospitals (53,000); and 
retail trade (46,300). The sectors with the largest percent of small 
business workers who are affected include: Telecommunications (2.9 
percent); insurance (2.3 percent); and broadcasting (except internet) 
(2.0 percent).

      Table 33--Number of Affected Workers Employed by Small Establishments, by Industry and Employer Type
----------------------------------------------------------------------------------------------------------------
                                                         Workers (1,000s)          Affected workers (1,000s) \a\
                                                 ---------------------------------------------------------------
                    Industry                                      Small business                  Small business
                                                       Total         employed          Total         employed
----------------------------------------------------------------------------------------------------------------
Total...........................................       139,636.5        51,542.2         1,271.3           483.4
----------------------------------------------------------------------------------------------------------------
                                                    Industry
----------------------------------------------------------------------------------------------------------------
Agriculture.....................................           (\c\)           (\c\)           (\c\)           (\c\)
Forest., log., fish., hunt., and trap...........           (\c\)           (\c\)           (\c\)           (\c\)
Mining..........................................           (\c\)           (\c\)           (\c\)           (\c\)
Construction....................................         7,955.8         5,153.8            38.1            27.4
Nonmetallic mineral prod. manuf.................           (\c\)           (\c\)           (\c\)           (\c\)
Prim. metals and fab. metal prod................         1,636.3           992.3             7.9             3.8
Machinery manufacturing.........................         1,267.0           678.3            10.2             4.2
Computer and elect. prod. manuf.................         1,211.3           562.2            11.8             3.6
Electrical equip., appliance manuf..............           (\c\)           (\c\)           (\c\)           (\c\)
Transportation equip. manuf.....................         2,522.2           711.3            13.3             4.2
Wood products...................................           (\c\)           (\c\)           (\c\)           (\c\)
Furniture and fixtures manuf....................           (\c\)           (\c\)           (\c\)           (\c\)
Misc. and not spec. manuf.......................         1,464.6           861.7            10.4             4.7
Food manufacturing..............................         1,761.2           834.6             8.2             3.6
Beverage and tobacco products...................           (\c\)           (\c\)           (\c\)           (\c\)
Textile, app., and leather manuf................           590.2           391.1             4.5             3.9
Paper and printing..............................           883.7           475.9             8.4             5.1
Petroleum and coal prod. manuf..................           (\c\)           (\c\)           (\c\)           (\c\)
Chemical manufacturing..........................         1,377.9           545.5            10.8             4.9
Plastics and rubber products....................           (\c\)           (\c\)           (\c\)           (\c\)
Wholesale trade.................................         3,453.2         1,617.5            44.0            21.6
Retail trade....................................        15,784.9         5,357.8           132.9            46.3
Transport. and warehousing......................         6,019.2         1,580.3            34.7             7.8
Utilities.......................................           (\c\)           (\c\)           (\c\)           (\c\)
Publishing ind. (ex. internet)..................           484.9           208.8             9.9             4.1
Motion picture and sound recording..............           (\c\)           (\c\)           (\c\)           (\c\)
Broadcasting (except internet)..................           577.5           136.8            10.2             2.7
Internet publishing and broadcasting............           (\c\)           (\c\)           (\c\)           (\c\)
Telecommunications..............................           885.4           177.7            14.9             5.2
Internet serv. providers and data...............           (\c\)           (\c\)           (\c\)           (\c\)
Other information services......................           (\c\)           (\c\)           (\c\)           (\c\)
Finance.........................................         4,446.7           818.7            80.7            15.9
Insurance.......................................         2,702.7           711.2            61.6            16.2
Real estate.....................................         2,015.4         1,208.9            24.3            14.1
Rental and leasing services.....................           (\c\)           (\c\)           (\c\)           (\c\)
Professional and technical services.............         9,445.1         4,433.7           149.4            67.5
Management of companies & enterprises...........           (\c\)           (\c\)           (\c\)           (\c\)
Admin. and support services.....................         5,029.6         2,285.4            38.1            15.3
Waste manag. and remed. services................           (\c\)           (\c\)           (\c\)           (\c\)
Educational services............................        13,911.5         2,916.7            71.9            13.9
Hospitals.......................................         7,158.8           327.9            67.6             2.9
Health care services, except hospitals..........         9,760.5         4,673.4           106.2            53.0
Social assistance...............................         2,937.6         1,643.5            47.8            26.1
Arts, entertainment, and recreation.............         2,680.8         1,360.4            48.3            24.1
Accommodation...................................         1,558.4           600.6             8.0             3.9
Food services and drinking places...............         8,766.3         2,399.7            25.6             7.2
Repair and maintenance..........................         1,584.2         1,181.1             8.9             4.9
Personal and laundry services...................         1,651.7         1,209.7             7.6             5.3

[[Page 10957]]

 
Membership associations & organizations.........         2,083.4         1,534.2            35.4            25.5
Private households..............................           (\c\)           (\c\)           (\c\)           (\c\)
Public administration \b\.......................         7,269.7           687.0            54.6             6.5
----------------------------------------------------------------------------------------------------------------
                                                  Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private..............................        10,019.2         4,123.0           126.5            60.3
For profit, private.............................       107,980.1        45,149.1         1,012.3           408.1
Government (state and local)....................        17,811.7         2,270.1           132.5            15.1
----------------------------------------------------------------------------------------------------------------
Note: Worker data are from CPS MORG using pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Estimation of affected workers employed by small establishments was done at the Census 4-digit occupational
  code and industry level. Therefore, at the more aggregated 51 industry level shown in this table, the ratio of
  small business employed to total employed does not equal to the ratio of affected small business employed to
  total affected for each industry, nor does it equal the ratio for the national total because relative industry
  size, employment, and small business employment differs from industry to industry.
\b\ Establishment number represents the total number of state and local governments. Data from Government
  Organization Summary Report: 2012.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
  less than 10.

    Because no information is available on how affected workers are 
distributed among small establishments that employ affected workers, 
the Department estimated a range for effects. At one end of this range, 
the Department assumed that each small establishment employs no more 
than one affected worker, meaning that at most 483,400 of the 6.3 
million small establishments will employ an affected worker. Thus, 
these assumptions provide an upper bound estimate of the number of 
affected small establishments (although it provides a lower bound 
estimate of the effect per small establishment because costs are spread 
over a larger number of establishments). The impacts experienced by an 
establishment would increase as the share of its workers that are 
affected increases. Establishments that employ only affected workers 
are most likely to experience the most severe effects. Therefore, to 
estimate a lower-end estimate for the number of affected establishments 
(which generates an upper-end estimate for impacts per establishment) 
the Department assumed that all workers employed by an affected 
establishment are affected.
    For the purposes of estimating this lower-range number of affected 
small establishments, the Department used the average size of a small 
establishment as the typical size of an affected small 
establishment.\277\ The average number of employees in a small 
establishment is the number of workers that small establishments employ 
divided by the total number of small establishments in that industry 
(SUSB 2012). Thus, the number of affected small establishments in an 
industry, if all employees of an affected establishment are affected, 
equals the number of affected small establishment employees divided by 
the average number of employees per small establishment.
---------------------------------------------------------------------------

    \277\ This is not the true lower bound estimate of the number of 
affected establishments. Strictly speaking, a true lower bound 
estimate of the number of affected small establishments would be 
calculated by assuming all employees in the largest small 
establishments are affected. For example, if the SBA standard is 
that establishments with 500 employees are ``small,'' and 1,350 
affected workers are employed by small establishments in that 
industry, then the smallest number of establishments that could be 
affected in that industry (the true lower bound) would be three. 
However, because such an outcome appears implausible, the Department 
determined a more reasonable lower estimate would be based on 
average establishment size.
---------------------------------------------------------------------------

    Table 34 summarizes the estimated number of affected workers that 
small establishments employ and the expected range for the number of 
affected small establishments by industry. The Department estimated 
that the rule will affect 483,400 workers who are employed by somewhere 
between 64,100 and 483,400 small establishments; this composes from 1.0 
percent to 7.7 percent of all small establishments. It also means that 
from 5.8 million to 6.2 million small establishments incur no more than 
minimal regulatory familiarization costs (i.e., 6.3 million minus 
483,400 equals 5.8 million; 6.3 million minus 64,100 equals 6.2 
million, using rounded values). The table also presents the average 
number of affected employees per establishment using the method in 
which all employees at the establishment are affected. For the other 
method, by definition, there is always one affected employee per 
establishment. Also displayed is the average payroll per small 
establishment by industry (based on both affected and non-affected 
small establishments), calculated by dividing total payroll of small 
businesses by the number of small businesses (Table 32) (applicable to 
both methods).

[[Page 10958]]



          Table 34--Number of Small Affected Establishments and Employees by Industry and Employer Type
----------------------------------------------------------------------------------------------------------------
                                                     Number of small affected            Per establishment
                                     Affected       establishments (1,000s) \a\  -------------------------------
                                    workers in   --------------------------------
            Industry              small entities   One affected    All employees     Affected     Average annual
                                     (1,000s)      employee per      at estab.     employees \a\      payroll
                                                    estab. \b\     affected \c\                      ($1,000s)
----------------------------------------------------------------------------------------------------------------
Total...........................           483.4           483.4            64.1             7.5           418.1
----------------------------------------------------------------------------------------------------------------
                                                    Industry
----------------------------------------------------------------------------------------------------------------
Agriculture.....................           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Forest., log., fish., hunt., and           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
 trap...........................
Mining..........................           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Construction....................            27.4            27.4             3.5             7.8           409.5
Nonmetallic mineral prod. manuf.           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Prim. metals and fab. metal prod             3.8             3.8             0.2            17.8           913.1
Machinery manufacturing.........             4.2             4.2             0.1            31.2         1,919.0
Computer and elect. prod. manuf.             3.6             3.6             0.1            49.8         4,454.5
Electrical equip., appliance               (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
 manuf..........................
Transportation equip. manuf.....             4.2             4.2             0.1            69.6         4,297.1
Wood products...................           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Furniture and fixtures manuf....           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Misc. and not spec. manuf.......             4.7             4.7             0.1            33.7         1,943.5
Food manufacturing..............             3.6             3.6             0.1            35.4         1,448.9
Beverage and tobacco products...           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Textile, app., and leather manuf             3.9             3.9             0.2            24.1         1,046.6
Paper and printing..............             5.1             5.1             0.3            17.1           870.6
Petroleum and coal prod. manuf..           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Chemical manufacturing..........             4.9             4.9             0.1            52.1         3,973.8
Plastics and rubber products....           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Wholesale trade.................            21.6            21.6             4.4             4.9           293.3
Retail trade....................            46.3            46.3             6.0             7.8           321.3
Transport. and warehousing......             7.8             7.8             0.9             8.7           408.2
Utilities.......................           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Publishing ind. (ex. internet)..             4.1             4.1             0.4            10.1           690.8
Motion picture and sound                   (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
 recording......................
Broadcasting (except internet)..             2.7             2.7             0.1            29.2         1,803.8
Internet publishing and                    (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
 broadcasting...................
Telecommunications..............             5.2             5.2             0.4            14.9         1,096.7
Internet serv. providers and               (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
 data...........................
Other information services......           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Finance.........................            15.9            15.9             2.5             6.4           507.9
Insurance.......................            16.2            16.2             3.2             5.1           351.6
Real estate.....................            14.1            14.1             3.2             4.4           240.9
Rental and leasing services.....           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Professional and technical                  67.5            67.5            12.4             5.5           444.1
 services.......................
Management of companies and                (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
 enterprises....................
Admin. and support services.....            15.3            15.3             2.2             7.0           254.3
Waste manag. and remed. services           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Educational services............            13.9            13.9             0.4            32.6         1,630.5
Hospitals.......................             2.9         \e\ 1.2             0.0           200.9        11,892.0
Health care services, except                53.0            53.0             6.4             8.2           384.9
 hospitals......................
Social assistance...............            26.1            26.1             2.3            11.3           373.0
Arts, entertainment, and                    24.1            24.1             2.2            11.1           404.4
 recreation.....................
Accommodation...................             3.9             3.9             0.4            10.9           381.9
Food services and drinking                   7.2             7.2             1.5             4.9           121.8
 places.........................
Repair and maintenance..........             4.9             4.9             0.8             5.9           248.0
Personal and laundry services...             5.3             5.3             0.9             6.1           183.0
Membership associations &                   25.5            25.5             4.9             5.2           254.4
 organizations..................
Private households..............           (\d\)           (\d\)           (\d\)           (\d\)           (\d\)
Public administration \f\.......             6.5             6.5             0.7             9.4           526.1
----------------------------------------------------------------------------------------------------------------
                                                  Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private..............            60.3            60.3             7.3             8.2           400.6
For profit, private.............           408.1           408.1            51.4             7.9           405.4
Government (state and local)....            15.1            15.1             0.5            31.2         1,615.2
----------------------------------------------------------------------------------------------------------------
Note: Establishment data are from the Survey of U.S. Businesses 2012; worker and payroll data from CPS MORG
  using pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Estimation of both affected small establishment employees and affected small establishments was done at the
  most detailed industry level available. Therefore, the ratio of affected small establishment employees to
  total small establishment employees for each industry may not match the ratio of small affected establishments
  to total small establishments at more aggregated industry level presented in the table, nor will it equal the
  ratio at the national level because relative industry size, employment, and small business employment differs
  from industry to industry.

[[Page 10959]]

 
\b\ This method may overestimate the number of affected establishments and therefore the ratio of affected
  workers to affected establishments may be greater than 1-to-1. However, we addressed this issue by also
  calculating effects based on the assumption that 100 percent of workers at an establishment are affected.
\c\ For example, on average, a small establishment in the construction industry employs 7.8 workers (5.2 million
  employees divided by 663,000 small establishments). This method assumes if an establishment is affected then
  all 7.8 workers are affected. Therefore, in the construction industry this method estimates there are 3,500
  small affected establishments (27,400 affected small workers divided by 7.8).
\d\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
  less than 10.
\e\ Number of establishments is smaller than number of affected employees; thus, total number of establishments
  reported.
\f\ Establishment number represents the total number of state and local governments.

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Proposed Rule

    The FLSA sets minimum wage, overtime pay, and recordkeeping 
requirements for employment subject to its provisions. Unless exempt, 
covered employees must be paid at least the minimum wage and not less 
than one and one-half times their regular rates of pay for overtime 
hours worked.
    Every covered employer must keep certain records for each nonexempt 
worker. The regulations at part 516 require employers to maintain 
records for employees subject to the minimum wage and overtime pay 
provisions of the FLSA. The recordkeeping requirements are not new 
requirements; however, employers would need to keep some additional 
records for additional affected employees if the NPRM became final 
without change. As indicated in this analysis, the NPRM would expand 
minimum wage and overtime pay coverage to 1.3 million affected EAP 
workers (including HCE workers and excluding Type 4 workers who remain 
exempt). This would result in an increase in employer burden and was 
estimated in the PRA portion (section V) of this NPRM. Note that the 
burdens reported for the PRA section of this NPRM include the entire 
information collection and not merely the additional burden estimated 
as a result of this NPRM.
i. Costs to Small Entities
    For small entities, the Department projected various types of 
effects, including regulatory familiarization costs, adjustment costs, 
managerial costs, and payroll increases to employees. The Department 
estimated a range for the number of small affected establishments and 
the impacts they incur. However, few establishments are likely to incur 
the effects at the upper end of this range because it seems unlikely 
that the proposed rule would affect all employees at a small firm. 
While the upper and lower bounds are likely over- and under-estimates, 
respectively, of effects per small establishment, the Department 
believes that this range of costs and payroll increases provides the 
most accurate characterization of the effects of the rule on small 
employers.\278\ Furthermore, the smaller estimate of the number of 
affected establishments (i.e., where all employees are assumed to be 
affected) will result in the largest costs and payroll increases per 
entity as a percent of establishment payroll and revenue, and the 
Department expects that many, if not most, entities will incur smaller 
costs, payroll increases, and effects relative to establishment size. 
The Department seeks comments on the estimates for regulatory 
familiarization, adjustment costs, managerial costs, and transfers, as 
discussed below.
---------------------------------------------------------------------------

    \278\ As noted previously, these are not the true lower and 
upper bounds. The values presented are the highest and lowest 
estimates the Department believes are plausible.
---------------------------------------------------------------------------

    The Department expects total direct employer costs will range from 
$55.5 million to $72.0 million for affected small establishments (Table 
35) in the first year after the proposed rule is finalized. Small 
establishments that do not employ affected workers will incur an 
additional $242.5 million to $260.1 million in regulatory 
familiarization costs. The three industries with the highest costs 
(professional and technical services; healthcare services, except 
hospitals; and retail trade) account for about 35 percent of the costs. 
The hospitals industry is expected to incur the largest cost per 
establishment ($22,000 using the method where all employees are 
affected), although the costs are not expected to exceed 0.19 percent 
of payroll. The food services and drinking places industry is expected 
to experience the largest effect as a share of payroll (estimated 
direct costs compose 0.48 percent of average entity payroll).

                      Table 35--Year 1 Small Establishment Direct Costs, Total and per Establishment, by Industry and Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Cost to small entities in year 1 \a\
                                                         -----------------------------------------------------------------------------------------------
                                                                       One affected employee                          All employees affected
                        Industry                         -----------------------------------------------------------------------------------------------
                                                                             Cost per       Percent of                       Cost per       Percent of
                                                               Total         affected     annual payroll       Total         affected     annual payroll
                                                          (millions) \b\      entity            (%)       (millions) \b\      entity            (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...................................................           $72.0            $149            0.04           $55.5            $867            0.21
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Industry
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture.............................................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Forest., log., fish., hunt., and trap...................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Mining..................................................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Construction............................................             4.2             151            0.04             3.2             894            0.22
Nonmetallic mineral prod. manuf.........................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Prim. metals and fab. metal prod........................             0.6             151            0.02             0.4           1,994            0.22
Machinery manufacturing.................................             0.6             151            0.01             0.5           3,461            0.18
Computer and elect. prod. manuf.........................             0.5             151            0.00             0.4           5,499            0.12
Electrical equip., appliance manuf......................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)

[[Page 10960]]

 
Transportation equip. manuf.............................             0.6             151            0.00             0.5           7,667            0.18
Wood products...........................................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Furniture and fixtures manuf............................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Misc. and not spec. manuf...............................             0.7             151            0.01             0.5           3,730            0.19
Food manufacturing......................................             0.5             151            0.01             0.4           3,917            0.27
Beverage and tobacco products...........................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Textile, app., and leather manuf........................             0.6             151            0.01             0.4           2,685            0.26
Paper and printing......................................             0.8             151            0.02             0.6           1,915            0.22
Petroleum and coal prod. manuf..........................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Chemical manufacturing..................................             0.7             151            0.00             0.5           5,754            0.14
Plastics and rubber products............................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Wholesale trade.........................................             3.3             151            0.05             2.5             580            0.20
Retail trade............................................             7.0            1.51            0.05             5.3             893            0.28
Transport. and warehousing..............................             1.2             151            0.04             0.9             995            0.24
Utilities...............................................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Publishing ind. (ex. internet)..........................             0.6             151            0.02             0.5           1,146            0.17
Motion picture and sound recording......................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Broadcasting (except internet)..........................             0.4             151            0.01             0.3           3,237            0.18
Internet publishing and broadcasting....................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Telecommunications......................................             0.8             151            0.01             0.6           1,672            0.15
Internet serv. providers and data.......................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Other information services..............................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Finance.................................................             2.4             151            0.03             1.8             743            0.15
Insurance...............................................             2.5             151            0.04             1.9             600            0.17
Real estate.............................................             2.1             151            0.06             1.7             522            0.22
Rental and leasing services.............................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Professional and technical services.....................            10.2             151            0.03             7.9             640            0.14
Management of companies and enterprises.................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Admin. and support services.............................             2.3             151            0.06             1.8             812            0.32
Waste manag. and remed. services........................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Educational services....................................             2.1             151            0.01             1.5           3,619            0.22
Hospitals...............................................             0.4             151            0.00             0.3          22,051            0.19
Health care services, except hospitals..................             8.0             151            0.04             6.1             944            0.25
Social assistance.......................................             4.0             151            0.04             3.0           1,277            0.34
Arts, entertainment, and recreation.....................             3.7             151            0.04             2.7           1,254            0.31
Accommodation...........................................             0.6             151            0.04             0.4           1,235            0.32
Food services and drinking places.......................             1.1             151            0.12             0.9             580            0.48
Repair and maintenance..................................             0.7             151            0.06             0.6             694            0.28
Personal and laundry services...........................             0.8             151            0.08             0.6             713            0.39
Membership associations & organizations.................             3.9             151            0.06             3.0             609            0.24
Private households......................................           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)           (\c\)
Public administration...................................             1.0             151            0.03             0.7           1,076            0.20
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private......................................             8.8             146            0.04             6.6             898            0.22
For profit, private.....................................            63.0             154            0.04            48.0             935            0.23
Government (state and local)............................             2.2             148            0.01             1.6           3,339            0.21
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Direct costs include regulatory familiarization, adjustment, and managerial costs.
\b\ The range of costs per establishment depends on the number of affected establishments. The minimum assumes that each affected establishment has one
  affected worker (therefore, the number of affected establishments is equal to the number of affected workers). The maximum assumes the share of
  workers in small entities who are affected is also the share of small entity establishments that are affected.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10.

    It is possible that the costs of the proposed rule may be 
disproportionately large for small entities, especially because small 
entities often have limited or no human resources personnel on staff. 
However, the Department expects that small entities will rely upon 
compliance assistance materials provided by the Department or industry 
associations to become familiar with the proposed rule. Additionally, 
the Department notes that the proposed rule is quite limited in scope 
as it primarily makes changes to the salary component of the part 541

[[Page 10961]]

regulations. Finally, the Department believes that most entities have 
at least some nonexempt employees and, therefore, already have policies 
and systems in place for monitoring and recording their hours. The 
Department believes that applying those same policies and systems to 
the workers whose exemption status changes will not be an unreasonable 
burden on small businesses.
    Average weekly earnings for affected EAP workers in small 
establishments are expected to increase by about $8.12 per week per 
affected worker, using the incomplete fixed-job model \279\ described 
in section VI.D.iv.\280\ This would lead to $204.1 million in 
additional annual wage payments to employees in small entities (less 
than 0.8 percent of aggregate affected establishment payroll; Table 
36). The largest payroll increases per establishment are expected in 
the sectors of transportation equipment manufacturing (up to $92,900 
per entity); computer and electronic product manufacturing (up to 
$44,400 per entity); and chemical manufacturing (up to $39,800 per 
entity). However, average payroll increases per establishment exceed 2 
percent of average annual payroll in only three sectors: Food services 
and drinking places (4.7 percent), primary metals and fabricated metal 
products (2.3 percent), and transportation equipment manufacturing (2.2 
percent).
---------------------------------------------------------------------------

    \279\ As explained in section VI.D.iv., the incomplete fixed-job 
model reflects the Department's determination that an appropriate 
estimate of the impact on the implicit hourly rate of pay for 
regular overtime workers, if the NPRM is finalized as proposed, 
should be determined using the average of Barkume's and Trejo's two 
estimates of the incomplete fixed-job model adjustments: A wage 
change that is 40 percent of the adjustment toward the amount 
predicted by the fixed-job model, assuming an initial zero overtime 
pay premium, and a wage change that is 80 percent of the adjustment 
assuming an initial 28 percent overtime pay premium.
    \280\ This is an average increase for all affected workers (both 
EAP and HCE), and reconciles to the weighted average of individual 
salary changes discussed in the Transfers section.

  Table 36--Year 1 Small Establishment Payroll Increases, Total and per Establishment, by Industry and Employer
                                                      Type
----------------------------------------------------------------------------------------------------------------
                                                Increased payroll for small entities in year 1 \a\
                                 -------------------------------------------------------------------------------
                                                       One affected employee          All employees affected
            Industry                             ---------------------------------------------------------------
                                       Total                        Percent of                      Percent of
                                    (millions)      Per estab.    annual payroll    Per estab.    annual payroll
                                                                        (%)                             (%)
----------------------------------------------------------------------------------------------------------------
Total...........................          $204.1            $422            0.10          $3,187            0.76
----------------------------------------------------------------------------------------------------------------
                                                    Industry
----------------------------------------------------------------------------------------------------------------
Agriculture.....................           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Forest., log., fish., hunt., and           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
 trap...........................
Mining..........................           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Construction....................             9.8             356            0.09           2,768            0.68
Nonmetallic mineral prod. manuf.           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Prim. metals and fab. metal prod             4.4           1,172            0.13          20,889            2.29
Machinery manufacturing.........             4.5           1,054            0.05          32,885            1.71
Computer and elect. prod. manuf.             3.2             892            0.02          44,405            1.00
Electrical equip., appliance               (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
 manuf..........................
Transportation equip. manuf.....             5.6           1,334            0.03          92,869            2.16
Wood products...................           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Furniture and fixtures manuf....           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Misc. and not spec. manuf.......             5.0           1,066            0.05          35,874            1.85
Food manufacturing..............             1.6             448            0.03          15,837            1.09
Beverage and tobacco products...           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Textile, app., and leather manuf             1.7             429            0.04          10,355            0.99
Paper and printing..............             0.5              91            0.01           1,556            0.18
Petroleum and coal prod. manuf..           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Chemical manufacturing..........             3.8             764            0.02          39,839            1.00
Plastics and rubber products....           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Wholesale trade.................            20.6             957            0.33           4,705            1.60
Retail trade....................            29.4             635            0.20           4,935            1.54
Transport. and warehousing......             1.9             242            0.06           2,104            0.52
Utilities.......................           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Publishing ind. (ex. internet)..  ..............               0  ..............               0  ..............
Motion picture and sound                   (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
 recording......................
Broadcasting (except internet)..             0.0               6            0.00             167            0.01
Internet publishing and                    (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
 broadcasting...................
Telecommunications..............             3.1             604            0.06           8,986            0.82
Internet serv. providers and               (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
 data...........................
Other information services......           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Finance.........................             7.0             442            0.09           2,829            0.56
Insurance.......................             3.2             196            0.06           1,000            0.28
Real estate.....................             5.4             386            0.16           1,692            0.70
Rental and leasing services.....           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Professional and technical                  22.6             335            0.08           1,826            0.41
 services.......................
Management of companies and                (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
 enterprises....................
Admin. and support services.....             3.7             245            0.10           1,720            0.68
Waste manag. and remed. services           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Educational services............             8.2             591            0.04          19,278            1.18

[[Page 10962]]

 
Hospitals.......................  ..............              $0  ..............              $0  ..............
Health care services, except                 8.7             165             .04           1,358            0.35
 hospitals......................
Social assistance...............             2.8             109            0.03           1,228            0.33
Arts, entertainment, and                    11.5             475            0.12           5,259            1.30
 recreation.....................
Accommodation...................             1.3             331            0.09           3,602            0.94
Food services and drinking                   8.4           1,168            0.96           5,736            4.71
 places.........................
Repair and maintenance..........             1.4             293            0.12           1,742            0.70
Personal and laundry services...             0.8             150            0.08             921            0.50
Membership associations &                    6.4             252            0.10           1,307            0.51
 organizations..................
Private households..............           (\b\)           (\b\)           (\b\)           (\b\)           (\b\)
Public administration...........             2.4             363            0.07           3,426            0.65
----------------------------------------------------------------------------------------------------------------
                                                  Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private..............            21.3             353            0.09           2,911            0.73
For profit, private.............           177.2             434            0.11           3,449            0.85
Government (state and local)....             5.7             376            0.02          11,710            0.72
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Aggregate change in total annual payroll experienced by small entities under the updated salary levels after
  labor market adjustments. This amount represents the total amount of (wage) transfers from employers to
  employees.
\b\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
  less than 10.

    Table 37 presents estimated first year direct costs and payroll 
increases combined per establishment and the costs and payroll 
increases as a percent of average establishment payroll. The Department 
presents only the results for the upper bound scenario where all 
workers employed by the establishment are affected. Combined costs and 
payroll increases per establishment range from $1,150 in publishing 
industries (except internet) to $100,500 in the transportation 
equipment manufacturing sector.\281\ Combined costs and payroll 
increases compose more than 2 percent of average annual establishment 
payroll in four sectors: Food services and drinking places (5.2 
percent), primary metals and fabricated metal products (2.5 percent), 
transportation equipment manufacturing (2.3 percent), and miscellaneous 
and not specified manufacturing (2.0 percent). In all other sectors, 
they range from 0.2 percent to 1.9 percent of payroll.
---------------------------------------------------------------------------

    \281\ When a single affected worker is employed, combined costs 
and transfers by industry were estimated to range from $151 (in both 
the publishing (except internet) and hospitals industries) to $1,500 
(in transportation equipment manufacturing) per establishment.
---------------------------------------------------------------------------

    However, comparing costs and payroll increases to payrolls 
overstates the effects on establishments because payroll represents 
only a fraction of the financial resources available to an 
establishment. The Department approximated revenue per small affected 
establishment by calculating the ratio of small business revenues to 
payroll by industry from the 2012 SUSB data then multiplying that ratio 
by average small entity payroll.\282\ Using this approximation of 
annual revenues as a benchmark, only one sector has costs and payroll 
increases amounting to more than one percent of revenues, food services 
and drinking places (1.5 percent).
---------------------------------------------------------------------------

    \282\ The ratio of revenues to payroll for small businesses 
ranged from 2.15 (social assistance) to 43.40 (petroleum and coal 
products manufacturing), with an average over all sectors of 5.35. 
The Department used this estimate of revenue, instead of small 
business revenue reported directly from the 2012 SUSB so revenue 
aligned with payrolls in 2017.

    Table 37--Year 1 Small Establishment Direct Costs and Payroll Increases, Total and per Establishment, by
                Industry and Employer Type, Using All Employees in Establishment Affected Method
----------------------------------------------------------------------------------------------------------------
                                                  Costs and payroll increases for small affected establishments,
                                                                      all employees affected
                                                 ---------------------------------------------------------------
                    Industry                                                                        Percent of
                                                       Total                        Percent of       estimated
                                                    (millions)    Per estab. \a\  annual payroll   revenues \b\
                                                                                        (%)             (%)
----------------------------------------------------------------------------------------------------------------
Total...........................................          $259.6          $4,053            0.97            0.18
----------------------------------------------------------------------------------------------------------------
                                                    Industry
----------------------------------------------------------------------------------------------------------------
Agriculture.....................................           (\c\)           (\c\)           (\c\)           (\c\)
Forest., log., fish., hunt., and trap...........           (\c\)           (\c\)           (\c\)           (\c\)
Mining..........................................           (\c\)           (\c\)           (\c\)           (\c\)
Construction....................................            12.9           3,662            0.89            0.20

[[Page 10963]]

 
Nonmetallic mineral prod. manuf.................           (\c\)           (\c\)           (\c\)           (\c\)
Prim. metals and fab. metal prod................             4.8          22,883            2.51            0.49
Machinery manufacturing.........................             4.9          36,346            1.89            0.39
Computer and elect. prod. manuf.................             3.6          49,904            1.12            0.25
Electrical equip., appliance manuf..............           (\c\)           (\c\)           (\c\)           (\c\)
Transportation equip. manuf.....................             6.1         100,536            2.34            0.34
Wood products...................................           (\c\)           (\c\)           (\c\)           (\c\)
Furniture and fixtures manuf....................           (\c\)           (\c\)           (\c\)           (\c\)
Misc. and not spec. manuf.......................             5.5          39,603            2.04            0.48
Food manufacturing..............................             2.0          19,753            1.36            0.12
Beverage and tobacco products...................           (\c\)           (\c\)           (\c\)           (\c\)
Textile, app., and leather manuf................             2.1          13,040            1.25            0.23
Paper and printing..............................             1.0           3,471            0.40            0.08
Petroleum and coal prod. manuf..................           (\c\)           (\c\)           (\c\)           (\c\)
Chemical manufacturing..........................             4.3          45,592            1.15            0.11
Plastics and rubber products....................           (\c\)           (\c\)           (\c\)           (\c\)
Wholesale trade.................................            23.2           5,285            1.80            0.11
Retail trade....................................            34.8           5,828            1.81            0.18
Transport. and warehousing......................             2.8           3,098            0.76            0.17
Utilities.......................................           (\c\)           (\c\)           (\c\)           (\c\)
Publishing ind. (ex. internet)..................             0.5           1,146            0.17            0.06
Motion picture and sound recording..............           (\c\)           (\c\)           (\c\)           (\c\)
Broadcasting (except internet)..................             0.3           3,404            0.19            0.07
Internet publishing and broadcasting............           (\c\)           (\c\)           (\c\)           (\c\)
Telecommunications..............................             3.7          10,658            0.97            0.14
Internet serv. providers and data...............           (\c\)           (\c\)           (\c\)           (\c\)
Other information services......................           (\c\)           (\c\)           (\c\)           (\c\)
Finance.........................................             8.9           3,572            0.70            0.25
Insurance.......................................             5.1           1,600            0.46            0.10
Real estate.....................................             7.1           2,214            0.92            0.20
Rental and leasing services.....................           (\c\)           (\c\)           (\c\)           (\c\)
Professional and technical services.............            30.5           2,466            0.56            0.22
Management of companies and enterprises.........           (\c\)           (\c\)           (\c\)           (\c\)
Admin. and support services.....................             5.5           2,532            1.00            0.45
Waste manag. and remed. services................           (\c\)           (\c\)           (\c\)           (\c\)
Educational services............................             9.7          22,897            1.40            0.54
Hospitals.......................................             0.3          22,051            0.19            0.08
Health care services, except hospitals..........            14.8           2,302            0.60            0.25
Social assistance...............................             5.8           2,505            0.67            0.31
Arts, entertainment, and recreation.............            14.2           6,513            1.61            0.53
Accommodation...................................             1.7           4,836            1.27            0.32
Food services and drinking places...............             9.3           6,315            5.19            1.54
Repair and maintenance..........................             2.0           2,436            0.98            0.28
Personal and laundry services...................             1.4           1,634            0.89            0.31
Membership associations & organizations.........             9.4           1,917            0.75            0.19
Private households..............................           (\c\)           (\c\)           (\c\)           (\c\)
Public administration...........................             3.1           4,501            0.86            0.23
----------------------------------------------------------------------------------------------------------------
                                                  Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private..............................           94.40           3,570            1.00            0.30
For profit, private.............................          585.30           3,532            1.00            0.20
Government (state and local)....................           12.20           9,264            0.60            0.20
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2015-2017 adjusted to reflect 2017.
\a\ Total direct costs and transfers for small establishments in which all employees are affected. Impacts to
  small establishments in which one employee is affected will be a fraction of the impacts presented in this
  table.
\b\ Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2012
  SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was
  calculated using revenues and payroll from the 2012 Census of Governments.
\c\ Data not displayed due to reliability concerns; sample size of affected workers in small establishments is
  less than 10.


[[Page 10964]]

vi. Projected Effects to Affected Small Entities in Year 2 Through Year 
10
    To determine how small businesses will be affected in future years, 
the Department projected costs to small business for nine years after 
Year 1 of the rule. Projected employment and earnings were calculated 
using the same methodology described in Section VI.B.ii. Affected 
employees in small firms follow a similar pattern to affected workers 
in all establishments: The number decreases gradually in projected 
years. There are 483,400 affected workers in small establishments in 
Year 1 and 405,200 in Year 10. Table 38 reports affected workers in 
selected years only.

 Table 38--Projected Number of Affected Workers in Small Establishments,
                               by Industry
------------------------------------------------------------------------
                                             Affected workers in small
                                              establishments (1,000s)
                Industry                 -------------------------------
                                              Year 1          Year 10
------------------------------------------------------------------------
Total...................................           483.4           405.2
Agriculture.............................           (\a\)           (\a\)
Forest., log., fish., hunt., and trap...           (\a\)           (\a\)
Mining..................................           (\a\)             1.7
Construction............................            27.4            22.3
Nonmetallic mineral prod. manuf.........           (\a\)           (\a\)
Prim. metals and fab. metal prod........             3.8             3.1
Machinery manufacturing.................             4.2             4.0
Computer and elect. prod. manuf.........             3.6             4.9
Electrical equip., appliance manuf......           (\a\)           (\a\)
Transportation equip. manuf.............             4.2             3.0
Wood products...........................           (\a\)           (\a\)
Furniture and fixtures manuf............           (\a\)           (\a\)
Misc. and not spec. manuf...............             4.7             5.5
Food manufacturing......................             3.6           (\a\)
Beverage and tobacco products...........           (\a\)           (\a\)
Textile, app., and leather manuf........             3.9           (\a\)
Paper and printing......................             5.1           (\a\)
Petroleum and coal prod. manuf..........           (\a\)           (\a\)
Chemical manufacturing..................             4.9             3.4
Plastics and rubber products............           (\a\)           (\a\)
Wholesale trade.........................            21.6            21.3
Retail trade............................            46.3            34.4
Transport. and warehousing..............             7.8             7.3
Utilities...............................           (\a\)           (\a\)
Publishing ind. (ex. internet)..........             4.1             3.8
Motion picture and sound recording......           (\a\)           (\a\)
Broadcasting (except internet)..........             2.7           (\a\)
Internet publishing and broadcasting....           (\a\)           (\a\)
Telecommunications......................             5.2           (\a\)
Internet serv. providers and data.......           (\a\)           (\a\)
Other information services..............           (\a\)           (\a\)
Finance.................................            15.9            14.8
Insurance...............................            16.2            11.9
Real estate.............................            14.1            12.4
Rental and leasing services.............           (\a\)           (\a\)
Professional and technical services.....            67.5            65.6
Management of companies and enterprises.           (\a\)           (\a\)
Admin. and support services.............            15.3            10.7
Waste manag. and remed. services........           (\a\)           (\a\)
Educational services....................            13.9            14.3
Hospitals...............................             2.9           (\a\)
Health care services, except hospitals..            53.0            44.4
Social assistance.......................            26.1            21.5
Arts, entertainment, and recreation.....            24.1            18.1
Accommodation...........................             3.9             3.1
Food services and drinking places.......             7.2             6.7
Repair and maintenance..................             4.9             4.5
Personal and laundry services...........             5.3             4.2
Membership associations & organizations.            25.5            20.2
Private households......................           (\a\)           (\a\)
Public administration...................             6.5             5.0
------------------------------------------------------------------------
Note: Worker data are from CPS MORG using pooled data for 2015-2017
  adjusted to reflect 2017.
\a\ Data not displayed because sample size of affected workers in small
  establishments is less than 10.

    Costs to small establishments vary by year but generally decrease 
from Year 1 mostly because regulatory familiarization costs are zero in 
all projected years, and adjustment costs are relatively small. By Year 
10, additional costs and payroll to small businesses have decreased 
from $259.6 million in Year 1 to $210.2 million (Table 39). The 
Department notes that, due to relatively small sample sizes, the 
estimates by detailed industry are not

[[Page 10965]]

precise. This can cause some numbers in the data to vary across years 
by a greater amount than they will in the future.

   Table 39--Projected Direct Costs and Payroll Increases for Affected
 Small Establishments, by Industry, Using All Employees in Establishment
                             Affected Method
------------------------------------------------------------------------
                                            Costs and payroll increases
                                                for small affected
                                           establishments, all employees
                Industry                     affected (millions 2017$)
                                         -------------------------------
                                              Year 1          Year 10
------------------------------------------------------------------------
Total...................................          $259.6          $210.2
Agriculture.............................             (a)             (a)
Forest., log., fish., hunt., and trap...             (a)             (a)
Mining..................................             (a)             2.4
Construction............................            12.9            12.2
Nonmetallic mineral prod. manuf.........             (a)             (a)
Prim. metals and fab. metal prod........             4.8             1.8
Machinery manufacturing.................             4.9             2.5
Computer and elect. prod. manuf.........             3.6             3.0
Electrical equip., appliance manuf......             (a)             (a)
Transportation equip. manuf.............             6.1             2.8
Wood products...........................             (a)             (a)
Furniture and fixtures manuf............             (a)             (a)
Misc. and not spec. manuf...............             5.5             0.8
Food manufacturing......................             2.0             (a)
Beverage and tobacco products...........             (a)             (a)
Textile, app., and leather manuf........             2.1             (a)
Paper and printing......................             1.0             [a]
Petroleum and coal prod. manuf..........             (a)             (a)
Chemical manufacturing..................             4.3             1.4
Plastics and rubber products............             (a)             (a)
Wholesale trade.........................            23.2            14.1
Retail trade............................            34.8            25.3
Transport. and warehousing..............             2.8             2.4
Utilities...............................             (a)             (a)
Publishing ind. (ex. internet)..........             0.5             3.6
Motion picture and sound recording......             (a)             (a)
Broadcasting (except internet)..........             0.3             (a)
Internet publishing and broadcasting....             (a)             (a)
Telecommunications......................             3.7             (a)
Internet serv. providers and data.......             (a)             (a)
Other information services..............             (a)             (a)
Finance.................................             8.9            15.5
Insurance...............................             5.1             4.0
Real estate.............................             7.1             5.5
Rental and leasing services.............             (a)             (a)
Professional and technical services.....            30.5            30.2
Management of companies and enterprises.             (a)             (a)
Admin. and support services.............             5.5             2.6
Waste manag. and remed. services........             (a)             (a)
Educational services....................             9.7             7.6
Hospitals...............................             0.3             (a)
Health care services, except hospitals..            14.8             9.7
Social assistance.......................             5.8             5.5
Arts, entertainment, and recreation.....            14.2             8.1
Accommodation...........................             1.7             0.2
Food services and drinking places.......             9.3             4.7
Repair and maintenance..................             2.0             1.3
Personal and laundry services...........             1.4             1.0
Membership associations & organizations.             9.4             6.6
Private households......................             (a)             (a)
Public administration...................             3.1             3.0
------------------------------------------------------------------------
Note: pooled data for 2015-2017 adjusted to reflect 2017.
a Data not displayed because sample size of affected workers in small
  establishments is less than 10.

ii. Differing Compliance and Reporting Requirements for Small Entities
    This NPRM provides no differing compliance requirements and 
reporting requirements for small entities. The Department has strived 
to minimize respondent recordkeeping burden by requiring no specific 
form or order of records under the FLSA and its corresponding 
regulations. Moreover, employers would normally maintain the records 
under usual or customary business practices.

[[Page 10966]]

iii. Least Burdensome Option or Explanation Required
    The Department believes it has chosen the most effective option 
that updates and clarifies the rule and which results in the least 
burden. Among the options considered by the Department, the least 
restrictive option was taking no regulatory action. Taking no 
regulatory action does not address the Department's concerns discussed 
above under Need for Regulation. Pursuant to section 603(c) of the RFA, 
the following alternatives are to be addressed:
    Differing compliance or reporting requirements that take into 
account the resources available to small entities. The FLSA creates a 
level playing field for businesses by setting a floor below which 
employers may not pay their employees. To establish differing 
compliance or reporting requirements for small businesses would 
undermine this important purpose of the FLSA and appears unnecessary 
given the small annualized cost of the rule. The Year 1 cost of the 
proposed rule for the average employer that qualifies as small was 
estimated to range from a minimum of $1,150 (publishing industries, 
except internet) to a maximum of $100,500 (transportation equipment, 
manufacturing), using the upper-bound estimates. The Department makes 
available a variety of resources to employers for understanding their 
obligations and achieving compliance. Therefore, the Department has not 
proposed differing compliance or reporting requirements for small 
businesses.
    The clarification, consolidation, or simplification of compliance 
and reporting requirements for small entities. The proposed rule 
imposes no new reporting requirements. The Department makes available a 
variety of resources to employers for understanding their obligations 
and achieving compliance.
    The use of performance rather than design standards. Under the 
proposed rule, employers may achieve compliance through a variety of 
means. Employers may elect to continue to claim the EAP exemption for 
affected employees by adjusting salary levels, hire additional workers 
or spread overtime hours to other employees, or compensate employees 
for overtime hours worked. The Department makes available a variety of 
resources to employers for understanding their obligations and 
achieving compliance.
    An exemption from coverage of the rule, or any part thereof, for 
such small entities. Creating an exemption from coverage of this rule 
for businesses with as many as 500 employees, those defined as small 
businesses under SBA's size standards, is inconsistent with the FLSA, 
which applies to all employers that satisfy the enterprise coverage 
threshold or employ individually covered employees.\283\ Creating a 
regulatory exemption for small businesses is beyond the scope of the 
Department's statutory authority to define and delimit the meaning of 
the term ``employed in a bona fide executive, administrative, or 
professional capacity.'' \284\
---------------------------------------------------------------------------

    \283\ See 29 U.S.C. 203(s).
    \284\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

E. Identification, to the Extent Practicable, of all Relevant Federal 
Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule

    The Department is not aware of any federal rules that duplicate, 
overlap, or conflict with this NPRM.

VIII. Unfunded Mandates Reform Act Analysis

    The Unfunded Mandates Reform Act of 1995 (UMRA),\285\ requires 
agencies to prepare a written statement for rules for which a general 
notice of proposed rulemaking was published and that include any 
federal mandate that may result in increased expenditures by state, 
local, and tribal governments, in the aggregate, or by the private 
sector, of $161 million ($100 million in 1995 dollars adjusted for 
inflation) or more in at least one year. This statement must: (1) 
Identify the authorizing legislation; (2) present the estimated costs 
and benefits of the rule and, to the extent that such estimates are 
feasible and relevant, its estimated effects on the national economy; 
(3) summarize and evaluate state, local, and tribal government input; 
and (4) identify reasonable alternatives and select, or explain the 
non-selection, of the least costly, most cost-effective, or least 
burdensome alternative.
---------------------------------------------------------------------------

    \285\ 2 U.S.C. 1501.
---------------------------------------------------------------------------

A. Authorizing Legislation

    This proposed rule is issued pursuant to section 13(a)(1) of the 
Fair Labor Standards Act (FLSA or Act), 29 U.S.C. 213(a)(1). The 
section exempts from the FLSA's minimum wage and overtime pay 
requirements ``any employee employed in a bona fide executive, 
administrative, or professional capacity (including any employee 
employed in the capacity of academic administrative personnel or 
teacher in elementary or secondary schools), or in the capacity of 
outside salesman (as such terms are defined and delimited from time to 
time by regulations of the Secretary, subject to the provisions of [the 
Administrative Procedure Act]. . .).'' \286\ The requirements of the 
exemption are contained in part 541 of the Department's regulations. 
Section 3(e) of the FLSA \287\ defines ``employee'' to include most 
individuals employed by a state, political subdivision of a state, or 
interstate governmental agency. Section 3(x) of the FLSA \288\ also 
defines public agencies to include the government of a state or 
political subdivision thereof, or any interstate governmental agency.
---------------------------------------------------------------------------

    \286\ 29 U.S.C. 213(a)(1).
    \287\ 29 U.S.C. 203(e).
    \288\ 29 U.S.C. 203(x).
---------------------------------------------------------------------------

B. Assessment of Costs and Benefits

    For purposes of the UMRA, this rule includes a federal mandate that 
is expected to result in increased expenditures by the private sector 
of more than $161 million in at least one year, but the rule will not 
result in increased expenditures by state, local and tribal 
governments, in the aggregate, of $161 million or more in any one year.
    Costs to state and local governments: Based on the economic impact 
analysis of this proposed rule, the Department determined that the 
proposed rule will result in Year 1 costs for state and local 
governments totaling $59.2 million, of which $17.2 million are direct 
employer costs and $42.0 million are payroll increases (Table 40). In 
subsequent years, the Department estimated that state and local 
governments may experience payroll increases of as much as $38.3 
million per year.
    Costs to the private sector: The Department determined that the 
proposed rule will result in Year 1 costs to the private sector of 
approximately $0.9 billion, of which $446.7 million are direct employer 
costs and $483.7 million are payroll increases. In subsequent years, 
the Department estimated that the private sector may experience a 
payroll increase of as much as $407.1 million per year.

[[Page 10967]]



      Table 40--Summary of Year 1 Affected EAP Workers, Regulatory Costs, and Transfers by Type of Employer
----------------------------------------------------------------------------------------------------------------
                                                                       Total          Private      Government a
----------------------------------------------------------------------------------------------------------------
                                          Affected EAP Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Number..........................................................           1,271           1,139             128
----------------------------------------------------------------------------------------------------------------
                                        Direct Employer Costs (Millions)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization......................................          $324.9          $321.2            $3.8
Adjustment......................................................            66.6            59.7             6.7
Managerial......................................................            72.7            65.9             6.7
Total direct costs..............................................           464.2           446.7            17.2
----------------------------------------------------------------------------------------------------------------
                                          Payroll Increases (Millions)
----------------------------------------------------------------------------------------------------------------
From employers to workers.......................................          $526.9          $483.7           $42.0
----------------------------------------------------------------------------------------------------------------
                                  Direct Employer Costs & Transfers (Millions)
----------------------------------------------------------------------------------------------------------------
From employers..................................................          $991.1          $930.4           $59.2
----------------------------------------------------------------------------------------------------------------
a Includes only state, local, and tribal governments.

    UMRA requires agencies to estimate the effect of a regulation on 
the national economy if, at its discretion, such estimates are 
reasonably feasible and the effect is relevant and material.\289\ 
However, OMB guidance on this requirement notes that such macro-
economic effects tend to be measurable in nationwide econometric models 
only if the economic effect of the regulation reaches 0.25 percent to 
0.5 percent of GDP, or in the range of $48.5 billion to $97.0 billion 
(using 2017 GDP). A regulation with smaller aggregate effect is not 
likely to have a measurable effect in macro-economic terms unless it is 
highly focused on a particular geographic region or economic sector, 
which is not the case with this proposed rule.
---------------------------------------------------------------------------

    \289\ 2 U.S.C. 1532(a)(4).
---------------------------------------------------------------------------

    The Department's RIA estimates that the total first-year costs 
(direct employer costs and payroll increases from employers to workers) 
of the proposed rule will be approximately $930.4 million for private 
employers and $59.2 million for state and local governments. Given 
OMB's guidance, the Department has determined that a full macro-
economic analysis is not likely to show any measurable effect on the 
economy. Therefore, these costs are compared to payroll costs and 
revenue to demonstrate the feasibility of adapting to these new rules.
    Total first-year private sector costs compose 0.015 percent of 
private sector payrolls nationwide.\290\ Total private sector first-
year costs compose 0.002 percent of national private sector revenues 
(revenues in 2017 are projected to be $38.8 trillion).\291\ The 
Department concludes that effects of this magnitude are affordable and 
will not result in significant disruptions to typical firms in any of 
the major industry categories.
---------------------------------------------------------------------------

    \290\ Private sector payroll costs nationwide are projected to 
be $6.4 trillion in 2017. This projection is based on private sector 
payroll costs in 2012, which were $5.3 trillion using the 2012 
Economic Census of the United States. This was inflated to 2017 
dollars using the CPI-U.
    \291\ Private sector revenues in 2012 were $32.3 trillion using 
the 2012 Economic Census of the United States. This was inflated to 
2017 dollars using the CPI-U.
---------------------------------------------------------------------------

    Total first-year state and local government costs compose less than 
0.01 percent of state and local government payrolls.\292\ First-year 
state and local government costs compose 0.002 percent of state and 
local government revenues (projected 2017 revenues were estimated to be 
$3.7 trillion).\293\ Effects of this magnitude will not result in 
significant disruptions to typical state and local governments. The 
$59.2 million in state and local government costs constitutes an 
average of approximately $657 for each of the approximately 90,106 
state and local entities. The Department considers effects of this 
magnitude to be quite small both in absolute terms and in relation to 
payrolls and revenue.
---------------------------------------------------------------------------

    \292\ State and local payrolls in 2015 were reported as $900 
billion. This was inflated to 2017 payroll costs of $962.9 billion 
using the CPI-U. State and Local Government Finances Summary: 
FY2015. Available at https://www.census.gov/govs/local/.
    \293\ State and local revenues in 2015 were reported as $3.4 
trillion. This was inflated to 2017 dollars using the CPI-U. State 
and Local Government Finances Summary: FY2015. Available at https://www.census.gov/govs/local/.
---------------------------------------------------------------------------

C. Least Burdensome Option or Explanation Required

    This NPRM has described the Department's consideration of various 
options throughout the preamble and economic impact analysis (section 
VI.C.i). The Department believes that it has chosen the least 
burdensome but still cost-effective methodology to update the salary 
level consistent with the Department's statutory obligation. Although 
some alternative options considered would have set the standard salary 
level at a rate lower than the updated salary level, that outcome would 
not necessarily be the most cost-effective or least-burdensome 
alternative for employers. A lower or outdated salary level would 
result in a less effective bright-line test for separating workers who 
may be exempt from those nonexempt workers intended to be within the 
Act's protection. A low salary level would also increase the burden on 
the employer to apply the duties test to more employees in determining 
whether an employee is exempt, which would inherently increase the 
likelihood of misclassification and, in turn, increase the risk that 
employees who should receive overtime and minimum wage protections 
under the FLSA are denied those protections.
    Selecting a standard salary level inevitably affects both the risk 
and cost of misclassification of overtime-eligible employees earning 
above the salary level, as well as the risk and cost of providing 
overtime protection to employees performing bona fide EAP duties who 
are paid below the salary level. An unduly low level risks increasing 
employer liability from

[[Page 10968]]

unintentionally misclassifying workers as exempt; but an unduly high 
standard salary level increases labor costs to employers precluded from 
claiming the exemption for employees performing bona fide EAP duties. 
Thus, the ultimate cost of the regulation is increased if the standard 
salary level is set either too low or too high. The Department 
determined that setting the standard salary level using the level 
equivalent to the earnings of the 20th percentile of full-time salaried 
workers in the South and/or in the retail sector, projected forward to 
January 2020, balances the risks and costs of misclassification of 
exempt status.

IX. Executive Order 13132, Federalism

    The Department has (1) reviewed this proposed rule in accordance 
with Executive Order 13132 regarding federalism and (2) determined that 
it does not have federalism implications. The proposed rule would not 
have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government.

X. Executive Order 13175, Indian Tribal Governments

    This proposed rule would not have substantial direct effects on one 
or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

List of Subjects in 29 CFR Part 541

    Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.

    Signed at Washington, DC this 7th day of March, 2019.
Keith E. Sonderling,
Acting Administrator, Wage and Hour Division.
    For the reasons set out in the preamble, the Department of Labor 
proposes to amend title 29 of the Code of Federal Regulations part 541 
as follows:

PART 541--DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, 
ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES

0
1. The authority citation for part 541 continues to read as follows:

    Authority:  29 U.S.C. 213; Pub. L. 101-583, 104 Stat. 2871; 
Reorganization Plan No. 6 of 1950 (3 CFR, 1945-53 Comp., p. 1004); 
Secretary's Order 01-2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24, 
2014).

0
2. Revise paragraph (a)(1) of Sec.  541.100 to read as follows:


Sec.  541.100   General rule for executive employees.

    (a) * * *
    (1) Compensated on a salary basis pursuant to Sec.  541.600 at a 
rate of not less than $679 per week (or $455 per week if employed in 
the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or 
the U.S. Virgin Islands by employers other than the Federal government, 
or $380 per week if employed in American Samoa by employers other than 
the Federal government), exclusive of board, lodging or other 
facilities;
* * * * *
0
3. Revise paragraph (a)(1) of Sec.  541.200 to read as follows:


Sec.  541.200   General rule for administrative employees.

    (a) * * *
    (1) Compensated on a salary or fee basis pursuant to Sec.  541.600 
at a rate of not less than $679 per week (or $455 per week if employed 
in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, 
or the U.S. Virgin Islands by employers other than the Federal 
government, or $380 per week if employed in American Samoa by employers 
other than the Federal government), exclusive of board, lodging or 
other facilities;
* * * * *
0
4. Revise paragraph (a)(1) of Sec.  541.204 to read as follows:


  Sec.  541.204 Educational establishments.

    (a) * * *
    (1) Compensated on a salary or fee basis at a rate of not less than 
$679 per week (or $455 per week if employed in the Commonwealth of the 
Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands 
by employers other than the Federal government, or $380 per week if 
employed in American Samoa by employers other than the Federal 
government), exclusive of board, lodging, or other facilities; or on a 
salary basis which is at least equal to the entrance salary for 
teachers in the educational establishment by which employed; and
* * * * *
0
5. Revise paragraph (a)(1) of Sec.  541.300 to read as follows:


Sec.  541.300   General rule for professional employees.

    (a) * * *
    (1) Compensated on a salary or fee basis pursuant to Sec.  541.600 
at a rate of not less than $679 per week (or $455 per week if employed 
in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, 
or the U.S. Virgin Islands by employers other than the Federal 
government, or $380 per week if employed in American Samoa by employers 
other than the Federal government), exclusive of board, lodging or 
other facilities; and
* * * * *
0
6. Amend Sec.  541.400 by removing the first two sentences of paragraph 
(b) and adding one sentence in their place to read as follows:


Sec.  541.400   General rule for computer employees.

* * * * *
    (b) The section 13(a)(1) exemption applies to any computer employee 
who is compensated on a salary or fee basis at a rate of not less than 
$679 per week (or $455 per week if employed in the Commonwealth of the 
Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands 
by employers other than the Federal government, or $380 per week if 
employed in American Samoa by employers other than the Federal 
government), exclusive of board, lodging, or other facilities. * * *
* * * * *
0
7. Amend Sec.  541.600 by:
0
a. Removing the first three sentences of paragraph (a) and adding one 
sentence in their place; and
0
b. Revising paragraph (b).
    The revisions and additions read as follows:


Sec.  541.600   Amount of salary required.

    (a) To qualify as an exempt executive, administrative or 
professional employee under section 13(a)(1) of the Act, an employee 
must be compensated on a salary basis at a rate of not less than $679 
per week (or $455 per week if employed in the Commonwealth of the 
Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands 
by employers other than the Federal Government, or $380 per week if 
employed in American Samoa by employers other than the Federal 
Government), exclusive of board, lodging or other facilities. * * *
    (b) The required amount of compensation per week may be translated 
into equivalent amounts for periods longer than one week. For example, 
the $679-per-week requirement will be met if the employee is 
compensated biweekly on a salary basis of not less than $1,358, 
semimonthly on a salary basis of not less than $1,471, or monthly on a 
salary basis of not less than $2,942. However, the shortest period of 
payment that will

[[Page 10969]]

meet this compensation requirement is one week.
* * * * *
0
8. Amend Sec.  541.601 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  541.601   Highly compensated employees.

    (a) An employee with total annual compensation of at least $147,414 
is deemed exempt under section 13(a)(1) of the Act if the employee 
customarily and regularly performs any one or more of the exempt duties 
or responsibilities of an executive, administrative or professional 
employee as identified in subparts B, C or D of this part.
    (b) (1) ``Total annual compensation'' must include at least $679 
per week paid on a salary or fee basis as set forth in Sec. Sec.  
541.602 and 541.605, except that Sec.  541.602(a)(3) shall not apply to 
highly compensated employees. Total annual compensation may also 
include commissions, nondiscretionary bonuses and other 
nondiscretionary compensation earned during a 52-week period. Total 
annual compensation does not include board, lodging and other 
facilities as defined in Sec.  541.606, and does not include payments 
for medical insurance, payments for life insurance, contributions to 
retirement plans and the cost of other fringe benefits.
    (2) If an employee's total annual compensation does not total at 
least $147,414 by the last pay period of the 52-week period, the 
employer may, during the last pay period or within one month after the 
end of the 52-week period, make one final payment sufficient to achieve 
the required level. For example, an employee may earn $125,000 in base 
salary, and the employer may anticipate based upon past sales that the 
employee also will earn $22,414 in commissions. However, due to poor 
sales in the final quarter of the year, the employee actually only 
earns $10,000 in commissions. In this situation, the employer may 
within one month after the end of the year make a payment of at least 
$12,414 to the employee. Any such final payment made after the end of 
the 52-week period may count only toward the prior year's total annual 
compensation and not toward the total annual compensation in the year 
it was paid. If the employer fails to make such a payment, the employee 
does not qualify as a highly compensated employee, but may still 
qualify as exempt under subparts B, C, or D of this part.
* * * * *


Sec.  541.602   Salary basis.

0
9. Revise paragraph (a) (3) of Sec.  541.602 to read as follows:
    (a) * * *
    (3) Up to ten percent of the salary amount required by Sec.  
541.600(a) may be satisfied by the payment of nondiscretionary bonuses, 
incentives and commissions, that are paid annually or more frequently. 
The employer may utilize any 52-week period as the year, such as a 
calendar year, a fiscal year, or an anniversary of hire year. If the 
employer does not identify some other year period in advance, the 
calendar year will apply. If by the last pay period of the 52-week 
period the sum of the employee's weekly salary plus nondiscretionary 
bonus, incentive, and commission payments received does not equal 52 
times the weekly salary amount required by Sec.  541.600(a), the 
employer may make one final payment sufficient to achieve the required 
level no later than the next pay period after the end of the year. Any 
such final payment made after the end of the 52-week period may count 
only toward the prior year's salary amount and not toward the salary 
amount in the year it was paid. This provision does not apply to highly 
compensated employees under Sec.  541.601.
* * * * *
0
10. Revise Sec.  541.604 to read as follows:


Sec.  541.604   Minimum guarantee plus extras.

    (a) An employer may provide an exempt employee with additional 
compensation without losing the exemption or violating the salary basis 
requirement, if the employment arrangement also includes a guarantee of 
at least the minimum weekly-required amount paid on a salary basis. 
Thus, for example, an exempt employee guaranteed at least $679 each 
week paid on a salary basis may also receive additional compensation of 
a one percent commission on sales. An exempt employee also may receive 
a percentage of the sales or profits of the employer if the employment 
arrangement also includes a guarantee of at least $679 each week paid 
on a salary basis. Similarly, the exemption is not lost if an exempt 
employee who is guaranteed at least $679 each week paid on a salary 
basis also receives additional compensation based on hours worked for 
work beyond the normal workweek. Such additional compensation may be 
paid on any basis (e.g., flat sum, bonus payment, straight-time hourly 
amount, time and one-half or any other basis), and may include paid 
time off.
    (b) An exempt employee's earnings may be computed on an hourly, a 
daily or a shift basis, without losing the exemption or violating the 
salary basis requirement, if the employment arrangement also includes a 
guarantee of at least the minimum weekly required amount paid on a 
salary basis regardless of the number of hours, days or shifts worked, 
and a reasonable relationship exists between the guaranteed amount and 
the amount actually earned. The reasonable relationship test will be 
met if the weekly guarantee is roughly equivalent to the employee's 
usual earnings at the assigned hourly, daily or shift rate for the 
employee's normal scheduled workweek. Thus, for example, an exempt 
employee guaranteed compensation of at least $700 for any week in which 
the employee performs any work, and who normally works four or five 
shifts each week, may be paid $210 per shift without violating the 
$679-per-week salary basis requirement. The reasonable relationship 
requirement applies only if the employee's pay is computed on an 
hourly, daily or shift basis. It does not apply, for example, to an 
exempt store manager paid a guaranteed salary per week that exceeds the 
current salary level who also receives a commission of one-half percent 
of all sales in the store or five percent of the store's profits, which 
in some weeks may total as much as, or even more than, the guaranteed 
salary.
0
11. Revise paragraph (b) of Sec.  541.605 to read as follows:


Sec.  541.605   Fee basis.

* * * * *
    (b) To determine whether the fee payment meets the minimum amount 
of salary required for exemption under these regulations, the amount 
paid to the employee will be tested by determining the time worked on 
the job and whether the fee payment is at a rate that would amount to 
at least the minimum salary per week, as required by Sec. Sec.  
541.600(a) and 541.602(a), if the employee worked 40 hours. Thus, an 
artist paid $350 for a picture that took 20 hours to complete meets the 
$679 minimum salary requirement for exemption since earnings at this 
rate would yield the artist $700 if 40 hours were worked.
0
12. Amend Sec.  541.709 by revising the first sentence to read as 
follows:


Sec.  541.709  Motion picture producing industry.

    The requirement that the employee be paid ``on a salary basis'' 
does not apply to an employee in the motion picture producing industry 
who is compensated at a base rate of at least $1,036 per week 
(exclusive of board, lodging, or other facilities). * * *
* * * * *
[FR Doc. 2019-04514 Filed 3-21-19; 8:45 am]
 BILLING CODE 4510-27-P